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ACCT 11059 Accounting, Learning and Online Communication

ASSIGNMENT STAGE 2

Name : Kangseon Lee

Student No. : 12066048

Course : ACCT 11059 Accounting, Learning and Online Communication

Assessment No. : ASS#2 step 7-10

Due date : 12 February 2018 11:00am

Step 71

Tingyi (Cayman Islands) Holding Corporation is the largest instant noodle producer in China. It specialises in the production and distribution of instant noodles, beverages, baked goods and soft drinks with its brand name, Master Kong.

Master kong produce three assumptions of the products which are instant noodles, baked goods and soft drinks.

First product

MASTER KONG ROASTED PORK RIBS NOODLES CUP 105G

Sale price $1.20

Second product

Master Kong Classic black Milk Tea, 16.9 oz

This English style classic milk tea is super tasty. Selected premium tea leaves combined with high-quality New Zealand milk.

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Sale price $2.40

Third product

master Kong mineral water 550ml * 12 FCL pure water natural nutrition

sale price $1.25 (12bottles=$15)

Contribution margin = Sales revenue – variable cost.

1) contribution margin of instant noodle = $1.20 - 0.40$ = $ 0.80

2) Contribution margin of bottle of black milk tea =$ 2.40 - $ 1.20= $ 1.20

3) Contribution margin of bottle of water = $ 1.25 - $ 0.25 = $ 1

These food and beverage products’ contribution margin is all positive. These products are low price so I will calculate to make percentage, contribution margin divide sale price. Thus, instant noodles is 67%, black milk tea is 50%, water is 80%. Consequently, even if black milk tea CM is higher than other products, percentage of CM is lowest than others.

It might be one of the reason which product will be priority. In fact that, Master Kong produce more instant noodles than milk tea. Water produce a similar with instant noodles.

This is a evidence of why Master Kong was more concern the instant noodles than beverage products.

SHANGHAI, July 20, 2017 /PRNewswire/ -- Changes to an increase in consumption has affected the industry of Fast Moving Consumer Goods. The Giant of instant noodles industry,

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Master Kong, is prospectively giving the industry new space for growth. After a four-year continuous sales decline in the instant noodles industry, Master Kong leads the rebound of the whole industry.

It is of benefit to the enterprise restructuring that Master Kong integrates and optimizes its assets and tentatively reforms the manufacturing mode of the instant noodles industry, which would enable the enterprise to make a more timely response and adjustment during the next iterative upgrade of consumption.

A long period of time ago, instant noodles were mistakenly considered as Junk Food mainly because of being cooked in oil, a preservative, with high calories included and containing little nutrition. All these factors affected the sales and consequently the whole industry.

With an increasing varieties of food, rigidities will definitely shake the subsistence foundations of instant noodles industry. Hence, changing customers' negative stereotypes about the nutrition and security of instant noodles relates directly to the prospect of this industry.

For three years, Master Kong never stops investing in enhanced technology of products development. It carried out a research about the initiative guarantee system of vegetable source safety with Tianjin University of Science&Technology. This project plays an instructive role in moving the suppliers' producing areas, selecting the agricultural lands and controlling the safety quality of agricultural products at the source by the means of surveying the contaminated distribution of main domestic vegetable origins.

This June(2017) Master Kong sold its five factories involving tea-based drinks, fruit drinks, sodas and bottled water, whilst also stopping selling the above products as well.

CISION prnewswire. www.prnewswire.com/news-releases/instant-noodles-has-a-bright-prospect-in-chinese-market-master-kong-promotes-an-industry-recovery-300491364.html

This article present that consumption is changed rapidly and low contribution margin of products stop selling and sold the beverage factories as well.

I guess that Master Kong made a decision to stop produce some low contribution margin of products such as beverage goods.(black milk tea)

There might be more reason to stop produce beverage products, indeed, CM is significantly related to make a profit for the firms.

Step 8

Tingyi (Cayman Islands) Holiding Cop.

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　 2016 2015 2014 2013Profitability RatiosNet Profit Margin Net profit after tax/sales 2.54% 3.09% 4.73% 4.52%Return on Assets Net profit after tax/total assets 2.62% 3.32% 5.27% 5.87%

Kaylee( Ambition Group)

　 2016 2015 2014 2013Profitability RatiosNet Profit Margin Net profit after tax/sales 0.3% 0.9% -0.2% -1.7%Return on Assets Net profit after tax/total assets 1.4% 3.6% -0.7% -7.4%

Amanda (SIG plc)

　 2016 2015 2014 2013Profitability RatiosNet Profit Margin Net profit after tax/sales -4.2% 1.4% 1.3% -0.5%Return on Assets Net profit after tax/total assets -7.9% 2.3% 2.5% -1.0%

Net Profit Margin

Net profit margin is the amount of profit made per dollar of sales. For 2013, this was 4.52 cents per $1, then slightly increased the following year, and decreased for the two following years after. The reason why decrease total sales revenue their products, however compare other companys, Cayman holding Cop. Still positive percentages last 4years.

Return on Assets

Return on asset is how much profit per dollar made on assets. For 2013, this was 5.87 cents and slightly decreased until 2016 to 2.54 cents.

According to this comparison chart, Cayman holding Cop. have operated quite well because profitability ratios are all positive percentages within 4years.


Efficiency (or Asset Management) Ratios

Days of InventoryInventory/av.daily cost of goods sold 17.24 14.71 15.26 17.65

Total Asset Turnover Ratio Sales/total assets 1.03 1.07 1.11 1.30

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Days of InventoryInventory/av.daily cost of goods sold - - - -


Amanda (SIG plc)


Days of InventoryInventory/av.daily cost of goods sold 43.69 47.21 42.63 40.01


Days of Inventory

I realized that other students get struggle this part because recent company’s sale not only products or goods, but also various services. My firm produce instant noodles and beverage products, indeed, day of inventory is quite short term to compare SIG plc.

Total asset turnover Ratio

This particular ratio is to determine how well a firm is generating sales from their assets. Cayman Holdings Cop. has become slightly worth total asset turnover from 2013 until 2016. As I mention that above, total sales of product have decreased last few years. However, ambition group which support accounting and business recruitment for Australia has higher ratio than other company.


Liquidity Ratios

Current Ratio Current assets/current liabilities 0.72 0.68 0.64 0.66


Liquidity Ratios

Current Ratio Current assets/current liabilities 2.09 1.90 2.23 2.43

Current Ratio

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Cayman Holding Cop. has had slight fluctuations throughout the last 4 years. In 2013, current ratio was 0.66, meanwhile had 0.66 times more current assets than liabilities, to compare Ambition Group had 2.43 times more current asset than liabilities. Consequently, in my opinion, Cayman Islands are not quite well paying off their short term debts to compare Ambition Group.


Financial Structure RatiosDebt/Equity Ratio Debt/equity 134.53% 117.80% 124.78% 114.56%Equity Ratio Equity/total assets 42.64% 45.91% 44.49% 46.61%　　 57.36% 54.09% 55.51% 53.39%

Debt/Equity Ratio

This shows how much is being put in from other sources per dollar of the equity the owner and shareholders are putting in. Cayman Islands’ debt/Equity Ratio illustrate in 2013 to 2016 that rapidly increase 114.56% to 134.53% and This is a very large amount. Cayman Islands of the equation of debt/equity ratio tell high debt, it will lead to high finance cost.

Financial performance

Finance costs(74,560.

0)(61,838.

0)(47,151.

0)(37,351.

0)

Equity Ratio

Equity Ratio represent percentage of equity by total assets. Other side of equation is the debt ratio. By adding the two together you get 100%. In 2013, my firm started with 53.39% of debt, and increasing each year to 57.36% in 2016.

Movement in Equity

Total Comprehensive Income (127,810) 33,580 396,140 627,698

Total comprehensive income has decreased from positive of 2013 to negative of 2016.

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Market RatiosEarnings per Share (EPS)

Net profit after tax/nos of issued ordinary shares

$ 0.0380

$ 0.0502

$ 0.0866

$ 0.0884

Dividends per Share (DPS)

Dividends/number of issued ordinary shares

$ 0.0253

$ 0.0433

$ 0.0443

$ 0.0369

Price Earnings RatioMarket price per share/earnings per share 0.831 0.910 0.826 0.826

2016 2015 2014 2013

Number of issued ordinary shares 5,602,925

5,603,569

5,599,873

5,594,388

Earnings per Share (EPS)

This is your earnings dividing into shares(EPS). Comparing 2013 to 2016, the earnings per share has lost more than halved. Number of issued ordinary shares, there were similar amount of number of shares past 4 years. thus this cannot have been caused by new shares. Due to, Cayman Islands have had struggle to sale their products to lead to decrease their sales revenue and increase debt, increase financial cost. It has come earning per share decrease from $0.0884 in 2013 to $0.038 in 2016.

Dividends per Share (DPS)

This is the diluted version of EPS. This is what shareholders actually receive.

final of year dividened approved and paid(141,69

6)(242,42

6)(247,82

3)(206,634

)

Shares repurchased (2,219)

DPS has decreased 2013 to 2015, but shares repurchased in 2015. It has come to increase DPS in 2016, even though dividends per share was $0.0253 in 2016.

Price Earnings Ratio

Price Earnings RatioMarket price per share/earnings per share 0.831 0.910 0.826 0.826

Market price per share $ 0.0316

$ 0.0457

$ 0.0715

$ 0.0730

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This represents the time taken for a share to pay itself back, or in a way payback period. It was interesting to see that EPS and market price per share decrease each year from 2013 to 2016 by similar ratio except 2015 caused by repurchasing shares. In my opinion, Cayman islands shares are very elastic by investors.


Ratios Based on Reformulated Financial Statements

Return on Equity (ROE)Comprehensive Income/shareholders' equity -3.68% 0.86% 9.67% 15.99%

Return on Net Operating Assets (RNOA)

Operating income after tax (OI)/net operating assets (NOA) -2.33% 0.85% 6.95% 14.31%

Net Borrowing Cost (NBC)

Net fin. expenses after tax/net financial obligations -4.10% -0.82% 1.24% 2.27%

Profit Margin (PM) Operating income after tax (OI)/sales -1.17% 0.49% 3.70% 5.65%

Asset Turnover (ATO) Sales/net operating assets (NOA) 1.99 1.75 1.88 2.53

Economic profit (RNOA - cost of capital) x net operating assets (NOA)

(517,874.3)

(477,148.6)

(166,303.5)

186,360.5

Return on Equity (ROE)

This represents how much profit is being generated per dollar of shareholder equity. In this part I will compare bank interest simply, now bank interest is 1.5%. when you willing to invest Cayman islands? ROE of 2015 and 2016 is lower than bank interest. I guess that Cayman islands was tried to approach good performance activities. The evidence with, “For three years, Master Kong never stops investing in enhanced technology of products development. It carried out a research about the initiative guarantee system of vegetable source safety with Tianjin University of Science&Technology. This project plays an instructive role in moving the suppliers' producing areas, selecting the agricultural lands and controlling the safety quality of agricultural products at the source by the means of surveying the contaminated distribution of main domestic vegetable origins.” NEWS PROVIDED BY

Master Kong

Jul 20, 2017, 03:18 ET

However, from 2015 until present , ROE rapidly decline negative 3.68%.It was big loss for shareholders and investors.

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https://www.prnewswire.com/news/master-kong

Comparing NROA and ROA

Return on Assets Net profit after tax/total assets 2.62% 3.32% 5.27% 5.87%Return on Net Operating Assets (RNOA)

Operating income after tax (OI)/net operating assets (NOA) -2.33% 0.85% 6.95% 14.31%

These two calculations are basically the same, they compare income to assets. The only difference is that the NROA only compares the operating assets and excludes the financial assets.

This chart show ROA is still positive percentages but RNOA is rapidly dropped from 14.31% and -2.33%. that means, financial activities income more than operating assets.

Total financial Assets 1,602,015 1,137,598 1,268,253 1,279,441

Net Borrowing Cost (NBC)

This is basically the interest rate on borrowing. I just confuse first time because that’s number has the opposite effect, so positive number of percentages are negative effect for profit, negative number of percentages are revers meaning. In 2013, NBC was 2.27% but it has become positive effect of -4.10% in 2016. It makes me question about Cayman islands’ comprehensive income has declined past 4 years. However, how they make a positive effect of BNC?

In my opinion, this evidence will be support answer. “This June Master Kong sold its five factories involving tea-based drinks, fruit drinks, sodas and bottled water, whilst alsostopping selling the above products as well. Meanwhile, Master Kong repurchased the shares of Tingyi-Asahi Beverages Holding Co.. The reason why Master Kong made these changes is that it is aiming at the research and development of products by removing non-core assets.” NEWS PROVIDED BY

Master Kong

Jul 20, 2017, 03:18 ET

Otherwise, this mean is that financial assets are decreased.10

https://www.prnewswire.com/news/master-kong

Comparing Net Profit Margin (NPM) to Profit Margin (PM)

Profit Margin (PM) is similar to the Net Profit Margin (NPM)

Net Profit Margin Net profit after tax/sales 2.54% 3.09% 4.73% 4.52%

Profit Margin (PM)Operating income after tax (OI)/sales -1.17% 0.49% 3.70% 5.65%

PM calculate only the operating income, instead of both the operating and financial income. After removing the financial profit, there is a big difference between PM and NPM. In fact, in 2013 and 2014 it just 1% point diffence, however from 2015 , it has come 3% point different. This leads me to believe there is basically more profit margin on financing activities.

Comparing Asset Turnover (ATO) to Total Asset Turnover (TATO)

Asset Turnover (ATO)Sales/net operating assets (NOA) 1.99 1.75 1.88 2.53


Again, these two are different because financial activities. ATO only uses operating assets instead of total assets. In other words, financial activities are higher than operating activities, thus, equation of ATO is higher than TATO. Regarding of percentages rate, it has decreased from 2013 to 2016.

Economic profit

What is the economic profit? We shouldn’t confuse this with accounting profit (Revenue- Expenses). Economic profit compares opportunities. In other words, which option of opportunity cost higher than other.

Economic profit (RNOA - cost of capital) x net operating assets (NOA)

(517,874.3)

(477,148.6)

(166,303.5)

186,360.5

In 2013, economic profit was $186,360.5. This declined every year after, with 2016 has become negative $517,874.3. during 4years, Cayman Islands lost $704,234.8 profit. This is a significant change over a short period of time. I guess that Cayman Islands made adecision to sell five factories and stop selling all beverages caused by changed consumption, complicated channel management and serious compatition with huge firms.

Let’s have look how this effects the ratios.

Economic profit = (RNOA - cost of capital) x net operating assets (NOA)

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With RNOA = OI/NOA

In $’000 2016 2015 2014 2013

OI -97,915 44,382 379,313 618,683

NOA 4,199,591 5,215,308 5,456,165 4,323,225

RNOA -2.33% 0.85% 6.95% 14.31%

WACC 10% 10% 10% 10%

Economic Profit -517,874.3 -477,148.6 -166,303.5 186,360.5

Looking at the table, NOA was increase between 2013 and 2014, but decreased 2015 to 2016. At this point, 2013 and 2016 NOA are roughly the same. However, OI has rapidly decline past 4years.

what is driving the change in operating profit.

Operating Income = Operating Income Before Tax + Net Tax Expense + Other Operating Comprehensive Income.

In $’000 2016 2015 2014 2013

Operating Profit before income tax 413,629 487,693 685,853 708,814

Net Tax Expense -169,218 -194,063 -206,891 -225,135

Other Operating Comprehensive Income -342,326 -249,248 -99,649 135,004

Comprehensive operating income after tax

(OI)

-97,915 44,382 379,313 618,683

The table shows that operating profit it the biggest driver in operating income. But what is driving that down?

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Operating Income Before Tax = Total Operating Income – Total Operating Expenses.

In $’000 2016 2015 2014 2013

Total Operating Income 8,538,108 9,276,236 10,454,652 11,172,730

Total Operating Expenses -8,091,764 -8,742,900 -9,713,932 -10,412,389

Operating Profit before income tax 413,629 487,693 685,853 708,814

We can see from this table that total operating income and total operating expenses are roughly similar amount during 4years. That means are bottom of profit for the firm.

Ratios based on Reformulated Financial Statements tell us

PM = Operating income after tax (OI)/sales

ATO = Sales/net operating assets (NOA)

We discussed above that both our revenue and expenses are decreasing, with revenue decreasing faster. This is what is causing a decrease in our PM and ATO ratio.

In conclusion, it is fact that revenue is the significant driving factor. Thus, Cayman Island holding Cop. tried to change these downward profits by encourage investing in enhanced technology of products development.

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Step 9

I will analysis three figures regarding Bunnings and Coles information , Net Present Value (NPV), Rate of Return (IRR) and payback period of investment cost.

The investment would be made on 1 January 2019. The estimated future cash flows are expected to be received on 31 December of each year.

The original cost, the estimated life, residual value and estimate future cash flows of each investment opportunity are set out in the table below. All amounts are expressed in Australian Dollars AUD.

　 Bunnings 　 Coles 　

Original cost -$ 77 　 -$ 135 　

Estimated Useful Life 10years 　 10years 　

Residual Value $2 　 ($1.5) 　

Estimated Future Cash Flow 　Cumulative Cashflow 　

Cumulative Cashflow

31 december 2018( time period = 0) -$ 77 　 -$ 135 　31 december 2019(time period = 1year) $ -4 $ -81 $ -5 $ -140 31 december 2020(time period = 2year) $ 5 $ -76 $ -1 $ -141 31 december 2021(time period = 3year) $ 15 $ -61 $ 10 $ -131 31 december 2022(time period = 4year) $ 20 $ -41 $ 15 $ -116 31 december 2023(time period = 5year) $ 20 $ -21 $ 15 $ -101 31 december 2024(time period = 6year) $ 20 $ -1 $ 20 $ -81 31 december 2025(time period = 7year) $ 25 $ 24 $ 20 $ -61 31 december 2026(time period = 8year) $ 25 $ 49 $ 20 $ -41 31 december 2027(time period = 9year) $ 10 $ 59 $ 25 $ -16 31 december 2028(time period = 10year) $ 13 $ 72 $ 14 $ -3 NPV $ 5.88 　 $ -66.61 　

IRR 11.37% 　 -0.26% 　

Payback period 6years 　 Investment never paid back within 10 years

14.60 day0.48 month0.04 year

Assuming a rate of return/discount rate/WACC of 10%.

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There are two options of investment opportunities for Cayman Island Holiding Cop.

Above this chart represent NPV, IRR and payback period, Bunnings is positive NPV and IRR 11.37%, as well as, payback period only 6years. If cash flow is roughly matched real activities of firm, this option is reasonably investing for Cayman Island.

In conclusion, I would recommend option of Bunning investment for Cayman Islands. It is long term investment, even if any project has good plan and management, firm has to make a profit. Therefore, NPV, IRR and payback period of Bunnings project are more efficient and valuable project than Coles.

Step 10.

My assignment was completed too late so I couldn’t give feedback to other students.

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