General Queries Topic 8

Hello Guys... Thanks for the good advise.. I am planning to attack topic 8 and submit my RAP this November 2014. My question is, At what point do you bring in the comparator ie the company your bench-marking? Do you have to write a literature review for that company bench marked company as well? thanks

@laemchi311 - You should try to do comparisons across the board – the best way is to calculate the figures as ratios rather than as absolute figures and show them on the same graphs / bar charts (clearly labelled and with titles) as then the differences become readily apparent. You then should use your words to explain what has caused the differences. Research is about finding out what has impacted on the results (the types of factors from the PESTLE) and how the SWOT factors influenced the management strategies when it comes to your main company. Although you will not be expected to go into quite such detail with the comparator it needs to be sufficient enough to avoid ‘text book’ type explanations or statements of the obvious that anyone could see instantly if they looked at the accounts. Insufficient and superficial comparator analysis can lead to failure for Evaluation so ensure that at least the profitability and investor ratios are well covered and try to do as many of the others as possible too to avoid this potentiality.

@Soban - most of these queries have been answered previously on other forums so please use the search facility to find the answers

Hi everyone, I'm also going with topic 8 but ran into a problem, hope i can get some help here. So the issue is I'm finding it hard to find any sources for net profit margin for items like gain on revaluation of investments staff training, canteen costs! So should i as a last resort choose financial report as a reference for this or should i try to source some general factors which can affect net profit like inflation etc? And what other factors are there which can effect NPM other than those listed specifically in P&L account?

@sameed - you are spending far too much time reading the notes to the accounts and insufficient time on reading business analyst reports and articles in the business press. Your approach currently needs refocusing if you want to pass Evaluation & Analysis as you are expected to find genuine factors not rely exclusively on trying to guess what lies behind some of the annual report figures - markers are not interested in canteen costs!!!

@trephena thanks for replying but the issue here is non of the analyst reports for that particular year have analyzed NPM in any detail. They have details about GPM and sales etc but barely anything on NPM

Fluctuation in NP margin occurs due to overall movement in indirect costs (e.g. administration cost, sales and distribution costs, finance costs, other costs etc) so you more focus on identification in reasons for changing in these costs. Although reasons provided in movement in GP margin section link with NP margin but you focus must be identification of reasons that not mentioned in GP margin. Internal reasons for movement in NP margin of your selected company mainly get from annual reports (especially report to shareholders section, key achievement sections, financial performance section, chairman/MD review section etc) of the company along with articles on websites and newspapers pertaining to your selected company. External reasons for movement in NP margin of your selected mainly get from sector reports (in which your selected company operates) over websites (especially website related to business activities or economy of country), articles related to associated sectors over online journals , business magazines , newspaper etc.

@sameed -OK so the net profit hasn't moved much? Then focus on other areas like turnover, the GP, gearing and investor ratios. You are best off letting the marker know that you tried with Net Profit and IF you have evidence that most of the change is down to inflation it would be perfectly reasonable to state this but equally you will not be criticised if you state that most of the significant changes were in the GP and the net profit showed only minor fluctuations in their individual categories that were not significant and appear to be largely due to inflationary factors (ref to PESTLE). What markers really hate is speculation (this could be why, this may be because etc) and statements of the obvious. On this one I totally disagree with @Ahmad - DON'T bother saying that administration/ distribution/marketing costs have increased/decreased unless you know WHY. If you can tie these increases to the management reports then that's great e.g. although I was dismissive of canteen costs if the company has stated it wants to improve employee welfare and you have a reference for this, then great, you can use it and the same would be true in relation to training if there was a strategy to improve staff training. Markers are quite derogatory about things they can see for themselves (in graphs) or read for themselves (if they bothered to look at the FSs) - I suppose they see it as students (a) stating the obvious (b) doing lazy research and not bothering to look further and (c) thinking the marker is blind and dim. And the last thing you do is play the marker for the fool!!! So show evidence that you are not doing any of these things :-)

I only describe broader level reasons for movement in NP margin of the company. Student must research on it and try to find root cause for such movement based on information provided in annual report along with some external sources....

Can you pass the RAP on Topic 8 , when the company selected is a non profit making organisation, but its very influential in the Economy of that country?

@gibsonsaruchera - the problem I foresee is how will choose an appropriate comparator? There have to be meaningful comparisons with another organisation and if there aren't you will fail E &A

@trephena within SWOT analysis. can we construct points based on our opinion and view? for e.g: my co. has invested its surplus cash in govt. securities and bonds, can i criticise this with the tone such as "although the investment is almost risk free, i believe management needs to build up its risk appetite and invest into more rewarding opportunities" and reasoning my statement with facts that inflation and devaluation of Pak ruppees with major currencies breakevens the return earned from govt. securities. and later in final part of RAP, in recomendations i can give management advice to hold foriegn currencies as devaluation of local curency plus 80% of raw materials have to be imported. Please your thoughts on this would be very helpful.

Can anybody else help me with my earlier post above?

My ROCE is not coming accurate to what it is in Annual reports for both primary and comparator company, whereas I have looked into notes tried to make adjustments but no way those ratios turn up to be accurate. I have also tried various other methods of calculating ROCE and its denominations ,such as replacing numerator with operating profit and Net Profit. Deriving Capital employed from Total assets less current liabilities OR Equity plus Non Current Liability. Should I proceed with minor differences of 1-2% in my ROCE or not?

@Soban - while you may suggest the risk aversion may be a weakness just give reasons and facts why rather than personally criticise it in the SWOT but feel free to do so in the recommendations section. Don't over worry about the ROCE - if the company give this use their figures (and reference) but mention this as a limitation in drawing comparisons as the bases for the 2 companies may differ.

@trephena when u say mention this as a limitation, should i do that in part 2 under "Models and ratios used and their limitations" was discussed? Or in my financial analysis which is part 3 of RAP under explanatory comments relating to ROCE?

Also I decided to include ROE in my ratios. With a limitation of this ratio that it includes cash which is idle and does not earn any profit, I made another ratio with adjusted equity derived from (Net profit / equity- cash). Just wondering is it okay to think out of the box? Thanks for the help in advance.

it should be "An evaluation of the business and financial performance of OBU Co between 1 January 20011 and 31 December 2013 (Topic 8)" Better to refer pg. 26 of Information Pack as this aspect explained there.

@Nick123 - in the grand scheme of things it doesn't matter as you will not be failed if your title isn't word for word the same. :-) However you will be failed if your report does not comply with the topic as stated in the Info Pack e.g. if you don't cover the relevant 3 years for T8 or do not consider all appropriate stakeholders for T17

@trephena Sorry to be a numb skull here but i would really appreciate your view on it. 1. when u say mention this as a limitation, should i do that in part 2 under “Models and ratios used and their limitations” was discussed? Or in my financial analysis which is part 3 of RAP under explanatory comments relating to ROCE? Also I decided to include ROE in my ratios. With inherent limitation of this ratio that it includes cash which is idle and does not earn any profit, I made another ratio with adjusted equity derived from (Net profit / equity- cash). Just wondering is it okay to think out of the box?

@Soban - limitations of a general nature are mentioned in part 2 e.g financial statements are historic and companies sometimes use different bases or policies in their accounts. So if you were using all company calculated ratios you might comment that you cannot be sure that ABC's figures are directly comparable in every respect with XYZ as each ratio may have been affected not just by these varying accounting treatments but possibly with some variation in the actual components included in their version of the formula [ I am thinking here of what some include as Capital / long term liabilities or whether all reserves are included as Capital for example]. However if you are doing the calculations yourself you would of course use the same formula and include the same items for both companies so this last bit is not relevant. However should you (as you seem to be implying ) be only using a company calculated ratio for ROCE or ROE you might then include this specific limitation about the components just in Part 3 when you are comparing their performances as part of your evaluation if there was a significant difference between the two that you can't fully explain just by earnings. There is no list of ratios you must use but you need to be sensible in your choice and anything that you feel advances the analysis is appropriate (provided it is explained). For example the quick ratio is useless for an airline but passenger load factors (whether the aircraft fly with 95% of seats full or 50% full) could explain a significant difference in turnover and GP.

Hi. I'm kind of confused as to what extent should i take referencing? I mean lets say i wanna comment on recievable days that they are decreasing and could be as a result of tighter policies and early payment incentives(since i can't find out for certain whether they're actually were tighter polcies through secondary data) but now this is common knowledge, am I required to give reference to this comment as well?

@sameed - I have covered this in my post on RAP - Part 3 Findings and analysis see: https://opentuition.com/reply/205795 (part way down the post) Don't resort to too much conjecture (possibly because, it might be due to etc.) as markers prefer facts. So reference facts and if you use textbook type explanations then as they are generalised then they do not have to be referenced to Kaplan / BPP etc. as they did not come-up with these ideas themselves either they have been around for years...

@trephena thanks a lot

I want to ask a minor question here about the net profit margin. It is a more of an accounting question rather. I'm using group-level accounts for my analysis. Now, about the net profit that I should take in the formula: should it be the entire net profit or the portion of net profit attributable to owners of parent?

@avian will - you should remove any minority interest figures from the calculations to be technically correct (but if these are relatively insignificant then don't bother as the impact will be negligible and not material).

@trephena I have successfully completed my RAP and SLS. I want to know how to include Financial Statements, RATIO ANALYSIS and GRAPHS, in my RAP that I made in MS excel for both companies. Should I upload them as a separate file as an appendix? Or to include them in MS Word file with my RAP. Also tell me do we have to upload seperate files for both SLS and RAP ? Thanks for your help

@Soban... You need to upload five files on online portal of OBU. These files are as follows: 1. Research Report (Contain part 1, part 2 and part 3 of report) 2. Appendix (in topic 8, better to provide excel file) 3. List of Reference 4. SLS 5. Presentation

@Ahmad... can you please tell me if we are supposed to include in the excel file a sheet separately that shows the formulas only? like a sheet showing formulas used in the cells only? while main sheet with figures worked out stays separate.

There are many way to present ratio working in excel file but you must understand that examiner only want to check your back end working for calculation of different ratios. thanks.