Financial Analysis of British Gas: Industry Highlights, Background, and Ratio Analysis

This report provides a financial analysis of British Gas, including industry highlights, background information, and ratio analysis. The report includes liquidity, profitability, solvency, and activity ratios, along with recommendations for improving the company's financial position.

Economics
and
Business

EXECUTIVE SUMMARY
The financial statement is the important part of any enterprise as it reflects the health of
the organisation in terms of facts and figures which are reflected on the face of their investors.
These statements are analysed by the internal and external user of the business concern so that
they can develop understanding about the performance of the entity over the accounting period.
The following report showcase about the UK companies that is British Gas and highlights that
how they analyse their business performance in the financial year after evaluating their financial
statements. In this report multiple interpretation has been carried out with respect to financial
statements items reflecting in the balance sheet and thereafter the strong recommendation has
been carried forward to the organisation.

Contents
EXECUTIVE SUMMARY.............................................................................................................2
INTRODUCTION...........................................................................................................................4
TASK...............................................................................................................................................4
1. Industry highlight with respect to the Company:...............................................................4
2. Background of British Gas from the Beginning:................................................................5
3. Analysis of Financial Figures of British Gas:....................................................................5
4. Ratio Analysis along with interpretation:...........................................................................5
5. Recommendation:.............................................................................................................10
REFERENCES..............................................................................................................................12

INTRODUCTION
Business economics relates to applied economics that studies about the financial,
environmental, and market related issued faced by the business concern. Business analysis means
analysing the performance of the entity by applying management and financial tools so that
performance of the organisation cab be judged and evaluated accordingly. After implementing
such strategies, the organisation would achieve the next level height that provides then
competitive edge in the market (Afanasyeva, Pokrovskaia, & Grishakina, 2021). It the core duty
of the organisations management to manage the resources of entity in such manger so that they
will effectively and efficiently utilized. This report highlights about the British Gas Plc. based in
United Kingdom who is providing energy services as their entity’s product which includes gas
and electricity segment. They are considered as best companies of UK who are working in gas
and electricity segment. They are providing the LPG gas to household by installation of Pipes in
their houses which are installed by other organisations. It is one of the ancient firms of UK and
according to market surveys and information gathered from the print media and journals they are
working in new heights as their net profits increases multiple times compares in previous years’
data in 2020. In this report financial ratios have been calculated and analysed accordingly
compare to previous years in order to check their performance. At the end of this report certain
recommendation has been provided to management of the entity that how they can improve their
business cycle through implementation of regular feedback so that their product quality raises at
higher standard.
TASK
1. Industry highlight with respect to the Company:
The UK market is completely changed over a decade as there are significant changes taken
place at industry and government level. Energy sector mainly focuses on the final price that is
delivered at the door step of household with respect to Gas and electricity (Barbieri, Bragoli, &
Marseguerra, 2020). There are various policy initiatives has been taken place with the increased
competition in order to control the price of gas and electricity to an acceptable level. Various
economic factors also affecting the business profits however energy industry regularly supported
by government in form of various subsidies in regular interval of time.

2. Background of British Gas from the Beginning:
British Gas in the house hold name as it is very popular and oldest energy and household
product delivered firm of UK as it serves almost 12 to 15 Million household suppliers and they
are one of the leading electricity and gas provides to residential in UK market (Clements, & Si,
2019). This organisation came into force in the year 1812 as Gas light and Coke entity, however
they are renamed as British gas during the year 1973. As far as firm financial are concerned they
are making the profit of Pound 27 Million approx. in the financial year 2019-2020. The firm has
been merged with Centrica plc UK based energy company.
3. Analysis of Financial Figures of British Gas:
The organisation has made several changes in their supply chain management so that they
can get competitive advantage over the other firms so that revenues multiply accordingly. They
concern is also working on continuous development so that they can improve their business
model by incorporating factors such as liberation, pellucidity etc. During pandemic they face
significant challenges in order to supply their product to household, therefore post covid they
implement multiple changes in the structure of working so that they can meet out the demand
accordingly in the dynamic environment (Dutkowsky, & VanHoose, 2020). Due to covid 19,
restriction imposed in th UK which affect their 2020-2021 financial performance however they
manage to hold their business at that phase. They management implement social distancing
measures at the workplace so that operational working does not get affected.
4. Ratio Analysis along with interpretation:
 Liquidity Ratio: Liquidity ratio indicates the repayment capacity of the business concern
over the period of time. This ratio explains that whether the enterprise is capable enough
to make payment to their debt holders on due course or not. Investors also keen to invert
their funds and resources in those company whose liquidity is sound at it reflect the
strength of the entity (Elena, Ionela, & Petre, 2019). Liquidity simply means the ability of
company to make payment to creditors and other debtholders. The sound liquidity is
useful for entity in order to expand their business activities as they have sufficient funds
to invest as their operating cash flows are positive since their liquidity is sound.
The following is the calculation of liquidity ratios of British Gas for the year ended 2018,
2019, and 2020.
Current Ratio:

Current Assets / Current Liability’s
2018,
= 8,666 / 8,382
= 1.033
2019,
= 8,171 / 8,867
= 0.921
2020,
= 6,301 / 5,679
= 1.109
Interpretation:
On the above of above ratios, the conclusion cab be drawn that that over the period of 3 years
mentioned above the company has performed well in terms of liquidity except in the year 2019
where the liability of the entity are more than their assets. On comparing with the industry it is
not favourable which is ideally 2:1. When compared to industry there are not able to contribute
near about that which needs to be revaluated accordingly. If the current obligation are more than
the assets, then they company needs to repay them by obtaining funds from the market that
indulge another risk to them in terms of loan and interest payment. It is important for the entity
to relocate its working capital requirement and debtors and creditors collection period that injects
regular cash in the entity. The above ratio indicates that they are at PAR and don’t have
sufficient surplus in invest thereafter in the capital projects or in the new process an organisation
undertook.
 Profitability Ratio: Profitability ratio highlights the performance of the company
throughout the accounting year (Hidayat, Ardi, & Herawati, 2019). Further profitability
ration denotes that how well the enterprise is utilising their resources in order to generate
profits for the stake holders and other persons associated with the entity. Profits can be
used by the entity for future growth of entity or cab be distributed to shareholders so that
shareholders needs and expectation can meet out.
Net Profit Operating Ratio:
Operating Profit / Revenue * 100

2018,
= 987 / 23304 * 100
= .04 %
2019,
= -849 / 22674 * 100
= - .04 %
2020,
= -362 / 12249 * 100
= -.03 %
Interpretation:
From the above ratio the interpretation can be drawn that the organisation is not
generating profits in the above years. In the year 2019 and 2020 they are incurring losses and in
2018 they are just at Par. The reason for such incompetence cab be the revenue decline or
emergence of expenses over the period of time which are not managed by the core management
team of entity. In order to earn sufficient profits for the employees and stakeholders it important
for them to redefine their marketing strategy so that sales volume can be increased. The reason
for such decline can be Covid 19 but this cannot be considering as an excuse for those losses as
not only them the world suffers from such pandemic.
1. Return on Investment:
Net Profit before Interest, Tax and Dividend / Capital Employed * 100
2018,
= 987 / (20557 – 8382) * 100
= 987 / 12175
= 8.10%
2019,
= - 849 / (18154 – 8867) * 100
= - 849 / 9287
= - 9%
2020,
= - 362 / (17119 – 5679) * 100
= -362 / 11440

= - 3%
Interpretation:
On the basis of above calculation, the judgement can be made that the organisation is gaining
the sufficient amount of return 2018 from the assets they incorporate in the business. But in 2019
and 2020 they are regularly incurred the losses and shareholder’s expectation does not meet the
level they are expecting in 2019 onwards. Such downfall directly influences by the pandemic
that is the reason the entity reduces their losses in 2020 by 6% as compared to previous year. It is
necessary for the business concern to focus more on advancement and technological changes so
that during Covid Phase also they can generate sufficient outcomes.
 Solvency Ratio: Solvency ratio reflects the ability of the entity to repay their long term
commitment when they become due for the repayment (Jüttler, & Schumann, 2019).
Solvency ratio reflects the payment capacity of the organisation to their debt holders and
other creditors. There is situation where the performance of the company is not up to
mark and that time solvency ratio interpretation will provide the complete overview of
the organisational standing in the industry.
The below is the calculation Metrix of debt equity ratio as part of solvency ratio over the
period of three years that is 2018,2019 and 2020 as under: -
Debt Equity Ratio:
Debt / Equity
2018,
= 16609 / 3145
= 5.28 times
2019,
= 16359 / 1212
= 13.49 times
2020,
= 15737 / 957
= 16.44 times
Interpretation:

The debt equity ratio of the entity is not favourable in the above years as it showcases the risk
in the organisation. As per industry norms the debt should not be more than double the equity.
The more the debt the more the organisation is considered as risky. On the above calculation the
debt is more than 2 in all the years that is not good for the organisation in the long run as they are
not generated sufficient profits and if the debt increase then they are not able to pay their interest
itself. The ratio between debt and equity must be maintained as 2:1. Sometimes incorporating
more debt will be tougher for the business to repay the loan and leads to bankruptcy or
insolvency of the enterprise.
 Activity Ratio: Activity ratio shows the performance of the entity especially considering
their operational business in the financial year (Kindhäuser, & Schumann, 2019). This
ratio indicates the performance of the entity in terms of utilisation of assets and resources
in the effective manner. This ratio helps the business to ensure that how they are utilising
their assets which generates profit for them over the period of years. The below table
shows activity ratio of the entity for the period ending 2018, 2019, and 2020: -
1. Debtors Turnover Ratio:
Accounts Receivable / Credit Sales * 365
2018,
= (5543 / 23304) * 365
= .237 * 365
= 86.50 Days
2019,
= (4839 / 22674) * 365
= .213 * 365
= 77.70 Days
2020,
= (2801 / 12249) * 365
= .228 * 365
= 83.20 Days

2. Creditor Turnover Ratio:
Accounts Payable / Credit Purchases * 365
2018,
= (6207 / 16320) * 365
= .380 * 365
= 138.70 Days
2019,
= (5533 / 15795) * 365
= .350 * 365
= 127.75 Days
2020,
= (114 / 8498) * 365
= .013 * 365
= 4.75 Days
Interpretation:
From the above calculation the interpretation can be drawn that higher accounts
receivable will affect the working capital cycle of the organisation as seen in the above
calculation. The accounts receivable on an average is 82 days in the above three yeas which
indicates that debtors are making payment to the organisation after 82 days when they purchase
goods and services from the entity. The creditors turnover ratio is better in 2018 and 2019 as the
company is making payment in 125 days plus to them however in 2020 it is reduced to 4.75
days. The reason for that is during covid 19 pandemic supplier and creditor are not giving much
credit to the organisation as thy are short of cash.
5. Recommendation:
The following recommendation is made to British Gas so that they can improve their working
positioning and profitability accordingly:
 Business concern in order to improve the liquidity position tries to reduce its current
liabilities and also tries to increases their current assets. A firm which have current assets
more than twice of its current liabilities are termed as good.

 Company already have raised significant amount of equity from the market. Thus now
company requires more capital for the purpose of expansion, so organization can arrange
it with the use of debts.
 Firm incurs a significant amount of non-operating expenditure in their business
operations. They need to reduce their non-operating expenses in order to increase their
Net-Profit margin of the business. So that they can focus on their core activities that will
help in maximisation of shareholder’s wealth.
CONCLUSION
From the above report it can be concluded that the business discussed in the following case
is British Gas. The business concern is Gas Service Provider. Ratios are calculated to know the
financial position. There are mainly 4 types of ratio which are liquidity ratio, profitability ratio,
solvency ratio and activity ratios which are used to provide the data of the company to the
external users. External users mean the individual whom have direct or indirect relation with the
business organisation. These includes banks, future investors, angel investors, etc. It can be seen
that the business concern has suffer a lot from the Covid Situation. From the report it can be seen
that it plays an important role in positioning company in the market place. Companies evaluate
their performance by comparing the current data with the previous year data. Recommendation
are providing to improve the position of the business and make plans according to the suggested
means and improve their financial position

REFERENCES
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