This report is prepared for critical evaluation of the financial condition of an ASX listed firm so that feasible advice could be provided to a wealthy investor. In this paper, the chosen company is Renu Energy Limited and the assessment of its financial condition would be made for providing advice to the client. Along with this, effective evaluation of the annual report of Renu Energy Limited would be made for obtaining an overview of the structures of corporate governance and ownership. Certain ratios would be taken into consideration for making honest assessment of the financial performance and position of the organisation and accordingly, recommendations would be provided to the investors for assisting in their investment decisions.
The share prices of Renu Energy Limited for the past two years would be taken into account for computing monthly return and comparison would be made with the monthly return of All Ordinaries Index. With the help of such comparison, it would be possible to provide a detailed account of the price movements of the stock chosen as well as the index on monthly basis for the previous two years. The debt ratios would be taken into consideration for analysing the capital structure of the business organisation. Along with this, the dividend policy that it has adopted would be discussed in this paper as well. Finally, the report would focus on developing a letter of recommendations to the concerned investor about the possible investment opportunity in Renu Energy Limited.
Renu Energy Limited is an independent power producer involved in providing clean energy products and services. It develops, owns and maintains assets having renewable energy with the intention for providing access to the customers at a minimum price having no upfront cost (Renu 2018). In addition, it develops various projects in order to ensure stable long-term returns. For developing these projects, the utilisation of proven technologies is made and they include solar PV operating under long-term contracts. This technology helps in ensuring constant cash flows and thus, the wealth of the shareholders is maximised. There are four key business areas of the organisation, which include the following:
The first component is used in apartments, shopping centres and retirement villages having no upfront costs for the customers. The second component is used for agricultural and processing facilities having organic waste streams for reducing greenhouse gas emissions. The third component is effective for industrial, commercial, community and government buildings for selling the system to the customers at minimised rates. The final component is designed so that the customers could make income from under-utilised assets.
The major shareholders holding a major portion of ordinary shares in Renu Energy Limited are the following:
|
Shareholder names |
Ordinary shares held |
Percentage of shares held |
|
S. Mclean |
– |
0.00% |
|
C. Murray |
196,262 |
14,24% |
|
A. Rohner |
– |
0.00% |
|
R. Brimblecombe |
28,192,979 |
84.74% |
|
J. Hamilton |
– |
0.00% |
|
K. Spence |
– |
0.00% |
|
G. Mitenyi |
– |
0.00% |
|
T. Pritchard |
– |
0.00% |
|
A. Mills |
341,622 |
1.03% |
|
Total |
694,837 |
100% |
In accordance with the above table, it could be stated that Renu Energy Limited has one shareholder named R. Brimblecombe holding nearly 85% of the company shares (Renuenergy.com.au 2018). Similarly, there is one shareholder named C. Murray holding nearly 15% of the company shares. However, most of the key management personnel do not own shareholdings of the organisation. Thus, after classifying the shareholder categories of Renu Energy Limited, it could be said that it is a family firm run by R. Brimblecombe, as majority of the company shares belong to the individual.
The governance structure of Renu Energy Limited comprises of the board chairperson and other non-executive directors, who operate independently. The organisation is observed to include two out of seven members in its firm committee and they are the following:
The table primarily assists to identify the individuals associated with the governance process of Renu Energy Limited. For the audit and risk management committee along with the remuneration and nominations committee, A. Rohners is the chairperson and the other person is R. Brimblecombe. R. Brimblecombe is observed to hold above 80% of the shareholdings, while A. Rohners does not enjoy any shareholding. The other five members are not included in the governance structure of the organisation. Hence, it could be stated that Renu Energy Limited is a family firm, since only two members are engaged in its governance structure.
|
Liquidity Ratios:- |
|||
|
Particulars |
Details |
2016 (in $’000) |
2017 (in $’000) |
|
Current Assets |
A |
20,933 |
12,066 |
|
Current Liabilities |
B |
4,532 |
2,914 |
|
Inventory |
C |
1,229 |
30 |
|
Current Ratio |
A/B |
4.62 |
4.14 |
|
Quick Ratio |
(A-C)/B |
4.35 |
4.13 |
Long Term Solvency Ratios:
|
Financial Leverage Ratios:- |
|||
|
Particulars |
Details |
2016 (in $’000) |
2017 (in $’000) |
|
Total Assets |
A |
21,961 |
14,887 |
|
Total Equity |
B |
17,138 |
11,704 |
|
Total Liabilities |
C |
4,823 |
3,183 |
|
Debt-to-Equity Ratio |
C/B |
0.28 |
0.27 |
|
Debt Ratio |
C/A |
0.22 |
0.21 |
|
Equity Ratio |
B/A |
0.78 |
0.79 |
Efficiency Turnover Ratios:
|
Efficiency/Turnover Ratios:- |
|||
|
Particulars |
Details |
2016 (in $’000) |
2017 (in $’000) |
|
Total Assets |
A |
21,961 |
14,887 |
|
Non-Current Assets |
B |
1,028 |
2,821 |
|
Revenue |
C |
165 |
354 |
|
Trade & Other Receivables |
D |
5,048 |
1,146 |
|
Total Asset Turnover Ratio |
C/A |
0.01 |
0.02 |
|
Fixed Asset Turnover Ratio |
C/B |
0.16 |
0.13 |
|
Receivables Turnover Ratio |
C/D |
30.59 |
3.24 |
Profitability Ratios:
|
Profitability Ratios:- |
|||
|
Particulars |
Details |
2016 (in $’000) |
2017 (in $’000) |
|
Net profit/loss |
A |
-10,559 |
-6,703 |
|
Revenue |
B |
165 |
354 |
|
Total Assets |
C |
21,961 |
14,887 |
|
Total Equity |
D |
17,138 |
11,704 |
|
Net Profit Margin |
A/B |
-6399.39% |
-1893.50% |
|
Return on Equity (ROE) |
A/D |
-61.61% |
-57.27% |
|
Return on Assets |
A/C |
-48.08% |
-45.03% |
Market Value Ratios:
|
Market Value Ratios:- |
|||
|
Particulars |
Details |
2016 (in cents) |
2017 (in cents) |
|
Earnings per Share |
A |
-1.98 |
-1.12 |
|
Dividend per Share |
B |
– |
– |
|
Market Value per Share |
C |
0.01 |
0.022 |
|
Dividend Pay-out Ratio |
B/A |
0.00% |
0.00% |
|
Dividend Yield Ratio |
B/C |
0.00% |
0.00% |
|
Price/Earnings Ratio |
C/A |
-0.00 |
-0.02 |
From the above two figures, it is inherent that Renu Energy Limited has maintained a constant return throughout the years. However, the returns are considerably low in comparison to the All Ordinaries Index despite the fluctuations in the index over the two years. In addition, significant fall in returns could be observed in the share price of the organisation due to the fact that it has suffered considerable net loss in both the years. Hence, from the point of view of the investors, Renu Energy Limited could not be considered as a feasible investment, as it might lower their overall return on investments. In other words, it could be cited that the share price of the organisation is under-valued with respect to the future streams of revenue and the stock index where it operates.
The major factor that creates an influence on the share price movement of the company is the “impact of the competitors”. The company constantly operates in the utilities industry that has continuously cope up with the increasing costs along with the complexities of maintaining the legacy system (Hurd 2018). The recent trend of utility company suggests that Renu Energy Ltd is constantly facing the rising competition from the growing number of competitors and the innovative customers. The share prices reflect that the company shares prices face large amount of price volatility in the last two years (Landis 2018). The rising trend of innovating company has increasingly led to higher volatility in the share prices of the Renu Energy Ltd.
An important factor that creates an impact on the share price of the company is the “changes in the forecast of the analysis”. Each and every year the company’s top line has risen by 70.64% on average reflecting that the company is high on growth as the expenditure races ahead of the revenues resulting in higher volatility of the share price and greater amount of annual loss generated by the company.
The “industry wide factor”can be held accountable for the movement in the share price is the enduring amount of headwinds during the period of last twelve months. This has resulted in the average earnings drop by -10.49%. This has resulted in Renu Energy Ltd in running in loss with greater industry headwinds the impact that has created a huge amount of volatility in the last twelve months (Online.capitalcube.com 2018). Wind would turn out to be appealing factor and the industry wide factor suggest that the energy industry production has declined by 71% and the share price has been highly volatile. The lower commercial solar system has suggested that the commercial solar system prices has been driven by the lower cost of supply instead of erosion of the profit margins.
The calculated beta of the Renu Energy Ltd stands at 0.89.
|
Particulars |
Details |
Units |
|
Calculated Beta |
A |
0.89 |
|
Risk-free Rate |
B |
4% |
|
Market Risk Premium |
C |
6% |
|
Required Rate of Return |
B+(AxC) |
9.34% |
Taking into the considerations the rationale for making a conservative investment is that the share prices of the Renu Energy Ltd reflects higher degree of volatility. The share price of the company is relatively lower but highly volatile. Renu Energy Ltd is a held as the loss making company and a comparative analysis of the company suggest that the investing in the shares of the company may not yield the investors with the desired amount of returns (Simply Wall St 2018). The share prices of the company has continued to perform lower against the Australian energy renewable industry average. Though the company can be considered as the good value based on the value of its assets in comparison to the other Australian industry renewable energy industry average but the shares of the company are not worth purchasing.
Renu Energy Ltd has not reported a profit in its last two financial years and with the year on year growth in their earnings rate was negative over the period of five years. The one year earnings growth of Renu Energy Ltd suggest that the company is not presently profitable (Scott 2015). The company has not been successful in making an efficient use of its shareholders funds and the company continuous loss making nature has reflected that capital over the period of two years has reflected a picture of loss making. Though an argument can be bought forward the Renu Energy Ltd has managed to cover its long term commitments as has cash and other short term assets.
The analysis suggest that the company has not paid its shareholder dividends and it is difficult to measure the whether the share prices of the company is above or under the risk saving benchmark (Macve 2015). Since the lack of Renu Energy Ltd dividend payment cannot be viewed as a viable choice for the investors to make an investment in its shares. The share prices of the Renu Energy Ltd presently trades at price to book ratio of 12.70 and a comparatively negative against its industry peers the company cannot be held as the viable options of making an investment.
|
Particulars |
Details |
Units |
|
Non-current liabilities |
A |
$ 269 |
|
Total equity |
B |
$ 11,704 |
|
Total non-current liabilities and equity |
C=A+B |
$ 11,973 |
|
Weight of debt |
D=A/C |
2.25% |
|
Weight of equity |
E=B/C |
97.75% |
|
Finance expenses |
F |
$ – |
|
Rate of return on debt |
G=F/A |
0.00% |
|
Corporate tax rate |
H |
30% |
|
Required rate of return |
I |
9.34% |
|
Weighted average cost of capital (WACC) |
[DxGx(1-H)+(IxE)] |
9% |
The Weighted Average Cost of Capital can be defined as the cost of organization capital in which an each and every category of cost of capital weighted proportionately (Warren and Jones 2018). An organizations Weighted Average Cost of Capital can be utilized to project the anticipated costs to finance all the sources (Williams 2014). Any form of greater amount of WACC portrays that there could be instances of greater risk associated to the effectiveness of the organization. There are certain kind of shareholders that needs higher return to suppose the availability of greater amount of risk. This includes any form of payments associated to obligation of debt or financing cost required for financing equity.
There are large number of listed companies in the public that possess numerous sources of funds in order to make an attempt to create a balance among the Weighted Average Cost of Capital to generate the single figure of cost of capital (Krüger, Landier and Thesmar2015). Concerning company valuation WACC is viewed as vital tool for considering the applications of loan for business functions. Issuing bonds might be considered as the more attractive way of raising capital than issuing stocks. For example, the interest rates are lower than the demanded rate of return on the stocks.
Shareholders that are valuable for the organizations may bring forward their concern if they notice that the WACC is greater than the actual return (Magni 2015). A suggestion is obtained that company is not relatively valuable and there is likelihood of improved return that other companies may provide the shareholders in market.
Debt ratio can be defined as the ratio that helps in measuring the degree to which the company is leverage (Fernandez 2015). The debt ratio for the Renu Energy Ltd during the year 2016 stood 0.22 while in the subsequent year of 2017 the debt ratio for the company stood 0.21 reflecting a marginal improvement in its debt. At the time of administering the capital the objective of the management is to make sure that the company continues in the form of going concern and maintain the structure to assure that the lowest cost of capital is incurred by the company.
The company is currently not in the position of funding debt until the projects are advanced in the direction of complete physically phase (Chen 2017). The debt structure suggest that Renu Energy Ltd requires sufficient management of debt since it has not reflected an instances of maintaining an optimal capital structure.
On the other hand to adjust its gearing ratio Renu Energy Ltd has increased its borrowing in order to obtain the funding of its project.
By taking into the considerations the dividend policy of the Renu Energy Ltd it can be stated that the company does not has any dividend since the director the company has not declared any dividend in respect of the current reporting period.
To ABC Ltd
From Financial Advisory Team
Respected Sir,
We would like to draw your kind attention towards the letter of recommendations that is directed in the direction of Renu Energy Ltd. It is not worth in making an investment in the shares of the company since its share prices has been lower than the market average. Renu Energy Ltd earnings and the EBITDA are both the negative that suggest that the company price to earnings is not meaningful between the operating advantage and the growth anticipations.
Renu Energy Ltd has posted a relatively lower net profit margin despite its asset efficiency has been relatively higher. In comparison to its industry peers the performance of the company has trailed the peer median and there is an indication that the company may be challenged operationally in relative to its peers. The EBITDA is considered to be negative and provides a suggestion that it is not generating a better price to earnings with lower anticipations of growth. The lower level of Renu Energy Ltd capital investment provides an indication that it is below the peer median.
The return on capital suggest that the company is currently in the mood of maintenance. Renu Energy Ltd has also not reported dividend over the period of last two years and it is a loss making company. Hence, from the perspective of investors it can be stated that it is not viable to make an investment in the shares of the Renu Energy Ltd since it is loss deriving unit.
We anticipate that the information that is provided has helped in serving your purpose.
Thank You
Conclusion:
On a conclusive note, it can be stated that the report has evident provided Renu Energy Ltd is a loss making company. The share prices of the company reflect a negatively growing trend with the earnings growth rate over the period of last one year has remained negative. The EBITDA is considered to be negative and provides a suggestion that it is not generating a better price to earnings with lower anticipations of growth. The share prices of the Renu Energy Ltd presently trades at price to book ratio of 12.70 and a comparatively negative against its industry peers the company cannot be held as the viable options of making an investment.
Reference List and Bibliographies:
Chen, J., 2017. WACC is Not the Proper Discount Rate for Asset Cash Flows.
Connell, J., Agarwal, R. and Dhir, S. eds., 2018. Global Value Chains, Flexibility and Sustainability.
Dirdal, T.H. and Gjone, K., 2017. Risk-return relationship of the renewable energy industry (Master’s thesis, BI Norwegian Business School).
Fernandez, P., 2015. WACC: definition, misconceptions and errors.
Fracassi, C., 2016. Corporate finance policies and social networks. Management Science, 63(8), pp.2420-2438.
Howard, J., Williams, T. and Agarwal, R., 2016, September. Governance Models and Frameworks for Smart Specialisation. In First SMARTER Conference on Smart Specialisation and Territorial Development titled “Changing Patterns of Territorial Policy: Smart Specialisation and Innovation in Europe”.
Hurd, K. 2018. Should You Invest In The Utilities Sector And ReNu Energy Limited (ASX:RNE)?. [online] Simply Wall St. Available at: https://simplywall.st/news/should-you-invest-in-the-utilities-sector-and-renu-energy-limited-asxrne/ [Accessed 27 May 2018].
Krüger, P., Landier, A. and Thesmar, D., 2015. The WACC fallacy: The real effects of using a unique discount rate. The Journal of Finance, 70(3), pp.1253-1285.
Landis, R. 2018. Does ReNu Energy Limited’s (ASX:RNE) Earnings Growth Make It An Outperformer?. [online] Simply Wall St. Available at: https://simplywall.st/stocks/au/utilities/asx-rne/renu-energy-shares/news/does-renu-energy-limiteds-asxrne-earnings-growth-make-it-an-outperformer/ [Accessed 27 May 2018].
Macve, R., 2015. A Conceptual Framework for Financial Accounting and Reporting: Vision, Tool, Or Threat?.Routledge.
Magni, C.A., 2015. Investment, financing and the role of ROA and WACC in value creation. European Journal of Operational Research, 244(3), pp.855-866.
Online.capitalcube.com. 2018. CapitalCube – Fundamental Analysis On Demand. [online] Available at: https://online.capitalcube.com/#!/stock/AU/ASX/RNE [Accessed 27 May 2018].
Patel, C.Y., 2015. Gender representation on corporate boards of directors. International Journal of Advanced Research in Management and Social Sciences, 4(6), pp.144-159.
Renu., 2018. [online] Available at: https://renuenergy.com.au/about-us/what-we-do/ [Accessed 27 May 2018].
Renuenergy.com.au., 2018. [online] Available at: https://renuenergy.com.au/wp-content/uploads/2017/10/ReNu-Energy-AnnualReport-2017_WEB-1.pdf [Accessed 27 May 2018].
Scott, W.R., 2015. Financial accounting theory (Vol. 2, No. 0, p. 0). Prentice Hall.
Simply Wall St. 2018. ReNu Energy (ASX:RNE) – Share price, News & Analysis. [online] Available at: https://simplywall.st/stocks/au/utilities/asx-rne/renu-energy-shares [Accessed 27 May 2018].
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