BAP42A Financial Statements and Investments Analysis
BAP42A covers a range of important theory and practice of Financial Statements and Investment Analysis. The main purpose of this assignment is to provide students with the opportunity to consolidate and extend their understanding in connection with the financial statements analysis of Australian stock listed companies.
In assessing submitted assignments consideration will be given to overall neatness, completeness and quality of presentation, timeliness of submission and demonstrated application of appropriate analysis of financial statements.
Analysis of Financial Statements of a selected company from the list provided by the Lecturer and Draft a Report incorporating the following points in relation to your selected company. 1. Describe the Core Business activity of the company. Provide full details of its different activities and/or operating segments. 2. Discuss any major changes in financial performance from the chairman’s message or managing director’s review. 3. Calculate the key financial ratios for the selected company based on the consolidated financial statements, for 2016 and 2017. 4. Provide an overall assessment of the company and its future prospects.
Origin Energy Ltd.
This report represents a detailed assessment and calculation of the factors affecting the overall performance of the firm. The area of focus has been to check the soundness, liquidity, operational efficiency and profitability of Origin Energy Company for the financial years FY2016 and FY2017. The report consists calculations which draw a comparison between company’s performance in the required periods in order to come to relevant conclusions.
The method of analysis includes calculating financial ratios to compare the performance of the company between 216 and 2017. Ratios calculated are Investment to equity ratio, Current ratio, Net profit ratio and debt to capital ratio. The implications of such calculations are then analyzed in detail to identify the change, analyze the reasons for such change and how is the change contributing to the overall performance of the firm.
Analysis of company’s financial performance presents all the relevant and significant aspects of the company’s operating, financing and investing activities in an elaborate manner. T the beginning of each financial period, the company involves in the planning process and set out objectives for the company to be accomplished in that particular financial year. Ratio analysis also helps determine if those objectives have been achieved or not.
This report can be used for both internal and external purposes, i.e. both the management and the users can utilize the report in understanding the major areas of changes in the company’s operations throughout the year.
The purpose of this project is to identify the positive or negative changes in the financial or operational efficiency of the company, analyze the key areas for improvement and recommend measures to implement such changes, if required.
Origin energy company (ORG) is a publicly listed ASX company. It was first established in February 2000, and has now grown to become one of the leading Australian energy retailing company. A few additions were made to the business later in the 20th century. They have an existing customer base of 4.2 million customers. They believe that natural gas and renewable energy is the future of energy industry which not only conserves our natural resources but also provides a cleaner energy to its customers in Australia and internationally. Not just in retail, they also hold a top position in developing and producing natural gas. The company has also expanded its business to renewable energy sector and has an objective to be one of the leading renewable energy producing company in Australia by decreasing customers’ carbon footprint in the world for the future generations through wind, solar and storage technology. [About Origin Energy]
CORE BUSINESSES OF THE COMPANY
WHISTLE BLOWING INCIDENT
In January 2017, a former compliance manager at Origin, Sally McDow, blew whistle against various integrity problems existing in the company. The allegations included-
A company spokesperson denied all the claims made by Sally and took the matter to the court.
The company’s management set the objective to reduce the debt and improve company’s profitability in the current financial year. Recently, the chairman of the company released various statements which included the following major areas-
Profitability ratios measure the ability of a business to earn profit by utilizing its capital or resources for its shareholders. The profitability ratios help to analyze the financial performance of a business.
Net Profit Ratio- This ratio evaluated how much net profit is generated directly from the operations of the company.
Net profit is calculated by taking the total revenue generated by operations of the firm less all direct and indirect expenses, and add indirect incomes. Both the internal was well as the external parties to an organization are keen about the profits of the firms, as the profitability directly impacts the share prices, dividend distribution, goodwill of the firm, it’s future operations as well as the credit rating of the firm.
The Net Profit Ratio is calculated as follows-
Net Profit Ratio = Net Profit/ Loss ÷ Net Revenue
Net Loss Ratio = 2,049 ÷ 13,646 = 0.15 or 15%
Net Loss Ratio = 296 ÷ 11,456 = .0025 OR 2.5%
Analysis: We can observe that the company’s loss has increased over the period of 2016 to 2017 by almost 12.5%. However, the company was able to increase its EBTIDA from FY2016 to FY2017 because the interest and depreciation expenses of the company increased substantially for the company in 2017. Ignoring those expenses, the company was able to show an increase in its EBTIDA. [2017 FULL YEAR RESULTS]
Additionally, let us calculate how effectively the company is able to utilize its finances-
Times interest earned ratio: This ratio determines the efficiency through which the company is utilizing its outside borrowings. It is calculated by dividing the EBIT of the company by it’s interest expenses on debts.
A business borrows funds from an external source to invest in the business and earn profits. Hence, the best way to analyze with such funds are actually being used efficiently or not is by calculating this ratio. This ratio calculates the revenue earned as a multiple (no. of times) the interest expense paid on the funds invested, if the company pays its interest expense using the profits generated. EBIT is earnings before interest and taxes. [Five year financial history ]
Times Interest Earned = EBIT ÷ Interest Expense
Times Interest Earned = 776 / 548 = 1.41 times
Times Interest Earned = 1128 / 553= 1.15 times
Hence, we can observe that the finances were better utilized to generate revenue in 2016 than in 2017 [Origin Energy Limited and Controlled Entities]
Liquidity ratios is one of the most important ratios to analyze the liquidity of the business in short run i.e. the ability of the business to readily convert its current assets into cash and pay off its immediate obligations without any failure or default.
Current Ratio- Current Ratio represents the ratio of the short term assets of the firm with its short term liabilities. It is calculated as follows:
Current Ratio = Current assets ÷ Current liabilities
Current ratio of a company should ideally be 2:1.
Current Ratio = 3555 / 2889 = 1.23
Current Ratio = 5011/ 3854 = 1.30
Hence, we can observe that the cash or liquidity position of the company has improved from the year 2016 to 2017. Even though the company’s cash and cash equivalents decreased in 2017 due to increase in its working capital but the company was able to generate cash inflows from other current assets like receivables and assets classified as held for sale.
The working capital of Origin Energy increased primarily in its Energy Markets. The change amounted to approx $480 million. The reasons for such huge change were lower tariffs and lower network charges in the FY2016. The working capital increased in FY2017 with respect to a sudden growth in the company’s revenue ($187 million approx) and timing ($137 million), which are due to be collected in first quarter of FY2018.
Debt to Capital ratio- The debt-to-capital ratio is calculated by taking the value of company’s external borrowings on which the company is paying an interest expense, both current and fixed and dividing it by the total capital. Total capital is all interest-bearing debt plus shareholders' equity. [Paul Barnes (December 1987)].
It is calculated as-
Debt to Capital ratio = Total Debt / [Debt + Equity]
Debt to Capital ratio = 9506 / (11956 + 14060)
= 9506 / 26016 = 0.365 or 36.5%
Debt to Capital ratio = 8382 / (9927 + 11418)
= 8382 / 21345 = 0.392 or 39.2%
Even though the ratio has increased in 2017 by almost 2.7% but that is because the total capital of the company reduced because of a substantial decrease in its retained earnings.
The company was able to decrease its long-term external debts substantially in the year 2017 by $1200 million.
Ratio analysis has proven to be an effective tool in analyzing and representing the performance of the business in a financial year. Different areas of the business can be analyzed by using different tools, e.g. liquidity can be checked using liquidity ratios.
After the analysis, we have concluded that the company was able to change the following items from year 2016 to 2017-
However, the company’s management still needs to focus on-