Accounting and Business Research

Accounting for Business
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Executive Summary
This report demonstrates the important of gaining an analysis of the different items of the
financial statements of a business entity for evaluation of its financial performance. In this
context, the financial performance of AGL Energy Limited is evaluated with the use of its
financial statements such as cash flows and balance sheet over the last few years. The report has
also adopted the use of ratio analysis technique fro depiction of its financial condition to the
investors. The information from the director’s report related to the management efficiency is also
provided for guiding the decision-making process of investors.
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Contents
Introduction.................................................................................................................................................4
Section 1: Financial Standing of AGL Energy during the past financial years...............................................4
Part 1.1: Profitability position of AGL Energy during the last two years and its comparison with
competitor Origin Energy........................................................................................................................4
Part 1.2: Analyses of cash flow statement of AGL Energy........................................................................7
Part 1.3: Evaluation of financial position of AGL Energy through analyzing the balance sheet...............8
Section 2: Calculation of financial ratios of AGL Energy for last three years..............................................10
Return on Assets:...................................................................................................................................11
Inventory Turnover Ratio:.....................................................................................................................11
Quick Ratio:...........................................................................................................................................12
Price Earnings Ratio:..............................................................................................................................13
Section 3: Explanation of the Management working in the best Interest of AGL Energy Limited for
guiding the decision-making of Investors..................................................................................................13
Analysis of Corporate Governance Statements & Practice of Integrity Policy.......................................13
Management Approach Towards..........................................................................................................14
Risk Management..............................................................................................................................14
Financial Reporting............................................................................................................................15
Information Processing & Accounting functions................................................................................15
Business Operations..............................................................................................................................16
Investments & Investment Activities.....................................................................................................16
Financing & Financing Activities............................................................................................................16
Industry Size..........................................................................................................................................17
Major Players/Competitors...................................................................................................................17
Market Shares of Industry Players.........................................................................................................17
Conclusion.................................................................................................................................................18
References.................................................................................................................................................19
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Introduction
This report depicts an overview of the organizational performance of a selected company
within Australia listed on ASX. The organizational performance is evaluated by examining the
financial standing of the selected company through carrying out the analysis of its profitability
by comparing its current year financial figure with the previous one and also from its competitors
operating within the same industry. Also, the analysis of the cash flow statement is undertaken
for identifying the financial, operating and investing activities of the selected company. Also, the
financial condition of the selected company is evaluated on the basis of the financial figures
presented in its balance sheet. In addition to this, the report has examined the financial
performance of the company with the use of ratio analysis technique by adopting the use of
mainly return on assets, inventory turnover, quick ratio and price-earnings ratio over the last
three financial years. Lastly, on the basis of director’s report, the report has also carried out an
evaluation of the role of management of the selected company acting in its best interest by
adopting the ethical standards for protecting the investor confidence.
Section 1: Financial Standing of AGL Energy during the past financial
years
Part 1.1: Profitability position of AGL Energy during the last two years and its
comparison with competitor Origin Energy
The financial standing of AGL Energy Ltd for the past two years and its comparison with
its competitor Origin Energy is carried out as follows:
Comparison of current financial data with previous financial data
Profit and loss Statement
AGL Energy
Comparison of financial items of current year with financial items of previous year
The amount are shown as $ million
Financial Items 2016 2017 Increase/Decrease
Continuing operations
In
amount in %
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Revenue or net sales
$
11,150.00
$
12,584.00
$
1,434.00 12.86%
Income earned from other sources
$
25.00
$
-
$
(25.00)
-
100.00%
Total Sales revenue
$
11,175.00
$
12,584.00
$
1,409.00 12.61%
Cost of Goods Sold
$
10,979.00
$
11,131.00
$
152.00 1.38%
Gross profit
$
196.00
$
1,453.00
$
1,257.00 641.33%
Share of profits of associates and joint
ventures
$
26.00
$
19.00
$
(7.00) -26.92%
Profit before net financing costs,
depreciation and amortisation
$
222.00
$
1,472.00
$
1,250.00 563.06%
Expenses Related Depreciation and
amortisation
$
(478.00)
$
(484.00)
$
(6.00) 1.26%
Net profit or loss before tax and
interest
$
(256.00)
$
988.00
$
1,244.00
-
485.94%
Income form financing
$
18.00
$
13.00
$
(5.00) -27.78%
Finance Cost
$
(236.00)
$
(237.00)
$
(1.00) 0.42%
Total Financing Cost
$
(218.00)
$
(224.00)
$
(6.00) 2.75%
Profit or loss as reported before tax
$
(474.00)
$
764.00
$
1,238.00
-
261.18%
Income tax expense or benefit
$
67.00
$
(225.00)
$
(292.00)
-
435.82%
Profit or loss reported in income
statement
$
(407.00)
$
539.00
$
946.00
-
232.43%
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$
-
Earnings per Share
$
(0.61)
$
0.81
$
1.41
-
233.06%
(Annual Report: AGL Energy, 2016) (AGL Energy Limited: Annual Report, 2017).
The profitability performance of AGL Energy Limited is better in the year 2017 as compared to
the year 2016. This can be stated on account of the net loss realized by the company before
paying its tax and interest expenses in the year 2016 while it has incurred a profit in the year
2017. This is mainly on account of the increase in the sales revenue realization of the company in
the year 2017 which has contributed to an increase in its gross profit. The earnings per share of
the company is also better in the year 2017 as it has realized profits in the respective year
(Needles and Powers, 2010).
Comparison of profitability of AGL Energy with the profitability of Origin energy
Financial Data
Financial Items
AGL Energy Origin Energy
2016 2017 2016 2017
Amount in $ million
Revenue or Net Sales $ 11,150.00 $ 12,584.00 $ 11,923.00 $ 13,646.00
Net Profit $
(407.00)
$
539.00
$
(589.00) $ (2,226.00)
Gross Profit $ 196.00 $ 1,453.00 $ 2,959.00 $ 2,547.00
Total Assets $ 14,604.00 $ 14,458.00 $ 28,898.00 $ 25,199.00
Shareholders’ Equity $ 7,926.00 $ 7,574.00 $ 14,509.00 $ 11,396.00
Profitability Ratios
Ratios
AGL Energy Origin Energy
2016 2017 2016 2017
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Net Profit Ratio -3.65% 4.28% -4.94% -16.31%
Gross Profit Ratio 1.76% 11.55% 24.82% 18.66%
Return on Equity -5.13% 7.12% -4.06% -19.53%
Return on Assets -2.79% 3.73% -2.04% -8.83%
(Annual Report: AGL Energy, 2016) (AGL Energy Limited: Annual Report, 2017) & (Annual
Report: Origin Energy, 2017)
The comparison of the profitability performance of AGL Energy with the Origin Energy has
revealed that the company financial performance is strong in comparison to the Origin. Origin
Energy profitability performance analyzed on the basis of net profit, gross profit and total assets
is not good as the company has reported financial losses in both the years 2016& 2017.
However, AGL performance for the year 2017 is much better as compared to Origin Energy as
clearly depicted in the above tables (Taparia, 2004).
Part 1.2: Analyses of cash flow statement of AGL Energy
The three major activities presented in cash flow statement of AGL Energy
Activities 2017 2016 Change % Change
Cash provided or used from
Operating Activity $ 891.00 $ 1,186.00 $ (295.00) -24.87%
Cash provided or used from
investing Activity $ (302.00) $ 81.00 $ (383.00) -472.84%
Cash provided or used from
financing Activity $ (687.00) $ (1,274.00) $ 587.00 -46.08%
Net change in cash and cash
equivalents after taking into
account cash flow from all
three activities $ (98.00) $ (7.00) $ (91.00) -1300.00%
(Annual Report: AGL Energy, 2016) (AGL Energy Limited: Annual Report, 2017).
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It can be stated from the overall analysis of cash flow statement of the company over the year
2016-2017 that its cash flow position is much better in the year 2016 as compared to the year
2017. There is a negative percentage change from the cash utilized in the operations and also
from its investment operations. There is also a negative change in cash percentage used in
financing activities and the overall change in the cash equivalents is negative indicating that its
cash position has weakened in the year 2017 as compared to the year 2016.
Part 1.3: Evaluation of financial position of AGL Energy through analyzing the
balance sheet
Information on AGL Energy
Balance Sheet Items 2016 2017
Total non-current liabilities $ 4,125.00 $ 4,153.00
Short term Interest-bearing loans and borrowings $ 22.00 $ 173.00
Total Debt $ 4,147.00 $ 4,326.00
Shareholders’ Equity $ 7,926.00 $ 7,574.00
Interest expenses $ 236.00 $ 237.00
EBIT $ (256.00) $ 988.00
Total Assets $ 14,604.00 $ 14,458.00
Revenue or Net Sales $ 11,150.00 $ 12,584.00
Financial Ratios 2016 2017
Debt ratio 0.28 0.30
Debt to Equity Ratio 0.52 0.57
Times interest earned ratio -1.08 4.17
Asset Turnover Ratio 0.76 0.87
(Annual Report: AGL Energy, 2016) (AGL Energy Limited: Annual Report, 2017).
The significant items in the balance sheet can be evaluated by the use of the above ratios that can
be interpreted as follows:
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 Debt Ratio: There is an increase in the debt ratio of the company for the year 2016-2017.
The clearly indicates that the company is increasing its leverage position at present for
financing its assets.
 Dent-Equity Ratio: The ratio has also increased in the year 2017 in comparison to 2016
reflecting that proportion of debt in comparison to equity in the capital structure of the
company is increasing (Joseph, 2013).
 Times interest earned ratio: The ratio was negative for the year 2016 reflecting the
inability of the company to meet its interest expenses. However, it has improved in the
year 2017 indicating the increase in the capability of the company to meet its interest
obligations.
 Asset turnover ratio: The ratio has improved in the year 2017 as compared to the year
2016 indicating that the ability of the company to realize sales from the use of its asset
base has improved gradually (Makoujy, 2010).
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Section 2: Calculation of financial ratios of AGL Energy for last three
years
Financial Information of AGL Energy
Particulars 2017 2016 2015
Amount in $ millions
Net Profit after tax $ 539.00 $ (407.00) $ 218.00
Total assets $ 14,458.00 $ 14,604.00 $ 15,833.00
Cost of Goods Sold $ 11,131.00 $ 10,979.00 $ 9,759.00
Inventory $ 351.00 $ 414.00 $ 396.00
Average inventory $ 382.50 $ 405.00 $ 293.50
Current Assets $ 3,625.00 $ 3,587.00 $ 3,459.00
Quick Assets $ 3,274.00 $ 3,173.00 $ 3,063.00
Current Liabilities $ 2,731.00 $ 2,553.00 $ 2,373.00
Market price per share (MPS)
(June, 20__) $ 19.70 $ 14.60 $ 12.10
Earnings per share (EPS) $ 0.81
$
(0.61) $ 0.33
(Annual Report: AGL Energy, 2015) (Annual Report: AGL Energy, 2016) (AGL Energy
Limited: Annual Report, 2017).
Ratios Formula 2017 2016 2015
Profitability Ratio
Return on Assets Net Profit after tax/Total Assets 3.73% -2.79% 1.38%
Efficiency Ratios
Inventory Turnover
Ratio
Cost of Goods Sold/Average
Inventory 29.10 27.11 33.25
Liquidity Ratios
Quick Ratio Quick Assets/Current 1.20 1.24 1.29
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Liabilities
Market Ratios
Price Earnings Ratio
Market price per
share/Earnings per share 24.47 -24.13 36.67
Return on Assets: The return on assets ratio is useful for depicting the overall profits realized
by an entity in comparison to the resources consumed. The total income realized by a company
with the use of its asset base is depicted with the use of this ratio. The return on assets ratio of
AGL Energy Limited has increased significantly from the year 2015-2017 depicting that its
efficiency to realize profits from the use of asset has improved. However, the ratio was worst for
the company in the year 2016 as a negative ratio depicts the financial loss and negative returns
from asset utilization (Palepu and Healy, 2007).
2017 2016 2015
-3.00%
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
Return on Assets
Percentage
Inventory Turnover Ratio: The ratio depicts the ability of a company to realize sales from
its average inventory level. The inventory turnover ratio of the company is adequate for the years
2015-2017 indicating that it is realizing sales from the use of its inventory frequently. However,
the inventory turnover ratio of the company has significantly decreased over the financial period
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2015-2017 indicating that its efficiency to realize sales from inventory is decreasing which can
impact its profitability position in the future context (Tracy, 2012).
2017 2016 2015
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
Inventory Turnover Ratio
In times
Quick Ratio: The ratio is used for measuring the ability of a company to meet it financial
obligation that is due within a year. It can be calculated by measuring its most liquid asset base
that can be used for meeting the short-term obligations. The company has maintained a good
quick ratio of greater than 1 over the financial period of 2015-2017 which means that it is having
sufficient liquid resources for meeting its short-term obligations (Fabozzi and Peterson, 2008).
2017 2016 2015
1.14
1.16
1.18
1.20
1.22
1.24
1.26
1.28
1.30
Quick Ratio
In times
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Price Earnings Ratio: The ratio indicates the relation between the stock prices of a company
in relation to its earnings per share. It depicts the potential money to be invested in a company
for realizing the expected level of earning. The price to earnings ratio was negative for the
company in the year 2016 indicating that the company was in a state of financial loss during the
phase. However, it has improved in the year 2017 and has become positive depicting the return
of confidence of investors to invest in the company (Mohana, 2011).
2017 2016 2015
-30.00
-20.00
-10.00
0.00
10.00
20.00
30.00
40.00
Price Earnings Ratio
Section 3: Explanation of the Management working in the best Interest of
AGL Energy Limited for guiding the decision-making of Investors
Analysis of Corporate Governance Statements & Practice of Integrity Policy
AGL Energy Limited is an ASX listed entity and therefore need to develop and
implement a corporate governance framework as per the ASX principles. ASX Corporate
governance Council has published standard set of principles and recommendations guiding the
relevant disclosure of the company in relation to its governing framework for maintaining
honesty and transparency in its business operations. AGL has adopted an effective corporate
governance framework for maintaining ethical standards in its business operations to guide the
behavior of the management personnel and employees (2017 Corporate Governance Statement,
2017). The governance framework of the company can be depicted by the help of following
diagram:
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(Source: https://www.agl.com.au/about-agl/who-we-are/our-company/corporate-governance)
AGL has established its Code of Conduct to be applied for carrying out its business
activities. The code has been developed for providing the standards of responsibility that the
organizational members should take into consideration for carrying out their job roles. The code
of conduct ensures the commitment of AGL to act with honesty and integrity in carrying out its
business operations (2017 Corporate Governance Statement, 2017).
Management Approach Towards
Risk Management
AGL Energy Limited face wide type of material risks due to nature of its business
operations. In this context, the company is highly dedicated towards the adoption of a risk
management model to develop the business procedures that takes into account the approaches
towards risk identification and mitigation. The risk management policy of the company has
established the objectives for identification of risk in advance by stating the responsibilities of
the management personnel in context of risk management. The risk management program of the
company is developed as per the international standards of ISO 31000. The risk management
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program is specifically aimed at examination and control of all the operational and financial
activities to ensure the safe and reliable operations of power generation plants (AGL Energy
Limited: Annual Report, 2017). The risk management model depicting the lines of defense
implemented within the company can be depicted as follows:
(Source: https://www.agl.com.au/about-agl/who-we-are/our-company/corporate-governance)
Financial Reporting
The company has adopted and implemented a continuous disclosure policy for ensuring
that the financial information is provided to the end-users on a continuous basis. The disclosure
policy is specifically meant for the purpose of developing and presenting the financial reports on
an annual basis by the company to its end-users for guiding their decision-making process. Also,
the integrity in the financial reporting of the company is maintained by its continuous review and
evaluation by the Audit Risk & Management committee (ARMC). It reviews the disclosures
made in the report and provides the recommendation to the Board on approving the financial
reports (AGL Energy Limited: Annual Report, 2017).
Information Processing & Accounting functions
The company for ensuring the proper flow of communication across its organizational
levels has established an effective organizational structure clarifying the roles and
responsibilities of Board, management and employees. The accounting functions are undertaken
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by the accounting team lead by the Chief Financial Officer (CFO). CFO is responsible for hiring
and recruiting the competent members within the accounting team efficient in carrying out the
various management accounting roles and responsibilities. The remuneration committee is
responsible for carrying out a review of the expertise and skills of the accounting personnel on a
regular basis for determining their variable component of pay (Burger, Graeber and Schindlmayr,
2008).
Business Operations
AGL Energy Ltd is recognized to a leading energy company within Australia that is
involved in both the production and distribution electricity and gas for residential and
commercial purpose. The major business operations of the company includes delivering
electricity, gas, solar and renewable energy services to its consumers across Australia and New
Zealand. The company is attributed to be a recognized player in the energy and utility industry of
Australia. The company is highly committed for providing innovative and technology solutions
to the energy needs and requirements of the customers (AGL Energy Limited: Annual Report,
2017).
Investments & Investment Activities
The major investment is incurred by the company in purchase of fixed assets such as
property, plant and equipment. Also, it is investing in its associates and carrying out joint venture
for promoting business expansion and growth. The investment activities of the company include
the ahs invested by it for promoting its expansion in the energy markets through development of
new and innovative energy products and services (Palmer, 2013). The investment programs of
AGL are valued at $ 1 billion in the year 2017 (AGL Energy Limited: Annual Report, 2017).
Financing & Financing Activities
The major financing activities of the company includes payments incurred for buying
back its shares issued, issue of shares to non-controlling interests, cash realized due to use of
borrowings and repaid, payments made for acquisition of non-controlling interests and payment
of dividends. The overall financing cash flow incurred by the company for the financial year
2017 is $687 million (AGL Energy Limited: Annual Report, 2017).
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Industry Size
AGL Energy Ltd carries out its operations in the energy sector of Australia and its overall
revenue is realized to be $50 billion on an annual basis. The annual growth of the industry is
estimated to be 5.3% and is known to provide employment to about 10,000 people across
Australia, its target market (Electricity Retailing - Australia Market Research Report, 2017).
Major Players/Competitors
AGL Energy Limited operates in a highly competitive energy market of Australia with
major players being Origin Energy and APA group along with AGL Energy Limited. The major
companies operating within the sector are competing with each other on the prices of its energy
retailing products and services. The companies are aiming to reduce the price of its energy
products and services for expanding their market share by achieving customer satisfaction
(Competition In Australia Electricity Retailing, 2017).
Market Shares of Industry Players
The market share possessed by different players operating within the industry can be
depicted as follows:
(Source: http://www.a2zfinance.com.au/A2ZWeb/Investment/aus_shares.htm)
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Conclusion
The report concludes that financial performance of AGL Energy Limited for the year
2017 is better as compared to the year 2016. This has been reflected from gaining an analysis of
its financial statement for the year 2015-2017. Also, the company has adopted an effective
governing framework for guiding the management to act in the best interest for promoting its
sustainable growth.
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References
2017 Corporate Governance Statement. 2017. AGL Energy Limited. [Online]. Available
at: https://www.agl.com.au/about-agl/who-we-are/our-company/corporate-governance [Accessed
on: 25 May 2018].
AGL Energy Limited. 2017. Annual Report. [Online]. Available
at: https://www.agl.com.au/-/media/agl/about-agl/documents/media-center/asx-and-media-
releases/2017/170825-agl-207-annual-report-asx.pdf?
la=en&hash=E27FEABC8A8FE5B618ACCF0966A70D6628B29950 [Accessed on: 25 May
2018].
Annual Report. 2015. AGL Energy. [Online]. Available at:
https://www.agl.com.au/-/media/agl/about-agl/documents/investor-centre/
150826_annualreport_1466512.pdf?
la=en&hash=7F7A235F303D884AC975A52454EEFEA7E8236D8D [Accessed on: 24 May,
2018].
Annual Report. 2016. AGL Energy. [Online]. Available at:
https://www.agl.com.au/-/media/agl/about-agl/documents/investor-centre/
150826_annualreport_1466512.pdf?
la=en&hash=7F7A235F303D884AC975A52454EEFEA7E8236D8D [Accessed on: 24 May,
2018].
Annual Report. 2017. Origin Energy. [Online]. Available at:
https://www.originenergy.com.au/content/dam/origin/about/investors-media/annual%20review
%202017/AnnualReport_FY2017.pdf [Accessed on: 24 May, 2018].
Burger, M., Graeber, B. and Schindlmayr, G. 2008. Managing Energy Risk: An Integrated View
on Power and Other Energy Markets. John Wiley & Sons.
Competition In Australia Electricity Retailing. 2017. [Online]. Available
at: https://www.energymatters.com.au/renewable-news/electricity-prices-australia-em5949/
[Accessed on: 25 May 2018].
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