HC2091- Business Finance Sample

The financial performance analysis of the AGL Energy Ltd has done through the initial preparation of the commo size financial statements, analysis of the net working capital, liquidity and capital structure ratios and later conclusion has drowned upon based on the above analysis.

AGL Energy Ltd is the energy company in Australia which provides electricity, gas, solar and renewable energy services to home and offices. 

Financial performance analysis of AGL Energy Ltd

Understanding the background of the AGL Energy Ltd

AGL Energy Ltd is one of the largest energy Company in Australia that provides electricity, gas, solar power, renewable energy services to homes and offices.

It is listed at the ASX and traded with the name of ‘AGL’. It is founded in 1837 as the Australian Gas Light Company, and renamed in 2006 as AGL Energy Ltd.

AGL energy Ltd are in the business of energy, natural gas generation, wind power, hydroelectricity and cola seam gas. It provides services related to electricity generation, distribution and retailing and natural gas distribution and retailing. Its overall revenue in 2019 was more than A$ 14B and net profit was around A$ 1 B. AGL energy employs more than 4000 employees. Further details can be found at their websites www.agl.com.au. (Ltd, 2020)

Common size financial statement

The common size financial statement (Subho, 2019)displays the component of the income statement and balance sheet as a % of the base figures like total revenue, total assets or liabilities. It is also one type of vertical analysis. The major advantage are as -

  1. It helps the users of the financial statements to see the % of the all line items to the Total revenue, assets or liabilities.
  2. Analyst can see the trend of the % share of each assets, liabilities to total assets and liabilities respectively.
  3. Comparison can be done at a glance and easy to ascertain ratios.
  4. It can also help in understanding the structural relation ship of individual lines to total revenue, assets, liabilities or Capital.

Common size income statement of the Income statement, taking revenue as a base -

Particulars

2019
$m

Percent

Revenue

   13,246

100.00%

Other income

           54

0.41%

Expenses

 (11,236)

-84.83%

Share of profit of associates or joint ventures

           33

0.25%

Profit before net financing costs, depreciation and amortization

     2,097

15.83%

Depreciation and amortization

       (625)

-4.72%

Profit before financing costs

     1,472

11.11%

Finance Income

           10

0.08%

Finance costs

       (203)

-1.53%

Net financing costs

       (193)

-1.46%

Profit before tax

     1,279

9.66%

Income tax expenses

       (374)

-2.82%

Net profit

         905

6.83%

Above common size income statement infers the below points –

  • Expenses accounts for 85% of the total revenue. Expenses consists of cost relates to sales, administrative expenses, employee expenses and other expenses related to the net gain or loss remeasurement, fair valuations, etc. Cost of sales is the major component of total expenses and it accounts for $9,440 M of the total expenses.
  • Profit before depreciation and interest costs accounts for 15.83% of the total revenue.
  • Profit before tax is 9.66% and net profit percentage is 6.83% of the sales figures.

Common size income statement of the Balance Sheet, taking total assets and total equity and liabilities as a base respectively –

Particulars

2019
$m

%

Cash and cash equivalents   

115

0.78%

Trade and other receivables 

1703

11.49%

Inventories   

388

2.62%

Current tax assets 

89

0.60%

Other financial assets    

798

5.38%

Other assets   

303

2.04%

Total current assets

3396

22.91%

Inventories       

57

0.38%

Other financial assets      

590

3.98%

Investments in associates and joint ventures  

150

1.01%

Property, plant and equipment         

6588

44.45%

Intangible assets     

3740

25.23%

Deferred tax assets     

261

1.76%

Other assets   

39

0.26%

Total non-current assets

11425

77.09%

Total Assets

14821

100.00%

Liabilities and Equity

 

 

Trade and other payables    

1556

10.50%

Borrowings       

102

0.69%

Provisions      

225

1.52%

Current tax liabilities        

27

0.18%

Other financial liabilities      

632

4.26%

Other liabilities      

4

0.03%

Total current liabilities

2546

17.18%

Borrowings     

2748

18.54%

Provisions 

481

3.25%

Deferred tax liabilities   

97

0.65%

Other financial liabilities  

282

1.90%

Other liabilities       

229

1.55%

Total non-current liabilities

3837

25.89%

Issued capital  

6223

41.99%

Reserves

-33

-0.22%

Retained earnings

2248

15.17%

Total Equity

8438

56.93%

Total liabilities and Equity

14821

100.00%

 

 -Inference that can be drawn from the above common size Balance Sheet is as –

  • Cash and cash equivalents accounts for 0.78% of the total assets, so the Company does not have big cash surplus at their Balance Sheet.
  • Trade receivable accounts for 11.5% where s total current assets accounts for 23% of the total assets.
  • Major component of the total assets and non-current asset are Property, plant and equipment and intangible assets which accounts for 44.45% and 25.23% respectively of the total assets, cumulatively, they are contributing around 70%.
  • Trade and other payable contributes 10.5% of the total liabilities and equity
  • Long term borrowings consist of the 18.5% where as short-term borrowings consist of 0.69 % of the total liabilities and equity.
  • Current liabilities accounts for 17% where as non-current liabilities accounts for 26%. Current assets are 22%, so it is observable that working capital is positive.
  • Retained earnings accounts for 15.17 % and issued capital is 42% of the total liabilities and equity figures.

Analysis of AGL energy Ltd net working capital position

Working capital (Lotta Lind, 2012)is required for the day to day functioning of the business to continue the ordinary course of the business. It is calculated as the current assets minus current liabilities.

Working capital also determines the liquidity position of the company.

Below is the presentation of the Working capital position of AGL energy for the last 4 years, it shows the component wise bifurcation of the current assets and current liabilities and net working capital position.

 

Particulars

2019

2018

2017

2016

Cash and cash equivalents   

           115

           463

             154

                252

Trade and other receivables 

        1,703

        1,775

          1,944

             1,975

Inventories   

           388

           370

             351

                414

Current tax assets 

             89

           147

 -

 -

Other financial assets    

           798

           600

             744

                267

Other assets   

           303

           261

             231

                232

Assets held for sale

 

             74

             201

                447

Total current assets

       3,396

       3,690

          3,625

             3,587

Trade and other payables    

        1,556

        1,579

          1,507

             1,519

Borrowings       

           102

             34

             173

                  22

Provisions      

           225

           233

             201

                226

Current tax liabilities        

             27

             81

               13

                102

Other financial liabilities      

           632

           394

             827

                460

Other liabilities      

               4

               2

               10

 -

Liabilities - held for sale

 

 -

 -

                224

Total current liabilities

       2,546

       2,323

          2,731

             2,553

Net working Capital

           850

       1,367

             894

             1,034

Net working capital is declining over the years and at 2019, its fallen to $850M from $1034 M in 2016.

Major component of the current assets are trade and other receivable and other financial assets. As such, major component of the current liabilities are trade and other payables and other financial liabilities.

Further analysis of the changes in working capital and its components over the years can be done through horizontal analysis –

Particulars

2019

2018

2017

2016

Cash and cash equivalents   

46%

184%

61%

100%

Trade and other receivables 

86%

90%

98%

100%

Inventories   

94%

89%

85%

100%

Current tax assets 

-

-

 

-

Other financial assets    

299%

225%

279%

100%

Other assets   

131%

113%

100%

100%

Assets held for sale

0%

17%

45%

100%

Total current assets

95%

103%

101%

100%

Trade and other payables    

102%

104%

99%

100%

Borrowings       

464%

155%

786%

100%

Provisions      

100%

103%

89%

100%

Current tax liabilities        

26%

79%

13%

100%

Other financial liabilities      

137%

86%

180%

100%

Other liabilities      

-

-

-

-

Liabilities - held for sale

-

-

-

100%

Total current liabilities

100%

91%

107%

100%

Net working Capital

82%

132%

86%

100%

 

 Cash and cash equivalents have fallen by 54% from the 2016 figures and it’s the steep decline at the cash balances.

Trade and other receivables have declined by 14 $ over the years from 2016 to 2019. Other financial assets have increased by 3 times by more than $500M in the last three years.

Trade and other payable remains the same over the years and have not changed.

Borrowings in 2017 has increased by 7 times due to the classification of the non-current borrowings to current. In 2019, borrowings are 4.6 times of the 2016 figures. Other financial liabilities have increased by 37% over the period of 4 years.

Total currents assets at the aggregate level has gone down by 5%, but the current liabilities remain the same over the years. Thus, the net working capital has gone down.

Net working capital has gone down by 18% over the period of 5 years.

There are no significant decision taken in the working capital during these years.

Analysis of AGL Energy Ltd liquidity and capital structure

Liquidity ratio (Lievia Angela Pinkan Komala, 2013)– measures the short-term debt paying ability and immediate short-term liquidity. Current ratio and quick ratio are the most common liquidity ratio analysis which are done below –

Particulars

2019

2018

2017

2016

Total current assets

        3,396

        5,710

          5,652

             5,827

Total current liabilities

        2,546

     11,418

        11,294

           11,654

Current ratio (Current assets / Current liabilities)

1.33

0.50

0.50

0.50

Current Assets - Inventory

        3,008

        3,320

          3,274

             3,173

Quick Ratio (Total current assets - Inventory) / Total current liabilities

          1.18

          0.29

            0.29

               0.27

 

Both has decreased in 2019 as compared to the earlier years, that signifies overall debt paying capacity and short-term liquidity has improved. The Company has bale to manage its working capital effectively in 2019.

Both current and quick ratio are at the rise in 2019 as compared to earlier years that implies the improvement of the liquidity.

Capital Structure analysis

Capital structure ratio are done to analyze the strength of the structure of the Capital of the Company. There are three popular capital structure ratios, that are Debt to equity ratio, debt ratio and time interest coverage ratio. It shows creditors the corporation ability to sustain losses, the percentage of total assets provided by creditors, measures the ability to meet interest payment as they come due respectively.

Capital structure ratios are calculated as below -

Capital structure ratio

2019

2018

2017

2016

Total Debt

        6,383

        6,332

          6,884

             6,678

Total Equity

        8,438

        8,301

          7,574

             7,926

Debt to Equity (Total debt / Total equity)

          0.76

          0.76

            0.91

               0.84

Total assets

     14,821

     14,633

        14,458

           14,604

Debt ratio (Total debt / Total assets)

          0.43

          0.43

            0.48

               0.46

Income before interest expense and tax

        1,472

        2,464

             988

              (256)

Finance costs

           193

           220

             224

                218

TIE ratio (Income before interest income and tax/Interest expenses)

          7.63

       11.20

            4.41

             (1.17)

 

Debt to Equity - It shows creditors the corporation ability to sustain losses. Its decreasing over time and it’s a good sign for the overall debt paying capacity as it has improved.

Debt ratio - It measures the percentage of total assets provided by creditors. Its decreasing over time though at a slow rate but it’s a positive sign as the lesser assets are dependent on credit then.

TIE ratio - It measures the ability to meet interest payment as they come due. Its been fluctuating over he years, but in 2019, it has dropped as compared to the 2018 which means the Company profitability has got reduced to cover the overall finance costs.

Overall, Capital structure ratios has improved over the years.

Conclusion

The overall analysis of the financials is done through the use of common size income statement and Balance Sheet, analysis of the net working capital positions, Company liquidity and capital structure analysis, it is observable that the Company has maintained its overall component of the income, expenses, assets and liabilities effectively though has moved a bit, but that seems temporarily. Also, the liquidity and capital structure performance has improved in 2019 as compared to the earlier years. Working capital positions has gone down a bit, but that also seems temporarily and will reverse in the future years.

Overall, the company financial performance is sound based on the above parameters.

 

References

Lievia Angela Pinkan Komala, P. I. N., 2013. The Effects of Profitability Ratio, Liquidity, and Debt towards Investment Return. Journal of Business and Economics, 4(11), pp. 176-1186.

Lotta Lind, M. P. S. V., 2012. Working capital management in the automotive industry: Financial value chain analysis. Journal of Purchasing and Supply Management, 18(2), pp. 92-100.

Ltd, M. o. A. e., 2020. AGL energy. [Online]
Available at: https://www.agl.com.au/
[Accessed 26 May 2020].

Subho, S., 2019. www.yourarticlelibrary.com. [Online]
Available at: https://www.yourarticlelibrary.com/accounting/financial-statements-analysis/common-size-statement-advantages-and-disadvantages-financial-statements/73277
[Accessed 26 May 2020].

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