Product 1 – Cogstate Alzheimer’s Battery

Product 2 – Cogstate Brain Injury Battery

Product 3 – Cogstate Early Phase Battery

Sales 1430 1000 505Variable Cost 1150 925 500Contribution Margin (sales – variable cost)

280 75 5

Assessment 2, Step 7Contribution Margins

The contribution margin represents the amount that each unit sold contributes to covering fixed costs, then generating profit. The larger the contribution margin, the more money there is to cover fixed costs, leading to a greater profit. The Alzheimer’s Battery contributes $280 per unit to Cogstate’s overall fixed costs and profits. The brain injury battery contributes $75 per unit and the early phase battery contributes $5 per unit.

The contribution margins for each of Cogstate’s services are quite different, this is due to the differences in variable costs, hence the sale price. The variable costs and sales price are determined by three factors:

1. Number of tests under the battery2. Length of test3. Application (or phase)

The information relevant to these factors for each of the services is displayed in the table below.

Product 1 – Cogstate Alzheimer’s Battery

Product 2 – Cogstate Brain Injury Battery

Product 3 – Cogstate Early Phase Battery

Number of tests 8 5 4Length of test (min) 5-30 5-20 15Application I - IV I - IV I

As you can see, the ‘Alzheimer’s battery’ has the largest contribution margin as it is the most complicated and extensive service. There are 8 tests involved, with a test length from 5 minutes to 30 minutes and an application ranging from phases 1 to 6. Due to this, the variable costs of producing and supplying this service are greater, which increases the selling price, hence creating the largest contribution margin. The ‘brain injury battery’ has the second largest contribution as it a lesser complicated and less extensive. There are 5 tests involved, with a test length from 5 minutes to 20 minutes and an application ranging from phases 1 to 6. The variable costs of producing and supplying this service are high (but not as high as the ‘Alzheimer’s battery’), which produces the second largest contribution margin. The ‘early phase battery’ has the smallest contribution margin as it is the least complicated and is the most basic service. There are 4 tests involved, with a test of 15 minutes and an application in the first phase. The variable costs of producing and supplying this service are lower, which causes a lower selling price, hence creating the smallest contribution margin.

The application and length of test for the Alzheimer’s and brain injury batteries are similar, which is represented by the contribution margins being closer (than the former and the

‘early phase battery’). If the number of tests in the batteries were closer, the difference between the contribution margins for these services would be smaller. When compared to the ‘early phase battery’, the ‘Alzheimer’s battery’ has a twice as many tests involved, double the amount of time (max) and has a wider range of phases, explaining the large discrepancy between the contribution margins for each of these products. Comparing the ‘brain injury battery’ and ‘early phase battery’, the number of tests and length of test (max) are similar, explaining why the contribution margins are closer. If the ‘early phase battery’ had more applications or the ‘brain injury battery’ had less, the contribution margins would be more similar.

Cogstate offer a range of services with different contribution margins because each service they produce has a different variable cost. The variable costs that would be incurred would mainly involve research costs and costs of the equipment needed for each test. The ‘batteries’ that involve more tests, phases and require a larger time length (such as the ‘Alzheimer’s battery’) require more research and equipment, increasing the variable costs. In order to be more competitive with other firms, Cogstate would be wanting to produce a greater range of services, with different contribution margins. This insinuates that if contribution margins are differing there are services with high and low prices. The discrepancy between the prices (and contribution margins) shows that Cogstate offers a range of services from simple, routine tests to more advanced, specialised tests. Due to this range of service types, the company is able to provide their services to a larger range of people, increasing profits.

In Cogstate’s case, they can’t only offer the clinical trial with the highest contribution margin, as they have a wide range of customers who require other trials and tests. If Cogstate only produced the item with the highest contribution margin they wouldn’t be able to offer the wide range of services that they do. In more broader terms, just because a product doesn’t have a high contribution margin, doesn’t mean that the firm should not produce it. Typically, products/services with lower contribution margins cost less for the firm to produce/supply, which causes a lower selling price, so customers are more inclined to purchase the good or service. Relating to Cogstate again, the ‘early phase battery’ has the lowest contribution margin, but due to this being a phase 1 service it is simpler and has a much broader use. Because of this, more people utilise this service, generating large amounts of profit. Although the ‘Alzheimer’s battery’ and ‘brain injury battery’ have higher contributions, due to being more sophisticated and less general tests, they may not be utilised as much. From this it can be gathered that, a service with a lower contribution margin is still able to produce a profit equal to that of a service with a higher contribution margin. Therefore, it doesn’t make sense to only produce the service with the highest contribution margin.

Resource and Market ConstraintsA possible resource constraint for Cogstate would be expensive equipment needed to design and conduct the trials and batteries. The effect that this constraint has on how Cogstate should produce and sell depends on the situation. If the company needs to pay for each time the equipment is used, they may decide to cut costs it is best to only offer the trial a certain amount of times each year. However, if it is a one-off cost for the equipment,

the company may choose to offer the trial as many times as possible in order to recover the money they spent on purchasing the equipment. For example, due to having a larger variable cost, it is assumed that the ‘Alzheimer’s battery’ requires more expensive equipment and larger amounts of research. Due to these constraints, Cogstate may choose to offer the trial a certain amount of times per year, to control the expenditure on this trial. On the other hand, it is assumed that the ‘Early phase battery’ requires less expensive equipment and less amounts of research. Due to this, Cogstate may choose to offer this trial more than they would the ‘Alzheimer’s battery’ or the ‘brain injury battery’.

Another resource constraint for Cogstate would be highly skilled workers. Due to the industry that Cogstate is in and the fact that they specialise in clinical research and trials, they need to ensure that the have the most skilled and knowledgeable staff as possible. They will need university qualified staff, maybe of the PhD level, with a bevy of experience. If the firm has a large number of qualified employees, they are able to conduct more research or conduct this research quicker, as well as being able to complete more trials as they have more staff available to conduct them. For example, if Cogstate has 30 employees they may be able to complete 1000 trials per year, but if they had 60 employees, they may be able to complete 2000 trials per year. If there is less staff, Cogstate wouldn’t be able to offer as many trials and conduct as much research as they do.

As well as resource constraints, there are also market constraints that impinge on Cogstate. A possible market constraint is the demand for the services. Unlike a service such as a haircut, there would be a lower demand for the services provided by Cogstate. It is unknown which of Cogstate’s tests have the highest demand, but it is obvious that the tests that have a lower demand will be supplied less and those with a higher demand will be supplied more. Another market constraint for Cogstate would be the size of the market. The market for Cogstate’s services will only consist of those who require the tests. The size of the market for the ‘Alzheimer’s battery’ and ‘brain injury battery’, are much smaller as they are very specific tests. Therefore, less of this service will be supplied/produced. However, the ‘early phase battery’ is a much broader test, so the market size is much larger. This means more of this service to be supplied/produced.

Assessment 2, Step 8RatiosBefore starting I didn’t think that the ratios would be too difficult. I thought it would just be linking values from my restated financials and then just applying formulas. Though when watching Martin’s lecture, I then realised it may be a little more difficult than I thought. From Martin’s lecture I gathered, that I would have to calculate values such as the cost of capital, NOA, RNOA, etc. When Martin said in the minute paper that it is quite basic, I was relieved.

When calculating my ratios, I didn’t experience many difficulties, it was more confusion than anything. A lot of my ratios were negative due to Cogstate experiencing a loss after tax in 2015, 2017 and 2018. I was unsure whether to add a negative sign when doing the calculations in order to make these values positive or whether I should leave them as

negative. I asked my on-campus lecturer her thoughts and she said that I should leave them as negative. When writing my discussions about the ratios, I did change my price per earnings ratios to positive values as I felt that it allowed for more ease when discussing. When calculating the DPS ratio, I spent a fair amount of time trying to find the dividends value for my firm, but I soon discovered by using the search function on PDF, that my company choose not to pay dividends for the past four years. I encountered the most difficulties and confusion when calculating the market ratios as my company used different wording. To overcome this, I looked at Paul Feasey’s draft to see where he got the figures from for each ratio. This was more to see if he got the information from his spreadsheets or the notes section of the annual report. When I found what information had to be gathered from a different source, I watched Maria’s video in Moodle, in order to find out where I had to gather the information from. I did find that when comparing and discussing my ratios that there was some contradiction, but by looking deeper into the annual reports and my previously completed financial statements, I was able to clear this confusion. Other than these areas of difficulties and confusion, I found this step extremely helpful in gaining a deeper understanding of Cogstate’s financials.

Profitability RatiosNet Profit MarginThis ratio indicates how much of the company’s revenue becomes profit. Over time, a company will want this ratio to increase and if it is decreasing, they need to know why. The net profit margin was -2% in 2018, -2.4% in 2017, 9.7% in 2016 and -31.5% in 2015. These ratios indicate that for all years except for 2016, the company’s revenue became a loss. There was an increase in the ratio from 2015 to 2016, when 9.7% of the company’s revenue became a profit, but it then decreased and became negative again in 2017 (-2.4%). In 2018, the ratio began to increase, but it is still negative (-2%). For Cogstate to continue operating in the long run, they will need to increase their net profit margin. It can be inferred that in 2015, 31.5% of the revenue became a loss, in 2017, 2.4% of revenue became a loss and in 2018, 2% of revenue became a loss. Therefore, it is evident that they are not performing well in this aspect. It is imperative that Cogstate determines why these ratios are negative. The ratios are negative only in the years that the company generated a loss after tax, it is discussed below as to how the company should go about reducing their loss after tax.

Return on Net AssetsThis ratio demonstrates the net income that a company generates from assets. The return on net assets was -3% in 2018, -3.8% in 2017, 13.5% in 2016 and -35.4% in 2015. This ratio demonstrates that 2016 was the only year that Cogstate generated income from assets. In 2015, 2017 and 2018 a negative return was generated from assets. Following the same pattern as the net profit margin, there was an increase in the ratio from 2015 to 2016, when 13.5% of the company’s income was generated from assets, but it then decreased and became negative again in 2017 (-3.8%). In 2018, the ratio began to increase, but it is still negative (-3%). It can be inferred that, in 2015 there was a negative return on assets of 35.4%, in 2017 there was a negative return on assets of 3.8% and in 2018 there was a negative return on assets of 3%. In each of these years, the company has generated a loss from assets. Therefore, they are not performing well in this aspect. So far it is evident that something has gone wrong in 2015, 2017 and 2018. From the information so far, it can be concluded that the issue is due to Cogstate generating a loss after tax. To minimise this

issue and make the profitability ratios positive, Cogstate should aim to reduce liabilities and expenses where possible to ensure that their revenue and assets can cover these costs, therefore generating a profit.

Efficiency RatiosDays of InventoryThis ratio indicates the time (in days) it takes inventories to turn into sales. Cogstate had no inventories for the past four years as they provide services only. Therefore, the ratio for 2015-2018 was n/a. If Cogstate was to have inventories, they would want the days of inventory ratio to be low. This means, that they have the goods for less days, allowing for a quicker turnover of stock, therefore increasing profits. Based off the net profitability margin and return on net assets, I believe that if this ratio was applicable to Cogstate it would be high. But it is a possibility that selling goods may increase their revenue by enough to allow them to incur profits rather than losses.

Total Asset Turnover Ratio – check this oneThis ratio demonstrates how efficiently a company is able to use its assets to generate sales. If a company has a higher total asset turnover ratio, they are able to operate with fewer assets, debt and equity. Though, this ratio is more effective in determining the efficiency of a company when it is compared to other companies in the same industry. Through this, we are able to compare how the assets, debt and equity (should) vary from company to company. In 2015, the ratio was 1.12, this then increased to 1.39 in 2016 and it increased again to 1.57 in 2017. The ratio then decreased to 1.54 in 2018. It can be concluded that from 2015-2017, Cogstate was able to operate with fewer assets, debt and equity, but obviously not enough in 2015 and 2017 as the company experienced a loss after tax. This is strange, as 2017 has the highest total asset turnover ratio, but a loss was still incurred. From the years 2015-2017, I believe that Cogstate was performing well in this aspect, but in 2018 they weren’t performing as well. But it is difficult to determine the overall performance of Cogstate in this aspect without comparing this ratio with companies in the same industry.

Liquidity RatiosCurrent RatioThis ratio demonstrates how a company can utilise current assets to cover liabilities. More simply, this ratio demonstrates the ease with which assets are able to be exchanged for cash. The lower and closer to one the ratio is the better, but the company wants the ratio to be over 1, otherwise the business needs an overdraft. The current ratio was 1.86 in 2018, 2.32 in 2017, 2.69 in 2016 and 2.95 in 2015. From the information, it can be gathered that Cogstate’s current ratio is improving. From 2015 to 2018 the ratio has decreased by 1.09 and is moving closer to 1. This shows that over the years the company is experiencing increased ease when exchanging assets for cash and that they are better able to use assets to cover liabilities. From this I can gather, that their loss after tax would have been a lot larger in 2017 and 2018 if the current ratio was higher or increasing. I believe that Cogstate is performing well in this aspect, but they should aim to decease this ratio as close to 1 as possible. By doing this, Cogstate should hopefully turn their loss after tax into a profit, therefore increasing their net profit margin and return on net assets ratios.

Financial Structure Ratios Debt/equity ratio – check this oneThis ratio evaluates the financial leverage of a firm. The debt/equity ratio demonstrates the percentage of company financing that is attributable to investors and creditors. Higher debt/equity ratios indicate that less investor financing (shareholders) is used than creditor financing (loans). The debt/equity ratio was 60.8% in 2018, 51.4% in 2017, 42.3% in 2016 and 41.4% in 2015. It can be gathered that Cogstate’s debt/equity ratio is worsening, as more creditor financing is used than investor financing From 2015 to 2018 the ratio has increased from 41.4% to 60.8%, meaning in 2015, more investor financing was used than creditor financing, but in 2018, more creditor financing was used than investor financing. This is quite that creditor financing through loans is occurring more in the company, but the firm has no financial obligations and there is no mention of loans in the annual report or financial statements. This aside, it can be concluded that Cogstate are not performing well in this aspect as the amount of creditor financing is increasing and investor financing is decreasing.

Equity ratio – might need to go into more detailThis ratio demonstrates the amount of assets that were funded by equity shares. A lower ratio represents more debt being used by a company to fund assets. Higher equity ratios demonstrate less risk and higher financial strength than a lower ratio. The equity ratio was 62.2% in 2018, 66.1% in 2017, 70.3% in 2016 and 70.7% in 2015. It can be gathered that Cogstate’s equity ratio is worsening. Cogstate’s equity ratio is decreasing over the years, meaning that more debt is being used to fund assets, rather than equity shares. In 2015, 70.7% of assets were funded by equity shares, compared to only 62.2% of assets being funded by equity shares in 2018. This decrease demonstrates that there is higher risk associated with the company and the financial strength is weaker in 2018. Based on these factors, Cogstate isn’t performing well in regard to the equity ratio.

Market RatiosEarnings Per Share (EPS) This ratio shows how much of a company’s profit is attributable to each ordinary share in the company. EPS is an important factor effecting the share price of a company. A higher EPS is associated with higher profitability. Cogstate’s EPS ratio was -$0.49 in 2018, -$0.57 in 2017, $2.36 in 2016 and -$4.71 in 2015. 2016 was the only year that this ratio was positive and this also happens to be the only year out of the past four years that Cogstate have made a profit. The EPS ratio is the lowest in 2016 (-$4.71) and this is also the year that Cogstate incurred their largest loss. In both 2017 and 2018, the EPS ratios are negative and Cogstate also experienced a loss. It can be gathered that, in 2016, Cogstate’s earnings were $2.36 per share. It can also be gathered that, Cogstate’s losses were $0.49 per share in 2018, $0.57 per share in 2017 and $4.71 in 2015. From this it can be concluded that in recent years Cogstate has not been performing well in this aspect. These EPS ratios suggest the share prices in Cogstate are very low, but even at a low price it is a risky company to invest in.

Dividends Per Share (DPS)This ratio demonstrates the dividend payments an investor should expect from their share of stock. An increasing DPS ratio indicates that the company’s management believes that the earnings growth will be sustained. Cogstate didn’t pay any dividends to shareholders, so this ratio is not applicable for this company. In each of Cogstate’s financial reports for the last three years it stated, “The directors do not recommend that a dividend be paid in respect of the financial year”. No further explanation was given, but it can be assumed that dividends were not paid in 2015, 2017 and 2018 as Cogstate made a loss after tax. I believe that they are withholding dividend payouts until the company makes a large enough profit to cover the payouts. Based on the above information, if Cogstate was to pay dividends the DPS ratio would be low as economic growth has not been sustained.

Price Earnings RatioThis ratio indicates the monetary amount of investment required to receive one dollar of the company’s earnings. When calculated these values were negative, but they were converted to be positive as a negative investment can’t be made. Cogstate’s price earnings ratio was 1.536 in 2018, 2.014 in 2017, 0.330 in 2016 and 0.0446 in 2015. This demonstrates that in 2015 an investment of 4 cents was required to receive one dollar of the company’s earnings. In 2016 an investment of 30 cents was required to receive one dollar of the company’s earnings. Furthermore, an investment of approximately $2 was required in 2017 and an investment of approximately $1.50 was required in 2018, to receive one dollar of the company’s earnings. These values are determined by the market price per share, which have fluctuated over the years, depending on the supply and demand of shares in the market. When there is a high demand, the price of the share will increase, indicating that there were higher demands for shares in 2017 and 2018, than in 2015 and 2016. Therefore, this ratio is not determined by the profit or loss the company makes. Cogstate was performing well in this aspect in 2015 and 2016 as investors were able to make a profit from their investment. However, in 2017 and 2018 the investment required is greater than the return, hence investors will incur a loss. Therefore, in these years Cogstate is not performing well in this aspect.

Ratios Based on Reformulated Financial StatementsReturn on Equity (ROE)This ratio indicates the amount of profit made from an investor’s dollar. A higher ratio indicates a higher profitability. Cogstate’s ROE was -4.84% in 2018, -5.81% in 2017, 19.15% in 2016 and -50.5% in 2015. The largest loss was incurred in 2015, which also happens to be the year with the lowest ROE ratio, in this year it can be concluded that a loss of 50.5% was made from an investor’s dollar. The ROE for 2016, is the highest and only positive value out of the previous four years and this was also they only year that Cogstate made a profit. In this year a profit of 19.15% was made from an investor’s dollar. In 2017, the ROE value decreased and became negative once again, indicating that the company made a loss (but not as large as 2015). In this year a loss of 5.81% was made from an investor’s dollar, which is not as large as 2015 but is still an issue. The ROE began to increase in 2018, but it was still a negative value, indicating that Cogstate made a loss yet again in 2018, but not as large as 2015 or 2017. In this year, a loss of 4.84% was made from an investor’s dollar. It can be concluded that in 2015, 2017 and 2018 Cogstate was not performing well in this aspect. If I

was an investor in Cogstate I would be extremely worried as they are making large amounts of losses from each dollar of investment.

Return on Net Operating Assets (RNOA)This ratio demonstrates how effectively a company is utilising assets. As the ratio increases, this represents that more earnings out of each dollar are being invested in assets. Cogstate’s RNOA was -5.30% in 2018, -9.77% in 2017, 29.09% in 2016 and -81.40% in 2015. The RNOA of -81.40% in 2015 indicates that Cogstate were ineffectively utilising their assets. It can be inferred that in this year majority earnings out of each dollar were invested into liabilities. In 2016, the RNOA value was 19.15%, which indicates that Cogstate effectively utilised their assets, contributing to why they made a profit in this year only. Out of the last four years, 2016 was the year that the most earnings out of each dollar were invested in assets. The RNOA value decreased and became negative again in 2017, indicating that yet again more earnings out of each dollar were being invested in liabilities (but not as much as 2015). From 2017 to 2018 the RNOA value increased by 1%, but it was still negative. This shows that although Cogstate were more effectively utilising assets, still more earnings out of each dollar were being invested in liabilities. Cogstate are not performing well in this aspect as for majority of the years more earnings out of each dollar were being invested in liabilities rather than assets, indicating that they aren’t effectively utilising their assets.

Net Borrowing Cost (NBC) – check this oneThis ratio indicates what a firm’s borrowings are costing them. A higher ratio indicates that the costs due to a firm’s borrowings were higher. Cogstate’s NBC ratio was 1.70% in 2018, 0.04% in 2017, -0.21% in 2016 and -0.13% in 2015. Cogstate’s net financial expenses values were positive in 2015 and 2016 indicating that they didn’t have any borrowings, which is supported by the negative NBC ratios of -0.13% in 2015 and -0.21% in 2016. Cogstate’s net financial expenses were the largest in 2018 (-24 980.20), which is supported by the NBC ratio as the value for 2018 is the highest (1.70%) out of the previous four years. In 2017, Cogstate also had net financial expenses, but these weren’t anywhere near as large as those in 2017. This is indicated by the NBC value being only 0.04%. It can be concluded that Cogstate were performing well in this aspect in 2015 and 2016 as they had no net financial obligations to pay, so this wasn’t costing them anything. In 2017 and 2018, the NBC values indicate that the firm had borrowings, but these borrowings didn’t incur large costs. Therefore, Cogstate also performed well in this aspect in 2017 and 2018.

Profit Margin (PM) – check this oneThis ratio represents the percentage of sales that have turned into profits. Cogstate’s PM ratio was -1.87% in 2018, -2.43% in 2017, 9.66% in 2016 and -31.53% in 2015. The PM ratio value in 2015 was the largest negative value out of the past four years, it is also in this year that the firm generated the largest loss. It can be concluded that in this year 31.53% of sales turned into a loss. 2016 was the only year that the PM value was positive, and it is also the only year that the firm generated a profit. In this year, 9.66% of sales turned into profits. Cogstate incurred another loss after tax in 2017 and in this year the PM value decreased and became negative yet again. In this year, 2.43% of sales turned into a loss. The PM value increased from 2017 to 2018 but was still a negative figure. In 2018, Cogstate experienced another loss but not as large as 2017. Therefore, in 2018 1.87% of sales turned into a loss.

Cogstate is not performing well in this aspect as 3 out of the 4 previous years had a negative PM ratio, indicating that a percentage of sales turned into a loss.

Asset Turnover (ATO)This ratio indicates how efficiently a company uses its assets to generate revenue. The higher the ratio, the more efficient the company. Cogstate’s ATO ratio was 2.84 in 2018, 4.02 in 2017, 3.01 in 2016 and 2.58 in 2015. This ratio can demonstrate how much each dollar of assets generates from sales. For example, in 2018 each dollar of assets generated $2.84 of sales. In 2015, the ATO ratio is the lowest, indicating that in this year Cogstate was least efficient in using their assets to generate revenue, hence the large loss. In 2016, they were more efficient in generating revenue from assets. The company was the most efficient in using assets to generate revenue in 2017. Therefore, the firm was most efficient in 2017 in this aspect. In 2018, the ATO ratio value decreased, showing that the firm was still able to generate revenue from assets, but not as efficiently as 2016 or 2017. From these values it can be determined that Cogstate is able to efficiently generate revenue from assets, but they experience losses because they struggle in other areas. It appears that Cogstate is performing quite well in this aspect, so the loss after tax for 2015, 2017 and 2018 is not related to sales or net operating assets.

Discussions with othersI had a discussion with Cassie Phillips, who also has a company in the healthcare industry. Her company, Ramsay Health Care, is a private health hospital company who also have facilities in day surgery clinics, treatment facilities, rehabilitation and more. We discussed the days of inventory, asset turnover and earnings per share. Our companies were different in the fact that Cassie’s company had a days of inventory ratio whereas Cogstate didn’t. Both companies were similar in the fact that the total asset turnover ratio was not too good. Ramsay Health Care’s ATO was 0.97 in 2015, 1.05 in 2016, 1.04 in 2017 and 0.99 in 2018. The values for Ramsay Health Care were actually lower than those for Cogstate, so Cassie’s company is performing worse in regard to this aspect. Differing from Cogstate, Ramsay Health Care’s earnings per share ratio was positive for each year. It was $2.14 in 2015, $2.20 in 2016, $2.73 in 2017 and $2.14 in 2018. Compared to Cogstate, more of Ramsay Health Care’s profits are attributable to each ordinary share.

Over the term, I have had many discussions in class with Karen Howard. Recently, we had a discussion of mainly the overview of our company through ratios. Karen’s company is Jumbo interactive, which is the company that essentially controls the lottery – so you could say our companies are quite different. Karen had to calculate two sets of the Ratios Based on Reformulated Financial Statements as her company, due to splitting revenue into operating and financial assets in her restated financials. Overall, the ratios for Jumbo Interactive were the opposite to Cogstate, as all ratios were positive except for the RNOA.

More will be added here!

Questions raisedWhen calculating the ratios, the questions that were raised about Cogstate, mainly surrounded the investors of the firm and the continuation of business in the future. Regarding investors in the firm, I wondered, “who would want to invest in Cogstate?”, “are

they happy with all of these negative values?” and “how many are considering selling their shares?”. Obviously, I can’t get the answers to these questions, but I can say that I certainly wouldn’t want to be investing in Cogstate, but if I was, I wouldn’t be happy with the amount of negative values. In regard to, selling my shares (if I had any) I would wait to see is the negative values continue to increase or if they decrease and become positive. Due to all of the negative values I also asked myself, “will Cogstate continue business into the future?” I believe that this is also a hard question to get an answer to. Certainly, if the firm continues to generate negative ratio values and losses, their future looks very bleak, but if these values become positive, they will be able to continue business into the future.

Economic profitThe formula to calculate economic profit is: (RNOA – cost of capital) x NOA. Therefore, key drivers of a firm’s economic profit are: RNOA, cost of capital and NOA. As discussed in the ratios section, RNOA demonstrates how effectively a company utilises assets. Cost of capital is the return necessary to make a capital budget necessary. As outlined in the assignment task, the cost of capital is 10%. NOA is the firm’s operating assets minus operating liabilities. This calculation is done in order to isolate the firm’s operating performance and value it independently of financial performance. Overall, the economic profit calculation allows us to break down the information and determine where the firm’s economic profit (or loss have come from). Cogstate’s economic profit was -1 562 343.1 in 2018, -1 298 175.2 in 2017, 1 727 237.1 in 2016 and -5 689 818.1 in 2015. From this it can be gathered that the firm has only experienced positive economic profit in 2016 and has experienced negative economic profit (a loss) in 2015, 2017 and 2018. For each of the years, the main determinant in whether the economic profit was positive or negative was the RNOA. The RNOA is calculated by: OI/NOA. The main determinant in whether the RNOA value was positive or negative was OI (or operating income), this is because NOA is always positive, so it can’t be a cause of a negative RNOA. It is important to note that Cogstate had no operating comprehensive income. This will be explained in further detail in each of the following paragraphs.

As mentioned above OI is the main determinant in whether RNOA is negative, which is then a main determinant in whether the economic profit is positive or negative. In 2018, the economic profit was -1 562 343.1, hence making it an economic loss. The negative economic profit is caused by the negative RNOA of -5.30%, which is caused by the negative OI of -$540 937.8. This negative OI is due to the total operating expenses ($28 834 196) and net tax expense ($682 840) combined ($29 517 036), being greater than the operating income ($28 976 099). So, the economic loss stems back to the large operating expenses and tax expense that couldn’t be covered by the operating income. I believe that an economic loss of -1 562 343.1 is quite large, but then again, I wouldn’t even want a small economic loss. This large economic loss is due to the large negative OI and RNOA values and a smaller operating income. The addition of a tax expense rather than a tax benefit, increases the negative value of the economic loss.

In 2017, the economic profit was -1 298 175.2, hence making it an economic loss. The negative economic profit is caused by the negative RNOA of -9.77%, which was caused by the negative OI of -$641 596. This negative OI is due to the total operating expenses ($27 134 421), being greater than the total operating income ($26 475 466) and net tax benefit

($17 359) combined ($26 492 825). So, the economic loss stems back to the large operating expenses that couldn’t be covered by the operating income or net tax benefit. There is a larger negative economic loss in 2017 and 2018, this is because Cogstate’s OI and RNOA are larger negative values in 2017 than in 2018. Is this enough explanation as to why the number is so large.

2016 was the only year out of the previous four that Cogstate experienced a positive economic profit. In 2016, the economic profit is $1 727 237.1. The positive economic profit is caused by a positive RNOA of 29.09%, which was caused by the positive OI of $2 632 119.7. This positive OI is due to the total operating expenses ($26 779 956) being less than the total operating income ($27 804 737) and net tax benefit ($1 607 338.7) combined ($29 412 075.7). So, the economic profit stems back to the large combined total of net tax benefit and total operating income that was able to cover the total operating expenses. I don’t believe that this is a very large economic profit, but in saying this it is much better than a loss, especially compared to the large loss in 2015. I believe that this is a large economic profit due to the large RNOA, OI and operating income values.

2015 was the year in which the largest negative economic profit/economic loss occurred. In 2015, the economic profit was -5 689 818.1, hence making it an economic loss. The negative economic profit is caused by the negative RNOA of -81.40%, which was caused by the negative OI of -$5 067 310.3. This negative OI is due to the total operating expenses ($21 938 295) being greater than the operating income ($16 717 172) and net tax benefit ($153 812.7) combined ($16 870 984.7). So, the economic loss stems back to the large operating expenses that were unable to be covered by the small operating income or net tax benefit. This is a large economic loss. This large loss is caused by the extremely high negative RNOA and OI values and lower operating income. Do I need to explain this more??

Cogstate’s economic profit has fluctuated significantly over the past four years. Beginning in 2015, the economic profit was a large negative value, in 2016 it then increased and became positive. The economic profit then decreased and became an economic loss again in 2017, this value then increased in 2018 but still wasn’t enough to make an economic profit. The fluctuations in economic profit are caused by the fluctuations in operating expenses and operating income. The fluctuations in operating income mainly occurred due to increases and decreases of revenue and other income (royalty revenue and net-pass through recovery). The total operating expenses actually remained relatively stable but increased from year to year. It is expected for a research company to spend large amounts of money on research. In Cogstate’s financials, cost of sales is the largest operating expense and has increased from 2015 to 2018, demonstrating that they are increasing their available trials or expanding research on their current trials. In order for revenue and then economic profit to increase, Cogstate will have to sell more of their services, in order to cover the rising cost of sales. Have I explained enough

Discussion with othersOn the 28th of May, Chris Apps posted a poll on Facebook asking if we would consider investing in our company. In the comments section he also asked us to comment about this

in regard to our firm’s economic profit. Included below is a screenshot of the comment section.

In similarity to Chris’ company (unknown), the economic profit of my firm has increased since 2015 (even though it is still negative value). My firm was different to Claudia’s company, ‘Top Glove’ in the fact that Cogstate only had a great economic profit in 2016 and the increased from 2017 to 2018. In similarity to Kyl’s company (also unknown), the economic profit of my firm for 2017 and 2018 has been negative, but a difference occurs in the fact that his company’s economic profits in 2015 and 2016 were positive enough to outweigh the shortfall, however the same can’t be said about Cogstate. From these comments it is hard to tell what might be causing these similarities and differences. It appears that majority of their company’s experienced a negative economic profit when they

were in the process of expansion. This is different to Cogstate as they have not completed any expansion in the last four years and their negative economic profit is attributable to their large operating expenses.

While discussing ratios with Cassie, we also compared the economic profit of our companies. Ramsay Health Care’s economic profit was $40 415.41 in 2015, $93 495.88 in 2016, $91 308.29 in 2017 and -$28 170.74 in 2018, so you could say that this is the complete opposite of Cogstate.

The economic profit of Karen’s company (Jumbo Interactive) was positive in all years for both sets of calculations, with the value calculated at NOA 2% being much larger than at NOA 1%. Therefore, our companies were also opposites in this aspect as Karen’s company generated economic profits for all four years whereas Cogstate only experienced an economic profit in 2016.

More will be added here!

InsightsFrom looking into the economic profit of Cogstate and dissecting their financial statements, I was able to gain a deeper insight into the company mainly in respect to their profitability and how effective the company is. I was able to recognise that the company is not very profitable and therefore wouldn’t be the best investment decision. This is mainly because the economic profit of the company has fluctuated over the past four years and was negative for three of these years. In terms of effectiveness, I believe that the firm is effective to some extent. In the aspect of operating income, they are effective as they have had large amounts of sales, but they need to more effectively control their operating expenses or increase their operating income, in order to make a profit. I don’t believe that there are any insights that I have not gained from the economic profits of Cogstate.

Assessment 2, Step 9Cogstate is considering whether to build either a new research centre in Australia or a new headquarters in America. It is assumed that the options are mutually exclusive, so the firm can only purchase one. It is assumed that Cogstate is planning to sell the research centre to another research company in 8 years-time for $195 million and the headquarters to a large corporation in 10 years-time for $170 million.

Option 1: Research Centre in Australia

Option 2: New headquarters in America

Original Cost $155 million $120 millionEstimated Life 8 10Residual Value $195 million $170 millionEstimated future cash flows2020 $10 million $7 million2021 $10 million $7 million2022 $10 million $8 million2023 $13 million $14 million

2024 $14 million $14 million2025 $14 million $14 million2026 $14 million $16 million2027 $16 million $16 million2028 $20 million2029 $21 million

The estimated life refers to how long Cogstate is expecting to own the facility before selling it to another company. Residual value refers to how much each facility will be sold to another company, at the end of its estimated life. The investment would be made on the 1 st

of July of 2019, therefore the estimated future cash flows will be received on the 1 st of July each year for the facilities estimated life.

The following table displays the calculated NPV, IRR and payback period for each option.Option 1: Research centre in Australia

Option 2: New headquarters in America

NPV $0.96 $22.11IRR 10.1% 12.5%Payback period 7 years and 122 days, approx. 9 years and 8 days, approx.

Based off of these factors, both options would be suitable for Cogstate to invest in, but as they are mutually exclusive, only one option can be selected. The NPV for both of the options is positive but, option 2 has an NPV of $22.11 compared to $0.96 for option 1, therefore it is obvious that option 2 is the better investment in regard to NPV. The IRR for both options is greater than the required return (10%), but option 1’s IRR is only 10.1% compared to 12.5% for option 2, again making option 2 the better choice. The pre-set payback limit for option 1 is 8 years and the calculated payback period is approximately 7 years and 122 days. The pre-set payback limit for option 2 is 10 years and the calculated payback period is approximately 9 years and 8 days. Therefore, in relation to payback period, both options are acceptable, but option 1 is better. Although, option 2 has a longer payback period, the NPV and IRR are more heavily weighted when making investment decisions, due to the factors explained below. Considering these factors, the new headquarters in America (or option 2), is the best option for Cogstate to invest in. In a real-life capital investment situation, it is important to note that if the interest rate at a bank is larger than the IRR, it may be a better decision for the firm to put the money in the bank. However, for the purpose of this assignment I ignored bank interest rates.

For each of the method, there are strengths and weaknesses. The payback period is easy to understand and is biased towards liquidity, however it ignores the time value of money, requires an arbitrary cut off point and ignores all cash flows past this point. Therefore, payback period is the least dominant method, when making an investment decision. NPV meets all of the desirable criteria as it considers all cash flows, adjusts for risks, is able to rank mutually exclusive projects and is directly related to an increase in wealth. The only weakness of this method is that it’s more difficult to understand due to a complicated formula. For these reasons, NPV is the dominant method when making budget decisions. Finally, IRR is the method preferred by executives as it is intuitively appealing and easy to communicate as well as considering all cash flows and the time value of money, however it

can produce multiple answers and is unable to rank mutually exclusive projects. Due to this, it is the second most dominant method in making investment decisions.

Assessment 2, Step 10

Feedback From: Kayla Cantoni

Feedback To: Joanne White

My Comments

Step 7Identify three products or services of your firm

Estimate selling price, variable cost & CM

Commentary – contribution margins

Constraints – identify & commentary

You have identified three services of your firm and estimated the selling price, variable cost and CM. The breakdown of what the sales and variable costs for your firm was a great addition, as well as explaining where the 180 figures came from.

To add some more to your commentary about the contribution margins you could discuss why the firm doesn’t choose to only offer the one flight that has the highest contribution margin. Other than that, this your discussion on this element is great.

Your discussion on the constraints of the firm was brief, but was still well done.

The inclusion of what Air Asia Malaysia needs to consider was a great inclusion, that ties to contribution margin.

Step 8 Your ratios appear to be calculated correctly and the right denominations have been used. Making the negative figures red was a great addition.

The inclusion of screenshots of the ratios, as well as some of the figures used to calculate the ratios allowed for ease of discussion. Great discussion of the ratios. Just to improve, you could discuss what each ratio represents. For example, RNOA demonstrates how effectively a company is utilising its assets.

Economic profit appears to be calculated correctly.

To improve your discussion on economic profit by writing why you think they made this loss.

Calculation of ratios

Ratios – commentary (blog)

Calculate economic profit

Commentary – drivers of economic profit (blog)

Step 9 You have provided a great discussion about the capital investment decision for your firm and the tables setting out the information are very well presented.

The calculations of PP, NPV and IRR appear to be correct.

Your discussion and recommendation are great, but to improve you should discuss the strengths and weaknesses of each method (as per the assessment task sheet)

Develop capital investment decision for your firm

Calculation of payback period, NPV & IRR

Recommendation & discussion

Overall ASS#2 Steps 7-9 Overall your work is of a high standard and was enjoyable to read. I believe if make the improvements suggested, your work will be of an even better quality.

Feedback From: Kayla Cantoni

Feedback To: Zoe Andersen

My Comments

Step 7Identify three products or services of your firm

Estimate selling price, variable cost & CM

Commentary – contribution margins

Constraints – identify & commentary

You have effectively identified three product or service of your firm and estimated the selling price, variable cost and CM. I liked the inclusion of the links to the actual product, to see where you got the selling price from. Your discussion on how you determined the variable costs was very detailed.

Great discussion on the CM – shows that you have a very good understanding of it. Your discussion on why the firm shouldn’t just produce the product with the highest CM was well done. You have briefly touched on why the CMs for each product might differ (one being yellow gold and the others being white gold), but to improve this section you could discuss this further.

Your discussion on both the market and resource constraints was well done and very detailed. You have slightly touched on it, but maybe you could discuss more how these constraints are relevant when Atlas pearls decide how much of each product they should produce and sell (as per the assignment information sheet)

Step 8 As your company didn’t have dividends, I recommend for the Dividends per share ratio you just put n/a instead of zero (this is what my lecturer told me to do). I noticed that for the EPS ratio some of the figures were also zero. Maybe try increasing the decimal as the value isn’t actually zero. Other than that, all your ratios appear to be correct.

Your discussion of the ratios was very good and I liked how you discussed how a low ratio in one area could be the cause of a low ratio in another area. What each ratio represents appears to be correct and demonstrates you have a good understanding of ratios (I will definitely check out the website you recommended!). I noticed you had subheadings for each ratio

Calculation of ratios

Ratios – commentary (blog)

Calculate economic profit

Commentary – drivers of economic profit (blog)

under the ‘ratios based on reformulated financial statements’, maybe you could make a subheading for each ratio under the other headings. As per your comment on my feedback sheet, I believe that your discussion on NBC is correct. The inclusion of screenshots of the ratios allowed for an ease of discussion.

Your discussion of the economic profit/loss and drivers of this was well done. I don’t think you need to add anything here.

Appears you still need to discuss your ratios and economic profit – maybe we can compare and contrast.

Step 9 You have effectively developed a capital investment decision for your company and have discussed this well.

It appears that NPV, IRR and PP have been calculated correctly.

Your recommendation was good and the addition of stating that the Sydney store would also be a viable option was good. To improve this you could add the factors that determine whether the decision is acceptable in each method (for example, only accept the project if IRR is greater than the required rate of return – 10% in your case). As well as this, you should discuss the strengths and weaknesses of your analysis, by discussing the strengths and weaknesses of each method (as per assignment info sheet).

Develop capital investment decision for your firm

Calculation of payback period, NPV & IRR

Recommendation & discussion

Overall ASS#2 Steps 7-9 Overall your steps 7 to 9 were very well done and your discussions were great! I believe if you incorporate the suggested feedback into your work, it will be of a very high standard!

Feedback From: Kayla Cantoni

Feedback To: Karen Howard

My Comments

Step 7Identify three products or services of your firm

Estimate selling price, variable cost & CM

Commentary – contribution margins

Constraints – identify & commentary

You have effectively identified three products of your firm and have done a good job in estimating the selling price, variable cost and CM. It was great how you explained your thought process as to why the variable cost for the software was zero.

Your discussion of why the contribution margins for each of your products differed was brief, but also well done. To improve this section, you could maybe add why they don’t just offer the lottery with the highest CM.

Your discussion of the market constraints was well done. Do they have any resource constraints? – the amount of money they can get for the winnings.

Step 8 Your ratio calculations appear to be correct (I remember the issues you had when trying to do them, which it appears you have overcome. Maybe make a note on the spreadsheet, as to why you did two sets of the ratios based on reformulated financial statements. For your Ratios Based on Reformulated Financial Statements with NOA @2%, the ATO shouldn’t be a percentage.

Definitely agree with you that the most difficult part was discussing what the ratios actually mean! You have done a very good job of discussing what each of the ratios mean. To improve, you could put the company’s values for each year or screenshots of these values for each of the ratios, so you can talk more about what these values mean for your company.

Looking at the days of inventory ratio, it’s strange that they would have an inventory. But I have to agree that it would most likely be the prize money.

It appears that both of your economic profit values are calculated correctly. For your Ratios Based on Reformulated Financial Statements with NOA @2%, the economic profit value shouldn’t be a percentage.

I think that what you have so far for your economic profit is good, but I think you should comment on what is causing the economic profit for your firm (look at the assessment 2 infor sheet for more detailed information). As you think that the 2% NOA figures give a truer representation of the company, I think that you could maybe discuss just that economic profit.

Calculation of ratios

Ratios – commentary (blog)

Calculate economic profit

Commentary – drivers of economic profit (blog)

Step 9 You have effectively developed a capital investment decision for your firm. Your discussion of this decision and the factors involved is very well done.

It appears that the PP, NPV and IRR have been calculated correctly.

Your recommendation and discussion of the capital investment decision was well done. To improve this section, you should discuss the strengths and weaknesses of your analysis – by listing the strengths and weaknesses of each method (as outlined on the assessment 2 information sheet)

Develop capital investment decision for your firm

Calculation of payback period, NPV & IRR

Recommendation & discussion

Overall ASS#2 Steps 7-9 Overall, your work was of a high standard and was enjoyable to read. I believe that if you make these improvements, your work will be of an even higher standard.