AGL Company Performance Analysis - Essay Example

AGL Company Performance Analysis “AGL is a leading Australia’s integrated energy company and is the largest Australian Stock Exchange listed owner, operator and developer of renewables generation in the country” (AGL Energy Limited, 2014, p.3). It was established in 1837 thus it has over 175 years’ experience in the retail and merchant energy business, power generation assets and upstream gas portfolio. The company as diversified power generation portfolio including base, peaking, and intermediate generation plants distributed in generation thermal, hydro, wind, landfill gas and biomass power generation (AGL, 2014). The company focuses on developing sustainable energy future for the consumers, community and investors by exploring the suite of reduced emission and renewable energy creation opportunities (AGL Energy Limited, 2014). This document gives a two-year analysis of the financial report for AGL Company for the year ended 30th June 2013 and 2014 in order to examine the company’s performance for the period. The financial report of the company provides the shareholders and other stakeholders with information on social, environmental, governance, risk issues affecting the company as well as the financial performance during the respective years. AGL is the consolidated entity with four reportable functional sections, and the results of each section are reported according to the reporting structure of the internal management during the reporting period (AGL, 2014). The four operational sections include Merchant energy, retail energy, upstream gas and energy investments. Merchant Energy develops, operates and sustains assets for power generation. Also, they manage risks related to obtaining and distributing natural gas and electricity to its retail and wholesale clients. Merchant Energy distributes natural gas and electricity to consumers and offers energy efficiency and carbon management services (AGL, 2014). Retail Energy segment sells natural gas, electricity and products and services associated with energy to residents and small scale business clients. Upstream Gas section deals with the exploration of gas, development and production of tenements and facilities for storing gasses (AGL, 2014). Energy Investments consist of Diamantina Holding Company Pty Limited and equity accounted investments in the ActewAGL Retail Partnership. It owns the Loy Yang power station and the nearby coal mine that is currently reported in the Merchant Energy operating segment (AGL Energy Limited, 2014). In the year ended June 30th, 2011 AGL company reported an underlying profit of $431.1 a 0.5% increase from the previous period. The retail and merchant energy divisions have continued to perform exemplary well against a milieu of continued indulgent demand for energy and strong competition in the market (AGL Energy Limited, 2014). 1. Profitability The profitability ratios signify a group of financial metrics used in evaluating the potential of the business to create income in comparison to its outlays and other appropriate expenditures incurred during a particular period. It is the measure of how effective the company is utilizing its resources and increasing the value of shares for the interest of shareholders. Return on Assets (ROA) ROA is the ratio of total debt to total assets. It determines how much company’s assets are financed by resources by external financiers. The ROA for AGL in 2013 was 45.1% and in 2014, it rose to 45.7%. Such a high total debt ratio is risky for the company because it implies that most of the company’s earnings will be used for repaying creditors and in the long-run this can render the company insolvent (Grammenos, 2013, p. 46). Furthermore, it hinders the company from accessing funds for expansion of its activities because of the outstanding debt. The increasing ROA implies the company depends on borrowed capital and does not generate adequate income to repay the debt and undertake other activities (AGL, 2014). The company should focus on reducing the debts by using some of earnings to repay the debts in order to improve ROA. Return on Equity (ROE) ROE is the amount of income expressed as a percentage of shareholders equity. It is used to evaluate the business performance in terms of income it can generate from the owners’ equity (Grammenos, 2013). The total equity attributable to AGL owner in 2013 was 7,339.0 while the total comprehensive income for the same year was 419.0. The higher the percentage rate, the higher the rate of growth of the company. In 2013, the ROE was 5.1% and increased to 7.51% in 2014. AGL should expand their operations such as investing in solar energy and tap energy opportunities in other regions beyond Australia. Return on capital employed (ROCE) Return on Capital Employed evaluates the profitability of the company and the efficiency with which the company employs the available capital (Maynard, 2013). Higher ROCE implies that the company is more efficient because it can generate stakeholders’ value. The ROCE for AGL declined from 0.193 in 2013 to 0.185 in 2014 despite an increase in capital employed due to decreasing EBIT. There was an increase in EBIT/average funds because of AGL’s capital expenditure program and loan of $126 million injected into Diamantina Power Station joint venture. Also, the average funds employed decreased 0.5 points as a result of 2% increase in funds employed while the EBIT decreased by 3% (2014, p. 35). The company to expand its operations through retained earnings in order to reduce borrowings. Gross profit margin Gross profit margin evaluates the ratio of cost of sales in relation to the sales. The AGL’s gross profit margin increased from 9.63% in 2013 to 13.67% in 2014. The increase in gross profit margin was an implication that AGL has increased efficiency of generating resources (AGL Energy Limited, 2014). AGL should invest more in innovative techniques I order to increase operating cost. Operating margin Operating margin of AGL increased from 10.33% in 2013 to 10.80% in 2014. However, the increase in this ratio was due to decrease in sales (Scholarly Editions, 2012). The sales declined due to declining in demand for energy by the consumers, and warm winter weather conditions affected the company’s earnings in the year ended 30th June 2014. Furthermore, increasing rivalry in the energy sector resulted to decline prices and increase in discounts for the customers and consequent reduction in earnings. However, the successful acquisition of the Australian Power and Gas business added more than 350,000 new customers (AGL Energy Limited, 2014). There is a prospect for improvement in business performance as the company focuses on increasing market for power and gas as well as a reduction in the cost of products and services. AGL should focus on improving workers efficiency in order to reduce the cost of labour and improve operating margin. Cash flow margin ratio Gives the relationship between cash generated from operations and sales. It shows the company’s potential to raise cash to pay the divided, service debt, suppliers and invest in new capital assets (Scholarly Editions, 2012). The cash flow margin ratio for AGL improved from 0.062% in 2003 to 0.073% in 2014 thus it implies an improvement in the company’s operations and capacity to generate more cash from sales activities (AGL Energy Limited, 2014). AGL should extend their operations to other regions in order to increase market share and improve cash flow. Net Profit margin This denotes the business profitability in relation to revenue. Higher profit margin implies the company is efficient in generating income from its trading activities (Sherman, 2011). AGL’s profit margin increased from 3.9% in the 2013 to 8.0% in 2014 depicting an increase in company’s efficiency. Although revenue had declined from 9716 in 2013 to 9543 in 2014 the company was able to manage its expenses effectively which reduced from 8806 in 2013 to 8263 in 2014 thus leading to increase in profitability of the business (AGL Energy Limited, 2014). AGL should invest in other income generating activities such as solar energy in order to improve revenue. 2. Efficiency ratio Efficiency is used to evaluate the business expenses as a percentage of revenue. Lower ratio is preferable because it implies business revenue if greater than its expenses (Maynard, 2013). They are useful for evaluating how the company generates revenue from internal assets and liabilities. Example of ratios includes fixed asset turnover, sales to inventory, account payable turnover, sales to networking capital, and stock turnover ratio. Fixed Asset Turnover Fixed asset turnover measures the efficiency with which the business is generating sales from fixed assets (Sherman, 2011). In 2013, the AGL’s turnover was 0.92 while, in 2014, it decreased to 0.89. This implies the declining potential of AGL to generate income from the fixed assets. They invested heavily in plant and equipment in order to expand the production capacity thus leading to declining in fixed asset turnover ratio. Although that does not imply the company has poor performance it could imply the company may not be able to generate quick cash to settle immediate financial needs such as paying salaries and wages, clearing debts, etc. (AGL Energy Limited, 2014). Sales Inventory Ratio Sales to inventory evaluates inventory in relation to monthly sales with a focus to identify the changes in inventory (Koller et al., 2010). In 2013, AGL had a sales inventory ratio of 0.014 while the same grew to 0.020 in 2014. This implies that the company can create revenue from sales of stock. It is an implication that AGL does not hold inventory for a long time, and it is healthy for the company because it enables the company to reduce the high cost of inventory (AGL Energy Limited, 2014). Sales to Networking Capital The Sales to Networking Capital examines how the company generates resources from investors’ capital (Wilson, et.al, 2013). The AGL attained a higher ratio for the year 2014 of 9.96 compared to 9.13 achieved in 2013. This implies an improvement in company’s performance during the period. This can attract more investors and ease the need for using other expensive means sources of capital (AGL Energy Limited, 2014). It is an implication that the shareholders resources are invested effectively and the company is capable of continuing to generate resources for the investors. Inventory Turnover Ratio: This ratio evaluates the efficiency of inventory management through comparing cost of goods sold with average inventory for the period (Grammenos, 2013). The Inventory Turnover Ratio for AGL Company reduced from 31 times in 2013 to 23 times in 2014. A low inventory turnover ratio could imply the company is losing market to the competitors (AGL Energy Limited, 2014). AGL should expand its activities through acquisitions in to improve sales. 3. Short-term Solvency Short-term solvency ratios such as current ratio and quick ratio/acid-test ratio evaluates the firms’ potential to meet short-term financial obligations (Sherman, 2011). The AGL’s current ratio in 2013 was 1.3 which implies that the company is capable of its current liabilities without undergoing financial stress. In 2014, the ratio grew to 1.6, and this was the implication of an improving performance. AGL management should be careful to avoid keeping too much resources idle, but instead they should invest in income generating activities (AGL, 2014). Quick Ratio This measures the efficiency with which a business can raise immediate cash from the current assets without selling the stock because this may take longer (Weil et al. 2012). In 2013, AGL had a quick ratio of1.23 and in 2014, it increased to 1.53. These imply the company is financially stable since it can meet its short-term financial obligations without disposing of inventory. However, the company should avoid keeping too much cash by investing the excess cash in income generating activities. Solvency Ratio This examines the operating profits of a company against total liabilities (Weil et al. 2012). The AGL’s solvency ratio in 2013 was 1.52, and it increased to 1.58 in 2014. However, the ratios are too low and imply in the long-run the company is not efficient enough to raise adequate revenue from the borrowed resources (AGL, 2014). They should devise means to implement the borrowed resources appropriately to generate more income. Net Income Ratio This examines how company generates income from resources after deducting tax obligations (Koller et al., 2010). AGL generated $983 million in 2013 and in 2014; the income grew to $1.412 billion. This depicts a tremendous performance because the company was able to increase income compared to the previous year. Debt Ratio It indicates the degree of financial leverage. Higher ratio denotes higher interest expenses and could be detrimental to the business (Koller et al., 2010). AGL had debt ratio of 0.82 in 2013, and this changed to 0.84 in 2014 (AGL Energy Limited, 2014). The ratio is appropriate and indicative of a better performance because the company is low leverage. 4. Long term solvency Interest Leverage Ratio The ratio evaluates the ability of the business to meet interest expense on its debt with its operating income (Wilson, et.al, 2013). AGL had an interest Leverage ratio of 4.87 in 2013, and this dropped to 4.62 in 2014. It indicates a better performance because the company is capable Interest Coverage Ratio This assesses the ability of a company to generate income to cover interest expenses before paying tax and interest expenses (Koller et al., 2010). AGL has high potential to meet tax expenses from operating income since it had a ratio of 4.87 and 4.62 in the year 2013 and 2014 respectively. Debt to Asset Ratio The ratio evaluates the business assets financed by debts. Higher ratios indicate higher leverage and an increased risk to the business. AGL has good performance because most of its business assets are financed by owners’ equity, and only a proportion of 0.211 and 0.233 in 2013 and 2014 respectively are financed by debts (AGL, 2014). 5. Market-based ratios Price Earnings Ratio This ratio measures the investors’ willingness to pay for the current earnings (Robinson, 2012). The AGL investors will pay higher for the current earnings in case they have higher expectations for future growth. The investors can pay as much as $20.9 for current income (AGL, 2014). This implies that investors have confidence in the company’s performance. Market-To-Book Ratio: This gives information about the company’s market value per share of the book value per share (Robinson, 2012). The Market-To-Book Ratio in 2013 was 0.46 while, in 2014, it was 0.49. This implies an improvement in the market value of the shares in relation to book value due to improvement in the company’s performance. In conclusion performance of the company was able to improve in 2014 compared to the previous period despite decline in total revenue because the operation cost went down as well. The company engaged in risk reduction strategies that led to decline in compensation against claims. Although the underlying company’s profit declined by 3.9% for the year 2014 compared to 2013 profit, the company was performing well and has potential for increasing profitability. The company is managing its resources efficiently, and only a small proportion of its resources are managed from external resources. AGL should expand its activities beyond Australia such as Asia and India. They should explore other income generating opportunities such as investing renewable energy such as solar energy and invest in low power electric devices in order to appeal to more customers. Bibliography AGL Energy Limited, (2014). ASX & Media Release: Annual Report 2014 17th September 2014. Pp. 1-88. http://www.agl.com.au/~/media/AGL/About%20AGL/Documents/Media%20Center/Investor%20Center/2014/2014 Results_Pres_release.pdf AGL, (2014). ASX & Media Release: AGL reports solid result in soft demand conditions 20 August 2014. Pp. 1-57. http://www.agl.com.au/~/media/AGL/About%20AGL/Documents/Media%20Center/Investor%20Center/2014/2014Results_Pres_release.pdf Grammenos, C. (2013). The Handbook of Maritime Economics and Business. Taylor & Francis. Pp. 1-1096. Koller, T., McKinsey & Company Inc., Goedhart, M. &Wessels, D. (2010). Measuring and Managing the Value of Companies. John Wiley and Sons. Pp. 1-768. Maynard, J. (2013). Financial Accounting, Reporting, and Analysis. UK: Oxford University Press. Pp. 1-744. Robinson, T. R. Pirie, W. L., Henry, E. & Broihahn, M. A. (2012). International Financial Statement Analysis, (2nd Ed.). John Wiley & Sons. Pp. 1-1040. Sherman, E. H. (2011). Finance and Accounting for Non-Financial Managers. AMACOM Div American Mgmt Assn. pp. 1- 285. Scholarly Editions, (2012). Issues in Materials and Manufacturing Research. Pp. 1-7148. Weil, R., Schipper, K. Francis, J. (Eds). (2012). Financial Accounting. Cengage Learning. Pp. 1-864. Wilson, M. A., Gibson, S. G., Bennett, W. & Alliger, G. M. (2013). The Handbook of Work Analysis. Routledge, pp. 1-818. Appendix Return on assets 2013: ROA = total debt/total assets = (6026.8/13,366)*100 = 45.1%. 2014: ROA = (6387 /13,975)*100 =45.7%. Return on equity ROE = Net Income/ Shareholder’s Equity. Therefore, ROE for the AGL company in the year 2013 was (375/7,339)*100 = 5.1%. For 2014, the ROE was (570/7588)*100 =7.51%. Return on capital employed ROCE = Earnings Before Interests and Tax (EBIT)/ Capital employed (summation of shareholders’ equity and debt liabilities). 2013: EBIT (1031)/capital (5354) =0.193 2014: EBIT (1004)/capital (5437) = 0.185 Gross profit margin It is given by Gross Profit/Net Sales. 2013= 936/9716 = 9.63% 2014 = 13.67% Operating margin 2013: EBIT/Net sales = 1004/9716 = 10.33%. 2014 = 1031/9543 =10.80% Cash flow margin ratio It is given as a percentage of cash flow to net sales. 2013: 602/9716 = 0.062 2014: 699/9543 = 0.073 Net profit margin 2013: (375/9716) 100 = 3.9%. 2014: (570/9543) 100 = 8.0%. It is the ratio of sales to the value of fixed assets = net sales/ Average net fixed assets. 2013: 9713/10530 =0.92 2014: 9543/10723= 0.89 Sales inventory ratio It is obtained from inventory/sales for the month 2013: 133/9716 = 0.014 2014: 191/9543 = 0.020 Sales to networking capital = net sales/account receivable +inventory-Account payable 2013: 9716/248+133-1445 = 9.13 2014: 9543/109+191-1258 = 9.96 Inventory Turnover Ratio = Cost of Goods Sold/Average Inventory 2013: 4143/133 =31 2014: 4344/191=23 Current ratio = total current assets /total current liabilities. 2013: 2836/2192=1.3 2014: 3252/2007= 1.6 Quick ratio = total current assets –inventory /total current liabilities. 2013: 2836 – 133/2192 = 1.23 2014: 3252 - 191/2007 = 1.53Solvency Ratio 2013: 9716/6387 = 1.52 2014: 9543/6026 = 1.58 Net income= gross income –tax profit +depreciation = 2013: 936-240+287 = 983 2014: 1305-219+326 = 1412 Debt to equity ratio = total debt /total equity. 2013: 6026/7340 = 0.82 2014: 6387/7588 = 0.84 Interest Coverage Ratio = operating income (EBIT) /Interest expense. The 2013: 1004/206 = 4.87 2014: 1031/223 = 4.62 Debt to assets = total debt /total assets. 2013: 2821/13366 = 0.211 2014: 3250/13975 =0.233 Price-earnings ratio =price per share/earnings per share (P/E Ratio) = Price per Share/Earnings per Share 2013: 14.48/0.682 = 20.20 2014: 15.48/1.022 = 15.15 Market-To-Book Ratio = Price Per Share/Book Value Per Share. 2013: 14.48/31.45= 0.46 2014:15.48/31.45 = 0.49 Read More