Analysis of Financial Statements

Question: Discuss about the Analysis of Financial Statements. Answer: Introduction Organizations around the world need to abide by the financial reporting standards for ensuring their long-term growth by maximizing their financial performance. Business firm should develop and implement external reporting financial framework for achieving transparency in their operational activities. In this context, the present report aims to analyze and examine he capital structure of two public listed companies in Australia, AGL and Genesis Energy Limited, by calculating and assessing their financial ratios. In addition to this, it also relates the financing structure and financial reporting framework with the nature of the business and with nature of the overall financial market condition (Rigby, 2011). The report also compares the financing sources of two companies in order to identify and evaluate the reasons responsible for the similarity and differences between them. At last, the report provides recommendations for the overall financial reporting framework adopted and follow ed by both the companies. Brief Description to Company AGL Energy Limited AGL Energy is an Australian company being established in the year 1837 and is mainly involved in providing energy products and services to the economy of the country. It is a public company that is involved in production as well as retailing of electricity (Annual Report 2015: AGL Energy Limited). The company provides energy products and services for residential and commercial use to the Australian economy. The company is recently involved in protecting the quality of environment through reducing the emission of greenhouse gases. The company has achieved a good brand image across the world and provides good profitability to all its shareholders. It provides good dividend to shareholders and that is responsible for its continuous growth. AGL Energy develops energy from power stations that incorporates the use of thermal power, natural gas, wind power, hydroelectricity and coal gas sources. The company serves approximately about 3.8 million customers across the country and is known to be the largest private owner, operator and developer of renewable energy assets (Annual Report 2015: AGL Energy Limited). The company organizational structure consists of executive team, management team and operational employees. The well-organized organizational structure of the company is responsible for its huge growth and success. Genesis Energy Limited On the other hand, Genesis Energy Limited is a major competitor of AGL Energy Limited carrying out its operational activities in New Zealand. The company is traded at the ASX (Australian Stock Exchange) and provides electricity and gas retailing services to about 640,700 customers in New Zealand (Annual Report 2015: Genesis Energy Limited). It is recognized as largest retailing company in the field of electricity and gas. The company also maintains good networks in Brazil, Europe, China and Australia and has achieved distribution rights from recognized international suppliers that provide them leading technology products. The main objective of the company is to provide sustainable energy products to the customers that are produced without degrading the environment quality. The company has achieved sustainability through ensuring environment protection form the any type of negative impact in the processes involved in production of energy and gas products. The sustainable production of energy products and services is driving its success and growth in the recent years. The organizational structure of the company consists of the executive team, middle management and employees at operational level. The executive team provides strategic direction to the company and is supported in its activities by the string wealth of general management team such as finance, strategy, marketing and procurement experience (Annual Report 2015: Genesis Energy Limited). Analysis of Financial Sources used by both the companies There are different sources of finance that company can choose to finance the different activities depending upon the requirement. Such sources of finance depend upon the amount of capital required and for how much time it is required. Mainly companies require financing sources to generate funds for the expansion plans, to buy the new plant and machinery and to enter in the new market (Bull, 2007). In this segment, financing sources used by the AGL Energy Limited and Genesis Energy Limited will be evaluated in detail. Mainly there are two types of external sources of finance: Issue of share capital and Leverage Capital. They can be further divided into long term, medium, and short term depending upon the time such capital has been raised (Read, 2002). AGL Energy Limited AGL Energy Limited is the energy producing company and it requires heavy investment in machinery, therefore it requires both leverage as well as equity capital to finance the activities. AGL Energy Limited mainly dependent upon the equity financing as compared debt capital as it is easy to finance through equity capital. Share Capital: This source of capital is commonly used by all the publically listed companies and this source of capital is generated through issue of common shares in the open market. As per the opinion by the experts shareholders capital is one of the best way to generate long term source of capital. The main advantage of this source of capital is that companies dont have to pay the interest on the amount generated through share capital as in case of debt source of financing (Dlabay and Burrow, 2007). AGL Energy Limited is highly dependent on the equity share capital to finance the assets and working capital. Company has about 5,437 million dollars as equity share in year 2014 and has issued new share capital in year 2015 to raise total amount up to 6,696 million dollars. This amount was raised to finance the acquisitions done in year 2015. Company has issued 1,275 share capital in year 2015 with cost to raise capital was 22 million dollars. This source of capital is the permanent source of capital and shareholders are the ultimate owners of the company. AGL Energy Limited has issued only ordinary share capital to raise the funds. There are no preference shares, management shares and other stock options used by the company to generate financing sources Annual Report 2015: AGL Energy Limited). Debt Financing: AGL Energy Limited is heavily involved in generating funds through loans from financial institutions and other federal banks (Moynihan and Titley, 2001). Almost 30 % capital required was financed through generating funds from either issuing debentures or taking loans from financial institutions. In year 2014, 3669 million dollars was recorded as long term debt and 522 million dollars as short term debt. Whereas, in year 2015, long term debt reduced to 3,439 million dollars and short term debt raised to 712 million dollars. Both short and long term debt was financed from the financial institution as term loans bearing fixed rate of interest Annual Report 2015: AGL Energy Limited). Genesis Energy Limited This Company operates in New Zealand and has issued the equity shares that are traded on Australian Stock Exchange. Share Capital: Genesis Energy Limited is public limited company and generates major capital through issue of common equity shares in the open market. Company is well known in the market and has goodwill due to good financial performance. Genesis Energy Limited has paid its highest dividend in year 2015 because of rapid increase in net earnings and value of share in the market. Company has generated 539.7 million dollars through use of ordinary equity shares and has 1000 million shares issued in the market. In year 2014 and 2015, company has neither issue nor buys any equity share from the public (Annual Report 2015: Genesis Energy Limited). Debt Capital: Apart from equity share capital, Company also finance capital through bank loans and issuing capital bonds to the source creditors (Albrecht, Stice and Stice, 2010). Genesis Energy Limited has used debt capital as major source of finance as compare to equity share capital (Fridson and Alvarez, 2011). In year 2014, Company has debt of about 989.4 million dollars that represents 65 % of the total capital part. Among this debt, 12.3 million dollars represents as short term debt capital and 977.1 million dollars represents as long term debt capital. In year 2015, the short debt financing was raised to 117.8 million dollars and long term debt financing was reduced to 977.1 million dollars (Annual Report 2015: Genesis Energy Limited). Capital Structure and important ratios Capital structure tells type and level of different financing sources used by the company to finance the activities. It is important to know the capital structure ratios before commenting on the capital structure of both the companies (Megginson and Smart, 2008). Two main ratio used to evaluate the capital structure are debt to equity ratio and equity ratio. Debt equity ratio shows the amount of debt over the equity. In year 2014, debt equity ratio of AGL Energy Limited was 0.86 times that indicates that company has 1 million dollars for every 0.86 million of debt. On the other hand, Genesis Energy Limited has debt equity ratio of 0.93 in year 2014 that indicates Genesis uses debt capital as major finance source as compare to AGL Energy Limited. In year 2015, debt equity of AGL Energy Limited was further reduced to 0.80 that indicates more stable capital structure. There was no change in debt equity ratio of Genesis Energy in year 2015. Equity ratio is also used to measure the capital structure of the organization as it tells amount of shareholders equity to total assets. In simple terms it means, how much part of assets is financed through using as equity as capital (Nevitt and Fabozzi, 2000). AGL Energy Limited has equity ratio of 0.54 in year 2014 that was raised to 0.56 in year 2015. In short it can be said that more than 50% assets was financed through equity shares whereas other assets was financed through debt capital or current assets Annual Report 2015: AGL Energy Limited). On the other hand, Genesis also has 0.52 as equity ratio in both 2014 and 2015. It reflects almost same strategy as AGL Energy has implied while maintain the capital structure. Financing Structure and financial reporting framework Financing structure refers to the balances of liability side of balance sheet and it concerns with how company finances the capital to carry out day to day activities as well as to invest in plant and equipments (Drake and Fabozzi, 2012). On analyzing the capital structure of both AGL Energy Limited and Genesis Energy Limited it can be said that AGL Energy Limited was more dependent on equity shares as main source of capital whereas Genesis believe to finance the capital through debt sources to avoid the time taken to issue the shares. AGL Limited is well reputed company as compare to Genesis Limited that gives an edge in the market to finance through issue of equity shares. Financial reporting is most important part in the corporate governance process and it includes producing the financial statements that reflects company financial position of the definite time period. Both companies are public listed companies and they follow the Australian GAAP in the financial reporting process (Coyle, 2000). Both companies have market in Australia and New Zealand therefore they are bound to follow the Australian GAAP to fulfill the financial reporting requirements. Similarities and Difference between company financing sources and financial reporting On having looked at financial sources used and financial reporting regularity requirement by the both the companies it can be said that there no differences in the financial sources used by such companies and but there was some differences between financial reporting process. Both the company uses debt and equity shares as major source of capital. The only difference was that AGL Energy Limited uses more equity capital as compare debt capital and on the other hand Genesis pays more emphasis on debt source of capital to finance the assets. Financial reporting processes of both the companies are almost same with some differences in preparation of financial statements and presentations of notes to accounts. AGL Energy Limited does not report all the accounting standards that required presenting in notes to accounts whereas Genesis Limited shows all the accounting standard compliance required to be reported in the notes to accounts. Conclusion and Recommendation On conclusion following finding and reasonable recommendation are given: Both the companies use debt and common equity shares as the major source of capital. It is recommended that companies can take active interest in other source of external financing such as preference capital, venture capital and lease financing. It was noted that both companies has taken heavy loans from the financial institutions to finance the activities. It is highly advised to reduce the debt capital through pay off from the reserve capital and finance more capital through issue of equity shares. Financial structure of both companies sound but it could be even better if debt equity ratio is further reduced to 0.50 or less. Both companies meet the financial reporting requirements but it is highly advisable to AGL Energy Limited to provide detail notes to accounts that explains clearly all the accounting standards in detail and provides a clear picture of financial statements. References Albrecht , W. S., Stice, E. K. and Stice, J. D. 2010. Financial Accounting. Mason: Cengage Learning. Annual Report 2015. Genesis Energy Limited. [Online]. Available at: https://www.genesisenergy.co.nz/en_GB/reports-and-presentations [Accessed on: 5 September, 2016]. Annual Report. 2015. AGL Energy Limited. [Online]. 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