ACCT13017: Financial Statement Analysis

ASSIGNMENT 2 Steps 3 – 5

Step 3 Ratios – Commentary
Profitability Ratios

Firstly, looking at the profitability ratios of my firm; Mayne Pharma (pharmaceutical company), the Net Profit Margins for years 2018 – 2021 were negative and therefore considered not very profitable. The net profit margins ranged from negative 20.7% to negative 54% which does not look promising for the business. I wanted to examine why there was a significant drop in net profit margin in the 2019 & 2021 years. Turns out the value of impairments were significantly larger in those years. Net profit margin is calculated by using net profit after tax divided by total sales. The total operating income has progressively decreased by approx. $130million during the years 2018 – 2021 from $530.313m down to $400.781m. This is mainly due to a decrease in the manufacture and distribution of generic pharmaceutical products in the U.S. due to other competitors.

These profitability ratios reflect that Mayne Pharma is not very profitable however, this also includes the significant value of impairments of equipment written off each year, which may be deceiving. Although impairments are based on estimates and no cash is used, they are still a real expense for a business similar to depreciation and must be included within the ratios. The impairment expenses for my firm range from $98.985m to $351.716m. These impairments mostly relate to cash generating units and some specific assets such as pipeline products. Mayne Parma’s plant & equipment would be very expensive therefore, impairments likely to be higher than in other industries. Thinking about the patented “Suba” technology specifically used to improve the poorly soluble anti-fungal drug “itraconazole”, the machine used to do this would be of significant value and general wear and tear would arise quickly subsequently, this asset would be considered impaired. When Mayne Pharma calculates their impairments for the year, they also consider the US market dynamics for the portfolio and the industry. However, one thought I had is can I manipulate these ratios to determine if Mayne Pharma would be profitable should they had not written off these impairments? If these impairment expenses were omitted from the net profit margin ratio, Mayne Pharma would have a net profit margin ratio of positive 1% to 9.5% which is a significant difference. I am not entirely confident that relying on my firm’s profitability ratios including these impairments is a strong indication of how successful my firm is.

Looking to another element of my firm’s net profit after tax figure, another large item that contributes to the net profit after tax is administration expenses which range from $100m – $170m per year. These administration expenses relate to amortisation of intangible assets, restatement of earn-out liabilities, share based payments expense, restructuring expenses, foreign exchange losses and drug pricing investigation and related litigation costs. In particular, there was an administration expense in 2021 amounting to $11.9m for the pre-launch of “Nextstellis” set up expenses which is Mayne Pharma’s new birth control pill they are wanting to market and launch this this year.

The Return on Asset (ROA) ratio suggests how profitable a company is in relation to its assets; whether the company is using assets to generate revenue. Because we use net profit after tax for the ROA ratio and Mayna Pharmas’s profit & loss is negative, the return on asset ratios ranges from (-5.2% to -17.3%). This tells me that Mayne Pharma is not generating revenue based on the high number of assets held. Again, this negative ratio would be because this ratio uses net profit after tax with impairments included. Mayne Pharma has a lot of expensive plant & equipment required to produce their pharmaceutical drugs. However, the total assets of the firm are high ranging from $1,463,184m – $1,830,508m with majority of these assets relating to property, plant & equipment. The equipment required to process the pharmaceutical drugs would be large and expensive for this industry therefore explains why the value of these assets are sitting high on the balance sheet. Another asset which sits high on Mayne Pharma’s balance sheet is trade and other receivables which tells me that they are still generating revenue and do not have a liquidity or cash issue.

Efficiency Ratios

Now, looking to the efficiency ratios; the asset turnover ratio (ATO) calculates how much revenue per dollar of assets. Generally, firms with high profit margins have low asset turnover and vice versa. Given my firm has negative profit margins, I expected these figures to be relatively high however they were low but consistent. These ATO ratios for my firm ranged from 0.25 – 0.32 which is still quite low but at least they are positive figures! I compared my ratios to Stuart Hentschke’s firm Medical Developments which was also a pharmaceutical company and the results were very similar. My theory for this is the high amount of assets our firms hold is relative to the sales revenue generated. It was good to see a similar industry with similar efficiency ratios. The current asset turnover ratios for my firm range from 0.93 – 1.11, a little higher than the total asset turnover ratio. I am wondering again, since we are using net profit in this calculation it is representing these efficiency ratios this way. Taking note that my firm has trade receivables and money coming in regularly so no cash flow issues however, if they wanted to improve the efficiency ratios, my firm would need to increase their sales revenue perhaps by selling and marketing the “Nextstellis” women’s contraceptive pill. Because they have on boarded a new team of women to help market and sell this new contraceptive pill after receiving FDA approval, I do believe that sales revenue will increase this year.

Liquidity Ratios

With the liquidity ratios, these current ratios determine the company’s ability to pay short-term obligations using their assets. With a current liquidity ratio ranging between 1.87 – 2.66, this tells me that Mayne Pharma is able to pay their current debts when due and they do not seem to have a liquidity issue. However, when looking at the quick liquidity ratio 1 which excludes inventory and prepayments it becomes a little concerning by the 2021 year with a ratio of 1.41. Then looking at the quick ratio 2 which excludes inventory, prepayments and accounts receivables these ratios are below 1 which is a bit alarming. These assets are more difficult to turn liquid fast therefore, what this tells me is that without selling inventory stock and relying on money coming in from Mayne Pharma’s sales revenue, they would struggle to pay their current liabilities when due.

Financial Structure Ratios
The financial structure ratios for Mayne Pharma look promising and positive – however what do these ratios mean? The debt-to-equity ratio is used to evaluate a company’s financial leverage (Investopedia, 2022). The higher the debt-to-equity ratio, the more the company has leveraged in debt so these ratios are actually bad for my firm, not good! In the 2021-year Mayne Pharma had a debt-to-equity ratio of 0.90 which means for each dollar of equity they have; they hold 90 cents of debt – this is quite high! Although anything below 1 is considered okay; the other years are well below 1. The equity ratio measures the value of assets financed using the owner’s equity; a higher ratio is considered favourable for the companies (Wall Street Mojo, 2022). The times interest earned ratio shows how many times a company could cover its interest charges with its pre-tax earnings (Investopedia, 2022). This ratio represents financial freedom from debt; for Mayne Pharma they can pay their interest debt 10 – 26 times over using its pre-tax earnings which is great.

Market Ratios

The market ratios for Mayne Pharma were really sad, all at 0%. This is probably due to the fact the company is currently not paying dividends to shareholders due to operating at loss and negative retained earnings therefore; not able to pay dividends.

Ratios Based on Reformulated Financial Statements

Dividend Payout Ratio

The dividend Payout ratio is 0% and this is because no dividends have been paid for the previous 4 years.

Return on Equity (ROE)

These ratios are all negative and this is because there has been no return to shareholders due to operating at a loss. Dividends can only be paid out of retained earnings.

Return on Net Operating Asset Ratio (RNOA)

The return on net operating asset (RNOA) ratio represents the ability a company has to generate income from its net operating assets. By excluding cash and financial obligations from this ratio; it represents the true return on assets a firm is generating through its operations. Mayne Pharma’s RNOA are all negative due to using a net loss figure from comprehensive income.

Net Borrowing Cost (NBC)

Mayne Pharma’s financial liabilities exceed their financial income.

Profit Margin (PM)

Profit margin focuses on the profitability of each dollar of sales. The more profit a firm can have from each dollar of sales, the greater “value add” to equity investors. Because Mayna Pharma do not have profit, all the profit margin ratios are negative.

Operating Liability Leverage (OLLEV)

Operating leverage is a ratio which measures the degree in which a firm can increase its operating income by increasing revenue. Companies with high operating leverage like Mayna Pharma must cover a larger amount of fixed costs regardless of whether they sell any products. What this ratio tells me is that Mayne Pharma has a high amount of fixed costs such as their plant & equipment required to produce their pharmaceutical products. These are fixed costs because the initial outlay is required whether they produce 10 or 10,000 pharmaceutical drugs from the same machine.

Financial Leverage (FLEV)

Financial leverage is the amount on money which is borrowed by a firm. Money is usually borrowed by a firm to finance assets in an attempt to increase equity/shareholder’s value. Companies generally financially leverage by debt when they cannot issue stocks to raise capital which is what Mayne pharma has clearly done due to their current share price being so low.

Return on Operating Assets (ROOA)

Return on operating assets for Mayna Pharma are negative, again because this uses operating income after tax which are currently losses. This shows that Mayna Pharma are currently not efficiently using their assets to generate revenue.

Operating Liability Leverage Spread (OLSPREAD)

Another negative ratio for Mayne Pharma.

Asset Turnover (ATO)

Efficiency is how well Net Operating Assets (NOA) in a firm are being used to generate sales revenue or asset turnover. Although Mayne Pharma’s ATO ratio is still relatively low, at least it is positive! I would imagine they have low asset turnover based on the high value of assets held on balance sheet.

Growth in Sales

Unfortunately for Mayne Pharma, their sales have actually declined over the past 4 years; and progressively in the years 2020 & 2021 due to economic factors such as covid-19.

Growth in Operating Income

There is a small decrease in operating income which progressively worsens in the 2020 & 2021 years to around -12%.

Growth in Net Operating Assets

Mayne pharma struggles to generate revenue using its assets.

Growth in Shareholders’ Equity

Unfortunately for Mayna Pharma, until they can generate more profits there will be no growth in shareholder’s equity.

Free Cash Flow

For my firm; Mayne Pharma the results of the FCF are all negative – this is because this calculation is based on the relationship between operating income and the change in assets. Because Mayne Pharma’s operating income is still a loss, unfortunately the FCF is negative.

Implicit Interest after tax

This is the implied interest costs Mayne Pharma will have based on its operating liabilities. They actually hold a relatively low amount of debt.

Economic Profit

Economic profit or loss is the difference between revenue received and the input costs including any opportunity costs such as cost of capital. For Mayne Pharma these amounts are negative.

Accounting Drivers – Commentary
Mayne Pharma Group is a pharmaceutical company focused on developing, manufacturing and marketing novel and generic pharmaceuticals. Mayne Pharma offers generic products to treat conditions of the cardiovascular and central nervous systems, attention-deficit/hyperactivity disorder (ADHD), and contraception as well as many other specialty pharmaceutical products. Mayne Pharma’s key focus is to expand its on-market portfolio of women’s health & dermatology products as well as growing contract services in Greenville, South Carolina and Salisbury, South Australia. With the key accounting drivers of economic profit being Return on Net Operating Assets (RNOA), cost of capital and Net Operating Assets (NOA) by looking to these items, helped me to determine what was driving my firms negative economic profit. Because the RNOA ratio uses operating income after tax to calculate the RNOA, this includes the impairments and administration expenses resulting in a negative economic profit. My firm’s economic profit has remained fairly consistent with an increase in the 2019 & 2021 years where they had lower NOA and higher net losses. The net losses are driven by my firm’s impairment costs for their plant & equipment especially higher in 2019 & 2021 years. Mayne Pharma would have expensive equipment to be used in producing their pharmaceutical drugs but not only that, they would have multiple pieces of the same equipment to keep up with the demand of producing their pharmaceutical drugs. It makes sense that these pieces of equipment would wear out and become impaired each year. Should these impairment and administration expenses not been included within these calculations, my firm would have had positive economic profits each year. However, these impairment and administration expenses are a real expense of my company and must be included in the calculations. I just thought it would be interesting to evaluate how much of an impact this would have on my firm’s economic profit. My firm has used a cost of capital of 8%; this is purely an estimate only and represents the required rate of return by investors. The NOA of my firm is strong and driven by the high number of assets held for production of my firms’ pharmaceutical drugs. Therefore, with a high NOA and negative RNOA by using net loss figure, this results in a negative economic profit for my firm. Ideally, a positive economic profit would be preferable however, Mayne Pharma would firstly need to increase sales revenue to help cover for these impairment and administration costs incurred. By starting with a profitable operating income after tax, this would result in a stronger economic profit.

Two key accounting drivers of RNOA are Profit Margin (PM) and Asset Turnover (ATO). The asset turnover ratios for my firm are one of the stronger ratios ranging from 0.30 – 0.38. This tells me that Mayne Pharma is generating sales revenue based on their assets – I would expect these ratios to be slightly higher to indicate efficiency. However, when you consider what sort of assets are required for Mayne Pharma to generate their sales revenue, they are expensive so I don’t think this ratio is terrible. It is not like a software engineer who only has a computer as an asset to generate sales revenue – now a software engineer’s asset turnover would be very high! Perhaps if Mayne Pharma focused on selling their new “Nextstellis” contraceptive pill this year and increasing sales revenue, they may see improvements to their profit margin and asset turnover ratios.

Key accounting drivers of a firm’s Free cash flow are Operating Income (OI) and Net Operating Assets (NOA). Because my firm has negative operating income this again results in a negative free cash flow. However, my firm has approx. $4,000 -$5,000m cash at bank so if you are assessing whether they have free cash flow, I’d say they do. Negative operating income is again due to the impairments of my firm. When looking at the trend of the NOA, there was a significant decrease in NOA in the 2021 year. This was due to $326.1m decrease in intangible assets (of this $229.3m was for impairments and $66.9m was due to foreign currency translation). There was also a significant change with the AUD/USD exchange rate in 2021 year. Property, plant & equipment decreased by $13.9m and was also mainly due to foreign currency translation. As you can see this key accounting driver of asset impairments and the economic driver of the weaker US dollar has had significant impacts for Mayne Pharma in the 2021 year.

Step 4
Economic and Business Drivers

One economic driver which affected Mayne Pharma’s sales revenue to decline from $456,001m in 2018 down to $299,071m in 2021, was Covid-19. Looking to the 2020 annual reports, I found that the generic business and contract services traded well through the second half of 2020 however, Mayne Pharma’s specialty brands business was negatively impacted by a decline in prescribing – driven by physician office closures or reduced capacity at these offices and subsequently fewer patient visits throughout Covid-19. Their prescriptions were down 15% across the dermatology portfolio in April & May 2020 and significantly impacted sales revenue in the 2021 year.

When looking at sales revenue, we must also consider competition as another economic driver of this decline in sales revenue. Having strong competition for pharmaceutical drugs can negatively impact the sales revenue for Mayne Pharma. What if another company was making a similar product for a lower price? The customer then has the choice to purchase the same or similar product for a lower price which could affect Mayne Pharma’s sales revenue. Mayne Pharma’s Generic Products Division (GDP) sales were down 8% in 2018, 21% in 2019, 42% in 2020 and 10% in the 2021 year due to being impacted by competition on some key generic products such as liothyronine which is a thyroid medication, dofetilide which is a cardiovascular medication and butalbital which is a pain medication. Mayne Pharma continues to discontinue unprofitable generic products, reduce stock obsolescence and optimise the cost base through realignment of its supply chain with raw material suppliers. This makes perfect sense to discontinue these products which are not contributing to sales revenue due to competition. Perhaps Mayne Pharma needs to focus on areas that produce high sales revenue resulting in profits.

Business Drivers – Impairments
The impairment of assets for Mayne Pharma is what is driving the net operating losses each year. In the 2021 year there were $229.3m worth of impairments recorded which considered the current and projected US market dynamics including Covid-19 and its industry. Another economic driver would be the weakening US dollar in the 2021 year.

One business driver of Mayne Pharma is their assets held to generate sales revenue. Because of Mayne Pharma’s high impairments written off each year, this makes me wonder whether they are efficiently using their assets to generate revenue. The RNOA ratio suggest they are not using their assets efficiently because these ratios range from -3.37% to -21.18%. With high value of assets, shouldn’t these assets be generating a higher percentage return in sales revenue? Have they expanded too quickly? More space means more equipment required to produce the work and when the equipment is expensive this would add up quickly. Although Mayne Pharma’s asset turnover ratio is still positive, they would benefit from 50% more sales revenue to improve the asset turnover ratio.

Mayne Pharma have not declared or paid any dividends to shareholders for years ended 30 June 2018 – 2021.

Step 5
Forecasting Key Value Drivers & Valuation

My farecasting for my firm; Mayne Pharma, was based on historical data extracted from the financial statements but also allowing for known events such as their goal to market and sell the new “Nextstellis” product and the new 11 dermatology products. Because of these events, I have predicted my firm’s sales revenue to increase by 20% each year for the next 5 years which was determined by using the average sales growth for years 2018 – 2021 (16.21%) plus added some extra due to covid-19’s reduced profits in 2020 and 2021 years. I am predicting that Covid-19 will no longer be a contributing factor to sales revenue growth due to the fact, it has been a few years now and medical fields have had the time to organise and facilitate appointments via telehealth if required therefore this should no longer impact sales revenue. Mayne Pharma have employed a team of women to help market and sell their new FDA approved product “Nextstellis” a women’s contraceptive pill, they also have 11 new dermatology products to market for this coming year which is why I have increased predicted sales growth. These forecasted figures will increase sales revenue from $273.600m up to $680.806m by 2026 which is a reasonable prediction since the Sales Revenue in 2018 prior to Covid-19 was $530,313m so definitely achievable. I believe if Mayne Pharma increased their sales revenue, this would subsequently have positive impacts on their profit and loss. Because of their high value of impairments each year for plant & equipment, they appear to be operating at a loss. Although I do not believe that this is a true representation of how successful and profitable my firm is due to impairments, if sales revenue increased it would definitely make the profit and loss look more attractive. Ideally, I would be moving towards a 50% – 100% increase in sales revenue for Mayne Pharma to help absorb the costs of the business such as impairments. I did hypothetical sales revenue figures within my reformulated spreadsheet to base this on and I found huge improvements by increasing sales revenue by 50%.

Profit Margin
Profit Margin (PM) percentage was again based on the average over the past 4 years which was -33.32%. I rounded this predicted PM % to -30% in the first year and to increase by 5% each year. You will see that these % are negative and that is because essentially it will be an improvement of 34.3% compared to the 2021 year which was -64.3%. Therefore, although my predictions are negative my theory for this is they are still an improvement. This has increased the predicted operating income amounts; although they are still negative, they are smaller losses compared to the actual figures sourced from the financial statements for the 2018 – 2021 years. With profit margin because this includes impairments by using the net profit figures, I would assume with the higher production of products to market and sell with the predicted sales revenue, that there may potentially be more impairments each year too.

Asset Turnover
For the Asset Turnover (ATO), which is Mayne Pharma’s strongest ratio, I went high for this. With increased sale revenue, more assets would be required to produce these products and subsequently this will also increase ATO ratio for Mayne Pharma. My predictions for Net Operating Assets (NOA) are to increase from $912.002m to $1,416.077m which also sounds reasonable due to the fact they will require more assets to produce new pharmaceutical products into the market to support the sales growth revenue.

Free Cash Flow
Free cash flow (FCF) being cash a company generates after taking into consideration cash outflows that support its operations and maintain its capital assets. It is the cash left over after a firm pays for its operating expenses and capital expenditures. For my firm; Mayne Pharma the results of the FCF are all negative – this is because this calculation is based on the relationship between operating income and the change in assets. Because Mayne Pharma’s operating income is still a loss, unfortunately the FCF is negative. As an investor, negative free cash flow does not look good since it is an indication of how much cash is left over for a firm and what is available to pay dividends to shareholders.

Economic Profit
The predictions suggest major improvements to my firm’s economic profit, although still negative – major improvements. Again, this is because it uses operating income (net loss). Mayne Pharma’s main focus should be to increase its sales revenue to help support the operational costs of its firm. Ideally it would be great to see them operating at profits, not losses and a way to do this would be to increase sales revenue.

Based on my predictions for the next 5 years, the discounted cash flow valuation for Mayne Pharma for its enterprise is -$1,910,751.92. I believe this is a fair measurement of my firm and the calculations are not unreasonable as it supports what is going on with the key accounting and economic drivers of the firm. They clearly need to focus on increasing their sales revenue to help support the operational expenses such as impairments and other admin expenses for launching new products like the contraceptive pill. Based on the calculated enterprise value of my firm; Mayna Pharma the current share price based on this valuation is $0. According to ASX the current share price as at 27/05/2022 is $0.30/share so pretty close to the valuation. See below:

Enterprise Value-$1,910,751.92
Number of Ordinary Shares1,764,840,757
Valuation Share Price$0.00
Market Share Price 27th May 2022$0.30

Equity Investors
I would recommend to equity investors who currently hold shares in Mayne Pharma to retain their shares. They could sell their shares too however, this would most likely be for a loss which would not be beneficial. The reasoning for retaining shares as opposed to selling would be the anticipation of potential growth. I believe Mayne Pharma’s value will increase when their sales revenue increases over the next 5 years by selling their new products in the market. With a low debt/equity ratio and having already invested money into producing new products and these costs absorbed by the company along with increased sales revenue, this could potentially increase the share price into the future. When considering to buy shares in Mayne Pharma, one must consider their own personal risk tolerance and the margin of safety. The margin of safety is the difference between the intrinsic value of a stock and its market value. For Mayne Pharma; this margin of safety is $0.30 which is very low and indicates a true reflection of the actual value of the stocks. With the share prices so low at the moment and predicted growth within the firm, this could potentially benefit equity investors and they realistically do not have much to lose!

Overall Summary of ACCT13017 Assignment

Overall, I really enjoyed completing this assignment. The ratio analysis part was full of learning experiences which I will take with me into my working career as an accountant. Instead of just producing financial statements for clients, I will now know how to analysis these statements and see through as to what is “actually” going on within their business. A very useful skill in my opinion! As always, I found the interaction with other students to be very helpful and I liked how this has been encouraged throughout Martin’s units. This is equally important in the work force; no 2 minds are alike and other students/work colleagues may see things from a different perspective. Collaboration is key! The use of zoom meetings makes this possible to contact anyone from all over the world to engage with. If I was asked to be a volunteer co-teacher for part of this unit next year, I would like to explain to other students how to delve deeper into each line item on the profit/loss and or balance sheet. Each figure has a story and it is our jobs to find what these figures are telling us by analysing and reading annual reports along with tying this altogether to the economy and what is happening around us. Being able to analyse these financial statements is a great tool for us students to take with us into our working careers. Thanks Martin for another great unit.



KCQs Ideas, reflections and reactions to Chapter 7 “How to Predict the Future to Eternity” and Chapter 8 “Going Forward”

Chapter 7: How to Predict the Future to Eternity

7.1 Putting the Guesswork into Eternity

It is very difficult to predict what will happen in the future, especially when it comes to businesses. These predictions are merely assumptions and will make predicting how much revenue our firms will have over the next 5 years difficult as it may be better or worse than its current situation. We don’t know if any economic situations will occur such as Covid-19 which greatly affected some businesses. We don’t know how the economy will deal with something like Covid-19 such as offering financial incentives to business owners to stay in business. Some things just happen and firms need to be able to accommodate and allow for these “risks” – that is part of being in business. I guess this is what Martin means by having a margin of safety when referring to the hotel gaming machines in the 1980s.

7.2 Continuing Values

It is not possible to make accurate forecast into the future but we can make convincing, sensible and sound estimates about the future based on a clear understanding of the economic and business drivers of our firm. Once we know our firms economic and business drivers, we will be able to predict into the future better. For example, my firm Mayna Pharma has had reduced sales revenue the past couple years due to covid but has now got FDA approval for a new woman’s contraceptive pill and is ready to market this. I would expect their sales revenue to increase over the next 1 to 2 years because of this new product they have developed.

7.3 Risk

My understanding of risk is only my personal experiences. When I was younger, I felt like I took more risks whereas now I am slightly older I tend to be a bit more cautious. However, when speaking about businesses; risks are inevitable. I’ve never really thought about measuring risks for a business before. I am intrigued to how I will be able to assess the risk for my firm; Mayne Pharma especially since they have not paid any dividends for the past 4 years and their share price is very low.

7.4 Margin of Safety

I understand the margin of safety being the difference between our best estimate of the value of a firm and the amount we pay to purchase an equity interest in a firm (market price). Martin’s example of Ryman Healthcare shares being valued at $16 per share having a larger margin of safety when market value is $12 as opposed to being $15.95 per share was great. I never really considered handling risk for a business in the same way we would treat a firm’s earnings. I still don’t understand how I am meant to calculate the risk for my firm based on the operations of the firm.

Chapter 8: Going Forward

8.1 Two Frameworks

The discounted cash flow and economic profit frameworks are two ways of making sense of our firm’s financial statements to quantify our qualitative assessments of the economic and business realities of our firm. The discounted cash flow model uses the present value of cash flows and the economic profit uses the current book value of equity which are both in today’s dollars and are both measures of value. Managers who make capital investment decisions within a firm would use some of these concepts when valuing a project. Banks analyse a company’s financial statements to assess whether the client can afford to repay its debts. Where I work as an accountant, we will send to the banks every 12 months a company’s financial statements and ATO portal accounts to see if the client has any outstanding debts.

8.2 Price Multiples

Where Martin mentioned that the value of a firm or what it is worth, is simply what someone is likely to pay for it is very true! That is why businesses have to get market valuations done when transferring land and property to family members because stamp duty and other charges are based on this market price. If someone else had purchased the land and property, they would have to pay stamp duty at the market price they paid for it therefore the requirement to get market valuations when transferring property. This is what property valuers do, they compare the price of the house to other properties nearby to come up with a valuation as to its highest and best use.

Comparable figures on the financial statements can be handy, I know at work when looking at financials we look to the previous year to see how much someone spent on repairs and maintenance for plant & equipment compared to this financial year. If there was a sudden increase in this account, this would generally indicate that something had occurred to their Dozer for example. However, I can see how when we are forecasting into the future that previous year’s figures may not be very helpful. What about the market? What about inflation? How much will the interest rates go up when we don’t even know how much the cash rate will be this year. We simply do not know what the future holds. Expenses usually increase too so wages paid last year for example will probably be slightly higher the following year. This confirms that when predicting into the future for my firm, I will be considering a growth rate for the abnormal OI.

8.3 Forecasting

Looking at the example of Ryman Healthcare, Martin used a 2% growth rate and assessed different WACC for risk ranging from 6 – 10% each generating different results. Questions raised here are how do we know what WACC to use? I don’t understand about the decay factor.  A lot to consider for when forecasting into the future for my firm.


KCQs Ideas, reflections and reactions to Chapter 5 “Predicting the Future” and Chapter 6 ” Focus on the Enterprise”

Chapter 5: Predicting the future

To be honest, I read this chapter twice and found it overwhelming! In summary, what I learnt was firstly we need to establish the key accounting drivers of our firm, then need to determine the economic and business drivers of our firm and lastly connect the accounting drivers of the firm to the economic and business realities. Accounting drivers will be sourced from my firm’s profit & loss and balance sheet items to investigate what is driving cash flow, Profit Margin (PM), Asset Turnover (ATO), Sales Growth and Return on Net Operating Assets (RNOA). Economic drivers will be focusing on the economy as a whole, market and competitors. I am looking forward to determining the economic and business drivers of my firm by analysing my firm’s business, what its goals are and what goods and services they sell. I feel like I still have a lot of work to be able to analyse my firm competently.

KCQs of Chapter 5

Prediction of the future – How accurate can these predictions be? Chapter 5 was about predicting the future by using both past performance and accounting drivers, economic and business realities to forecast future accounting drivers. I assume we do this by reading our firms annual reports to gauge their goals and to get a clear indication of the direction the firm is heading, whether our firms have any special projects at the moment and are expecting sales revenue from these. I know my firm; Mayne Pharma has just had FDA approval for their oral contraceptive pill “Nextellis” plus a few supply agreements entered into in the 2021 year for 11 of their dermatology products therefore I predict there will be additional sales revenue from these products in the 2022 year onwards and beyond. My main KCQ with these is the accuracy of these predications. How do I know what market value these products should be?

From what I can read from chapter 5, we engage with and make judgements about how the economic and business drivers of a firm’s Return on Net Operating Assets (RNOA) and Net Operating Assets (NOA) could be expected to change in the future. We need to be able to convert these judgements into numbers and forecast future RNOA & NOA. To be able to do this, we need to be able to determine what is driving Profit Margins (PM) and NOA. Net Profit Margin ratio is calculated as net profit after tax divided by sales. Looking at the profitability ratios of my firm; Mayne Pharma, the net profit margins for years 2018 – 2021 were negative ranging from -20.7% to -54% therefore, considered not very profitable. This may be deceiving because when using the profit & loss statement which reports they are operating at a loss; this also includes the significant value of impairments of equipment written off each year which I have previously mentioned. I am wondering whether I should remove these impairment expenses as an operating expense to reflect a true indication of how profitable my firm actually is? Because this is an accounting journal like depreciation, it does not affect the cash at bank and Mayne Pharma do not seem to have a cash problem. By removing these impairment expenses, Mayne Pharma’s net profit margin would range from 1 – 14%. This changes everything and appears Mayne Pharma is actually profitable and indicates a range of 0.01 – 0.14 cents of profit generated by each dollar of sales revenue, as opposed to operating at a loss.

Another key concept that stood out to me was the good and bad sales growth; this was intriguing to learn because at first, I imagined that all sales revenue would be good! When I learnt that good sales growth is sales revenue that adds value to equity investors it made more sense. This would be sales generated with customers with asset turnover remaining unchanged resulting in growth to NOA from cash at bank. I guess it depends who you are when looking to sales growth because as an investor you obviously would like to see this sales growth paid as a dividend as opposed reinvested back into the business to keep running. Bad sales growth can be generated by applying discounts to convince customers to buy your products; this will generate sales revenue however will result in bad sales growth because you also have higher inventory and you are selling the product for a fraction of the price. This will result in there not being surplus cash leftover for equity investors and therefore will be deemed bad sales growth because it is costing the firm. 

Another key concept is the prediction of future sales, profit margin and asset turnover based on a firm’s business and economic drivers. I understand that this has to be predicted but how accurate will these predictions actually be? To what extent will firms rely on these predictions? What if the predictions turn out contributing towards inefficient business decisions because you expected more sales revenue than you actually received for example? How often would these predictions have to be closely monitored throughout the year? Often enough to be rectified should there be a major issue, I hope. Key accounting drivers of a firm are Return on Net Operating Assets (RNOA), Sales Growth, Asset Turnover (ATO), Profit Margin (PM) and Net Operating Assets. Good sales growth is growth that adds value to the business. You don’t necessarily want to generate sales if it is costing too much to generate the sales. Ultimately the focus should be on profit rather than sales revenue. Are the drivers of the firm going to change over the next 5 years? I would imagine the predictions would have to be monitored at least annually to establish whether any changes.

Chapter 6: Focus on the Enterprise

I found this chapter challenging to read and understand. I do not feel like I have a good grasp of what was discussed. Although, some key takeaways are that we need to focus on the economic profit of the enterprise; that is focus on the risks of the firm’s operations, not financing activities. This is because the firms operating activities are most likely to be adding value. I found the equations within this chapter very confusing.

Good and bad earnings growth was interesting to read about.  Good earnings growth being growth that creates value for equity investors from changes in the economic and business drivers of a firm’s operations. Generally, larger firms can grow by acquiring smaller firms (and they would have the capital to do so) whereas smaller firms tend to grow by developing and investing back into their business organically. What this means is the smaller a firm, the more likely they will benefit from investing in property, plant & equipment, inventories or even investing in staff training or growing by on boarding more clients and focus on efficiency with staff rather than outsourcing and acquiring a new business as an alternative business source of revenue. Bad earnings growth can be a result of changes in financial leverage; that is when a firm borrows more money and this does not add value to equity investors. The study guide gives an example of bad earnings growth as the changes in the accounting treatment of a firm for doubtful debts. What if the allowance for doubtful debts was reduced? Although this will increase earnings, this would not add value to equity investors. Interesting point. I look forward to implement what I have learnt from these chapter when determining my firms economic and business drivers.

ASS #2 Step 1 KCQs

Here are my KCQs of Chapters 5 & 6 in the study guide

DRAFT ASS #1 Steps 3 – 5 & Step 7 (Ready for peer review)

Step 3 is posted on my blog below or link below:

Step 4 – Inputting Financial Statements into spreadsheet

Step 5 – Re-Stating firm’s Financial Statements and;

Step 7 – Calculating Ratios for my Firm – Mayne Pharma

ASS #1 Step 5 – Comments on re-stating Financial Statements

I found the process of restating the income statement and balance sheet for my firm much easier than when I did this task in previous units. I did however, still watch Maria’s videos on how to do this which was very helpful! I did have to read my firm’s notes to their financial reports to gain some insights on a few items such as other income and expenses as well as other financial assets and other financial liabilities.

With Mayne Pharma’s income statement, most items were classified as operating except for finance income and some finance expenses. The area of concern I had was mainly to do with the interest paid amount; this was included as part of their other finance expenses. I went to the relevant notes for finance expenses in Maybe Pharma’s annual reports and found that these finance expenses were made up of interest expenses for syndicated loans, receivables finance and finance leases which are the amounts I have used for interest expense. For the calculation of the Times Interest Earned ratio, I split these payments out between interest expenses listed above and other finance expenses for a more accurate ratio. The other financial expenses included items such as line fees, borrowing costs and gain/losses on modification of syndicated loans and foreign exchange losses. Although these finance expenses are still considered a financing activity, they do not need to be included in the ration for calculating the Times Interest Earned ration because they are not interest expenses.

Mayna Pharma’s financial assets are made up restricted cash held as security for letter of credit and therefore, I allocated this as a finance activity.

Within Mayne Pharma’s non-current liabilities, I noticed significant interest-bearing loans and other financial liabilities. Upon looking at the notes to see what these were for, I discovered that majority of the $161.838m of other financial liabilities for the 2021 year relates to earn-out liabilities for their products/distribution rights. Earn-out liabilities are a contractual provision for paying a firm additional compensation in the future; usually based on gross sales for a number of years (Investopedia, 2022). For Mayne Pharma, this relates to their products/distribution rights and it is initially recognised at fair value within the balance sheet through other financial liabilities. Movements in these other financial expenses are then recognised through their profit and loss at fair value when brought to account. By reading the notes, this confirmed that these were considered financial activities. The other item I struggled with was the allocation and calculation for cash to go to operating vs finance activities. I initially was calculating 1% of cash, not sales until Rebecca Turner brought this to my attention when she reviewed my assignment. Bec and I had similar firms both in the medical field so we discussed this (refer to peer review sheets below). We both initially thought to include greater than 1% of sales. My reasoning for this was because my firm is in the medical sector, if they need to purchase any new plant & equipment – these are expensive and therefore more cash required. Although, would they finance these purchases and therefore considered financing activities? Another thought I had was should the ability to pay outstanding debts come into consideration? E.g. if current outstanding trade and other payables equates to $113.798m for the 2021 year and in the restated balance sheet I have only allocated 1% of sales allocated to operating activities ($4.008m) they will not have enough cash to pay debts? Would it be reasonable to assume the cash receivables would be sufficient to cover the account payables and therefore cash not to be a consideration for this? Mayne Pharma’s receivables are greater than its payables which seems like there would not be any cash issues.

Top 3 Favourite Blogs

1. Shelly Coombs (Coles Group)

Shelly’s blog was my favourite, I liked the way she set out her blog with some pictures and graphs. It really helped me to picture about her company more and gain some insights; this also gave me inspiration for my blog. I am also interested in learning about Coles since I do my grocery shopping at Coles. It was interesting to read about the increase in sales revenue and online shopping during the COVID-19 pandemic.

Link –

2. Tanya Clark (Carbon Revolution)

Tanya’s blog was also one of my favourites due to the way her page was displayed with pictures and graphs making for easier reading. I also liked how she had posted her KCQs from Steps 1, 2 & 6 directly onto her blog (not via word doc) although this did make the blog post quite long! I thought her analogy of accounting to be like an artist mentioned in her Step 1 quite insightful into her personality.

Link –

3. From staff to student – Stuart Hentschke (Medical Developments International)

Stuart’s blog was another one of my favourite blogs. Again, for the same reasons; the use of pictures on his blog. I am also interested in Stuart’s company; Medical Developments International because it is in the medical field similar to my company, Mayne Pharma. Perhaps there will be similarities between our 2 companies! I also liked Stuart’s blog layout which listed the blogs that he follows at the bottom of his blog page.

Link –

Mayne Pharma Financial Reports:

ASS #1 Step 3 – Introducing Mayne Pharma Group Limited (MYE)

Background Information

I have been allocated Mayne Pharma Group Limited (ASX Code: MYX) as my firm to analyse in ACCT13017 Financial Statement Analysis in Term 1 2022. I am excited to be learning about a company that I have not heard of before. Mayne Pharma Group is an ASX listed specialty pharmaceutical company focused on developing, manufacturing and marketing novel and generic pharmaceuticals. Mayne Pharma offers generic products to treat conditions of the cardiovascular and central nervous systems, attention-deficit/hyperactivity disorder (ADHD), and contraception as well as many other specialty pharmaceutical products. The company was founded in 1845, with its headquarters and manufacturing facility based in Salisbury, South Australia from 1983. They also have an additional manufacturing facility in Greenville, North Carolina distributing to all over the world but specifically Australia, the United States and Asia. They employ over 900 staff globally and have more than 200 scientists. For further information about my firm, it can be accessed – here.

A key focus of Mayne Pharma is to develop therapies and solutions that measurably improve people’s lives. They are focused on providing innovative products to clinicians, pharmacists and patients. They produce a women’s health contraceptive, dermatology drugs for healthy skin, patented “Suba” technology used for their anti-fungal compounds and have developed a range of analgesic products including immediate and extended-release varieties. Their patented “Suba” technology is used for enhancing the bioavailability of poorly soluble drugs. This results in an improvement in absorption in the gastrointestinal tract compared to conventional formulations. This “Suba” technology is specifically used to improve the poorly soluble anti-fungal drug “itraconazole” as shown below:

Retrieved from:


Upon reading Mayne Pharma’s 2021 Financial Reports I discovered that they are not in the position they want to be but are progressing towards desired company growth. This is due to the weaker US dollar, COVID-19 and a tough US generics market. Mayne Pharma’s key focus is to expand its on-market portfolio of women’s health & dermatology as well as growing contract services in Greenville and Salisbury. They have just received FDA approval of their oral contraceptive pill “Nextstellis” plus on boarding a women’s health team to help launch this. Also, a few new supply agreements were entered into throughout the 2021 year for the launch of 11 dermatology products such as hydrocortisone lotion to treat dermatitis. I found it interesting to see what percentages made up Mayne Pharma’s gross profit; women’s health makes up 16%, dermatology makes up 29%, metrics contract service makes up 26% and international makes up 9% of gross profit. The metrics contract services division includes drug development, analytical testing and commercial manufacturing to over 100 clients worldwide from its Greenville, North Carolina facility. This metrics contract services division along with the dermatology sales for acne, psoriasis, rosacea, dermatitis and actinic keratosis makes up 55% of Mayne Pharma’s gross profit.

KCQs of Mayne Pharma

I am concerned with Mayne Pharma’s profit and loss figures; for year end 30 June 2021 the net loss was $209.082m and for year ended 30 June 2020 it was a net loss of $94.535m. When attempting to analyse the financial reports, I was looking for an answer as to why a seemingly successful company was operating at a loss. One item which stood out to me was the value in the profit and loss statement for impairments. For 2021 year the total value of impairments was $229.321m; should the company not had any impairments for the 2021 year, they would have made a profit of $20.239m and $4.450m in 2020. Furthermore, this got me thinking Mayne Parma’s plant & equipment would be very expensive therefore, impairments likely to be higher than in other industries. Thinking about the patented “Suba” technology specifically used to improve the poorly soluble anti-fungal drug “itraconazole” shown above; the machine used to do this would be of significant value and general wear and tear would arise quickly subsequently, this asset would be considered impaired. These impairments are displaying that Mayne Pharma appears operating at a loss; could they in fact hold onto these assets longer or design better assets to handle the required work? Is this accounting method of recording impairments altering the representation of Mayne Pharma? When you look to their balance sheet, they have a significant amount of assets (including cash, equipment and trade receivables). They also have less liabilities than assets resulting in positive equity; I believe the profit and loss statement is not accurately representing the actual position of this seemingly highly successful company (by reporting losses mainly due to the impairment of equipment).

KCQs – Why is Mayne Pharma’s share price so low?

Mayne Pharma Group Limited (MYX) was listed on the ASX website on 1 April 2022 with a closing share price of only $0.24. I also discovered from the 2019, 2020 & 2021 annual reports that no dividends have been paid. As an investor, this would be concerning. I thought it may also be interesting to see the 5-year trend of the ASX listed share price only to realise the share price has remained fairly consistent the last 2 years. The share price has actually dropped since its peak in April 2017 and September 2018 where the share prices were $1.34 and $1.31 respectively; which is still relatively low.

Retrieved from:

Media Release

There was a news article dated 6 December 2021 from In Daily about Mayne Pharma’s approval from Therapeutic Goods Administration (TGA) to sell its oral contraceptive pill “Nextellis” into the Australian Market by mid-2022. Nextellis has already received approval from the US Food and Drug Administration and has hit the market in Europe and Canada. This “first of a kind” drug contains estetrol, a naturally occurring estrogen and progestin drospirenone.  It is said that this new contraceptive pill is effective, safe and well-tolerated with excellent cycle control and demonstrated low impact on certain aspects of the body. Hopefully the successful commercialisation of this “Nextellis” product along with the 10 other dermatology products created in the 2021 year drives the profit for the 2022 year.

Retrieved from:

A quick google search enlightened me about a class action against Mayne Pharma Group by Phi Finney McDonald on behalf of investors who acquired shares in Mayne Pharma between 24 November 2014 and 15 December 2016. The proceeding commenced in the supreme court of Victoria for class action. The allegations towards Mayne Pharma were that they had breached its continuous disclosure obligations and engaged in misleading and deceptive conduct by failing to inform investors they had agreed to price-fixing and market sharing arrangements with Heritage Pharmaceuticals Inc in the US. This class action alleges that due to Mayne Pharma’s failure to disclose this information, the share price was listed at an inflated price during this time and consequently, the shareholders suffered loss and damage. Retrieved from:

ASS #1 Step 6 KCQs

ASS #1 Step 2

This week went really fast and I feel like I just finished Step 1 but I guess its good to keep up to date with the weekly work! Here is my step 2

ASS #1 Step 1

Please see below a link to my ASS #1 Step 1.

Featured Post

Welcome to my Accounting Journey

Hi everyone, Welcome to my blog where I will document my progress through the capstone CQU unit Financial Statement Analysis. I am really looking forward to collating what I have learnt throughout my studies and work into this unit. I have been lucky to score myself a job working as an undergraduate Accountant for the past 4 years which has helped immensely with my studies. Looking forward to meeting you all. Maddie

Latest Posts


11 thoughts on “ACCT13017: Financial Statement Analysis

  1. Hi Maddie
    I am really enjoying reading your blog. Looks like you are well on your way to being “third time lucky” to have gotten this far as you are on now on the home stretch! All the best for this unit and finishing your degree.


    1. Thank-you Bec! I can see we have both been given medical firms. I am in the process of providing you some feedback. Would you please be able to provide some feedback for my ASS #1 posted on my blog?


  2. Hi Maddie, I really enjoyed reading your blog, I can tell you have taken the time to really get to know you company and expressed your findings in a way to keep readers interested. Great use of images!

    Liked by 1 person

  3. Hi Maddie, I really enjoyed reading your blog, I can tell you have taken the time to really get to know you company and expressed your findings in a way to keep readers interested. Great use of images!


  4. Great blog Maddie! I loved your use of images and your thorough analysis and good KCQs show you’ve really taken the time to get to know your company!


  5. Hi Maddie,

    I can see that you have a sound understanding of what your firm does. It is good work.

    The following are areas which you can improve your work:
    – A bit more information of how the firm’s plans to making revenue from the work they are doing; competition etc;
    – General market position to similar companies;
    – What is the market reaction (share price) to any bad news?
    – How did you find reading the financial statements? Easy, difficult? Are the notes provided sufficient and clear? Any financials unexplained etc.

    My firm is kaiza therapeutics. Pretty much the same picture. Low or no revenue, high expenses, scandals and compliance actions. Good comparison.

    Hope this helps.


  6. Excellent job Maddie, I had never heard of this company before reading your blog and you did a terrific job of providing background information of your company. I really enjoy your blog layout and how thoughtful your KCQ’s are! Good luck with this assignment!


  7. Wow this is the best blog I’ve seen so far, it looks like you put a lot of effort into this. I love your use of pictures and graphs it really helped to add colour and keep my interest in your blog haha I can find it hard to stay concentrated if I don’t see something I can use as a break from all the info I’m trying to take in.


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