ASSIGNMENT
MAY 2021 SEMESTER
SUBJECT CODE
: MAF865
SUBJECT TITLE
: ACCOUNTING & FINANCE FOR DECISION MAKING
LEVEL
: DOCTORAL LEVEL
STUDENT’S NAME
: MAUREEN BERNADENE PEIRIS
(NEE CANDAPPA)
MATRIC NO.
: M70209200012
PROGRAMME
: DOCTOR OF BUSINESS ADMINISTRATION
ACADEMIC FACILITATOR
: DR. KELUM GAMAGE
& PROF. ROSHAN AJWARD
“There are no secrets to success.
It is the result of preparation, hard work and learning from failure”.
Collin Powell
FIGURES
Figure 1
What is Accounting……………………………………………………………………………………………………..
Figure 2
Scope of Management Accounting and Financial Accounting…………………………………………………………
Figure 3
Basic Accounting Concepts…………………………………………………………………………………………….
Figure 4
The Difference between Financial Account and Management Accounting……………………………………………
Figure 5
Importance of Accounting………………………………………………………………………………………………
Figure 6
Two-year prediction of Trend Analysis…………………………………………………………………………………
Figure 7
Revenue & Gross Profit Trend Analysis………………………………………………………………………………..
Figure 8
Operating Profit, Profit before Tax & Gross Profit Trend Analysis……………………………………………………
Figure 9Valuation Methods………………………………………………………………………………………………………
TABLES
Table1:
Two-year prediction of Growth Analysis………………………………………………………………………………
Table 2:
Profitability Ratio……………………………………………………………………………………………………….
Table 3:
Liquidity Ratio………………………………………………………………………………………………………….
Table 4:
Efficiency Ratio…………………………………………………………………………………………………………
Table 5
Solvency Ratios…………………………………………………………………………………………………………
ABBREVIATIONS
CA
:
Competitive Advantage
CSE
:
Colombo Stock Exchange
DCF
:
Discounted Cash Flow
EPS
:
Earnings Per Share
MA
:
Market Approach
OBV
:
Options Based Valuation
OTC
:
Over The Counter
RI
:
Residual Income
ROCE
:
Return On Capital Employed
ROI
:
Return On Investment
VRS
:
Voluntary Retirement Scheme
ACKNOWLEDGEMENT
It gives me great pride to extend my sincere thanks and gratitude to my Lecturers
Dr. Kelum Gamage and Prof. Roshan Ajward, at Cambridge College of Business for
sharing their knowledge and for supporting me throughout this module.
Special thanks go out to Dr. Lewie Diasz and the Staff of Cambridge College Sri
Lanka and Asian E University for theguidance that made this study a success and a
great experience in the field of Business Administration and Management.
Maureen Peiris (Nee Candappa)
Doctoral Student of Asian E University, Malaysia
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EXECUTIVE SUMMARY
With the introduction of advanced technology, a share of new software has emanated
an efficient accounting system. It has facilitated in contemporary accounting
proceedings methodically minimizing human errors and efforts. Accounting is where
you take all the transactions of a business, summarize it and produce a financial
statement for decision making. It is a systematic process of recognizing, analyzing
and posting various events related to accounting in records of company.
Finance is
an
extensive
banking, leverage or
debt,
term
that
credit, capital
defines
markets,
activities
money,
connected
and
with
investments.
Essentially, finance exemplifies financial administration and the manner of obtaining
required funds. Finance likewise includes the oversight, creation, and study of money,
banking, credit, investments, assets, and liabilities that create an economic system.
As a financial analyst of ABC PLC., I have selected M/s.Morison PLC., which is a
listed company in the CSE, to conduct a financial statement analysis.
As a requirement of Part A of this assignment, I will be analyzing the financial report
of M/s. Morison PLC., for a period of five years from 2016 to 2020. Simultaneously,
as required in Part B of this assignment, a valuation report will be carried out on M/s.
Morison PLC., and will be submitted as per the required criteria. These will be
evaluated on the suggestion of academic view, and on observational grounds.
The report on the recommendations on the quantitative analysis and the valuation
report of M/s Morison PLC., will be submitted to the Board of Directors of ABC
PLC., for their decision in investing on this company.
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FINANCIAL REPORT
THE FUTURE OF M/s. MORISON PLC., SRI LANKA
To
: The Board of Directors of M/s. ABC PLC.
From : Maureen Peiris -Financial Analyst of M/s. ABC PLC.
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CHAPTER ONE – TASK A
1.0 INTRODUCTION
The main intention of this report is to carry out an analysis on the financial statement
ofM/s. Morison PLC., which is a listed organization in the CSE and to stipulate
recommendations to the Board of Directors of ABC PLC., to decide on the feasibility
of investing in this organization. As a financial analyst of ABC PLC, the author will
thusanalyze the published financial statements of M/s. Morison PLC., for the recent
five years. However, the author firmlybelieves that M/s. Morison PLC., is a credible
organization that will add value to this assignment.
The paper defines the organization profile of Morison Plc., to comprehend the
environment of the business, itsexistence in the marketplace and itsrivalry. Further,
the concept of the financial statement analysis and the traditional performance
evaluation techniques will be deliberated with two-year predictions. The author
willpredominantlyanalyze the profitability, liquidity, solvency and cash flow analyze
in order to get hold of a completecomprehension of the future of this
organization.Simultaneously, this report will determinethe value of this organization
by using the appropriate valuation methods and will submit its recommendations to
the Board of Directors of ABC PLC for the decision of investing in this company.
1.1 Company Profile
Morison PLC, formerly known as J L Morison Son & Jones (Ceylon) PLC., is a Sri
Lankan based pharmaceutical manufacturing company for over eighty years. It is a
subsidiary company of Hemas Holdings PLC., contributing to the groups’purpose of
making healthful living happen in the manufacture, import of high quality, generic,
branded generic and OTC pharmaceutical products. Morison also import and
distribute internationally renowned healthcare needs to the private and public sector,
manufacture high quality pharmaceutical and OTC products, and has an island wide
extensive distribution network reaching over 10,000 doctors, 3,500 pharmacies and
30,000 trade outlets island-wide.Morison represents world leading medical diagnostic
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products and is a leader in providing medical diagnostic solutions to Sri Lanka. Across
the eight decades, the local pharmaceutical manufacturinghas invested in developing all
aspects of the industry from production, research and development, quality assurance,
lean manufacturing, information systems, talent management and community
improvement activities
Morison live by their values which guide their decisions and developments. Morisons
will continue to move forward, innovating and producing trusted, high quality,
efficacious pharmaceuticals for Sri Lanka and beyond, making premium healthcare
affordable to Sri Lankans of all ages and socio economic classes.
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Figure 1: What is Accounting
1.2 Definition of Accounting
Accounting is a science of taking all the transactions of a business, recorded,
summarized it and a financial statement is produced for appropriate decision making.
There are various branches of accounting, one is classified as the financial
accounting-handing the day to day activities of the business organization, recording
all these things and preparing the financial statement, which is for external recording
purposes and decision is made for external stakeholders of the organizations, another
branch of accounting is called management accounting, which is holding information
for internal stakeholders, where management decision processes takes place and
decides the future of the organization (Gordon, 2020).
Figure 2: Scope of Management Accounting and Financial Accounting
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1.3 Objective of Accounting
The main objective of accounting is to come up with aneconomic decision making to
provide financial information to the decision makers of organizations, which is the
output of the financial statement (Watts, et. al., 1974).
Basic Accounting
Concepts
Business Entity
Money Measurement
Going Concern
Periodicity
Realization
\
Historical Cost
Accrual or matching
Consistency
Materiality
Dual Aspect
Prudence
Conservatism
Figure 3: Basic Accounting Concepts
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2.0CONCEPT OF FINANCIAL STATEMENT ANALYSIS
Accounting is a very important practice likewise a very important profession. Under
accounting functions, comes the financial statements where decisions are based upon.
Accounting is a process, inputs are the transactions, that is the raw data, and then it is
processed, classified and summarized and the output is the information that is
obtained out of it, which is the financial statement. The financial statement contains a
balance sheet, which is called the statement of financial position, the income
statement, the cash flow statement, the liquidity statement. Based on these financial
statements, the prediction of the future of the business could be made. With the
computerized environment, the processes of accounting are very much easier in
business organization. In accounting there are several accounting standards, such as
International Finance Reporting Standards and in Sri Lanka Finance Reporting
Standards and if these standards are adhered to, organizations could be confident that
the accounts of the organization are accepted. Simultaneously, there is a requirement
of corporate governance requirements and other regulations of the government, and
the regulatory body will monitor and set minimum standards on accounting of
organizations (Hossan et. al., 2010).
2.1 The difference between Financial Accounting Vs Management
Accounting
Accounting, refers to the process of recording, classifying and summarizing in
monetary terms, the business transactions and events and interpreting the results. It is
used by entities to keep a track of their financial transactions. Financial Accounting
and Management accounting are the two branches of accounting. Financial
accounting stresses on giving true and a fair view of the financial position of the
company to various parties.
On the contrary, management accounting aims at providing both qualitative and
quantitative information to the managers, so as to assist them in decision making and
thus maximizing the profit (Hopper et. al., 1992).
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Information
Purpose
of
Legal
Formats
mainly
information
requirements
Nature
of
Time period
information
produced for
Financial
External use.
To record the
Limited
Format
and
Accounting
Shareholders,
financial
companies
content
of
creditors,
performance in
must
financial
lenders, banks,
a period and
financial
accounts
government
the
accounts
intending
financial
produce
give a true and
fair
period
historical
a
to
end
that
Mainly
financial
record
position at the
of
Mostly
view
should follow
accounting
standards
and
company law
Management
Internal
Accounting
eg.
use.
Managers
and Employees
To
Management
Financial
planning,
aid
None
decide on the
non-financial
and
controlling and
information
decision
they
making
and the most
Historical and
forward
looking
require
useful way in
presenting it
Figure 4: The Difference between Financial Account and Management Accounting
2.2 Importance of Financial Reporting & Analysis
Evaluating and comprehending financial statements is important when a
firmnecessitate to bring about significant decisions. Financial reports permit
management to recognize trends, impendingbarriers, and vigorouslytrace their
financial performance immediate(Hasanaj, et. al., 2019).
Systematic
recording
Communicate
financial status
Importance of
Accounting
Assist decision
making
Ensure control
of assets
Plan future
activities
Comply with
law
Figure 5: Importance of Accounting
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3.0 TRADITIONAL PERFORMANCE EVALUATION TECHNIQUES
INCLUDING TWO YEAR PREDICTIONS
The traditional techniques used by firms are predominantly financial measures, i.e.
contribution margin, ROI, RI, net profit, EPS and are significantly based on the past
financial performance rather than generating impending shareholder value
(Ranatunga, et. al., 2008).
2017
2018
2019
2020
2021
2022
Revenue
2.30%
-11.80%
21.78%
3.61%
3.97%
4.39%
Cost of Sales
3.51%
-10.81%
17.08%
0.39%
-16.69%
-17.08%
Gross Profit
-0.52%
-14.21%
33.69%
10.77%
Operating Profit
25.63%
23.77%
-12.71%
-7.05%
Table1: Two-year prediction of growth Analysis
Figure 6: Two-year prediction of Trend Analysis
3.1 Two-year Prediction of growth of M/s. Morison PLC.
The author has made a two-year prediction, which is given in Annexure 5. The
prediction is based on looking at the trends of the Company over the past five years.
This was considered looking at the immediate past of the Company, that is, the last
two years of the Company to make the predictions. However, the last two years of the
Company’s performance showed very large fluctuations in the figures. This resulted
in some very unrealistic numbers. Hence, it was therefore decided to consider the past
five years of the Company and averaging out the results.
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When averaging out the last five years, it has eliminated the uneven numbers. Based
on the results of the projection,the author learns that there is an increase in the
revenue of the Company for the two years. Simultaneously, the author also identified
that the profit of the Company has largely stayed the same in 2021 and has shown a
slight increase in 2022.
Adding on the above analysis, the author understand that Morisonsis preparing for
noteworthy growth in buildingtheir new research and manufacturing factory in
Homagama. In spite of construction interruptions faced due to Easter attacks and
Covid-19 pandemic, Morison is self-assured that the operation of the factory will
commence by 2021/2022 as intended. The total investment of the plant was Rs. 3.2
billion and was constructed as per international paradigms and is competent of
generating five billion tablets and two million liters of liquid annually creating a
substantial percentage of the country’s tablet and liquids necessities. The author
assures that with the opening up of this manufacturing factory, there will behuge
potential in its investment in the coming years, whilst opening up opportunities for
export business in the long run (Morison PLC Annual Report 2019/2020).
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4.0 ANALYSIS OF PROFITABILITY
Experts and shareholders utilize profitability ratios to quantify and assess a
firm’scapacity to make profitin relation to income, balance sheet assets, operating
costs, and shareholders’ equity throughout a precise time frame. It displays how
finely a firm make the most of its assets to generate income and value to investors
(Devasenapathy, 2020).
PROFITABILITY RATIOS
2016
Profit Margin
Net profit margin
Assets turnover ratio
Return on assets
Return on ord. shareholder equity
Earnings per share
2017
2018
2019
2020
30%
29%
28%
28%
33%
5%
8%
10%
10%
5%
1.22
1.17%
0.8%
0.80%
0.49%
7%
8%
8%
8%
3%
12%
17%
17%
7%
5%
22.99
34.09
38.15
38.15
23.48
Table 2: Profitability Ratio
The Company’s profit margins have shown a healthy increase from 30% in 2016 to
33% in 2020. This is despite the effect of the COVID-19 Pandemic and the effects of
the Easter Bombing in Sri Lanka. The turnover has shown a modest increase from Rs.
3.2 Billion in 2016 to Rs. 3.6 billion in 2020.
In particular, it is noted that the net profit margin of 5% has remained the same in
2016 and 2020, despite the fact that the Company’s profit margin has increased. The
reason for the stagnant net profit margin of 5% is due to the fact that the Company
had a VRS scheme in 2020, where a total payout of Rs. 105 million was made for 50
redundant employees. While this has affected the Company’s profitability in the
current year, the resultant savings in costs in the coming years will benefit the
Company(Morison PLC Annual Report 2019/2020).
This one off expense has caused the net profit margin of the Company to decline.
Excluding this expense would result in the net profit margin of the Company being a
7.6%, which is in line with the net profit margin of 2019.
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4,000,000,000
3,500,000,000
3,000,000,000
2,500,000,000
2,000,000,000
1,500,000,000
1,000,000,000
500,000,000
0
2016
2017
2018
2019
2020
3,245,454,0
3,320,196,5
2,928,478,8
3,566,266,0
3,695,080,9
Gross profit 971,266,629
966,170,117
828,885,068
1,108,107,3
1,227,403,6
REVENUE
Figure7: Revenue & Gross Profit Trend Analysis
The above line graph indicates the trend of the Company’s revenue and gross profit.
There was a decline in the Company’s revenue in 2018, which according to the
annual report of the Company has attributed to the fact that they lost a distributorship
with a multinational Company for their Sri Lanka operations(Morison PLC Annual
Report 2018/2019). Overall there is an upward trend for both the revenue and gross
profit.
The asset turnover ratio of the Company has shown a large decline over the years.
This can be explained by the fact that the Company has been constructing a new
factory which has resulted in their asset base increasing from Rs. 324 million in 2016
to Rs. 4.5 billion in 2020. As the factory is not operational yet, the profit of the
Company has not increased in line with the investment in assets in the Company
(Morison PLC Annual Report 2019/2020).
Similarly, the return on assets of the Company has shown a decline from 7% in 2016
to 3% in 2020. This can also be attributed to the fact that the Company has shown
more than a tenfold increase in assets, which are yet to provide revenue for the
Company.
The ROCE of the Company has shown a decline from 12% to 5%, which is quite low.
The one-year treasury bill rate in Sri Lanka as at March 2020, was 7.5%(CBSL
Monthly Economic Indicators, March 2020). The fact that the ROCE of the Company
is lower than the risk free rate in the Country is indicative that the Company is not
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utilizing itsshareholder’s funds properly. Either the Company will have to increase its
profit, or declare its surplus reserves as dividend to compensate the shareholders.
However, once the factory is operational, we should see an uptick in the Company’s
profitability and it’s ROCE.
450,000,000
400,000,000
350,000,000
300,000,000
250,000,000
200,000,000
150,000,000
100,000,000
50,000,000
0
2016
2017
2018
2019
2020
Operating Profit 191,815,239 240,984,242 298,263,253 260,351,791 242,009,276
Profit before tax 232,548,65
303,776,39
387,998,64
340,294,48
234,995,20
Gross Profit
257,430,31
288,081,57
263,202,95
177,324,64
173,604,67
Figure 8: Operating Profit, Profit before Tax & Gross Profit Trend Analysis
The trend for the Company’s profitability unfortunately seems to be on the way
down. However, this is mostly attributable to the fact that the Company is making
investments in a factory, which has resulted in them having reduced profits
comparatively. Once the factory is operational, the Company should see an increase
in its profitability as it starts to utilize all its assets (Morison PLC Annual Report
2019/2020).
Overall, the profitability of the Company is not ideal, however this is attributed to the
fact that the Company is investing for the future and should see an increase in its
profitability in the coming years.
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5.0 ANALYSIS OF LIQUIDITY
Liquidity ratio analysis assist in determining the short-term solvency of a business. It
assists in assessing a firm’s aptitude to encounter its short-term requirements.
Consequently, liquidity put forward how rapidly assets of a firm get change over into
LIQUIDITY RATIOS
cash (Carlson, 2019).
2016
2017
2018
2019
2020
Current Ratio
2.49
2.13
1.50
2.37
1.48
Quick Ratio
1.83
1.56
1.13
1.58
0.85
F
i
g
u
r
e
1
1
EFFICIENCY RATIOS
Table3: Liquidity Ratio
Receivable Turnover Ratio
Average Collection period
Inventory Turnover Ratio
Inventory turnover in days
2016
2017
2018
2019
2020
4.04
4.97
4.49
2.72
2.40
90
73
81
134
152
3.74
3.72
3.10
2.90
2.11
98
98
118
126
173
T
able 4: Efficiency Ratio
The current ratio has deteriorated over the years. The reason for this is that the
Company has taken substantial loans in 2020. It is also noted that their cash and cash
equivalents have also declined substantially over the years which has also contributed
to the decline in the current ratio. They are also holding more inventory than in the
previous years.
The above analysis on the efficiency ratios indicates that the Company’s average
collection period has increased from 90 days in 2016 to 152 days in 2020. This
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coupled with the fact that Company’s inventory turnover in days has also increased
from 98 days in 2016 to 173 days in 2020, making it evident that the Company is not
collecting its debts as quickly as it used to and is holding more inventory than
previously. This should cause deterioration in the Company’s cash position, and
indeed the Company’s cash flow statement shows that in 2020 the Company had a net
negative cash outflow of Rs. 205 million for the year and the cash generated from
operations has reduced to Rs. 141 million from Rs. 488 million in 2018.
Notwithstanding, this is an improvement on the cash generated from operations in
2019 of Rs. 86 million.
The Company’s investment in its factory has negatively affected its cash flow.
However, the Company is also holding more inventory than it previously did. There
is no slowdown in the revenue of the Company, which indicates that the Company is
stockpiling inventory for future expected sales.
The quick asset ratio has also declined over the years. This has also attributed to the
decline in the cash and cash equivalents, loans increasing and increased inventory.
Overall, the Company's liquidity is satisfactory and nothing to be concerned about.
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6.0 ANALYSIS OF SOLVENCY
SOLVENCY RATIO
Solvency ratios are predominantly utilized to assess a firm’scapacity to convene its
long-term commitments. By understanding a solvency ratio, an expert/stakeholder
couldadd understanding as to how well a firm will endure meeting its liability
commitments. A stronger/higher ratio signifies financial strength (Furhmann, 2019).
2016
2017
2018
2019
2020
Debt to equity ratio
89%
88%
118%
43%
91%
Debt Ratio
47%
47%
54%
30%
48%
Equity ratio
53%
53%
46%
70%
52%
(5)
(4)
(3)
(3)
35
Interest coverage
Table 5:Solvency Ratio
It can be seen that the Company had a large decline in its debt to equity ratio in 2019
compared to 2018. The Company merged with its subsidiary company M.S.J.
Industries (Ceylon) (Pvt) Ltd., in 2019, which resulted in the assets and liabilities of
the subsidiary being included in the Balance Sheet of the Company from 2019
onwards. The resultant increase in the reserves of the Company caused the debt to
equity ratio to reduce to 43% in 2019.
In 2019, the Company had low debt compared to equity. In 2020, due to the
investment in the factory, the Company has taken on more loans, which has resulted
in the debt to equity ratio increasing to 91% from 43%, which indicates that the
Company is going from a very low debt to equity ratio to a more moderate level of
debt to equity.
However, further analysis of the accounts indicates that even though the Company
has taken large loans for the construction of the factory, all loans will be settled
within a period of 3 years from 2020(Morison PLC Annual Report 2019/2020). This
indicates that the company will settle its loans and will have lower debt to equity
ratios within the next few years.
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Overall, the Company’s debt to equity ratio is good as the Company will be relatively
debt free within the next few years and even as of right now, the Company is in a
very good solvency position.
7.0 CASH FLOW STATEMENT ANALYSIS
The Cash Flow Analysis discusses the scrutiny/study of diverse entries of money to
the firm and the depletion of the money from the firm throughout the period under
concern from diverse undertakings which consist of functioning accomplishments,
investing accomplishments and funding endeavours (Loth, 2021).
The Company’s overall cash flow position has deteriorated significantly since 2016.
The cash and cash equivalents of the Company as at 2016 was a positive of Rs. 874
million and this has reduced to a negative of Rs. 93 million as at 2020.
The main reason for this large decline in cash reserves is the investment in the factory
of the Company. It can be seen in the cash flow that the Company has acquired Rs.
689 million worth of Property, plant & Equipment in 2019 and Rs. 1.7 billion in
2020. These investments have resulted in the reduction in the cash flow position of
the Company.
Besides the investments, the Company is also holding on to more inventories in 2020.
It could be also observed that that the Company is taking longer to collect its debts.
All these factors combined have resulted in the cash reserves of the Company
declining.
Although the Company’s cash position has declined over the years, the Company still
has good financial standing. Once the factory is completed and starts generating
revenue, it will result in an improvement in the Company’s cash flow position.
However, the overall the cash flow of the Company is good.
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8.0 RECOMMENDATIONS
From the above analysis, in the case of the profitability of the Company, currently the
Company is not providing enough returns for its shareholders. Its ROCE is even
lower than the risk free rate in Sri Lanka as of March 2020.
Although, their ROCE is low, the Company has also shown positive signs in its
profitability. It has increased its profit margins significantly, and has had a VRS
scheme, which will result in decreased costs in the future years. The investment in the
factory will result in improved profitability when the factory is operational.
The Company as of right now has a very strong balance sheet. It has a large amount
of reserves and has a good cash flow position and good solvency as well. Overall,
investment in Morisons PLC would be a safe investment.
However, the main concern with regard to Morisons PLC., is its profitability. It has a
low ROCE and has shown a trend of lower profits for the past few years. The
improved profitability of the Company in the future is weighing on the performance
of the factory that is under construction.
Based on the above findings, the author learns that once the factory is operational in
2021, and it can be ascertained that the Company’s investment in the factory will
bring in enormous potential in the coming years and thereby will open up
opportunities for export business in the long run and thus will improve the
organization’s profitability and for certain it is advisable to invest in this Company.
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REFERENCES
 Carlson Rosemary, November 20, 2019 – Analysis of Liquidity Position using
Financial Ratios.
 Central Bank of Sri Lanka Monthly Economic Indicators, March 2020.
 Devasenapathy Pratibha | Nov-13-2020 – What is Profitability Analysis?
Definition of Importance
 Furhmann Ryan, 2019, June 25 – Analyzing Investments with Solvency Ratios.
 Gordon, Jason, 2020, December 16, The Business Professor – The Accounting
Journal Definition.
 Hasanaj, Petrit & Kuqi, Beke. (2019). Analysis of Financial Statements.
Humanities and Social Science Research. 2. p17. 10.30560/hssr.v2n2p17.
 Hopper, Trevor & Kirkham, Linda & Scapens, Robert & Turley, Stuart. (1992).
Does Financial Accounting Dominate Management Accounting – A Research
Note. Management Accounting Research. 3. 307-311. 10.1016/S10445005(92)70019-5.
 Hossan, F. and Habib, M.A. (2010), “Performance evaluation and ratio analysis of
pharmaceutical company in Bangladesh”, master’s thesis, International Business,
University West, Trollhättan, pp. 1-64.
 Loth, Richard, 2021, April 28, Analyze Cash Flow the Easy Way
 Morison PLC Annual Report 2018/2019
 Morison PLC Annual Report 2019/2020
 Ratnatunga, Janek & Montali, Lorenzo. (2008). Performance Management
Measures that Enhance Organisational Value: A Review. 6.
 Watts, Ross & Ross,. (1974). Accounting Objectives.
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CHAPTER TWO – PART B
The Board of Directors of the ABC PLC also requires you to perform a valuation of
the company that you had selected under Part A of this assignment. They need to know
the value of the company, and you are required to furnish a report on it. In your report,
you need to address following aspects:
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a. Discuss with examples different valuation methods in valuing a company.
1.1 Concept of Valuation
Valuation refers to the analytic manner of ascertaining the projected worth of an
enterprise or an asset utilizing various techniques. A forecaster requires to place value
on an enterprise examines the management of the business, the components of its
investment structure, the potential imminent earnings, and the marketplace value of its
assets, i.e the overall worthiness of an enterprise or an asset (Hayes, 2021).
1.2 Different Valuation Methods
Figure 9: Valuation Methods
At the time of valuing an enterprise, the following three most known valuation
methods could be utilized by business experts, such as the Cost Approach, Market
Approach (Relative Value),
and the Discounted Cash Flow (Intrinsic Value)
Approach, which are used in investment banking, equity research, private equity,
corporate development, mergers and acquisitions, leveraged buyouts, and in a good
number of areas of finance(Wang, 2010).
i.
Cost Approach
The Cost Approach examines at what it costs to build or substitute an asset. The cost
approach method is useful in valuing real estate, such as commercial property, new
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construction, or special use properties. Finance experts do not usually utilize this
approach to value an enterprise that is a going concern.
ii.
Market Approach (Relative Value)
Subsequently the next approach is the MA, which is a method of relative
valuation and frequently utilized in business. It comprises of Comparable Analysis
and Precedent Transactions.
iii.
Discounted cash flow (Intrinsic Value) Approach
Lastly, the DCF approach is a method of intrinsic valuation and is the mainly
comprehensive and detailed approach to valuation displaying.
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2. Apply the methods discussed in a. above to the selected company under Part A
of this assignment and perform the valuations. You need to clearly indicate any
assumptions used, the calculations, and the final valuations.
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3. Explain how the Board of Directors could use the information obtained under
the different valuation techniques in making the acquisition decision.
Morisons PLC has a history of not declaring dividends. In the five years that was
analysed, the Company declared dividends in only two of those years. This makes the
dividend growth model not suitable for valuing the Company.
The net assets of the Company as at 31 March 2020 are Rs. 3.9 billion. The net assets
per share is 520.67. What is interesting about the Company’s net assets per share is
that in the years 2016 and 2017, the net assets per share was lower than the market
value of the share. In the subsequent years the net assets per share is higher than the
market value of the share.
When we consider the free cash flow method, it gives us a value of the Company of
Rs. 5.0 billion. For this valuation, we have assumed that the Company’s new factory
will be operational and will substantially affect the cash flow. This valuation is
contingent on the new factory substantially affecting the cash flow. While for the last
two years the profitability of the Company has shown a declining trend, we do not
expect this trend to continue. We expect the new factory will improve the Company’s
ROA and ROCE as well.
Based on the above, we recommend buying over the Company at a value of Rs. 5.0
billion. The Company has a strong balance sheet and a large amount of reserves and
we anticipate that its profitability to improve in the coming years. Due to this, the
Company will be a great acquisition.
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4. Discuss what do you mean by ‘due diligence’ and qualitative factors that the
Board of Directors should consider in acquiring the company.
i)
What is meant by Due Diligence
Due diligence is an analysis, review, or audit executed to sanction evidences or
particulars of a problem in concern. In the economic sphere, due diligence
necessitates an investigation of financial records prior to arriving into a planned
contract with an alternate party.
ii)
Qualitative factors the Board of Directors should consider in acquiring the
company.
While comparatively it is challenging to evaluate, the qualitative factors that
are an imperative share of an enterprise. Qualitative factors are not determined
by numbers and have a tendency to be subjective and signify an adverse or
optimistic force that affect the organization. However, more or less of these
qualitative factors will have more impact than the others, and ascertaining the
amount of these consequences could be impudent.
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5. Evaluate how ‘Options-Based Valuation’ would impact the valuation of the
above company and the final decision made.
i)
What is meant by OBV
OBV means contributions to the worth of an actual option (time, discount rates,
volatility, cash inflows and outflows) are respectively have an effect on
organizations and its macro environmental influences that a task exists in
(Wernerfelt, (1984).
ii)
The impact of OBV on organizations’ decision-making
OBV propounds an outline for decision-making. It offers a substitute and
vibrant opinion of the physical developments that plan and set organization
approach in the direction of achieving supportive CA. It ascertains whether
organizations are in a position to take advantage of the prospects in decision
making and looking at whether the organization could add value and increase
organization’s CA, even at times of uncertainty (Bowman, et. al., 1993).
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REFERENCES
Bowman, E.H. & Hurry, D. (1993). Strategy through the options lens: An integrated
view of resource investments and the incremental-choice process. Academy of
Management Review, 18, pp. 760-782.
Hayes Adam, 2021, Apr 25, How to value a company
Wang, A. (2010). "Comparison of real asset valuation models: A literature review.
"International Journal of Business and Management 5.5: 14.
Wernerfelt, B. (1984). A Resource-based view of the Firm. Strategic Management
Journal, 5, pp. 171-180.
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CONCLUSION
To sum up, this assignment discovers that the pharmaceutical industry is positioned
as one of the utmost imperative industries to institute commercial opportunities for
the growth of the economy of the country. Nevertheless, this industry has swiftly
transformed the state of leading pharmaceuticals, together with local and international
market, and has increased occupation and lucrative import earning opportunities.
On the other hand, the author needs to add in further insights to this assignment with
relevance to the impact of the outbreak of COVID19 corona virus and foremost
unpredictable occurrences in the macro environment, which havealso generated
challenges to firms. This assignment foregrounds that despite the fact that numerous
firms are under pressure to persist in this circumstance, where most people have lost
their jobs, challenges and opportunities have also emerged. It has hindered import and
export-oriented industries; opportunities have also developed for the future of the
healthcare industry.
However, Morison sustains its standpoint in the sphere as a leading player in the local
manufacturing company in the pharmaceutical industry. As a result, Morison endures
its resilient trade process and recognition of its products in the local marketplace and
remain to stay competitive in the marketplace. This will enhance the organization’s
performance and increase its ROI and solidity of the brand in the market and deliver
its drive to make the best pharmaceuticals reasonably priced across Sri Lanka. It will
besides have a bearing on the financial wellbeing of Sri Lanka. Henceforth, as an
Analyst of M/s. ABC PLC., considering the above facts, I wish to comment that it is
imperative to emphasize that it is an abundant opportunity for M/s.ABC PLC., to
invest in M/s. Morison PLC.
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THANK YOU
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