Accounting For Business And Performance Evaluation Essay.

Financial Standing of AGL Energy during the past financial years

Discuss about the Accounting For Business And Performance Evaluation.

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.

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 %
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%
			$                -
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).

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
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).

Profitability position of AGL Energy during the last two years and its comparison with competitor Origin 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).

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.

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:

• 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).

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 Liabilities	1.20	1.24	1.29
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).

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 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).

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).

Comparison of profitability of AGL Energy with the profitability of Origin energy

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).

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).

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).

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 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 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).

Analyses of cash flow statement of AGL Energy

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 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).

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).

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).

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).

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).

Evaluation of financial position of AGL Energy through analyzing the balance sheet

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).

The market share possessed by different players operating within the industry can be depicted as follows:

(Source: https://www.a2zfinance.com.au/A2ZWeb/Investment/aus_shares.htm)

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.

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].

Electricity Retailing - Australia Market Research Report. 2017. [Online]. Available at: https://www.ibisworld.com.au/industry-trends/market-research-reports/electricity-gas-water-waste-services/electricity-retailing.html [Accessed on: 25 May 2018].

Fabozzi, F. and Peterson, P. 2008.  The Complete CFO Handbook: From Accounting to Accountability. John Wiley & Sons.

Joseph, C. 2013. Advanced Credit Risk Analysis and Management. John Wiley & Sons.

Makoujy, R. 2010. How to Read a Balance Sheet: The Bottom Line on What You Need to Know about Cash Flow, Assets, Debt, Equity, Profit...and How It all Comes Together. McGraw Hill Professional.

Mohana, R. 2011. Financial Statement Analysis and Reporting. PHI Learning Pvt. Ltd.

Needles, B. and Powers, M. 2010. Principles of Financial Accounting. Cengage Learning.

Palepu, K. and Healy, P. 2007. Business Analysis and Valuation. Cengage Learning EMEA.

Palmer, G. 2013. Energy in Australia: Peak Oil, Solar Power, and Asia’s Economic Growth. Springer Science & Business Media.

Taparia, J. 2004. Understanding Financial Statements: A Journalist's Guide. Marion Street Press, Inc.

Tracy, A. 2012. Ratio Analysis Fundamentals: How 17 Financial Ratios Can Allow You to Analyse Any Business on the Planet. RatioAnalysis.net.