This report will focus on Centrica plc (British Gas) and events that affected its financial statements over the past three years. British gas has experienced significant growth over the years, through expansion schemes and adverse weather conditions which have increased demand for gas.
The selection of Centrica plc popularly known as British Gas for this report was based on its role in servicing energy demands in the United Kingdom and its contribution to the development of the UK economy through job opportunities.
British gas is a company that has shown significant growth over the past 5years to become the preferred utilities provider in the UK. British gas performance is clear for everyone to see, this report will focus on its expansion growth for the past 3years, between 2007 and 2009.british gas has made numerous investments in gas exploration, storage facilities, facility management and customer care, below are some events that show British gas's intention to become the one utility provider in the UK.
2007
Centrica plc British gas announces energy price cuts; British gas cuts its standard tariffs for gas by 17% and electricity by 11%. Centrica (8th February 2007)
Centrica increase LNG capacity to supply British gas customers. Centrica (17th May 2007)
Centrica invests to acquire North Sea gas assets; this acquisition is expected to boost gas reserves to 300billion cubic feet over the next 3years.Centrica(17th September 2007)
2008
British gas announces increase in tariffs by 15%. Centrica (18th January 2008)
Centrica begins work on proposed new offshore gas storage facility, the first time in 25years, when completed will boost storage capacity to 20billion cubic feet. Centrica(27th March 2008)
Centrica acquires it first Norwegian gas producing interests, this was done to reduce the group's exposure to movements in gas pricing through securing additional upstream assets. This also increase the level of gas reserves to supply British Gas customers. Centrica (8TH July 2008)
2009
British gas energy acquires 22% stake in Secure electrons Ltd. Secure electrons ltd, will develop an in home payment device which will allow prepayment customers to make payments from the convenience of their home. Centrica (26th of March 2009)
British gas business to acquire Newnova group ltd (BMS Solutions) BMS solutions this acquisition further strengthens British Gas' position in the expanding business energy services market in the UK. BMS Solutions provides British Gas with an on-demand engineering capability and access to new skills, including scheme design and project management to fulfil the initial installation and upgrading of building control equipment. BMS Solutions provides maintenance and servicing facility for businesses. Centrica (3rd August 2009)
These events will surely have some operational effects on British Gas in the future, but before this report goes any further we shall analyse the ratios and compare if there were any changes within the three years.
ANALYSIS OF RATIOS
EFFICIENCY RATIOS
This is shows how an organisation performs in terms of converting its services for returns; efficiency ratios measure how a company is able to this. Dyson (2007)
Debtor's Collection days: This shows how quick an entity takes to recover its debt, the shorter the amount of days the better for the entity. It is expressed in days
Debt recovery in 2009 was good compared to the other years; this may be attributed to the
acquisition of 22% stake in secure electrons which developed a prepayment device which allowed prepayment customers to make payments from their homes
Stock turnover days: A Measure of stock liquidity over a period of time I.e. ability to convert stock to cash over a period of time. The greater the stock the more efficient the company Dyson (2007), it is displayed as a number
Sales in 2007 were good this might be attributed to the tariff cuts for gas and electricity
Creditors' payment days: this is the amount of days an entity takes to repay its creditors. i.e service its loans, an upward trend might show that the entity is having difficulty finding cash to service its loans. It might be a sign of problems. Dyson(2007)
There has been an increasing trend over the years which might raise some questions in terms of how debt servicing is done. An increasing trend is observed, 3.01days in 2008 and 34.99days in 2009
LIQUIDITY: Is the degree to which an asset can be bought or sold in the market without affecting the assets price. Investopedia (2011) this section will cover the following liquid ratio, solvency ratio and gearing ratio
Liquidity Ratios are used to measure the extent to which assets can be turned into cash.Dyson(2007)
Current Ratio: is a liquidity ratio that measures a company's ability to pay short term obligations. The higher the current ratio the better the company is able to meet its obligation. Investopedia(2011). A ratio under 1 would suggest that the company cannot meet its obligations
There is an increase of 0.09% in 2008 and a decrease of 0.05% in 2009; this will suggest the company is able to meet its short term obligations even though there is a slight fluctuation
Solvency Ratio: is a liquidity ratio that measures a company's ability to meet long term obligations. A solvency ratio of greater than 20% will suggest the entity is financially healthy. Investopedia (2011)
There is a decrease of 4.72% in 2008 and a further decrease of 2.11% this does not pose any problem at the moment since its still just above 20% despite the decrease witnessed
Gearing Ratio: is a financial ratio that compares an entity's equity (capital) or borrowed funds. It is analysed based on comparism of ratios of other companies in the same industry. Investopedia (2011)
From the table above there has been an increasing trend over the years an increase of 25.72 % in 2008 and a further increase of 97.31 % 2009 which makes them highly geared.
PROFITABILITY RATIO: Is a class of financial metrics used to assess an entity's ability to generate earnings as compared to its expenses and other relevant cost incurred over a period of time. Investopedia(2011)
Profit Margin: this ratio measures how much out of every dollar of sales a company actually keeps in earnings. Investopedia (2011)
The year 2007 has a huge profit margin compared to the other years this might be caused by the cut in tariffs which would have boosted revenue, but when the tariffs where reverted back in 2008 there would have been a reduction in revenue which would have effect on their profit margin, there was a decrease of 10.82 % in 2008 and a slight increase of 2.43% in 2009
Return on capital employed (ROCE): This is the profit realised from capital investment. It is expressed in percentage (%) Dyson (2007)
In 2007 British gas realised an increase in return compared to the other years, this might be as a result of the investment to acquire North Sea gas assets which boosted their reserves to 300 billion cubic feet. There was a drop of 28.73% in 2008 compared to 2007 and a slight increase of 2.65% in 2009
Return on shareholders' fund (ROSF): this is the profit that is realised for the shareholders i.e how much the shareholders earn. It is expressed in percentage (%) the higher the percentage the more the shareholders earn on their investment
This table shows that the shareholders earned a lot in 2007; looking at 2007 it was a good year for British gas this huge percentage will mean that it would have the ability to payout generous dividends to its shareholders. Compared to other years there was a decrease of 53.15% in 2008 and a slight increase of 13.38% in 2009.
THE IMPACT OF CURRENT EVENTS SINCE THE LAST BALANCE SHEET
A glimpse of the analysis of these ratios will show that the financial years differ from each other in terms of liquidity, efficiency and profitability ratios. There was a fluctuating trend which might sound worrisome, but that might not be the case. 2007 financial year was by far the best year for British gas it had a lot of positive indicators, it made strategic investments that would boost operations in the short and long run, an example of these investments were
Acquisition of North sea gas assets which boosted reserves to 300billion cubic feet of gas
Tariff reductions for gas and electricity
These investments along with other events played a positive role for British gas, which made 2007 a brilliant year. British gas used this as stepping stone for operations in 2008 by continuing its expansion plans with further acquisitions and decisions, but it didn't go as planned but a brave move nonetheless. British gas announced increase in tariffs because of wholesale oil and gas prices which will definitely affect its revenues, but it addressed this problem with the acquisition of its first Norwegian gas interest which secured additional upstream assets. And also continued with its expansion programmes in 2008, British gas had a bumpy ride in 2008 it lost revenue because of the tariff increase but still continued with its expansion programs which would definitely affect their profitability ratios. With the performance from 2008 you can see that British Gas is addressing problems which might have affected its operations. In 2009, there is evidence British gas is addressing these problems, there's a trend of improvement in its ratios. Evidence of this can be seen in its efficiency ratios. It acquired 22% stake in secure electrons limited which developed a home payment device which allows easy payment from prepaid customers. Centrica (2009)
CONCLUSION
In 2010 there were events that showed British gas witnessed a significant growth and this could be traced back to its events and investment decisions it made between 2007 and 2009 financial year. Evidence of this growth "British gas profits from harsh winter Attracts 200,000 new resident customer Benefiting from cheap wholesale price of gas". The Guardian (2010)
Ratios analysis is used to asses a firm's performance; however ratios cannot predict the future. In this report the analysis of the ratios were fluctuating which should have raised some concerns. But those ratios really show the risks and decisions British gas took to expand its operations, which affected its performance between 2007 and 2009. Which made them highly geared.
This goes to show that in any business you gain nothing if you don't take any risks, if an entity's ratios are analysed and there are problems or fluctuations in the ratios. It could mean a lot of different situations, below are examples
the company is really in trouble or having difficulties
its making short term sacrifices for long term future gains
RECOMMENDATIONS
From the analysis of this report its obvious British gas has a vision to become the number one preferred utility service provider in the UK. It has been able to do this with its investments in upper stream services, storage and innovations, which has resulted to the growth of its client base.
British gas provides energy services that are very important to everybody, with the growing population and increasing demand for clean and cheap fuel ,British gas have to invest more in exploration and storage to meet these growing demands. However they must invest in countries or regions that are not volatile an example of this can be seen in Libya which is causing unrest in the Arab region and also think of acquisitions and mergers with other local competitors to ensure it can guarantee its quality of service delivery to its customers.
