Ratio Analysis
Discuss about the Lease Capitalisation on Financial Statements.
The analysis of the financial reports or statements is very important for the stakeholders and investors like government and lender. The investors look to identify present abilities of a company and future opportunities by evaluating the financial reports or statements (Robinson, Henry, Pirie and Broihahn, 2015). Financial analysis is said to be a procedure if measuring projects, businesses, budgets and other financial entities to define their suitability and performance. Classically, financial analysis is utilized to examine whether an entity is steady, wealthy, liquid or lucrative enough to permit a financial investment (Weaver, 2011). While observing a particular company, a financial expert conducts examination by concentrating on the balance sheet, cash flow statement, and income statement. Financial statements are utilized to measure the set financial policies, recognizing companies or projects for the investment purpose, economic trends, and creating long-term strategies for the activities of the business (Lee and Lee, 2016).
This report highlights the analysis of financial reports of two companies namely ACL energy and Origin Energy Limited. Ratio analysis is one of the measures that will help in understanding the better position of the companies. The ratio analysis is said to be a quantitative analysis of the data confined in financial statements of a company. Ratio analysis is utilized to measure different aspects of the financial performance and operations of a company like its liquidity, solvency, efficiency, and profitability. The investors of both the companies will get help from the ratio analysis as a reference because it identifies the financial health of a company. The report will discuss and compare five important ratios i.e. Liquidity ratio, Solvency ratio, Efficiency ratio, Profitability ratio, and Market value ratio.
ACL Limited is the Australian Biotechnology company listed in Australian Stock exchange. It has specific proficiency in the chemistry that has been involved in the development and discovery of the products of human therapeutic. Antithrombotic drug and generic fondaparinux of ALC Limited Company is said to be a near-term opportunity that helps in targeting the multi-billion dollar market of heparin-drug and is predictable to be creating company’s revenues in 2012.
One of the most advanced products of ALC energy limited company is HA-irinotecan anticancer product and is probably to start Phase III scientific trials in 2011. It is formed with ALC’s HyACT technology which collects the drug i.e. chemotherapeutic drug irinotecan along with hyaluronic acid (HA). In 2007, ALC reported that excellent outcomes from Phase II scientific trial: HA-irinotecan not just permitted more irinotecan cycles to be managed of the cancer patients, but also formed statistically important disease monitor and a repetition in development free survival.
Liquidity Ratio
The platform of VAST drug discovery m of ALC aims at G-protein coupled receptors (GPCRs). Presently partial of drugs are up to target the market GPCRs and signify around US$100 billion in sales. VASTTM a said to be a revolutionary drug discovery technology involves numerous drug entrants in initial development stages. This technology’s main advantage is that it can be used to target anyone and the target structure is nor important to be known (Linked In, 2017).
Origin is a public energy company listed in Australian Stock Exchange with headquarter in Sydney. The company was established in 2000, due to the demerger of the conglomerate of Australia i.e., Boral Limited, which observed the energy business shaped as an innovative company, distinct from the construction and building material business. The SAGASCO business is part of Origin Energy Company as part of the demerger. In 2001-02, Origin Energy acquired a retailer of Victorian electricity license from the distributors CitiPower and Powercor. In 2004, the SEAGas pipeline was finished and custom-built, which aided to relate the South Australian and Victorian gas markets. In this time duration, Origin Energy Company got 50% interest in the Company Kupe Gas Field and accomplished to gain 51.4% interest in Edison Mission Energy in the Contact Energy of New Zealand. Origin added its 53% shared its shares to the market in Contact Energy in 2015. In 2006 the government of Queensland broadcast the sale of the company i.e. Sun retail private limited, the former arm of retailing of Energex to Origin for $1.200 billion. Sun retail comprised 8, 40,000 industrial, commercial and residential customer accounts and 55,000 LPG customers (Origin Energy, 2018).
The financial report is formed with the help of general or information and requirement of the user. The information that is transferred by the financial reports is not precise or directed in the direction of any particular goals like the lending decision or investment decision (Birchall, 2014). Therefore, it becomes very important to evaluate the financial reports or statements by applying various techniques and tools to excerpt applicable and exact information (Stickney, Weil, Schipper and Francis, 2009). The investors are very enthusiastic to acknowledge the financial weaknesses and strength of the company. In order to know this, comparative ratio analysis is performed which involves liquidity, solvency, profitability, and efficiency of the company. The company’s financial ratios are compared with its major competitor in order to know its financial strength and weaknesses. Further, analysis of ratio is also very helpful in measuring the trends in the financial report and company’s position, which is also said to be important while taking the decisions of investment (Fabozzi and Drake, 2009).
Solvency Ratio
Besides ratio analysis, the Balance sheet is also a very important financial statement as it reflects a picture of the company’s performance. The balance sheet is not officially needed for very small reports of business or even taxes; it can be useful in defining the company’s health. Deprived of the knowledge of simple principles of accounting, it might be irresistible to think of making a balance sheet. Though, creating a balance sheet can be simple for a small company and can even make automatically by most traditional or online accounting software (Sage, 2015).
Being the manager of a company, profit and loss statement or balance sheet can be prepared to know about the performance of the business. These statements help in providing a snapshot of the company’s performance. The balance sheet is a changing document in which business regularly writes about new assets that are acquired and new liabilities that business has undertaken. While updating regularly, the balance sheet will provide potential investors and lenders the material they require to take learned decisions about advancing resources or money (Anaejionu, 2018).
Liquidity ratios evaluate the ability of the company to recompense debt duties and its margin of safety by calculating the metrics comprising the operating cash flow ratio, quick ratio, and current ratio. Current liabilities are examined in terms of liquid assets in order to assess the coverage of short-run debts in an emergency (Tracy, 2012). Bankruptcy experts and loan inventors make use of liquidity ratios to assess issues related to going concern because of liquidity ratio support in specifying the position of the cash flow. Liquidity ratio is useful when they are applied in comparative form. This evaluation can be done externally or internally. For instance, the internal analysis in terms of liquidity ratio includes using periods of multiple accounting that are stated for using the same methods of accounting. Associating different time periods with the current operations permits experts to trail variations in the business. Generally, the ratio of higher liquidity designates that a business is very liquid and has healthier treatment of outstanding debts (Accounting tools, 2017).
In respect to ACL Limited, it has been observed that the Current ratio of the company is comparatively high in the year 2017 i.e. 24.05 and current ratio in 2016 i.e. 13.35 (Yahoo Finance, 2018). This reflects that company is trying to improve its position in the market. Further, in case of Origin Energy Limited, it has been observed that it is also trying to improve its performance in the market because its current ratio in 2016 was 0.24, whereas in 2017 it increased and reached to 1.30 (Yahoo Finance, 2018). It reflects that company is trying its efforts to enhance the performance however the percentage of improvement is higher in ACL Limited as compared to Origin Energy Limited (Appendix 1).
Efficiency Ratio
The quick ratio was also analyzed to be reflecting the similar trend in both the companies. In the matter of ACL Limited, the quick ratio was observed to be 4.43 in 2015, 13.35 in 2016, and 24.05 in 2017, it states that 2017’s quick ratio is 6 times higher than the ratio of 2015 (Market Index, 2018). On the other side, in case of Origin Energy limited the quick ratio is 0.42 in 2015, 0.22 in 2016, and 1.26 in 2017 (Appendix 1). It can be seen that the quick ratio is also in the increasing phase however at slow speed.
Solvency or Financial Leverage ratios are said to the main metric utilized to evaluate the ability of the enterprise in order to meet its debts. This ratio reflects whether a cash flow of the company is enough to fulfill its long-term and short-term liabilities. The lower solvency ratio of the company will result in the probability that it will be defaulting on its debt obligations (Bragg, 2012).
The solvency ratio is one of the metrics that is utilized to define the solvency of the company. Other ratios of solvency are comprised of total debt to total assets, interest coverage ratios, and debt to equity (Leach, 2010). On the other hand, the solvency ratio is a complete evaluation of the solvency, as it evaluated cash flow in place of net income by comprising depreciation to measure the capacity of the company to stay flooded. It evaluates the capacity of the cash flow in regards to all the liabilities, rather than just short-term debt. Through this method, solvency ratios measure a long-term health of the company by assessing its long-run debts and interest on the debt (Ramachandran, 2013).
From the ratio analysis, it can be observed that the Interest time’s ratio is reflecting negative trends in both the cases of companies. In case of ACL Limited, the performance is very poor (Morning Star, 2018). Whereas in the case of Origin energy limited the trends is negative i.e. (2.42) in 2015, (1.50) in 2016, and (1.57) in 2017, which reflects that the trends are negative, however, company has tried to improve its performance from 2015 to 2017 (Appendix 1). Therefore, it can be said that Origin Energy Limited Company is at a better position as compared to ACL Limited Company, though it needs to implement some other strategies in order to survive in the market and come up with new and innovative offerings.
Profitability Ratio
The efficiency ratios are also called activity ratios. The evaluation of efficiency measures a company’s ability to utilize assets and liabilities to measure liabilities. These ratios measure how a company can use assets to create revenues and represents the ability to manage assets. The efficiency ratios are used by the management to improve company as well as investors and creditors to know creditability and profitability of the company (Heikal, Khaddafi & Ummah, 2014). The most prominent ratios are taken for this purpose such as inventory holding days and accounts receivable days have been computed as shown below in the charts:
From the above chart, it can be observed that account receivable days are maintained at the inconstant level by ACL energy limited. The account receivable was maintained at 9 days in 2016. However, in the case of Origins energy limited, the columns in the chart are representing a falling trend. In 2015, the company maintained account receivables at 66 days which decreased to 64days in 2016 and then 61 days in 2017 (Council, 2016 ). The decrease in account receivable days represents that the management has been competing with regard to the collection of account receivables. The major cause of the decrease in account receivable days seems to be conservative policy followed by the company to increase it’s market share. On the other side, ACL energy limited is facing downfall in demand which is leading to the financial crisis (Samuelsen, et. al. 2017). Therefore the company should try to maintain account receivable days low to tight it’s working capital condition.
The comparative position in respect to inventory holding days is observed to be quite different. It can be perceived that ACL energy limited is trying to keep inventory holding days at very lower side whereas Origin energy limited has maintained high inventory holding days in 2015 and 2016. But now it has considerably lowered inventory holding days (Azzi, et.al. 2014). ACL energy limited maintained inventory holding days whereas the other company gone up from 9 days in 2015 and 2016. The company tried to keep average 7 days in last three years. The Origin energy limited has experienced good growth in demand which seems the main reason for maintaining a high stock of goods.
The profitability ratios are used to evaluate company’s ability to generate earnings compared to the expenses and costs incurred during a specific period of time. It shows how well a company uses its assets to create profit and value for shareholders and investors (Nimtrakoon, 2015). A higher ratio means the business is performing well by creating revenues, profits and cash flow. These ratios are more useful when they are used to compare two companies. In this way, it can be said that the profitability ratios are more useful for ACL energy and Origin energy.
Market Value Ratio
In order to analyze the profitability of both companies, return on equity and net margin ratios are considered prominent. The net margin ratio shows the revenue of company after deduction of operating expenses, taxes, interest and dividends from the total revenue (Pais & Gama, 2015). It is used to compare the profitability of competitor companies of the same industry (Christodoulou, Clubb & Mcleay, 2016). The net margin ratio reflects profits as a percentage of revenue whereas the return on equity demonstrates profits as a percentage to total equity of shareholders. The return on equity can be determined by dividing net income by the equity of average shareholders. It signifies how efficient a company can be in generating returns on the investments. It generally prefers a company with a higher return on investments (Kraemer-Eis, et. al. 2017) (Appendix 1). The graphical representation in respect of ACL energy and Origin energy limited is given below:
From the above charts, it can be observed that net margin ratio of ACL Limited is going downward. In 2015, it was -258% and then went down more down in 2016 and fell down to -9296% in the year 2017. However, in respect of Origin energy limited there has been a noticeable rising trend in the profitability. In 2015, Origin earned net margin of -3.78% which went a bit high to -2.58% in the year 2016 and -0.02% in 2017. The main reason of reduced margins of ACL energy Limited has been observed to be fall in sale of audit software in the year 2017. The fall in demand is putting pressure on company to reduce prices which is the main reason causing reduction in profitability. Further, the return on equity also indicates the same trend. In the case of ACL energy limited, the return on equity went down to -129.37% in 2015 and then suddenly increased to 782.92 % in 2016 (Appendix 1). Further, it reduced to -24.60 % in 2017. However in respect to Origin energy limited, the return on equity seems stable except the minor drawbacks. It has been noticed that equity of the company has increased considerably over the period of next years. The company has been capable to maintain stable return on equity (Wong & Joshi, 2015). The main season for the stability seems to be increased profitability of Origin energy limited.
The market ratios are also called ownership ratios. It is used by the stockholder to evaluate present and future investment in a company. These ratios are used by the potential investors to conclude whether a company’s shares are under-priced or overpriced. It is basically the evaluation of the economic status of public traded companies.
Conclusion
These ratios offer a financial portrait of companies. It also offers idea to management what a firm’s investor think about performance and future prospects of the company. The price earnings ratio is current price of stock divided by the EPS (Earnings Per Share). It compares the price of company’s stock to cash flows. It measures current share price of the company relative to it’s per share earnings (Houmes & Chira, 2015). The ratio specifies that an investor can anticipate investing in the company in order to receive part of company’s earnings. It provides a better sense of the value of the company. The price-earnings ratio of ACL energy ltd in 2016 was .11times whereas in 2017 it was in negative due to huge losses. On the other side, the price earnings ratio of Origin energy limited in 2016 was 110 times further it reduced to 86.10 times in 2017 (Investsmart, 2018). The origin energy limited is much better than ACL energy limited as the company have the high earnings ratio which is often considered to be growth stocks.
Conclusion
This report presents the outcome of the analysis of financial performance and position of two companies namely, ACL energy limited and Origin energy limited. The analysis of financial performance is conducted with the help of ratio analysis tool. It shows that ACL energy ltd. is losing the way whereas Origin energy ltd. performing better. The ratio analysis was effective to evaluate aspects of the companies such as operating and financial performance. These ratios are interpretation of the financial statements of both companies. The ratios are helpful in taking certain decisions. It is a better means of understanding strength and weaknesses of companies. The calculation of ratios does not serve any purpose unless these are analysed and interpreted. There are some parties who rely on ratios for evaluating and measuring financial condition of companies such as banks, investors, shareholders, financial institutions and management. The financial condition of the firms cannot be evaluated without using ratio analysis. It can find out whether the condition of a company is good, poor, strong or questionable. It can also be concluded that whether the performance of the company is improving or worsening.
The ratios can be used to make decisions from the information available in the financial statements. It can also be helpful in financial forecasting and planning. The ratios calculated for a number of years which is going to work as a guidance to company itself and to public and investors. These ratios are capable of drawing meaningful conclusions for the future. It is helpful in planning as well as forecasting. It has been observed that standard ratios are based on the financial statements and variances. So by comparing actual with standards a corrective action can be taken at the required time which results in better control of business. It is also an essential part of the budgetary control and standard costing.
In the 2017, the net margin ratio of ACL energy ltd. was -9296.13% as against the margin of -0.02%. The overall financial condition of the company in regard to liquidity and solvency was observed to be weaker as compared to Origin energy limited. Further it was also noticed that the company retains high debt that the risk of solvency can raise in the future. If the things are going to happen as these are in the present then company will put itself in more problem. The analysis of stock price illustrates that both stocks are on decline currently. However, Origin energy limited is more capable to absorb economic shocks. The fall in stock of company is lower than the ACL energy limited. As long as the future outlook is concerned the news for both the companies is not promising. So in the coming years the energy industry is going to struggle with the growth. The Origin Energy Limited is performing well as compared to ACL Limited. Therefore, if choice is made between ACL energy limited and Origin energy limited, then it is recommended to opt for Origin energy limited. This advice is based on the financial performance of company absorbed in the recent years.
The financial performance of ACL energy limited is deteriorating day by days. So it is recommended to well plan, organise, control and monitor it’s financial resources in order to achieve business goals. A good financial management is helpful to business to make effective use of resources, gain competitive advantage and prepare for the financial stability in the long run.
- A clear business plan is required to be maintained by the company so that it can know where it is at present and where it want to go in the next coming years.
- ACL can regularly monitor the progress of company. The company should check bank balance and sales on a regular basis. It should review the position against the target set in the business plan on monthly or quarterly basis.
- The company runs in the major problems just because of receiving late payment from customers. A computerised credit system can be useful to company in keeping track of customer accounts to ensure that customers pay on time.
- An updated accounting record system can help company to track expenses, debtors and creditors. It tells the need for the application of additional funds and save time and accountancy costs.
- After reviewing the performance of ACL in the past few years, the company can take decision to merge with strong company. It can result in enhancement of revenue.
References
Accounting tools (2017) Liquidity Ratio [online]. Available from https://www.accountingtools.com/articles/2017/5/13/liquidity-ratios [accessed 23 May 2018]
Anaejionu, R. (2018) The advanatges of balance sheet [online]. Available from https://smallbusiness.chron.com/advantages-balance-sheet-11490.html [accessed 23 May 2018]
Azzi, A., Battini, D., Faccio, M., Persona, A. and Sgarbossa, F., (2014) Inventory holding costs measurement: a multi-case study. The International Journal of Logistics Management, 25(1), pp.109-132.
Birchall, A. (2014) Financial Analysis and Control: Financial Awareness for Students and Managers. 1st edn. U.K: Butterworth-Heinemann.
Bragg, S.M. (2012) Business Ratios and Formulas: A Comprehensive Guide. 8th edn. U.S: John Wiley & Sons.
Christodoulou, D., Clubb, C. and Mcleay, S., (2016) A structural accounting framework for estimating the expected rate of return on equity. Abacus, 52(1), pp.176-210.
European Investment Fund (2017) European Small Business Finance Outlook [online]. Available from https://www.eif.org/news_centre/publications/eif-wp-46.pdf [accessed 23 May 2018]
Fabozzi, F.J., and Drake, P.P. (2009) Finance: Capital Markets, Financial Management, and Investment Management. 2nd edn. U.S: John Wiley & Sons.
Heikal, M., Khaddafi, M. and Ummah, A. (2014). Influence analysis of return on assets (ROA), return on equity (ROE), net profit margin (NPM), debt to equity ratio (DER), and current ratio (CR), against corporate profit growth in automotive in Indonesia Stock Exchange. International Journal of Academic Research in Business and Social Sciences, 4(12), p.101.
Houmes, R. and Chira, I. (2015) The effect of ownership structure on the price earnings ratio—returns anomaly. International Review of Financial Analysis, 37, pp.140-147.
Investsmart (2018) Origin Energy Limited [online]. Available from https://www.investsmart.com.au/shares/asx-org/origin-energy-limited/financials [accessed 23 May 2018]
Leach, R. (2010) Ratios Made Simple: A beginner’s guide to the key financial ratios. 3rd edn. England: Harriman House Limited.
Lee, J.C., and Lee, C.F. (2016) Financial Analysis, Planning & Forecasting: Theory and Application. 3rd edn. Singapore: World Scientific Publishing Company.
Linked In (2017) ALC Limited [online]. Available from https://in.linkedin.com/company/alchemia-limited [accessed 23 May 2018]
Market Index (2018) ACL [online]. Available from https://www.marketindex.com.au/asx/acl [accessed 23 May 2018]
Morning Star (2018) ACL [online]. Available from https://financials.morningstar.com/ratios/r.html?t=QA9®ion=deu&culture=en-US [accessed 23 May 2018]
Nimtrakoon, S. (2015) The relationship between intellectual capital, firms’ market value and financial performance: Empirical evidence from the ASEAN. Journal of Intellectual Capital, 16(3), pp.587-618.
Origin Energy (2018) We are Origin [online]. Available from https://www.originenergy.com.au/about.html [accessed 23 May 2018]
Pais, M.A. and Gama, P.M. (2015) Working capital management and SMEs profitability: Portuguese evidence. International Journal of Managerial Finance, 11(3), pp.341-358.
Ramachandran (2013) How To Analyze A Financial Statement. 3rd edn. New York: Tata McGraw-Hill Education.
Robinson, T.R., Henry, E., Pirie, W.L., and Broihahn, M.A. (2015) International Financial Statement Analysis Workbook. 3rd edn. U.S: John Wiley & Sons.
Sage (2015) What are balance sheets and why are they important? [online]. Available from https://www.sage.com/ca/Sage-Advice/Articles/19769/2015/6/16/What-are-balance-sheets-and-why-are-they-important [accessed 23 May 2018]
Samuelsen, B.T., Webster, K.E., Johnson, N.R., Hewett, T.E., and Krych, A.J. (2017) Hamstring autograft versus patellar tendon autograft for ACL reconstruction: is there a difference in graft failure rate? A meta-analysis of 47,613 patients. Clinical Orthopaedics and Related Research, 475(10), pp.2459-2468.
Stickney, C.P., Weil, R.L., Schipper, K., and Francis, J. (2009) Financial Accounting: An Introduction to Concepts, Methods and Uses. 7th edn. U.S: Cengage Learning.
Taranaki Regional Council (2016) origin Energy Resources NZ Limited Rimu production station [online]. Available from https://www.trc.govt.nz/assets/Documents/Environment/Monitoring-OGproduction/MR2016-OriginRimuPS.pdf [accessed 23 May 2018]
Tracy, A. (2012) Ratio Analysis Fundamentals: How 17 Financial Ratios Can Allow You to Analyse Any Business on the Planet. 1st edn. RatioAnalysis.net.
Weaver, S.C. (2011) The Essentials of Financial Analysis. 3rd edn. U.S: McGraw Hill Professional.
Wong, K., and Joshi, M. (2015) The impact of lease capitalisation on financial statements and key ratios: Evidence from Australia. Australasian Accounting Business & Finance Journal, 9(3), p.27.
Yahoo Finance (2018) Origin Energy Limited [online]. Available from https://au.finance.yahoo.com/quote/ORG.AX/balance-sheet?p=ORG.AX [accessed 23 May 2018]
Yahoo Finance (2018) ACL.AX [online]. Available from https://finance.yahoo.com/quote/ACL.AX/balance-sheet?p=ACL.AX [accessed 23 May 2018]
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
