Evaluation Of Genesis Energy Limited For Investment
Financial Position Analysis
Finance for business report explains about the various tools through which the performance, actual position, activities, changes into the stock performance etc could be evaluated easily. This report has been prepared on Genesis Energy Limited. It is an Australian company which is managing its operations and business into electricity industry. For evaluating the actual position and performance of the company, financial statement of the company has been analyzed. Further, the stock price of the company has been compared with the Australian stock prices and additionally, the total cost of capital has been evaluated to identify the best investment proposal of the company. This report assists the company and the investors to evaluate the position of the company so that a better conclusion could be get.
- Company description:
Genesis Energy Limited is basically a New Zealand company which has been listed in the industry of electricity generation and LPG and electricity natural gas. This company has also been registered in the ASX by the name of GNE.AX. This company is one of the largest electricity and LPG and natural gas retailers in the Australian market. The market share of the company is increasing continuously and currently the 39% of electricity market of Australia is owned by the company (Home, 2018). The company is currently employed 860 people. Further, the total assets and total equity of the company has been enhanced.
- Ownership structuregovernance:
Ownership governance structure is an important part of corporate governance of an organization. It manages the elements of finance of the company through merging various theory of agency. The ownership structure of the company has been analyzed and the following data has been found:
The figure 1 explains that the people with higher than 20% shareholding is only one which name is Her Majesty. This is holding 51.23% share of the company. In addition, there are only 2 investors who are holding more than 5% stock of the company. The name of the holder is HSBC Nominees (New Zealand) Limited and the total ownership is 5.17% (Annual Report, 2018).
Figure 1: Ownership structure
(Annual Report, 2018)
The chairman of the company is Jennifer Shipley. He is working with the company since 2009. The board members of the company are Mark cross, John Leuchars, Maury Leyland, Douglas McKay, Timothy Miles and Paul Zealand. And the CEO of the company is Marc England who is working since 2016 with the company (Reuters, 2018). Further, it has been evaluated that none of the investors are with the same surname in the top 20 shareholders of the company and none of the shareholder are holding more than 5% stock of the company.
- Performance ratios:
Ownership Governance Structure
Performance ratios are the part of ratio analysis study. This ratio includes various ratios which are used by the professionals to manage and administer the financial changes and the performance of the company. Following are the study few performance ratios of the company:
Return on assets ratio explains about the total profit of company which has been earned in context with the total assets of the company. The return on assets calculations of the company explains that the return on assets is 2.82% which is expressing about moderate performance of the company (Morningstar, 2018).
|
Return on assets= |
NPAT/ total Assets |
|
119/4219 |
|
|
2.82% |
(Gapenski, 2008)
Return on equity (ROE):
Return on equity ratio explains about the total profit of company which has been earned in context with the total equity of the company. The return on equity calculations of the company explains that the return on equity is 6.00% which is expressing about moderate performance of the company.
|
Return on Equity= |
Net profit after tax/ ordinary equity |
|
119/1982 |
|
|
6.00% |
(Morningstar, 2018)
Debt ratio explains about the total liability of company which has been managed in context with the total assets of the company. The debt ratio calculations of the company explain that the capital structure of the company is 53.02% which is expressing about huge liabilities of the company in context with the total assets of the company.
|
Debt Ratios = |
Total Liabilities/ total assets |
|
2237/4219 |
|
|
53.02% |
Further, it has been explained that the EBIT, TA, EBIT and OE decides the return on equity of the company which could be proven through the following equation:
|
EBIT / TA * NPAT / EBIT * TA/ OE = NPAT / OE |
|
|
(137/4219)*(119/137)*(4219/1982) |
(119/1982) |
|
6.00% |
6.00% |
TA/OE:
Total assets and operating equity are the main elements of an organization which is stated in the financial position statement. Both of these figures are important for the professionals to evaluate the performance of the company. Mainly, these figures impact on the ROA and ROE of the company. The following equation makes it easy for the professionals to understand it:
|
TA/TE = (NPAT/ Total assets)/(NPAT/TE) |
|
TA/TE =Total assets/TE |
ROA and ROE:
In addition, the ROE of the company is 6% whereas the ROA of the company is 2.82% which explains that the ROE is significantly more than the ROA of the company. The main reason behind this difference is following accounting equation:
|
Total assets |
= |
total liabilities |
+ |
Total shareholder equity |
(Glajnaric, 2016)
- Changes in stock price:
Below given graph, figure 2 explains about the changes into the stock price of GEN.AX and stock price of AORD. It explains about the relationship among the stock price of both stocks.
Figure 2: Changes into stock price
(Yahoo Finance, 2018)
The above graph, figure 2 explains that the Stock price pg GEN is quite stable in nature. No more changes have taken place into the stock price of the company in last 2 years. On the other hand, AORD stocks explain that the stock price is quite volatile and it changes rapidly. The Correlation of both the stock explains about 0.83 similarities which explain that the stock price of both the stocks is related to each other. Changes into one stock make an impact on the other stock as well.
- Significant factors:
Performance Ratios
The stock price of GNE.AX has been quite stable in last 2 years. Though few positive as well as negative changes have taken place into the performance of the company. The changes into the stock price have been taken due to various market and internal changes. The stock price on 05-01-2016 has been reduced due to industry factors (AFR, 2018). Further, the stock price on 26-01-2016 has been changed due to the dividend announcement of the company (ASX, 2018). More to it, the stock price of 14-03-2016 has been enhanced by 4% due to new project of the company (Bloomberg, 2018). At the same time, the stock price of the company has been changed on 8-10-2017 due to the less divided announcement of the company and the law suit wining has also enhanced the stock price of the company on 14-8-2017 (Yahoo Finance, 2018).
- Calculation of CAPM and beta values:
- Beta:
Beta calculations express about the systematic risk of the company. The beta of the company is 0.1018 which explains that the risk level of the company is quite lower.
- CAPM:
|
Calculation of cost of equity (CAPM) |
|
|
RF |
4.00% |
|
RM |
6.00% |
|
Beta |
10.18% |
|
Required rate of return |
4.20% |
The above table explains that the required rate of return of the company is 4.20% which explains that if the company wants to enhance the funds by raising the equity capital than they are required to pay 4.20% of total profit as dividend amount to the shareholders of the company (Morningstar, 2018).
- WACC calculations:
- WACC calculations are as follows:
|
Calculation of WACC |
||||
|
Price |
Cost |
Weight |
WACC |
|
|
Debt |
1,249 |
5.60% |
0.69816 |
0.0391 |
|
Equity |
540 |
4.20% |
0.30184 |
0.01269 |
|
1,789 |
Kd |
5.18% |
|
Calculation of cost of debt |
|
|
Outstanding debt |
1,249 |
|
interest rate |
8% |
|
Tax rate |
0.3 |
|
Kd |
5.60% |
|
Calculation of cost of equity (CAPM) |
|
|
RF |
4.00% |
|
RM |
6.00% |
|
Beta |
10.18% |
|
Required rate of return |
4.20% |
(Reuters, 2018)
The above table explains that the cost of equity of the company is 4.20% and cost of debt of the company is 5.6% which explains that if the company wants to enhance the funds through equity capital than they are required to pay 4.20% as dividend to the shareholders of the company and at the same time, for raising the funds through debt, company has to pay 5.6% of total profit as interest amount to debt holders. The current cost of capital of the company is 5.18% which is quite moderate. If the company would raise the debt more than equity than the total cost of the company would be more.
- Debt ratios:
- Optimal capital structure:
Optimal capital structure is a level of debt and equity of the company where the risk of the company and the cost of the company are lower. The following calculation of debt ratio explains that the company is required to reduce the level of debt and must enhance the equity to manage the optimal capital structure.
|
2017 |
2016 |
|
|
Debt Ratios = |
Total Liabilities/ total assets |
Total Liabilities/ total assets |
|
2237/4219 |
1787/3778 |
|
|
53.02% |
47.30% |
- Gearing ratios:
Further, the gearing ratio of the company has been evaluated and it has been found that the gearing position of the company has been enhanced. The company has lowered the short term liabilities and the total liabilities have been enhanced by the company. Due to it, the gearing ratio of the company has been enhanced (Dixon and Monk, 2009). Director has not mentioned anything about it in their annual report.
|
2017 |
2016 |
|
|
Gearing ratios = |
Total Liabilities/ Capital employed |
Total Liabilities/ Capital employed |
|
2237/(4219-228) |
1787/(3778-346) |
|
|
56.05% |
52.07% |
The company is following the relevant dividend policy which explains that the dividend amount must be given to the stockholders of the company to motivate them and attract more investors towards the company. Company is continuously giving a good % of profit as dividend to the stockholders (Gapenski, 2008). Currently, 8% dividend amount has been given to the stockholders of the company.
Conclusion:
It is a pleasure to recommend you that the company Genesis Energy Limited is a good opportunity in terms of investment. The risk and return of the investment of the company is quite in the favour of the investors. According to the evaluation, it is one of the best companies to make an investment. The short term as well as long term returns of the company is quite better. Overall, an investor should invest in Genesis Energy Limited to enhance the return.
References:
AFR. 2018. Stocks. viewed Jan 29, 2018, https://www.afr.com/research-tools/GNE/company-profile/operational-history
Annual Report. 2018. GENESIS ENERGY LIMITED. viewed Jan 29, 2018, https://gesakentico.blob.core.windows.net/sitecontent/genesis/media/content/investors/other/gene1127-gear17-annual-report-web-spreads.pdf
ASX. 2018. GENESIS ENERGY LIMITED. viewed Jan 29, 2018,https://search.asx.com.au/s/search.html?query=GENESIS+ENERGY+LIMITED+&collection=asx-meta&profile=web
Bloomberg. 2018. GENESIS ENERGY LIMITED. viewed Jan 29, 2018, https://www.bloomberg.com/quote/GNE:AU
Dixon, A.D. and Monk, A.H., 2009. The power of finance: accounting harmonization’s effect on pension provision. Journal of Economic Geography, 9(5), pp.619-639.
Gapenski, L.C., 2008. Healthcare finance: an introduction to accounting and financial management. Health Administration Press.
Glajnaric, M., 2016. The importance of dividend paying stocks. Equity, 30(2), p.6.
Home. 2018. GENESIS ENERGY LIMITED. viewed Jan 29, 2018, https://www.genesisenergy.co.nz/
Morningstar. 2018. GENESIS ENERGY LIMITED. viewed Jan 29, 2018,https://financials.morningstar.com/cash-flow/cf.html?t=GNE®ion=nzl&culture=en-US&platform=sal
Reuters. 2018. GENESIS ENERGY LIMITED. viewed Jan 29, 2018,https://www.reuters.com/finance/stocks/company-officers/GNE.AX
Yahoo Finance. 2018. GENESIS ENERGY LIMITED. viewed Jan 29, 2018,https://nz.finance.yahoo.com/quote/GNE.AX/history?period1=1451586600&period2=1514658600&interval=1d&filter=history&frequency=1d