Financial analysis is the procedure of evaluating and analysing the financial statements of a particular company in order to assess its financial performance and position over the past years. The analysis conducted helps in knowing about the future prospects of the company by analysing the past trends. On the basis of the information derived from such analysis, the investors take important decisions related to their investment in a particular company.
The report provides a proper financial analysis of APA Group for the past two accounting periods. It includes ratio analysis and trend analysis of company’s balance sheet, income statement and cash flow statement. Further, the report critically reviews the company’s corporate governance statement and indentifies the challenged faced by it in terms of ethical behaviour. All the findings of the report are then summarised under the heading conclusion provided in the last.
Description of APA Group Stapled
APA group is an Australian based company which owns and operates electricity assets and natural gas transportation across the country. There are three segments through which the company operates and they are Asset Management, Energy Infrastructure and Energy Investments. In Australia, it is considered as the largest natural gas infrastructure business. Its core activities includeownership of energy infrastructure assets, gas transmission business to the areas located across Australia and energy investments in listed and unlisted entities.
The asset management division of the company provides operating and commercial services to the Australian Gas Network Limited along with the maintenance services. Energy infrastructure segment deals with the business related to gas assets, pipelines and power stations. The energy investment has its stake in many investment companies and offer services related to gas distribution and transmission. APA is publically listed on ASX and is traded with the ticker ASX: APA.
The top five competitors of APA Group are ConocoPhillips Company, Chesapeake Energy Corporation, Devon Energy Corporation, Petróleos de Venezuela S.A. and HollyFrontier Corporation. Among these, ConocoPhillips is an exploration company which deals with the production of crude oil, natural gas, transports and many others. The company has approx. 11000 employees and has revenue of $32.6 billion. The PDVSA has the highest revenue of $128.4 billion with 98,000 employees working in the organization. All such corporations operate in the same industry and are chief competitor s of APA Group Stapled.
Ratio analysis
Liquidity ratios
These ratios indicate the financial stability of the company by measuring its ability of managing its assets properly for paying off its short term financial obligations. They reflect the overall liquidity position of the company and states that whether the firm can maintain sufficient cash for the business or not.
|
Formula |
2016 |
2017 |
|
|
Current ratio |
Current assets/Current liabilities |
0.48 |
1.11 |
|
Quick ratio |
Quick Assets/current liabilities |
0.45 |
1.07 |
|
cash flow ratio |
Operating cash flow/ current liabilities |
0.98 |
1.40 |
It is one of the liquidity ratios which determine firm’s capability in paying off its current liabilities with its current assets. The ideal current ratio for the companies is 2:1. This means that the firm should have its CAs double of its CLs so that it can easily set off its obligations. Companies having increased and high current ratio have better liquidity position than others.
The calculation done in above table reflects that the current ratio of APA has increased in 2017 from 0.48 to 1.11. This was due to the significant increase in company’s cash and cash equivalents from $85 million to $395 million. Moreover, the inventories of the firm remain same which results in more availability of cash in the business for paying off the liabilities. On the top of that, the current liabilities of the company reduce by 21% in financial year 2017.
It is another liquidity ratio which measures the competency of the firm in setting off its CLs with its most liquid assets. The quick assets of the company comprises of all the current assets except the amounts of inventories and prepaid expenses. The standard QR is 1:1 which means the company should maintain its quick assets equal to its current liabilities.
The same trend is observed in the QR of APA Group as it rises from 0.45 to 1.07 during the year 2017. Due to the constant inventories and high upsurge in the cash balance, the company is easily able to maintain its liquidity position by paying off its liabilities on time. The same has been reflected by the reduction in its overall current financial obligations. A significant fall of 69% was noticed in APA’s short term debt which eventually affected its total CLs. However, the payables increases during the year but can be set off against the amount of cash company had in 2017.
This ratio measures the operating cash flow of the firm against its current liabilities. It is said that if the ratio is below 1, it means that the company is not generating sufficient cash flows from its operations to meet its short term debt.
The CFR of APA was 0.98 in 2016 which increased to 1.40 in 2017. This is because of the hike of 12.93% in company’s cash flow from operations. As the ratio is more than 1, it reflects that APA has improved its capability of generating more cash flows and meeting its short term debt obligations quickly and easily.So overall, it can be said that the APA’s liquidity has improved and increased in 2017 as compare to the prior year.
Profitability ratios
It is another category of ratios which focuses on the profitability position of the firm. It takes into account the amount of profits earned and returns offered by the firm from its revenue during a particular financial year. Generally, investors look up to these ratios to know about the fact that whether the firm, in which they are investing is profitable enough to provide them high and regular returns on not.
|
Formula |
2016 |
2017 |
|
|
Net profit margin |
Net profit/Total revenue |
8.74% |
10.33% |
|
Gross profit margin |
Gross profit/Total revenue |
100.00% |
100.00% |
|
Return on assets |
Net income /Total assets |
1.21% |
1.58% |
|
Return on equity |
Net income available for equity shareholders /Total equity |
6.04% |
7.99% |
|
Earnings per share |
Given in the annual report (in cents) |
0.16 |
0.21 |
It measures the net profit f the company against its total revenue earned during a specific accounting period. The amount of net profit is expressed as a percentage of total sales and a high NPR reflects that the firm is capable enough to maintain its profitability throughout the year.
From the above table, it can be interpreted that NPR of APA has increased from 8.74% to 10.33% due to the considerable rise in company’s net income. In 2016, it was reported at $180 million which rose to $237 million in 2017. Along with this the revenue also rises to $2295 million from $2060 million in the same year. However, the percentage change in the net margin was more than the change in company’s sales. Profit rose by 32% whereas the revenue reported an increase of 11% only. This boosted up the ratio and increases the profitability.
It determines the gross income of the firm earned from the revenue and is expressed in percentage form only. In case of APA Group, it is noticed that the amount of revenue and gross profit is same due to the absence of company’s cost of goods sold. This makes the ratio 1005 in both the years and the increase of 11% also remains same.
It evaluates the quantity of returns generated by the company by employing its total assets within the business. A high ROA is more favourable for the companies than the lower one.
The same trend has been noticed in the ROA of APA Group as it increases from 1.21% to 1.58%. One reason was the significant rise in company’s net profit and a minor increase in company’s total assets. Its property and plant reduces which shows the sale of assets and generation of cash in the business. Overall, its total assets rose by 1% only whereas profit got a hike of 32%. This brings an upsurge in the ratio.
It is also a profitability ratio which determines the amount of return offered by the company to its shareholders on the part of their capital invested in the business. APA’s ROE was 6.04% in 2016 which turned out to be 7.99% in 2017. The only reason was high profits and stable shareholder equity of the company.
It shows the portion of profit attributed to each outstanding share of the company. In other words, the ratio reflects the earnings made by the firm on its each share. The EPS of APA also increases from 0.16 cents to 0.21 cents due to increased profits and same number of shares during the year.
Common size statements
From the above abstract it can be observed that the revenue and operating expenses of APA increased by 11% along with the 1% increase in its interest expense. Further, the net income rose by 32% making the company more profitable. In 2017, the profit was 8.74% of the revenue and the same changed to 10.33% in 2017. Operating expenses reduced from 62.18% to 61.96% along with the reduction in the finance cost from 24.81% to 22.57% in 2017.
The total assets of the firm rose by 1%, total liabilities has shown an increase of 2% and the stockholders’ equity remains same for both the years. The major change was the cash balance as it was 0.57% of total assets in 2016 which increased to 2.63% of the same in 2017. The non-current assets were 97.16% in 2016 and 94.87% in 2017 due to the reduction in property and plant. As far as liabilities are concerned, the portion of long term debt in total liabilities was 78.53% in 2016 which reduced to 63.635 in 2017. Further, the element of current and non-current liabilities also reduces in the same year.
The portion of investment in property increases from 67.66% to 90.21% as well as the funds invested in purchase of intangibles also rose in 2017. APA’s debt has shown an upsurge of 93.24% and cash dividends paid also rose by 8.86% during the same year.
Corporate Governance
The concept of corporate governance states the manner in which the company is governed by its board of directors and senior managers. Being an ASX listed company, APA Group has to publish its corporate governance statement every year which contains all the information about the policies and procedures followed by the company in governing its business. As per the recent report, it is observed that APA follows all the recommended principle of ASX CGC and provide the disclosure of the same in the appendix.
However, there are certain obligations and regulations in respect of remuneration which do not apply to APA under the ASX listing rules and Corporation ACT 2001. As far as ethical behaviour is considered, the statement provides a code of conduct which is to be followed by each employee of the organization including senior staff. The challenges which can be faced by APA in context to ethical behaviour are the dishonesty and deceitfulness on part of employees. Furthermore, creating a sustainable and safe environment for the workers is itself a challenging task for the company. All the fraudulent practices, breach of law and any action which lead to financial loss for the firm also counts in issues related to ethical behaviour.
Conclusion
From the above report, it can be concluded that APA Group has enhanced its performance over the year and do follow all the principles and recommendations of ASX CGC. It can also be interpreted that it is very important for the company to conduct a financial analysis in order to know about its future growth by evaluating trends in past year. This also helps the potential investors to take correct and appropriate decisions regarding a particular entity. Overall, it can be said that the financial position of APA Group has improved in 2017 as compare to the prior year.
APA Group, Corporate Governance Statement and Appendix 4G (2017) <https://www.apa.com.au/globalassets/documents/governance-docs/20170823-corp-gov-statement–4g-final.pdf>
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