Origin Energy: Financial Analysis, Performance, and Future Prospects

This report provides a comprehensive financial analysis of Origin Energy, examining its structure of ownership and governance, key financial ratios, debt and dividend policies, and future prospects. The analysis includes an overview of the company, followed by an examination of its governance structure, liquidity, solvency, efficiency, and profitability ratios. The report also considers the company's performance in relation to the All Ordinaries Index, announcements affecting stock prices, and the calculation of beta and Weighted Average Cost of Capital (WACC). Furthermore, the report delves into the company's debt ratios and dividend policy, providing recommendations based on the financial analysis. The study concludes with an assessment of the company's financial health and potential for future growth, considering its current performance and market position. The report highlights the importance of effective management processes and a strong ownership structure for sustainable growth.

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Finance for business - Masters

Origin energy Ltd
Executive summary
Structure of ownership and governance is vital for a company to develop in the future. With
the help of this report, the overall structure and operations of Origin energy Ltd has been
taken into account to evaluate whether the company possesses the capability to expand in the
future. Besides, its dividend policies and ratios are also discussed that assists in enhancing the
discussion. This report starts with the company’s overview that is followed by its governance
and ownership structure. Thereafter, key ratios have been computed to ascertain the
company’s overall performance. Lastly, key significance is offered to the company’s debt and
dividend policy that is a major factor of future performance.
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Origin energy Ltd
Contents
Contents................................................................................................................................................3
Introduction...........................................................................................................................................4
1. Company overview........................................................................................................................4
2. Structure of ownership and governance.......................................................................................4
3. Fundamental ratio.........................................................................................................................5
- -Liquidity ratios..............................................................................................................................5
- -Long term solvency.......................................................................................................................5
- -Efficiency ratio..............................................................................................................................6
- Profitability....................................................................................................................................6
4. All ordinaries index........................................................................................................................7
i. Graph.............................................................................................................................................7
ii. Computation of share prices with all ordinaries index..................................................................7
5. Announcements............................................................................................................................7
6. Beta and computation...................................................................................................................8
a. Beta computation..........................................................................................................................8
7. Weighted average cost of capital (WACC).....................................................................................8
8. Debt ratios.....................................................................................................................................9
9. Dividend.......................................................................................................................................10
Recommendation................................................................................................................................11
Conclusion...........................................................................................................................................12
References...........................................................................................................................................13
Appendix.............................................................................................................................................14
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Origin energy Ltd
Introduction
Origin Energy has been opted for the purpose of this discussion as to whether the overall
structure and policies of the company are suitable for future developments or not. Besides,
the company’s internal state of affairs like its dividend policy and debt has also been taken
into account to ascertain its financial capability. In this context, it must be noted that internal
state of affairs must be duly supported by effective management processes so that the
company can pave a path for future progress. Furthermore, this is not feasible in the
prevalence of an ineffective ownership and governance structure as it may facilitate in
interrupting smooth flow of operations. Nevertheless, analysis of a company’s affairs through
computation of significant ratios can also assist in determining whether it has been
performing effectively in various segments or not, thereby highlighting the significance of
such ratios.
1. Company overview
Origin Energy was established in the year 2000 and was an output of the demerger of the
Australian conglomerate that is Boral Limited. Origin Energy is an energy company if
integrated nature and is mainly engaged into energy retailing, generation of power and
production of natural gas located in New Zealand, Australia and international domain. Origin
energy is helping the household of Australia by ensuring they d o not have to pay for the
increase in the price of energy. The motto of the company is to simply energy and enables
customers to compare offers easily. The focus of the company is on the LED lighting and the
sales together with the marketing are established around the efficiency in energy, proper
designs and best class service. The business strategy is mainly concerned towards growth in
the LED lighting products and touching new scales of achievement.
2. Structure of ownership and governance
The Board of Directors of the company has established high level for the employees and
officers of the company. The concept of corporate governance is provided stability though the
string principles. The board of directors serve as a support to the shareholders to have an
insight into the management of the company. To ensure a normal functioning, it is important
that the BOD follows the standards laid in the guidelines (Origin Energy, 2017). The Board
comprises of three committees that is the Audit and Finance Committee, Compensation
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Origin energy Ltd
Committee and a Nominating committee. The Nominating Committee ascertains the
structure of the committee and the membership of other committees on an annual basis and
provides recommendations in this regard.
3. Fundamental ratio
- -Liquidity ratios
This ratio is also called as efficiency ratio of a company that plays a crucial role in
determination of resources that are primarily short-term in nature and the procedure by which
the management undertakes to assist the company. Further, such liquidity can be utilized to
reflect the extent of funds that the company must cover in order to fulfil its short-term
obligations, thereby portraying whether the company has a powerful state of liquidity or not.
In contrast to this, the efficiency ratios also play a key role in depicting the effectiveness with
which any company can manage its assets for future developments. Moreover, this ratio is
also equivalent to the liquidity ratio as it assists in measuring the way a company can attain
profits from its investment of funds (Matt & Simon, 2014). From the present scenario, it can
be commented that the liquidity position of Origin Energy is strong because the current ratio
is higher than the standard ratio that is 1:1 meaning for every $1 of current liabilities there is
$1 of current asset with the company. In addition, the quick asset ratio of the company stands
at more than 1 meaning that the company has strong liquidity leaving the inventory.
2017 2016
current ratio = CA/Cl 1.300207577 1.2305296
liquid ratio =quick assets/ current liabilities 1.26 1.14
- -Long term solvency
The long term solvency is commented by the debt ratio. The debt ratio of the company
indicates that the company is using debts to a lower extent. Going by the performance of the
company it can be said that the company needs to utilize the debt in an appropriate manner so
that it can stabilize the position because the company is under immense pressure (Matt &
Simon, 2014). The debt ratio of the company stands at more than 0.54 meaning that the
company has utilized more debts and has excess stress on the debts. The company have a
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Origin energy Ltd
major reliance on the debt. However, when it comes to debt equity ratio, the composition of
debt is more as compared to equity.
2017 2016
Debt equity ratio 1.206953932 1.05583215
Debt Ratio = TL/TA 0.546886781 0.51357897
- -Efficiency ratio
Efficiency ratios evaluate how effectively the company utilize the assets of the company to
generate income. From the computation, it can be observed that the working capital ratio is
strong and asset turnover ratio is positive. This implies the fundamentals of the company are
strong.
2017 2016
Working capital ratio = CA/Cl 1.30020758 1.2305296
Asset Turnover ratio = sales/ Avg total assets 0.42309243 0.36797559
- Profitability
This ratio can be utilized to evaluate the way in which any company can attain earnings in
opposition to the costs that it incurs to facilitate smooth flow of operations. Furthermore, it
must be taken into account that a higher profitability ratio is a very good indicator of the fact
that the company can easily cater to its obligations in future (Parrino et. al, 2012). Besides,
such ratio is generally compared with the ratio of the last year, thereby proving the fact that a
higher ratio signifies a positive business environment for the entire company. The gross profit
margin of the company is positive however, the net profit margin of the company is negative
implying that the company was unable to have a control over the operating expenses (Porter
& Norton, 2014).
2017 2016
Net Profit Margin [(Net Profit after tax/Sales Revenue)*100] -16.290488 -5.3683659
Gross Profit Margin [(Gross Profit /Sales Revenue)*100] 18.6648102 25.8292598
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4. All ordinaries index
i. Graph
ii. Computation of share prices with all ordinaries
index
Based on the calculation, it can be seen that the stock price of Origin energy complies with
the all ordinaries index. Furthermore, it has a beta of around 2.04 that is greater than one
(Origin Energy, 2017). This sheds light on the fact that when the scale of operations in the
market is high in nature, the stock will also enhance. In contrast to this, when such market
scale is low, the stock prices will also decline, thereby reflecting the prevalence of higher
volatility in the market.
5. Announcements
 The introduction of LED lights that are substitutes in the manner of cost, efficiency
and quality led to a sharp increase in the price of stock.
 The growth declaration in the past four quarters led to an upsurge in the price.
However, in the last two quarter there was negative growth owing to a decline in the
fluorescent business (Origin Energy, 2017).
 The Fluorescent scales dipped by 64% and hence, a downfall was observed.
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Origin energy Ltd
6. Beta and computation
a. Beta computation
i. Beta
The company has a beta of 2.04 within its framework that sheds light on the fact that its stock
prices have a higher volatility and risky in nature (Origin Energy, 2017). This is evident by
the fact that companies that have a beta of more than one have high movement stocks.
Furthermore, the company’s stock price increases and decreases in the similar way as the
index (Subramanyam & Wild, 2014).
ii. CAPME ® = RFR + βstock (R market – RFR)
Therefore, 0.04+2.04 (6-4) = 0.04+4.08
Thus, the answer is 4.12
Origin Energy can be regarded as a high volatile stock and the reason behind this can be
attributed to the fact that its beta reports at more than one. Further, it can be stated that such
stock cannot be considered inappropriate for users like investors, thereby showing that its
stock is entirely conservative in nature (Horngren, 2013).
7. Weighted average cost of capital (WACC)
i. Weight of equity = E / (E+D)
WACC = 0.0816*9.18% + 0.1984*4.6516% * (1-0.95%)
=8.27%
ii. Implications of a higher WACC
In relation to the company, it can be seen that a higher weighted average cost of capital can
possess significant implications upon various management processes. This is because that a
WACC that is high in nature facilitates in indicating a higher risk in association with the
activities of the company (Guerard, 2013). Further, in association to investment projects, it
can be seen that investors are more likely to attain further returns by accounting for more
risks. The reason behind this can be attributed to the fact that a company’s WACC can be
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Origin energy Ltd
utilized to forecast its anticipated expenses for all finance sources. This consists of costs that
are incurred on debt or equity financing, payments being done for addressing debt
obligations, and expected rate of return ordered by ownership (Vaitilingam, 2010).
In opposition to this, many companies often seek decline of their respective WACC by
choosing cheaper sources of finance because management can use such method to balance
their relative expenses of several sources so that not even a single cost can be incurred.
Furthermore, the issue of bonds can seem more favourable for the company than the issue of
its stocks if interest rates are lower than the demanded return rates on such stock (Brigham &
Daves, 2012). Therefore, this sheds light on the fact that a higher WACC can be very risky
for the company in relation to higher costs and risks for investment in prospective or effective
projects.
8. Debt ratios
i. Calculation
When the debt ratio of a company is lesser than 0.50, it sheds light on the fact that the company has
been operating more on equity financing and lesser on debt sources. Moreover, this reflects that the
company has the ability to attain additional loans for the future as it has a stagnant kind of capital
structure. This can benefit the company and its workforce as well. Nevertheless, if the company
intends on expanding, then debts can be attained.
2017 2016
Debt equity ratio 1.206953932 1.05583215
Debt Ratio = TL/TA 0.546886781 0.51357897
i. The company’s debt ratio is sufficient in nature because it can raise it in future
and that can allow it to expand for future developments. Further, when the
company has a debt ratio of less than 0.50, it can utilize such opportunity to
enhance in the future. Besides, it has already raised major loans in the year 2016
(Brealey et. al, 2011).
9. Dividend
The company has not paid any dividend for the year 2017. Further, the company has paid
dividend regularly in the past five years. The company incurred heavy losses in the year 2017
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Origin energy Ltd
and owing to it, the declaration of dividend was not supported by the board.. The credit
policy of the firm is present in a manner that it restricts the payment of dividend in the case of
losses (Origin Energy, 2017). Further any payment of dividend in future will be done as per
the sole discretion of the BOD and will rest n the operation, financial position and contractual
restrictions.
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Origin energy Ltd
Recommendation
The company encountered a major loss for the year 2016 and is currently facing issue in
terms of net profit. The reason behind this can be attributed to lesser revenues and interest
revenues. Moreover, it can also be seen that the company had a balanced ratio of debt that
can be utilized by it to diversify its affairs in a fair manner. In other words, this can allow the
company widespread its affairs in a way that can assist in developing its overall position in
the industry. Furthermore, in relation to governance, the company has a proper structure of
the same that can be used to enhance smooth flow of operations. Overall, considering the
entire evaluation and assessment processes of the company, it can be recommended that it is
crucial for Origin to focus on its management processes and other operations so that it can
attain additional developments in the upcoming tenure. Since, the company has strong utility
it can manage funds in a better fashion and hence, can take control of the operational
expenses. This will help the company is rectifying the net loss situation. The company can
revive the profit position through strong policies and management.
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Origin energy Ltd
Conclusion
From the previously mentioned evaluation and analysis, it can be witnessed that the company
has an effective debt ratio and dividend policy within its framework. Even though it had
encountered huge losses in the year 2016 and 2017, its debt structure can allow it to expand
in the future because of the ability to procure more loans for future developments. Besides,
the ownership and governance structure are also well-crafted in nature that facilitates in
smooth flow of operations. Therefore, if the company duly concentrates on its management
processes, it can attain additional progress in the entire industry as all its inefficacies will be
terminated. Overall, the company is in a good position to develop in the upcoming tenures.
Hence, going by the trend in the global scenario, it can be commented that the stock has the
potential to provide strong returns in the upcoming future and hence must be in the radar of
the stock list. Though the present global market might be disturbed and particularly this
sector, however the time is apt for selection of the stock as it is available in discount.
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