Company Performance Analysis: Origin Energy

This report examines the financial performance of Origin Energy through ratio analysis, cash management analysis, risk analysis, and dividend performance. It analyzes the profitability and operational efficiency ratios, sensitivity analysis, marketable securities, and systematic and unsystematic risks. The report concludes that the company is not recommended for investment based on its dividend payout and earnings per share ratio.

Company Performance Analysis: Origin Energy
1

Abstract
This report has been prepare din the context of examining the annual reports of a selected
ASX listed entity over the past three financial years. As such, it has initially discussed the
operation and comparative advantage of the selected company. It has them undertaken the
examination of its financial performance over the period by calculation and interpretation of the
profitability and operational efficiency ratios. The sensitivity analysis has also been done to
evaluate the market sensitivity of the company. This is followed by calculation of dividend
payout ratio, identification of marketable securities and examination of the systematic and
unsystematic risks related with the business operations. It has been indicated that the company is
not in a good state of profitability in the present and is not recommended to the investors to
invest within the company on the basis of its dividend payout and earnings per share ratio.
2

Contents
Part I: Introduction...........................................................................................................................4
Part II: Financial Analysis of selected company (All these parts will provide in detail in complete
file)...................................................................................................................................................4
2.1: Description of the company..................................................................................................4
2.2: Use of Ratio Analysis to evaluate the financial performance of Origin Energy..................5
Profitability Ratios of Origin Energy.......................................................................................5
Operating Efficiency Ratios.....................................................................................................8
2.3: Management of cash through of marketable securities by Origin Energy..........................10
2.4: Sensitivity Analysis of the given data.................................................................................11
2.5: Risk Analysis (Systematic and Unsystematic Risk)...........................................................16
Systematic risks......................................................................................................................17
Unsystematic risk...................................................................................................................18
2.6: Dividend Payout Ratio and dividend policy adopted by Origin Energy............................19
Part III: Recommendation Letter...................................................................................................19
Part IV: Conclusion.......................................................................................................................20
References......................................................................................................................................21
Appendix........................................................................................................................................22
3

Part I: Introduction
Potential investor’s require detailed examination of the company financial performance
before making the valuable decision of investing the funds and becoming the shareholder. In
order to analyse the company financial performance there is need to evaluate lot of financial data
present in the annual reports of the company. It is the responsibility of company’s management
to prepare and publish their annual reports so that investors can use them for analyzing the
financial performance of the company. Investment decision requires investing of current funds
into the long term project to earn the best holding period returns and it is the reason why
evaluation of financial information becomes very important for success of such investment
opportunities. The conception of financial information implies all such information that have
been presented in the audited financial statements of an organization that can be used to ascertain
the financial performance and financial position of such company which investors seeks to make
investment. So it is highly important that appropriate financial tool must be used to evaluate the
financial performance of the company.
The purpose of this report is to analyse the financial performance of one of company
listed on ASX. The aim is to provide the investment advice to potential the investor who seeks to
make investment in the selected company. The company selected for the purpose of analysis is
Origin Energy. Origin Energy deals electricity, natural gas, solar, and LPG and this company is
listed on ASX. Comprehensive examination of the firm’s financial performance has been
performed based on the latest financial statements of Origin Energy. Annual reports of last three
years has been extracted from the investor’s relation section of the company and based on that
financial analyse has been performed. Financial tools used to evaluate the financial statements of
Origin Energy include ratio analysis, cash management analysis, risk analysis and dividend
performance.
Part II: Financial Analysis of selected company (All these parts will provide in detail in
complete file)
2.1: Description of the company
Origin Energy is a publicly listed energy company of Australia that has been
headquartered within Sydney and is traded on Australian Stock Exchange (ASX). It is an
4

integrated energy company that is involved in large-scale exploration, production, generation and
sale of energy product and services to domestic and commercial use within Australia. The core
business activities of the company include retailing of energy products and supplying the
customers electricity, natural gas, LPG and solar. It is also involved in creating renewable energy
and as such is continually seeking investment within wind, solar and storage technologies. It is
also emphasizing towards exploring the reserves of natural gas for developing it as a future
source of energy (Who we are: Origin Energy, 2017).
The company has attained a leading position within the energy sector of Australia
involved in providing electricity to about 4.2 million customers. It aspires to attain number one
position within the renewable energy sector of Australia by continuously focusing on reducing
its carbon footprint through investing in exploration and creation of renewable energy products.
It has launched its carbon reduction scheme within the year 2007 to achieve reduction in its
carbon emission and ensuring the environment protection. In this context, it has also acquired
Eraring Energy, the largest power station of Australia and its cogeneration business provides
low-carbon energy products to the customers within Victoria. The geographic foot print of the
company extends to Australia and New Zealand. The company is a recognized member of the
‘We Mean Business’ coalition that emphasizes on taking adequate action on climate change. IT
has also become the first energy company within Australia in the financial year 2015 to sign up
seven commitments in regards to climatic changes. The progress made by the company in the
key areas for monitoring the climatic changes has been provided within the public disclosures.
The progress made by the company in reducing its carbon footprint and developing energy
products through renewable sources have enabled it to gain competitiveness within the energy
sector of Australia. The natural gas portfolio of the company also enables it to achieve a core
competency within the energy sector of Australia (Who we are: Origin Energy, 2017).
2.2: Use of Ratio Analysis to evaluate the financial performance of Origin Energy
Profitability Ratios of Origin Energy
Financial Data used to calculate profitability ratio
Financial Items 2015 2016 2017 2018
Amount in $ Million
Net profit after tax $ $ $
5

(576.00) (2,223.00) 221.00
Net Sales
$
11,923.00
$
13,646.00
$
14,604.00
Shareholder's equity
$
14,159.00
$
14,530.00
$
11,418.00
$
11,828.00
Average shareholder's
equity
$
14,344.50
$
12,974.00
$
11,623.00
Total Assets
$
33,367.00
$
28,898.00
$
25,199.00
$
24,257.00
Average total assets
$
31,132.50
$
27,048.50
$
24,728.00
Profitability Ratio
Ratios Formula 2016 2017 2018
Net profit ratio Net profit/Sales -4.83% -16.29% 1.51%
Return on equity
Net profit after
tax/Average shareholder's
equity
-4.02% -17.13% 1.90%
Return on total assets Net profit after
tax/Average total assets -1.85% -8.22% 0.89%
(Origin Energy: Annual Report, 2016); (Origin Energy: Annual Report, 2017) and (Origin
Energy: Annual Report, 2018)
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2016 2017 2018
-20.00%
-15.00%
-10.00%
-5.00%
0.00%
5.00%
-4.83%
-16.29%
1.51%
-4.02%
-17.13%
1.90%
-1.85%
-8.22%
0.89%
Profitability Ratio of Origin Energy
Percentage
The profitability position of Origin Energy can be analyzed by the use of following ratios:
 Net profit ratio: The ratio is used for assessing the profits realized by a company in
comparison to the net sales realized. It can be said from analyzing the trend of the ratio
for the company over the last three years that its net profits have improved over the
period of time and have became from negative to positive. However, it can be said on the
basis of negative trend of the ratio for the company over the financial year 2016-2017
that it is having high operational expenses as compared to net sales. As such, it needs to
place measures for reducing the operational expenses to improve the profits realized
(Brigham and Michael, 2013).
 Return on Equity (ROE): It provide a depiction of the rate of return realized by the
company on its shareholder investments. There is negative trend maintained for ratio in
the financial years 2016-2017 for the company which depicts that is not able to provide
any profits on the shareholder investments. However, the ratio has depicted an overall
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increase from -4.02 % to 1.90% for the company over the period which means that it is
able to provide positive return to the shareholders only in the year 2018. In this context,
the company is suggested to reduce the cost of debt for providing positive returns to the
shareholders (Bragg, 2010).
 Return on Assets (ROA): The ratio depicts the returns realized by a company over the use
of its asset resources. The ratio has depicted a negative trend over the year 2016-2017 but
has reflected positive results for the financial year 2018. This depicts that the company is
not able to derive any returns on its assets resources over the year 2016-2017 but have
improved the capability of generate profits from its assets in the eyar2018. However, it
needs to improve its capability to derive profits from the effective use of assets to
improve its long-term profitability position (Reilly & Brown, 2011).
Operating Efficiency Ratios
Financial Data used to calculate operating efficiency ratio
Financial Items 2015 2016 2017 2018
Amount in $ Million
Net Sales
$
11,923.00
$
13,646.00 $ 14,604.00
Account Receivables
$
2,085.00
$
1,945.00
$
2,278.00 $ 2,537.00
Average account
receivable
$
2,015.00
$
2,111.50 $ 2,407.50
Total Assets
$
33,367.00
$
28,898.00
$
25,199.00 $ 24,257.00
Average total assets
$
31,132.50
$
27,048.50 $ 24,728.00
Cost of Goods Sold
$
8,964.00
$
11,099.00 $ 11,674.00
Inventory
$
239.00
$
248.00
$
138.00
$
196.00
Average Inventory
$
243.50
$
193.00
$
167.00
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Operating Efficiency Ratios
Ratios Formula 2016 2017 2018
Inventory Turnover ratio Cost of goods sold/Average
inventory 36.81 57.51 69.90
Account Receivable turnover ratio Net sales/Average account
receivables 5.92 6.46 6.07
Asset Turnover ratio Net Sales/Average total
assets 0.38 0.50 0.59
(Origin Energy: Annual Report, 2016); (Origin Energy: Annual Report, 2017) and (Origin
Energy: Annual Report, 2018)
2016 2017 2018
0.00
10.00
20.00
30.00
40.00
50.00
60.00
70.00
36.81
57.51
69.90
5.92 6.46 6.07
0.38 0.50 0.59
Operating Efficiency Ratios
Times
The operational efficiency of Origin Energy has been analyzed with calculation of
following ratios:
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 Inventory turnover ratio: The ratio depicts the efficiency of a company to replace its
inventory level. It can be stated from analyzing the ratio trend for Origin Energy for the
past three years that it has depicted an increase from 36.81 to 69.90. This reflects that it is
able to continuously replace its inventory in regular period of time and thus is able to
reduce the cost of holding the inventory that would help it to improve its profitability
position (Moles & Kidwekk, 2011).
 Accounts Receivable Turnover Ratio: The ratio depicts the efficiency of the company for
realizing its payments from its debtors on outstanding invoices or bills. The ratio for
Origin Energy has depicted an increase from 5.92 to 6.07 over the financial period 2016-
2018 which is good for the future growth prospects of the company as it is able to
maintaining sufficient flow of cash for meeting its financial obligations by regularly
collecting the money on its credit sales (Krantz, 2016).
 Asset Turnover ratio: The ratio depicts the ability of a company to use its assets for
generating sales and revenue. The ratio has depicted an increase from 0.38 to 0.59 over
the year 2016-2018 which means that it is improving its efficiency to realize returns on
its assets. However, the ratio is less than 1 over the period which means that it need to
improve its capability to utilize asset base to produce sales and generating profits
(Schlichting, 2013).
2.3: Management of cash through of marketable securities by Origin Energy
Marketable securities can be regarded as the short-term investments that are
incurred by a company with the use of its cash resources. The securities are regarded as quick
assets of a company that can be sold quickly and transferred into cash for meeting the short-term
financial liabilities of a company as soon as they become due (Zimmerman & Yahya-Zadeh,
2011). The marketable securities as analyzed from the balance sheet of the company are
categorized as assets held for the sale and cash equivalents. The company has not incorporated
the use of any assets held for sale in the financial year 2018 but has the presence of it in the
current assets for the financial year 2016-2017. The assets that are related to the divestment of
the conventional upstream business have been falsified for sale and these are recognized at cost.
The marketable securities include cash and cash equivalents mainly as they can be used for
releasing cash on quick basis (Origin Energy: Annual Report, 2017 & Origin Energy: Annual
Report, 2018).
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.
2.4: Sensitivity Analysis of the given data
Data Given
Project Life 4
Cost of Equipment $ 2,000,000.00
Reisdual Value $ 200,000.00
Depreciation Method Straight Line
Life of Equipment 4
$ 450,000.00
Initial Working Capital $ 600,000.00
Recovery of working capital $ 600,000.00
Selling Units per year 300000
Selling Price $ 20.00
Variable Cost $ 12.00
Fixed Cost $ 300,000.00
Discount Rate 10%
Depreciation of Equipment per
year
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Particulars Year 0 Year 1 Year 2 Year 3 Year 4
Cash Inflows
Selling Units 300000 300000 300000 300000
Selling price 20.00$ 20.00$ 20.00$ 20.00$
Net Cash Inflows 6,000,000.00$ 6,000,000.00$ 6,000,000.00$ 6,000,000.00$
Cash Outflows
Variable Cost 3,600,000.00$ 3,600,000.00$ 3,600,000.00$ 3,600,000.00$
Fixed Cost 300,000.00$ 300,000.00$ 300,000.00$ 300,000.00$
Depreciation 450,000.00$ 450,000.00$ 450,000.00$ 450,000.00$
Total Cash outflows 4,350,000.00$ 4,350,000.00$ 4,350,000.00$ 4,350,000.00$
Cash flows before tax 1,650,000.00$ 1,650,000.00$ 1,650,000.00$ 1,650,000.00$
Less: Tax @ 30% 495,000.00$ 495,000.00$ 495,000.00$ 495,000.00$
Cash Flows after tax 1,155,000.00$ 1,155,000.00$ 1,155,000.00$ 1,155,000.00$
Add: Depreciation 450,000.00$ 450,000.00$ 450,000.00$ 450,000.00$
Cash Flows before
depreciation after tax 1,605,000.00$ 1,605,000.00$ 1,605,000.00$ 1,605,000.00$
Initial Equiment Cost (2,000,000.00)$
Salvage Value 200,000.00$
Working Capital
Initial Requirement (600,000.00)$
Recovery 600,000.00$
Net Cash Flows (2,600,000.00)$ 1,605,000.00$ 1,605,000.00$ 1,605,000.00$ 2,405,000.00$
Statement of Cash flows
Years Cash flows PVF @ 10% PV @ 10%
0 (2,600,000.00)$ 1.000 (2,600,000.000)$
1 1,605,000.00$ 0.909 1,459,090.909$
2 1,605,000.00$ 0.826 1,326,446.281$
3 1,605,000.00$ 0.751 1,205,860.255$
4 2,405,000.00$ 0.683 1,642,647.360$
NPV 3,034,044.806$
Project NPV when there is no change in value drivers
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Particulars Year 0 Year 1 Year 2 Year 3 Year 4
Cash Inflows
Selling Units 270000 270000 270000 270000
Selling price 20.00$ 20.00$ 20.00$ 20.00$
Net Cash Inflows 5,400,000.00$ 5,400,000.00$ 5,400,000.00$ 5,400,000.00$
Cash Outflows
Variable Cost 3,240,000.00$ 3,240,000.00$ 3,240,000.00$ 3,240,000.00$
Fixed Cost 300,000.00$ 300,000.00$ 300,000.00$ 300,000.00$
Depreciation 450,000.00$ 450,000.00$ 450,000.00$ 450,000.00$
Total Cash outflows 3,990,000.00$ 3,990,000.00$ 3,990,000.00$ 3,990,000.00$
Cash flows before tax 1,410,000.00$ 1,410,000.00$ 1,410,000.00$ 1,410,000.00$
Less: Tax @ 30% 423,000.00$ 423,000.00$ 423,000.00$ 423,000.00$
Cash Flows after tax 987,000.00$ 987,000.00$ 987,000.00$ 987,000.00$
Add: Depreciation 450,000.00$ 450,000.00$ 450,000.00$ 450,000.00$
Cash Flows before
depreciation after tax 1,437,000.00$ 1,437,000.00$ 1,437,000.00$ 1,437,000.00$
Initial Equiment Cost (2,000,000.00)$
Salvage Value 200,000.00$
Working Capital
Initial Requirement (600,000.00)$
Recovery 600,000.00$
Net Cash Flows (2,600,000.00)$ 1,437,000.00$ 1,437,000.00$ 1,437,000.00$ 2,237,000.00$
Statement of Cash flows when Unit sales decrease by 10%
Years Cash flows PVF @ 10% PV @ 10%
0 (2,600,000.00)$ 1.000 (2,600,000.000)$
1 1,437,000.00$ 0.909 1,306,363.636$
2 1,437,000.00$ 0.826 1,187,603.306$
3 1,437,000.00$ 0.751 1,079,639.369$
4 2,237,000.00$ 0.683 1,527,901.100$
NPV 2,501,507.411$
Project NPV when Unit sales decrease by 10%
(Ross, Drew, Westerfield & Jordan, 2016)
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Particulars Year 0 Year 1 Year 2 Year 3 Year 4
Cash Inflows
Selling Units 300000 300000 300000 300000
Selling price 18.00$ 18.00$ 18.00$ 18.00$
Net Cash Inflows 5,400,000.00$ 5,400,000.00$ 5,400,000.00$ 5,400,000.00$
Cash Outflows
Variable Cost 3,600,000.00$ 3,600,000.00$ 3,600,000.00$ 3,600,000.00$
Fixed Cost 300,000.00$ 300,000.00$ 300,000.00$ 300,000.00$
Depreciation 450,000.00$ 450,000.00$ 450,000.00$ 450,000.00$
Total Cash outflows 4,350,000.00$ 4,350,000.00$ 4,350,000.00$ 4,350,000.00$
Cash flows before tax 1,050,000.00$ 1,050,000.00$ 1,050,000.00$ 1,050,000.00$
Less: Tax @ 30% 315,000.00$ 315,000.00$ 315,000.00$ 315,000.00$
Cash Flows after tax 735,000.00$ 735,000.00$ 735,000.00$ 735,000.00$
Add: Depreciation 450,000.00$ 450,000.00$ 450,000.00$ 450,000.00$
Cash Flows before
depreciation after tax 1,185,000.00$ 1,185,000.00$ 1,185,000.00$ 1,185,000.00$
Initial Equiment Cost (2,000,000.00)$
Salvage Value 200,000.00$
Working Capital
Initial Requirement (600,000.00)$
Recovery 600,000.00$
Net Cash Flows (2,600,000.00)$ 1,185,000.00$ 1,185,000.00$ 1,185,000.00$ 1,985,000.00$
Statement of Cash flows when Price per unit decreases by 10%
Years Cash flows PVF @ 10% PV @ 10%
0 (2,600,000.00)$ 1.000 (2,600,000.000)$
1 1,185,000.00$ 0.909 1,077,272.727$
2 1,185,000.00$ 0.826 979,338.843$
3 1,185,000.00$ 0.751 890,308.039$
4 1,985,000.00$ 0.683 1,355,781.709$
NPV 1,702,701.318$
Project NPV when Price per unit decreases by 10%
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Particulars Year 0 Year 1 Year 2 Year 3 Year 4
Cash Inflows
Selling Units 300000 300000 300000 300000
Selling price 18.00$ 18.00$ 18.00$ 18.00$
Net Cash Inflows 5,400,000.00$ 5,400,000.00$ 5,400,000.00$ 5,400,000.00$
Cash Outflows
Variable Cost 3,960,000.00$ 3,960,000.00$ 3,960,000.00$ 3,960,000.00$
Fixed Cost 300,000.00$ 300,000.00$ 300,000.00$ 300,000.00$
Depreciation 450,000.00$ 450,000.00$ 450,000.00$ 450,000.00$
Total Cash outflows 4,710,000.00$ 4,710,000.00$ 4,710,000.00$ 4,710,000.00$
Cash flows before tax 690,000.00$ 690,000.00$ 690,000.00$ 690,000.00$
Less: Tax @ 30% 207,000.00$ 207,000.00$ 207,000.00$ 207,000.00$
Cash Flows after tax 483,000.00$ 483,000.00$ 483,000.00$ 483,000.00$
Add: Depreciation 450,000.00$ 450,000.00$ 450,000.00$ 450,000.00$
Cash Flows before
depreciation after tax 933,000.00$ 933,000.00$ 933,000.00$ 933,000.00$
Initial Equiment Cost (2,000,000.00)$
Salvage Value 200,000.00$
Working Capital
Initial Requirement (600,000.00)$
Recovery 600,000.00$
Net Cash Flows (2,600,000.00)$ 933,000.00$ 933,000.00$ 933,000.00$ 1,733,000.00$
Statement of Cash flows when Variable cost per unit increases 10%
Years Cash flows PVF @ 10% PV @ 10%
0 (2,600,000.00)$ 1.000 (2,600,000.000)$
1 933,000.00$ 0.909 848,181.818$
2 933,000.00$ 0.826 771,074.380$
3 933,000.00$ 0.751 700,976.709$
4 1,733,000.00$ 0.683 1,183,662.318$
NPV 903,895.226$
Project NPV when Variable cost per unit increases 10%
(BPP Learning Media, 2015)
15

Particulars Year 0 Year 1 Year 2 Year 3 Year 4
Cash Inflows
Selling Units 300000 300000 300000 300000
Selling price 18.00$ 18.00$ 18.00$ 18.00$
Net Cash Inflows 5,400,000.00$ 5,400,000.00$ 5,400,000.00$ 5,400,000.00$
Cash Outflows
Variable Cost 3,960,000.00$ 3,960,000.00$ 3,960,000.00$ 3,960,000.00$
Fixed Cost 330,000.00$ 330,000.00$ 330,000.00$ 330,000.00$
Depreciation 450,000.00$ 450,000.00$ 450,000.00$ 450,000.00$
Total Cash outflows 4,740,000.00$ 4,740,000.00$ 4,740,000.00$ 4,740,000.00$
Cash flows before tax 660,000.00$ 660,000.00$ 660,000.00$ 660,000.00$
Less: Tax @ 30% 198,000.00$ 198,000.00$ 198,000.00$ 198,000.00$
Cash Flows after tax 462,000.00$ 462,000.00$ 462,000.00$ 462,000.00$
Add: Depreciation 450,000.00$ 450,000.00$ 450,000.00$ 450,000.00$
Cash Flows before
depreciation after tax 912,000.00$ 912,000.00$ 912,000.00$ 912,000.00$
Initial Equiment Cost (2,000,000.00)$
Salvage Value 200,000.00$
Working Capital
Initial Requirement (600,000.00)$
Recovery 600,000.00$
Net Cash Flows (2,600,000.00)$ 912,000.00$ 912,000.00$ 912,000.00$ 1,712,000.00$
Statement of Cash flows when Cash fixed cost per year increases by 10%
Years Cash flows PVF @ 10% PV @ 10%
0 (2,600,000.00)$ 1.000 (2,600,000.000)$
1 912,000.00$ 0.909 829,090.909$
2 912,000.00$ 0.826 753,719.008$
3 912,000.00$ 0.751 685,199.098$
4 1,712,000.00$ 0.683 1,169,319.036$
NPV 837,328.051$
Project NPV when Cash fixed cost per year increases by 10%
(Feldman & Libman, 2011)
2.5: Risk Analysis (Systematic and Unsystematic Risk)
The business operations of a company are largely impacted by the systematic and
unsystematic type of risks that can have a large influence on the financial performance of a
company.
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Systematic risks
Systematic risks are the risk that is inherent within the entire market and thus influence
large number of assets within a company. It is regarded to be un-diversifiable in nature as it
impacts the overall market segment and therefore it is not relatively possible to eliminate it
(Arnold, 2013). The types of systematic risks that can have an impact on the future performance
of Origin Energy as analyzed from the annual report of the year 2018 can be described as
follows:
Credit Risk
The credit risk is the major type of systematic risk faced by Origin Energy. The risk can
be faced by the company due to its inability for meeting the financial obligations under a contract
or an agreement. It is exposed to this type of risk on the basis of nature of its operations such as
through customer contracts, financing activities, deposits and risks associated with the measures
taken to manage financial risk. The company has determined the credit limitations that determine
the level of exposure of the company towards this type of risk. The Board of the company has
developed and implemented credit risk management policies for mitigating the credit risk that
exist due to nature of its assets (Origin Energy: Annual Report, 2018).
Liquidity Risk
The liquidity risk is the risk that is associated with the operations of the company due to
its non-ability to meet the financial obligations (Feldman & Libman, 2011). The risk can
negatively impact the future growth and development of the company due to its inability of
taking advantage of the new investment opportunities and associated hedging activities. It
manages its liquidity risk through managing the operating cash flows and the degree of access to
debt and equity capital markets (Simply Wall Street, 2017).
Foreign Exchange Risk
It is the type of risk that exists within the company due to fluctuation in the exchange
rates that can adversely impact its financial performance. The risk is present within the company
due to nature of its future commercial transactions including payment of interests, debt, long-
term loans, sale and purchase of oil and capital equipment and investments in foreign operations
17

(Gibson, 2011). The business operations of the company are largely exposed to the fluctuations
in the foreign currency of US dollar and Euro as it conducts its operations in overseas and in
Australia. The company integrates the use of forward foreign exchange contracts and cross-
currency interest rate swaps for managing the future cash flows of its activities carried out in its
different subsidiaries (Origin Energy: Annual Report, 2018).
Interest Rate Risk
The interest rate risk is another type of risk that is being faced by the company in relation
to the market which it operates. The risks exist within the company due to its exposure with
meeting interest rate obligations. It manages its cash flow interest rate risk through entering into
fixed-rate interest rate swap contracts and debt securities. The use of fixed to floating interest
rate swaps is also being done by the company for managing its interest rate risk. The use of these
types of financial instruments has enabled the company to hedge the costs associated with
interest rate and associated debt obligations (Origin Energy: Annual Report, 2018).
Unsystematic risk
On the other hand, unsystematic risk faced by the company mainly exists on account of
the uncertainty related in regard to its future financial performance due to nature of its business
activities and the industry in which it operates. It is also known as diversifiable risk as it can be
reduced by controlling the uncertainty related with business operations (Baker & Powell, 2009).
These are stated as follows:
Competition
The Company conducts its activities within highly competitive energy sector and this
can result in causing pressure on the company to implement adequate strategies for improving its
profitability position and maintaining its competitiveness. The company places adequate
importance on improving customer loyalty to overcome the impact of such risk.
Technological Development
The use of different types of technological developments within the energy company can
enable in generating and creating diverse type of energy products and services for the companies.
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As such, the Origin Energy is required to implement new and improved types of technology for
enhancing the operational efficiency (Origin Energy: Annual Report, 2018).
Regulatory Policy
The energy companies of Australia have to comply with energy policies and
regulations and non-compliance of energy laws can result in negatively impacting the future
performance of the company. The company is mitigating the impact of such risk by actively
complying with all governmental rules and regulations for gathering continuous support from
government (Moody, 2013).
2.6: Dividend Payout Ratio and dividend policy adopted by Origin Energy
Formula to calculate the dividend payout ratio: Dividend per share/Earning per Share
Calculation of Dividend Payout Ratio
Items 2016 2017 2018
Dividend per share (DPS) (In
Cents) -39.8 -126.9 12.4
Earnings per share (EPS) (In
Cents)
No
Dividend
No
Dividend
No
Dividend
(Origin Energy: Annual Report, 2016); (Origin Energy: Annual Report, 2017) and (Origin
Energy: Annual Report, 2018)
The dividend policy is developed by the company for structuring its dividend payout
provided to the shareholders (Damodaran, 2011). It can be stated from analyzing the annual
report of the company that the company has not properly structured its dividend policy. This is
because it has not provided any information in relation to the criteria that is used by the company
to provide dividend to the shareholders (Davies & Crawford, 2011). The company is incurring
financial losses over the past financial years and therefore it is not proving regular dividends to
the shareholders. As analyzed from the annual report of the company, it has not paid dividend
during the financial year 2018 and this cannot be regarded as good for promoting the future
growth prospects of the company. The Board of Directors has not developed any dividend policy
in the recent years in accordance with the earnings realized over the past there years. However,
there has been significant improvements made by the company in improving the financial
19

performance in the financial year 2018 and on the basis of which the Board is gaining emphasis
on providing dividends from the financial year 2019.
Part III: Recommendation Letter
It is recommended to the existing investors of the company on the basis of analyzing its
overall financial performance over the past three years that they should hold on their investment
within the company. They should analyze the future financial performance of the company
before taking any new investment decisions because it is not able to realize earnings and is also
not paying any dividend on its shareholders. The recent market performance of the company
does not support its good future growth prospects and therefore it is not recommended to the
investors to invest within the company. Also, the potential investors should not invest within the
company on the basis of its weak financial position and thus there is less chance for them to gain
returns on their investment.
Part IV: Conclusion
It can be stated on the basis of discussion held within the report that financial
performance of an entity can be analyzed on the basis of using the financial ratio analysis
technique. The use of s sensitivity analysis, examining dividend payout policy and cash
management and evaluation of the risks associated with in a company also helps in depicting the
present and future growth prospects of a company.
20

References
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Baker, K. & Powell, G. (2009). Understanding Financial Management: A Practical Guide.
USA: John Wiley & Sons.
BPP Learning Media. (2015). ACCA F9 Financial Management. London: BPP Learning Media.
Bragg, S. (2010). Business Ratios and Formulas: A Comprehensive Guide. US: John Wiley &
Sons.
Brigham, F., and Michael, C. (2013). Financial management: Theory & practice. Canada:
Cengage Learning.
Damodaran, A, (2011). Applied corporate finance. USA: John Wiley & sons.
Davies, T. & Crawford, I., (2011). Business accounting and finance. USA: Pearson.
Feldman, M. & Libman, L. (2011). Crash Course in Accounting and Financial Statement
Analysis. USA: John Wiley & Sons.
Gibson, C. (2011). Financial Reporting and Analysis: Using Financial Accounting Information.
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Krantz, M. (2016). Fundamental Analysis for Dummies. USA: John Wiley & Sons.
Moles, P. & Kidwekk, D. (2011). Corporate finance. USA: John Wiley &sons.
Moody, P. (2013). Risk and the Form of Regulation Consultation. Retrieved May 26, 2019,
from http://www.qca.org.au/getattachment/e9c088cd-8bd4-4b49-a3cd-e241dfe0f2d9/Origin-
Energy-(Apr-13).aspx
Origin Energy: Annual Report. (2016). Origin Energy Annual Report of year 2018. Retrieved
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documents/Origin_Annual_Report_2016.pdf
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Origin Energy: Annual Report. (2017). Origin Energy Annual Report of year 2018. Retrieved
May 26, 2019, from
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%20review%202017/AnnualReport_FY2017.pdf
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22

Appendix
Financial Data used to calculate profitability ratio
Financial Items 2015 2016 2017 2018
Amount in $ Million
Net profit after tax
$
(576.00)
$
(2,223.00)
$
221.00
Net Sales
$
11,923.00
$
13,646.00
$
14,604.00
Shareholder's equity
$
14,159.00
$
14,530.00
$
11,418.00
$
11,828.00
Average shareholder's
equity
$
14,344.50
$
12,974.00
$
11,623.00
Total Assets
$
33,367.00
$
28,898.00
$
25,199.00
$
24,257.00
Average total assets
$
31,132.50
$
27,048.50
$
24,728.00
Profitability Ratio
Ratios Formula 2016 2017 2018
Net profit ratio Net profit/Sales -4.83% -16.29% 1.51%
Return on equity
Net profit after
tax/Average
shareholder's equity
-4.02% -17.13% 1.90%
Return on total assets
Net profit after
tax/Average total
assets
-1.85% -8.22% 0.89%
Financial Data used to calculate operating efficiency ratio
Financial Items 2015 2016 2017 2018
Amount in $ Million
23

Net Sales
$
11,923.00
$
13,646.00
$
14,604.00
Account Receivables
$
2,085.00
$
1,945.00
$
2,278.00
$
2,537.00
Average account
receivable
$
2,015.00
$
2,111.50
$
2,407.50
Total Assets
$
33,367.00
$
28,898.00
$
25,199.00
$
24,257.00
Average total assets
$
31,132.50
$
27,048.50
$
24,728.00
Cost of Goods Sold
$
8,964.00
$
11,099.00
$
11,674.00
Inventory
$
239.00
$
248.00
$
138.00
$
196.00
Average Inventory
$
243.50
$
193.00
$
167.00
Operating Efficiency Ratios
Ratios Formula 2016 2017 2018
Inventory Turnover ratio
Cost of goods
sold/Average
inventory
36.81 57.51 69.90
Account Receivable
turnover ratio
Net sales/Average
account receivables 5.92 6.46 6.07
Asset Turnover ratio Net Sales/Average
total assets 0.38 0.50 0.59
24