RAP – Part 3 Findings, Analysis + Business Models

No matter what I do I cannot get the same answers as posted in financial reports, heck even the results of stock exchange and companies dont match. ROCE for same year is different everywhere.
So my question is can I use the ratios written on stock exchange or investment bank for both the main company and the competitor. Do I really need to calculate the ratios by my self ? cant i just the analysis on the ratio calculated my somone else.

Your input will be really helpful.

thanks

Companies often have a table showing a summary of key ratios / results for the last 5 – 10 years. It is acceptable to use these ( in which case I would suggest a direct reference to the actual page in the annual report be shown) but also copy & paste the table as an appendix with the reference and then it is clear that you are not trying to pass this off as your own work. You should try to do some calculations of your own – perhaps the percentage increase over the 3 year period and some liquidity ratios or comparing the difference in the company’s performance with that of its comparator in percentage terms. There are no assessment criteria that actually stipulate that you must calculate ratios for yourself – Evaluation fails where it is descriptive and there is little or no critical analysis I.e. giving ratios without a reasoned discussion of them. The reason I suggest some of your own calculations is as @bassaniobroke has mentioned is to show spreadsheet skills, using Excel to calculate them and producing graphs etc to satisfy criterion 7 on IT.

How long is a piece of string?

(a) Better 10 good ratios PROPERLY EXPLAINED than 20 ratios just calculated with obvious comments that this has increased / decreased….. (and that is the real PROBLEM students do NOT explain them see my posting under Forum Topic ‘Tip for today- 2nd May 2014’ dated 3 May 2014 )

(b) again how long is a piece of string? – If you read my posting on ‘Top Tips for the RAP’ dated 24 April 2014 you will get part of your answer about graphs and if you read it in conjunction with 3 May posting mentioned above and take it on board you will produce a much better RAP that is likely to pass.

You might also find my 30 April Posting on’ Inclusion of the Financial statements(Pdf?xlm, etc)’ also useful

Sorry but maybe I need to put all of these points in one new Forum under a better heading when I have a moment as they will be useful, for those starting the RAP but in the meantime you will have to dig them out for yourself, as I will lose the will to live it I have to keep repeating myself on what Evaluation & Analysis means – just accept it does not end with ratios – that’s just where it starts!!!!

(c) I do not understand your question but you need to load a spreadsheet with formulae to demonstrate your ITskills

Remember that most of your figures will be turned into ratios so the currency is a bit irrelevant in that context e.g. you should be comparing GP% not actual amount s. So although if producing the accounts for the income statement you would normally be expected to use the average exchange rate, I think for the purpose of the RAP you could simply use the closing rate. On the scale of things unless there were massive differences in the exchange rates (e.g. significant fluctuations between the beginning of the year and the end) then it shouldn’t materially affect things for comparative purposes as you are mainly identifying trends between the companies rather than comparing the figures in absolute terms. You will still be able to calculate the year on year increases for the comparator company itslef as they will all be in Euros.

Mention the problem and the approach you choose to take in the Limitations section

If you were doing a higher level degree then possibly you might have to do some currency adjustments but I don’t think it would be an issue with the RAP

(The average rate would be a lot of hard work -especially if you were looking at 3 years -unless you were able to import all the data easily into a spreadsheet where you could then use the built in Excel formula to calculate it.)

@trephena

I have made graphs from the appendix in which I have made ratio calculations and then I moved these graphs to the word document (RAP), however, the graphs will not appear correctly if they are opened on another computer (Marker’s computer) as the excel document (Appendix A) path is on my computer even if I uploaded it in the relevant section of the appendices for OBU, so what should I do?

@trephena

If I made them as image, will OBU count the words included in the graphs towards the word count?

@pinkmonkey – personally I encourage students to look at the whole period under study as a continuous period of 3 years. Of course the graphs show the position year by year but it is the trends in the figures that are important together with the underlying factors from the business environment (e,g, PESTLE – which does not comply with year ends!!!). Usually many of the PESTLE factors that influence the company’s performance affect more than one year and management strategies often influence more than one year too (and don’t start on 1 Jan and finish on 31 Dec either!).

I find if students use a year by year approach they are fixed on explaining differences for each ratio for each year and tend to miss the ‘big picture’ of what is really going on. Their work if I am honest then becomes very boring as it is full of numbers and little real depth of analysis (the GP has decreased because COS has increased – sort of thing -which is totally useless in terms of evaluation as anyone could see this from the annual report figures). However for a good business and financial review, graphs showing the position mean you don’t need to talk about obvious changes and you can focus on researching the main influences on the company and strategies the company has used Maybe a decision taken back in 2011 may not have a full impact until 2013 for example and a year by year approach is likely to totally miss this, but when looking at it as 3 year period it becomes more obvious.

However with the EPS and some of the other ratios it is relevant to do a year by year study but for turnover, GP and net profit the whole period approach makes far more sense. Obviously if there is something significant in one year (the Japanese tsunami for example) then it is appropriate to bring this in if it is relevant for that year. It all comes down to doing an interesting and objective analysis that will engage and impress (rather than bore) the reader so that you get a good grade. 🙂

@pinkmonkey I think you could probably do a tabulation to show the variances and that would be quite effective. If you did it year by year it would then allow you to pick out any significant changes which you could then comment on. You only need to cover 3 full years so it depends on the availability of the company financial statements which year you start with.

By Period 29 submission in November organisations will all have 2013 results available and some will have 2014. You must use the latest financial statements so that means any that will be in the public domain by 31 Aug 2014. After that date then you are not forced to use them as OBU will not fail you if they have only been available <3 months. However markers are very hot on checking (they even look to see when the auditors sign off the accounts as this normally coincides within a day or two of them being posted on the company’s website) and will fail on Application and Evaluation if students haven’t bothered to use the latest accounts.

Remember in your evaluation you must link the business and financial analyses and a good way of doing this is to read the CEO and directors reports from about 3 years ago, Look to see what strategies they were favouring and the direction they were proposing to move the company in. See if you can see how these have affected the trends and how figures interrelate e.g. if they were proposing to expand you would expect further down the line to see a significant increase in turnover but there may also be a corresponding increase in depreciation especially if fixed assets have increased and the gearing and / or share capital may have changed as they had to finance the expansion plans. This is what I meant in my last post on tuning into the ‘bigger picture’. Students fixated on year by year ratios miss the obvious – which is why I encourage the continuous period approach 🙂

@pinkmonkey To do the ratios you have to use the year end accounts and so your graphs will be constructed by using these figures . However when it comes to commenting look at the trends and try to get ‘a feel’ for what has gone on over the period under review (and I personally think this is actually easier and makes for a better analysis normally if you try to detach yourself from each year -hence my recommendation for a ‘continuous period approach’ for profit ratios). However some results such as EPS and its impact on share price are affected by each year’s year end results, so investor ratios are probably better done on a year by year basis.

So I would say wherever it is sensible e.g. turnover, cost of sales, GP and net profit it is probably better to look at the overall movements in the trend over the 3 years: go back to your SWOT/ PESTLE and try to identify if there any factors in that that may have impacted on the results (e.g. exchange rates, floods or other climatic factors, other economical factors and any management strategies and policies etc). This type of analysis is far superior to one that tells the reader that in 2012 net profit reduced because administration costs rose.

Tabulations are useful if you want to draw attention to abnormal results for one year if the trends are not showing a direct consistent movement e.g. the 2nd year is down on the 1st year but the 3rd year is up again and higher than the 1st year and you can embolden the figures or colour the box in the table to highlight this.

Remember however you present the data (graphs, charts or tables) it is what you say by way of evaluation and explanations that will get you the grade. You should research so that you can really explain things rather than rely on ‘annual report type of explanations’e.which often are statements of the obvious that the reader (and of course the marker) could see for themselves. ‘Evaluation’ of this type is likely to be failed as being inadequate

@Fatema No you do not have to calculate the ratios yourself. Often companies give 5 year’s worth of main ratios and key figures so you can take these as long as you reference them as not being your work. You can use these though to help construct your graphs and charts. By evaluating the position and analysing the performance in terms of what strategies have been employed and what influences have impacted on the financial results will give you the opportunity to fufil the evaluation & analysis assessment criteria (provided you do a decent and detailed analysis that doesn’t just rely on ratio calculations and statements of the obvious).

Hi again
I have just been looking at the company’s annual report and they have included main ratios such as NPM.
Some of the ratios such as GPM and ROCE and asset turnover which I have listed in part 2 of my rap that I want to analyse are not calculated.
Shall I calculate them myself(and show this) or pick other ratios such as increase in turnover per year etc?

Hi Trephena

I am stuck in part 3 of my rap!
I have to write 4500 words but I am finding it hard to even start.
I have started with a financial analysis, so my first ratio is GPM. I have calculated GPM for my company and comparator over the three years. I have also produced a graph comparing both. The hard part is the analysis and evaluation. I know that GPM has fallen over the years because of high costs and inflation and there is info in the annual reports.
But how do I write this? do I copy and reference extracts from the annual report or do I write it in my own words and how on earth am I going to write 4500 words. it just seems too much.
Regards

Fatema