The procedure of measuring and evaluating the performance and position of a company is known as financial analysis. It determines the feasibility of a business for long run along with the critical examination of its profitability position. The assessment is based on the data presented in the annual report of the companies and is compared against the industry averages. There are various tools that are used for conducting such analysis named as horizontal, vertical and ratio analysis. Out of these, ratio analysis is considered most appropriate and suitable technique as it covers all the aspects that are enough for judging the performance of an entity (Higgins, 2012). This report contains an overall examination of financial position of CLP Holdings Limited, an electric company operating its business in Hong Kong. The company is listed on the stock exchange of Hong Kong. The report highlights the measurement of key ratios of the company that reflects its performance and position in the past two years. Each category of ratios is calculated and is compared with the competitor to make meaningful conclusions and recommendations.
CLP Holdings Limited also known as China Light and Power Co Ltd. is a Hong Kong based electronic company incorporated in 1901. The core activities of the firm involve transmission, generation and retailing of electricity. The company also has its operations in many of Asian markets. It is the second main electric power generation company in Hong Kong after Honking Electric Company. It operates a vertically integrated electricity supply business, which provides a highly reliable supply of electricity to almost 80% of the city’s population. Apart from Hong Kong, CLP has also invested in the energy sector in India, Mainland China, South Asia, Australia and Taiwan. Its operations include distribution and retailing of gas and electricity. Our vision is to become the leading energy provider in Asia-Pacific region. Working in changing world, the mission of CLP is to develop and supply energy having minimal impact on the environment and creating value for the shareholders, employees, consumers and for the community. The ultimate goal of the company is to meet the energy challenge of Asia-Pacific in the most sustainable manner (CLP. 2017).
In urge of pursuing its objectives, CLP has formulated strategies that focus on utilizing latest technologies and adhering to the standards of governance. They promote better quality services and choices to customers and value to stakeholders. As far as the financial performance is considered, the total revenue of CLP increases from HK$79434 million to HK$92,073 million. The earnings from other segments also rise except from Mainland China, Southeast Asia and Taiwan. The total assets of the firm also increase during the year along with the upsurge in shareholder’s funds. The company is listed on Hong Kong stock exchange and is traded with the symbol 0002.HK (Reuters. 2017).
The most appropriate and suitable technique or tool used for measuring the position of an entity. It analyse the company’s financial statements by critically examining the consolidated financial data presented in them. Ratio analysis provides the snapshot of organization’s performance is the past years. It collects the past information and measures the trend going on in a particular company. Many of the investors rely on the data reflected by the key ratios to take their investment related decisions. Apart from the potential investors, other users of the statements such as creditors, banks, government and others also uses the information provided by the ratios to analyse company’s financial health and status. Under this method, several categories of ratios are calculated which examines the position of an entity from each financial facet. The main advantage of using this tool is that it allows the management to study the past trends and movements by explaining the company’s performance in a nutshell (Bragg, 2012). The calculated figures are very useful for the owners as well as they can easily interpret them and have an idea about what how their investment is been used in the business. They can also figure out the amount of return they are expected to get from the organization by looking at its profitability position. On a whole, it is a very simple method to apply. However, despite having such advantages, the technique also has some disadvantages. It is totally based on historical and past data, which does not provide guarantee that the same trend will follow in future also. Sometimes, it is difficult to interpret some ratios because of the different accounting policies and operations of the companies. Nevertheless, ratio analysis is still treated as the most apt method for conducting financial analysis of a particular company (Bragg, 2012).
These ratios determine the profitability situation of the business. Knowing about the same is the primary objective of investors, shareholders and management of the company. The calculation of such ratios reflects the profit making capacity of the business and provides managers with the idea about the future performance of the company. By properly interpreting the key profitability ratios, management can take accurate decisions for the concerned entity (Gibson, 2011).
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CLP Limited |
Hong Kong Electric Company |
|||
|
2017 |
2016 |
2017 |
2016 |
|
|
Net profit margin |
16.7% |
17.4% |
28.57% |
31.51% |
|
Return on Equity |
15.7% |
12.2% |
6.71% |
7.28% |
It determines the overall profit situation of the entity. It measures the amount of net profit earned by the company against its total revenue. The ratio is calculated by dividing company’s net profit after tax with its total sales made during the year (Godwin & Alderman, 2012). It is expressed as a percentage of revenue. From the above table, it can be interpreted that the profitability position of CLP has reduced in 2017 as compare to 2016. This is reflected by the reduction in its NPR from 17.4% to 16.7%. This is due to the significant reduction in the total revenue and net profit of CLP. The reason for this fall is the reduced sales from Mainland china and the increase in the prices of coal, which ultimately affected the profitability of company’s coal, fired projects.
Apart from, this when compared to its competitor HK Electric, it is observed that company has high net profit margin, though reduced in 2017 from 31.51% to 28.57%. Briefly, it is interpreted that profitability of CLP limited has shown a declining trend in past two years and is lower than its competitor.
It is profitability metric, which evaluates the amount of return offered by the firm to its investors on their share of investment. It is the most used ratio as it gives the potential investors an idea about the capability of the company to offer suitable returns to them by properly utilizing their funds. In other words, it indicates the appropriate use of shareholders’ funds by the company in its business. Generally, a high ROE is considered more desirable as it reflects that the firm has enough profits for offering high returns to its stakeholders (Jenter & Lewellen, 2015).
In case of CLP Limited, the ratio has shown an upward trend as it increases from 12.2% in 2016 to 15.7% in 2017. This is due to the increase in net income available to shareholders and a considerable rise in company’s total equity. Moreover, its ROE is also more than the return on equity of HK Electric. In 2017, its competitor has ROE of 6.71%, which was less than that of in 2016. Overall, it is interpreted that CLP despite having reduced profits, CLP has offered high returns to its investors during the year.
They determine the financial health of the firm by examining its liquidity position. There are only two types of ratios, which are used to measure the capability of the firm to meet its current liabilities with its current, and quick assets. The same are discussed below. Liquidity ratios are generally used by the creditors to know about the competency of the firm in managing its cash and other liquid assets and in paying its accounts payables (Kimmel, Weygandt & Kieso 2010).
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CLP Limited |
Hong Kong Electric Company |
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|
2017 |
2016 |
2017 |
2016 |
|
|
Current ratio |
0.93 |
0.63 |
0.66 |
0.34 |
|
Quick ratio |
0.84 |
0.56 |
0.47 |
0.19 |
It measures the potentiality of the firm in paying off its short term obligations with its current assets. The ideal CR of the companies is 2:1 which means entity should have its current assets equal to double of its current liabilities (Saleem & Rehman, 2011). The CR of CLP limited increases from 0.63 to 0.93 during the last two years. This was due to the sudden upsurge in company’s CA and a minor reduction in its CL. CA rises because of the increase in amount of CLP’s cash and cash equivalents from HK$4467 million to HK$6529 million. This proves that CLP is capable enough to meet all its current liabilities. Furthermore, the ratio is more than HK Electric, reflecting better liquidity position. (Refer Appendix).
It is another metric, which also measure the financial health of the corporation. The only difference is that it takes into account the liquid assets of the company, the ones that can be quickly converted into cash. In other words, liquid assets mean current assets less inventory and prepaid expenses. The ideal ratio is 1:1 (Krantz & Johnson, 2014).
The same trend is been followed in the QR of CLP Limited as its ratio rises from 0.56 to 0.84 during the year. This is because of the significant rise in company’s trade receivables and cash balance. As the CL reduces, the QA increases which ultimately boosted up the ratio. Just like CR, this ratio is also more than the competitor’s ratio.
These financial metrics examine the efficiency of firm’s management in utilizing its assets and available resources. They are also known as activity ratio and determines how efficiently and effectively a company employs its resources or assets to generate revenue. Efficient use of all the assets generally results in more revenue and therefore, it is said that higher the ratio, more desirable it will be (Lee, Lee & Lee, 2009).
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CLP Limited |
Hong Kong Electric Company |
|||
|
2017 |
2016 |
2017 |
2016 |
|
|
Asset turnover ratio |
0.42 |
0.39 |
0.11 |
0.1 |
|
Inventory turnover ratio |
32.80 |
27.99 |
5.39 |
5.75 |
It measures the competency of the firm to generate revenue from its total assets. It is calculated by dividing total sales with average total assets. It is used as an indicator with which the company deploy its assets in making revenue. Usually, a high ATR is more favourable for the companies than the lower one. However, the ratio varies widely from industry to industry.
In case of CLP limited, it has been increased from 0.39 times to 0.42 times during the past two years. This was due to the upsurge in company’s average total assets and its revenue. A significant increase was there in the fixed assets, inventories and other assets of CLP, which ultimately boosted up the ratio. Comparatively, its ATR is also higher than HK Electric who reported a ratio of 0.11 times in 2017.
It is another activity ratio, which measures the time taken by the firm to convert its inventory into cash. In other words, it evaluates the capability of the company in generating revenue from its inventory. A high ITR is considered desirable as it reflects that the firm quickly and easily change its stock into cash and is efficient to maintain its stock (Nikolai, Bazley & Jones, 2009).
The same trend is been noticed in the ITR of CLP Limited as it was in its ATR. The ratio has shown an upward trend over the past two years by increasing from 27.99 times to 32.80 times. The rise in company’s inventory is proportionately lower than the increase in its revenue. This brings an upsurge in the ratio and makes CLP more efficient. When compared to its competitor, firm’s ITR was much higher than its ratio in the past two years. Therefore, it can be interpreted that CLP is much more efficient than HK Electric.
These are those ratios, which show the manner in which a company finances its overall operations and focus on its growth by deploying different sources of funds. Generally, a firm finance its business through equity and debt only. The ratios reflects the proportion between these two components and determines the degree of financial risk, the firm is exposed to. They analyse the entity’s short and long-term debt portion against its total equity (Penman, Reggiani, Richardson & Tuna, 2017).
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CLP Limited |
Hong Kong Electric Company |
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|
2017 |
2016 |
2017 |
2016 |
|
|
Debt/Equity Ratio |
47% |
49% |
83% |
79% |
|
Debt ratio |
25% |
25% |
38% |
37% |
It is the most common and popular metric to figure out the capital structure of the firm. It measures company’s total debt against its total shareholder’s funds. It is calculated by dividing the amount of debt with equity. Generally, companies having high debt equity ratio have high financial leverage and aggressive capital structure. More debt means more risk and it indicates that the firm finance more of its assets through long and short-term debt (Salunke & Bagad, 2009).
From the above table and the calculations done in Appendix, it is observed that D/E ratio of CLP Limited has reduced over the past two years. In 2016, it was 49%, which falls to 47% in 2017. This indicates that the company has reduced its debt portion in 2017. It can be seen from its balance sheet that CLP has paid off its short-term borrowings, which make them to fall from HK$10651 million to HK$8,472 million. Moreover, the equity portion of the company rises from HK$105,773 million to HK$121,507 million. All this bring a downfall in its D/E ratio. However, when CLP’s ratio is compared to HK Electric, it was observed that the latter company has high debt equity ratio, which means it relies more on debt financing to fund its operations.
It is also a capital structure ratio, which measures the total debt of the company against its total assets. It identifies the extent of company’s leverage. It is calculated by dividing the amount of firm’s total debt with the value of its total assets. The ratio helps the investors to know about the amount of assets that are been financed through debt. Therefore, a low ratio is more desirable for the companies (Tracy, 2012).
CLP Limited’s debt ratio remains same for the past two years that is 25%. This is because of the minor increase in company’s total assets and long-term debt and a decrease in its short-term financial obligations. Proportionate changes keep the ratio same for two years. Just like the D/E ratio, the debt ratio of HK Electric is also more than CLP limited. The latter had a ratio of 37% in 2016, which increased to 38% in 2017. Therefore, it can be interpreted that CLP is less risky and has a preferred capital structure.
These ratios are generally used by investors and market analyst to evaluate the performance of the company within the market. They measure the share price of a publically held company’s stock. They provide investors with the information about how the stocks of a particular firm are performing in the market. With help of such ratios, investors can easily judge the market performance of an entity (Vogel, 2014).
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CLP Limited |
Hong Kong Electric Company |
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|
2017 |
2016 |
2017 |
2016 |
|
|
Dividend payout ratio |
52% |
56% |
101.1% |
101.4% |
|
Earnings per share |
5.64 |
5.03 |
3.8 |
4.1 |
It determines the amount of dividend paid out to the shareholders in relation to the net income of the company. The DPR reflects the type of dividend policy followed by the firm and the value of dividends paid out of its retained earnings. It is calculated by dividing the amount of dividend per share with earnings per share. However, there are many other formulas to derive DPR such as 1-retention ratio (Warren & Jones, 2018).
CLP’s DPR reduces from 56% to 52% in 2017. Despite having an increase in the earnings and in figure of DPS, the ratio still reduces. This is because of the minor increase in company’s DPS from HK$2.80 cents to HK$2.91 cents. Whereas, the EPS shows a significant change is the past two years. Comparatively, HK electric has high DPR of 101% in 2017 and 101.4% in 2016. This shows that company pay high dividends to its shareholders.
This ratio indicates the portion of company’s profit allocated to each outstanding share of the equity. It shows the profitability of the firm and the amount of earning earned by each share of the company. The EPS of CLP Limited has increased from 5.03 cents to 5.64 cents in year 2017. This is because of the overall rise in company earnings while the number of shares remains same. However, as compared to its competitor, the company has high EPS which indicates that its stock perform much well than its competitor (Warren, Reeve & Duchac, 2011).
Conclusion
From the above analysis, it is concluded that the overall performance of CLP limited is better than HK Electric. However, the company needs to focus on some areas such as net profit margin and dividend payout ratio. It should enhance its profits so that it can offer high dividends to its shareholders. Apart from these two, the company is efficient enough to utilize its assets efficiently in order to generate revenue. Furthermore, it has high current and quick ratio, which reflects sound liquidity position. CLP has enough competence to meet its current liabilities with its current and liquid assets. In addition, the company has high ROE of 15.7%, which shows that it provides high returns to the investors on their investment. CLP does not relies more on debt and prefer to pay off the same within the year. This makes the company less risky and investors can invest their funds in it. Overall, the financial performance and position of CLP limited is better than its competitor.
References
Bragg, S. M. (2012). Business ratios and formulas: a comprehensive guide (Vol. 577). New Jersy: John Wiley and Sons.
Bragg, S. M. (2012). Financial analysis: a controller’s guide. New Jersy: John Wiley and Sons.
CLP (2017). CLP. Retrieved from https://www.clp.com.hk/en
Gibson, C. H. (2011). Financial reporting and analysis. USA: South-Western Cengage Learning.
Godwin, N., & Alderman, C. (2012). Financial ACCT2. USA: Cengage Learning.
Higgins, R. C. (2012). Analysis for financial management. New York: McGraw-Hill/Irwin.
Jenter, D., & Lewellen, K. (2015). CEO preferences and acquisitions. The Journal of Finance, 70(6), 2813-2852.
Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2010). Financial accounting: tools for business decision making. New Jersy: John Wiley and Sons.
Krantz, M., & Johnson, R. R. (2014). Investment Banking for Dummies. New Jersy: John Wiley and Sons.
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Penman, S.H., Reggiani, F., Richardson, S.A., & Tuna, A. (2017). A Framework for Identifying Accounting Characteristics for Asset Pricing Models, with an Evaluation of Book-To-Price. Retrieved from https://www.ivey.uwo.ca/cmsmedia/3778035/penman_2017.pdf
Reuters, (2017). CLP Holdings Ltd (0002.HK). Retrieved from https://www.reuters.com/finance/stocks/overview/0002.HK
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Salunke, M., & Bagad, A. (2009). Humanities and Social Sciences. India: Technical Publications.
Tracy, A. (2012). Ratio analysis fundamentals: how 17 financial ratios can allow you to analyse any business on the planet. RatioAnalysis. Net.
Vogel, H.L. (2014). Entertainment industry economics: A guide for financial analysis. New York: Cambridge University Press.
Warren, C. S., & Jones, J. (2018). Corporate financial accounting. USA: Cengage Learning.
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