Operation and Comparative Advantages of the Organisation

FINANCE FOR BUSINESS

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
1. Description of operation and comparative advantages of the organisation............................1
2. Calculation and comparison of performance ratios................................................................3
3. Analysis of monthly share price movements..........................................................................9
4. Significant factors affect and influence the share price........................................................11
5. Calculation of Beta values and expected rates of return using CAPM.................................13
6. Dividend policies..................................................................................................................14
7. Recommendation letter.........................................................................................................14
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................16

INTRODUCTION
Finance is the primary source of business for smooth functioning and operation. It is very
important for organisation to analyse the financial requirement and find out appropriate resources
to fulfil the requirement of business (Li, 2005). This report is prepared analyse the financial task.
Description of operations and comparative advantages of the two organisation as ELLEX
MEDICAL LASERS LIMITED and GICS industry group. Calculations and comparison of
performance ratios of both the organisations are done to evaluate the financial performance of
organisation. Analysis of monthly share prices movements by using three years investing plans
and ordinaries index. Share price influencing factors are also discussed in this report and internet
or financial business publications are undertaken. Beta value analysis and expected rates of
returns by using CAPM method are analysed in this context. Dividend policy of organisation in
terms of managing the operations and management are considered in this report.
Recommendations are made subject to analyse the appropriate organisation for future
investment.
MAIN BODY
1. Description of operation and comparative advantages of the organisation
Ellex Medical Lasers Limited
It is a medical technology organisation that build and develops services, manufactures
products and sells comprehensive ranges of medical equipments for use in ophthalmic
procedures (Ben-David, Grahamand Harvey. 2013). Organisational values ad services as
distribution mainly assist the organisation in terms of incorporating the changes and dealing with
financial challenges.
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Organisation adopts effective and ethical corporate governance structure to develop the
strategies and plans. Business operate its operations and management in high competitive
environment. It is one of the consolidated group which follow the main competitive policies and
edge for deriving strategies and plans. Satisfactory staff engagement and prominent work
environment policy is the main competitive strategy used by organisation to deal with uncertain
competitive challenges. .
GICS (Global Industry Classification Services Sector) group
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GICS was formed in 1999 by MSCI and standard and poor's (S&P) for utilising the
global financial communities. This is the group of multiple standards as a joint standards and
poor Morgan Stanley capital international products. It is aimed to Standing the industry
definitions. Core activities of GISC group is energy suppliants, providing financial and housing
solutions, health and social care management and control, Materials and telecommunication
serves, mining services and utilities. The Australian market has been traditionally increased and
enhanced and dedicating 24 industries separately in country. GICS consist of major 10 sectors
which aggregated form 24 industry groups. Form July 1, 2002 the ASX industry categorisation
become more redundant due to competitive business environment. Australian market retains
traditionally accepted within 24 industry sector and unique to this country.
2. Calculation and comparison of performance ratios
Financial ratios analysis indicates towards analysation of financial performance of
business. Financial ratios are analysed on the basis of financial statements (Cash flow statement,
income statement and Balance sheet) of organisation (Fee and Hadlockand Pierce, 2013). The
key financial ratios of both the organisations are prepared on the following basis.
Ellex Medical Lasers Limited (ELX.AX)
ASX - ASX Delayed Price. Currency in AUD
Period Ending 6/30/2018 6/30/2017 6/30/2016
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Current Assets
Cash And Cash
Equivalents 23067 9244 7283
Short Term Investments - - -
Net Receivables 14663 15121 15425
Inventory 22458 23416 18641
Other Current Assets - - -
Total Current Assets 61218 48692 42825
Property Plant and
Equipment 14576 13452 7771
Goodwill - - -
Intangible Assets 3885 3879 4093
Accumulated Amortization - - -
Other Assets 23031 20519 17301
Deferred Long Term Asset
Charges 7548 6307 4776
Total Assets 102710 86542 71990
Current Liabilities
Accounts Payable 2232 4276 5266
Short/Current Long Term
Debt 14999 15635 8169
Other Current Liabilities 4034 5263 3096
Total Current Liabilities 19790 28321 18642
Long Term Debt 5723 - 2041
Other Liabilities 1758 1189 2701
Deferred Long Term
Liability Charges 14885 13446 11579
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Total Liabilities 27450 29609 23733
Stockholders' Equity
Common Stock 78311 55949 46041
Retained Earnings -3372 1665 2559
Treasury Stock 321 -681 -343
Other Stockholder Equity 321 -681 -343
Total Stockholder Equity 75260 56933 48257
Net Tangible Assets 71375 53054 44164
Liquidity ratios: This is ratio mainly shows the liquidity performance of organisation
by evaluating the fluctuation of liquid assets and liabilities. There is a liquidity ratio table is
produced below which shows the three years liquidity position of organisation.
Total Liabilities &
Equity 100 100 100
Liquidity/Financial
Health 2018-06 2017-06 2016-06
Current Ratio 3.09 1.72 2.3
Quick Ratio 1.91 0.86 1.22
Financial Leverage 1.36 1.52 1.49
Debt/Equity 0.08 — 0.05
As per above analysis of liquidity position of organisation it is resulted that the
organisation retain the current ratio of 2.3 in 2016, 1.72 in the year 2017 and 3.09 for 2018. it is
analysed that the liquidity position of organisation get increased regularly. Quick ratio of
organisation indicates that 1.91, 0.86 and 1.22 subsequently for 2018, 2017 and 2016. it shows
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that company's cash capability and short term current assets get increased in comparision to last
financial year.
Profitability ratios and Capital structure (leverage) ratios: This ratio defines the
capita:
this shows the net profitability capacity of organisation by evaluating the income statement off
organisation (Yuan, 2011). Leverages and the variations in equity and liabilities are also defined
in this context.
Profitability 2018-06 2017-06 2016-06
Tax Rate % — — 27.76
Net Margin % -6.37 -1.25 4.14
Asset Turnover (Average) 0.84 0.9 1.12
Return on Assets % -5.32 -1.13 4.62
Financial Leverage (Average) 1.36 1.52 1.49
Return on Equity % -7.62 -1.7 6.88
Return on Invested Capital % -6.04 -1.12 6.16
Interest Coverage -17.87 -4.83 20.58
As per above analysis it is resulted that the net margin get decreased due to increasing in
interest on long term debts and loans. It is also considered that return on assets also decreased by
-5.32 times. Organisation has to pay heavy amount of rates and taxes in the financial year 2017-
2018 due to which financial leverage get increased.
GICS industry group- health and care equipment and services
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Profitability ratio: the profitability position of organisation is shows the following
results as follows:
Particulars 2017 2016 2015
Gross profit margin 78.5 78.09 75.1
Net profit margin 27.86 22.67 20.8
Operating margin 21.43 19.23 19.25
Assets turnover 0.4 0.37 0.36
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Return on assets 11.1 9.56 8.37
Gross profitability get increased by 4% from 75.1% to 78.09%, net profit profit margin
get increased by 5% in 2017 and 1.68% form 2015. operating margin defines following position
as 45.46% for the year 2017, 42.42% for the year 2016 and 37.57% for 2015. as business in
terms of return on assets as 11.1% in the year 2017, 9.56% for 2016 and 8.37% for 2016. return
on invested capital indicates towards following results as 15.41% for 2017 and 13.44 for 2016
and 3.49 for 2015, there is a dramatically increase seen in return on invested capital due to
having interest income on investments.
Capital structure (Leverage ratio): Capital structure of organisation is mainly
associated with ongoing operations growth initiative and acquisitions. The primary objective of
capital structure of organisation mainly contains the long terms loans and debts. Net assets
coverage ratio it is resulted that capital structure of GICS continuously changing upwards and
downwards. The financial leverage for the year 2017 was 8.17, 9.71 in 2016 and 3.49 for 2015.
Debt equity shows the 5.18 for 2017, 6.53 for 2016 and 6.53 for 2015.
Liquidity position of organisation: the current ratio shows following results as
Particulars 2017 2016 2015
Current ratio 2.09 1.97 2.13
Quick ratio 2 1.89 1.98
Operating cash flow growth% YOY 7.03 42.07 0.11
Free cash flow/sales 36.13 27.89 34.08
Free cash flow/sales 1.17 1.5 1.15
It is concluded that the current ration indicates towards optimum liquidity position of GICS and
quick ration is also in good position that shows an optimum level of required assets as cash,
convertible to met the short term assets requirement of organisation. Free cash flow sales was
recorded as 36.13, 27.89 and 34.08 for 2017, 2016 and 2015. it shows that cash sales get
increased in last year. There is a cash flow statement is mention below which shows the cash
flow formation of organisation.
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3. Analysis of monthly share price movements
Ellex Medical Lasers Limited (ELX.AX)
There are lots of changes seen in the share price and market cap of organisation. Per
share price of ELX was sited as $0.59 in 2018, $0.61 in 2017 and $0.67 for the year 2016.
negative share holders' returns were recorded in as -42.7% in 2018 and 11.5% in 2017 and
189.3% in 2016. Book value of shares was $0.52, $0.47 and $0.42 subsequently 2018, 2017 and
2016. no dividend was declared on shareholding due to having losses. Negative earnings
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occurred in 2018 as -3.6 ¢, -0.4 ¢ and 2.8¢. cash flow price show the following figures as
customers receipts as $87 million in 2018, $79 million in 2017 and $71 million for 2016. Net
operating cash flow was recorded as 0.52 for 2018, -3.5 million for the year 2017 and 5.22 for
the year 2016. Net investing cash flow was recorded as -8 million in 2018, -12 million for the
year 2017 and -9 million for the year 2016.
Price earnings ELXMF shows 7.4 for the year 2010 and 52.4 for 2016. S&P 500 shows
following results as 10.9, 18.6, 15.5, 13.7, 15.0, 18.6, 18.6, 20.3, 22.9 and 20.7 for ten years.
Book price was stated 1.7, 2.2, 2.2, 2.1, 2.6, 2.7, 2.7, 2.8, 3.2 and 3.3 for the ten years. NTA per
share was recorded as $0.5 for 2018, $0.44 for 2017 and $0.39 for 2016.
GICS industry group- health care and equipments
With continuous growth of capital and liquidity structure build a base to met the financial
requirement of business. As the financial needs of organisation completes then profitability
automatically increased and this is the key concept followed by GICS. Share price of
organisation get changed by many ways during the financial years. There is a graphical
presentation of fluctuation of price in stock and share price are defined below;
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(Source: Stock market analysis of ELX.AC)
There are type of fluctuations was recorded in share and stock price of GICS (MSCI) in
last five years. It is evaluated that in 2013 was 41.08 was recorded, 8.92 was 2014, 53.73 for
2015, 2016 for 10.61 and 62.30 for 2017. capital market mainly shows the following results as
53.35 for 2013, 12.66 for 2014, 0.40 for 2015, 20.07 for 2016 and 21.83 for 2017. Dividend yield
presents the positive and negative both the aspects. Company earned high profit in 2015 which
resulted declaration of dividend at high rate in comparison to 2014. A significant increment was
seen in share price of organisation as 1.27%. it get diminished due to increasing in interest
liabilities and decreasing in liquid liability.
4. Significant factors affect and influence the share price
Type of factors affect the share or stock price of an organisation. Some of significant
factors are defied below which affect the price of stocks;
Interest rates: This is the main factor which fluctuate the price of shares and the market
price of organisation. It is a consideration charged on amount borrowed by company to complete
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short term and long term requirements (Malkiel, 2013). High interest rates directly influenced tha
share price and increased the fluctuating rate of prices and the shares and stocks. Increased rate
of interest exceed the amount of payables for a financial year in net effect net profitability get
decreased that impact the low dividend payout ratio. It also impact the future plans and capital
expenditure (Swift and Piff, 2014). It is considered as base of incremental cost of stock price. It
indirectly affect profitability, earning per shareholding, operating and leverage ratios and capital
structure. A significant impact fall upon an organisation after having an optimum structure of
business is to meet the long terms financial requirement of business. This influence the price of
shares of both the Ellex and GICS.
Exchange rates: The change in value of currency in comparison to other currencies are
considered as exchange rate. This mainly related to inflation, economic growth and GDP of
country (Moffett, Stonehill and Eiteman, 2014). For example an the difference between the
currency value of Australian Dollars to American Dollars affect the price of organisations values
to. Government policies and norms are also some influencing factor that changes the pricing and
valuation structure. ASX rules was modified in 2012 and new rules and regulations was
introduced subject to transfer and acquire shares, equities and commodities of organisations
listed under ASX. These rates change time to Time.
Inflation: It indicates towards the decrease in value of currency. If inflation rate remains
high then organisation has to face the negative results in subject to stock market and share price
with in the country (Renz, 2016). An optimum structure of demand and supply with in a country
control the inflation rate. This directly impact the stock market and security position of
organisation.
Economical and political: Diversify Financial market and inadequate economical
conditions are also some influencing factor that impact the price of shares and the equities
(Hribar and Yang,2015). It is required to analyse properly the economical environment of
country comparison to shareholders and stakeholders. Australia's trade association and the
profitability mainly impact the products and share price in longer run. Movement overseas share
market influence the downturn in the economy. In 2011 economy of Australia has to bear the
burden of international debts. America and Europe was the main contributes and stakeholders
that impacted the basic economic structure of organisation. The political environment of Europe
is uncertain and impacted the interest rates payable on the debts provided to Australia.
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5. Calculation of Beta values and expected rates of return using CAPM
Capital Assets Pricing Mode (CAPM) helps to determine the bond between the expected
rate of return and risk associated with invested securities contributed by an organisation for a
specific duration and time (Chun-juan, 2003). An equal risk free rate returns and a risk premium
is driven under this model which mainly based upon the beta of the security. It is calculated as
per following formula as;
Ra = Rrf + [Ba *(Rm- RrF)]
Ra = Expected return on a security
Rrf = Risk Free rate
Ba = Beta of the security
Rm = Expected return on market
Calculated beta (β)
Ellex Medical Lasers Ltd (ELX.AX): The expected Calculated beta for the company is
calculated as 0.02 and for industry it is calculated as 0.87 and for sector it is calculated as 0.88
for sector.
MSCI Inc (MSCI.N): The expected Calculated beta for this company is calculated as
0.86 and for industry it is calculated as 0.58 and for sector it is calculated as 0.95 for sector.
Required rate of return
The expected rate of return is required to calculated where the risk free rate is 5% and
risk premium is 6%. on the basis of mentioned organisation it is required to calculated the
CAPM. Beta is taken form online sources to calculate expected rate of return.
Ellex Medical Lasers Ltd (ELX.AX)
Expected rate of return = 5% - [0.87(6%-5%)]
Expected rate of return = 4.13%
as per above analysis that expected rate of return is calculated as 4.13%.
MSCI Inc (MSCI.N)
Expected rate of return = 5% - [0.02(6%-5%)]
Expected rate of return = 4.98%
As per above calculation it is analysed that the expected rate of return is calculated as
4.98%.
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6. Dividend policies
Ellex Medical Lasers Ltd
It is observed that there was no any dividend declared by the organisation in last three
financial year whether in the form of interim dividend or final dividend. Initial recognition shows
that organisation gain losses on investments in equity instruments. For a upcoming one year it is
not providing the dividend to their share holders. Dividend yield of company for five years
presents nil and no significant growth seems to be fall in near future as per current financial
position of company.
GICS industry group
GICS has large industry and health and care equipment sector of this group get financial
benefits regarding this. Dividend yield is calculated as 1.25 and payout ratio is calculated as
36.41.
7. Recommendation letter
There is a comparison of financial statements of Ellex Medical Lasers Ltd and GICS
industry group health and care equipments. It is seen that GICS is one the has strong dividend
pay out and expected rate of return subject to invested capital. It is observed that profitability and
liquidity position of GICS industry group is enough capable in comparison to Ellex Medical
Lasers ltd. For investors and stakeholders perspective return on investment and dividend payout
ration retain significant interest. There is a nil dividend paid by ELX in last finical year and there
is no dividend growth was recorded in this field.
As per above information and analysis it is concluded that stakeholders should go for
GICS group of industry because it there is an opportunity to increase in dividend payout ratios of
company and investors will get better returns in comparison to Ellex Medical Lasers Ltd.
CONCLUSION
The above report summarise the concept of finance for business in two organisation. It is
seen that organisations be able to attain competitive edge by analysing the core activities and
operations of business. There is a proper flow of operational data and analysis done for analysing
the capital building capacity. Key ratios are defines the financial positions through which future
decisions and planes will be executed effectively. Analysis of frontlet sale price movements
indicates the changing rates of stock market and return with in and outside the organisation.
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Factors that influence the price of shares and fluctuate the stock market analysis discussed to
maintain the optimum level of profitability and liquidity. Capital asset pricing model is used to
calculate the expected rate of return. In recommendation part best company suggested and
defined properly.
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REFERENCES
Books and Journals:
Li, P. I. N. G., 2005. Considerations on the Financing Problem of Chinese Medium and Small-
sized Enterprises [J]. Sci/tech Information Development & Economy. 2. p.118.
Ben-David, I., Graham, J. R and Harvey, C. R., 2013. Managerial miscalibration. The Quarterly
Journal of Economics, p. qjt023.
Fee, C. E., Hadlock, C. J. and Pierce, J. R., 2013. Managers with and without style: Evidence
using exogenous variation. Review of Financial Studies. 26(3). pp.567-601.
Malkiel, B. G., 2013. Asset management fees and the growth of finance. The Journal of
Economic Perspectives. 27(2). pp.97-108.
Moffett, M. H., Stonehill, A.I and Eiteman, D. K., 2014. Fundamentals of multinational finance.
Pearson.
Renz, D. O., 2016. The Jossey-Bass handbook of nonprofit leadership and management. John
Wiley & Sons.
Swift, L. and Piff, S., 2014. Quantitative methods: for business, management and finance.
Palgrave Macmillan.
Hribar, P. and Yang, H., 2015. CEO overconfidence and management forecasting. Contemporary
Accounting Research.
Chun-juan, W. A .N. G., 2003. A Research into the Loans for Small and Medium Enterprises
[J]. Yin Shan Academic Journal. 5. p.019.
Yuan, L. I., 2011. Research on the Implementation of International Trade Comprehensive
Training of Business English Major in Vocational & Technological Institutes——
Taking Shantou Polytechnics as an Example. Journal of Southern Vocational
Education. 6. p.020.
Online
Stock market analysis of ELX.AC, 2018. [online]. Available through:
<https://www.reuters.com/finance/stocks/financial-highlights/ELX.AX>.
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