The Performance of Origin Energy Limited - Case Study Example

Executive Summary In this report, the performance of Origin Energy Limited in terms of its share prices over a two months period starting from 6th March 2017 to 5th May 2017 has been analyzed. A hypothetical investment of the company’s shares worth $5,000 has been observed over the tracking period. This has been compared against the performance of ASX 200 during the same period. The results of the analysis indicate a bullish performance of the company’s shares that have even outperformed the market. As such, a recommendation to hold the shares up to the time they achieve the anticipated high based on the analysis and news is made. The company’s financial performance has also been analyzed using ratio analysis. Based on the analysis, it has been recommended that the company institutes strategies to improve financial performance since the financial performance has not been found desirable for investors. Table of Contents Executive Summary 1 Purpose of the report 3 The scope of the report 3 Methodology 3 What I know about Origin Energy Limited and why I chose it 3 Company summary 3 Tracking Period 4 Performance Analysis 5 Gain or Loss on portfolio of Origin Energy Ltd 5 Recommendation 6 IDENTIFICATION OF KEY FINANCIAL DATA AND RATIO ANALYSIS 6 RECOGNITION OF KEY FINANCIAL DATA: 6 RATIO ANALYSIS 7 Profitability Ratios: 7 Different profitability ratios are- 7 Different Stability ratios are- 9 Liquidity Ratios: 9 Different Liquidity Ratios are- 9 Capital Structure Ratios: 10 Different Capital Structure Ratios are- 10 Conclusion 10 References: 12 Appendices 13 Appendix 1: calculation of ratios 13 Introduction Purpose of the report This report provides recommendation on the action to take regarding a hypothetical investment of the company’s shares made during the tracking period that started on 6th March 2017 and ended on 5th May 2017. The performance of the shares is compared to that of ASX 200. On the basis of the analysis and on news as well as the company’s financial statement analysis using ratio analysis, a decision is made on whether to buy, hold or sell the company’s shares. The scope of the report The scope of the report is limited. It involves making the decision on whether to buy, sell or hold shares in Origin Energy Limited. In this regard, a hypothetical investment in 793 shares is observed. The decision made is influenced by the results of the investment at the end of the tracking period, news and the financial ratio analysis conducted in part 2 of the report. Methodology Secondary sources such as company websites have been the main source of data for the report. The report uses both qualitative and quantitative data to arrive at the recommendations made at the end of the report. What I know about Origin Energy Limited and why I chose it The company is one of the leading Australian energy retail companies that is engaged in the production as well as exploration of oil and gas, renewable power generation as well as electricity. The company is also a leading investor in renewable energy technologies such as solar, hydro, wind and thermal energy. The company came into being in the year 2000 and is headquartered in Sydney Australia (originenergy.com.au, 2016). The energy industry in which the company operates is characterized by attractive returns and hence this is the reason why I have found some interest in the company and hence chosen it as an investment option in the hope that the investment I make will make attractive returns and probably prompt me to invest more in future. Company summary The table below shows the summary of various issues relating to the company Product and Services The company is engaged in the production as well as exploration of oil and gas, renewable power generation as well as electricity and is a leading investor in renewable energy sources such as solar, hydro, wind and thermal energy. The CEO and CEO’s remuneration Grant King is the company’s managing director. His remuneration for the 2016 period was $ No. of shares held by Managing Director 1,009,059 Shares Latest Dividend Paid 10 cents ( 23rd February 2016) (Sharedividends.com, 2017) Share Price 52 week high : 7.55 AUD 52 week low : 4.72 AUD Tracking Period The tracking period for the company’s share price started on 6th March 2017 and ended on 5th May 2017. The data related to the Performance of the company’s share price during the period is attached in the excel file (au.finance.yahoo.com, 2017). The graph below shows the trend of how the share price performed. On the other hand, the share prices have been compared to the ASX 200 performance and the information contained in the attached excel document. The resultant graph showing the ASX trend during the tracking period is shown below; Performance Analysis Since the start of the tracking period on 6th March 2016, the company’s share price has taken a general upward trend. The hypothetical shares were bought at $6.3 and at the close of the hypothetical period, they are worth $7.34 per share. The share’s highest points have however been observed on 26th April and 3rd May 2017 when the share was valued at $7.53. The average price over the tracking period on the other hand was $7.012 meaning that the share price has largely been above the average meaning that the share has been bullish during the period. On comparing the share price with the ASX 200, it is clear that there is little correlation between the two although both observe a general upward trend and have their prices declining towards the end of the period. In fact, I think the share has outperformed the market since its price increase is more rapid than that of the industry. The lowest price for the index was $5,684.50 on 22nd March 2017 while its highest price was $5,950.40 on 2nd may 2017. The average price was $5,833.90 with the closing price at the end of the tracking period $5,836.60 which is still higher than the average price meaning that the index is also bullish. The general trend for the Origin Energy share price indicates a bullish pattern and from the trend, the share is expected to observe the upward trend for the time being. This should inform the investor’s choice of strategy (Ronngard, 2016) Gain or Loss on portfolio of Origin Energy Ltd The total amount of investment – here it will be approx. AUD 5000. On 6th March 2017, a total 793 shares were purchased at a price of AUD 6.3. So the total investment would be AUD 4995.90. On 23rd September 2016, the 793 shares were valued at a price of AUD 7.34 each and hence the total income would be AUD 5820.62. This resulted in a total income of AUD 824.72 on 5th May 2017 which is 16.51% of the initial investment. Recommendation The above analysis has revealed a bullish trend for the company’s shares during the tracking period. The hypothetical shares on the other hand have realized a 16.51% return during the period meaning that even if the investment was sold today, one would still make a profit. On the other hand, Rachit (2017) is of the view that the company’s share price will benefit from its Telsa deal. On the other hand, Financial Times (2017) poll that involved eleven financial analysts indicate that the share will outperform the market and is expected to have a median target of $7.88 with its highest price being $8.67 and the lowest estimate being $6.40. This means that the share price is still expected to be bullish in future. Based on this, one would be good either by selling the investment at the current price or holding the investment to the time its returns will have increased. Thus, I recommend that we hold the investment to a later date. IDENTIFICATION OF KEY FINANCIAL DATA AND RATIO ANALYSIS RECOGNITION OF KEY FINANCIAL DATA: (AUD in million) 2016 2015 Revenue / Sales 11,956 12,090 Interest Expense 560 389 EBIT ( Earnings Before Interest and Tax) -399 -257 Net Profit Before Tax -737 -534 Net Profit After Tax -576 -590 Current Assets 3,571 8,321 Total Assets 28,898 33,367 Current Liabilities 2,889 5,175 Total Liabilities 14,368 19,208 Total Equity 14,330 14,159 (Originenergy.com.au, 2017) Ratios Ratios 2015 2016 Net Profit Margin -4.88% -4.82% Return on Assets -1.77% -1.99% Return on Equity -4.17 -4.02 Fixed Assets Turnover 2.07 2.12 Debt Ratio 0.5 0.58 Equity Ratio 0.5 0.42 Current Ratio 1.61 1.24 Total Debt to Equity 1.36 1 Interest Coverage -0.66 -0.71 RATIO ANALYSIS Profitability Ratios: Profitability Ratios measure income statement figures and the ability of a company to generate revenue from various operations. It also focuses on other assets and investment on inventory. It helps creditors and investors to analyze whether a company is earning enough revenue from operations by using its assets. Different profitability ratios are- a. Net Profit Margin : Net Income / Sales b. Return on Assets : Net Income / Total Assets c. Return on Equity : Net Income / Total Equity The company’s profitability slightly improved in 2016 compared to 2015 as shown by the net profit margin and the return on equity calculated above. However, the return on assets slightly declined. Despite the slight improvement, the company has made losses over the two years and this is not desirable for investors as it indicates declining returns. Stability Ratios: Stability Ratios help to identify the long-term stability of a company. It measures the financial structure of the company to show how the assets of the company are financed. It also investigates how much debt is taken by the company and whether equity and debt are balanced or not. Different Stability ratios are- a. Fixed Assets Turnover: Sales / Net Fixed Assets b. Debt Ratio: Total Liabilities / Total Assets c. Equity Ratio: Owner’s Equity / Total Assets The company’s stability showed differing reactions over the two years with the fixed assets turnover slightly improving in 2016 compared to 2015. On the other hand, the company’s debt increased resulting to increased debt ratio and reduced equity ratio. This is not desirable to the investors as it shows increasing leverage risk. Liquidity Ratios: Liquidity Ratios compute a company’s ability to pay its obligations and debts. It shows the cash level of a company and its ability to transform other assets into liquid form to pay its short-term obligations and liabilities. Different Liquidity Ratios are- a. Current Ratios: Current Assets / Current Liabilities b. Quick Ratios: (Current Assets-Inventories) / Current Liabilities The company’s liquidity greatly declined in 2016 compared to 2015 as indicated by the current ratio above. This is not desirable to the investor as it shows increased liquidity risk which would be a threat to the company’s current operations and hence ability to generate returns will be hampered. Capital Structure Ratios: Capital Structure Ratios are also known as Leverage Ratios. It contains Structural ratios and Coverage ratios where Structural ratios depend on the portion of equity and debt whereas, Coverage ratios measure the relationship between debt financing and source of fund to meet obligations. Different Capital Structure Ratios are- a. Total Debt to Equity: Total Debt / Total Assets b. Total Debt to Assets: Total Debt / Total Equity c. Interest Coverage: EBIT / Interest Expense The company’s total debt slightly improved in 2016 compared to 2015 since the amount of debt declined. This is good since the risk associated with increasing debt levels has declined. Conclusion The ratio analysis conducted above shows that the company is not doing well financially in most of the aspects investigated. Though the company’s profitability is noted to have improved, it is worth noting that the company continues to make losses and this is not desirable for investors as they are mainly interested in returns. Likewise, the company’s liquidity as well as efficiency is also noted to have declined again increasing the company’s liquidity risk while affecting its ability to generate profits. It is however worth noting that the level of debt in the company’s capital structure slightly declined and this is desirable to investors since it indicates decreased risk. This is however offset by the company’s declining ability to pay interest which declined in 2016. As such, it would be worth concluding that unless the company takes steps to improve its financial performance, it would not a good investment choice for an investor since its ability to generate returns will be hampered in future and at worst, the company will face bankruptcy. This means that my recommendation above to hold the investment though valid should not last for a very long time unless the company takes strategies to improve profitability. Otherwise, the shares should be sold immediately the anticipated high is reached to avoid falling into loss. References: Sharedividends.com, 2017, Dividend history for Origin Energy Limited (ORG), Retrieved on 21st May 2017, from; http://www.sharedividends.com.au/org+history au.finance.yahoo.com, 2017, Origin Energy Limited (ORG.AX), Retrieved on 21st May 2017, from; https://au.finance.yahoo.com/quote/ORG.AX/history?ltr=1 ft.com, 2017, Origin Energy Limited, Retrieved on 21st May 2017, from; https://markets.ft.com/data/equities/tearsheet/forecasts?s=ORG:ASX Rachit, D2017, How Origin Energy Ltd.’s share price could profit from its Telsa deal, Retrieved on 21st May 2017, from; http://www.fool.com.au/2017/05/05/how-origin-energy-ltds-share-price-could-profit- from-its-tesla-deal/ Ronngard, H. (2016). The Australian Share Market Is a Drama Queen, Don’t Listen! Retrieved on 21st May 2017, from; http://www.moneymorning.com.au/20160928/australian-share-market-drama-cw.html Originenergy.com.au, 2017, Full year results 2016, Retrieved on 21st May 2017, from; https://www.originenergy.com.au/about/investors-media/reports-and-results/full-year- results-20160818.html Appendices Appendix 1: calculation of ratios 1. Net Profit Margin : Net Income / Sales 2015: -590 / 12,090= -4.88 % 2016: -576/11956 = -4.82% 2. Return on Assets : Net Income / Total Assets 2015: --590 / 33,367 = -1.77 % 2016: -576/ 28,898 = -1.99 % 3. Return on Equity : Net Income / Total Equity 2015: -590 /14,159 = -4.17 % 2016: - 576/ 14,330 = -4.02 % 4. Fixed Assets Turnover: Sales / Net Fixed Assets 2015: 11,550 / 8,638 = 1.34 2014: 14,518 / 12,862 = 1.13 5. Debt Ratio: Total Liabilities / Total Assets 2015: 19,208 / 33,367 = 0.58 2016: 14,368 / 28,898 = 0.5 6. Equity Ratio: Owner’s Equity / Total ssets 2015: 14,159 / 33,367 = 0.42 2016: 14,330/ 28,898 =0.5 7. Current Ratios: Current Assets / Current Liabilities 2015: 8,321/ 5,175 = 1.61 2016: 3,571 / 2,889 = 1.24 8. Total Debt to Equity: Total Debt / Total Assets 2015: 19,208/33,367 = 0.58 2016: 14,368 /28,898 = 0.5 9. Total Debt to Assets: Total Debt / Total Equity 2015: 19,208/14,159 = 1.36 2016: 14,368/ 14,330= 1 10. Interest Coverage: EBIT / Interest Expense 2015: -257/ 389 = - 0.66 2016: -399/ 560 = -0.71 Appendix 2: Income Statement Appendix 3: Balance Sheet Read More