The immature part of me always has a slight chuckle at writing ASS as the topic of my blog posts for this course. After completing the remaining sections of this assignment, I’m beginning to think that’s exactly what ratios and shares can kiss …. its been a far more challenging exercise than I had first anticipated!
Nevertheless, here is my draft Steps 7 – 9 for this assignment, as well as my spreadsheet.
*Edit – I have updated the Spreadsheet since my original post, so my market ratios may not reflect those reported in my Response just yet 🙂
Grand Baoxin Ratios
Maree Smith Ass 2 – Steps 7 – 10 Response
I would really welcome any feedback, positive or negative – don’t worry I can handle it! 🙂
The part I struggled with most (apart from everything) was the market ratios. I’m still not totally confident with these and is what I am hoping to focus on perfecting or at least improving over the next week before the assignment is due.
It has taken me a lot of research to get to this stage, so I hope I have come up with the right interpretations, particularly for the Economic Profits of my firm, which have actually been fairly significant losses for the past 2 years. Here’s my analysis of the contributing factors (from my assignment).
The year 2013 seems to be, across all figures, the most positive for the firm. The firm seems to have been in a good position at this time, despite there still being room for some improvements.
From an industry perspective, there were other external influences at play that have contributed significantly to the downturn seen in the above figures.
The Chinese macro economy was facing a recession. As mentioned previously, growth rates were the lowest they had been since 1990 and this would result in the firm experiencing losses regardless of their structure, inventories, turnover rates or sales.
In hind sight, the firm to a certain extent maybe had to “whether the storm” and do the best it could to turn around figures as quickly as possible. This resulted in a management re-structure, purchase of additional selective subsidiary companies.
Regardless of these, the firm is still facing some pretty heavy losses. So what does this mean? When all the figures I had analysed so far were coming out positive (albeit very low) I figured the firm would surely then have to still be making an economic profit, right? Well, for 2 of the 4 years, yes.
So here’s my best shot at an analysis, as the build up to “the big one” hadn’t really shed much light on my understanding.
Economic profit is based on the RNOA, the Weighted Average Cost of Capital (WACC) and the NOA. It measures the opportunity costs of capital in the investment decisions made by management. When these opportunity costs are positive, the firm has made positive choices for the company. When the economic profit is negative (or a loss) the opportunity cost is greater, reflecting poor choices of management.
The greater the WACC, the worse it is for the economic profit (or loss). In determining which figure to use, the WACC Expert from Moodle suggested 9%, while the Assignment suggests 10% without anything firm to justify otherwise. I have adopted 10% in this instance as the assignment suggests.
From playing with the figures, it seems to me that the main drivers for economic profit for Grand Baoxin are its Operating Income. This is the figure that it needs to increase, its operating income after tax, or the OI part of the RNOA. If Grand Baoxin can (obviously) increase its revenue, but at least reduce its costs of services or even more specifically the administration and selling & distribution expenses, this seems to make a huge impact on the Economic Profit.
The company (any company) needs to maintain a RNOA above 10% (or the WACC) in order to be making an economic profit. Obviously the WACC is also a key driver in economic profit (or losses).
On review of the annual reports, I can see that Grand Baoxin has taken steps to do exactly this. The administration expenses may or may not be able to be significantly reduced, although they have undertaken a major restructure of the company. Essentially now, each store is responsible for its own new car and spare parts ordering and inventory. This will hopefully reduce (possibly significantly) its selling and distribution expenses with a reduction in warehouse costs while a central department holds and distributes new cars and parts. Instead, they will go straight to the stores.
