Financial Position Comparison of AGL Energy and Genesis Energy

Question: Discuss the Financial Position Comparison of AGL Energy and Genesis Energy. Answer: Introduction About AGL Energy AGL Energy Ltd. is based out of Sydney, Australia and majorly operates as an integrated renewable energy provider. The company provides gas, electricity, related products and solar PV in Queensland, South Australia, New South Wales and Victoria. The company is involved in buying and selling of the above products, along which it also has power generation facilities, explores and extracts natural gas and has gas storage facilities. The power generation includes thermal power generation and other renewable resources like hydro, solar, wind and biomass. The company caters to both homes and businesses. About Genesis Energy Genesis Energy Ltd. is also an energy and gas provider. The company operates majorly in New Zealand and provides energy solutions and services. The company is involved in buying and selling of electricity and gas and generation of electricity which include the traditional thermal and other renewable resources. The company also explores produces and sells LPG, gas and light oil. It caters to both residential and commercial customers providing customised electricity and LPG pricing solutions to the business houses. Financial Statements Review The financial statements include balance sheet, income statement and cash flow statements which indicate the financial position of the company. The major items of the statements have been analysed to ascertain the financial position. AGL Energy % change Genesis % change Amount in $ million 2014 2015 2014 2015 Revenue 10445 10678 2.2% 2005 2097.6 4.6% Net Profit 570 218 -61.8% 49.2 104.8 113.0% Total Assets 14134 15833 12.0% 3629.4 3528 -2.8% Total Liabilities 6546 7018 7.2% 1748.7 1702.6 -2.6% Equity 7588 8815 16.2% 1880.7 1825.4 -2.9% Cash from Operation 699 1044 49.4% 303.9 318.5 4.8% The revenue of AGL Energy has increased by a mere 2.2% which is on account of low revenue from natural gas. The energy industry is very competitive and hence it is difficult to garner a higher market share. The net profit has reduced considerably in 2015 but that is due to extraordinary expenses like impairment of assets for $600 million and transaction costs of acquiring Macquarie Generation assets for $153 million. This has increased the operating expenses. If we look at the underlying profit, it has increased by 12% to $630 million. The total assets of the company have increased by 12% as the company has acquired new plant and equipment and also oil and gas assets in 2015. The total liabilities increased a as a result of borrowings for acquiring Macquarie assets and pay for other capital expenditures. However, the company also repaid some part of its long term loans. The total equity has increased due to issue of equity. There is an increase in cash from operation by almost 50% on account of lower payments as compared to receipts as the creditors have increased thus increasing the cash flow. The total revenue of Genesis Energy has also increased by a meagre 4.6%. This is due to lower international oil prices and lower electricity customers than expected. However, we see that the profit has increased by more than 100%. This is due to the unexpected gains on fair value of financial instruments resulting from low wholesale electricity prices and a reduction in finance expense. If we look at the EBIDTAF, the net profit has increased by 12%. The total assets has reduced by 3% whereas the total assets have fallen by 2.6% due to repayment of long term loan, however the company has taken additional short term loan. The cash from operation has increased by approx 5% due to lower capital expenditure and reduced finance expenses. Ratio Analysis AGL Energy Genesis Energy 2014 2015 2014 2015 Profitability Return on Assets =570/14134 4.1% =218/15833 1.5% =49/3629 1.3% =104/3528 2.9% Net Profit Margin =570/10445 5.5% =218/10678 2.0% =49/2005 2.5% =104/2097 5% Liquidity Current Ratio =3411/2166 1.6 =3459/2373 1.5 =357/246 1.4 =-346/309 1.1 Quick Ratio =(3411-191)/2166 1.5 =(3459-396)/2373 1.3 =(357-93)/246 1.1 =(346-80)/309 0.9 Capital Structure Debt to Equity =6546/7588 86.3% =7018/8815 79.6% =1748/1880 93% =1702/1825 93.3% Equity ratio =7588/14134 53.7% =8815/15833 55.7% =1880/3629 51.8% =1825/3528 51.7% Market Performance Earnings per share =570/580.2 0.98 =218/653.7 0.33 =49.2/999.9 0.05 =104.8/999.5 0.1 Dividend per share =269/580.2 0.46 =344/653.7 0.53 =121/999.9 0.12 =145.9/999.5 0.15 Profitability The return on assets of AGL has gone down in 2015 due to a decrease in net profits. The profits are low due to high asset impairment costs. Also the profit margin has reduced in 2015 for the same reason. The total assets and revenue have increased but the decrease in profits is higher as such the profitability of the company has gone down. Both the net profit margin and return on assets has increased for Genesis in 2015 due to abnormal profits arising from gains on fair value of financial instruments. The profits are not as a result of regular business operations. Since AGL Energy has seen abnormal loss and Genesis has experienced abnormal profits, the profitability of Genesis seems higher, but if EBIDTAF were to be taken into consideration, AGL Energy would have higher profitability. AGL has higher revenue and total assets in absolute terms. Liquidity The current ratio has decreased very slightly for AGL Energy in 2015. This is due to an increase in current liabilities in the form of borrowings. However, the ratio is within the ideal limits. Even the quick ratio is more than 1 which means the company does not have much funds tied in inventory and can be said to be quite liquid. Both current ratio and quick ratio have decreased for Genesis. This is due to an increase in current liabilities and a decrease in current assets. The company has undertaken short term loan to repay its long term debts. AGL energy has a better liquidity than Genesis. Capital Structure The debt to equity ratio of AGL has reduced by approx 6% to 80%. This is due to an increase in equity and decrease in long term borrowings. However, the company has more debt than equity and can be considered to have a risky capital structure. The equity ratio has increased in 2015 to 55.7% signifying more than 50% of the assets being financed by equity. The company has reduced its dependence on debt to some extent. The debt to equity ratio for Genesis is as high as 93%. The company is highly risky with more debt than equity. 50% of its total assets are financed by equity and 50% by debt. However, the total debt is 93% of the total capital structure. The capital structure has not changed from 2014 to 2015. AGL is more stable than Genesis. Market Performance The EPS for AGL Energy has reduced considerably in 2015 owing to very low profits. Also the total outstanding shares have increased in 2015 resulting in a lower EPS. The dividend per share has increased due to increase in dividends paid. Even though the company has experienced low profits, but due to strong cash flow, it has been able to pay higher dividends, thus increasing the return of shareholder. The EPS for Genesis is very low at 5 cents in 2014 has increased in 2015 to 10 cents as a result of extraordinary profits earned. The number of outstanding shares has remained the same. The dividend per share has increased slightly to 15 cents in 2015 due to an increase in dividends paid. AGL has a better market performance as it has higher EPS and dividend per share in spite of lower profits as compared to Genesis Energy. Conclusion The ratios calculated above provide a clear picture of the financial performance of both the companies for the years 2014 and 2015 and how the companies have improved or worsened in 2015 as compared to the previous years. However, one cannot depend entirely on the ratios calculated from the annual reports because AGL has prepared the accounts on the basis of AASB whereas Genesis has prepared the accounts on the basis of New Zealand GAAP so the accounting policies used may be different. The qualitative aspects like environment and social responsibility have not been considered in the analysis. Recommendation On the basis of the ratio analysis conducted above, it is clearly advisable to a potential investor to invest in AGL Energy Limited as the company has better liquidity, stability in the capital structure and a better market performance. The profitability of Genesis may seem better on the face of it, however the profits are extraordinary and not from the normal business operations, hence on the basis of EBIDTAF, AGL has a better profitability. The investor can expect to have higher returns from AGL since it pays higher dividends. Reference AGL Energy, (2015), AGL Annual Report 2015 Genesis Energy, (2015), Genesis Energy Annual Report 2015 Finance.yahoo, (2016), AGL Energy Limited, accessed online on 22nd August, 2015, available at https://finance.yahoo.com/quote/AGL.AX/profile?p=AGL.AX Finance.yahoo, (2016), Genesis Energy LP, accessed online on 22nd August, 2015, available at https://finance.yahoo.com/quote/GEL/profile?p=GEL