Economics of the Business Environment

Overview of organization

Analayzing  the factors that affect the financial performance of Centrica Plc and Southern Energy Plc

Centrica Plc is public limited company at United Kingdom and it main aim is to supply electricity and gas to businesses and consumer. Therefore, it consist of externals factors for setting up different strategies within organization for maximizing in sale and generating more energy for UK service users and firms. Thus, organization is involving of new ideas and some innovative techniques for attracting their customers (Oil and gas sector of UK, 2016). They consist of small and large scale plants for producing enough electricity.

Scottish Southern Energy Plc is public limited company and its headquarter is in Perth, United Kingdom. They are delivering products which consist of electricity, natural gas and broadband  to houses and business. It is one of the main constituent of FTSE 100  index. This business organization is highly involved in the generation and supply of electricity gas. Hence, other energy related services include gas storage, exploration and production, contracting, connections and metering. Hence, it is one of the sixth largest firm which has dominated the energy sector to the large extent. Thus, it is one main rival firms of Centrica Plc

Financial performance of Centrica Plc from 2006 to 2016 are as follows:

Performance evaluation of Scottish Southern energy Plc in monetary terms from the accounting year 2006 to 2016 are:

Evaluation of business strategies which are employed by Centrica and Scottish Southern Energy Plc are as follows:

Revenue: From the financial statement analysis it has been assessed that from 2007 to 2014 sales revenue of Centrica plc is continuously inclined. This aspect shows that business unit has employed sound strategic and policy framework. However, on the critical note, in 2015 and  2016 sales revenue of the firm declined irrespective the fact that economic condition of the country is good (Hamilton and Webster, 2015). On the contrary to it, high level of growth has been identified in the sales revenue of Southern energy plc. In 2006, revenue of the firm was £7427.6, whereas at the end  of accounting year 2015 such element accounts for the amount of £31654. In 2016, sales revenue of the firm decreased because price per barrel falls.

Hence, crisis which takes place in the accounting year 2015 and 2016 affected the sales revenue and profit margin of the firms operated in the oil and gas sector in the negative direction. Thus, due to the lack of having sound strategic framework Centrica Plc failed  to cope with the situation of crisis. In contrast to this, at the end of accounting year 2015 sales revenue of Southern energy Plc was £31654. Thus, by taking into consideration such aspect it can be said that business unit has managed its financial more effectively and efficiently (Solaymani and et.al., 2015). Along with this, in 2016 sales performance of Southern energy Plc was  good as compared to the rival firm. It shows that business strategies adopted by the firm is high

Gross profit (GP) %: It presents the extent to which business unit has managed its direct expenses from the sales revenue attained by it during the year. Hence, by dividing the gross profit from net sales business organization and their stakeholders can assess the extent to which growth takes place in the monetary aspect of firm. From, 2006 to 2016 GP margin of the firm is showing fluctuating trend in the performance level. During such period most of the time GP margin decreased irrespective the fact that sales revenue inclined. The reason behind this company failed to manage the expenses of direct nature more effectively and efficiently. On the contrary to it, GP margin of Southern Energy plc dropped to the large extent during the last 11 years. In the financial year 2009 gross profit margin of the  firm was 2% which is highly lower as compared to other years. Hence, during this period business unit incurred high level of expenses for the extraction of oil. High drilling cost is also one of the main factors due to which GP of the firm reduced significantly. Hence, failure of management in relation to the development of effectual strategies is one of the main micro factors that impacted the performance of firm in the negative direction (Richert, Rogers and Burton, 2015). Hence, overall view of the firms performance entail that Southern energy Plc  failed to manage the direct expenses in an effectual way.

Net profit (NP) % This measure provides deeper insight about the extent to which business unit has fund to distribute among the shareholders. Along with this, it also provides deeper insight about the firms ability in relation to the management of indirect expenses. During the period of 11  years five times Centrica Plc suffered from the situation of negative return. This aspect presents that company has incurred high level of expenses in comparison to the other years. Thus, it reflects that higher management fails to exert effectual control on the expenditure level during this period. Hence, after facing such critical situation business unit has taken decision in relation to the reduction of job level to maintain the expenditure.

Along with this, depressed oil prices are also one of the significant factors due to which net profit margin of the firm was affected in the negative direction. Further, company has also made its efforts in relation to cutting the prices with the aim to cope up with the price level. Unfortunately, management failed to manage the expenses that is resulted into lower or negative profit margin in the last 10 years. Hence, due to the external pressure in terms of reducing the price of barrel and other crisis Centrica Plc has taken several decisions with the aim to improve its position in the market. Hence, by taking into account such aspect business enterprise has taken decision in relation to the cutting down dividend and reducing the level of capital expenditure (Sadaghiani and et.al., 2015). Thus, it is highly required for the business organization to change the portfolio mix to the large extent. This in turn helps company in improving its financial position and performance level to the large extent.

On the other hand, net profitability margin of Southern Energy Plc reduced from 7.54%  to 1.60% at the end of accounting year 2016. Hence, from the financial report it has been assessed that with the aim to cope with the critical business situations company has undertaken number of research projects in relation to the renewable energy options including biomass, solar, wind etc. (Financial statement of Southern Energy Plc, 2009). Further, in 2009, Southern Energy Plc started projects in relation to finding the most  economical ways to perform the manufacturing aspects or operations. Hence, due to this net profitability aspect of the firm decreased to the significant level.

Along with this, debt burden is another significant factors due to which profit margin of the firm declined. Moreover, in the period of 2009 business unit required billion of dollar to build and maintain smarter, robust transmission and distribution system. In addition to this, to expand the grid operations business unit had taken decision to raise debt. Hence high debt and interest expense is one of the main factors due to which both Centrica and  Southern Plc failed to maintain high level of profit margin especially in the period of 2009. Thus, debt burden is the main causes behind the decreasing trend in the profit margin (Betz and et.al., 2015). Moreover, debt instrument such as bank loan and debentures impose fixed periodical financial burden in front of the firm in terms of interest payment. Thus, it is recommended to the business organization to undertake limited projects at one time. In this way, by taking the significant measures or actions both Centrica plc and Southern energy plc would become able to meet the objectives of themselves and their stakeholders to the large extent.

Earning per share: The amount or proportion of net earnings that Centrica Plc distribute or allocate to their investors on each holding is called earnings per share (EPS). It is an indicator of profitability which can be determined by dividing the residual earnings to the number of outstanding shares. Investors often use this ratio to examine the possibility of return on their investment in the company. With reference to Centrica Plc, in 2007, growth in net profitability was the main reason for positive EPS of 1.28. In this year, although revenue dropped down but still effective control over cost assist management to maximize their net earnings and deliver more return to the organization (Lamorgese, Geneletti and Partidario, 2015). However, thereafter, in 2009, EPS got decreased to -0.13 due to adverse market conditions and financial crisis. As per the chart presented, it can be seen that in the year 2005, Centrica Plc’s net earnings was only £672m which got improved in 2007 to £1122m but still, in 2009, it came down to £1111m. In this, year, adjusted EPS remained unchanged to 21.7 pence due to more issuance of shares as it grown up by 22%. However, in 2007, EPS indicates strong performance because of favorable commodity prices that driven more revenue and return to the Centrica Plc. As a result, it became able to deliver better return to their investors (McChlery and et.al., 2015). However, its Total Shareholder return (TSR) showed an exceptional performance in comparison to FTSE 100 Index as company has outperformed the FTSE Index beyond 20% over a period of 5 year. However, 2010, stipulated growth in basic EPS and adjusted EPS to 25.2 and 1.49 pence even after 22% increase in average number of shares. But at the end of the period, its performance came down because of lower EPS -0.56 whilst adjusted EPS dropped down by 4%.

Falling in oil and gas price decreased operating profit by 12% and decreased adjusted EPS to 17.2p which was 25.9 p in 2013.  Its TSR also showed underperformance as in comparison to FTSE 100, it got reduced by 12.5% in a period of three year. However, on the other hand, SSE’s EPS showed a rising trend till 2008, but, in 2009, it got decreased to 0.13 in 2009 due to financial instability and crisis which declined its product prices for rendered utility services.  It indicates outturn growth of 3.6% p.a higher than inflation rate and showed excellent performance. However, in 2015, growth in dividend and net earnings to £543m demonstrates that company performed well in this year. On full vesting, its EPS is equal to RPI + 8% however, on 25% vesting it is around RPI. Efficient delivery of energy and utility services, disciplined investment, strong financial commitment and achieving EPS to the minimum level of inflation also enable SSE to reward investors and fulfill their return expectations.

Return on equity: It is a profitability measure which helps to examine that how much proportion of profitability firm generated on their investor’s equity capital. In other words, it indicates that how effectively business equity is managed to generate more and more return in the business. In the year 2006, Centrica Plc’s ROE showed negative return of 7.81% however, its competitors, SSE’s ROE was comparatively greater to 29.16%. In the micro-conditions, skilled and talented personnel and strong managerial decisions to achieve high growth in the market were the reasons behind favorable ROE in SSE (Sonesson and et.al., 2016). On the contrary, in 2007, Centrica’s ROE got enhanced to 61.33 higher than that of SSE’s ROE of 35.03 positive. It becomes possible mainly because of positive movement in goods price which in turn enable company to generate higher return on their total equity capital.

After that, in 2010, ROE got enhanced to 38.66% in 2010 clearly demonstrates that this year, Centrica Plc generated greater return on their total shareholders’ equity mainly because of higher return worth £1935m. Contrary to this, in SSE, although revenue indicates negative movement as it dropped down to £21550m, but still, its ROE is comparatively greater to 40.49% may be due to less use of equity fund. At the same time, value of net earnings is also less to £1235m. Thereafter, Centrica Plc’s ROE showed a mixed trend as till 2012; it got improved to 22.09 than got decreased to -22.33 in 2016. Similarly, SSE’s ROE got improved to 8.41 in 2013 and then came down to 8.17 at the end of the period (Goh and et.al., 2015).  Adverse price fluctuations demand volatility, internal managerial strength, policies, rules and regulations, new legislation, standards etc. are the reasons behind such volatile trend in business profitability and affected ROE as well.

Return on invested capital: This ratio is used to evaluate that how much amount of profitability business generated on their total capital employed comprising both debt and equity capital. It can be seen from the table given above that return on capital employed of SSE decliner slightly but same of the Centrica plc is negative. Centrica is currently operating in the UK, rest area of Europe and North America (Annual statements of Centrica, 2015). ROCE of the firm decline and low commodity price play an important role in decline of the value of the mentioned ratio. It must be noted that commodity prices to large extent reflects the direction in which world economy is going on.

It can be seen that in end of the FY 2015 China economic growth get declined which directly affects its import of commodity items from the American and European market. This reduce commodity production in the American and European region. This lead to reduction in the demand of oil among the business firms. Economic conditions in the UK are not good and in past few months demand for gas get declined (Vazquez and Federico, 2015). People are trying to save more and more money at their own level. Hence, due to these reasons slight decline come in the revenue of the business firm. These are the two main macro factors due to which firm observe small decline in its revenue.

The above presented table clearly shows that Southern Energy Plc has made effectual use of shareholders equity in comparison to Centrica Plc. Moreover, irrespective of the fluctuations in the business situation Southern energy Plc has generated positive returns as compared to other firms operated in this sector. Annual report furnishes information regarding the fact that Southern energy invested huge amount of fund on research and other technological aspects. However, still in the period of 2009 such measure was only 2.96%. Hence, this aspect exhibits that in comparison to the invested capital low level of sales has been generated by the firm. Thus, business organization needs to make focus on the making proper estimation regarding the happening of future aspects. Hence, by following sch aspects both the oil and gas companies can make contribution in the attainment of organizational goals.

Conclusion

From the above report, it has been concluded that performance of Centrica Plc is not good in comparison to the rival firm. Moreover, past year performances of both the companies present that Southern Energy Plc has managed the performance level in the best possible manner at the time of financial crisis in against to Centrica Plc. It can be seen in the report that in the critical situations company has managed the positive net profitability aspect which is good indicator for the firm. Besides this, it can be revealed from the report that by taking the significant measure or action Centrica Plc  can get the desired level of outcome or success. Along with this, companies need to make focus on investing money in the derivative instruments  which in turn helps them in managing the situation of financial crisis to the large extent.

References

• Betz, M. R. and et.al., 2015. Coal mining, economic development, and the natural resources curse. Energy Economics, 50, pp.105-116.
• Goh, B. W. and et.al., 2015. Market pricing of banks’ fair value assets reported under SFAS 157 since the 2008 financial crisis. Journal of Accounting and Public Policy. 34(2). pp.129-145.
• Hamilton, L. and Webster, P., 2015. The international business environment. Oxford University Press. USA.
• Lamorgese, L., Geneletti, D. and Partidario, M.R., 2015. Reviewing Strategic Environmental Assessment Practice in the Oil and Gas Sector. Journal of Environmental Assessment Policy and Management. 17(02). p.1550017.
• McChlery, S. and et.al., 2015. An empirical study of the determinants of UK oil and gas voluntary disclosures. Applied Economics. 47(54). pp.5917-5931.
• Richert, C., Rogers, A. and Burton, M., 2015. Measuring the extent of a Social License to Operate: The influence of marine biodiversity offsets in the oil and gas sector in Western Australia. Resources Policy. 43. pp.121-129.

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