Management Accounting Ratio Analysis

Question: Discuss about theManagement Accounting for Ratio Analysis. Answer: Introduction: This report has been prepared for the financial study of AGL Energy Ltd for the year 2014 and 2015. In this report the different financial ratios are calculated to interpret the financial position of the company. Financial study of Genesis Energy Ltds is also carried out for the comparative study of the both organizations. Finally, the report provides recommendation regarding, whether to invest in the company or not. Financial Analysis of AGL Limited: Ratio analysis is a helpful technique for conducting financial analysis of a company. Following table provides calculation of different ratios of AGL: Financial statement is an effective tool to analyze past record and predict the future performance of the company for different time span. Gross profit ratio shows the pricing decisions and product cost. Gross profit ratio of AGL for 2014 and 2015 are recorded as 12.02% and 16.02% respectively (Brigham, 2013). On the basis of this, gross profit ratio of company is increased by 4.00% in 2015, but as compared to the net sales of company, it is very less. It is indicating that the companys production cost is very high. The company should focus on reducing production control for enhancing its profitability (Needless and Powers, 2016). On the other hand, the operating ratios are calculated to identify the capability of company to control the operating expanses of the company. This ratio shows the relationship between the sales and management controlled cost for a time period.Operating ratio of company has increased from 11.70% in 2014 to 15.68% in 2015. This is the good sign for the compa ny that it would be more capable to control the operation cost of the company and to generate more profit. Better operating ratio also attract to the investor for good return on investment. At the same time the liquidity ratio is calculated to measure the financial capability of the company for instant expanse needs (Warren, 2015). The current ratio as 2:1 is measured as satisfactory for the company. The liquidity ratio for AGL Energy is 1.57% and 1.45% for the year 2014 and 2015. The current liquidity ratio is decreased; it shows the negativity of the company in terms of short term solvency. Moreover, the acid test ratio as 1 is an ideal ratio or more than 1 it shows the soundness of the company to meet the obligations. The acid test ratio is as 1.49% and 1.29%. It is also decreasing from 2014 to 2015; it is also a weak point for the company, because it would be difficult for the company to overcome the problem of quick debt paying. Capital structure is the composition of debt and equity for the company. The debt and equity ratio indicate the relative proportion of the debt or equity in financing the asset of the firm (Powers, 2016). This ratio is calculated to analyze the long term solvency of the company in a span of time. The debt equity ratio for the company is 0.59 and 0.70 in 2014 and 2015 respectively. The ratio of debt and equity is increasing which is an unfavourable situation for the AGL Energy, because the firms operations would be affected and the creditors also interfere in the operation of company and they pressurize to company. So company should control on the debt equity proportion ratio for sound solvency position. The equity ratio shows the relationship between shareholders fund and asset of the company. The equity ratio for 2014 and 2015 of AGL Energy is as 53.68% and 55.68% respectively. The equity ratio is increasing it show that this fund is invested in financing the asset of the organization. On the other hand, the market performance ratios are calculated for analyzing the return on per share of the company over a time period (Warren, 2015). On the basis of calculation, the earning per share of company is decreasing from 2014 to 2015. It will directly affect the investor to purchase the share of AGL Energy. It is indicating that the market price of the companys share is decreasing over a year. It would also be difficult to raise the capital for company in capital market. At the same time the dividend per share of the company has increased from 2.92 to 2.94, which is the good for company to attract the shareholder to invest in the company. Financial Analysis of Genesis Energy Ltd: Below table is providing calculation of different types of ratios for Genesis Energy Ltd: On basis of above table, the gross profit ratio of Genesis has increased from 7.12 in 2014 to 16.54 in 2015, which depicts improvement in sales efficiency of the company. At the same time, operating profit margin ratio of company has also increased from 2014 to 2015 that is indicating increase in operating profit generating efficiency of the organization (Vozikis et al., 2014). The increase in operating margin ratio of Genesis is showing increase in companys potential to generate profits against increase in competition or cost. From analysis of above table, it can also be seen that current ratio and acid test ratio of Genesis have decline from 2014 to 2015. The decline in these ratios signifies decline in companys short term solvency position. In other words, companys ability to meet short term financial obligations in business has declined (Robinson et al., 2015). From analysis of capital structure ratios in above table, it is identified that the debt equity ratio of Genesis has reduced from 0.63 to 0.62 from 2014 to 2015. The decline in debt equity ratio of company is providing improvement in creditworthiness of the company in market. Debt-equity ratio below 1 is considered good (Adam and Dogramaci, 2012). Equity ratio generally measures the leverage level in company proportion of assets that are financed by shareholders. The equity ratio of company has slightly reduced from 51.81 to 51.74 in 2015. This depicts improvement in companys ability to produce good returns for shareholders. Apart from these, the value of earning per share of Genesis has increased from $1.15 to $4.07 per share. This is good for companys attractiveness for shareholders and investors. But the value of dividend per share has reduced slightly from 2.47 to 2.23. On basis of analysis of increase in EPS and decline in DPS, it can be asserted that dividend payout decisions of company have reduced. This is also showing companys preference towards retained earnings in business (Vozikis et al., 2014). But, the shareholders of company will be able to enjoy capitalization benefits over their investment. Overall, it can be said that the financial performance of Genesis Ltd has improved from 2014 to 2015. Comparative Financial Analysis of AGL Energy Ltd: The ratio analysis tables of both companies show that AGL Energy Ltd is in good position in context of profitability ratio compared to Genesis Energy Ltd. AGLs gross profit and operating margin ratio are 16.02% and 15.68% for the year 2015. But at the same time, Genesiss gross profit and operating margin are 16.54% and 6.98% for the year 2015. It shows that, management of the Genesis is ineffective compared to AGL (Bhattacharyya, 2012). In the context of 2014, the condition of Genesis was also seemed same. The AGLs ratios were 12.02% and 11.70 respectively. On the other hand, Genesiss ratios were 7.12% and 3.45% respectively. In addition to this, situations of the both companies are not good in the context of firms liquidity positions. AGLs current ratio for year 2014 and 2015 are 1.57 and 1.45 respectively, which is less compared to ideal current ratio 2:1. Genesiss current ratio for the year 2014 and 21015 are 1.44 and 1.11 respectively, which are not good compared to both ideal current ration and AGLs current ration. Further this, Acid test ratio depicts that Genesis is not good in paying its short term liabilities due to its acid test ratio is 0.86 for the year 2015 that is not good in financial terms (Kieso, et al., 2012). In this way, AGL condition is seemed good due to acid ratio is 1.29 here that enough to pay it short term liabilities. At the same time, capital structure both companies situation was similar in the 2014, because the debt equity ratio and equity ratio for AGL and Genesis were 0.59 or 0.53 and 0.63 or 0.52 respectively. But, Genesis condition is spoiled in 2015. The companys debt equity ratio is 61.20%, which is less compare to AGLs debt equity ratio 70.44%. This situation is raised due to company is using less leverage and it has a stronger equity position (Horngren, et al., 2012). The same condition is seen in equity ratio. There also AGL position is strong with 55.67% as compared to 51.54% of Genesis. In the context of earning per share, Genesis performance is good compared to AGL. Earning per share ratio of AGL and Genesis is recorded as 2.96 and 4.07 in 2015. It shows that Genesis is earning good profit on per share. On the other hand, in context of dividend per share, the situation is fully changed. Dividend per share ratio for AGL and Genesis are recorded as 2.94 and 2.23 respectively in 2015 (Edwards, 2013). On basis of this, AGL dividend payout of Genesis is comparatively low. Overall, AGL has more potential to provide attractive return to shareholders. Recommendations: From the analysis of the both companies financial performance, it can be recommended that an investor should invest in AGL. It is best decision rather than to invest in Genesis. It is because, AGL financial performance is good compared to Genesis. At the same time, Genesis involves the risk of the Liquidity liabilities and less profitability. It is also recommended to AGL, it should focus to improve its managerial skills and try to become cost efficient. Conclusion From the above discussion, it is analyzed that AGL Energy Ltd is has performed better for from 2014 to 2015. The company is also good in the context of profitability, as different profitability ratios of company have increased from 2014 to 2015 (Borrego-Marn, wt al., 2016). It can also be concluded that investor should invest their money in AGL Energy Ltd than in Genesis Ltd, because the investment in this company would be more profitable as compared to Genesis. References Adam, N.R., and Dogramaci, A. (2012) Productivity Analysis at the Organizational Level. Germany: Springer Science Business Media. Adler, R. (2013) Management Accounting. UK: Routledge. Annual Report (2014) [online] Available at: Bhattacharyya, A.K. (2012) Financial Accounting for business managers. UK: PHI Learning Pvt. Ltd. Borrego-Marn, M.M., Gutirrez-Martn, C. and Berbel, J. (2016) Estimation of cost recovery ratio for water services based on the system of environmental-economic accounting for water. Water Resources Management, 30(2), pp.767-783. Brigham, E.F. and Ehrhardt, M. C. (2013) Financial Management: Theory and practice. USA: Cengage Learning. Edwards, J.R. (2013) A History of Financial Accounting (RLE Accounting) UK: Routledge. Horngren, C., Harrison, W., Oliver, S., Best, P., Fraser, D. and Tan, R. (2012) Financial Accounting. UK: Pearson Higher Education AU. https://www.agl.com.au/-/media/AGL/About-AGL/Documents/Investor-Centre/150826_AnnualReport_1466512.pdf?la=en (Accessed: 30 august, 2016) Kass-Shraibman, F., and Sampath, V.S. (2011) Forensic Accounting For Dummies. USA: John Wiley Sons. Kieso, D.W., Weygandt, J.J., Kieso, D.E. and Kimmel, P.D. (2012) Study Guide to Accompany Financial Accounting, 8Edn . USA: John Wiley Sons. Needless, B. and Powers, M. (2016) Principles of Financial Accounting. USA: Cengage Learning. Robinson, T.R., Henry, E., Pirie, W.L., and Broihahn, M.A. (2015) International Financial Statement Analysis Workbook. USA: John Wiley Sons. Vozikis, G., Mescon, T., Feldman, H., and Liguori, E.W. (2014) Entrepreneurship: Venture Initiation, Management and Development. UK: Routledge. Warren C.S., Reeve, J. and Duchac, j. (2015) Financial Accounting. USA: Cengage Learning.