AGL Energy Limited - Comparative Analysis Of Financial Free Sample

Question: Discuss about the Comparative Analysis of Financial for AGL Energy Limited. Answer: Introduction Ratio analysis is the financial statement analysis, which helps to gather a quick suggestion regarding the financial performance of the firm in several key areas. Ratios can be of different types depending on the liquidity, profitability, market performance, and solvency of the specified firm. In this report, two companies named AGL Energy Limited and Genesis Energy Limited of the same industry (energy sector) have been selected to analyze the financial condition of both the firms by comparing and contrasting the ratio values and their trends. In order to analyze the trends and ratio of both the firms, the historical value of last two years 2014 and 2015 of both the firms have been gathered from their respective annual reports. Company Background Genesis Energy Limited Genesis Energy Limited was founded in the year 1999 and it is a public type company enlisted in both NZX and ASX as GNE. It belongs to the energy sector and is the predecessor of the company named Electricity Corporation of New Zealand (Genesis Energy 2016). The particular company deals with LPG, electricity generation, natural gas and electricity retailing company. Genesis Energy Limited is the largest natural gas as well as electricity retailer in New Zealand as in the financial year 2013-2014, the firm had a market share of 42% and 26% respectively (Genesis Energy 2016). AGL Energy Limited AGL Energy Limited was founded in 1837 as the Australian Gas Light Company; however, later it was founded as AGL Energy in the year 2006. It is a public company enlisted in ASX and is head quartered in North Sydney (Agl.com.au 2016). AGL Energy Limited belongs to the energy as well as utilities sector and its key products are coal seam gas and hydroelectricity, energy, natural gas generation and wind power (Agl.com.au 2016). It has been found that AGL Energy has more than 3.8 million residential as well as business consumers across South Australia, Victoria, Queensland, and New South Wales. Profitability Ratio: Return on Assets: AGL Energy Limited Genesis Energy Limited 2014 ($Million) 2015($Million) 2014 ($Million) 2015($Million) Return on Assets (Net income/ Average Total Assets) 0.013768 -0.027937551 0.013502342 0.029761905 Table 1: Showing the Return on Assets (Source: Genesis Energy 2016 and Agl.com.au 2016) The return on assets of AGL Energy mainly declined from 2014 to 2015 indicating low sales generated from operations. However, the return on assets of Genesis Energy mainly increased, which indicates an effective deployment of management function. After the effective comparison of both the company it could be concluded that based on ROA Genesis energy could be identified as the most valuable stock for investment. Christensen and Nikolaev (2013) argued that during an economic crisis the overall valuation of the company assets and revenue could be hampered, which projects a low ROA of the company. Net Profit Margin: AGL Energy Limited Genesis Energy Limited 2014 ($Million) 2015($Million) 2014 ($Million) 2015($Million) Net Profit Margin (Net Income/ Net Sales) 0.020415808 -0.036591928 0.024475524 0.050529355 Table 2: Showing the Net Profit Margin (Source: Genesis Energy 2016 and Agl.com.au 2016) With the help of table 2, net profit margin of AGL Energy could be identified as weak compared to Genesis Limited. This reduced net profits margin of AGL Energy could be because of the declining sales or increasing administrative expenses incurred by the company to conduct its operations. Moreover, the rising net profit margin of Genesis Limited could be helpful for investors to receive higher dividends. Stahl et al. (2012) stated that with the help of net profit margin investors are able to identify the overall administrative expenses incurred by the company to generate sale, which might be helpful in achieving sustainable growth. Liquidity Ratios: As commented by Healy and Palepu (2012), liquidity ratios help in vivisecting the capability of a firm in order to write off its existing debts and obligations. Hence, these ratios help in gauging the cash availability of an organisation to convert its assets into cash. Current Ratio: AGL Energy Limited Genesis Energy Limited 2014 ($Million) 2015($Million) 2014 ($Million) 2015($Million) Current Ratio (Current Assets/ Current Liabilities) 1.457648546 1.405013709 1.44534413 1.119354839 Table 3: Current ratio of AGL Energy Limited and Genesis Energy Limited (Source: Genesis Energy 2016 and Agl.com.au 2016) According to the above table, it has been found that the current ratio of both the firms has experienced a marginal decline in the subsequent years. This depicts the increase in the liability base of both the organisations in contrast to the average current asset base (Hoberg, Phillips and Prabhala, 2014). Therefore, it could be inferred that both the organisations are suffering from poor liquidity position as far as the current ratio is concerned. Quick Ratio: AGL Energy Limited Genesis Energy Limited 2014 ($Million) 2015($Million) 2014 ($Million) 2015($Million) Quick Ratio [(cash + cash equivalents + short-term investments +current receivables)/ Current Liabilities] 1.29 1.242 1.064 0.861 Table 4: Current ratio of AGL Energy Limited and Genesis Energy Limited (Source: Genesis Energy 2016 and Agl.com.au 2016) According to the above table, it has been evaluated that the quick ratio of both the organisations has declined over the consecutive years. In case of AGL Energy Limited, the ratio has been high compared to the ideal standard and vice-versa for Genesis Energy Limited. This implies that the former organisation has focused on accumulating higher inventory compared to that of the market demand. The latter firm, however, has been struggling to meet off its existing debts and obligations. Capital Structure Fan et al. (2012) mentioned that the process through which the business entity gathers external finance through the various sources of fund has to evaluate by the management of the business enterprise. The debt equity ratio as well as the equity ratio for both the business entities has to be computed . Debt to Equity Ratio The debt to Equity ratio calculates the amount of finance coming from creditors as well as the investors (Refer to Appendix). AGL Energy Limited Genesis Energy Limited 2014 ($Million) 2015($Million) 2014 ($Million) 2015($Million) Debt to Equity (Total Liabilities/ Total Equity) 0.44323 0.4572 0.4819 0.4827 Table 5: Debt to Equity Ratio of AGL Energy Limited and Genesis Energy Limited (Source: Genesis Energy 2016 and Agl.com.au 2016) It can be stated that the ratios of both organizations can be considered healthy in the context of the global market. Robb and Robinson (2012) mentioned that this indicates the strong financial health of the company. In the context of AGL Energy Limited, the debt to equity ratio of the organization was 0.44 in the year 2015. The debt to equity ratio in the context of the Genesis Energy Limited has enhanced from 0.481 in the year 2014 to 0.482 in the year 2015. Therefore, the liabilities of both the firms have shown substantial growth. Equity Ratio The equity ratio is the financial ratio that indicates the portion of equity that facilitates the financing of the assets of the company (Refer to Appendix). AGL Energy Limited Genesis Energy Limited 2014 ($Million) 2015($Million) 2014 ($Million) 2015($Million) Equity Ratio (Total Equity/ Total Assets) 1 1 1 1 Table 6: Equity Ratio of AGL Energy Limited and Genesis Energy Limited (Source: Genesis Energy 2016 and Agl.com.au 2016) From the table, it can be stated that the equity ratio of both the organizations have shown consistency in growth for both 2014 and 2015. From the equity ratio, it can be identified that both the organizations have shown similar trends, and have delivered consistent business performances over a period of time Market Performance: In the words of Loughran and McDonald (2014), the market performance portrays a vivid description of the organisational performance in the target market. Therefore, in order to dissect the market performance of both the firms, the ratios related to dividend per share and earnings per share have been taken into consideration. Dividend per share: This ratio helps in gauging the percentage of the actual net profit, which is distributed to the stockholders on the part of the organisation. AGL Energy Limited Genesis Energy Limited 2014 ($Million) 2015($Million) 2014 ($Million) 2015($Million) Dividends per share (Sum of dividend/ No. of outstanding shares) 0.591 0.68 0.079 0.8 Table 7: Dividend per share of Genesis Energy Limited and AGL Energy Limited (Source: Genesis Energy 2016 and Agl.com.au 2016) According to the above figure, it has been inherent that both the organisations have increased their dividend payout to the shareholders over the subsequent years. In case of AGL Energy Limited, the dividend payout has increased from 0.59% in the year 2014 to 0.68% in the year 2015. However, this ratio has been high in case of Genesis Energy Limited, since the same has increased from 0.079 in the year 2014 to 0.8 in the year 2015. The possible reason behind such increase is the rise in net profit, which might have resulted from the higher amount of sales in the Australian market. Thus, the amount of dividend for both the firms has increased over time due to the higher income earned over the subsequent years. Hence, it could be inferred that both the firms have increased their dividend payouts; however, Genesis Energy Limited is enjoying a competitive advantage. Earnings per share: AGL Energy Limited Genesis Energy Limited 2014 ($Million) 2015($Million) 2014 ($Million) 2015($Million) Earnings per share [(Net income Preferred Dividends)/ Weighted average common shares outstanding] 0.33 0.23 0.1 0.12 Table 8: Earnings per share of Genesis Energy Limited and AGL Energy Limited (Source: Genesis Energy 2016 and Agl.com.au 2016) Based on the above graph, it has been evident that AGL Energy Limited has experienced a decline in its share earnings possibly due to the indifferent motive of the investors to invest in the organisation. However, the scenario has been opposite in case of Genesis Energy Limited, since the company has experienced an increase in its earnings per share. Therefore, Genesis Energy Limited is enjoying a competitive advantage over AGL Energy Limited as well. Comparing AGL Energy Limited and Genesis Energy limited: Both AGL and Genesis energy are from the energy sector and the ratio comparison effectively helps in evaluating the overall performance of companies. In addition, with the help of liquidity, profitability, market performance, and capital structure the overall performance of both the companies are effectively evaluated. Moreover, Genesis energy limited is mainly identified as the most valuable stock, which could provide investors with adequate invested return. Ally (2013) stated that with the help of ratios investor are able to identify the most favourable stock, which might help in providing higher return from investment. Conclusion It can be concluded that Genesis Energy limited and AGL Energy Limited require more improvements in order to run the businesses successfully in future. It has been noted that both companies need to put more effort on their profitability, solvency and liquidity ratios for improving their financial conditions. Recommendations The investors should invest more in AGL Energy Limited as Genesis Energy has a relatively poor solvency situation. Additionally, it has been found that AGL Energy has a better financial position in liquidity and market performance ratios. Reference and Bibliography: Agl.com.au. 2016.AGL Energy Limited. [online] Available at: https://www.agl.com.au [Accessed 26 Aug. 2016]. Ally, Z., 2013. Comparative analysis of financial performance of commercial banks in Tanzania.Research Journal of Finance and Accounting,4(19), pp.133-143. Callen, J.L., 2015. A selective critical review of financial accounting research. 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