AGL ENERGY FINANCIAL STATEMENT ANALYSIS

AGL Energy Limited is an energy generating company and retailer of electricity and gas in Australia. The company is publicly listed on the Australian Securities Exchange under the Energy and Utilities industry. The company was founded in 1837 with a committed strategy to offer sustainable and affordable energy to its customers. AGL has the largest electricity generation portfolio in Australia – it is the largest ASX investor in renewable energy in Australia. The company commits to better and prosper in the energy industry by offering the most reliable energy in a carbon-constrained world (AGL Energy LTD, 2017) . 

AGL generates energy and retails gas and electricity in Australia. According to its 2017 financial report, the company has more than 3.6 million accounts in both the residential and commercial marketing across its geographical segments in Australia. The company has a very large investment in the supply of gas and electricity – being the largest investor in the same among the ASX-listed companies. The major competitors are Origin Energy, AusNet Services and, Alinta Energy (AGL Energy LTD, 2016) . 

Horizontal Analysis of Income Statement and Balance Sheet (Financial Year 2015-2017) 

Horizontal Analysis is the trend analysis that compares the financial statements of a company against each year. Trend analysis helps determine the positive and negative trend of the various financial elements of the company in the various financial reports. The horizontal analysis focuses on the historical progress of the company’s financial and can be used to forecast feature years. The periodical trend may be on a monthly , quarterly, or annual basis (Walther, 2012) . The positive or negative trend can help a company look further into trends that may have a substantial effect on the company operations and financial health in the long run. In this case, we analyze the AGL income statement and balance sheet for the years ending 2015 to 2017. In this 3-year horizontal analysis, 2015 financial year is the base year, that is, the denominator in determining the changes in the various financial elements. Appendix A and B shows the horizontal analysis of both the income statement and balance sheet. 

According to Appendix A, AGL recorded a 4% change in revenue in 2016 compared to 18% change in 2017. According to the 2017 annual report, this high increase in 2017 is due to the high wholesale electricity prices in the year, price management, and cost reduction strategies in the company (AGL Energy LTD, 2017) . The company also achieved an operating and net profit in 2017 after operating and net losses in 2015 and 2016 following these changes in the market. The net finance costs decreased by 5% in 2016 and 3% in 2017 against the 2015 amount. However, comparing 2017 and 2016, the net finance costs increased by 0.4% following the increased rehabilitation interest costs following the review of natural gas assets in 2015 (AGL Energy LTD, 2017) . 

Appendix B shows the horizontal analysis of the AGL balance sheet for the years ending 2015 to 2017. AGL had an increase in current assets by 4% in 2016 and 5% in 2017. The total non-current assets decreased by 11% in 2016 and by 12% in 2017 following a decrease in most of the fixed assets in the two periods. Total assets also decreased in 2016 by 8% and by 9% in 2017 due to the decreased fixed assets in the two financial years. The most significant decrease in assets was on the oil and gas assets in 2016 by 91% while in 2017 the significant trend was positive by 113% on other assets. Total liabilities decreased by 5% in 2016 and by 2% in 2017 following the significant decrease in borrowings and other liabilities in the two years. 

Ratio Analysis 

Ratio analysis evaluates various financial aspects of an entity using the financial elements of a firm’s financial reports. Each ratio evaluates different aspects using different financial elements. In this assignment, we use financial ratios on the liquidity of the company. Liquidity ratios evaluate the ability of a company to meet its financial obligations when they fall due using its current assets (liquid assets) (Walther, 2012) . In Table 1, all the ratios used have a common denominator – current liabilities. 

Table 1 : AGL Liquidity Analysis for the 2016 & 2017 Financial Years 

From Table 1, we use the current ratio, quick ratio, and cash ratio to evaluate AGL’s liquidity. The current ratio evaluates the liquidity of the company by comparing the current assets against the current liabilities. In 2016, the AGL recorded a current ratio of 1.41 and 1.33 in 2017. The current ratio indicates a high liquidity level – AGL can use its current assets to meet its current liabilities since the current assets are more than the current liabilities. 

The quick ratio is almost similar to the current ratio except for the fact that the inventory and prepaid expenses of the company are regarded as less liquid hence the subtraction from the total current assets. The quick ratio in 2016 was 1.24 and 1.20 in 2017 indicating a high liquidity level – AGL can pay off all its current liabilities when they fall due. 

The cash ratio evaluates liquidity based on the cash and cash equivalents of the firm against its current liabilities. In 2016, the cash ratio was 0.099 and 0.056 in 2017 – AGL has a very small proportion of cash and cash equivalents against current liabilities hence may not manage to meet all its short-term debt immediately. 

The Australian energy industry is faced with a high volatility of spot prices that may affect the liquidity of the companies. According to the Australian Energy Regulator (2009) , the spot price volatility of the electricity market can have a significant risk to the physical market participants. Low prices may have an impact on the liquidity of the company if the firm is unable to pass some very high electricity prices. Most companies in the industry take out financial contracts that mitigate this liquidity risk by locking the future electricity prices. 

Recommendation 

The horizontal and ratio analysis of the company indicate that AGL is a great investment. AGL has shown positive trends in its revenue, assets, expenses, and liabilities. In the three-year analysis, AGL has shown resilience in their operating and financial performance. The company recorded losses in 2015 and 2016 but in 2017, the profits skyrocketed to give investors a better return. The company also managed to increase their performance resiliently despite the increased electricity prices that as discussed can lead to liquidity issues. The ratio analysis also shows that the company has a very strong liquidity position. The company has more current assets than current liabilities hence a low risk of liquidation. For these reasons, AGL is a great investment to take advantage of especially if an investor is looking to diversify. 

References  

AGL Energy LTD. (2016). Annual Report 2016. Retrieved July 2, 2018, from AGL: https://www.agl.com.au/-/media/AGL/About-AGL/Documents/Investor-Centre/160828_AR_1587084.pdf?la=en 

AGL Energy LTD. (2017). Annual Report 2017. Retrieved July 2, 2018, from AGL: https://www.agl.com.au/-/media/AGL/About-AGL/Documents/Media-Center/ASX-and-Media-Releases/2017/170825-AGL-207-Annual-Report-ASX.pdf?la=en 

Australian Energy Regulator. (2009). Energy Financial Markets 2009. Retrieved July 2, 2018, from AER: https://www.aer.gov.au/system/files/Chapter%203%20%20Electricity%20financial%20markets%202009.pdf 

Walther. (2012). Principles of Accounting I (1st ed.). San Diego, CA: Bridgepoint Education. Retrieved from https://content.ashford.edu/books/AUACC205.12.1/sections/