AC0823F Analysing Organisational PerformancePage 26 of 26University of xAnalysing Organisational PerformanceAssessment 1/9/2012Semester I, Year ISummary of Report This report mainly consists of 6 parts. Part 1 is a short and brief introduction into the history of the company, while Part 2 introduces the workings of 8 financial ratios, and analyses the performance of the company. Part 3 and 4 deal with an explanation into cash flow statements and marginal costing, and their importance in predicting the financial position of a company. The fifth part deals with capital budgeting and financial investment appraisal and gives a short overview in the methods used to carry out capital budgeting along with their significance. The last part of the report, i.e. Part 6, is simply a pro forma spreadsheet with the formulas required to calculate the different methods given in the fifth part. This will be attached to the report in a spreadsheet format. This will be followed by an appendix which will include the full copies of my companys financial statements along with any other necessary information. References in Harvard style will be included after that, followed by a short bibliography with some recommended reading. All sources are verifiable, and I have used published books, online news articles, college notes, journals and publications as sources and references for my assignment. Contents List Title Page NumberTitle Page 1Summary 2 Contents List 3Introduction 4Part I History of Digi Telecommunications 5Part II Calculated Ratios 6Part II Analysis of Digi Bhd. 12Part III Cash flow statements 15Part IV Marginal Costing 16Part V Investment Appraisal 19Conclusion 22Appendix including Part VI Spreadsheet 23Bibliography 26Introduction This report is a short analysis of the telecommunications company, Digi. I have written this report in order to assess the performance Digi as well as to judge its past, present and future performances. The aim of my report is to provide a comprehensive outlook of Digi and its performance between the two years available, 2009-2010. This report was written a requirement for the first semester of analyzing organization performance. My aims and objectives of this report are to calculate ratios for Digi Bhd and hence use the same in order to find the financial position of the company.The report covers six (6) parts, and each part is clearly labeled with indicators as to the content of that specific parts. Wherever needed, I have added notes for further reference.I have used a wide variety of sources of information for structuring my report, such as the companys online reports, financial accounting books, journals, news articles and college notes. I aim to provide an unbiased and comprehensive view to the structuring and workings of the company.Part I History of Digi Telecommunications:DiGi Telecommunications is a communications service provider in Malaysia. Digi is well known in Malaysia as they are one of the leading telecommunications companies, providing services to millions of Malaysians all over the country. Digi was the first company to launch a digital cellular network in Malaysia. Digi's achievements are well known in the local market and they are one of the leading mobile service providers to consistently win awards from local bodies. A recent report from The Borneo Post revealed that DiGi is the only Telco Company that managed to record double-digit revenue growth at the expense of its rivals..., Part II (I) Financial Ratios of Digi Bhd for the years 2009 & 2010: Note: All figures expressed are in '000s of Ringgits1) Current Ratio = Current Assets / Current Liabilities2009:Current ratio= 874096 / 2025786 =0.43:12010:Current ratio= 1330782 / 2271589 = 0.59:12) Net Profit Ratio = (Net profit / Net sales) 1002009:Net sales = 4,909,565Net Profit Ratio = [(1,000,471/4,909,565) 100]=20.3779968286396 or appx. 20.38%2010:Net sales = 5,406,457Net Profit Ratio = [(1, 178, 004, /5,406,457) 100]= 21.78883509107721 or appx. 21.79%3) Debtors Turnover Ratio = Total Sales / Average Debtors2009:Average Debtors = (420,336+420,807)/2 = 841,143/2Total Sales = 4,909,565 4,909,565/420,571.5 = 11.67 Times2010:Average Debtors = (437,099+420,336)/2 = 857,435/2Total Sales = 5,406,4575,406,457/428,717.5 = 12.61 Times4) Fixed Assets Turnover Ratio = Sales / Net Fixed Assets 2009:Fixed Assets Turnover Ratio = Sales / Net Fixed Assets= 4,909,565 / 2,908,174= 1.689 Times2010:Fixed Assets Turnover Ratio = Sales / Net Fixed Assets = 5,406,457 / 2,959,894 = 1.827 Times5) Rate of Stock Turnover = Cost of Goods sold/Average Stock2009:1,170,858 / (13,061+17,053) / 2=1,170,858 / (30,114) / 21,170,858 / 15,057= 77.76170551902769=77.762 times2010:1,404,195 / (43,099+13,061) / 2= 1,404,195 / (56,160) /2= 1,404,195 / 28,080 = 50.00694444444444 Times= 50 times6) Debt Ratio = Total Liabilities / Total Assets20093,210,976 / 4,732,444 = 67.85026933229426% or 67.85%20103,790,011/5,136,633 = 73.7839553653142% or 73.784%7) Return on net assets = Profit after tax / (Fixed assets + working capital)Working capital = (Current Assets Current Liabilities)2009:1,000,471 / 2,908,174+ (874096 - 2025786)=1,000,471 / 1,756,484 = 56.95%2010:1,178,004 / + 2,959,894+ (1330782 - 2271589)=1,178,004 / 2,019,087 =58.34%8) Liquid Ratio = Liquid Assets / Current LiabilitiesLiquid Assets = Current Assets (Stock + Prepaid Expenses)2009:Liquid Ratio = (874096 - 13061) / 2,025,786 = 861,035 / 2,025,786 = 0.425:12010:Liquid Ratio = (1,330,782 - 43,099) / 2,271,589 = 1,287,683 / 2,271,589 = 0.567:1(II) Analysis of Digi Bhd for the year 2010: (All values in millions of ringgits)My forecast for the year 2010 is that DiGi is doing well, stable performance and its able to cut their losses from previous years. The net profit of DiGi has increased from 1000 RM to 1178 RM in 2010. This can be seen as a stable increase, however if we compare the net profit for 2008 which is 1141, we can merely infer that DiGi managed to cut their losses in the year 2009, which had an economic slowdown. The forecast for the year 2011 is good; with signs of the Malaysian economy getting back on track, as well as news of the sale of the coveted iPhone in Digi, will surely attract customers in the droves to DiGi. DiGi continued to strengthen its market position and market share increased to 25.6%. This will surely have a positive impact in the telecommunications market as DiGi further proves its domination in the market. More and more Malaysians are getting connected, and DiGi is the forerunning factor for such a move in Malaysia. For the financial year ended Dec 31, 2010 (FY10), Digis revenue increased 10.1% to RM5.4 billion, amid higher take-up of smart phone bundles, increased data usage and a larger subscriber base. Net profit surged 17.7% to RM1.18 billion from RM1.0 billion the previous year.Investors of Digi can also rejoice, as their earnings per share have increased to 151.5 sen from 128.7 sen in 2009, along with net dividend per share of RM1.63 or total dividend of RM1.267 billion, representing a dividend pay-out ratio of 108%. Group revenue increased by 10.1% to RM 5.4 billion, while Digi's customer base grew by 14.2% to 8.8 million compared to the previous year. EBITDA margin for the year held firm at 44.4%, driven by positive results from our cost efficiency initiatives. Despite Digis 10.1% growth in revenue, operational expenses remained the same as in 2009, thus highlighting the efficiency of Digis cost effective measures. According to a report, "DiGi.Com Bhd said it will pay out 138% of its 2009 net profit as dividends after posting full-year earnings that were in line with analysts expectations but which showed the effects of last years economic slowdown. The full-year dividend payout, at RM1.78 per share and totaling RM1.38bil, is DiGi largest in terms of proportion to its net profits and gives its shares a dividend yield of 8% based on yesterdays closing price of RM21.10 per share. DiGi used its strong cashflows and raised a little more debt to pay out its dividends. It is likely to maintain, if not increase, its dividend payments in 2010."The higher current ratio in 2010 is a statement of the fact that Digi managed to increase its current assets by 52.25% between the two years. The bulk of the increase is attributed to the higher value of cash equivalents, which almost doubled from 430,096 in 2009 to 850,584 in 2010. However inventory also recorded a 229.98% increase between 2009 and 2010 which may also indicate an overstocked inventory, and the inability to sell stock off at a steady rate. Trade and equivalents remained stable, recording a 3.98% increase. The high value of current liabilities may prove to be a cause of concern for Digi BHD. as current liabilities continue to out value current assets for the second consecutive year. Trade and payables accruals amount for the majority of current liabilities, clocking in at 1,461,297 and 1,128,503 for 2010 and 2009 [according to note 21]. This might prove to be a disadvantage for Digi unless they manage to pay them off, as accruals have recorded an increase of 29.49%. Loans and borrowings in 2010 increased to 1,076,863 from 772,010 in 2009. However loans and borrowings maturing between two to five years may prove to be a difficulty for the company in future years, as they increased from 522,870 to 797,019 between the two years [note 18] The stable increase of Digis Debtor turnover ratio indicates that Digi was able to satisfactorily handle its debtors and receivables and manage them efficiently. It would be advisable not to make any changes with regard to trade receivables, noting the satisfactory progress for the year. Fixed Assets remained relatively stable, recording a Rm 50,000 increase from last year. The high amount of fixed assets may prove to be a cause of worry, as fixed assets are less liquid and cannot be easily converted to cash. It was also a major factor in the value of the depreciation, which also remained high at about 618,000 Ringgits for the year. DiGi might want to think about converting their fixed assets into current assets, or reducing the viability of their fixed assets.The company is also committed to becoming a leader in sustainable business practices and ethics. Since 2005, the company has returned more than RM6.8 billion in cash to shareholders as a result of their capital discipline to ensure that generated strong operating cash flow to fund our investment activities. Long-term shareholder capital would have enjoyed total returns to about 300% since 2005. Part III Role of Cash Flow Statements:The cash flow statement is a statement used in financial analysis, and it shows the cash aspect of companies business. It is broken down into operating, financing and investing activities and shows how the changes in the final accounts affect the cash funds of the company. The cash flow statement is very useful in budgeting analysis, as the company can make use of it to predict and analyze the future cash inflows and outflows of the company. Many such companies reinvest all of their cash flow into growing the business, leaving them little or no free cash -- but that doesn't necessarily make them poor investments. One has to take a closer look at the company in order to determine their usage of resources.By calculating incomes, expenses, earnings, capital and cash, the investor can get an accurate and concise view of what is considered the most important facet of a company: the amount of cash generated, and, the amount of cash earned from its core operationsCash flow statement helps us in different ways such as:It tells us about the liquidity and solvency amount of the firm, and the change in the cash flow in future budgets. It also gives us more useful date for mapping and analyzing changes in capital and equity. The cash flow helps us compare different companies operating performance by removing the differences in accounting procedures between firms. It also helps us in understanding the rate, timing and level of future cash flows. Part IV The Importance of Marginal Costing as a tool to support decision making:The Marginal cost is the amount of cost required to produce one extra unit of the good. In other words, Marginal costing distinguishes between fixed costs and variable costs as convention ally classified.Marginal costing is formally defined as:the accounting system in which variable costs are charged to cost units and the fixed costs of the period are written-off in full against the aggregate contribution. Its special value is in decision making A company engaged in production of multiple products is interested in the study of the relative profitability of its products so that it may suitably change its production and sales policies in case of those products which it considers less profitable or unproductive. While taking this decision the concept of profit volume ratio can be applied.An objective of the enterprise is to get maximum profits, so, the management would prefer that product mix which is an ideal one in the sense which yields maximum profits. In this case maximizing Contribution is maximizing profit.The attractions of using marginal costs are as follows:In the short term, relevant costs are required for decision making and fixed overheads are largely irrelevant because they cannot be avoided They are best seen as committed cost of the periodProfit calculation is not dependant on changes in stock levels. They have a practical effect of disentangling fixed costs from stock values.There is no risk of carrying forward in stock an element of fixed production overhead cost which may not be recovered through sales Marginal costing is particularly useful in internal decision making of the firm. By weighting and analyzing a products marginal cost, the company will be able to have an effective cost comparison of different products of the company and the most effective product to produce which bring forward highest returns. The cost-volume-profit analysis is the systematic examination of the relationship between selling prices, sales, production volumes, costs, expenses and profits. This analysis provides very useful information for decision-making in the management of a company. For example, the analysis can be used in establishing sales prices, in the product mix selection to sell, in the decision to choose marketing strategies, and in the analysis of the impact on profits by changes in costs. In the current environment of business, a business administration must act and take decisions in a fast and accurate manner. As a result, the importance of cost-volume-profit is still increasing as time passes.. This marginal cost analysis provides very useful information for decision-making in the management of a company. For example, the analysis can be used in establishing sales prices, in the product mix selection to sell, in the decision to choose marketing strategies, and in the analysis of the impact on profits by changes in costs. In the current environment of business, a business administration must act and take decisions in a fast and accurate manner. As a result, the importance of marginal costing is becoming more and more important. Digi Bhd can use marginal costing as a viable tool to decide on product outlays, however this is slightly restricted due to the fact as it is a telecommunications company, there is an inability of calculation marginal costs for some products, as it earns its revenue through different means other the products.An example of the marginal costing approach is tabulated in the below tablePeriod 1 $Period 2 $Period 3 $Period 4 $Period 5$Total $Opening StockNil270810810450nilCost of Production2070243023402160225011250Closing Stock(270)(810)(810)(450)NilNilCost of goods1800189023402520270011250Fixed costs of period5005005005005002500Total Costs2300239028403020320013750Sales4000420052005600600025000Gross Profit1700181023602580280011250Part V Investment Appraisal methods:In modern times, the efficient allocation of capital resources is a most crucial function of financial management. All these assets are extremely important to the firm because, in general, all the organizational profits are derived from the use of its capital in investment in assets which represent a very large commitment of financial resources, and these funds usually remain invested over a long period of time. New projects such as investment decisions of a firm fall within the definition of capital budgeting or capital expenditure decisions.Businesses have limited financial resources, they have to decide how to best invest the limited resources. At any given time, a business will have the choice allocating its resources between alternative projects or capital investments. The proper choice of investment is necessary to ensure that the business earns optimum returns.Two mains factors are required to be considered by a business before making any investment.They are:-Rate of Return-Cost of Capital.The rate of return is the minimum return on the investment of a business. If a project or business is unable to earn minimum rate of return, then the project may be rejected unless other subjective factors require the project to be undertaken. The rate of return varies between enterprise to enterprise and from project to project. The cost of capital is another important factor to consider before making any investment or plan. The minimum rate of returns must be higher than the cost of capital. Another factor to consider is the time value of money, as investments and returns are spread over a period of time. Also, the purchasing power of money diminished in times of rising prices.Investment Appraisal:Investment appraisal involves:Deciding on the projects to be undertakenAmount of finance to commit to the projectsLong term profitability of a business depends on the ability of the business to evaluate and appraise the various capital investment opportunities To assess the viability of projects, the cash outlay, that is investment, and the cash inflow of the project are determined. Non-cash expenses are excluded. The amount of cash invested in a project can be readily calculated. However estimating future cash inflow is a difficult exercise, especially for new projects.A number of techniques can be used to evaluate investment opportunities, some of the commonly used methods are:Payback MethodNet Present value MethodInternal Rate of ReturnThe payback method is the simplest appraisal technique, and maybe the most popular technique. Payback period is the length of time required for cash flow from the investment to equal the initial cash investment in the product. Under this method, the time period to recover initial investment is found. The advantages are that is easy to understand and popular and wisely used but it has some disadvantages like the failure to recognize the time value of money.The net present value method is ma the present value of cash inflow matched with the initial investment. Projects will be considered successful if the present value of the cash inflow exceeds or is equal to the net cash inflow. Projects with positive NPV should be accepted and ones with negative value should be reconsidered or rejected. The Internal rate of return method is another method that uses the time value of money. But the results are expressed in percentages. Under the NPV method the decision is based on absolute amount of NPV. Some decision makers prefer to use a percentage rather than absolute amounts. The cash inflows are discounted using various discount rates. In other words, a company has to determine the discount rate which when applied to cash flows from the proposed investments, will give neither positive or negative NPV.ConclusionFrom my findings, I can conclude that Digi has done well for the year 2010. Its outlook is also bright for forthcoming years. I can conclude that Digi was a good choice for my report, and my findings are all concurrent with the fact that investors seem to be flocking in the droves to Digi. I also found out that Cash Flow statements are very vital in calculating a companys financial position, and the impact on marginal costing in decision making. Investment appraisal strategies have also been included in report, and my findings seem to point to the fact that they are critical for appraising the companys investments and projects.Appendix:Notes: 1) All figures included in the Ratios sections are calculated in '000s of Ringgits2) As information for Total Sales were not readily available, as Digi is a telecommunications company, Revenue was replaced by Sales wherever necessary3) Full referencing have been given, as per Harvard referencing, wherever information such as the location of the publisher were not available, they have been omitted.4) The spreadsheet was formulated on MS Excel and converted in MS word,. For comprehensive reference.5) Full copies of annual reports have been attached, including parts of the notes, wherever needed.Part VI SpreadsheetCash InflowsYearProject AProject B1xx2xx3xx4xx5xxProject ACash FlowPresent Value FactorPresent Value of Cash FlowYearRM1xxx2xxx3xxx4xxx5xxxInflowxInitial Investment(x)Net Present ValuexProject BCash FlowPresent Value FactorPresent Value of Cash FlowYearRM1xxx2xxx3xxx4xxx5xxxInflowxInitial Investment(x)Net Present ValuexNet present Value1/(1+r)nr - annual rate of interest n - time period Bibliography Weetman, Pauline (2006). Financial and Management Accounting - An Introduction. 4th ed. Madrid: Prentice Hall. 517-521. Heakal, Reem . (2010). What Is A Cash Flow Statement?. Available: http://www.investopedia.com/articles/04/033104.asp. Last accessed 20th December 2011.Epstein, Barry J. (2007). Interpretation and Application of International Financial Reporting Standards. John Wiley & Sons Ltd. BorneoPost Online. (2011). Migration to LTE imminent for telco players. Available: http://www.theborneopost.com/2011/12/24/migration-to-lte-imminent-for-telco-players/. Last accessed 3rd Jan 2012. Wood, Frank & Sangster, Alan (2005). Frank Wood's business accounting, Volume 2. 10th ed. Prentice Hall. Royal, Jim. (2012). Meet the Cash Kings of Oil. Available: http://www.dailyfinance.com/2012/01/07/meet-the-cash-kings-of-oil/. Last accessed 6th Jan 2012. Helfert, Erich A. (2001). "The Nature of Financial Statements: The Cash Flow Statement". Financial Analysis - Tools and Techniques - A Guide for Managers. McGraw-Hill. p. 42. Ganachari, M.A.. (2011). Marginal Costing A Tool For Decision Making. Available: http://iifmglobal.com/blog/marginal-costing-a-tool-for-decision-making. Last accessed 7th Jan 2012.