Business Of National Grid Essay Example Pdf - Free Essay Example

National Grid plc (National Grid) is an international electric and gas company and also is one of the largest investor owned Energy Company in the world. It is listed on the London Stock Exchange (LSE: NG) and New York Stock Exchange (NYSE:NGG). Primary areas of operations are the ownership and operation of regulated electricity and gas infrastructure network in UK and the US, serving more than 19 million consumers in a direct or indirect way. In UK the company owns the high voltage electricity transmission network, high pressure gas transmission system and also operates in related markets which include electricity interconnectors, metering services, Liquefied Natural Gas (LNG) facilities, LNG storage and transportation and land remediation. The company in US owns over 4,000 MW of contracted electricity generation along with non-regulated gas transmission pipelines. National grid is headquartered in London, UK. The Company have more than 27,500 employees located in the UK and the US. The Business Model is divided into 4 key areas: Transmission Electricity Distribution Generation Gas Distribution Non-regulated Businesses Transmission The transmission of electricity and gas in the UK as owner and operator of high voltage electricity transmission network in England and Wales, the gas national transmission system in Great Britain, the electricity inter connector with France and storage facilities for LNG .Operator of electricity transmission networks in Scotland. Key Facts Over 20,900 kilometres of electrical overhead lines Over 800 kilometres of electrical underground cables 296 Twh of electricity transmitted in the UK Over 7,600 kilometres of gas pipeline 1,158 Twh of gas throughput Electricity Distribution Generation This operation is carried out in US as owner of electricity distribution networks in upstate New York, Massachusetts, New Hampshire and Rhode Island. Key Facts Over 116,700 kilometres of circuit 3.4 million customers 670 substations 57 generation units at 13 locations across Long Island Gas Distribution Owner and distributor of four of Great Britains eight gas distribution networks. Key Facts Around 190,000 kilometres of gas pipe Delivery of 317 and 205 Twh of gas to over 10.8 million consumers in the UK. Non-Regulated Businesses Primarily metering services, Property management, LNG importation terminal on the Isle of Grain, construction and operation of electricity interconnector between Netherlands and the UK. Key Facts Metering and meter reading services for more than 20 million meters in the UK Property portfolio of over 800 sites with more than land of around 1,600 hectares Phase III Grain LNG completion anticipated in 2010 Analysis and evaluation of the annual reports. Table of Absolutes Statistics 2010  £m 2009  £m Variation B/W Revenue 13,988 11,423 -10.47% W Cost Of Sales 10,714 8,534 -17.98% B Operating Profit 3,239 2,964 25.54% B Profit after tax 1,386 947 23.33% B Fixed Assets 38,488 30,830 2.05% B Comparison of Balance Sheet 2010  £m 2009  £m 2010  £m 2009  £m Equity 4,211 3,984 Fixed Assets 38,488 37,712 Debt 32,783 33,457 Stock 407 556 Debtors 2,293 1,569 Others 2,365 4,630 Total C.A. 5,065 6,755 Trade Creditors 2,847 1,653 Borrowings 2,806 3,253 Others 906 2,120 Total C.L. 6,559 7,026 Capital Employed 36,994 37,441 T.A. C.L. 36,994 37,441 Ratio Analysis RATIO 2010 2009 B/W Op. Profit/T.A. less C.L. 3293/36994 8.9% 2,623 / 37,441 7.05% B Operating Profit Margin Op. Profit / Sales 3,293/13988 23.54% 2,623 / 15,624 16.78% W Sales / T.A.-C.L. 13,988/36,994 0.37 times 15,624 / 37,441 0.41 times B Fixed Asset Turnover Sales / Fixed Assets 13,988/38,488 0.36 times 15,624 / 37,712 0.41 times W Stock Turnover Stock x 365 / Cost Of Sales (407*365)/10,714 13.8 days 556*365 / 13064 15.53 days B Debtor Turnover Debtors x 365 / Sales (2293*365)/13,988 59.8days 1569 * 365 / 15,624 36.65 days W Creditor Turnover Creditors x 365 / Cost Of Sales (2847*365)/10,714 96 days 1653 * 365 / 13,064 46.18 days W Current Ratio C. Assets/ C. Liabilities 5,065/6,559 0.77 times 6,755 / 7,026 0.96 times W Quick Ratio (C. A. Stock) / C. Liabilities (5,065-407)/6,559 0.71 times (6,755 556) / 7,026 0.882 times W Debt to Equity Ratio Debt / Equity 32,783/4,211 7.78% 33,457 / 3,984 8.39% W Gearing Ratio Debt / (Debt + Equity) 32,783/(32,783+4,211) 88.61% 33,457 / (33,457 + 3984) 89.35% W Return on Equity R.O.E. Profit after tax/equity 1,386/4,211 32.91% 947 / 3984 23.7% B Dividend Yield 38.49/594 6.47% 35.64/684 5.21% B Dividend Cover 1,386/688 2.01 times 947/ 838 1.13 times B Earnings Per Share 56.1p 36.9p B Earnings Yield 56.1p/594 9.44% 36.9p/684 5.69% B Price Earnings Ratio P / E 594/56.1p 10.58 times 684/36.9 18.67 times W Market-To-Book 10.58*0.329 3.48 17.7 *0.23 4.07 W Operating Performance Ratio Sales Revenue/Average No of Employees 13,988/28,067 494.83% 15,624 / 28,208 55.38% W Return on Asset ROA 2,193/43,553 5.03% 1394/44,467 3.13% B analysis and evaluation of the development of the organisation during last two years : Operating Profit Margin Ratio Definition The operating profit margin ratio indicates how much profit a company makes after paying for variable costs of production such as wages, raw materials, etc. It is expressed as a percentage of sales and shows the efficiency of a company controlling the costs and expenses associated with business operations. Operating Profit Margin Formula The operating profit margin ratio formula is calculated simply using: [Operating profit margin = Operating income à · Total revenue] Operating Profit Margin Meaning Operating profit margin ratio analysis measures a companys operating efficiency and pricing efficiency with its successful cost controlling. The higher the ratio, the better a company is. A higher operating profit margin means that a company has lower fixed cost and a better gross margin or increasing sales faster than costs, which gives management more flexibility in determining prices. It also provides useful information for investors to determine the quality of a company when looking at the trend in operating margin over time and to compare with industry peers. Usually, it serves more as a general measurement than a concrete value. The objective of margin analysis is to detect consistency or positive/negative trends in a companys earnings. Positive profit margin analysis translates into positive investment quality. To a large degree, it is the quality, and growth, of a companys earnings that drive its stock price. Financial statement in this operating profit margin, in the year of 31 march 2010 was 23.5% and in the year of 2009 it was 16.78%. The total OP of the income statement was 3293 £ in 2010 and 13064 in 2009 so the OP is best in the when comparing with 2009. Fixed Assets Turnover Ratio: Definition: Fixed Asset Turnover ratio is also known as Sales to Fixed Asset Ratio. The fixed asset turnover ratio tends to measure the efficiency and profit earning capacity of the concern. Higher the ratio, greater is the intensive utilization of fixed assets. Lower ratio means under utilization of fixed assets. Formula of Fixed Assets Turnover Ratio: Fixed assets turnover ratio is calculated by the following formula: [Fixed Assets Turnover Ratio = Sales / Fixed Assets] The fixed-asset turnover ratio measures a companys ability to generate net sales from fixed-asset investments -  specifically property, plant and equipment (PPE) net  of depreciation. This ratio is often used as a measure in manufacturing industries, where major purchases are made for PPE to help increase output. When companies make these large purchases, prudent investors watch this ratio in following years to see how effective the investment in the fixed assets was. The fixed assets are worst in 2010. The Fixed ration is 0.3 times and in the 2009 it was 0.41. the measures of the fixed asssets was worst and as per the income statement in 2010  £m 13988 and  £m 15624 in 2009. If the fixed asset turnover ratio is low as compared to the industry or past years of data for the firm, it means that sales are low or the investment in plant and equipment is too much. Inventory Turnover Ratio or Stock Turnover Ratio (ITR): Every Small or Big firm needs to maintain a specific level of inventory of the finished goods which enables them to meet the requirements of carrying out the business. One need to bear in mind that level of inventory should neither be too high nor too low. A higher inventory means that there are higher carrying costs involved and also higher is the risk of stocks becoming obsolete. Also if there is a low inventory than it suggests loss of business opportunities. Thus it is of prime significance to keep sufficient stock in business. Definition: Stock turnover ratio and inventory turnover ratio are the same. This ratio is a relationship between the cost of goods sold during a particular period of time and the cost of average inventory during a particular period. It is expressed in number of times. Stock turnover ratio / Inventory turnover ratio indicates the number of time the stock has been turned over during the period and evaluates the efficiency with which a firm is able to manage its inventory. Formula of Stock Turnover/Inventory Turnover Ratio: The ratio is calculated by using the following formula: [Stock Turnover Ratio: Stock x 365 / Cost of Sales] The inventory turnover ratio in the year 2010 is 13.8 days and the value is 407 and in the year 2009 it was 556 and turnover was 13064. So the result shows that the turnover ratio is best when comparing with year 2009. Significance of ITR: Inventory turnover ratio measures the velocity of conversion of stock into sales. Usually a high inventory turnover/stock velocity indicates efficient management of inventory because more frequently the stocks are sold; the lesser amount of money is required to finance the inventory. A low inventory turnover ratio indicates an inefficient management of inventory. A low inventory turnover implies over-investment in inventories, dull business, poor quality of goods, stock accumulation, accumulation of obsolete and slow moving goods and low profits as compared to total investment. The inventory turnover ratio is also an index of profitability, where a high ratio signifies more profit; a low ratio signifies low profit. Current Ratio: It is a measure of general liquidity and is most widely used to make the analysis for short term financial position or liquidity of a firm. Definition: Current ratio may be defined as the relationship between current assets and current liabilities. This ratio is also known as working capital ratio. Formula: Following formula is used to calculate current ratio: [Current Ratio = Current Assets / Current Liabilities] The current liabilities of this company in the year 2010 is 6559 and 7026 in the year 2009. The current assts was 5065 in the year 2010 and 6755 in the yrear 2009 so the ratio in the year 2010 was 0.77 times which is worst in the year 2010 because in the year 2009 it was 0.96 times. Significance: This ratio is a general and quick measure of liquidity of a firm. It represents the margin of safety or cushion available to the creditors. It is an index of the firms financial stability. It is also an index of technical solvency and an index of the strength of working capital. A relatively high current ratio is an indication that the firm is liquid and has the ability to pay its current obligations in time and when they become due. On the other hand, a relatively low current ratio represents that the liquidity position of the firm is not good and the firm shall not be able to pay its current liabilities in time without facing difficulties. An increase in the current ratio represents improvement in the liquidity position of the firm while a decrease in the current ratio represents that there has been deterioration in the liquidity position of the firm. A ratio equal to or near 2: 1 is considered as a standard or normal or satisfactory. The idea of having double the curren t assets as compared to current liabilities is to provide for the delays and losses in the realization of current assets. Limitations of Current Ratio: This ratio is measure of liquidity and should be used very carefully because it suffers from many limitations. It is, therefore, suggested that it should not be used as the sole index of short term solvency. It is crude ratio because it measures only the quantity and not the quality of the current assets. Even if the ratio is favourable, the firm may be in financial trouble, because of more stock and work in process which is not easily convertible into cash, and, therefore firm may have less cash to pay off current liabilities. Quick Ratio or Acid Test: Definition: Quick Ratio is also termed as Liquidity Ratio or Acid Test Ratio. It is the ratio of liquid assets to current liabilities. The true liquidity refers to the ability of a firm to pay its short term obligations as and when they become due. Formula of Quick Ratio / Acid Test Ratio: [Quick Ratio: (Current Assets Stock) / Current Liabilities] The Quick Ratio is also known as Acid Ratio. The current assets of the National Grid in the year 2010 is 43, 553 and in the year 2009 is 44,467 and the stock is 407 in the year 2010 and 556 in the year 2009 and the current liabilities of both years are 6,559 and 7,026. The Quick Ratio of National Grid in the year 2010 is 0.17 times and 0.88 in the year 2009 as per the balance sheets of the both the companies. Significance: The quick ratio/acid test ratio is very useful in measuring the liquidity position of a firm. It measures the firms capacity to pay off current obligations immediately and is more rigorous test of liquidity than the current ratio. It is used as a complementary ratio to the current ratio. Generally higher liquid ratios are an indication of the liquidity of the firm and its ability to meet the current liabilities on appropriate time. On other hand a low liquidity ratio indicates that the firms liquidity position is not good. As a convention, generally, a quick ratio of one to one (1:1) is considered to be satisfactory Debt to Equity Ratio: Definition: Debt-to-Equity ratio indicates the relationship between the external equities or outsiders funds and the internal equities or shareholders funds. It is determined to ascertain soundness of the long term financial policies of the company. Formula of Debt to Equity Ratio: The formula for Debt to Equity ratio is as follows: [Debt to Equity Ratio: Debt / Equity] The debt to equity ratio in 2010 is 7.78% and 8.39% in the year 2009. Significance of Debt to Equity Ratio: Debt to equity ratio indicates the proportionate claims of owners and the outsiders against the firms assets. The purpose is to get an idea of the cushion available to outsiders on the liquidation of the firm. However, the interpretation of the ratio depends upon the financial and business policy of the company. The owners want to do the business with maximum of outsiders funds in order to take lesser risk of their investment and to increase their earnings (per share) by paying a lower fixed rate of interest to outsiders. The outsider creditors on the other hand, want that shareholders (owners) should invest and risk their share of proportionate investments. A ratio of 1:1 is usually considered to be satisfactory ratio. Theoretically if the owners interests are greater than that of creditors, the financial position is highly solvent. Return on Equity Capital (ROEC) Ratio: In real sense, ordinary shareholders are the real owners of the company. They assume the highest risk in the company. (Preference share holders have a preference over ordinary shareholders in the payment of dividend as well as capital. The range of measures used to analyse the return to equity investors is much greater than that applied to debentures, perhaps because this class of investment carries a greater risk, and ordinary shareholders are the most significant group of investors. Preference share holders get a fixed rate of dividend irrespective of the quantum of profits of the company). The rate of dividends varies with the availability of profits in case of ordinary shares only. Thus ordinary shareholders are more interested in the profitability of a company and the performance of a company should be judged on the basis of return on equity capital of the company. Return on equity capital which is the relationship between profits of a company and its equity. Formula of return on equity capital or common stock: Formula of return on equity capital ratio is: [Return On Equity: Profit after Tax / Equity] This ratio indicates how profitable a company is by comparing its net income to its average shareholders equity. The  return on equity ratio (ROE) measures how much the shareholders earned for their investment in the company. The higher the ratio percentage, the more efficient management is in utilizing its equity base and the better return is to investors. Significance: This ratio is more meaningful to the equity shareholders who are interested to know profits earned by the company and those profits which can be made available to pay dividends to them. Interpretation of the ratio is similar to the interpretation of return on shareholders investments and higher the ratio better is. Price Earnings Ratio (PE Ratio): Definition: Price earnings ratio (P/E ratio) is the ratio between market price per equity share and earnings per share. The ratio is calculated to make an estimate of appreciation in the value of a share of a company and is widely used by investors to decide whether or not to buy shares in a particular company. Formula of Price Earnings Ratio: Following formula is used to calculate price earnings ratio: [Price Earnings Ratio = Market price per equity share / Earnings per share] The financial statement of the national grid company in the year 2010 is 56.1p and in the year 2009 it was 36.9p. The price earnings ratio in this was 10.58 times. In the year 2009 was 18.67 times. The equity share is 594 and 684 in 2009. Significance of Price Earnings Ratio: Price earnings ratio helps the investor in deciding whether to buy or not to buy the shares of a particular company at a particular market price. Generally, higher the price earnings ratio the better it is. If the P/E ratio falls, the management should look into the causes that have resulted into the fall of this ratio. One of the reasons that a companys earnings may be expected to grow is if a large proportion of earnings are retained and effectively invested back into the business. This means that it is usually (but not always) the case that companies which retain earnings rather than paying out high dividends will have higher PE ratios than those with a high dividend payout. undervalued relative to bonds.  Market-to-Book Ratio Definition: Market-to-Book Ratio is the ratio of the current share price to the book value per share. It measures the worth of the company at that moment in comparison with the amount of capital invested by current and past shareholders into it. Formula of Market-to-Book Ratio: Following formula is used to calculate market-to-book ratio: [Market-to-Book Ratio: PE Ratio * Return on Equity] The equity return in the year 2010 is 0.32% and 23 % in the year 2009. A ratio used to find  the value of a  company by  comparing the book value of a firm to its market value.  Book value is calculated by looking at the firms  historical  cost, or accounting value. Significance of Market-to-Book Ratio: The book-to-market ratio attempts to identify undervalued  or overvalued  securities by taking the book value and dividing it by market value.  If your business has a low market/book ratio, its considered a good investment opportunity. In basic terms, if the ratio is above 1 then the stock is undervalued; if it is less than 1, the stock is overvalued. Operating Performance Ratio: Sales/Revenue per Employee As a gauge of personnel productivity, this indicator simply measures the amount of dollar sales, or revenue, generated per employee. The higher the dollars figure the better. Here again, labour-intensive businesses (ex. mass market retailers) will be less productive in this metric than a high-tech, high product-value manufacturer. Formula for Sales /Revenue per Employee: Following formula is used to calculate Sales / Revenue: [Sales /Revenue per Employee: Sales Revenue /Average Number of Employees] The operating performance ratio is beneath sales and revenue on employee. In the year 2009 the company has reduce 200 employees from 28,208 which is total number of the employees. In the year of 2010 the total number of the employee was 13988 instead of 15624. Which is 49% in the year of 2010? Significance of Sales /Revenue per Employee: The Higher the ratio better it is for the company. This ratio is a measure of how efficiently the company is making profit by using the total assets of the company. Companies want this ratio to be higher as this ratio is directly dependent on profit. National Grid was able to achieve a higher ratio for the year 2009 than 2008 which would be of significant consideration for everybody to understand that company is strongly footed even in tough economic period. Management is highly efficient and so are the policies of the company. Return on Assets This ratio indicates the profitability of a company relative to its total assets. The return on assets (ROA) ratio illustrates how efficiently the management is employing the total assets of company to make the profit. More higher the return, the more efficient management is in utilizing the asset base. The ROA ratio is calculated by comparing net income to average total assets, and is expressed in percentage. Formula of Return on Assets Ratio: Following formula is used to calculate Return on Asset Ratio: [Return on Asset: Net Income / Average Total Assets] The net income of the company in the 2010 is 2,193 and in the year 2009 is 1,394 and the average total assets 43,553 in the year 2010 and 44,464 in the year 2009. The Return on Assets of national grid in the year 2010 is 5.03% and 3.31% in the year 2009. Significance of Return to Asset Ratio: The need for investment in current and non-current assets varies greatly among companies. Capital-intensive businesses (with a large investment in fixed assets) are going to be more asset heavy than technology or service businesses. Return on assets measures how effectively a company has used the total assets at its disposal to generate earnings. Because the ROA formula reflects total revenue, total cost, and assets deployed, the ratio itself reflects a managements ability to generate income during the course of a given period, usually a year. The possible financial performance A climbing return on assets usually indicates a climbing stock price, because it tells investors that a management is skilled at generating profits from the resources that a business owns The business activities carried out by National Grids power and distribution network are nearly 95% regulated, their revenues and cash flow are almost predictable and the group henceforth do not find themselves into troubled water of fluctuating prices. Henceforth the financing position is only the most likely cause of its weakness. For the year 2008-09 the net debt rose by 29% to almost  £23bn, which reflects large currency movements which follows the acquisition of US business Keyspan in 2007 for  £3.8 bn. There is also a twist in the tale as the appreciation of dollar may have increased the sterling value of National Grids net debt by  £4bn, but in return it has also increased the sterling value of US assets by  £4.5 bn. To add more, National Grids business model is very rob ust and thus it can support such high amount of debts. The annual investment of  £3bn is typically funded half by cash and half by debt, resulting that debts are always increasing constantly, but then the asset base also grows at the same time. National Grids US subsidiaries have requested to their own regulators requesting for higher authorised returns. If it would be allowed, than it would improve earnings and cash flow in the future. The Grid is very confident in sticking to its policy of increasing the dividend by 8 percent every year till 2012.But there are two small caveats first of all the share buyback programme has been suspended to save costs, and secondly, investors are being offered the option of taking payment as scrip dividend. Conclusion: In the year 2008 the company earnings per share was 122.3p and in the year 2009 it was 38.5p in the year 2009 the share the company earnings per share value is get down to 47% of share value this was due to recession. In the year 2010 the company earnings per share is 56.1p. so on the average of the value is 21.5% has increased. The cost of sales in the year 2009 was 8,534 and in the year 2010 it was 10,714 so the profit after the taxation the company profit was 1,386 in 2010 and 947 in 2009. The National Grid is clearly on the right path after looking at the ratios calculated. These ratios are not the actual mirror to the performance of the company but it shows the trend where it might head into the future taking into considerations the competitive market and fluctuating market conditions.