Question

           

Common Size Income statement
	2017		2016
	$M	Percentage	$M	Percentage
Operating revenue	2319	100%	2375	100%
Operating expenses	-1666	-71.84%	-1725	-72.63%
Earnings before interest, tax, depreciation, amortisation, changes in fair value of hedges and other signifcant items (EBITDAF)	653	28.16%	650	27.37%
Depreciation and amortisation	-264	-11.38%	-236	-9.94%
Impairment of assets	-10	-0.43%	-4	-0.17%
Loss on sale of assets	-4	-0.17%	-1	-0.04%
Net change in fair value of electricity and other hedges	-76	-3.28%	-15	-0.63%
Operating profit	299	12.89%	402	16.93%
Finance Cost	79	3.41%	80	3.37%
Interest Income	2	0.09%	2	0.08%
Net change in fair value of treasury instruments	55	2.37%	-68	-2.86%
Net profit before tax	277	11.94%	256	10.78%
Income tax expense	-80	-3.45%	-71	-2.99%
Net proft after tax attributed to the shareholders of the parent company	197	8.50%	185	7.79%
Earnings per share (EPS) attributed to ordinary equity holders of the parent	cents		cents
Basic and diluted earnings per share	7.7	0.33%	7.2	0.30%

COMPREHENSIVE INCOME STATEMENT

COMPREHENSIVE INCOME STATEMENT
	2017		2016
	$M	Percentage	$M	Percentage
Net profit after tax	197	8.50%	185	7.79%
Other comprehensive income
Intems that will not be reclassifed to profit or loss
Asset revaluation	428	18.46%	889	37.43%
Defferred tax on the above item	-120	-5.17%	-248	-10.44%
Items that may be reclassified to profit or loss	308		641
Net gain on cash flow hedges	2	0.09%
Exchange differences arising from translation of foreign operation	1	0.04%	-23	-0.97%
Income tax on the above items
	3	0.13%	-23	-0.97%
Other comprehensive income for the year, net of tax	311	13.41%	618	26.02%
Total comprehensice income for the year, net of tax attributed to shareholders of parent company	508	21.91%	803	33.81%
BALANCE SHEET 2017 2016 $M Percentage $M Percentage Current Assets Cash and cash equivalents 80 0.92% 118 1.38% Trade receivables 260 3.00% 194 2.27% Financial Instruments 59 0.68% 71 0.83% Other assets 32 0.37% 23 0.27% Total Current Assets 432 5.00% 406 5.00% Non-current assets Property, plant and equipment 7961 91.88% 7771 91.02% Intangible assets 58 0.67% 47 0.55% Deferred tax 43 0.50% 40 0.47% Financial Instruments 172 1.98% 274 3.21% Total non-current assets 8234 95.00% 8132 95.00% Total assets 8665 100.00% 8538 100.00% Current Liabilities Payables and accuals 296 3.42% 205 2.40% Employee entitlements 15 0.17% 15 0.18% Current portion of termborrowings 170 1.96% 214 2.51% Finance lease payable 1 0.01% 1 0.01% Financial Instruments 67 0.77% 48 0.56% Current tax payable 30 0.35% 30 0.35% Total current Liabilities 579 6.68% 513 6.01% Non-current liabilities Term borrowings 1022 11.79% 1000 11.71% Deferred tax 1710 19.73% 1617 18.94% Provisions 9 0.10% 8 0.09% Finance lease payable 46 0.53% 47 0.55% Financial Instruments 124 1.43% 203 2.38% Term payables 93 1.07% 100 1.17% Total non-current liabilities 3004 34.67% 2975 34.84% Total liabilities 3583 41.35% 3488 40.85% Net assets 5082 58.65% 5050 59.15% Shareholders' equity Share capital 1598 18.44% 1597 18.70% Reserves 3484 40.21% 3453 40.44% Total shareholders' equity 5082 58.65% 5050 59.15% Using the following financial ratios for 2016 and 2017 periods, and other associated information available in the public domain, assess the financial health of MEL from the view of an investor. Liquidity ratios b) Asset management efficiency ratios c) Profitability ratios d) Market ratios Assume you are a banker evaluating a loan request from Meridian Energy Limited (MEL) for $220 million. Considering MEL’s recent earnings announcements and earnings forecast updates, what would be your concerns in deciding on approval or denial of the loan request? Use the company’s capital structure ratios for 2016 and 2017 in your explanation.

Answer 1

1) Liquidity ratios:	Formula	2016	result	2017	result
Working Capital :	CA-CL	406-513	-107.00	432-579	-147
Current ratio:	CA/CL	406/513	0.79	432/579	0.75
Acid test ratio:	CA-Inventory / CL	(406-0)/513	0.79	(432-0)/579	0.75
2) Asset Management efficiency ratios:
Return on Assets	EBIT / Total Assets	650-236-4)/8538	0.05	(653-264-10)/8665	0.04
Assets to equity ratio	Total Assets/SH equity	8538/5050	1.69	8665/5082	1.71
Total Operating Income to Assets	Total Operating Income/ Total Assets	2375/8538	0.28	2319/8665	0.27
3) Profitability ratios:
Gross Profit ratio	GP / Sales	650/2375	0.27	653/2319	0.28
Net profit ratio	NI / Sales	185/2375	0.08	197/2319	0.08
Return on assets	NI / Total Assets	185/8538	0.02	197/8665	0.02
Return on equity	NI / Total Equity	185/5050	0.04	197/5082	0.04
4) Market ratios:
EPS	NI to SH / No. of Comm shares	7.2	7.20	7.7	7.70
Common equity to SH Equity	Common equity/T SH Equity	1597/5050	0.32	1598/5082	0.31
5) Capital Structure ratios:
Debt Equity ratio	Total Debt / Total Equity	3488/5050	0.69	3583/5082	0.71
Total debt ratio	Total Debt/Total assets	3488/8538	0.41	3583/8665	0.41
Times interest earned ratio	EBIT/interest	402/80	5.03	299/79	3.78
Equity Multiplier	Total Assets/Total equity	8538/5050	1.69	8665/5082	1.71
The banker should deny the loan to MEL because of followings:
1) The income of the company going down
2) Higher finance charges
3) higher debt to equity ratio
4) reducing profitability of the concern
5) The working of the concern has been negative and current ratio is under 1.