Question:
Discuss about the Financial Reporting and Analysis System.
The analysis and interpretation of financial position of a business entity is essential for the end-users such as investors and creditors for taking accurate investment decisions. As such, the report discusses and analyses the findings obtained from financial analysis of two ASX listed companies operating in the same sector in Australia. The companies selected for the purpose are ERM Energy and Pacific Energy Limited. The reports present the findings interpreted from the horizontal, vertical and ratio analysis of both the companies. It also provides recommendations to the investors regarding their potential investment decision based on their financial performances. The limitations of the investment decisions based on the financial statements analysis is also discussed in the report. The investment decision recommend is also supported from the CSR performance of both the companies.
The financial ratio analysis is an important tool in analysing and examining the financial performance of both the companies. The analysis will help the end-users in making decisions relating to their investment in either of two companies (Stickney et al., 2009). The results interpreted from the financial ratio analysis of both the companies can be discussed as follows:
The profitability ratio helps in evaluating the earnings realised by a company as compared to the expenses incurred during a specific period of time (Weygandt, Kieso and Kimmel, 2010). The profitability position of both the companies is analysed through the calculation of the following ratios:
The asset efficiency ratio indicates the efficiency of a company in using its asset base in generating revenue. It can be measured through the calculation of the following ratios:
The liquidity ratio measures the ability of a company to meet its debt obligations. The liquidity position of both the companies is compared through the following formulas:
The capital structure ratio of a company provides analysis of its debt and equity structure (Ernst and Häcker, 2012). It is assessed for the both the companies through the calculation of the following ratios:
It can be said from the analysis of financial position of both the companies that investors should invest in Pacific Energy Limited as compared to ERM Energy. The Pacific Energy has better capital structure and also is providing larger profits as compared to ERM Energy. The Pacific Energy though doe snot possesses good liquidity position in comparison to ERM Energy but its asset efficiency and cash flows is better than that of ERM.
The main shortcomings of investment decision based on financial statement analysis area s follows:
Thus, as such investors should also rely on information obtained from other source such as non-financial information for their investment decisions. As such, the comparison of CSR (Corporate Sustainability Report) of both the companies will help in making better investment decisions. The energy companies operating in Australia are presently emphasizing to a large extent on improving their social and environmental performance to achieve sustainable growth and development. It can be analyzed from the sustainability report of ERM Energy that the company is taking active steps in promoting the social and environmental development. The company has actively contributing in carrying of the vents such as UN Sustainable Development Summit and UN Climate Change Conference in Paris. In addition to this, the company has also implemented effective strategies for minimizing the carbon emissions and overcoming the depletion of natural resources in order to promote its sustainable growth. The company is actively working with global clients to support the sustainable growth of local communities globally. The company has also developed ERM foundation in order to align its strategic objectives as per the GRI’s G4 Sustainability Reporting Guidelines (ERM publishes its 2016 Sustainability Report, 2016).
On the other hand, Pacific Energy is also placing emphasis on improving its sustainability performance through adopting strategies for reducing the greenhouse gas emissions in development of its energy products. The company has placed achieving improved environmental performance and energy efficiency as its major strategic goals for promoting the social and environmental development. The company is also attributed to be a recognized leader in developing clean burn technology. Therefore, it can be said although both the companies are implementing strategies for improving the sustainable performance but ERM is performing better on the basis of sustainability perspectives. The Pacific Energy Limited has not disclosed its CSR reports and therefore investors re recommend investing in ERM as it has provided larger information reading its social and environmental performance (Pacific Energy, 2017).
The financial ratio analysis through supports the decision-making process of investors by providing an insight into the present and future financial condition of a business entity has also some limitations. The ratio analysis helps the investors in comparing the financial position of different business entities but sometimes the results obtained from its use is not accurate due to some limitations of the method. The major limitation of ratio analysis is that some results obtained from the method are based on historical data and some on current financial data (Gibson, 2010). For example, the income statements report some financial elements on the current costs while in balance sheet some information is stated on historical cost. As such, the ratio analysis can provide unusual financial results. Also, the use of only non-financial information in decision-making has a major problem that it does not depict the future performance of an entity in absence of accounting estimations and predictions (Weil, Schipper and Francis, 2013).
Conclusion
It can be inferred from the overall report that end-users should integrate the use of both financial and non-financial information in making investment decisions.
References
Annual Report. 2016. ERM Limited.
ERM publishes its 2016 Sustainability Report. 2016. [Online]. Available at: https://www.erm.com/en/news-events/news/erm-publishes-its-sustainability-report-2016/ [Accessed on: 7 October, 2017].
Ernst, D. and Häcker, J. 2012. Applied International Corporate Finance. Vahlen.
Gibson, C. 2010. Financial Reporting and Analysis: Using Financial Accounting Information. Cengage Learning.
Morning Star. 2017. Pacific Energy Ltd PEA. [Online]. Available at: https://financials.morningstar.com/balance-sheet/bs.html?t=PEA®ion=aus&culture=en-US [Accessed on: 7 October, 2017].
Pacific Energy. 2017. Green Energy. [Online]. Available at: https://pacificenergy.net/green-energy [Accessed on: 7 October, 2017].
Palepu, K. et al. 2007. Business Analysis and Valuation: Text and Cases. Cengage Learning EMEA.
Stickney, C.P. et al. 2009. Financial Accounting: An Introduction to Concepts, Methods and Uses. Cengage Learning.
Weil, R., Schipper, K. and Francis, J. 2013. Financial Accounting: An Introduction to Concepts, Methods and Uses. Cengage Learning.
Weygandt, J., Kieso, D.E. and Kimmel, P.D. 2010. Financial Accounting: IFRS. John Wiley & Sons.
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