Accounting for Management Decision MAking Leading Organisation

Question: Discuss about the Accounting for Management Decision Making for Leading Organisation. Answer: Introduction About AGL Energy Limited AGL Energy Limited is the leading organization in Australia, founded in 2006. The company deals with products and services integrated with energy. It has the enhanced sustainability strategy to uphold high standards and control for ethical business conduct, compliance and transparency. It is involved in retailing and generation of electricity for utilizing the energy resources for the purpose of both residential and commercial (AGL, 2016). About Genesis Energy Limited Genesis Energy Limited was formerly known as Genesis Power Limited. It was founded in the year 1999 located in New Zealand. It is a diversified energy company which provides energy solutions and services to its customers. It generates energy in the form of electricity through trade electricity, natural gas and generation assets. It is one of the largest electricity and gas retailer company based in New Zealand (Reuters, 2016). Discussion Analysis of Financial Ratios The analysis of financial statement indicates the position of an organization in the market. Basically, financial statement of an organization is comprised of Profit and Loss Statement, Statement of Cash Flow and Balance Sheet. The stakeholder analyzes the financial position of an organization and its competitors to mitigate the number of risk involved and thereby wish to increase their opportunity for making profit through investing in the stable business. The financial statements of AGL Energy Limited (AGL, 2015) and Genesis Energy Limited (Genesis, 2015) has been analyzed to calculate the key ratios. Profitability Ratio Return on Assets: ROA ratio indicates the total income produced by the total amount of assets in a particular period of time. It explains the efficiency of the firm for managing its assets throughout a period of time in order to produce profits (Gibson, 2012, pp.325-26). Formula: Net Income / Average Total Assets Return on Assets of AGL Energy Limited and Genesis Energy Limited for FY 2014 and 2015 are as follows- AGL Energy Limited Genesis Energy Limited in $ million in $ million 2015 2014 2015 2014 Return on Assets 0.058043327 0.0905618 0.097732426 0.084807 (Gibson, 2012) Net Profit Margin: Ratio of net profit margin indicates the income earned by an organization with the total amount of revenue produced. This ratio calculates an efficiency of the company to convert sales into the net income generated (Gibson, 2012, p.324). Formula: Net Profit / Total Revenue Net Profit Margin Ratio of AGL Energy Limited and Genesis Energy Limited for FY 2014 and 2015 are as follows- AGL Energy Limited Genesis Energy Limited in $ million in $ million 2015 2014 2015 2014 Net Profit Margin 0.020415808 0.0545716 0.049961861 0.024539 (Gibson, 2012) Liquidity Ratio Current Ratio: The current ratio examines the connection between the current assets and the current liabilities. It determines the ability of the firm to meet its short term liabilities. The ideal current ratio is 2:1 (Stickney et al., 2009, p.266). Formula: Current Assets / Current Liabilities Current Ratio of AGL Energy Limited and Genesis Energy Limited for FY 2014 and 2015 are as follows- AGL Energy Limited Genesis Energy Limited in $ million in $ million 2015 2014 2015 2014 Current Ratio 1.457648546 1.5747922 1.118102614 1.448905 (Stickney et al., 2009, p.266) Quick Ratio: Quick Ratio determines the short term liquidity position of the organization. It determines the firm's ability to finance its short term liabilities with its liquid assets (Stickney et al., 2009, p.266). Formula: (Current Assets - Inventory - Prepaid Expenses) / Current Liabilities Quick Ratio of AGL Energy Limited and Genesis Energy Limited for FY 2014 and 2015 are as follows- AGL Energy Limited Genesis Energy Limited in $ million in $ million 2015 2014 2015 2014 Quick Ratio 1.290771176 1.4866113 0.859954824 1.068532 (Stickney et al., 2009, p.266) Capital Structure Ratio Debt to Equity Ratio: It examines the amount of capital contributed by the creditors and the owners of the firm. This measures the level of extent to which the shareholders equity fulfills an obligations of the company to its creditors (Damodaran, 2002, p.51; Heikal et al., 2014). Formula: Total debt / Total equity Debt to Equity Ratio of AGL Energy Limited and Genesis Energy Limited for FY 2014 and 2015 are as follows- AGL Energy Limited Genesis Energy Limited in $ million in $ million 2015 2014 2015 2014 Debt to Equity Ratio 0.526942711 0.5772272 0.762956064 0.798692 (Damodaran, 2002, p.51) Equity Ratio: Equity ratio determines the total amount of assets which can be invested by the owners in the company (Bellalah, 2013, p.175). Formula: Total Equity / Total Assets Equity Ratio of AGL Energy Limited and Genesis Energy Limited for FY 2014 and 2015 are as follows- AGL Energy Limited Genesis Energy Limited in $ million in $ million 2015 2014 2015 2014 Equity Ratio 0.556748563 0.5368615 0.517403628 0.518185 (Bellalah, 2013, p.175) Market Performance Earnings per Share: Earnings per share indicate the profitability of the company as it measures the allocation of company's profit in respect to outstanding shares (Rao, 2003, p.103; Livnat Segal, 2000). Formula: (Net Income - Preferred Dividend) / Weighted Average Outstanding shares Earnings per Share of AGL Energy Limited and Genesis Energy Limited for FY 2014 and 2015 are as follows- AGL Energy Limited Genesis Energy Limited in $ million in $ million 2015 2014 2015 2014 Earnings per Share 33.30203443 98.20296 10.49050633 4.920062 (Rao, 2003) Dividend per Share: This ratio indicates the amount of dividend declared by the company for each outstanding share (Rao, 2003, p.103; Peavler, 2016). Formula: Dividend / Number of Shares Dividend per Share of AGL Energy Limited and Genesis Energy Limited for FY 2014 and 2015 are as follows- AGL Energy Limited Genesis Energy Limited in $ million in $ million 2015 2014 2015 2014 Dividend per Share 24.22535211 37.103594 7.695147679 3.186978 (Rao, 2003) Comparison of Ratio Analysis The profitability, asset efficiency, liquidity and capital structure of AGL Energy Limited and Genesis Energy Limited has been analyzed through key financial ratios. AGL Energy Ltd. and Genesis Energy Ltd. have recorded revenue of USD 10,678 million and USD 2097.6 million respectively for the period of FY 2014-15. Profitability: AGL Energy Limited has recorded a net profit of US$ 218 million and US$ 570 million in FY 2015 and FY 2014 respectively. Whereas, Genesis Energy Limited has recorded lower net profit in these financial years i.e. US$ 104.8 million and US$ 49.2 million in FY 2015 and FY 2014 respectively. Therefore, profitability of AGL Energy Limited is higher in comparison to Genesis Energy Limited for the FY 2014 as it has recorded a difference of net profit margin of 0.03. But in the FY 2015 Genesis Energy Limited has recorded a high profit margin as compared to AGL Energy Limited. This change in net profit has been observed due to high fluctuation in the total revenue. From the net profit margin it can be depicted that Genesis Energy Limited has improved its performance from the last financial year. Liquidity: Liquidity of both the company can be measured through its current and quick ratio. AGL Energy Limited is having sufficient cash to meet its current liabilities as compared to Genesis Energy Limited. The cash balance of both the company is declining in FY 2015 followed by FY 2014. But the company has invested its cash in the purchase of fixed assets and operating activities. Thus, it can be stated that short term solvency of AGL Energy Limited is stable as compared to Genesis Energy Limited. The company has strong liquidity position in the industry. Asset Efficiency: AGL Energy Limited has recorded its total assets of US$ 15,833 million in the FY 2015 which has increased by US$ 1699 million from 2014 whereas, total assets of Genesis Energy Limited has decreased by US$ 101.4 in the FY 2015. Despite the fluctuation in the sales of both companies, asset efficiency of AGL Energy Limited is better than Genesis Energy Limited. This efficiency of AGL Energy Limited is high because the company has increased its level of inventory with the increase in its sales. Capital Structure: The capital structure of any company depicts the financial structure of the firm. The company is either financed by debt or equity which determines its solvency position in the industry. The capital structure of the company can be measured through equity ratio and debt to equity ratio. The capital structure of AGL Energy Limited is stable as compared to Genesis Energy Limited. This shows that the long term performance of an organization is considered safe and thereby also indicates that the prospective creditors or the stakeholders of the company are more stable and less risky to offer the future loan amount. It can be inferred that the company is issuing more equity shares as compared to long term loans and thereby earning huge profits by the investment made by shareholders. Conclusion From the above discussion and ratio analysis it can be said that AGL Energy Limited is highly feasible and economically viable in its performance. Ratio analysis helps to determine the company's efficiency in the financial terms in order to sustain its performance within the industry. While making an investment decision, it is important to synergize the financial statements of the company effectively as well as the internal and external market conditions of the company which it is prevailing through. Hence, in this report only financial performance of the company has been analyzed to make an investment decision. The financial ratios are calculated for the period of two years only which is subjected to the limited study of the company's financial statements. Also, business policies and market strategies have not been considered while making decision for investment which may have a great impact on the investors. Recommendation The financial performance of the AGL Energy Limited is stable as compared to the Genesis Energy Limited. The revenues of the company have been increasing and with the market being noted to be having higher demand, it is suggested for the investors to make investment in the AGL Energy Limited against Genesis Energy Limited. References AGL, 2015. Annual Report 2015. AGL Energy Limited. AGL, 2016. Our Company. [Online] Available at: https://www.agl.com.au/about-agl/who-we-are/our-company [Accessed 28 August 2016]. Bellalah, M., 2013. Islamic Banking and Finance. Cambridge Scholars Publishing. Damodaran, A., 2002. Investment Valuation: Tools and Techniques for Determining the Value of Any Asset. John Wiley Sons. Genesis, 2015. Annual Report 2015. Genesis Energy Limited. Gibson, C.H., 2012. Financial Reporting and Analysis. 13th ed. Cengage Learning. Heikal, M., Khaddafi, M. Ummah, A., 2014. Influence Analysis of Return on Assets (ROA), Return on Equity (ROE), Net Profit Margin (NPM), Debt To Equity Ratio (DER), and current ratio (CR), Against CorporateProfit Growth In Automotive In Indonesia Stock Exchange. International Journal of Academic Research in Business and Social Sciences, 4(12), pp.101-14. Livnat, J. Segal, D., 2000. The Calculation of Earnings per share and Market Value of Equity: Should common stock equivalents be included? Northfield Information Services. Peavler, R., 2016. What Are Dividends per Share and How Are Dividends per Share Calculated? [Online] Available at: https://www.thebalance.com/calculate-dividend-per-share-393223 [Accessed 28 August 2016]. Rao, M.E.T., 2003. Management Accounting. New Age International. Reuters, 2016. Genesis Energy Ltd (GNE.NZ). [Online] Available at: https://in.reuters.com/finance/stocks/companyProfile?symbol=GNE.NZ [Accessed 28 August 2016]. Stickney, C.P., Weil, R.L., Schipper, K. Francis, J., 2009. 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