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Comparison of AGL Energy Limited and Origin Energy Limited

Introduction

The current study is designed to compare and evaluate the two most ranking companies in Australia, the competitors too. We are taken both companies from the same industry, which have the same market structure and selling the same products; that’s why the customers are also identical. So, the companies chosen for this research are; AGL Energy Limited and Origin Energy Limited.

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Origin Energy Limited

Origin Energy Limited is an Australian-based energy company founded in 2000.​​ Sydney is the headquarters of the group.​​ Origin Energy Limited is also on the list of Australian Stock Exchange. The company's products are electricity, natural gas, solar panels, liquid petroleum gas, hot water, heating and cooling, and electric vehicle charging.​​ Six thousand workers are working under Origin Energy Limited. After paying tax, the company's net income is $ 589 million, and the revenue is $ 12,174 million.​​ Origin Energy Limited has 4.4% of power generation capacity for renewable energy. The electricity generated through Origin Energy Limited is 0.6%.​​ 

AGL Energy Limited

AGL Energy Limited is also an Australian-based company that provides electricity and gas for residential and commercial use. The company was founded in 2006, and its headquarters are located in in Sydney. The energy can be generated from thermal power,​​ natural gas, wind power,​​ hydroelectricity, solar energy, gas storage, and coal​​ seam gas. AGL Energy Limited provides electricity generation services, electricity distribution, electricity retailing, natural gas distribution, and natural gas retailing. The 3385 workers are working with AGL Energy Limited. The company earned $802 million of net income and generated​​ $12,584 billion in revenue. AGL Energy Limited is making 16% of power generation capacity by renewable energy.

Electricity Plans

State

Provider

Plan

Discount

Annual Cost

Victoria

AGL Energy Limited

Essential

0%

$2,233.83

Victoria

Origin Energy Limited

Maximizer

30%

$2,438.52

NSW

AGL Energy Limited

Set and Forget

25%

$2,444.09

NSW

Origin Energy​​ Limited

Maximizer

23%

$2,462.02

SA

AGL Energy Limited

Set and Forget

14%

$3,059.93

SA

Origin Energy​​ Limited

Maximizer

16%

$3,064.05

QLD

AGL Energy Limited

Set and Forget

28%

$1,818.28

QLD

Origin Energy​​ Limited

Maximizer

16%

$2,016.66

 

The above electricity plan shows that AGL energy limited is cheaper than Origin Energy Limited.

Body

The primary purpose of the current study is to compare both companies that which one is best. So, for this purpose researcher choose the financial reports of the AGL Energy Limited and Origin Energy limited to see who is better in operation and performance.

A scenario in the retail energy market came in 2014-15 when the energy companies ratio increased, and brands operate the residential customers, small business customers, and extensive business customers. Thus, the market share was also fluctuated and shifted,​​ and the long-standing retailers increased their shares of expanse. (Origin Energy and AGL)

When competition arises in the energy industry, consumers have two options to purchase energy. The one is to make retail market contracts, and the other is standard retail contracts. Some customers are used to consuming energy with their existing contracts​​ with retailers that would be​​ why they do not contact the​​ retailers for a new deal to enter the market. (Essential Service Commission)

The comparative performance report of 2015 tells that the consumer rate that switches or transfers to electricity was 27 percent in this period while the transfer rate to gas was 22 percent.

Financial Reports

The​​ financial report for the year 2017 of AGL Energy Limited is as follows;

 

Balance Sheet

Cash Flow

 

The financial report for Origin Energy Limited is as follows.

Income Statement

 

Balance Sheet

Cash Flow

 

Short Term Solvency (Liquidity Ratio)

Short term solvency is also called liquidity ratio.​​ Short term solvency is used for comparison between companies or between different industries. The comparison aims to check which company is the best for investment in the future, which will give the maximum profit.​​ In a company, when we check that is it liable to pay its debt, so this​​ concept is called liquidity ratio. It means a company can run fast if he can paying his debt in a critical situation. It is the most vital point to protect or provide safety to the company. The question arises in the mind of how the liquidity ratio can be measure. It is effortless if the current assets exceed the current liabilities; it means the company is liable to pay its debt and can gain more. From the perspective of recent research, the aim is to be​​ comparing​​ the companies. So, the comparison will be made on behalf of short term solvency or liquidity ratio.​​  ​​​​ In the above discussion, the financial statement is seen by the researcher. This point concludes that AGL Energy Limited has $3625 million in current assets while having $2731 million in liabilities. It means the company can bear its debt in a worse situation. On the other hand, Origin Energy limited has $5011 million current assets and $3854 million current liabilities. So, it seems the Origin Energy Limited​​ cannot​​ qualify with the debt.

Long Term Solvency (Financial Leverage Ratios)

Long term solvency ratio is called financial leverage ratios. It can be measure from the debt ratio and debt-equity ratio. This is also seen for debt that whether the company is willing to pay its debts or not. The company that can pay his debt can survive more in the market; otherwise, the company's value will be less.​​ If the company cannot bear its financial needs, it means the debt ratio is high, which is not suitable. Too many debts or too little debt, both the conditions are dangerous for the company. We can measure long-term solvency or financial leverage ratio by various methods, but these two are the most common methods to calculate the percentage of the debt.

  • Debt Ratio

  • Debt to Equity Ratio

In the debt ratio, the ratio can be checked through total debts and total assets. The formula for the debt ratio is,

 ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​​​ Debt ratio= Total debts/ Total assets

In debt to equity ratio, total debt and total equity are being used. The formula is,

 ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​​​ Debt to Equity Ratio= Total debt/ Total equity

The leverage ratio is used to check how​​ much​​ debt is there; a company suffers from it. If the debt ratio is increased, that is, the liabilities are more​​ than​​ the assets, it means that the company is disturbed, and the company's cash flow can also create some problem. If the debt ratio of the company is too low, so in this condition, the company cannot charge interest or principal payment. In the high debt ratio, the company cannot​​ have enough​​ amounts​​ to​​ clear​​ the debts, whereas, in the low debt ratio case, we say that the company cannot profit from its product. Hence, both the situation​​ can​​ damage​​ company​​ repetition.

In our study,​​ AGL Energy Limited and Origin Energy Limited are studied. Now, we will check how the debt ratio affects the energy industry. As per the 2017 annual report, the AGL Energy Limited's total debt is $6884 million, and the total assets are $14458 million. Now, the debt ratio can be calculated for AGL Energy Limited.

 ​​ ​​ ​​​​ Debt Ratio = 6884/ 14458

 ​​ ​​ ​​​​ Debt Ratio = 0.47

The ratio below 1 is suitable for the company. It means that the company has more assets than debts, and it can be survived in a tough time.

Now the debt ratio will be checked for Origin Energy Limited. The total debts are $13781 million, and the total assets are $25199 million. The estimates from the annual report are drawn from the of 2017. In the next stage, the values will be put into the formula.

 ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​​​ Debt Ratio = 13781/ 25199

 ​​ ​​ ​​ ​​ ​​ ​​ ​​ ​​​​ Debt Ratio =​​ 0.54

The value represents that the assets are higher than the liabilities so the company can pay his debts. By calculating both companies' debt ratio, it is concluded that Origin Energy Limited is more powerful to adjust in the market than AGL Energy Limited because the Origin has more assets than AGL.

Asset Utilization (Efficiency Or Turnover Ratio)

To calculate a company's revenue for every​​ dollar​​ of asset is called asset utilization or efficiency ratio, or turnover ratio. The following formula can check the asset utilization ratio.​​ 

​​  Asset utilization​​ = Revenue/ Average total asset

AGL Energy Limited's total revenue for 2017 is $12584​​ million, and the average real asset is $7750​​ million. When the values are put in the formula, the following values are generated.

Asset utilization = 12584/ 7750

Asset utilization =  ​​​​ 1.62

The revenue of Origin energy Limited is $13646 million, and the average total asset is $25478 million. By putting the values in the formula;

Asset utilization = 13646/ 25478

Asset utilization = 1.07

The value of both companies' value of asset utilization shows that AGL Energy is best than Origin Energy to invest the capital in it.

Profitability Ratios

The purpose of evaluation and to compare two companies,​​ researchers examine​​ company earnings and its expenses that whether they have much different or not. If the company's wages are higher than its cost, it means the company earns the profit and has the right market place, but if the value exceeds the payments, then the​​ company is in loss, and it will never affect investors. The profitability ratio can be of different types.

Profit margins on sale = Net income/ Sales

Operating margins on sale = Earnings before interest and taxes/ Sales

Return on assets = Net income/ Average assets

Equity return = Net income/ Common average equity

To check the profitability ratio, values will be entered in all formulas for both companies.

First of all, the values are taken from AGL Energy Limited.

​​ Profit margins on sale = 12584/ 11131 = 1.13%

Operating margins on sale = 1472/ 11131 = 0.13%

Return on assets = 12584/​​ 7750 = 1.62%

Return on equity = 12584/ 7750 = 1.62%

Origin Energy Limited values are used now for evaluation.

Profit margins on sale = 13646/ 13667 = 0.99%

Operating margins on sale = 2075/ 13667 = 0.15%

Return on assets = 13646/ 25478 = 0.53%

Return on equity = 13646/ 25478 = 0.53%

To interpret the values, it can be seen that the profit margin on the sale of AGL products is 1.13 while on sale of origin product, it is 0.99, so the AGL product gains max profit than Origin. Operating margins on sale returns on sale and returns on equity for the AGL Energy Limited are 0.13, 1.62, and 1.62 percent. In comparison, the operating margins on sale, returns on sale, and returns on equity for Origin Energy Limited are 0.15, 0.53, and 0.53 percent respectfully. The values of both companies show that choosing AGL is better than the other company.

Market Value Ratios

Market value ratios are used by the investors mostly that which company is better for investing. Market value tells the stock and prices ratio etc. Many market values are used to choose a good market company. These market values​​ are;

  • Earnings per share

  • Book value per share

  • Market value per share

  • Market/ book ratio

  • Price-earnings​​ ratio

  • Price/ cash ratio

  • Dividend yield ratio

  • Earnings Per Share

In this term, the net income is measured to check that how much a company can be profitable in the future. We can measure the per share earnings by the following formula.

Earnings per share = Net income/ Outstanding shares

For AGL​​ Energy Limited,

Earnings per share =​​ 80.5 cents

For Origin Energy Limited,

Earnings per share = 117 cents

  • Book Value Per Share

The book value per share is the essential value that tells that its prices match the market price.​​ It can be calculated by equity​​ divided​​ by outstanding shares of the company.

  • Market Value Per Share

By​​ dividing​​ the total market value of shares by outstanding share, the market value per share can be generated.​​ 

  • Market/Book Ratio

This shows the relationship between the market and book ratio. One can quickly know the difference between market value and the book value.

  • Price/Earnings Ratio

The price /​​ earnings​​ ratio indicates the price-earnings ratio and earnings. By dividing the current, it can be determined price of the stock by earnings per share.​​ 

  • Price/Cash Ratio

The relationship between company price and its cash flow is called the price/ cash ratio. By breaking the per share price of the market with the company's cash flow prices, the price/ cash ratio can be generated.

  • Dividend Yield Ratio

The company's dividends ratio can be divided by per year dividend payment to obtain the value of the dividend yield ratio.

Conclusion

In this study, two companies are taken from the same energy industry. The one company is AGL Energy Limited, and the other company is Origin Energy Limited, and both are founded in 2006 and 2000, respectively. The companies are working in​​ Australia, and the headquarter of both companies in Sydney. Both companies are selling the same product and deal with some kind of customers.​​ The products are electricity and gas. Many other small companies are working in the energy sector. These two companies are still on top of the market by their right strategies and plan and gaining the highest profit in Australia.​​ The important issue, however, is that both firms are competitors of each other. The focus of the study is to evaluate and compare the operation and performance of both companies. For this, the course discusses in detail the short-term solvency, long-term solvency, asset utilization, profitability ratios, and market value ratios. The financial reports of the AGL and Origin Energy are taken to analyze the figures of the income statement, balance sheet, and cash flows of the year 2017.​​ At the start of the report introduction, give an in-depth review of companies working, their products and services, and how they deal in the market. In the brief​​ explanation​​ of the body section, it can be seen that both the companies are high-level competitors so if any investor wants to invest in the energy sector than he should make his mind that which one is the best and for this, he should know everything about the companies briefly.​​ After the detailed discussion, the investor's recommendation is given below that what is best for him to choose AGL Energy Limited or Origin Energy Limited and why it is best.​​ 

Recommendation

At the end of the study, there is a part of the recommendation given on current research and previous literature.​​ When an investor visits the local or, especially the foreign market, he meets his high expectations, and with these expectations, he enters the market. He wants to know the companies well because he is new in the market and​​ wants to invest in blue-chip companies. For those investors, many investment managers are working in Australia to guide them better and give them the right direction for investment, which offers the benefit of the company and saves investors' future.​​ As an investment manager in the energy industry, I wish to suggest a good option for the investor to invest​​ in Australia's energy sector, but there are two competing companies. After all the above discussion, I recommend that the investor invests in AGL Energy Limited​​ instead of Origin Energy Limited. However, both the companies are competitors of each other and making so many products with good quality and delivery. Still, as I​​ thought, the AGL has more assets than his debt, and he can​​ survive​​ in very critical condition in the market. The other benefits are​​ high market share, maximum gaining profit, and​​ a perfect asset utilization place than Origin Energy.

References

  • Australian Energy Regulator State of the Energy Market Report 2014

  • ESCOSA, 2011–2014 Electricity standing contract price determination

  • Energy Australia website

  • Hewson, J 2015, ‘The real villains in Australia’s renewables debacle three big energy companies

  • Market Forces 2015, Market Forces Research Briefing: AGL.

  • Market Forces 2015, Market Forces Research Briefing: Origin

  • Sydney Morning Herald 2012, 'Origin Energy Attacks Renewable Energy Target,' 2 May

  • Taylor, L 2014, ‘Almost 90% of Australians support renewable energy​​ target​​ says poll’, The Guardian 2 December

  • www.agl.com.au/

  • ​​ www.originenergy.com.au/

  • www.asx.com.au/asxpdf/20170825/pdf/43lqz5s7mc9dn0.pdf

  • www.asx.com.au/asxpdf/20170914/pdf/43mb3nq5sdxgz4.pdf

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