Assessment 2

Step 7-10

Student name: Vithanage Perera

Student number: 12061738

Unit name: Accounting, Learning and Online communication

Unit code: ACCT11059

Lecturer: Martin Turner

Step 7I chose following three products of Azure Healthcare Limited to calculate the contribution margin. I took this product information from the company website. But the company website does not provide the market prices for their products.

The Tacera Patient Station

Tacera is an advanced nurse call solution which provides ‘plug and play’ functionality. This helps to minimise the installation cost and commissioning for healthcare facilities. The calls display on pagers and it alert staff quickly that a call has been activated.

Pulse mobile

Pulse phone is a smartphone application designed for android and IOS. It gives the opportunity for nursing staff to receive nurse calls and other 3rd party system alarms directly to their personal devices. The app is easy to learn and navigate using technology that the users are familiar with. This supports the healthcare personnel to simply their day to day activities by increasing their mobility.

Reports and dash board

Reports and Dashboards is a powerful business intelligence tool that helps clinical leadership optimize costs and streamline workflows. It has an interactive dashboard with widgets reporting KPIs and a powerful system of reporting with multiple report types.

Calculating Contribution margin for above products

Selling price (SP) – I guesstimate the prices as below.

Tacera: $ 300

Pulse mobile app: $200

Dash board: $250

Variable cost (VC)- Usually there will be a fairly high margins on law volume products. So, I am guesstimating the variable cost around 6o%.

Tacera: $ 180

Pulse mobile: $120

Dash board: $150

Contribution margin= SP-VC

Tacera: $300: $ 180= $120

Pulse mobile: $ 200- $140 = $80

Dash board: $250- $150 = $100

Contribution Margin is the amount of sales contributes to cover fixed costs and contributing to profits. Contribution margin for a product is calculated by deducting variable cost from sales price. After calculating the contribution margin for different products, I can see the way how each product contributes to create profit of the company. Variable costs can be varying as different usage of materials are associated with each product type.

Step 8

Profitability ratios

Net Profit Margin (NPM)

Net profit margin calculates dividing net profit after tax by sales. It shows for every dollar of sales how much the company turn into net profit or loss. Net profit margin of the company for year 2017 was -23.7% and 2016 was-10.8%. Net profit margin of the year 2015 was 3.1% and 2014 was 11.9%. That means the profit margin of the company has continuously

decreased from 11.9% in 2014 to -23.7% by 2017. This is not good for the company as the sales of the company is not contribute in generating profits.

I was curious to find out about the NPM of other companies and I compared my company NPM with Tony’s (one of my peers) Net profit margins and found out that her company is performing very well than mine. Even though there is a dramatic decrease from 75% in 2016 to 26.2% by 2017, still every dollar of sales contributes to generate profits.

Tony’s NPM

Return On Assets (ROA)

This shows for every dollar of assets how much the company turning into profit. On other words how, much profit generates for each dollar of assets. We calculate this dividing net profit after tax by total assets of the company. Azure healthcare has had a high return on their assets in 2014 at 17.6%. This has decreased to 4.7% in 2015. The ROA in 2016 was -15.5% and -39.5% in 2017. The ROA ratio has decreased dramatically from 2014 to 2017. This is not a good sign for the future of the company. Looking at Tony’s ROA I can notice that her company is utilising their assets in generating profits very well.

Efficiency Rations

Days of inventory

This shows how long it will take for the company to turn their inventory int sales. This is calculated by dividing company inventory using average daily cost of goods sold.

The company had kept their inventories in stores for 116.5 days in 2014. The number of days has gradually increased to 215.57 days by 2017. This is not good as company taking more than a half a year to sell their products. The company has to bear more expenses when keeping inventory for a long time. Looking at Tony’s figures I realised her company is keeping their inventory for a long time as my company. In 2014 her company had taken 755 days convert inventories into sales. But the number of days has decreased to 172 by 2017. This is pretty good.

Total Asset Turnover Ratio (TSTR)

This shows how many times the company is turning its dollar value of assets into sales. Companies calculate this dividing sale by total assets. My company is turning 1.47 times the dollar value of assets into sales. This has increased to 1.67 by 2017. This is good. This means the company is using their assets efficiently to generate sales.

Liquidity Ratios

Current Ratio

This ratio shows the ability of a company to pay their current obligations using their current assets. This is calculated dividing current liabilities by current assets.Azure Healthcare has enough current assets to pay their current liabilities. The company had a ratio of 2.42 in 2014. Which was good. This has been decreased to 1.85 by 2017. Still the company has a good current ratio as it can cover the current liabilities if the company faces any risk of liquidation situation. It is important for a company to identify the type of current assets a firm has and whether they can convert their current assets in to cash if necessary. In Azure healthcare the company has a higher inventory under current assets. Financial structure ratios

Debt/equity ratio

This is calculated, dividing total liabilities by total equity. It shows how much borrowings that a company use to finance its assets. The ratio of Azure Healthcare in 2014 was 48.2%. This has increased to 50.6% by 2015. The ratio has dramatically increased up to 110% by 2017. The ratio has increased because the company has taken bank loans to build their new manufacturing facilities in United States of America. This shows that the company has increased their debts and depend on loans than their investors.

Equity Ratio

This ratio shows the amount of assets that are financed by the company shareholders. In 2014, 67.5% of assets were financed by the shareholders of the company. This has decreased gradually year after year. In 2016 the ratio was 66.4% and it was 55.4% in 2015. Equity ratio has decreased to 47.6% by 2017. This means the company is increasing their debts and decreasing the investments made by shareholder. A firm can increase its equity by issuing new shares, or by making a profit.

Market Ratios

Earnings per share

This shows for every share how much profit has company earns during the time period and the actual amount that a company could pay to their investors per share. EPS breaks down a firm’s profit on a per share basis and shows what the market is willing to pay on a company net income. EPS for 2015 and 2014 were positive at $0.01 and $0.02 respectively. In 2017 and 2016 company EPS was negative at -$0.03 and -$0.02 as company has generated a loss instead of profit. The company has generated losses because they have reduced the number of product parts manufactured from 800 to 300.

Dividends per share

This is how much a company pay to their investors per share. Azure healthcare has not paid any dividends to its shareholders for four years. So, I could not calculate this. Furthermore, for years 2017 and 2016 the company could not pay any dividends as it made losses.

Price earnings ratio

PE ratio shows how long a company takes to pay back for an investment that shareholders made. PE ratio of Azure Healthcare was -2.9 in 2017 and -2.6 in 2016. In 2015 PE ratio was 24.3. PE ratio has been decreased from 2015 to 2017 dramatically.

Reformulated financial statements

Return on Equity(ROE)

The return on equity ratio, is a measure of shareholder’s return on the investments that they have made in a company. ROE for 2014 was 26.01% and in 2015 it was 7.7%. The ROE ratio has decreased from 2014 to 2015 in almost 3 times. The ROE ratio was negative in Azure healthcare in 2017 at -28.07% and in 2016 at -83.02%. ROE ratio has been decreased from year 2014 to 2017 continuously. This is bad for the company.

Return on Net Operating Assets(RNOA)

RNOA ratio shows how much operating income a firm has generated in relation to its operating assets. RNOA ratio for year 2014 was 26.25% and 8.06% in 2015 in Azure Healthcare. In 2016 it was -26.17% and this has further decreased to -84.99% by 2017. The RNOA ratio has decreased continuously from the year 2014 to 2017. There was a dramatic decrease from 2016 to 2017 by over 3 times. When comparing with ROA ratios with RNOA ratios, there is a huge gap between RNOA and ROA ratios for all four years.

Return on Assets Return on Net Operating

Assets

2017 -39.5% 84.99%

2016 -15.5% -26.17%

2015 4.7% 8.06%

2014 17.6% 26.25%

As per above table RNOA ratio figures are higher than ROA ratios. This is because we only have considered operating income and operating assets when calculating RNOA.

Net Borrowing Cost

The net borrowing cost shows the how much interest rate a firm pays for its borrowings. Azure Healthcare has paid 0.38% in 2014 and 0.34% in 2015 on company borrowings. The borrowing ratio has increased from 0.45% in 2016 to 0.92% by 2017. The borrowing cost has increased for the company throughout the years. The financial expense has risen by 2017 as company has taken more long-term borrowings to build new manufacturing facilitates.

Profit Margin

PM shows how much profit or loss a firm makes for every dollar of sales. PM indicates how well a firm operates and contributes to its profit than Net Profit Margin(NPM) as it shows a clear view of operating costs compared to NPM.

Net Profit Margin Profit Margin

2017 -23.4% -22.89%

2016 -10.8% -10.49%

2015 3.1% 3.25%

2014 11.9% 12.08%

Looking at above figures there is not much difference can be noticed between NPM and PM. Only a slit difference can be seen just above 1%. We calculated NPM using original financial statements and PM using restated financial statements. In 2017 PM was -22.89% and 12.08% in 2014. PM has been decreased gradually from 2014 to 2017. NPM also has been decreased gradually throughout the years.

Asset Turn Over Ratio(ATO)

As same as the Total Asset Turnover ratio (TATR) the Asset Turnover (ATO) shows how efficiently a firm use their assets to generate revenue. Firms calculate TATR using original financial statements and ATO using restated financial statements. ATO can calculate dividing sales by Net Operating Assets.

Total Asset Turnover Ratio Asset Turn Over Ratio

2017 1.67 3.71

2016 1.44 2.50

2015 1.49 2.48

2014 1.47 2.17

In 2014 ATO was 2.17 and this has been increased to 3.71 by 2017. This is a good trend. That means the company is using the operating assets efficiently in generating sales. When looking at the above figures it can be seen that ATO ratios are higher than TATR figures. ATO gives a better view when operating assets are separated from total assets.

Economic Profit

Economic profit is the difference between the revenue and its opportunity cost. Economic profit is made up of three things. They are RNOA, cost of capital and net operating assets (NOA). Firms create value for the company investors when the return on net operating assets (RNOA) is greater than its opportunity cost of capital. When firms invest in net operating assets at returns greater than its cost of capital they create high value.

RNOA can calculate dividing operating income by net operating assets (NOA) invested in the business. The cost of capital is also called weighted-average cost of capital(WACC). I decided to take the percentage of 10% as the Weighted Average Cost of Capital, as I could not find any other WACC in the annual reports of Azure Healthcare.

In 2017 and 2016 Azure Healthcare has generated an economic loss of -$ 7585.02 and -$ 4641.87. This is because company RNOA is less than WACC. RNOA is a negative value because the company has generated operating losses during these years. So, the company could not add any value to the company investors in those years. Economic profit of the year 2015 was $272.75 and $ 2340.89 was in 2014. In 2014 the firm has added value to their investors as RNOA is greater than the cost of capital. The company has generated operating income this year. Looking at the trend the economic profit of the company has been decreased from 2014 to 2017. This is not good for the company.

Step 9

Capital Investment Decision

I have developed a capital investment decision for Azure Healthcare. The company has invested a high amount in 2017 in research and development to develop information-based systems in order to improve patient care. The demand for software and informatic base solutions has increased, the company expect to expand their future investments to develop patient stations with built in RFID (Radio frequency identification), a near field communication system. This would enhance the communication of patient movements to the staff in real-time.

During the next phase of capital investment, the company can invest in developing a “Artificial Intelligence and Analytics Unit” with in the business. The primary function of the unit is to analyse enormous data produce by the Tacera in the client hospitals and aged care

facilities to develop machine learning tools and forecasting tools (Staff scheduling, logistic scheduling) to enhance their profits and customer service.

The table below shows the estimated investment cost, useful life time and estimated future cash flow.

Patient station Artificial intelligence unitOriginal Cost $5 Million $8 MillionEstimated Useful Life 10 years 10 yearsEstimated Future Cash Flows31 May 2019 $0.5Million $1.5 Million31 May 2020 $1 Million $2.2 Million31 May 2021 $1.2 Million $2 Million31 May 2022 $1Million $2.5 Million31 May 2023 $1 Million $1.5 Million31 May 2024 $1 Million $1.2 Million31 May 2025 $0.5 Million $1 Million31 May 2026 $0.5 Million $0.8 Million31 May 2027 $0.2 Million $0.5 Million31 May 2028 $0.2 Million $0.2 Million

Option 1: Develop patient stations with built in RFID

As shown in the results on the spreadsheet, there is an expected -$0.3 Million of NPV if the company invest money on developing patient stations with built in RFID. IRR is 8.4% for this option.

Payback Period: For company to recover the initial cost for this project it will take 4 years and 3 months.

Option 2: Artificial Intelligence Analytics Unit

If the company invest money in developing artificial intelligence and analytics unit expected NPV is $ 1.18 million and IRR is 14.2%.

payback period: It takes 4 years and 11 months for company to cover the initial cost that they make if they choose this option.

Investment decision

I recommend Azure Healthcare to invest money on developing artificial intelligence analytics unit. This will be popular in the market as this is associated with modern technology. When compared the results of calculations, the second option has a higher NPV and higher IRR. Payback period will take only 8 more months than the option 1. The company can gain more profits in investing to develop artificial intelligence analytics unit.

Step 10

It has been wonderful calculating ratios and comparing my company ratios with the ratios of my peers. I provided some feedback to some of my peers after checking their assignment drafts.

Feedback From: Vithanage Perera Feedback To: Tonia Daniel

My CommentsStep 7Identify three products or services of your firmEstimate selling price, variable cost & CMCommentary – contribution margin Constraints – identify, commentary

You have researched about three products of the company and included a screenshot of the products and actual retail price.

You have explained about your estimate selling price, variable cost and CM well. The calculations are clear.You have identified the company constraints clearly mentioning about company competitors. Such as Amazon coming to Australia and how it could affect the company.

Step 8Calculation of ratiosRatios – commentary (blog)Calculate economic profitCommentary – drivers of economic profit (blog)

You have calculated all required ratios accurately. All ratio calculations are neat and clear. Easy to understand. You have explained about the economic profit clearly.

Step 9Develop capital investment declines for your firmCalculation of payback period, NPV & IRRRecommendation & Discussion

You have developed two investment opportunities that the company could invest by calculating NPV and IRR values and payback period.

Step 10Individual feedback with other students

Not yet completed

OVERALL ASS#2 Overall, you have done a great job with all your assignment steps.

Feedback From: Vithanage Perera Feedback To: Mariah Smith

My Comments

Step 7Identify three products or services of your firmEstimate selling price, variable cost & CMCommentary – contribution margin Constraints – identify, commentary

You have calculated Contribution Margin for three products of the company clearly. You have calculated variable cost for each product in detail.The calculations are easy to understand.

Step 8Calculation of ratiosRatios – commentary (blog)Calculate economic profitCommentary – drivers of economic profit (blog)

All ratio calculations are neat and clear. You have calculated the ratios accurately. You also have explained about some of the ratios in detail. But you do not have explained about economic profit in detail. I recommend you include an additional paragraph about economic profit. As Maria advised us in the video to write about it.

Step 9Develop capital investment declines for your firmCalculation of payback period, NPV & IRRRecommendation & Discussion

You have developed two investment decisions for the company. You have calculated NPV and IRR values and payback period in the spread sheet. You have recommended the company a good investment opportunity.

Step 10Individual feedback with other students

Not yet completed

OVERALL ASS#2 Overall, you have done a great job in completing each step of the assignment.

Feedback From: Vithanage Perera Feedback To: Antonius Raymond

My CommentsStep 7Identify three products or services of your firmEstimate selling price, variable cost & CMCommentary – contribution margin Constraints – identify, commentary

You have chosen three products of the company and calculated Contribution Margin for each of product accurately. The calculations are clear and easy to understand.

Step 8Calculation of ratiosRatios – commentary (blog)

You have calculated all ratios accurately by linking the figures from original and restated financial statements.

Calculate economic profitCommentary – drivers of economic profit (blog)

You have explained about the ratio calculations in detail comparing the results and how the company has performed from 2014 to 2017. I recommend you write bit more information about economic profit. Such as what is economic profit, how firms calculate it etc.

Step 9Develop capital investment declines for your firmCalculation of payback period, NPV & IRRRecommendation & Discussion

You have developed two capital investment decisions for the company. You have calculated NPV and IRR values and payback period in the spread sheet for both investment decisions.

Step 10Individual feedback with other students

Not yet completed

OVERALL ASS#2 Overall, I think you have done a great job in completing each step of the assignment.