Financial Performance Analysis Scottish Power and EDF Energy

Question: Critically examine the performance of these two companies,Scottish Power and EDF Energy using ratios extracted over the two year period. This will include trend(s) and the relative performance comparison between these firms? Answer: Introduction Financial performance analysis is considered to be crucial for the organization as well as investors. This paper has focused on analyzing financial performance of two public listed companies in terms of profitability, liquidity; efficiency etc. ratio analysis is an effective tool that significantly contributes in the performance analysis of organizations (Atkinson, 2007). This paper will focus on the energy sector of United Kingdom and two business organizations from this sector will be chosen for analyzing as well as comparing the financial performance of these companies. In this paper, the chosen companies are Scottish Power and EDF Energy. An overview of the energy sector along with the companies has been presented in this report. Therefore, financial performance analysis has been undertaken with the aid of ratio analysis of the company. Energy Industry of United Kingdom Energy industry of United Kingdom has significant contribution in the economy of the nation. It provides job opportunities for 680,000 people and the sector pays tax of 5.7 billion GBP. It is considered as the second most important sector of United Kingdom. In 2014, 13.1 million GBP has been invested in the infrastructure. The energy sector of United Kingdom is consisted of three principal components: generation of electricity, distribution and supplying it to the consumers. In United Kingdom, fossil fuel such as coal and natural gas are considered to be the major source for electricity generation. In 2010, it has been estimated that coal and natural gas contribute to 28% and 47% of the electricity generation. O n the other hand, nuclear source of energy contributes to 16% of the total electricity production. It is expected that the operations of nuclear power stations of UK will be ceased within 2025. Renewable sources of energy have been utilized by UK for contributing 7% of the to tal electricity generation. It is expected that within 2020, the figure will reach 30% of the total electricity generation in UK. Some significant changes is expected to occur in the energy sector of United Kingdom which will make its more simple as well as fair to the consumers (Energy-uk.org.uk, 2015). Company Overview Scottish Power: Scottish Power is focusing on providing renewable energy solutions. The company is committed to its consumers for becoming more energy efficient (Scottishpower.com, 2015). EDF Energy: EDF Energy is the largest producer of low carbon electricity in United Kingdom. The company produces 20% of the total electricity of the nation. It has 15,000 employees. It has been focusing on meeting customer demand (EDF Energy, 2015). Financial Analysis Financial analysis helps in gaining an insight regarding the performance of the company. It is very important for the business organizations to evaluate its performance to assess whether it has been able to achieve its objectives in that financial year. Additionally, the investors must use the financial information for evaluating the performance in order to make rational investment decision. This section will focus on analyzing the financial performance of Scottish Power and EDF Energy (Coombs, Hobbs and Jenkins, 2005). Ratio Analysis Ratio analysis one of the most efficient tool that uses relevant information from the financial statements of the company for calculating specific financial performance indicators. In this section, the financial information of consecutive two years 2012 and 2013 has been gathered from the annual reports of the company for analyzing the financial performance (Epstein and Lee, 2010). Profitability Ratio Profitability ratio helps in estimating how well the company has been able to generate profit. Gross profit margin indicates how much money is left from the sales after considering the cost of goods sold. Net profit margin indicates how much amount remains with the company after considering total expenditure. From the following table, it can be found that the gross profit margin of EDF Energy in 2012 and 2013 is same. The gross profit margin of Scottish Power has improved slightly in 2013. However, the gross profit margin of Scottish power is much lower than EDF energy. Net profit margin of EDF is much lower than the gross profit which implies that operation cost of the company is higher. Net profit margin of EDF energy is higher than Scottish Power which has encountered slight decline in terms net profit margin. Hence, it can be concluded that EDF Energy is in better position than Scottish power in terms of profitability (Gazely and Lambert, 2006). Scottish Power (million) EDF Energy (million) 2013 2012 2013 2012 Profitability Ratio Gross Profit 2,171.50 2,032.20 3,699.00 3,557.00 Revenue 54,070.00 53,227.00 8,311.00 7,960.00 Gross Profit Margin 4.02% 3.82% 44.51% 44.69% Net Profit 539.70 612.90 814.00 563.00 Revenue 54,070.00 53,227.00 8,311.00 7,960.00 Net Profit Margin 1.00% 1.15% 9.79% 7.07% Liquidity Ratio Liquidity ratio helps in estimation of the cash position of the company and its ability to meet short terms obligations or day to day operation. Two important liquidity ratios current ratio and quick ratio has been calculated in this section for the two companies for 2012and 2013. Current ratio as well as quick ratio implies the potential of the company. If current ratio is 1 or more, it indicates the company has adequate current assets for meeting short term liabilities (Hansen and Mowen, 2000). In case of Scottish Power, the current ratio has declined in 2013 from the previous financial year. The value is very poor and indicates the short term obligations of the firm are much higher than current assets. Hence, the company will encounter difficulty in managing working capital. On the other hand, current ratio of EDF Energy is 1.6 and 1.76 in 2012 and 2013 respectively. It clearly implies that the company has been able to maintain adequate current assets for meeting short term liabilities. Quick ratio does not consider inventories in the current asset as it cannot be quickly converted into cash. The quick ratio of Scottish power clearly indicates the company needs higher amount of current asset. The quick ratio of EDF Energy is found to be better in 2013. It can be concluded that the liquidity position of EDF Energy is quite good while Scottish Power do not have adequate current assets (Madegowda, 2007). Scottish Power (million) EDF Energy (million) 2013 2012 2013 2012 Liquidity Ratio Current Asset 3,053.00 3,532.80 6,140.00 5,998.00 Current Liabilities 5,525.20 5,407.80 3,493.00 3,753.00 Current Ratio 0.55 0.65 1.76 1.60 Current Assets 3,053.00 3,532.80 6,140.00 5,998.00 Inventories 298.30 164.30 2,334.00 2,139.00 Current Liabilities 5,525.20 5,407.80 3,493.00 3,753.00 Quick Ratio 0.50 0.62 1.09 1.03 Efficiency Ratio Efficiency ratio helps in estimating the efficiency of the organizational activities in terms of asset utilization, inventory conversion etc. In this section, two important efficiency ratios, asset turnover ratio and inventory turnover ratio has been calculated. Asset turnover ratio of Scottish Power has improved in 2013. On the other hand, asset turnover ratio of EDF energy has been estimated to be very poor (Weetman, 2010). It can be clearly concluded that Scottish Power has been able to utilize its assets efficiently for generating revenue. In contrast, EDF Energy has not been able to utilize the assets effectively. Inventory turnover ratio assists in calculating the time taken for converting the inventory into sales. It has been found that the inventory turnover ratio of Scottish Power has increased in 2013. On the other hand, the inventory turnover ratio of EDF Energy is much higher than Scottish Power. Higher inventory turnover ratio has a negative implication for the company ( Hansen and Mowen, 2005). Scottish Power (million) EDF Energy (million) 2013 2012 2013 2012 Efficiency Ratio Revenue 54,070.00 53,227.00 8,311.00 7,960.00 Total Asset 13,903.90 19,802.20 30,661.00 28,801.00 Asset Turnover Ratio 3.89 2.69 0.27 0.28 Inventories 298.30 164.30 2,334.00 2,139.00 Cost of Sales 4,612.00 4,403.00 6,059.20 5,770.90 Inventory Turnover ratio 23.61 13.62 140.60 135.29 Capital Structure ratio Capital structure of an organization plays a major role in understanding the risks associated with the organization. Gearing ratio and interest coverage ratio are the two important capital structure ratios. Gearing ratio estimates the ratio between debt and equity capital. In case of Scottish Power, the gearing ratio is greater than 1 which indicates that debt is higher than equity. Hence, higher risk is associated with the company (Weetman, 2010). On the other hand the gearing ratio of EDF Energy indicates that the proportion of debt is much less than equity. Hence, risk is lower in case of EDF Energy. Interest coverage ratio refers to the ability of the company to payback its loan. It has been calculated that the interest coverage ratio has declined in 2013 in case of Scottish Power and it has improved in case of EDF energy. However, both the companies have been able to maintain a good position in terms of interest repayment capability (Horngren, Harrison and Bamber, 2005). Scottish Power (million) EDF Energy (million) 2013 2012 2013 2012 Capital Structure Ratio Debt Capital 6,253.40 6,084.40 1,505.00 1,196.00 Total Equity 3,871.20 3,778.50 16,321.00 15,992.00 Gearing Ratio 1.62 1.61 0.09 0.07 Profit before interest and tax 765.10 911.30 1,197.00 1,061.00 Interest Expenses 211.60 211.90 444.00 546.00 Interest Coverage Ratio 3.62 4.30 2.70 1.94 Investors Ratio Investors ratio is important for making investment decision. Earnings per share and dividend per share are the most important ratios. In case of EDF Energy, the EPS has slightly improved in 2013. Though the EPS of Scottish Power has declined in 2013, it is higher than EDF Energy. On the other hand, dividend per share is higher in case of Scottish Power in 2013 in comparison to EDF Energy. In 2012, the company has not paid dividend. In terms of EPS and dividend payment, Scottish Power seems to be better in comparison to EDF Energy. Scottish Power (million) EDF Energy (million) 2013 2012 2013 2012 Investor Ratio PAT 539.80 613.00 816.00 564.00 No of ordinary shares issued 3,000.00 3,000.00 13,051.00 12,644.00 Earnings Per Share (EPS) 0.18 0.20 0.06 0.04 Dividends 600.00 - 807.00 677.00 No of ordinary shares issued 3,000.00 3,000.00 13,051.00 12,644.00 Dividend per share 20.00 0.00 6.18 5.35 (Ref: (www.scottishpower.com, 2014, www.edfenergy.com, 2014)) Conclusion This paper has provided an insight regarding the financial performance of two major companies from the energy sector of UK. It has been found that the profitability and liquidity position of EDF Energy is better. Moreover, level of risk is less in case of EDF Energy. However, in terms of investors return, Scottish Power seems to be more lucrative. The efficiency of business operations is better in case of Scottish Power. References Atkinson, A. (2007).Management accounting. Upper Saddle River, N.J.: Pearson/Prentice Hall. 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