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Table of Contents
1. Introduction:................................................................................................................................3
1.1 Purpose of assignment...............................................................................................................3
1.2 Key highlights............................................................................................................................3
1.3 Methodology..............................................................................................................................3
1.4 Source of data (FAME)..............................................................................................................4
2. Justification..................................................................................................................................4
3. Performance Analysis:.................................................................................................................5
3.1 Profitability Ratios.....................................................................................................................5
3.1.1 Return on equity (ROE)..........................................................................................................5
3.1.2 Return on assets (ROA)..........................................................................................................6
3.1.3 Return on capital employed (ROCE):.....................................................................................7
3.2 Liquidity Ratio:..........................................................................................................................9
3.2.1 Quick ratio..............................................................................................................................9
3.2.2 Current ratio..........................................................................................................................10
3.3 Gearing ratio............................................................................................................................12
3.4 Investment ratio.......................................................................................................................13
3.4.1 Earnings per share (EPS)......................................................................................................13
3.4.2 Dividend payout ratio...........................................................................................................14
4. Summary of Analysis.................................................................................................................15
5. Weaknesses of ratio analysis......................................................................................................16
6. Conclusion and Recommendation.............................................................................................16
Recommendation...........................................................................................................................16
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1. 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
company RWE Npower Plc operating in UK.
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
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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
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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
8,996.00
11,017.0
0
9,246.00
Return on equity
0.41
2.78
1.19
23,451.0
0
10,234.0
0
2.29
22,451.00
TOTAL EQUITY
25,212.0
0
9,069.00
11,919.00
1.88
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ROE
3
2.78
2.5
2.29
1.88
ROE
1.5
1.19
1
0.5
0.41
0
2010
2011
2012
2013
2014
Return on assets
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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
ROA
0.03
0.02
0.01
0
2010
2011
2012
2013
2014
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
Equity
8,996.00
Debt
35,313.00
ROCE
0.23
2,148.0
0
9,069.0
0
37,331.
00
0.24
1,971.0
0
9,246.0
0
38,089.
00
0.21
2,153.0
0
10,234.
00
44,471.
00
0.21
22,451.
00
11,919.
00
40,465.
00
1.88
ROCE
0.23
0.24
2010
0.21
0.21
1.88
2011
2012
2013
2014
Figure
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Quick ratio
2010
2011
2012
2013
2014
346
384
332
671
354
1,397.0
0
6,693.0
0
1,179.0
0
6,936.0
0
1,143.0
0
6,091.0
0
1,547.0
0
7,445.0
0
1,723.0
0
7,431.0
0
0.26
0.23
0.24
0.30
0.28
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Quick ratio
0.3
0.3
0.26
0.23
0.25
0.28
0.24
0.2
Quick ratio
0.15
0.1
0.05
0
2010
2011
2012
2013
2014
Current ratio
2010
2011
2012
2013
2014
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5,736.00
6,233.00
TOTAL CURRENT
LIABILITIES
6,359.00
6,396.00
Current ratio
0.90
0.97
5,691.0
0
6,097.0
0
9,576.0
0
7,445.0
0
7,489.0
0
7,331.0
0
0.93
1.29
1.02
Current ratio
1.02
2014
1.29
2013
Current ratio
0.93
2012
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.
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EBIT
Tax expenses
Interest coverage ratio
2013
3,504.0
0
975
3.59
2014
3,536.0
0
1,000.0
0
3.54
3.88
3.8
3.7
3.56
3.6
3.51
3.5
3.59
3.54
3.4
3.3
2010
2011
2012
2013
2014
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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
2011
2012
2013
2014
2,069.0
0
838
2,148.
00
886
2,153.0
0
810
8,996.0
0
0.14
9,039.
00
0.14
1,971.
00
1,006.
00
9,264.
00
0.10
2,451.0
0
1,059.0
0
11,919.
00
0.12
10,342.
00
0.13
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EPS
0.12
2014
0.13
2013
EPS
0.1
2012
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
838
886
1,006.0
0
810
1,059.
00
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NET INCOME
2,069.0
0
0.41
Dividend payout
ratio
2,148.
00
0.41
1,971.0
0
0.51
2,153.0
0
0.38
2,451.
00
0.43
0.43
0.41
0.38
0.4
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
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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.
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.
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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.
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Reference
Books
Libby, R., (2010). Financial Accounting. 6th ed. Oxford: Blackwell Publishing.
Michael, G. C. (2011) Sales Forecasting, 4th ed. London, Thousand Oaks CA: Sage Publication.
OBryan, D, W., (2010). Financial Accounting: A Course for All Majors. 3rd ed. New York: Free
Press
Puxty, A. (2010). Financial Management: method and meaning. 6th ed. New York: Harper &
Row.
Wahlen, J. And Brown, P. (2010) Financial reporting, financial statement analysis, and
valuation. 4th ed. South-western Cengage Learning: New York.
Journals
Chapman, C. S. (2012) Discussion Of: The Role of Information Systems in Supporting
Exploitative and Exploratory Management Control Activities, Journal of Management
Accounting Research, 24(1), pp. 61-63
Frankel, R., Kothari, S. and Weber, J. (2010) Determinants of the in formativeness of analyst
research. Journal of Accounting and Economics 41, 29-54
Khan, M. B. and Rehman, S. (2012) Financial Ratios and Stock Return Predictability, Research
Journal of Finance and Accounting, 3(10), 1-6
Kheradyar, S. and Ibrahim, I. (2011) Stock Return Predictability with Financial Ratios,
International Journal of Trade, Economics and Finance, 2(5): 391-396
Kinney, M. and Trezevant, R. (2010) The Use of Special Items to Manage Earnings and
Perceptions Journal of Financial Statement Analysis 3, 45-53.
Krishnan, R. (2012) Role of Management Accounting Systems in the Development and Efficacy
of Transactive Memory Systems, Journal of Management Accounting Research, 24(1), pp. 201220
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Lewellen, J. (2010) Predicting returns with financial ratios, Journal of Financial Economics, 74,
209235.
Mathuva, D. (2012) The Determinants of Forward-looking Disclosures in Interim Reports for
Non-financial Firms: Evidence from a Developing Country, International Journal of Accounting
and Financial Reporting, 2(2) pp 114-124
Saeidi, P. And Jorjani, N. (2012) Measuring Productivity of Private Companies on the Iran Stock
Exchange, Research Journal of Finance and Accounting, 2(10), 115-121
Soleimani, H. and Salehfar, D. (2012) The Necessity of Applying Accrual Accounting In
Establishing performance Budgeting System (An Analytical Study), International Journal of
Accounting and Financial Reporting, 2(2) 76-88
Soumaya, H. (2012) The effect of debt, firm size and liquidity on investment -cash flow
sensitivity, International Journal of Accounting and Financial Reporting, 2(2) 1-6
Wachter, J. A. (2011) Portfolio and consumption decisions under mean-reverting returns: An
exact solution for complete markets, Journal of Financial and Quantitative Analysis, 37, 6392.
Yogo, M. and Campbell, J. Y. (2010) Efficient tests of stock return predictability, Journal of
Financial Economics 81, 2760.
Website
www.npower.com
(2013)
Consolidated
Segmental
Statement.
Available
from:
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