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Introduction:
The pricing hike in the energy products in the country has raised alarms. The consumers
expenditure is increasing day by day (Wahlen and Brown, 2010). Recent news shows that the
consumers expenses have risen by about 1.23 per day due to the rapid rise in the prices of
the electricity and gas (www.npower.com, 2013). The governmental additional cost of green
production has burdened the energy companies with additional production costs. Thus this
has compelled the companies to raise the prices (Yogo, and Campbell, 2010).
In the following assignment the focus will be to evaluate the financial performance of the
energy
1.3 Methodology
For the purpose of financial analysis of Npower, the tools of financial ratio are applied to
carry out the evaluation. Financial ratio is an effective method to critically evaluate the
performance of the company (OBryan, 2010). The comparison of the present performance
with the historical figures will indicate the development of the company in financial as well
as economical values. The company analysis is an effective tool as these ratio analyses are
made for the managers of the company to make the decisions pertaining to different areas of
business (Lewellen, 2010). The financial statements form the basis of the financial ratio
analysis. For this purpose the financial statements are sources through valid sources like
Fame or the annual reports from the websites of the company (Michael, 2011). The ratio
analysis is calculated to identify the profitability ratio, liquidity ratio, gearing ratio and the
investment ratio. Apart from this the analysis drawbacks are also discussed to highlight the
weaknesses of the methodology (Kinney and Trezevant, 2010).
2. Justification
Fame software is used as this is a prevalent source of information. As this framework has a
record of almost all the companies functioning in UK, this source has been selected for the
purpose of collecting the financial statements of the past 5 years of Npower (Chapman,
2012). The financial statements are valid and reliable as the login of these sites requires the
discloser of the details of the user and hence it is secured. Mintel is another data base which
shows similar reports but it is not used as this data base shows jumbled figures which include
a number of irrelevant data (Soumaya, 2012).
Financial ratio analysis model is used as this model shows a comparative study on year on
year basis and so it helps the mangers of the company to understand the flaws in the present
operation and evaluate the success of new plans incorporated (Mathuva, 2012). The managers
of the company can use these ratios to understand the financial performance of the company
without considering all the financial reports which saves time.
3. Performance Analysis:
Performance analysis is the determination of the change in the financial performance of the
company in the given external economic condition (Soleimani and Salehfar, 2012). These
ratios show the ability of the company to perform strategically within the prevailing financial
condition.
Return on equity
2010
2011
2012
2013
2014
NET INCOME
3,719.00
TOTAL EQUITY
8,996.00
9,069.00
9,246.00
10,234.00 11,919.00
Return on equity
0.41
2.78
1.19
2.29
1.88
ROE
3
2.78
2.5
2.29
1.88
2
1.5
ROE
1.19
1
0.5
0.41
0
2010
2011
2012
2013
2014
Return on asset
2010
2011
2012
2013
2014
NET INCOME
2,079.0
2,159.00
1,917.00
2,153.00
2,476.00
Total assets
0
44,607.
46,400.00
47,335.00
54,705.00
52,384.00
Return on Assets
00
0.05
0.05
0.04
0.04
0.05
ROA
0.06
0.05
0.05
0.05
0.04
0.05
0.04
0.04
0.03
ROA
0.02
0.01
0
2010
2011
2012
2013
2014
The employment of capital into a business is for the purpose of earning profit. ROCE is the
indicative of the income earned through the total investment in a certain project (Kheradyar
and Ibrahim, 2011). The capital employment comprises of the debentures of the company and
the net assets which may be infused. The assets of the company is not fully explored to meet
the actual efficiency of the company.
ROCE = Profit after tax / Capital employed*100
Capital employed = Debt + Equity
Return on capital employed (ROCE)
2010
2011
2012
2013
2014
NET INCOME
2,069.00
2,148.00
1,971.00
2,153.00
22,451.00
Equity
8,996.00
9,069.00
9,246.00
10,234.00
11,919.00
Debt
35,313.00
40,465.00
ROCE
0.23
0.24
0.21
0.21
1.88
ROCE
0.23
0.24
0.21
2010
2011
0.21
2012
1.88
2013
2014
Figure
Quick ratio
2010
2011
2012
2013
2014
346
384
332
671
354
TOTAL RECEIVABLES
Quick ratio
0.26
0.23
0.24
0.30
0.28
Quick ratio
0.3
0.3
0.26
0.23
0.28
0.24
0.2
0.1
Quick ratio
0
2010
2011
2012
Quick ratio
2013
2014
Current ratio
2010
2011
2012
2013
2014
5,736.00
TOTAL CURRENT
LIABILITIES
6,359.00
Current ratio
0.90
0.97
0.93
1.29
1.02
Current ratio
1.02
2014
1.29
2013
0.93
2012
Current ratio
0.97
2011
0.9
2010
0
0.2
0.4
0.6
0.8
1.2
1.4
Current ratio is the indication of the current assets as compared to current liabilities. The
operational activities of the company determine the ideal current ratio and this ratio is
different for different companies (Krishnan, 2012). The ideal current ratio is considered to
be 2:1 but it depends on the company to company. For Npower it is evident that the company
as maintained a constant current ratio which shows that the company has shown stagnant
approach has not undergone any change in the production capacity as well as the increase in
the demand of the company(Krishnan, 2012). This ratio shows that the company has financial
crisis as the demand of the products have stagnated.
EBIT
Tax expenses
Interest coverage ratio
2013
3,504.00
975
3.59
2014
3,536.00
1,000.00
3.54
3.88
3.8
3.7
3.56
3.6
3.59
3.51
3.5
3.54
3.4
3.3
2010
2011
2012
2014
Interest coverage ratio justifies the use of the liabilities. If the ratio is low this means that the
company is not able to earn profit to pay the interest payable for the liabilities and hence the
company may soon turn out to be insolvent (Krishnan, 2012). For Npower the ratio is
decreasing and this is matter of concern as the company is finding it difficult to meet the cost
or the interest of the liabilities. The earnings of the company have fallen in the recent years. If
the condition continues Npower will find it difficult to survive in the competitive market and
will soon windup. The interest coverage ratio can also influence the profit margin of the
company as most of the profit earned will be drained away to pay the interest of the liabilities
(Krishnan, 2012).
2010
NET INCOME
2,069.00
Preferred dividend
838
TOTAL EQUITY
8,996.00
EPS
0.14
2011
2012
2,148.00 1,971.00
886
1,006.00
9,039.00 9,264.00
0.14
0.10
2013
2014
2,153.00
2,451.00
810
1,059.00
10,342.00
11,919.0
0
0.12
0.13
EPS
0.12
2014
0.13
2013
0.1
2012
EPS
2011
0.14
2010
0.14
0
0.02
0.04
0.06
0.08
0.1
0.12
0.14
This ratio is useful for the investors of the company (OBryan, 2010). The investors make
decision related to the investment in the company if these ratios are impressive. The ratio
shows the ability of company to create wealth for the shareholders. In case of Npower the
EPS has dipped lower than that of the previous years figures which means that the company
has not been able to earn the expected returns from the projects (OBryan, 2010). This can be
due to the reason that the economic condition of the energy sector has declined in the recent
years.
2010
2011
2012
2013
2014
TOTAL DIVIDEND
PAID
NET INCOME
838
886
1,006.00
810
2,069.00
2,148.00
1,971.00
2,153.00
0.41
0.41
0.51
0.38
1,059.00
2,451.00
0.43
0.43
0.41
0.38
0.4
0.3
0.2
0.1
0
2010
2011
2012
2013
2014
4. Summary of Analysis
The analysis of Npower shows that the company is having huge financial crisis. The demand
of the products has declined as a result the operational cost of the company have not been
rationalised. The profitability ratios of the company show that the company is bound to
increase the prices of the energy products. The financial performance evaluates that the
company has shown no improvement in the earnings of the company or the demand of the
company. The return from the projects has also not been able to improve the financial health
of the company. Npower has earned profit but that is not enough to overcome the interest
payable by the company.
understanding the strategies of the company (Krishnan, 2012). The investment decision may
also show apparent decrease in the cash flows which can change the ratios to give adverse
results related to the performance of the company.
The inflation factor is not considered in the processes of calculation of the ratio for historical
data which also is a weakness as the actual value comparison is not considered.
Recommendation
Decrease in the operational cost: The operational cost should be decreased to increase the
profit margins of the company. To achieve this company should decrease the waste of the
resources and involve new technologies to increase the efficiency of Npower.
Cost of resources: The resources incurs for the large amount of production cost. Npower
should encourage the use of cheap raw material like renewable energy to produce electricity
using green technologies.
Improvement of collection period: The collection period of the company should be decreased
so that the company can avail liquid cash to infuse into the operational activities. These
strategies can help the company to improve the availability of resources to prevent lag in time
of production process. Decrease in the ideal time will result in increase in the efficiency.