Assignment 2 step 1
As I opened chapter 4, I became frustrated. As soon as I saw 26 pages, I immediately knew that this chapter was going to be filled with lots of information. When I signed up to the module, student support services told me that this course was easy. That it did not take the recommended 12.5 hours per week and that I should be fine with it. This is so far from the truth. This module is very deceiving, and it will take way more time than anticipated. The first 3 chapters were quite easy in comparison and If I had known it would be like this, I may have dropped a unit. I have been studying every day for the past 3 weeks and I could use a break right now. Unfortunately, because this step 1 is due first thing Monday morning, I have had to work on it during my vacation week while doing other assignments and exams for other courses. I’m really grateful for that vacation week. I just want to say how important it Is to do a study planner before you start the terms. If I had not completed one before the start of term, (a weekly study schedule, weekly planner, daily planner,) I would be so much further behind. My previous work experience of using time management skills within the office has really helped me to stay somewhat in control of my studies.
I’m currently studying 3 units and doing share trading at the same time. One of the units I am studying is ECON11026 and I just finished reading about economic costs. In economics it discusses explicit and implicit costs. Implicit being opportunity costs and explicit costs being accounting costs. I was happy to see economic profit being discussed in this chapter. It’s great when you are studying one subject and it helps you to understand another. Economic cost in economic terms is calculated differently to the economic profit equation in accounting; Economic profit = (RNOA – cost of capital) × NOA. In economics, economic costs are the implicit costs which are how much you could have earned (for e.g. by placing the capital into a bank account and accruing interest or how much your previous salary was vs the current salary) plus the explicit costs (accounting costs). In some ways they are similar, in other ways, they are different.
To further help me understand chapter 4 more I watched the week 5 lecture video and after Maria explains what operating activities and financial activities are I feel a little more confident moving forward onto other topics such as FCF, OI etc. when I think about operating activities I think about my old workplaces. They were all businesses. Every single one. From working in a small corner shop selling pies at the age of 12 to working in a bigger corporation, they all had operating activities and they all had financial activities. The corner store where I was selling pies, I think about the operating activities and being everything to do with the business; such as customers buying pies (OR), price of ingredients (OE) from suppliers and the financial activities being; how much the owner (D) put into the company to first open it, and how much he borrowed from the bank (F). As per figure 4.1, pg. 7 chapter 4. Obviously, there is more to it than that, such as wages and lease costs and equipment and Share purchase programs in raising equities but for me I wanted to do simple steps for this chapter. To think big, you think small first. So small easy steps it is for me. I was confused at first by NOA, and it took me a while to understand this. Am I right to think of this like an investor that an operating Asset is something that is expected to give you a return on your investment? And the RNOA is the profit you made on it? I am certain that’s accurate. Looking now at FCF, I understand this a bit more clearly. If a company has a high amount of FCF, and generally has a good yield you would expect them to pay more dividends. However, if their capital is used more for growth, then they would invest more of that FCF into their company to obtain higher future RNOA. To be honest the terms of Net financial assets and NFO really confused me at first. I just want to say how much I love that diagram figure 4.1. It has helped me so much. I try to picture it in my mind. It feels like the previous readings we did of two sides to businesses. I can see it more clearly in mind now. When I think about how many companies I have invested in I think about how they raised equity through share purchase programs. Usually companies did this to improve their cash flow or perhaps to buy another company to expand its current operations. After all, if a company is losing cash it needs to raise cash so it does not become bankrupt. The only way a business can become bankrupt is when it has no cash. So why don’t businesses just keep raising equity through SPP’s? This way they would never close. Perhaps dilution is the answer? Or is it a lack of institutional investment because firms read annual and financial reports and know which businesses are good to invest in? Perhaps firms have calculated the economic profit and realised it would be negative which would make it a terrible investment? Is this why large investment firms very rarely invest in penny and speculative stocks even though the gains can be enormous? Let’s face it, penny stocks are a gamble at best. No matter how much research one does, until it earns a revenue it is a gamble. When I first started reading about SOCIE I was so confused. I watched again the lectures and now I am not as annoyed when I first started reading this chapter. SOCIE is separate from the income and balance sheets because it is more information that some firms and investors like to look at. Whenever I was investing I always looked at earning per share and to some extent the PE ratio, but now after learning more about the SOCIE and what impact it can have on the future of the company this is something I will look at more closely. I will no longer look at just the EBITDA, operating income, and the technical analysis, when investing and this chapter has changed my way of thinking. Especially when I think about economic profit. One part of the economic equation that really stumped me was the 8%. Why is this considered a good number in working out the equation for economic profits? What did I miss? I had to read the chapter again. I felt like a fool. Surely, I am missing something? why 8%? We are being taught that every business is different so why is 8% for every business acceptable? I decided to use the forum and got a great answer from Selvi about weighted average cost of capital. This makes sense now. I wasn’t sure if it was just a random number that Martin picked because maybe he loves the number 8. Maybe it’s his lucky number and he likes to buy 8 kinder surprises at a time? Although it stated in the chapter about it being an appropriate number for international companies at present, it still didn’t make any sense to me how all international companies could use the same. So if you’re reading this and you have any questions about what you’re studying, I highly recommend using that forum. This helped me tremendously. Thanks again Selvi.
So how does this all relate to my company so far? Looking at my company FCF for 2019, they had a closing total FCF of 7.9 million, which is down from 8.7 million the year prior. The first time I saw this I was concerned about this company and looking further into it I am still concerned. Connect Group’s Pty Ltd statement of changes in equity; Comprehensive expenses while decreasing YoY (45.9 million 2018 to 28.5 million for 2019) is dwindling the retained earnings amount they have. But I’m not sure what retained earnings are? Is this a sale of a previous division of their company then the funds are kept separate from the cash flow statements? This was confusing and it made analysing my company further a little tricky. Perhaps I’m looking at this the wrong way though, perhaps this company isn’t in such a bad position too. After all the challenges they have faced they are still only down 1 million in FCF YoY. So lets try a quick sum from chapter 4 to see if I am correct in my understandings of chapter 4 so far. FCF = C-I, which I believe for my company is net cash used in financing activities + net cash used in investing activities, as they didn’t pay any dividends for 2019 according to the SOCIE. When I do this calculation it equals my FCF number which happens to be -15.9 + -8 = 23.9. we had cash inflow of 23 million so that leaves the difference of -0.9 which is the correct difference in cash flow decrease YoY. So have I done the wrong calculation here? I had to look at this a few times, I even did the wrong sum initially. Trial and error and practice makes perfect they say. If I’m practicing the right calculations that is. I can’t begin to explain at first how confused I was about comprehensive income before watching the chapter 4 video. After watching it and listening to all the lecturers and tutors describe it differently yet similar it occurred to me that it is similar to music once again. If you ask me to play a Cm9 chord, I will play it. On guitar the options are plentiful and it can be played many different ways. And if you ask someone else to play the same chord they will play it their way. The strumming will be different, the octaves could be higher, they might decide to fingerpick or traverse pick, the transposing could be different but ultimately it will still be the same chord. It might sound a little different, it might sound higher or lower, but the chord being played together by two people will be in harmony because it is theoretically the same chord. The theory behind the chord will always make it sound pleasant no matter what. (but only if you are playing the correct notes otherwise it will sound horrible) That’s what it is was like listening to the explanation of CI from the different lecturers. They all played the same notes because the chord theory supported it and it was in harmony.
I have read this chapter 4 times now and will likely read it at least another 10 times. I have broken down concepts into easy steps for myself to make it easy for me to understand. When I first became very ill in 2015, I lost the ability to walk and talk properly. I had to rehabilitate my cognitive and motor functions. This took time and sometimes it was very frustrating. I found I became more frustrated when I compared my older self to my new self. Why can’t I just walk normally? Its not hard right? Why can’t I talk properly? Why am I stuttering and forgetting simple words such as “door” or dog”? This new reality was hard on me. But my physical therapist guided me, and together we set goals. We simplified everything and set very short goals within a timeframe. We broke everything down into small steps. First I would focus on getting my balance back as my equilibrium was ruined, and concentrate on just taking a few steps everyday. Everyday, just a few steps. Once I could do that, it was time to set the next goal of walking a little further, just a few more steps. Then once I regained the energy, and the ability to walk further distances, I would practice counting backwards from 100 while I walked. This helped improve my cognitive abilities, and trick my brain as I am focusing on maths more so than my walking. My walking autonomy started to improve. After about 1 year of my rehabilitation, I no longer needed any assistance from a walking stick to help me. Fast forward to today, I go to the gym, ride a bike, my speech is clear and loud and I am active when I can be. This is why I’m breaking it down into easy steps for myself. I don’t understand everything in the chapter right now. But in a few weeks I’m confident I will have a really good grasp on it. At first when I opened the chapter and started reading I was annoyed, but once I watched the videos, broke everything down into small steps I became more comfortable. I still don’t understand everything and that’s ok, but I’m no longer annoyed and actually more appreciative of how much information is in the chapter. After all I’m here to learn and I should feel good that Martin has wanted to challenge us like this. I’m not paying for a certificate, I’m paying for an education.
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