ASS#3 Draft

British Polythene Industries

Step 1

Ratio Analysis

After calculating ratios for the last four years of my firm I realize that ratio analysis is critical to gain a full understanding of financial statements for many users including investors and managers in making decisions. Because these ratios reflect all the parts of company’s performance including company's efficiency in terms of its operations and management, its ability to use its assets and earn profits, its sufficient liquidity and its reputation in market place.

Profitability Ratios

·         Net Profit Margin = Net profit after tax/sales      3.3%      2.6%      2.9%      2.9%

Profit margin is calculated as net profits after tax divided by sales. I initially confused because I cannot find ‘Sales’ account in my firm’s Income Statement. After discussing with my fellows about my problems I understand that ‘Sales’ is ‘Turnover’ in my statement. Profit margins are expressed as a percentage and, in effect, measure how much out of every dollar of sales a company actually keeps in earnings which varies from year to year. In relation to the net profit margin calculated for Polythene British Polythene Industries, the figures show that the highest net profit margin in 2011 at a rate of 3.3% which means the company has a net income of £0.033 for each dollar of total revenue earned. The ratios decreased slightly in following years with 2.6% in 2012 and the figures remained stable in 2013 and 2014, for every dollar that company earned the firm kept £0.029 of every dollar earned. In 2012, although the firm experienced a decline of 0.7% in net profit margin, they generated higher revenue of £’m507.5.

·         Return on Assets = Net profit after tax/total assets         6.5%      5.2%      6.0%      6.5%

The Return on Assets Ratio (ROA) illustrates how efficient company is at using its assets to create earnings calculated by dividing a company's net profit after tax by its total assets. That tells us how much the return is on every dollar of profit that the company makes on every dollar that is invested into the total assets. These ratios show that my company has generated a rate of 6.5% in 2011 before decreasing to 5.2% and 6.0% in 2012 and 2013 respectively. Then its level of return on assets recovered to 6.5% in 2014. This demonstrates that the higher profit does not directly mean a higher return because the figures for 2011 and 2014 in net profit are different (£’m16.4 and £’m14.8) but they have a similar rate of 6.6% of return for the total amount of assets in the company.

Efficiency (or Asset Management) Ratios

·         Total Asset Turnover Ratio           Sales/total assets             1.99       2.03        2.08        2.24

The Asset Turnover ratio can often be considered as an indicator of the efficiency with which a company is using its assets in generating revenue. In other words, these ratios show how much revenue gained for every dollar invested into assets. The figures demonstrate that the company experienced an upward trend in the amount of asset turnover from 1.99 increasingly gradually to 2.24 in 2014. Actually, the higher the asset turnover ratio, the better the company is performing. Therefore, my company effectively generated revenue from its assets over the period shown.

Liquidity Ratios

·         Current Ratio     Current assets/current liabilities               1.44       1.19        1.30        1.32

The current ratio (liquidity ratio) that present a company's ability to pay their both short-term and long-term obligations considering the relationship between the total assets of a company including both liquid and illiquid (cash, marketable securities, inventory, accounts receivable) and their current total liabilities (debt and accounts payable). The higher the current ratio, the more capable the company is of paying its obligations  A guideline for the current ratio suggests that a company’ current ratio under 1 indicates that its liabilities are larger than its assets and are likely to be unable to pay off its obligations if they came due at that point. Likewise, a current ratio below 1 shows that an unhealthy financial situation. In relation to my company, these ratios are greater than 1 (1.44; 1.19; 1.30 and 1.32 in 2011; 2012; 2013 and 2014 respectively) would suggest that the company seems to be able to pay off their current obligations.

Financial Structure Ratios

·         Debt/Equity Ratio = Debt/equity    543.7%             266.0%                  297.6%                 314.7%

Debt/Equity Ratio is a debt ratio is the measure of a company's financial control, calculated by dividing a company’s total liabilities by its stockholders' equity. The ratio indicates how much debt a company being fund to finance its assets relative to the amount of value represented in shareholders’ equity. My company’s debt to equity ratio shows that there has been a downward trend from 543.7% in 2011 to 266.0% in 2012, 297.6% in 2013 and increased slightly to 314.7% in 2014. This indicates that the company has taken on relatively little debt and thus has low risk.

·         Equity Ratio = Equity/total assets          15.5%    27.3%    25.2%    24.1%

The Equity Ratio tells us the amount of assets that are funded by owners' investments by comparing the total equity in the company to the total assets. This ratio allows companies to determine the areas where they would like to take any financial risks to improve the amount of equity that is allocated to different areas in the business. The equity ratio shows that my company has an unstable amount of equity over the past four years. In 2011, Sky Network Television had a relatively low figure of 15.5% then increased to 24.1% in 2014. These small figures are not healthy ratios because companies with higher equity ratios show new investors and creditors that investors believe in the company which are worth investing and are willing to finance it with their investments. A higher ratio also shows potential creditors that the company is more sustainable and less risky to lend future loans.

Market Ratios

·        Earnings per Share (EPS) = Net profit after tax/nos of issued ordinary shares      

0.60        0.48        0.52        0.56

The Earnings per Share (EPS) Ratio is an indicator of a company's profitability that is distributed to the number of ordinary shares in the company. It is calculated by determining the relationship between net profit after tax and the number of issued ordinary shares. I collected the number of issued ordinary shares from the note for Share premium account in my firm’s financial statement. My company’s EPS has fluctuated by falling rapidly from 0.60 in 2011 to 0.48 in 2012 then rose slightly to 0.52 and 0.56 in 2013 and 2014 respectively. These small figures indicate that my company are unlikely to expect the shares to generate more earnings in the future. Because higher earnings per share is always better than a lower ratio because this means the company is more profitable and the company has more profits to distribute to its shareholders.

·         Dividends per Share (DPS) = Dividends/number of issued ordinary shares           

(0.15)    (0.13)    (0.12)    (0.12)

Dividends per share (DPS) is the amount of dividends that the shareholders receive on a per-share basis. It is calculated using the total dividends paid out to shareholders over one fiscal year and the number of issued ordinary shares. My company experienced a negative amount of DPS in all of the four given years. The figures increased slightly from -0.15 in 2011 to -0.12 in 2014 indicating to my company that the expected share price of dividends is expected to rise in the future.

·         Price Earnings Ratio = Market price per share/earnings per share             

10.95     13.35     7.66        6.04

The Price Earnings Ratio indicates the dollar amount an investor can expect to invest in a company in order to receive one dollar of that company’s earnings by examining the relationship between the current market price per share and the earnings per share. High P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E. my company has experienced a downward trend in the amount of price earnings gradually deceasing from 10.95 in 2011 to 6.04 in 2014 showing the lower expected earnings growth in the company in future.

Ratios Based on Reformulated Financial Statements 

·         Return on Equity (ROE) = Comprehensive Income/shareholders' equity

-58.10%       22.58%           12.26% -11.72%

The Return on Equity (ROE) Ratio shows how much profit a company generates with the money shareholders have invested. The return on equity ratio examines the relationship between the amount of comprehensive income and shareholders’ equity. Over the past four years, BPI Polythene Industries have witnessed a significant increase of 80.68% from -58.10% in 2011 to 22.58% in 2012 before rapidly falling to 12.26% in 2013 then continuously dropping to -11.72% in 2014. These figures show the unstable financial health of my company because when net income is negative, ROE will also be negative. In 2012 and 2013 the ROE level greater than 10% so the company is considered strong and covers its costs of capital. But in 2011 and 2014 the negative ratios show a not good performance of firm with these years.

·         Return on Net Operating Assets (RNOA) = Operating income after tax (OI)/net operating assets (NOA) -31.34%   20.07%  13.07%                -5.70%

The Return on Net Operating Assets (RNOA) a key driver in generating value for a business. These ratio tell us the rate of return on the net operating assets in the company examining the relationship between the amount of comprehensive operating income after tax (OI) and net operating assets. Over the period, my company’s RNOA dramatically rose to 20.07% in 2012 from -31.34% in 2011 before falling by 7% in 2013 and 25.77% in 2014. The figure of RNOA is -5.7% in 2014 tells the company that the earnings under of the net operating assets invested in the business, hence gaining the not good financial position of the company.

·         Net Borrowing Cost (NBC) = Net fin. expenses after tax/net financial obligations              

-20.00%                -18.15%                -17.71%                -10.91%

The Net Borrowing Cost (NBC) Ratio shows the average interest rate the firm is paying on its financing calculated by examining the relationship between the net financial expenses after tax and the net financial obligations. In over four years, BPI Polythene recorded its negative rate of net borrowing of -20.00%; -18.15%; -17.71% and -10.91% in 2011, 2012, 2013 and 2014 respectively. Initially these negative values show profitable situation to the company.

·         Profit Margin (PM) = Operating income after tax (OI)/sales         

-3.86%  3.68%    2.06%    -0.92%

The Profit Margin (PM) Ratio is the measure how much out of every dollar of sales a company actually keeps in earnings which is similar to net profit margin. The profit margin ratio examines the relationship between the amount of comprehensive operating income after tax (OI) and sales. Over the past three years, my company has recorded its highest profit margin of 3.68% in 2012 before gradually falling to 2.06% and -0.92% in 2013 and 2014 respectively. These decreases in profit margin indicate to the company that there is no profit and unable to cover its costs.

·         Asset Turnover (ATO) = Sales/net operating assets (NOA)           

8.13        5.46        6.35        6.18

The Asset Turnover (ATO) Ratio reveals how much revenue the company is generating from each dollar's worth of assets calculated by establishing the relationship between the total amount of sales and the net operating assets. My company’s asset turnover ratio fluctuated over the four years decreasing from 8.13 in 2011 to 5.46 in 2012 before increasing to 6.35 and 6.18 in 2013 and 2014 respectively. Generally, ATO measures how well a company used assets to generate profit so according to these figures, my firm’s performance currently has no improvement.

Economic Profit Analysis

According to the economic profit for over the past four years of British Polythene Industries. The key drivers of my firm’s economic profit are the Return on Net Operating Assets (RNOA), cost of capital and Net Operating Assets (NOA) throughout the formula:

Economic profit = (RNOA – cost of capital) * NOA

Therefore, as I use 10% as my firm’s cost of capital, if the total rate of RNOA is less than 10%, my firm will generate a negative economic profit. If the total rate of RNOA is more than 10%, my firm will generate a positive economic profit meanings they add some value to company. We can see from the figures above, my firm generated negative economic profit -25.4 in 2011 and -12.9 in 2014 due to -31.34% and -5.70% in the rate of RNOA respectively. And they generated positive economic profit 9.4 in 2012 and 2.3 2013 with the rate of RNOA are 20.07% 13.07% respectively.

As a result, in order to create value for firm with positive economic profit, the rate of RNOA must exceed the cost of capital. In addition, the two key accounting drivers of RNOA are PM and ATO (PM=PM*ATO). Therefore, the company’s negative economic profit is the result of the decreasing of PM and ATO. Over the past four year, the figures for ATO are positive so the negative in the rate of PM in 2011 (-3.86%) and 2014 (-0.92%) result in the company’s negative economic profit. Some causes of negative PM can be higher supplier costs as my firm’s resource constraints are polymer, and higher cost of energy, lower prices and intense competition. In order to achieve the final profitable objects of company, they should take some implemented solutions such as analyse profit margins by finding out the gross profit margin on each of products and services over different business divisions, product categories, suppliers or customer categories to identify both low margin or loss-making items and profitable activities or products to stop selling low margin lines and focus on the ones that work, increase and review prices, no discounting too much, take cash discounts from suppliers, prevent theft and use inventory systems effectively.

Step 2

British Polythene Industries has two options for a capital investment which are new manufacturing plant in Melbourne and Wellington in 10 years and 7 years respectively. In order to decide the most profitable capital investment option to BPI, I focus on examine the Net Present Value (NPV) and Internal Rate of Return (IRR) which help to predict these options’ outcomes. Throughout my calculation

In the table below are the original cost, expected future selling price, estimated life, payback period, NPV, IRR, the estimated future cash flows and cumulative cash flows for each investment option.

               

	Manufacturing in Melbourne	Manufacturing in Wellington
Original Cost	$250,000	$135,000
Estimated life	10 years	7 years
Estimated future cash flows
2017	30,000	15,000
2018	68,000	18,000
2019	68,000	21,000
2020	12,000	26,000
2021	90,000	26,000
2022	88,000	28,000
2023	6,800	30,000
2023	7,800
2024	8,400
2025	6,900

The investment would be made on 31 December 2016. The estimated future cash flows are expected to be received on 31 December of each year.

A positive net present value indicates that the projected earnings generated by a project or investment (in present dollars) exceeds the anticipated costs (also in present dollars). Generally, an investment with a positive NPV will be a profitable one and one with a negative NPV will result in a net loss. This concept is the basis for the Net Present Value Rule, which dictates that the only investments that should be made are those with positive NPV values.

These two options differ in initial investment, future life and cash flows. Net present value (NPV) indicates how profitable a predicted project is in present dollars. Melbourne has a larger amount of investment and higher expected future cash flow than the Wellington investment. The Melbourne also is expected to return a positive NPV of $11,664.17 while the Wellington is forecasted to produce a negative NPV of -$25,607.67. The internal rate of return (IRR) is the rate of growth that the project is predicted to achieve. The IRR for Melbourne (11.31%) is two times greater than the figure for Willington (5%). The Melbourne’s payback periods is also shorter than Wellington with 4.8 years for option 1 and 6.033 years for option 2.

According to the calculated figures, option 1 taking a new manufacturing plant in Melbourne should be chosen by the company because it has a positive NPV that can produce more income, better IRR and payback period than the option 2 has a negative NPV which is expected to lose money and the lesser IRR and longer payback period.

Throughout analysing of the two capital investment options I found some strengths and weaknesses. Determining the NPV is the better method of the three because it is easy to calculate and take ‘time value of money’ into account while payback method easy to understand but does not take ‘time value of money’ into consideration. In addition, I found that estimating a timing of cash flow is difficult to predict.

Daft ASS2

Step 1

Chapter 4

Instead of providing a direct example of capital market, the author gave us a contrast example, Sydney Fish Market, a real image helping us to gain a clear understanding of capital markets. They are opposite concepts. Capital markets are not like fish markets in which what you see is what you get, they trade in expectations. How risky that is!! That means equity investors must have a number of particular skills in predicting the future depending on some relevant factors to reduce the risks of predictions in decision making. Because I think no one can predict exactly what will happen in the future, there must always be some unpredicted cases which decision makers should have deep considerations.

Understanding the past is the best steps forward predicting the future and the key tool supporting to have a throughout understanding of the past is a firm’s financial statements. So I think providing a high trusted quality firm’s financial statements is an important requirement of any firms.

How we can work effectively with a firm’s financial statement is my question when I know its importance in decision making. Fortunately, then the author let me know an effective way in viewing a business is to restate the financial statements including restated statement of changes in equity, restated balance sheet and restated income statement with operating and financial activities are classified. But I don’t know why we have to separate these two kinds of activities? Also, I wonder why don’t firms prepare and provide restated annual reports because of their importance and for more convenient and easier for investors in making decision? Is it mainly because while working hard with the financial statements to restate them, external entities will gain a full knowledge of firm’s activities like my practical experiments with my company BPI?

The dividends which equity investors receive are not ‘add value’ of firms to them. It is just simply a transfer of value between a firm and its equity investor. I was surprised because I had a misunderstanding before I got this document that dividends like my grandfather receives annually each year are not the profit he gains from his invest. Actually, they are the value he already owns.

Free cash flow (FCF) is also a transfer of value but within a firm, between its operating and financial activities. The more a firm invests into its operating assets, the less will be FCF and DCF approach. Yes, it did make me confuse. Is there any particular ratio? Does this simply mean that when a firm invests more, it will do not have much free cash and discounted leaf? The example of Ryman Healthcare is not about the thing I confused, it is about the expectancy of the firm is to earn grater and ‘add value’ to its equity investors when they invest more into operating assets. I think it is a normal knowledge which lots of people have. Fortunately, another more detailed example of this firm in 2014 did helped understand the relationship between FCF and investing. Because FCF = OI- I so my question is answer. And I also got that if a firm more into operating assets is, the return come in the future will be stronger and that is the way it ‘add value’ to equity investor. So my own short summary for this relationship is the more investment into operating assets, the less FCF and the more value will be.

FCF is a measure of transfer of value, whereas economic profit is a direct one. One important facet in creating value is opportunity cost of capital which requires decision makers to judge and evaluate carefully because you can only invest it in one thing at a time. That may why it is called ‘opportunity cost’.

When we want to know how a firm is adding value to its equity investors, we need to focus on cash flow and economic profit. This information help me to answer my question in the last ASS1 when I did not know that where I have to look at when I want to know whether my firm created any value or not.

Having separate operating and financial activities is necessary when restating a firm’s financial statements. Actually, I did not understand why we need to classify these two things in the introduce paragraphs of this chapter. After reading this section I understand that separating these two activities help us focus on a firm’s operating activities where value is added (or destroyed) and are firm’s interactions with the product and input markets, with its customers and suppliers. Financial activities are firm’s interactions with the capital market, with equity and debt investor to gain a full knowledge of the firm’s activities in given period time. Although the author gave me an understandable image of a small chocolate egg in which the outside chocolate egg surrounding the toy inside is the financial activities and the toy is operating activities, I am looking forward an example of a firm with their particular financial and operating activities. But thanks to this chapter especially the Finger 4-1, I have a clear understanding with these two activities helping me to restate my firm’s financial statement more effectively because when I put information from those statement to excel in the last ASS1, I have no idea about the headings.

The knowledge I gain form ‘Statement of changes in equity’ is very useful for me because it outlined the relationship between a firm’s income statement and balance sheet. Actually, I know that the value of equity (from the previous balance sheet) + the earnings (from the income statement) = the value of equity (from the current balance sheet). After I gained this knowledge, I want to check with my company but I wonder whether the value of equity in balance sheet is the total equity and the earning in income statement is the earnings per share or not?

The thing we need to do when restating a statement of changes in equity is only includes genuine equity because a firm’s equity sometimes can include some debt.

‘Restate two key financial statements’ gives me a very useful knowledge in restating my own financial statements especially balance sheet and income statement. The author suggests us an effective way to separate a firm’s operating and financial activities is to print out a firm’s balance sheet and income statement and to put an ‘O’ (for operating) and ‘F’ (for financial). This way is useful for me because as the way I did is to change the color of operating is red is not as convenient as having a hard copy of these documents. Studying carefully this section help a lot in the most difficult step in restating a firm’s income statement is to allocate tax and I also know that the greater a firm’s profit the grater the amount of tax it have pay. So by looking at the different amount of the total tax my company had to pay each year I can know the profit they created more or less than the other year.

Moving to section 4.4, a thing I confuse is 'All other things being equal' so what are ' all other things'? What are being equal? They are stores, inventory, head offices, car dealership, aren't they? A car dealership usually only make occasional sales of cars each week instead of selling large amounts of goods each day like a supermarket. Do they do accounting every day like supermarkets do?

Break things in a firm's financial performance into its profitability (profit for each dollar of sales) and its efficiency (sales for each dollar it has invested).

Economic profit = (RNOA - cost of capital) * NOA

So economic profit of firms is made up of three things: RNOA, cost of capital and NOA. So I think in order to increase firm's economic profit, they need to invest into NOA and decrease the cost of capital as much as possible.

Making an 'adequate' profit margin is the ultimate aim of any firm. My company's operating profit margin for the year ended 31 December 2014 from its restated income statement is: PM = OI/Sales = £19.9m/£ 499m = 3.98%. My company’s profit margin is quite low and the ‘Sales’ in my company’s financial statement is ‘Turnover’

I agree with the author that most people including me consider profit margin as an important part in creating value to shareholders. But I want to understand why he said that he focuses more on its interaction with efficiency that motivates me moving to efficiency part. After studying this part, I understand that RNOA is not driven by PM only but by the combination of PM and ATO which is the interaction and trade-offs between them (RNOA = PM*ATO).

In conclusion, this chapter let me know where I need to look at in a firm's statement to know how a firm adds value: They are cash flow and economic profit. Also, it brings me the way to separate the operating and financial activities effectively when I restate my company’s financial statements and I have a deeper understanding the importance of classifying these two activities through a wide range of helpful provided knowledge and easily understandable examples.

Step 2

Restating my firm’s financial statements is not easy after studying carefully Chapter 4, I started with statement of changes in equity. I found it is a bit easy and it just took me a short time but there are some of the difficult account names in my firm’s financial statement I do not understand such as ‘Actuarial gain on defined benefit pension schemes’ and ‘IFRS 2 charge in relation to equity settled transactions’. I cannot find these headings in the document of Chapter 4 so I posted them in ASS#2 Forum and discussed with my fellow as well. Then I understand that ‘Actuarial gains and losses’ are accounts using for pension plans to predict about the rate of salary increases, the length of employee tenure, an appropriate discount rate for the plan obligations and the expected rate of return on plan assets in future. ‘IFRS 2’ providing guidance on the accounting for share based payments to recognize share-based payment transactions (such as granted shares, share options, or share appreciation rights) in its financial statements.

Then I moved to restate my firm’s balance sheet. It was a bit harder because I have to separate the operating and financial activities. However it was not too  difficult because almost accounts in my firm are similar with the example of Ryman Healthcare balance sheet so I can use it as an effective tool.

Finally, like many other students, I found it is so challenging to me with tax benefit. Although I got that Tax benefit = Net interest expense * Tax rate of the firm, the results of Comprehensive Net Profit After Tax (CI) are not same with the figures in financial statements. After telling my issue to others students in the course I realized that my problem is the tax rate. Because I used the same tax rate of the year 2014 to multiply with the other year, rather multiplying with their own tax rates which are different in each year (2011: 26.5%; 2012: 24.5%; 2013: 23.25%; 2014: 21.5%).

Step 3

Product 1: Light Duty Refuse Sack, Cube Dispenser

Selling price: $50.00

Variable cost: $20.00

Contribution margin: $30.00

Product 2: Recycled Plastic Planter with Corner Posts

Selling price: $40.00

Variable cost: $10.00

Contribution margin: $30.00

Product 3: Visqueen Heavy Duty Aprons

Selling price: $30.00

Variable cost: $8.00

Contribution margin: $22.00

I estimated these products’ selling price and variable cost and then calculated their contribution margin with no relevant evidence. I just guess and think that the price should be affordable and the amount of contribution margin should make up approximately two-thirds of the total price in order to contribute more profit for my company’s revenues. However, they are quite different for each of my firm’s three products. For example, the variable cost of Refuse Sack may be higher than two others. Although all of them are household products, the amount of sold product of Refuse Sack can be greater than Plastic Planter and Duty Apron’s. It simply because we normally change sack for bin almost every day but we do not buy so many planters and aprons. So the amount of product of Refuse Sack sold will be larger making its contribution margins differ from others. Actually, different products are made from different sources of material, time and labor effort affecting to the fixed cost leading to different contribution margins. The products with the highest contribution margins will have the greater amount of profit. However, because of capacity constraints and firms actually produce everything they can sale to gain profit as much as possible. Therefore firms should not only produce the product with the highest contribution margin.

My firm’s resource constraints can be polymer, my firm’s main raw material, which depends on fluctuating prices for ethylene and, to a lesser extent naphtha and oil. Energy also can be a constraints with my firm because to run the recycling system they need a huge amount of energy converting into electricity or thermal energy.

Some market constraints may impinge my firm can be the competition prices because the cost of recycling is not cheap. But almost of their main products are household goods so the prices they provide should me as affordable as possible to keep their profit. The cost of their material is expensive as well so they need to do research carefully about their available suppliers.  

My top 3 blogs ^^

Here are my 3 most interested blogs:

RENAE GORDON http://ladyofledgers.blogspot.com.au/

Company: Morgan Sindall

I have chosen Renae Gordon  as my favourite blog, not only because I am strongly impressed with her engaging blog right from the very first glance, but I also can feel her enthusiasm through all her posts which are very detailed, well-structured. Also, she gave other fellow students some useful review, tips which she had from her own work as well as cheer me up by some funny pictures. She really enjoy this journey. Her language showed me her thorough knowledge as well as practical experiment. You did a very good job, Renae!!

JASON HOLT    http://jasonsaccountingjourney.blogspot.com.au/

Company: Spectris

Although his blog is set up very basic with dark background and light text, it is not boring and make it be so clear for me to read. The points given are short but straight, concise and very comprehensive so it is easy to follow and understand his thought processes.

SAM MARSH    http://sbmarsh.blogspot.com.au/

Company: Yue Yuen (Holdings) Ltd

This blog is thorough, detailed and engaging. He provides very good KCQ's. I like the way he ask smart questions from KC so I found it engaging and interesting making me want to read more and more to have better knowledge about his company. I can presume that he did a very thorough research of his company and really understand the material. I believe he has a ability to make very good judgement and evaluation!!

My ASS#1 draft

Step #2

British Polythene Industries

Annual Report Links for:

2014       http://www.bpipoly.com/downloads/annualreport/2015/BPI_21954_AR2014_web.pdf

2013       http://www.bpipoly.com/downloads/annualreport/2014/BPI_19952_AR_2013_Web.pdf

2012     http://www.bpipoly.com/downloads/annualreport/2013/annual_report_2012.pdf

Background information on British Polythene Industries 

British Polythene Industries PLC (BPI) is the leading manufacturer of polythene film, bags and sacks in Europe. The company and its subsidiaries produce, market and sell polythene packaging products. British merchandises its products to retail and industrial sectors throughout the United Kingdom and Europe with manufacturing capacity in excess of 300,000 tonnes per annum for a diverse range of everyday applications. In addition, BPI is also Europe's largest recycler of polythene waste recycling around 65,000 tonnes each year with 3,500 staffs.

The Greenock, UK-based company, which operates from sites across the UK, Europe, North America and China, has received its Centenary Certificate from Companies House to commemorate the 100th anniversary of the company's registration. During its remarkable history the Group has seen changes not only to its name but in its areas of expertise as it has evolved.

Incorporated on the 16th March 1910, the business which exists today has a strong, industrious heritage through the merger of two enterprising Scottish companies during the 20th Century; James Scott & Sons Ltd and J F Robertson Limited.

Although their roots in spinning and weaving sacks stretched as far back as 1797, these businesses recognised the changing industrial landscape and had the foresight to adopt new technologies and advancing raw materials. As such they laid the foundations which enabled the BPI Group to become the leading global supplier of polyethylene films it is today as well as Europe's largest recycler of polythene film waste with the ability to reprocess over 64,000 tonnes of post-use material annually.

 In late 2009, the BPI Group achieved 40th place out of 236 companies in its inaugural entry into the "Britain's Most Admired Companies" Survey. It was also recently shortlisted for both a Global Reach and Innovation Award in the annual Scotland plc Awards

Source: http://www.spra.org.uk/news/201009/british-polythene-industries-celebrate-their-centenary

Major Markets:

• Fresh Produce
• Bakery
• Nuts & Dried Fruits
• Mail Orders & Courier
• Frozen, Speciality & Fast Foods
• Printed Collation Shrinkwrap

Major Products:

• Wicketted Polythene Bags
• Lamination Solutions
• Self Seal Polythene Bags
• Printed Polythene & Polypropylene Reels
• Modified Atmosphere Packaging

Annual reports

Clear concise, well structure and professional are my first impression of the BPI's Annual reports.

• Profit for the year increased from 13.0£’m in 2013 to 16.4£’m in 2014
• Share price increased slightly from 6.7£’m  in 2013 to 6.8£’m in 2014.
• Sales of £499 million ( increased from 2013: £508million)

The challenges

• Poor Economic Conditions: Reduced demand leads to lost contribution, but can also put pressure on margins as competitors fight for remaining volumes

• Credit Risk: As the economic climate remains challenging, there is always a risk of customer insolvency.

• Raw Material Prices: Main raw material, polymer, subject to volatility on a month by month basis due to fluctuating prices for ethylene and, to a lesser extent naphtha and oil. Supplier actions can also influence prices due to maintenance periods and breakdowns at their production plants creating a risk of erosion in margins if price increases cannot be passed through immediately to customers. Recent years have seen exceptional levels of volatility and unprecedented price levels. Falling raw material prices on the realisable value of finished goods stocks also can be risks.

• Energy Costs: As a process business and a significant user of energy, our results can be affected by major price movements.

Strategies meeting these challenges

• Poor Economic Conditions: The Group has a diverse business portfolio with a large number of customers operating in a range of market sectors and locations such as European ( Belgium and Holland, France, Benelux, Germany and Scandinavia, Greece, Italy, Spain) as well as major geographical markets are the UK, Ireland and North America. In the event of adverse trading conditions steps can be taken to restructure the business and reduce costs. Most recently this was undertaken in the UK Consumer Packaging operations during 2013. The cost base of all operations is continually reviewed and significant capital expenditure targets cost savings in combination with efficiency and productivity improvements. 

•  Credit Risk: Continued focus on credit assessment and prompt action on overdue accounts. Some accounts are credit insured, particularly in Europe and in the agricultural sector. The Group’s largest customer accounts for less than 3% of Group turnover.

• Raw Material Prices: Centralised Group purchasing arrangements to ensure the best purchase price. Coordinated instructions to sales teams on forward pricing. Some linkage of customer pricing to polymer price indices. Management of stock levels depending on anticipated price movements.

•  Energy Costs: Monitor energy prices and buy forward when advantageous. Group energy saving programme implemented on each manufacturing site. Ongoing engagement with Government and User Groups to ensure policy makers understand the impact of high energy costs on manufacturing industry.

My KCQ’s on the 2014 Annual Report

Areas I have difficulty understanding:

1. KC: In Chairman's Statement he determined that they have made a good start to 2015, orderbooks are similar to the same time last year and expect good demand from the agricultural sector in the coming months. BUT reported results can be influenced by US dollar and euro translation rates.

         Q: Why do US dollar and euro translation rates can effect to reported results? That is good, bad, or indifferent for the process of BPI and other organisations? What they can do to protect themselves from currency fluctuations?

 2.  Q: When I look at annual report I would like to know if BPI has created any value for a year? How do I determine if any value has been created, is it from profit, assets increase

After taken a careful look at Consolidated income statement I realized that the value of a year is the total of these profit.

3. KC: In their Business Model, Recycle is the most engaging sector with me, they stated that BPI is one of the largest recyclers of waste polythene film in Europe. Also, retaining this waste for

reprocessing in one of our UK recycling factories is not only good business sense, but also supports national and regional Government policy.

   

    Q: I wonder that is whether there any real value they can create from Recycling areas or just because of the reputation or a good marketing step?

Links to articles for BPI polythene industries

file:///C:/Users/ly/Downloads/BPI100414outlook.pdf

https://www.youtube.com/watch?v=90e0LQqYnQU

http://www.heraldscotland.com/business/13620774.BPI_expected_to_post_healthy_first_half_financials/

Am I happy with my firm?

Yes, I am. I definitely happy with the firm given. Initially I felt a little bit bored with BPI because they are a producer of polythene films which seems to be somewhat not attractive and engaging like other areas such as entertainment, hotel or technology. But step by step I find it so good for me. Firstly, I was impressed of the size of the firm, BPI is not only a leading global manufacturer of polythene films, but also Europe's largest recycler of polythene waste recycling. Secondly, their annual reports are so professional- represented and engaging supporting me to follow easily. Last but not least, it just because I want to have knowledge about the organisations producing things I use every day- plastic bags

# Step 4

Chapter 1

Through Martin’s book was the way he used words to emphasize the importance of numbers, by not using numbers. He believes in accounting power, he insists the fact that, accounting, is not simply a word, but it shows the reality and the relevance between accounting and business, the way “this relevance” concerns to all of us. As myself, I totally agree with this opinion. Moreover, I just do like the way he expresses his viewpoint, but he still respects our viewpoints. For example, all of readers who read through his book, might be conscious that he always uses rhetorical questions such as: “Can accounting makes economic and business easier or difficult? After reading this book, this is a question you can ask yourself”. He does not want to force anyone to think, or be aware like him, but he provides the facts, his research, his discovery about the concepts, for us.

I like the way he connected different businesses into “one group” that can help each other in gaining profits by serving different demands of customers. For example, as for me, I support that it might be so much easier to buy different products in one store, firstly the businesses can share the investments on infrastructures, secondly they can also provide customers all kind of products they need which leads to the situation that, customers want to come back again. The improvement of number of customers results in the progression of interests for businesses groups, and shows the incorporations between businesses and economic and accounting staff. All in all, his viewpoint about the diversity of businesses can be connected makes me overwhelming by its truth.

The part I liked most that make some real senses is part 1.2 “Keeping records” which shows clearly the perceptions about accounting and its history, its two-sided perspectives that can make difficulties for managing “journals” and “pledgers”. As a matter of fact, this two kind of concepts are essential and familiar with any accountants. However in this part, I do not really understand the concept: “Proprietorship”. When I looked up the dictionary, it showed kind of thing like possession of a business. Nonetheless, when read through the content, that seemed so much confused about Thus I think the session could be the hardest, to understand the real rights of the owners, of the proprietors who can make any changes of the business staff.

Finishing this chapter, I can conclude that, this chapter provides me a wide range of new knowledge, new concepts, new provision as well. There are also some parts, that I found difficulties in making senses, however, the overall ideas are clearly for readers. I respect author’s perception, but I also have my own thoughts. Anyway, I have not yet had any questions so far, as I want to find out through my curriculum.

Chapter 3

Like any others feedback for this chapter, I saw the chapter had been incredible in both content and the way author expressed his perceptions in terms of financial statement. He mentioned to a number of new concepts such as: financing activities, Balance Sheet, income statement that can help me have deep understanding about finance situation in contemporary life. He also emphasized that over the past 100 years so far, the financial situation in the whole circumstance has been changed that much through the development of trade, banking statement, globalisation.

The most understandable part is “The value of anything” which stated that anything has its own value, “Price is what you pay, value is what you get”. Whether all of us can have a broad perspective about anything’s value seemed a hard question. The great example author gave us for this session was almost people chose receiving $20 right now instead of after five years later. This example showed that people will always think about present value. That is awesome. I realize how the businesses can use this perception to start their work: put themselves into customers’s role, and think whether they will choose low price or high value. That should be the main point that I realised after this session.

In short, there are, of course, a number of new concepts have been introduced in this reading materials. To be honest, I’m not the kind of people who can spend a lot of myself-time just to read through all the concepts about the thing I like, and try to remember. But this chapter, author used skilfully the facts, the examples, to show that what he was taking about mostly based on reality. Again, accounting, financial statements, they are all built by the facts, and facts create more concepts. Finance seems like a harder thing more than accounting. But I made some senses, so I think the next time, I will be able to read more financial materials without wasting-time to translate the key concepts.