HI5002 Finance For the Business For Origin Energy

Answer:

Introduction

Origin Energy has been opted for the purpose of this discussion as to whether the overall structure and policies of the company are suitable for future developments or not. Besides, the company’s internal state of affairs like its dividend policy and debt has also been taken into account to ascertain its financial capability. In this context, it must be noted that internal state of affairs must be duly supported by effective management processes so that the company can pave a path for future progress. Furthermore, this is not feasible in the prevalence of an ineffective ownership and governance structure as it may facilitate in interrupting smooth flow of operations. Nevertheless, analysis of a company’s affairs through computation of significant ratios can also assist in determining whether it has been performing effectively in various segments or not, thereby highlighting the significance of such ratios.

Company overview

Origin Energy was established in the year 2000 and was an output of the demerger of the Australian conglomerate that is Boral Limited. Origin Energy is an energy company if integrated nature and is mainly engaged into energy retailing, generation of power and production of natural gas located in New Zealand, Australia and international domain. Origin energy is helping the household of Australia by ensuring they d o not have to pay for the increase in the price of energy. The motto of the company is to simply energy and enables customers to compare offers easily. The focus of the company is on the LED lighting and the sales together with the marketing are established around the efficiency in energy, proper designs and best class service. The business strategy is mainly concerned towards growth in the LED lighting products and touching new scales of achievement.

Structure of ownership and governance

The Board of Directors of the company has established high level for the employees and officers of the company. The concept of corporate governance is provided stability though the string principles. The board of directors serve as a support to the shareholders to have an insight into the management of the company. To ensure a normal functioning, it is important that the BOD follows the standards laid in the guidelines (Origin Energy, 2017). The Board comprises of three committees that is the Audit and Finance Committee, Compensation Committee and a Nominating committee.  The Nominating Committee ascertains the structure of the committee and the membership of other committees on an annual basis and provides recommendations in this regard.

Fundamental ratio

Liquidity ratios

This ratio is also called as efficiency ratio of a company that plays a crucial role in determination of resources that are primarily short-term in nature and the procedure by which the management undertakes to assist the company. Further, such liquidity can be utilized to reflect the extent of funds that the company must cover in order to fulfil its short-term obligations, thereby portraying whether the company has a powerful state of liquidity or not. In contrast to this, the efficiency ratios also play a key role in depicting the effectiveness with which any company can manage its assets for future developments. Moreover, this ratio is also equivalent to the liquidity ratio as it assists in measuring the way a company can attain profits from its investment of funds (Matt & Simon, 2014). From the present scenario, it can be commented that the liquidity position of Origin Energy is strong because the current ratio is higher than the standard ratio that is 1:1 meaning for every $1 of current liabilities there is $1 of current asset with the company. In addition, the quick asset ratio of the company stands at more than 1 meaning that the company has strong liquidity leaving the inventory.

 Long term solvency

The long term solvency is commented by the debt ratio. The debt ratio of the company indicates that the company is using debts to a lower extent. Going by the performance of the company it can be said that the company needs to utilize the debt in an appropriate manner so that it can stabilize the position because the company is under immense pressure (Matt & Simon, 2014).  The debt ratio of the company stands at more than 0.54 meaning that the company has utilized more debts and has excess stress on the debts. The company have a major reliance on the debt. However, when it comes to debt equity ratio, the composition of debt is more as compared to equity.

Efficiency ratio

Efficiency ratios evaluate how effectively the company utilize the assets of the company to generate income. From the computation, it can be observed that the working capital ratio is strong and asset turnover ratio is positive. This implies the fundamentals of the company are strong.

Profitability

This ratio can be utilized to evaluate the way in which any company can attain earnings in opposition to the costs that it incurs to facilitate smooth flow of operations. Furthermore, it must be taken into account that a higher profitability ratio is a very good indicator of the fact that the company can easily cater to its obligations in future (Parrino et. al, 2012). Besides, such ratio is generally compared with the ratio of the last year, thereby proving the fact that a higher ratio signifies a positive business environment for the entire company. The gross profit margin of the company is positive however, the net profit margin of the company is negative implying that the company was unable to have a control over the operating expenses (Porter & Norton, 2014).

 All ordinaries index

Graph 

Computation of share prices with all ordinaries index

Based on the calculation, it can be seen that the stock price of Origin energy complies with the all ordinaries index. Furthermore, it has a beta of around 2.04 that is greater than one (Origin Energy, 2017). This sheds light on the fact that when the scale of operations in the market is high in nature, the stock will also enhance. In contrast to this, when such market scale is low, the stock prices will also decline, thereby reflecting the prevalence of higher volatility in the market.

Announcements

• The introduction of LED lights that are substitutes in the manner of cost, efficiency and quality led to a sharp increase in the price of stock.
• The growth declaration in the past four quarters led to an upsurge in the price. However, in the last two quarter there was negative growth owing to a decline in the fluorescent business (Origin Energy, 2017).
• The Fluorescent scales dipped by 64% and hence, a downfall was observed.

Beta and computation

Beta computation

1. Beta

The company has a beta of 2.04 within its framework that sheds light on the fact that its stock prices have a higher volatility and risky in nature (Origin Energy, 2017).  This is evident by the fact that companies that have a beta of more than one have high movement stocks. Furthermore, the company’s stock price increases and decreases in the similar way as the index (Subramanyam & Wild, 2014).

1. CAPME ® = RFR + β_stock(R _market – RFR)

Therefore, 0.04+2.04 (6-4) = 0.04+4.08

Thus, the answer is 4.12

Origin Energy can be regarded as a high volatile stock and the reason behind this can be attributed to the fact that its beta reports at more than one. Further, it can be stated that such stock cannot be considered inappropriate for users like investors, thereby showing that its stock is entirely conservative in nature (Horngren, 2013).

Weighted average cost of capital (WACC)

1. Weight of equity = E / (E+D)

WACC = 0.0816*9.18% + 0.1984*4.6516% * (1-0.95%)

=8.27%

1. Implications of a higher WACC

In relation to the company, it can be seen that a higher weighted average cost of capital can possess significant implications upon various management processes. This is because that a WACC that is high in nature facilitates in indicating a higher risk in association with the activities of the company (Guerard, 2013). Further, in association to investment projects, it can be seen that investors are more likely to attain further returns by accounting for more risks. The reason behind this can be attributed to the fact that a company’s WACC can be utilized to forecast its anticipated expenses for all finance sources. This consists of costs that are incurred on debt or equity financing, payments being done for addressing debt obligations, and expected rate of return ordered by ownership (Vaitilingam, 2010).

In opposition to this, many companies often seek decline of their respective WACC by choosing cheaper sources of finance because management can use such method to balance their relative expenses of several sources so that not even a single cost can be incurred. Furthermore, the issue of bonds can seem more favourable for the company than the issue of its stocks if interest rates are lower than the demanded return rates on such stock (Brigham & Daves, 2012). Therefore, this sheds light on the fact that a higher WACC can be very risky for the company in relation to higher costs and risks for investment in prospective or effective projects.

Debt ratios

1. Calculation

When the debt ratio of a company is lesser than 0.50, it sheds light on the fact that the company has been operating more on equity financing and lesser on debt sources. Moreover, this reflects that the company has the ability to attain additional loans for the future as it has a stagnant kind of capital structure. This can benefit the company and its workforce as well. Nevertheless, if the company intends on expanding, then debts can be attained.

1. The company’s debt ratio is sufficient in nature because it can raise it in future and that can allow it to expand for future developments. Further, when the company has a debt ratio of less than 0.50, it can utilize such opportunity to enhance in the future. Besides, it has already raised major loans in the year 2016 (Brealey et. al, 2011).

Dividend

The company has not paid any dividend for the year 2017. Further, the company has paid dividend regularly in the past five years. The company incurred heavy losses in the year 2017 and owing to it, the declaration of dividend was not supported by the board.. The credit policy of the firm is present in a manner that it restricts the payment of dividend in the case of losses (Origin Energy, 2017). Further any payment of dividend in future will be done as per the sole discretion of the BOD and will rest n the operation, financial position and contractual restrictions.

Recommendation

The company encountered a major loss for the year 2016 and is currently facing issue in terms of net profit. The reason behind this can be attributed to lesser revenues and interest revenues. Moreover, it can also be seen that the company had a balanced ratio of debt that can be utilized by it to diversify its affairs in a fair manner. In other words, this can allow the company widespread its affairs in a way that can assist in developing its overall position in the industry. Furthermore, in relation to governance, the company has a proper structure of the same that can be used to enhance smooth flow of operations. Overall, considering the entire evaluation and assessment processes of the company, it can be recommended that it is crucial for Origin  to focus on its management processes and other operations so that it can attain additional developments in the upcoming tenure.  Since, the company has strong utility it can manage funds in a better fashion and hence, can take control of the operational expenses. This will help the company is rectifying the net loss situation. The company can revive the profit position through strong policies and management.

Conclusion

From the previously mentioned evaluation and analysis, it can be witnessed that the company has an effective debt ratio and dividend policy within its framework. Even though it had encountered huge losses in the year 2016 and 2017, its debt structure can allow it to expand in the future because of the ability to procure more loans for future developments. Besides, the ownership and governance structure are also well-crafted in nature that facilitates in smooth flow of operations. Therefore, if the company duly concentrates on its management processes, it can attain additional progress in the entire industry as all its inefficacies will be terminated. Overall, the company is in a good position to develop in the upcoming tenures. Hence, going by the trend in the global scenario, it can be commented that the stock has the potential to provide strong returns in the upcoming future and hence must be in the radar of the stock list. Though the present global market might be disturbed and particularly this sector, however the time is apt for selection of the stock as it is available in discount.

References

Berk, J,  DeMarzo, P & Stangeland, D 2015,  Corporate Finance,  Canadian Toronto: Pearson Canada.

Brealey, R, Myers, S & Allen, F 2011, Principles of corporate finance,  New York: McGraw-Hill/Irwin.

Brigham, E. & Daves, P 2012, Intermediate Financial Management , USA: Cengage Learning.

Guerard, J. 2013, Introduction to financial forecasting in investment analysis, New York, NY: Springer.

Horngren, C 2013, Financial accounting, Frenchs Forest, N.S.W: Pearson Australia Group.

Matt B & Simon P 2014, Accounting and Finance For Managers, Kogan Page Limited

Northington, S 2011, Finance, New York, NY: Ferguson's.

Origin Energy. (2017) Origin  Energy Annual report & Accounts 2017 [online]. Available from: https://www.originenergy.com.au/content/dam/origin/about/investors-media/annual%20review%202017/AnnualReport_FY2017.pdf [Accessed 22 May 2018]

Parrino, R., Kidwell, D. & Bates, T 2012, Fundamentals of corporate finance, Hoboken, NJ: Wiley

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Subramanyam, K & Wild, J 2014, Financial Statement Analysis, McGraw Hill

Vaitilingam, R 2010,  The Financial Times Guide to Using the Financial Pages, London: FT Prentice Hall.

Williams, J 2012,  Financial accounting, New York: McGraw-Hill/Irwin.