Accounting Decision Making Largest Gas and Electric Retailer

Question: Discuss about the Accounting Decision Making for Largest Gas and Electric Retailer. Answer: Introduction Genesis Energy Ltd Genesis Energy Ltd, formerly known as Genesis Power Ltd is an electricity and electricity generation, LPG and natural gas retailing company. It is a diversified energy company and it provides services through Customer Experience Business. It generates electricity through several groupings of natural gas, electricity, trade and assets. It is deemed as New Zealands largest gas and electric retailer, supplying energy to more than 650,000 customers across New Zealand. It focuses on keeping and attracting valuable commercial, residential and industrial customers throughout the country. For thermal generation throughout the country, it has two modern gas fired and two coal or gas fired generating units. In terms of capacity, the Huntly Power Station has the largest one (Genesis Energy Ltd, 2015). The main motive of the company is to appropriately meet the demands of all their customers and for this; it assists them effectively through a customer care center and generates energy at the lowe st cost possible. It also aims to enhance the value of its excess thermal generation capacity during scenarios of higher prices of electricity. Performance evaluation It can be observed from the annual report of Genesis Energy that it reported net profit of $104.8 million in 2015 that is significantly higher than $49.2 million in comparison to 2014. Due to such profits, the company was satisfied that it could pay the estimated final dividend of shareholders amounting to $80 million. It can also be seen that in 2015 there was a decline of $2.3 million in the current assets of the company in comparison to 2014. The reason behind such was because of reduction in inventories and cash. Furthermore, the current liabilities of the company also increased due to excess borrowings by the company. It also depicted an EBITDAF of $344.8 million in the financial year 2015 that is higher than that of $307.8 million in 2014. The reason behind such satisfactory financial performance is because of regular attention towards capital expenditure debts and costs. In terms of net debt, the company witnessed a three percent decrease in the net debt amounting to $937.2 mi llion as at 2015 (Genesis Energy Ltd, 2015). AGL Energy Ltd From more than 175 years of experience, AGL Energy Ltd provides, solar PV, electricity, gas and related products and services to around 3.7 million customers across New South Wales, Queensland, South Australia and Victoria. It is one of the leading integrated energy companies of Australia and the largest ASX listed developer, operator and owner of renewable energy generation in the country. It aims to provide customers with affordable and secure energy but not compromising with the needs of reducing greenhouse gas emissions. In the last years, it has initiated a vertical integration plan by giving more attention to electricity. Due to such plan, it can now concentrate on 10000 MW capacities also. Its widespread power generation portfolio comprises of intermediate and peaking generation plants, spread across renewable sources as well as traditional thermal generation including wind, hydro, solar, landfill gas and biomass (AGL Energy Ltd, 2015). It also invests in and operates producti on and development tenements, natural gas exploration and storage facilities. Performance analysis It can be observed that the wholesale market operations, key generation assets and portfolios of customers portrayed a powerful underlying profit outcome. This depicts that the company focuses on driving value and operational execution through cost and margin discipline at a similar time as the company develops. The operating EBIT of the company increased from $1004 million to $1126 million in 2015 (AGL Energy Ltd, 2015). A major highlight of the company depicts that the regulatory revenues were affected by variations in many significant items including the expenses of assets impairment of main upstream gas and Macquarine Generation Acquisition. The profits of the company increased in the year 2015 in comparison to 2014 which portrays a significant enhancement. Due to such increment, even the expenses of the company gradually increased. Taking into consideration the current assets and liabilities of the company, it can be seen that in 2015, current assets amounted to $3459 million th at is potentially higher than that of $3411 million in 2014. Similarly, the current liabilities of the company also enhanced due to greater borrowings that is from $45 million in 2014 to $443 million in 2015 (AGL Energy Ltd, 2015). In terms of cents, the dividend per share also increased from 63 in 2014 to 64 in 2015. Both the fixed assets and issue share capital also witnessed a growth in 2015. Analysis of the trend Profitability ratio AGL Energy Ltd. Return on Assets Return on Assets is a profitability ratio that indicates the manner in which the assets are utilized (Choi Meek, 2011). From the above computation it is projected that ROA of AGL has declined and this is attributed due to improper performance and utilization of the assets. Net profit margin The net profit margin indicates the profit earned by the company. It highlights the performance in terms of profit. However, it is seen that the net profit margin has declined and this is attributed to addition of new items in the financial statements that have impacted the profit capacity (Christensen, 2011). Genesis Energy Limited Return on Assets The ROA of Genesis has increased indicating that the assets were utilized in an effective hence, a strong increment is witnessed. It is a positive scenario for the company and stresses that the management is performing in an effective manner. Net profit margin The ratio has shown a sudden jump and hence proves that the company has made commendable profit. In comparison to AGL Ltd it has outperform. The strong jump in profit is owing to sharp increase in net income. Liquidity AGL Energy Ltd Current ratio When it comes to liquidity, current ratio is vital as it provides an indication regarding the skill of the company to honor the obligations. The standard ratio is 2:1 (Deegan, 2011). However, in the case of AGL, the ratio has declined and strikes a liquidity issue. This is due to strong increment in current liabilities. Quick ratio Quick ratio is a better representation of the liquidity as it excludes stock and hence it represents that the company can repay the amount without locking in the stock. Standard ratio is 1:1 and the company is just close to it. It denotes a strong liquidity of the company (Kaplan, 2011). Genesis Energy Limited Current ratio Just like AGL Ltd, the current ratio of Genesis has dropped and this can be cited due to high increment in the current liabilities. The ratio is not close to the base ratio and hence, is a high alert for the management. Quick Ratio As per the computation of quick ratio it can be seen that the company is striving to achieve the base ratio and its beneficial for the company in terms of liquidity. Hence, it has shown better ratio as compared to AGL ltd. Solvency Ratio AGL Energy Ltd Debt Equity Ratio The Debt ratio indicates the proportion of debt that is utilized in the company. Higher debt ratio is dangerous for the company because the claims of shareholders will be more (Davies Crawford, 2012). The debt equity ratio of AGL Energy Ltd has dropped indicating less stress on debt and is close to 0.50 which is the ideal ratio. The company has an optimum combination of equity and debt. Equity ratio The equity ratio denotes the reliance on the factor of equity. From the ratio it is observed that the equity ratio has enhanced which is positive news for the company. As per Graham Smart (2012) higher level of equity ratio is beneficial for the company. Genesis Energy Ltd Equity Ratio Genesis energy Ltd has low debt equity ratio and has increased marginally in 2015. It is to be noted that it has more reliance on equity and utilizes a very low level of debt. It can enhance the ratio till .50 so as to use the optimum debt ratio. However, AGL Energy Ltd utilizes the equity and debt in an optimum manner. As per the general notion, an increasing or higher level of equity ratio is best for the company. Genesis has an equity ratio of above 0.50 which is positive in nature (Brigham Daves, 2012). A slight fall can be witnessed in the ratio owing to a drop in the level of total assets. Market performance AGL Energy Ltd Market performance Earnings per share in 2014 96.9 Earnings per share in 2015 96.4 Dividend per share in 2014 63 Dividend per share in 2014 - 64 Genesis Energy Ltd Market performance Earnings per share in 2014 4.92 Earnings per share in 2015 10.49 Dividend per share 6.6 Dividend per share - 8 The market performance of a company is vital because an investor peep to this numbers when it comes to evaluating the company (Brealey et. al, 2011). The Earnings per share of AGL Energy Ltd has declined marginally while the EPS of Genesis has shown a great bounce. In this scenario, Genesis has outperformed. On the other hand, dividends of both the companies are satisfactory and project a strong performance. But, it needs to be noted that the dividend of Genesis has shown better growth. Recommendation In the light of the above discussion it can be said that the result of both the companies are satisfactory and stresses on the strong fundamental factor. But, while recommending it can be said that Genesis has shown remarkable results and is striving for better results. The annual report clearly indicates that it I focus more on development that has enhanced its level. From profitability to market performance it can be said that it has better performances as compared to AGL Energy Ltd. As per the trend, the investment in Genesis will fetch more returns as compared to AGL Energy Ltd. Conclusion The above report clearly stresses on the fact that there is a cut throat competition between AGL Energy Ltd and Genesis Energy Ltd. However, the above report shows that Genesis is better placed in the market and the evaluation is an evidence of that. The selection of Genesis for investment will prove to be profitable as the company is showing rapids signs of development. Further, the expansion mode of Genesis is another factor that needs to be taken into consideration. However, AGL needs to concentrate on few ratios to have a better show. References AGL Energy Ltd 2015, AGL Energy Ltd Annual Report and accounts 2015, viewed 30 August 2016, https://www.asx.com.au/asx/research/company.do#!/AGL Brealey, R., Myers, S. and Allen, F 2011, Principles of corporate finance, New York: McGraw-Hill/Irwin. Brigham, E. Daves, P 2012, Intermediate Financial Management , USA: Cengage Learning. Choi, R.D. and Meek, G.K 2011, International accounting, Pearson . Christensen, J 2011, Good analytical research, European Accounting Review, vol. 20, no. 1, pp. 41-51 Davies, T. and Crawford, I 2012, Financial accounting, Harlow, England: Pearson. Deegan, C. M 2011, In Financial accounting theory, North Ryde, N.S.W: McGraw-Hill. Genesis Energy Ltd 2015, Genesis Energy Ltd 2015 Annual Report and accounts 2015, viewed 30 August 2016, https://www.asx.com.au/asx/research/company.do#!/GNE Graham, J. and Smart, S 2012, Introduction to corporate finance, Australia: South-Western Cengage Learning. Kaplan, R.S 2011, Accounting scholarship that advances professional knowledge and practice, The Accounting Review, vol. 86, no.2, pp. 367383.