laura m. sepulveda correa · web view2018. 2. 7. · laura m. sepulveda correa. student no....

Laura M. Sepulveda CorreaStudent No. 12067167ACCT11059 T3-2017

Step 7: Variable Costs and Contribution Margins

It was a bit of a difficult task to find Atlas Copco’s products’ price on their website. Most of the information found on it was purely a description of the products and if I wanted to know the price I would have had to call and enquire. Atlas Copco manufactures a variety of construction products used in mining, civil engineering, etc, and unfortunately, I do not know much about these type of product and what they might cost, so this was not an option for me. However, I did some more research and tried to find a website where I could buy the products without going through Atlas Copco.

I found a place called Stokker (www.stokker.com) and another called Airtoolswa (airtoolswa.com.au)

The products I chose to learn more about are:

Atlas Copco’s reversible plate compactor LG 504 was $18,182

Drainage pump WEDA 10N which comes with a water level was $2,567

200 cfm Refrigerated Air Dryer was $3,152

There is no reason why I chose these products for this assessment, as I have not had any experience with machines like them, but I have a general interest in construction work, for that reason I chose the compactor. The drainage pump was out of pure curiosity. And finally the refrigerated air dryer I know is used in different industries like the telecommunications industry making sure moisture is repelled away from the cables, paint industries, etc.

To determine the variable cost of the products Atlas Copco manufactures, I made a guessing utilising Maria’s suggestion from the lecture. However, I believe that Atlas Copco’s products not being high volume items, would have a variable cost of around 85%. Therefore, the variable costs for the items I have chosen are:

Atlas Copco’s reversible plate compactor LG 504: $18,182 * 85% = $15,454.7

Drainage pump WEDA 10N which comes with a water level: $2,567 * 85% = $2,182

200 cfm Refrigerated Air Dryer was $3,152 * 85% = $2,679

To find contribution margin I use the following formula:

Sales Price – Variable Cost = MC

Atlas Copco’s reversible plate compactor LG 504: $18,182 - $15,455 = $2,727

Drainage pump WEDA 10N which comes with a water level: $2,567 - $2,182 = $385

200 cfm Refrigerated Air Dryer was $3,152 - $2,679 = $473

Atlas Copco faces different constraints like the high cost of raw materials like copper and iron ore. Moreover, they have research constraints as they have to develop new technologies like the ones they have created before. So it takes time to create a new technology, testing and getting the approvals that are necessary for most countries to be able to sell. These technologies are the ones that make Atlas Copco stand out in the industry, for this reason, there is a high standard.

Another constraint that I imagine they would face would be the market itself. Their products are not household products, therefore the market is very small, as well as, they are not the only business that provides machinery of this kind, therefore competition is also a constraint.

At the time of deciding how much product to manufacture it is important to keep in mid this constraints.

Atlas Copco provides a wide variety of products, from small parts to big and expensive machinery. I think it is important for them to have a variety of products with distinct contribution margins in case things don’t go as planned. For example, Atlas Copco offers products used for mining, as well as construction and other different areas. If there is a massive change in one industry, for example, in the mining industry, if they do not continue operations Atlas Copco would not be able to sell. For this reason, I think it is smarter to have such a variety of products that contribute to the fixed costs (not putting all the eggs in one basket).

Also, some of the small parts which have a low CM are bought specially for a machine that when bought, it would have had a high CM. If these parts weren’t available because of their contribution margin, most people would not buy the machine in the first place because it would be impossible to find parts for it.

For these reasons, I think Atlas Copco and other companies need to also sell products that maybe do not have a high CM.

Step 8: Ratio Analysis

I have to admit I was very overwhelmed by this step. It took me a while to finish my ratios on my excel sheet due to other personal commitments, so I was afraid I was not going to be able to finish this step on time as Maria mentioned how long they thought it would take to finish.

I am sitting here hoping that all the study I have done this last 12 weeks will help me analyse the ratios that I have worked out for Atlas Copco. I have to say that watching the lectures and doing them at the same time was very helpful. I also felt very good to see the returns my company was making compared to Maria’s it felt like it was actually my company and I felt proud. I am happy that I have not only learned so much about accounting topics but I learned heaps about Atlas Copco and its financial side, which most people would not know the insights that I now know.

When I was completing my ratios part, I also felt so proud that all that hard work from my past assessments and previous steps have paid off, and I am so glad I listened to Maria when she said to label the accounts as OI, NOA, etc. It saved me so much time and it was very easy to find.

I am also happy to say that Atlas Copco has had a very stable time at least for the last 5 years and there are no big fluctuations in their profits.

Profitability ratios

These were the first ratios that we worked out, it included net profit margin which was given as a percentage figure and was obtained by taking the net profit after tax divided by sales. What this ratio basically tells us is that for each SEK of sale how much is Atlas Copco turning into profit. From 2013 to 2016 Atlas Copco has been rather consistent with its profitability. The lowest year was 2015 turning 11% of the money made from sales into profit. Moreover, in 2014, the net profit margin was 18%. In 2014 and 2016 Atlas Copco had a 15% net profit margin. Which tell me that it is consistent as there is not a great difference between the 4 years.

Furthermore, return on assets (ROA) which is obtained getting the net profit after tax and divide it by total assets. This percentage gives us an idea of how much money are we turning in relation to every

piece of assets. A company like Atlas Copco will need a number of very expensive machines to create their products, unlike another company whose majority of assets are intellectual assets. This is important because if a capitalized company like Atlas Copco have to stop operating, all those assets can be sold and be used to pay shareholders. In the case of Atlas Copco, its return on assets surprised me a bit as I was expecting a figure closer to what Maria had with her company. However, AC’s lowest ROA was 10.9% in 2015 and highest was 16% in 2014. Which is consistent with the total income for both years. 2014 has the year with the highest profit in the four years and 2015 the lowest profit.

As an investor, I would look at these figures and be really happy with them as overall, Atlas Copco shows to be profitable.

Efficiency Ratios

The days of inventory I thought to be quite high with a minimum of 46 days until the products are sold as an average over the four years. However, in the industry Atlas Copco is in, these products are not sold very often as most of them are very expensive as well as they are products that customers hold and use for a number of years. So I compared my numbers with Maria’s and I was surprised to see that her company is also keeping their products for around 45 days. Which made me realise how great and efficient Atlas Copco was (proud moment again). Comparing my four years I can again see the consistency except for 2015 which took 50 days. And I can understand why because in the last step I expressed how 2015 was not as profitable as the rest of the years as well as its profit after tax was as well a bit lower. Now I can see that they were taking about 5 days longer to sell the products compared to the other years.

The total asset turnover ratio sees how efficiently we are using the assets. I was surprised by the results I found. For every SEK of asset, Atlas Copco has been making 0.95, 0.89, 0.96 and 0.87 for 2013, 2014, 2015 and 2016 respectively. This was not good news, it meant that they were not using their assets efficiently. This makes me wonder if it is the lack of efficiency or their machinery and assets are just so expensive that the sales of the products do not even cover the value of the assets.

Liquidity Ratios

The current ratio shows how well can a company pay their debt. It is obtained by taking the current assets and dividing them by current liabilities. Atlas Copco did pretty well in this area. For example, in 2013, for every 1 SEK of liability, they had 2.35 of asset to pay for it. These ratios had a slight decrease over the four year period but Atlas Copco was still able to pay its short-term debt.

The liquidity ratios during this period were all consistent and there was not a drastic change.

Financial Structure Ratios

The debt/equity ratio is also given as a percentage to show the proportion of money that an external lender is putting in the company for every SEK that the shareholders put in.

In the case of Atlas Copco, for every SEK of equity that the shareholders put into the company, in 2013, another source put 121% of that same amount into the company. Overall these figures are very high, AC relies on external sources to finance a big portion of the business. The following 3 years that percentage decreased a small amount from 121% in 2013 to 107% in 2014, the increased to 120% in 2015 and then decreased to 118% in 2016.

From this figures we can also see that 2014 is consistent with the other aspects of the ratios we have worked out previously, being the year with the highest profit. And according to the debt/equity ratio, is the year with the least money from sources other than the shareholders going into the company. This percentage can help investors identify the level of risk that the company has.

The equity ratio is found by taking the company’s equity and dividing it by the total assets. This measures the proportion of assets that are financed by the shareholders, in other words, it measures if it is financed by equity instead of debt. This ratio is a concern when discussing the long-term issues of the business. I found Atlas Copco to be extremely consistent throughout these 4 years. And the equity ratio was not an exception, the proportion of assets owned was on average 45% in this period which I consider to be very high, it means that more than 50% of AC’s assets are founded with debt which it’s not a good thing for shareholders. Moreover, there was no sign of these figures considerably increasing or decreasing.

This equity ratio is consistent with the information shown previously on the debt/equity ratio part. It clearly showed that other sources financed Atlas Copco more than shareholders, and now we can see that the majority of its assets are funded with debt. I feel like it all fits like a puzzle.

Market Ratios

When it was time to look for the number of shares to find AC’s earnings per share, I felt so confused as my company did not display these shares like Maria has shown us during the lectures. Atlas Copco has two types of shares: share A and share B. I was not sure if they were ordinary shares or if preference shares. I was very confused. When I looked at my report, there was not such a thing as ordinary or common share nor preference shares. Then a beam of light hit me when I read the voting system explained at the bottom as shown in figure 1. Then I did some researching and I found that even though preference shares have priority of claim to the assets of the company they often

do not have voting rights which is not the case for common shares. So I figured that both shares A and shares B were common or ordinary shares as they both have certain voting right.

Figure 1

Atlas Copco 2014 annual report

Now looking at Atlas Copco’s earnings per share, I can see again the consistency throughout the years and with earnings per share between 9.50 and 9.82 per share. However, the dividends they pay shareholders per share are around half of the earnings. However, I noticed that the dividends are slowly increasing every year, with 5.42 in 2013, 5.43 in 2014, 5.96 in 2015 and 6.25 in 2016. This is a good sign and compared to other fellow students and Maria’s company I thought it was a pretty good dividend payment.

The price-earnings ratio compares the price of the shares with the earnings they make. Once again, AC showed consistency from the year 2013 to 2016, with the following ratios 19.35, 22.03, 21.72 and 28.86 respectively. According to Maria, the average price-earnings ratio is 20 – 25 and Atlas Copco’s mostly fall into this average except for 2013 being 0.65 lower than the average and 2016 which is 3.86 higher than the average. But still, it is not a massive difference.

What this means for investors is that AC’s shares will have a high growth in years to come compared to other companies and also from the ratios we can see that their shares are not inflated which would not be good for an investor. Moreover, every year from 2013 had a price-earnings ratio which means that the company is not losing money, so it is another important aspect to highlight.

Ratios Based on Reformulated Financial Statements

The return on equity (ROE) tells us how much we make in profit for every SEK of shareholder’s equity. This is seen as the rate of return that investors will be looking at before investing. It can also give an idea of how high or low is the company’s growth is.

Atlas Copco has a pretty good rate in this period. We can see that between 2013 and 2014 it increased by 2.43% and then decrease by 9.26% in 2015, we already know that 2015 was not as profitable as the rest of the years, this could be the reason. However, in 2016 it increased again by 3.79%. Something I noticed was that even though we had some years where it increased, the end rate was not as high as when we started comparing which was in the year 2013. I then went back and looked at the debt ratio to see if there was a big difference in how much debt was financing the assets between 2016 and 2013, but the figures were similar. Then I looked at the efficiency ratios and realised that the problem here was again the income made in those years. And in conclusion, Atlas Copco is not using the shareholder's money to create profit as much as it used to in 2013. There can be a variety of factor affecting these ratios, and at the moment they are unknown.

The return on net operating assets (RNOA) is similar to the return on assets but instead of the net profit after tax and total assets, we take the operating income after tax (OI) and divide it by net operating assets (NOA). These ratios give us a better idea of how profitable the company is by only including the operating aspects of it, which means that we do not include the financial assets or any financial income generated.

Investors want these ratios to be as high as possible so they can make more money. In the case of Atlas Copco, return on net operating assets is considerably higher than the return on assets. However, the return seems to have behaved differently to what it did with the ROAs in that period. With the ratios of return on assets (ROA) we had the percentages in the first year go up, then down, then up again. From 2013 the RNOAs decreased in 2014 and 2015 but finally in 2016 increased by 4.24% compared to the previous year. But even with the decrease of the RNOA in those years, the rates are still quite good with the lower one being 20.47% in 2015 and the highest 28.90% in 2013,

Moreover, the net borrowing cost (NBC) is the cost of the loans the company has. It is like the interest rate that Atlas Copco is paying. I was surprised because in the first year (2013) it decreased by over half the starting rate from 13.16% to 6.04% and stayed with a similar figure over 2015. However, in 2016 it increased by only 1.88%. I believe the rates are low in a business point of view, in the case of Atlas Copco it is important to have a low-interest rate as most of the assets were bought with debt. This is why it is so important for them to have a low rate to pay less in interest.

Profit margin (PM) is worked out similarly to net profit margin (NPM), but unlike net profit margin, profit margin (PM) used operating income after tax instead of net profit after tax. I was surprised to

see that both ratios of my PM and NPM were very similar which makes me think that pretty much most of my profit comes from my operating activities.

And just like the NPM ratios, Atlas Copco shows to be a profitable company.

The asset turnover (ATO) is the sales divided by net operating assets. It tells us how much of the operating assets in a SEK figure we are turning into sales. It is a bit like the total asset turnover ratio but we use operating assets instead. With the ATO we can see that Atlas Copco is now making at least 1.50 SEK for every 1 SEK of assets, which is a big difference compared to the TATO ratio where in none of the years it reached 1 SEK of sales. This tells me that Atlas Copco is using its operating assets efficiently.

And finally, the economic profit which is one of the most important parts of this assessment. It looks at the return on net operating assets minus the cost of capital which in Atlas Copco is 10%. From this part, I know it is a positive figure as my RNOA ratios are all over 20% and they are also fairly consistent. Once I had my percentage I then multiplied it by NOA to give me the economic profit. This profit takes into account the opportunity cost which is the second-best option that we have given up.

I was pretty happy to see positive economic profits and I started to look at the drivers that make up these results. I noticed that in 2013 and 2014 even though my RNOA ratios were basically the same, the difference in my economic profit was MSEK 2,887 which I found a bit odd. Then I noticed a difference between the two years in my net operating assets from my restated statement. The difference was MSEK 18,199 which is a pretty large amount and explains why the difference in economic profit.

I also noticed that the profit increased and decreased over the years, however, with only looking at 4 years it is difficult to find a trend or be able to predict if the economic profit for the coming years will increase or decrease.

Moreover, 2015 had the lowest profit in that period as it was to expect keeping in mind that the sales were rather low compared to the other years as well as the return on net operating assets, its profit for the year was MSEK 6,078. On the other hand, the year with the highest profit was 2014 with MSEK 11,291.

After looking at all these ratios I am happy that Atlas Copco was a company very consistent and probably saved me some headaches. The end results were very predictable as I seeing the trends mostly in 2014 and 2015. But overall, there was not much difference between all the years.

If I was an investor I would happily invest with Atlas Copco as they have shown to be a profitable company, that is still growing and pays good dividends every year.

Step 9: Capital investment decision

Atlas Copco is considering to expand due to high demand, it wants to build a new factory to be able to supply the demand. It is considering two options: opening a new factory in Australia or in China. They only have the funds to build one factory at the moment.

Atlas Copco plans to keep this factory for as long as it is profitable for them. However, to be able to compare the two projects I am going to assign an estimated length of 10 years for both projects.

Due to the size of the factory, they would be able to be sold at the end of the term in either country.

The cash flows for both projects would basically be generated from customer’s orders of the products that will then have to be shipped. The operational costs for the factory in China will be considerably lower compared to Australia as the award wages in China are considerably lower. These costs include production, administration, etc.

The investment would be made on the 1st of July of 2018. The estimated future cash flows are expected to be received on the 30th of June of every year.

Australia ChinaSEK SEK

Original Cost -1,254 million

-941 million

Estimated Useful Life 10 years 10 yearsResidual Value 31 million 25 millionEstimated Future Cash Flows30 July 2019 (time period = 1 year) 400 million 500 million30 July 2020 (time period = 2) 1,000

million1,700 million

30 July 2021 (time period = 3) 2,000 million

2,300 million


3,000 million


3,400 million


4,000 million


6,000 million


7,000 million


8,000 million

30 July 2028 (time period = 10 years) 6,000 million

8,200 million

I found this step to be a little difficult as I did not have an idea of what sort of cash flow a company like Atlas Copco would make at all and even more when it is starting a new project. I assume that because it is not starting a business and they already have a big demand, the cash flows would be positive from the start. However, I am only considering the possible cash flows received due to the

new factory. For this reason, I looked at my report and found that the average yearly cash flows are anywhere from 15,000,000,000. I kept my cash flows for the prospective factories considerably low because it would take time to train and get everything running as smooth as some of the other factories around the globe but they are still quite high compared to other companies’ cash flows.

Australia:

NPV 15,736 million SEKIRR 89.7%Payback period 1.85 Years

China:

NPV 21,972.97 million SEKIRR 130.6%Payback period 1.26 Years

Once I calculated the net present value, internal rate and payback period of both projects it was clear to me which one Atlas Copco should go for as it cannot choose both because as stated previously they are mutually exclusive.

Atlas Copco should choose to build its new factory in China as its NPV is considerably higher than the factory in Australia by SEK 6,237 million. And if that is not enough reason to decide to go for the factory in China, we can also compare IRR. I must say that both of them have a high rate, Australia 89.7% and China 130.6%. But China’s is again considerably higher. However, as both projects are mutually exclusive I would prefer to still make my conclusion from the NPV’s results. Moreover, both projects will be paid very quickly, to be precise, Australia factory will be paid in one year and 311.7 days and China factory in one year and 96.7 days.

So, in conclusion, I believe that Atlas Copco should choose China for its next factory.

Another point that I would like to highlight is the wages that need to be paid in China are considerably lower than in Australia, which would also affect the company’s profit at the end of the year.

Step 10: Feedback

I provided feedback to Tenille Ashton:

https://moodle.cqu.edu.au/mod/forum/discuss.php?d=272804#p765394

PEER FEEDBACK SHEET: ASS#2 (Steps 7-10)

Feedback From: Laura Sepulveda

Feedback To: Tenille Ashton .

My Comments

Step 7

Identify three products or services of your firm

Estimate selling price, variable cost & CM

Commentary – contribution margins

Constraints – identify & commentary

You have done a good job overall

I suggest to include competition as another constraint that your company may have, assuming they are not the only ones in the business.

I liked how you explained how you worked out the cost of their products

in this area.

I also would suggest to include some comments about the contribution margins you worked out, for example I noticed that all of them had a very similar CM, you could elaborate on this and say why this happens.

Step 8 I thought that your comments were very on point.

However, I thought that you should elaborate more on each aspect including some of the figures in your ratios for a better analysis as well as what happened in some

of the years so the reader can see the trends a bit easier.

Calculation of ratios

Ratios – commentary (blog)

Calculate economic profit

Commentary – drivers of economic profit (blog)

Step 9 I would suggest for you to again elaborate a bit more about why you would choose

Super Vida over Excel Pro, I know it may seem obvious sometimes but that is what markers want to see.

You could also include that Excel Pro will be paid back quicker than Super Vida and examine if that difference would be enough to change your mind on what to

choose.

Develop capital investment decision for your firm

Calculation of payback period, NPV & IRR

Recommendation & discussion

Step 10

Individual feedback with other students

Overall ASS#3 I think you still need to elaborate a bit more in some parts, but you’re in the right

track

Mitchell Kliese:




Feedback To: Mitchell Kliese .

My Comments

Step 7





You have done a very good job here

I really liked how you explained how your company diversifies the investment made by building in different areas to cover for losses if case

of price fluctuations

I cannot think of any things to add

Great job

Step 8Ratios seem to be correct and you have explained the well in my opinion.

Information flows and it’s easy to understand

Calculation of ratios




Step 9 And again great job

You have explained why you would choose to proceed with the shopping complex in Beijing, ChinaDevelop capital investment decision for your firm



Step 10

Individual feedback with other students

Overall ASS#3 Sorry I could not provide any suggestions

I think you have done an outstanding job and I wish you good luck

And Keira Esler:




Feedback To: Keira Esler

My Comments

Step 7





You have done a very good job here

You have identified your products and worked out their CM correctly

I would suggest for you to include why you think that their products have a different CM and like Maria asked, why do they keep the ones that make a low CM instead of only focusing on the ones that contribute the most.

Step 8Ratios seem to be correct and you have explained all your ratios and made the link between them as well which is what I did with mine. How good is when you find

the connections!!

Good job Calculation of ratios




Step 9 And again great job

You have explained why you would choose to proceed with the shopping complex in Beijing, ChinaDevelop capital investment decision for your firm



Step 10 Don’t forget to put your original costs as negative figures as they are investments

I agree with your decision to choose option 1 as you wouldn’t want a project that has a negative NPV Individual feedback with other students

Overall ASS#3 I think you have done an outstanding job and I wish you good luck

laura m. sepulveda correa · web view2018. 2. 7. · laura m. sepulveda correa. student no....

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