Sorry everyone, I did not realise I had issues with the viewing of the original documents. Here is my updated and almost complete draft work. I have compiled the earlier Ratio and key economic and business drivers blogs and listed them below as well.
Step 3:
Ratios Commentary:
Profitability
The first information I gained form the ratios involved the profitability ratios. I learnt that the Net profit margin of the broncos was at 6.3% in 2015, slightly increased to 6.6% in 2016 but has dropped to 4.0% in 2018, this is the amount of profit extracted form total sales. At first looking at this, I believed the figure appeared quite low. However, after further research I discovered that in most sectors a NPM over 10% is considered excellent. However, this again is down to the sector and comparability should be restricted to similar entities to be of any value. The broncos have heavily invested in their long-term future viability by developing a WNRL (a women’s league) since 2016 and these extra expenses could be a driving force behind the decreasing NPM. Return on asset ratio had also followed a similar downward trend, again likely to do with the decrease in net profit driven by the increase in expenses. Whilst these ratios show the profitability of the Broncos decreasing, they are still within acceptable standards (these are high comparatively to others in the league) but also may be reflective on increased costs of development.
Efficiency
The broncos started the financial analysis period in 2015 with an asset turnover ratio of 1.02, this figure then dropped to 0.98 and 0.92 in 2016 and 2017 respectively before increasing to 1.03 in 2018. The asset turnover ratio measures a company’s ability to generate sales from its assets. In determining what this means for the Broncos it can be seen that in the years 2016 and 2017 total assets increased without showing an increase in overall revenue and in 2018 assets slightly decreased form the 2017 figures with revenue then increasing. This was an aspect that was quite interesting to me, my view of assets is that they are a resource that is owned or controlled by the entity to produce value. In investigating further, the financial statements it could be seen that the broncos had a large drop of over 40% in cash and cash equivalents that were held combined with a large increase in Property, plant and equipment. The Broncos do not have any debt through loans so large capital purchases such as PPE are derived from their cash holdings. This adjustment and increase of assets likely produced the drop in revenue derived from them and resulted in the 16/17 decrease below the $1/asset mark. The current asset turnover ratio is much higher, moving from 1.69 in 2015 to now be resting at 3.12 in 2018. Again, the largest change in this sector is the substantial decrease in cash and cash equivalents being dispersed into long term assets and removing them from this calculation.
Liquidity
The current ratio depicts how well a company can meet its short-term obligations. The current ratio is another ratio that has been affected by the decrease in cash and cash equivalents that has occurred since the 2016 financial year. The current ratio in 2015 and 2016 was relatively stable around 2.4 and 2.37 respectively but this has since decreased to 1.35 in 2018. Whilst this is still at acceptable levels, it is quite a drop for the Broncos and comes down to their decisions to not finance through debt arrangements and loans. As mentioned previously, the broncos have had a large decrease in cash and cash equivalents (current asset) and a substantial increase in property, plant and equipment (non-current asset). Whilst throughout this period current liabilities have remained fairly consistent with increases to unearned revenue and provisions. Whilst overall assets have increased, current assets have decreased and current liabilities have slightly increases thereby decreasing the ratio, leaving the broncos with a lesser ability to meet their short-term obligations. Although this decrease provides a somewhat negative outlook, the Broncos have actually value added to shareholders in their decisions to invest in the future of the club through pre-existing assets. The quick ratios have both followed a similar trend to that of the current ratio.
Financial structure
The equity ratio hovers around 70% for the Broncos. Showing that the majority of the company is financed through shareholder equity. Industry comparisons were difficult to find to determine appropriate levels of ratios. Often the only comparisons available were of large US sporting teams that had large amounts of equity investment, but this seemed to be within the acceptable norm for financial structuring.
Market
The market ratios were an aspect of the Broncos financials that were really quite lacklustre. There earnings per share sat at 0.03 across the comparison period before dropping to 0.02 in 2018. Dividend yield ratio was also quite uninspiring at 0.02 in 2015, falling to 0.01 in 2017 before again increasing to 0.02. The most interesting ratio I found within the market sector was that of the price earnings ratio. The Broncos had a ratio result of 13 in 2015 which has increased to 23. The price earnings ratio is a marker of the dollar amount an investor can expect to invest in a company to have one dollar in return of the company’s earnings. The market ratios raised questions for me regarding who is investing in the broncos. None of the ratio results inspired me to go out an invest in the Broncos. Are these fans who are investing in the broncos for the feeling of being part of a team they love and their financial future rather than investing for future financial gain? I can say for myself that I would not invest my money in the Broncos in hopes of financial gain, but I was a part of a community ownership model of another national sporting team and can see why investment has occurred.
In determining how my firm was fairing in comparison to other students I had a look at a few others commentary for comparison, but also to see how other company’s ratios were different and where they were similar.
These were the 2 that I found most interesting:
- Accounting with Tash – Tash’s company Fresenius had a large foreign currency translation loss. It was very interesting to see the effect that this had upon the profitability ratios compared to the effect it had in the restated financial ratios. This effect was something that I hadn’t truly considered before and it was interesting to be displayed so clearly in this way.
- Sariel Stories – Sarah had the firm ‘Air France’. The most interesting thing I found when viewing Sarah’s ratio and throughout her commentary was the fluctuations that occurred across the years. Whilst there was an overall trend towards decline (which seemed to be a common factor across the airline firms I viewed) there was strange fluctuations across the ratios seemingly randomly. Sariel had great commentary and discussion surrounding these changes which I found very interesting.
My profitability ratios were on the average to low side, in comparison to other firms. There were some firms that excelled in this area, and some that looked to be in quite poor shape. The Broncos 2018 result, dropping to $% is on the lower end. The broncos seemed to have quite high asset turnover ratios compared to other first. This means that they are very efficient in using their assets to generate revenue. The Bronco’s liquidity ratios were again high compared to other firms, but with the drop in cash and cash equivalents to fund expansions (as they don’t use banks loans) their liquidity ratios have moved into the ‘average’ range once again. Market ratios, as discussed above, are definitely a key area where the Broncos do not seem to compete with other firms, they were very much below average in this regard.
A link to my blog and where I have had these discussions with others can be found here.
Accounting Drivers – Commentary:
| Ratio | 2015 | 2016 | 2017 | 2018 |
| Economic Profit | 2,042,981 | 2,207,768 | 2,292,231 | 1,713,264 |
| Free Cash Flow | (613,316) | (7,783,616) | 1,492,251 |
Economic profit is a factor of the return on net operating assets, cost of capital and net operating assets. Economic profit, unlike free cash flow, has remained relatively stable over the past four financial years starting at 2,042,981 in 2015 but has now decreased to 1,492,251. Cost of capital was calculated as 8% across all financial years and NOA has had quite a large growth period. To determine why economic profit is reducing, further investigation needs to occur in identifying changes in RNOA which is a factor of profit margin and asset turnover. RNOA continued to decrease across the financial analysis starting from 0.26 in 2015 to .08 in 2018. This is due, as previously discussed, to the large increase in operating assets without the correlating increase to operating income, largely due to the substantial PPE acquired since the 2015 financial year.
Free cash flow for the Broncos has drastically changed over the years for the Broncos, so further investigation is needed to determine what is driving this change. Free cash flow was at negative values until the financial year 2018 where a positive value of 1,492,251 was obtained for this ratio, but just the previous year in 2017 it was at negative 7,783,616. The key drivers of free cash flow are operating income and net operating assets. Net operating assets drastically increased by over $10,000,000 in the financial years from 2016 to 2017 leaving a large figure to reduce OI in that year. This result was increased due to the combination of operating income increasing, but operating expenses increasing at a higher rate, leaving a lower level of Total OI.
Over the 2017 and 2018 financial year, NOA remains stable, OI remains stable and this produces a positive FCF. Free cash flow is a measure of the cash leftover after a company pays for its operating expenses and capital expenditures. The Broncos went through a large period of expansion in Property, plant and equipment which greatly increased net operating assets in the 2017 financial year, this also resulted in a decrease in cash and cash equivalents, but this was from the financing cash and therefore did not reduce the impact.
The Broncos operating income and expenses have been relatively stable across the financial analysis years. Across this time, financial assets and liabilities have also remained constant. The key driving factors which are impacting economic profit and Free cash flow is the large increase in operating assets which doubled from the FY 2015 to FY 2018 and the lack of an impact this has had on overall operating income. This is likely due to the increases in operating assets stemming from Property, plant and equipment and these assets generating income on a long-term basis., with often large upfront costs.
A link to my blog where I have discussed my key accounting drivers can be found here. My discussions with others through my blog can also be seen in using the blog link. Accounting drivers seemed to be fairly consistent across the industries and the firms that I viewed. A common theme consistently held was the relationship between economic profit and free cash flow of our firms. Whether firms had remained stable, were going through a period of growth or were moving towards an economic downturn. The key accounting drivers always fell back to being free cash flow (and sometime the lack thereof) and economic profit.
This process gave me a much better understanding of the separation of the financial statements into operating and financial. This was particularly highlighted in the splitting of cash into operational and financial. The large bulk of reduction in cash that was used to partially fund PPE expenditure came from the financial cash flows, where it should. Previously I wouldn’t have had this split and it would have affected how profitable the company was in my mind. But through the restating process and then by analysing the ratios and where they were coming from, it was easy to see the benefits of restating. The Broncos were a different company to analyse in this way by breaking their financials into key accounting drivers, but they still possess the key fundamental drivers.
Step 4:
The firms main economic and business drivers are focused on continuing the growth of their revenue which stems from on-field success and attracting greater market share. Across the operating income streams the Broncos remain consistent and this can be linked to the consistency across the economic profit accounting driver over the last four years. The Broncos have two main sources of sales, revenue from contracts with customers and grants received from the NRL. Both of these major income sources continue to increase and through stability in on field performance and continuing development, the Broncos are likely to continue this trend of gradual increase but overall stability.
The largest economic and business driver providing uncertainty and change to the Broncos financial statements is the large increase in PPE that can be attributed to the inclusion of a national women’s team. Throughout this financial analysis period the Broncos have prepared for and then participated in the first WNRL season. As part of this process a substantial amount of cash and cash equivalents has been used to acquire Property, Plant and Equipment to assist in this transition and development period.
This significant expansion has had an impact of Free cash flow (FCF), however with a lot of the costs being incurred within the 2017 year or prior, FCF is now at positive levels. However, as can be seen in the 2018 financial statements of the Broncos, this growth, is a long-term strategy. Whilst the development of the Women’s league is a way to increase market share and diversify whilst also increasing participation, this is unlikely to have a positive impact upon growth until towards the end of the 5-year outlook. This is an area where there will be both extensive growth, but also extensive costs associated with this growth. It is unlikely this will produce positive growth, rather than growth for the sake of growth, for quite some time.
It was quite difficult to connect the accounting drivers to the key economic and business drivers, but I was lucky that I had a rather simplistic business model and strategies within my firm. It was also a firm that I was familiar with prior to the semester beginning, which I feel made the analysis of the economic and business drivers a smoother process. I started the process by identifying through the ratios and financial statements where changes had occurred and why these changes were important. Then once identified, I asked why has this change occurred, was the company investing, reacting, adjusting, planning for the future? If so where did they identify their business as growing, going and moving into the future and key areas for change. I read through the report form the CEO in the financial statements and compared their “key aspects” and researched their key aspects thoroughly in the wider marketplace and similar entities.
Through expending time into researching the company and other market competitors I found myself more comfortable with my analysis, but I also held a sinking feeling of “what if I am wrong?”. It was difficult to come to the eventual understanding that the analysis we are doing is filled with speculation and personal judgements. But by taking the time to inform ourselves prior to making these judgements, whilst allowing for a margin of safety (error, change and risk) sound analysis can occur.
A key aspect that was similar between my firm and Hannah’s firm, which can be found here, was that they were both striving for growth. Whilst their sizes and industries were completely different, they held this common theme. Whilst it is not uncommon for firms to seek “growth” as a way to benefit their equity holders. This did pose the questions on whether more was better of whether more efficient could have been a better choice.
In looking at other blogs that had undertaken analysis into their key economic and business drivers I came across Yvette’s discussion regarding her firm James Fisher and Sons PLC. It was very interesting to see that both Yvette’s firm and my own, although very different in almost every other aspect, shared some of the same drivers. Both our firms were choosing to drive growth through asset expansion, with this not yet yielding results for our firms. Although our firms were completely different, we both questioned whether share price was really an accurate reflection of where value lay for our firms.
Step 5:
Confidence is key, but my confidence in my analysis is limited. Whilst I feel as ai have undertaken a thorough analysis and have a sound understanding of my firm I am not sure I would be investing my own money into it.
My firm was valued at $72,963,612.51 through the DCF valuation and economic profit valuation, with economic profit valued at $2651809.60. Throughout the comparisons I have undertaken throughout all stage sof the unit, I have often be quite confused with how the share price interacts with the valuations. The share price (on the whole) continues to increase, irrespective of changes to financials and business policies. it is something that I have struggled to relate to any one event or valuation.
The investment decision I have come to, based on my analysis is that I would not recommend investing in The Broncos if you were wanting any tangible returns in the short term. The Broncos are investing in their development and this will likely result in growth in value for equity holders. This may be a good time for those wanting to invest prior to the expected high growth in the 5 – 10-year range, but I cannot say with enough certainty that there would be a high payoff to recommend taking this course of action.
For equity investors who currently hold shares in The Broncos, I would recommend holding them. The share price continues to increase and with the expansion currently taking place, this is likely to continue increasing. For equity investors looking to invest, I would not recommend buying into The Broncos.
Reflections:
As always in this style of unit, I feel as if I continually gain more from my peers then I give back. I hope that everyone feels this way as I find it to be a wonderful learning opportunity and experience. I continually look to others blog’s and analysis to see how I interpret their firms and how my analysis is the same and where it differs to the blog owners. This style of learning allows you develop your skills in a controlled manner within your own firm and then explore, investigate and further develop knowledge and learnings through the work of our peers. I am endlessly grateful for the hard work of some of my peers whose blogs allow for this such as Yvette whose blog shows an in depth analysis and thought across all aspects of the unit and Tash whose blog can be found here and details heavy analysis on across a wide variety of units and has even helped me go over topics from previous subjects. My only hope is that at the end of the unit, that this is a common theme for all students. That through our ongoing interactions across our blogs space and the Facebook site, that we all gain a better learning experience.
I really enjoy the reading chapters in the unit. I find that at most times, this is enough to provide the learnings you need for the unit. But there is also lots of supplementary learning tools, like the videos and lectures. The one aspect I don’t enjoy is Peerwise. I understand that the lecturer has the ability to adjust marks, but I find that Peerwise is the most easily manipulatable assessment piece and this can be frustrating. Possibly I find this as frustrating as I do because I know how good of a learning resource this could be, if only it wasn’t filled with time wasting questions, comments and ratings – simply to earn marks rather than actually learn. My contributions to Peerwise, and this as a learning experience, were lacking. Perhaps this is an area I could have taken an opportunity to refocus on, if only for the benefit of other students, like myself, who would have enjoyed the learning opportunity later on in the semester.
I thoroughly enjoy the real-life applications that are present throughout the chapters, particularly the engagements with Ryman healthcare. This provides an opportunity to actively engage with the readings in a real-life exercise and really aids in my understandings of the unit. I think this is then further reinforced by the KCQs. The importance of not simply reading a chapter but then also taking the time to describe what you have read in your own words, with your own take of understanding is not lost in this subject. This is something that other units should adopt. There is no point in reading a chapter if you are simply reading for the sake of getting to the end. My overall learning experience was greatly aided by the KCQS and the reflections that occurred on the learning materials through them.
This subject was the first time that I had engage in doing a restatement of the financial statements. I now feel quite confident in being able to do this. But I think the greatest learnings were separate from the manual completion of the task. For myself the greatest understanding came from the realisation that there is no one right analysis of financial statements. That every analysis is a reflection of the individual undertaking it, there interpretations and biases. But that this is okay. We simply need to be able to take an in-depth understanding of the company and the economic and business realities, apply it to our ratios and calculations and then adding in our safety margins to obtain the equity value of the firm. We do not need to get the right answer, we simply need to be able to do this better than others. Although I do not feel completely certain, I am far more confident in my abilities to do this and will take these learnings through to other aspects of my life.
The most important aspect of this unit is the understanding that practical application and practice is absolutely necessary. Throughout the readings there is practical application. Throughout the assessments there is practical application opportunities within your own firm, but also the opportunity to engage with other firms as well through blogs. It is through the practical application that actual learning occurs. The most important aspect of this unit is to take the knowledge on board for life and further develop it, not simply for it to get you through an assignment or exam, or to the end of the unit and for it to end there. To way the unit is structured allows for this to occur and it has been the most meaningful aspect of the unit for myself.
The three most important tips that I would give future students are: 1. Start early – start your readings, your assessments and Peerwise early on in the unit. There is much benefit to beginning early so you allow time for your knowledge to develop throughout the unit. 2. If you don’t understand a topic within the readings and lectures, engage with other students, utilise the videos and look for outside resources. Each week builds on the earlier topics so it’s important to take the time to use the resources provided. 3.Take a break. If you are not understanding something, or are frustrated with your spreadsheets or analysis, leave it for a little while and come back feeling fresh.
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