The investment in any stock or the company is crucial part for an individual or the corporate as it is riskier than the investment into the government bonds. However, the return from those stocks is also higher than the government bonds. In case of investment into the stock of an organization, the investors and the analyst are supposed to evaluate various factors such as the trend in the financial position and financial performance of the business, stock volatility, risk associated with the company, the expected return from the business etc. (Kaplan and Atkinson, 2015). All of these evaluation make it quite easier for the investors and the analyst to identify the investment level of the stock and company so that a better decision could be made.
The financial evaluation process is bit complex but an analyst could apply these tools and methods in a proper way to manage the performance and lead towards a better conclusion about the investment position. In this report, AGL ENERGY LTD and OIL SEARCH LTD has been taken into the context to measure that whether the investment into the Australian market is beneficial for the foreign investors and out of both the stocks, which one is better for the purpose of long term and short term investment. Various financial analysis methods have been applied while performing the study on both the companies to recommend the investors about the better company.
Company descriptions:
At the first place, the history, activities, competitive strength, changes in the business etc has been studied, which are as follows:
AGL energy limited is an energy utility company which is offering its services in the Australian market. The main products of the company includes energy, wind power, natural gas generation, coal seam gas etc. the services of the company includes electricity generation, electricity distribution, retailing of electricity, natural gas distribution etc. the company has been founded in 1837 by the name if Australian gas light company. In the year of 2006, the name has been changed by AGL energy limited. The company is offering the services to around 3.6 million business customers and residential in the Australian states (Home, 2018). The main competitive advantage of the company is its numerous projects and the great market base.
Oil search limited is the largest oil and gas exploration company in the Australian market which is offering its services in the Australian market. The main products of the company include various projects related to the gas and oil explorations. The company has been founded in 1929 and from that time, the company has accomplished various projects. In the year of 2006, the company has offered a great amount of dividend to its shareholders. The company is contributing around 13% in the industry’s GDP which is a great number (Home, 2018). The main competitive advantage of the company is its goodwill and investor’s trust.
Ratios are the study which is performed on the final financial statements of the business in order to summarise the information and make the figures easier for the individuals and the investors. It measures the different financial level of the business such as the short term solvency level, long term solvency level, profit generation capabilities of the business etc. (Moles, Parrino and Kidwekk, 2011) the study on the performance ratios of the company are as follows:
Liquidity ratios are the financial ratios which are used to identify the short term solvency ratios of the company. The current assets, current liabilities, cash position etc of the business are taken into the concern to measure that whether the liquidity risk of the company is higher or in the control of the management.
In case of AGL ENERGY LTD, it has been found that the current ratio level and quick ratios level depict that whether the company is able to pay all the debts against the current funds of the business. On the basis of the below table, it has been found that the current ratio has been reduced from 1.46 to 1.33 whereas the quick ratios has been lowered from 1.29 to 1.2 (Morningstar, 2018). It explains that the funds have been reduced by the business. However the liquidity level is in control of AGL limited.
|
AGL ENERGY LTD |
|||
|
Liquidity Ratios |
2015 |
2016 |
2017 |
|
Current Ratio |
|||
|
Current Assets / |
3,459,000 |
3,587,000 |
3,625,000 |
|
Current liabilities |
2,373,000 |
2,553,000 |
2,731,000 |
|
Answer: |
1.46 |
1.41 |
1.33 |
|
Quick ratio |
|||
|
Current Assets – Inventory / |
3,063,000 |
3,173,000 |
3,274,000 |
|
Current Liabilities |
2,373,000 |
2,553,000 |
2,731,000 |
|
Answer: |
1.29 |
1.24 |
1.20 |
(Morningstar, 2018)
Further, in case of OIL SEARCH LTD, it has been found that the current ratio has been improved from 1.98 to 2.05 whereas the quick ratios have been improved from 1.74 to 1.90. It explains that the funds have been improved by the business. It explains that the associated cost of the company is higher and the liquidity risk is lowest.
|
OIL SEARCH LTD |
|||
|
Liquidity Ratios |
2015 |
2016 |
2017 |
|
Current Ratio |
|||
|
Current Assets / |
1,562,982 |
1,567,217 |
1,650,462 |
|
Current liabilities |
789,213 |
762,627 |
803,559 |
|
Answer: |
1.98 |
2.06 |
2.05 |
|
Quick ratio |
|||
|
Current Assets – Inventory / |
1,375,758 |
1,419,598 |
1,528,644 |
|
Current Liabilities |
789,213 |
762,627 |
803,559 |
|
Answer: |
1.74 |
1.86 |
1.90 |
(Morningstar, 2018)
Profitability ratios are the financial ratios which are used to identify the profit generation capabilities of the company. The net profit, gross profit, sales, equity, assets etc of the business are taken into the concern to measure that whether the profitability level of the company is enough competitive or not (Madura, 2014).
In case of AGL ENERGY LTD, it has been found that the different profitability ratios are calculated to measure that whether the company is able to generate enough funds or not. On the basis of the below table, it has been found that the return on equity has been improved from 2.5% to 7.1%, further, the gross profit margin has been reduced from 26.4% to 25.6% and the net profit level has been improved from 2.04% to 4.36%. It explains that the profit have been managed by the business. However, few reductions have been seen in the profit management capabilities of the business.
|
|
AGL ENERGY LTD |
||
|
Profitability Ratios: |
2015 |
2016 |
2017 |
|
Rate of return on ordinary equity |
|||
|
Net profit / |
218,000 |
– 408,000 |
539,000 |
|
Total equity |
8,806,000 |
7,915,000 |
7,574,000 |
|
Answer: |
2.5% |
-5.2% |
7.1% |
|
Gross profit margin |
|||
|
Gross profit / |
2822000 |
3034000 |
3167000 |
|
Sales Revenue |
10678000 |
11150000 |
12359000 |
|
Answer: |
26.4% |
27.2% |
25.6% |
|
Net profit margin |
|||
|
Net profit / |
218,000 |
-407,000 |
539,000 |
|
Sales Revenue |
10,678,000 |
11,150,000 |
12,359,000 |
|
Answer: |
2.04% |
-3.65% |
4.36% |
(Morningstar, 2018)
In case of AGL ENERGY LTD, it has been found that the return on equity has been improved from -0.8% to 6.1%, further, the gross profit margin has been reduced from 75.9% to 75.4% and the net profit level has been improved from -2.48% to 21.76%. It explains that the profit have been managed by the business. However, few reductions have been seen in the profit management capabilities of the business.
|
|
OIL SEARCH LTD |
||
|
Profitability Ratios: |
2015 |
2016 |
2017 |
|
Rate of return on ordinary equity |
|||
|
Net profit / |
– 53,904 |
124,095 |
387,297 |
|
Total equity |
6,445,881 |
6,530,287 |
6,330,454 |
|
Answer: |
-0.8% |
1.9% |
6.1% |
|
Gross profit margin |
|||
|
Gross profit / |
1647992 |
1151002 |
1340881 |
|
Sales Revenue |
2170446 |
1625222 |
1779509 |
|
Answer: |
75.9% |
70.8% |
75.4% |
|
Net profit margin |
|||
|
Net profit / |
-53,904 |
124,095 |
387,297 |
|
Sales Revenue |
2,170,446 |
1,625,222 |
1,779,509 |
|
Answer: |
-2.48% |
7.64% |
21.76% |
(Morningstar, 2018)
Capital structure ratios are the financial ratios which are used to identify the long term solvency position of the company. The debt, asset, equity, interest amount, earnings etc of the business are taken into the concern to measure that whether the long term solvency position of the company is enough competitive or not.
In case of AGL ENERGY LTD, it has been found that the different capital structure ratios are calculated to measure that whether the company could manage all the funds and debt in an efficient manner. On the basis of the below table, it has been found that the debt to asset ratio, interest coverage ratio, gearing ratios etc of the business has been changed. It explains that the solvency position have been managed by the business (Morningstar, 2018). However, few changes in the debt level must be done by the business to improve the solvency level.
|
AGL ENERGY LTD |
|||
|
Capital Structure ratio |
2015 |
2016 |
2017 |
|
Debt to asset ratio |
|||
|
Total debt |
4,654,000 |
4,136,000 |
4,153,000 |
|
Total assets |
15,833,000 |
14,604,000 |
14,458,000 |
|
Answer: |
0.294 |
0.283 |
0.287 |
|
Interest cover ratio |
|||
|
EBIT / |
811,000 |
521,000 |
1,319,000 |
|
Interest expenses |
250,000 |
236,000 |
237,000 |
|
Answer: |
3.244 |
2.208 |
5.565 |
|
Gearing ratio |
|||
|
Long term liabilities / |
4,654,000 |
4,136,000 |
4,153,000 |
|
Capital employed |
13,460,000 |
12,051,000 |
11,727,000 |
|
Answer: |
0.346 |
0.343 |
0.354 |
(Morningstar, 2018)
Further, in case of OIL SEARCH LTD, it has been found that the different capital structure ratios are calculated to measure that whether the company could manage all the funds and debt in an efficient manner. On the basis of the below table, it has been found that the debt to asset ratio, interest coverage ratio, gearing ratios etc of the business has been changed. It explains that the solvency position have been managed by the business. However, few changes in the debt level must be done by the business to improve the solvency level
|
Capital Structure ratio |
2015 |
2016 |
2017 |
|
Debt to asset ratio |
|||
|
Total debt |
6,921,536 |
6,701,183 |
6,343,549 |
|
Total assets |
14,156,630 |
13,994,098 |
13,477,562 |
|
Answer: |
0.489 |
0.479 |
0.471 |
|
Interest cover ratio |
|||
|
EBIT / |
558,107 |
603,513 |
487,912 |
|
Interest expenses |
262,692 |
264,793 |
249,036 |
|
Answer: |
2.125 |
2.279 |
1.959 |
|
Gearing ratio |
|||
|
Long term liabilities / |
6,921,536 |
6,701,183 |
6,343,549 |
|
Capital employed |
13,367,417 |
13,231,471 |
12,674,003 |
|
Answer: |
0.518 |
0.506 |
0.501 |
(Morningstar, 2018)
Share price of AGL and OSH has been compared with the AORD stock price. The stock price evaluation is as follows:
The stock price of both the stocks has been evaluated on the basis of the AORD stock prices. On the basis of the evaluation on the AGL stock, it has been found that the average return of the stock is 1.02% and the volatility of the stock is 1.40 as well as the correlation of the company is 0.24 (Yahoo Finance, 2018). It explains that the return of the stocks are higher as well as the volatility in the stock price is lower. The stock price of the company is correlated with the AORD stock price at a great level (AFR, 2018).
Further, on the basis of the evaluation on the OSH stock, it has been found that the average return of the stock is 0.66% and the volatility of the stock is -0.36 as well as the correlation of the company is -0.19 (Morningstar, 2018). It explains that the return of the stocks are lower against the AGL stock as well as the volatility in the stock price is lower. The stock price of the company is less correlated with the AORD stock price (Reuters, 2018).
The significant factors of the company have been evaluated behind the changes in the stock price of the company. In case of AGL limited, on 31/10/2016 the macro economical factors have affected the stock price of the company due to which the stock price of the AGL has been improved by 20.69% (AFR, 2018). As well as, on 31 Dec 2017, 18.99% reduction has been seen in the stock price of the business because of dividend announcement (Yahoo finance, 2018).
Further, in case of Oil search limited, on 31/08/2016 the contract with the new companies have affected the stock price of the company due to which the stock price of the AGL has been improved by 11.16% (Reuters, 2018). As well as, on 31 Dec 2017, 10.74% improvement has been seen in the stock price of the business because of the industry factors (AFR, 2018).
The beta values explain about the fluctuations in the stock price of the company. On the basis of Reuters (2018), it has been found that the beta coefficient of AGL and OSH stock is 0.65 and 0.84.
|
AGL |
OSH |
|
|
Beta |
0.65 |
0.84 |
(Reuters, 2018)
Further, according to the given case the risk free rate and market risk premium of the business is 5% and 6%. The CAPM model has been applied on both the companies to identify the expected rate of return. On the basis of evaluation on AGL, it has been found that the required rate of return of the business is 8.9% (Yahoo Finance, 2018). Further, in case of OSH limited, it has been found that the 10.04% return could be expected from the stock of Oil search limited. It explains that the return from the oil search limited is higher. Though, the associated risk with oil search limited is also higher in the industry.
It explains that if the investors want to control on the risk and return both the position than the stock of AGL is better option than the stock of oil search limited.
|
AGL |
|
|
CAPM (Cost of equity) |
|
|
Risk free rate |
5.00% |
|
RM |
6.00% |
|
Beta |
0.650 |
|
Required rate of return |
8.90% |
|
OSH |
|
|
CAPM (Cost of equity) |
|
|
Risk free rate (Rf) |
5.00% |
|
RM (Rm) |
6.00% |
|
Beta |
0.840 |
|
Required rate of return Rf* (Rm-RF)*Beta |
10.04% |
(Yahoo finance, 2018)
Dividend policies are defined as a way to distribute the profits of the company among the stockholders of the business. The different dividend policies are followed by the different companies in order to manage the stock price, stock position and the market capital of the business. Mainly, there are two type of dividend policies which are followed and applied by the companies in its operation in order to identify that how much profit must be distributed among the stockholders of the business (Higgins, 2012).
Dividend policies are mainly of two type i.e. relevant dividend policies and irrelevant dividend policies. Relevant dividend policies explains that the investors always look for the total return and dividend from a stock in order to identify that whether the investment must be done or not. So, a company is required to offer a great amount of dividend to the stockholders of the business. However, in case of irrelevant dividend policies, it has been found that the profits must be retained by the business for internal funds (Madura, 2014). The return and the profits could be managed by the shareholders through selling the stock in the market.
In case of AGL limited, it has been found that the dividend of the company was 0.36, 0.91 and 1.17 in the year of 2015, 2016 and 2017. The earnings level of the company has also been improved from last 3 years. Thus, the dividend payout ratio of the company has been evaluated and it has been found that the dividend payout ratio of the company is quite higher. Company is focusing on offering a great dividend to the shareholders in order to improve the attractiveness of the company in the market (Morningstar, 2018). The company is following the relevant dividend policies.
|
AGL |
|||
|
|
2015-06 |
2016-06 |
2017-06 |
|
Dividends AUD |
0.36 |
0.91 |
1.17 |
|
Earnings per share |
0.33 |
-0.6 |
0.81 |
|
Payout Ratio % * |
109.09% |
151.67% |
144.44% |
(Yahoo finance, 2018)
Further, in case of oil search limited, it has been found that the dividend of the company was 0.06, 0.07 and 0.09 in the year of 2015, 2016 and 2017. The earnings level of the company has also been improved from last 3 years. Thus, the dividend payout ratio of the company has been evaluated and it has been found that the dividend payout ratio of the company has been reducing at great level (Morningstar, 2018). Company has lowered the dividend amount in order to retain the profit for the future investment of the business. It explains that the company is following the irrelevant dividend policy.
|
OSH |
|||
|
|
2015-06 |
2016-06 |
2017-06 |
|
Dividends AUD |
0.06 |
0.07 |
0.09 |
|
Earnings per share |
-0.04 |
0.08 |
0.25 |
|
Payout Ratio % * |
150.00% |
87.50% |
36.00% |
(Yahoo finance, 2018)
To,
Mr. Mark (client)
Street, NSW
Australia.
Subject: Recommendation letter
Dear Mark,
Your concern about the investment into the Australian market has been studied by the financial analyst team. On the basis of your choice, the AGL limited and Oil search limited, oil and gas industry, has been taken into the context to perform the study and measure that whether the investment must be done in the companies or not.
The ratio analysis study has been performed firstly on both the companies and it has been found that the current funds have been reduced by the AGL limited in current year. However the liquidity level is still in control of AGL limited. Further, in case of oil search limited, the funds have been improved by the business and it explains that the associated cost of the company is higher and the liquidity risk is lowest.
Further, in case of profitability analysis, it has been found that few reductions have been seen in the profit management capabilities of the business. Though, the position of AGL limited is better. Further, in case of capital structure ratio, solvency position has been managed by the AGL limited by a better way than the oil search limited. It explains that the performance of AGL limited is better.
In addition, on the basis of required rate of return evaluation, it has been found that if the investors want to control on the risk and return both the position than the stock of AGL is better option than the stock of oil search limited. In terms of dividend polices, AGL is following the relevant dividend policies.
It recommends you to invest into the stock of AGL limited in order to get better return for the long term.
References:
AFR, AGL LIMITED, Viewed Sept 30, 2018, https://www.afr.com/business/energy/gas/how-agl-energy-got-caught-out-on-gas-20180618-h11iox
AFR, Oil search LIMITED, Viewed Sept 30, 2018, https://www.afr.com/research-tools/OSH/shares-forecast
Higgins, R. C., 2012. Analysis for financial management. McGraw-Hill/Irwin.
Home, AGL LIMITED, Viewed Sept 30, 2018, https://www.agl.com.au/
Home, Oil search LIMITED, Viewed Sept 30, 2018, https://www.oilsearch.com/
Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.
Madura, J. 2014. Financial Markets and Institutions. Cengage Learning.
Moles, P. Parrino, R and Kidwekk, D. 2011. Corporate finance, European edition, John Wiley &sons, United Kingdom.
Morningstar, AGL LIMITED, Viewed Sept 30, 2018, https://financials.morningstar.com/balance-sheet/bs.html?t=AGL®ion=aus&culture=en-US
Morningstar, Oil search LIMITED, Viewed Sept 30, 2018, https://financials.morningstar.com/cash-flow/cf.html?t=OSH®ion=aus&culture=en-US
Reuters, AGL LIMITED, Viewed Sept 30, 2018, https://www.reuters.com/finance/stocks/overview/AGL.AX
Reuters, Oil search LIMITED, Viewed Sept 30, 2018, https://www.reuters.com/finance/stocks/overview/OSH.AX
Yahoo Finance, AGL LIMITED, Viewed Sept 30, 2018, https://finance.yahoo.com/quote/AGL.AX/history?period1=1443551400&period2=1538245800&interval=div%7Csplit&filter=div&frequency=1mo
Yahoo Finance, Oil search LIMITED, Viewed Sept 30, 2018, https://finance.yahoo.com/quote/OSH.AX/history?p=OSH.AX
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