Analysis Of Financial Statement Essay

Questions:

a). Provide a brief outline of the company in terms of the products or services they provide and the industry and market in which they operate.

b). Comment on the financial performance of the company for the year ended 31 March 2014. As part of your answer you should make reference to the relevant financial statement and use no fewer than two performance ratios.

c). Comment on the capital structure of the company as at 31 March 2014. As part of your answer you should make reference to the relevant financial statement and use no fewer than three ratios.

Answers:

a. Outline of the company

Z Energy is fuel distributor located in New Zealand that has service stations of high class. It consists of former assets of Shell. It has been listed on the ASX since August 2013 and even on the NZX with the code ZEL. The biggest shareholders include Infratil and the Super annuation fund of New Zealand. The main subsidiaries include Mini Fuels & Oils Ltd, Harbour City Property Investments Ltd, Z Energy ESPP Trustee Ltd and Z Energy LTI trustee Ltd.

It is in a cut throat competition with BP, ExxonMobil and other smaller groups that are independent in nature like Gulf. The former rivals include Caltex that were acquired by Z Ebergy in 2016. Z Energy limited caters to the market of New Zealand and sell fuel over there. The supply of fuel is done to the retail customers and commercial customers like airlines, mining companies, vehicle operators, etc.

The company even offers services of Z card so that fuels can be purchased, diesel refuelling can be done with ease and flexibility. It owns, as well as manages around 214 service stations, 92 truck stops, terminals, etc. The company was formed by the name of Greenstone Energy Limited and changed the name to Z energy Limited in 2011.

The main challenge is the volatility that is evident in the prices of oil. This has even impacted the regional supply. Moreover, when volatility is present it affects the momentum and brings a lot of uncertainty that the business is unable to face.

b. Financial performance

As a listed company, Z energy achieved a significant achievement. It earned a Historical cost net profit after tax for the year 2014 and the figure came to be $95 million. The financial results were boosted by the success of the IPO and the listing in NZX and ASX in 2013.

The financial performance was in tune with the prediction made by the investors at the initiation of the IPO. The Replacement cost operating EBITDAF appearing at $219 exceeded the forecast of $207 million. The Replacement cost EBITDAF of $218 million was influenced by the strong management of the equity stake in refining company of New Zealand. The gross refining margin appeared to be volatile over the time because it is influenced by the prices of oil and its regional supply. The revival activity in the US because of shale oil production has influenced the margin on a global note.

The year 2014 financial result projects the skills to continue the operations in earnings growth and the way in which the company can meet the adverse circumstances in various parts. Year 2014 witnessed growth in fuel, as well as non-fuel gross margin contributions. Even the food, as well as coffee operated in a profitable manner providing revenue growth of 45%. It invested $73 million in capital expenditure in the period and the capital expenditure was less than the forecast. The earnings enhanced by 39% and NPAT enhanced by 51%.

Return on Capital Employed

ROCE

2014

2013

ROCE

PBIT

139.00

169.00

Total assets - current liabilities

1,097.00

1,065.00

ROCE

12.67

15.87

This ratio is even tagged as the primary ratio that connects the income reaped by the company with the resources that the company employs and have under possession. A higher ROCE is an indicator of a stronger utilization of the capital and hence favours the organization.

In the case of Z Energy, a drop is seen in the ROCE and this is owing to a drop in the PBIT. The revenue dropped and hence, there is a difference in the figure.

Return on assets

2014

2013

Net Income

100.00

136.00

Average Assets

1,546.00

1,726.00

Return on Assets [(Net Income/Average Assets)*100]

6.47

7.88

This ratio signifies the profitability of the company in tune to the total assets of the company. The ROA for Z Energy decline as compared to 2013 because there is a fall in the net income. Therefore, the decline is not a good indication for the future prospects of the company.

Net Profit Margin

Net Profit Margin

2014

2013

Net Income

100

136

Sales Revenue

3371

3547

Net Profit Margin [(Net Profit after tax/Sales Revenue)*100]

2.96647879

3.834226

The net profit margin for Z Energy Ltd has declined as compared to 2013. It is net profit to sales and hence, there is a strong influence of the revenue. The Net profit margin declined in 2014 as the sales revenue declined. The dent in the sales revenue leads to a low net profit margin. Hence, the return in lower in 2014 as compared to 2013.

Gross Profit Margin

Gross Profit Margin

2014

2013

Gross Income

208.00

164.00

Sales Revenue

3,371.00

3,547.00

Gross Profit Margin [(Gross Profit /Sales Revenue)*100]

6.17

4.62

The ratio is termed as gross profit divided by sales. The gross income of the company enhanced despite the drop in the sales revenue. This indicates that there is a strong arrangement for cost of goods sold and reflected by the GP margin.

As per the annual report, it is witnessed that there was a drop in the revenue or sales and contrary to it; there was an increment in the operating expenses. The increment should be supported by the increment in sales that will justify the expenses and will not be a burden for the company. The taxation expense declined and this is due to a drop in the net profit before taxation. The drop in the taxation expenses is justified by the drop in the sales.

Taxation contains both current, as well as deferred tax. Deferred tax is considered in lieu of the difference that that arises in the difference between the assets carrying amount and liabilities for financial reporting. Here deferred tax is reduced to the level that is non recurring. The deferred taxation has been deducted from the taxation expense. It is offset on the face of the financial statements and showcased either as a deferred tax asset or liability.

c. Capital structure

Increment/ Decline in total assets

2014

2013

Total assets

1,546.00

1,906.00

Decline in total assets

44.79

55.21


Increment/ Decline in current assets

2014

2013

Total current assets

887.00

1,563.00

Decline in current assets

36.20

63.80

The total intangible assets increased and this is due to acquisition by the company. The acquisition are done for that intangibles that have indefinite life over a long span of time and measured at cost eliminating the impairment losses that is accumulated. It was $25 million at the beginning of 2013 that ultimately increased to $35 million in 2014.

The debt structure of the company contains bank facilities that are secured against specific class of assets of the group. This particular condition needs Z security to maintain specific level of shareholder funds and function with strong performance and gearing ratios. The arrangements also contain limitations over the sale of specific assets without any agreement from the bank. The secured bank debt facilities stood at $400 million. The debt-equity ratio points out that the ratio is over .50 that stress on the fact that the company has a major reliance on debt and hence, it is an alert for the management to look into the matter.

Debt to Equity Ratio

Debt Equity Ratio

2014

2013

Total liabilities

$ 949.00

$ 1,313.00

Total Equity

$ 597.00

$ 593.00

Debt Equity Ratio

1.58961474

2.214165261

Debt equity ratio is an important indicator of the debt component of the company. This ratio sheds light on the fact that whether the overall equity of the company is adequate to meet the obligations. Higher proportion of debt more than .50 is risky because a major chunk of the profit will go towards interest payment. Though the dent equity ratio of the company declined in 2014 yet 1.5 debt ratios is high this is an alert for the management.

Working capital ratio

Working capital ratio

2014

2013

Current asset

887

1,563

Current liabilities

449

841

Working capital ratio

1.975501114

1.858501784

The working capital ratio reflects that whether the company have sufficient assets of short-term nature that will enable to meet the short-term debt. Ratio that is below one is negative while above 2 states the idle nature. Working capital for Z Energy is adequate as it is not above 2 and below 1. It indicates that the needs of the company are meeting with ease and flexibility.

Comment

From the above computation it can be commented that the company’s funding is done by way of debt and have a major reliance on debt. This is indicated by the debt equity ratio. Moreover, for the equity holder it is of major concern as the claims of the creditors will be more and a major chunk will go towards payment of interest. This means the creditors claim s will be entertained initially. The management should look for a policy that will enable to have a balance between equity and debt.

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