Factors Affecting the Overall Performance of Origin Energy Company
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
- ENERGY RETAILER: Origin energy is one of the lead players of the Energy supply chain in Australia. They supply electricity, natural gas, LPG and solar energy to their customers. Being the leading retailers, they strive towards providing affordable, more sustainable, smarter and easier energy usage to its customers in Australia and outside.
- GAS EXPLORATION AND PRODUCTION: The company also engages in exploring for reserves of natural gas. Natural gases have immense potential to serve as the energy source to produce energy in future. Origin Energy company is currently the leading gas producer for Australian and international markets.
- POWER GENERATION: The company uses a range of energy sources to produce electricity, from traditional fuels like coal and natural gas, to renewables like the wind and the sun.
- RENEWABLE ENERGY: The have expanded their business and now working towards creating renewable energy sources for their customers in Australia and internationally. Their growing portfolio includes wind, solar and storage technologies.
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-
- Inability to preserve numerous wells across Australia and New Zealand,
- Inability to cover, maintain and close the wells properly, after they have been used throughout their useful lives, which is hazardous and can cause accidents
- Intentionally trying to cover up the incidents and not reporting them to the higher management or to the concerned regulators, in order to save the reputation of the company
- Developing and encouraging an inappropriate and discouraging work culture of bullying and harassment within the organization. As per Sally, she advised the company’s CEO of the organization at the time but he refused to report the incidents an tried to hide it as he was afraid that the information might be used by competitors in the industry to hamper the company’s current or future projects [Wikipedia (22 Aug 2018)].
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-
- Reducing company’s debts in the capital structure through asset sales, restructuring capital structure, maintaining a strict low-debt capital structure, and improving efficiency of operations in future
- The disinvestment by company’s management in Lattice Energy and Acumen resulted in a reduction in debt by $1.6 billion. The revised value of adjusted net debt is now below $6.5 billion
- The Board has decided not to pay a dividend for FY2018
- The management successfully improved the liquidity position and brought the net cash flows of the company to required set target
- Management’s focus is on further improving company’s balance sheet figures and profits
- The company’s period end statements shows that the company’s productions and earnings have increased immensely due to higher commodity prices and operations from LNG trains
- The company has become more immune to the rise and fall in market commodity prices because of reduced debt and better financial position
- The underlying EBITDA of the company has also increased substantially
- An increase in underlying EBTIDA in both Energy Markets and Integrated Gas businesses to $2.95 billion in FY2018 (38% increase from last year)
- There was an increase of $1.8 billion in FY2018 (14% increase from last year) through revenues in power generation and gas production [About Origin Energy]
- FINDINGS FROM FINANCIAL STATEMENT ANALYSIS
- Analysis of Profitability
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]
- Analysis of Liquidity
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.
- Analysis of Debt
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-
- Decrease in statutory Loss by $(2,226) million, including decrease in impairments of $3,064 million after tax
- Increase in company’s EBITDA by $2,530 million from FY2016
- Increase in underlying Profit by $550 million from FY2016
- Decrease in Adjusted Net Debt by $8.1 billion from FY2016
However, the company’s management still needs to focus on-
- Improving liquidity of the company
- Improving the utility and efficiency of the interest-bearing-debts and making sure that the company is making enough revenue using those funds, so as to satisfy the interest expenses bore on those funds
- Improving the capital structure by increasing the equity and decreasing debts further more