Erm Power - Australian Energy Company

ERM Power is an Australian energy company and it focuses on the electricity generation and electricity sales. ERM Power was founded in 1980 and listed on the Australian Securities Exchange (ASX) in 2010. During these 30 years, ERM Power has become the fourth largest seller of electricity in Australia. As an energy company, ERM Power keeps an upward trend of its business during the 30 years. In this essay, we will focus on ERM Power’s profitability and efficiency based on the financial reports between 2012 and 2014.

Profitability can be defined as the ability of a company to earn profits. The expense ratios and profit margin can be used to evaluate company’s profitability. And the graph and table of those dates will be showed as follow. 2012 is chosen to be the basic year.

ERM Power

Profitability

　 2012 2013 2014

Operating Revenue (Sales) 900,647,000.00 1,555,375,000.00 2,059,737,000.00

Operating Expense -877,096,000.00 -1,433,925,000.00 -1,990,299,000.00

Cost of Goods Sold -788,699,000.00 -1,438,257,000.00 -1,931,696,000.00

Gross Profit 111,948,000.00 117,118,000.00 128,041,000.00

EBIT 40,954,000.00 115,766,000.00 61,902,000.00

Net Profit 13,607,000.00 63,637,000.00 27,123,000.00

EBIT Margin (%) 4.55 7.44 3.01

Gross Profit Margin (%) 12.43 7.53 6.22

Net Profit Margin (%) 1.24 3.97 1.28

Operating Expense Ratios (%) 97.385 92.192 96.629

ROA (%) 4.18 8.89 4.60

Table 1

Graph 1

Graph2

Graph 3

Gross profit margin: The formula is that Gross profit margin = Gross Profit / Revenue (sale). In 2012, the gross profit margin is 12.42%, which means for every dollar that ERM power earned on electricity earns 12.42 cents. However, the gross profit margin witnessed a decline in 2013 (from 12.43% to 7.53%) and a slight decrease in 2014 (from 7.53% to 6.22%). However, the cost of goods sold in 2013 was nearly twice as much as the data in 2012 (AU$1,438,257,000 and AU$788,699,000 respectively). And the cost of goods sold in 2014 was also higher than the data in 2013 (AU$1,931,696,000 and AU$1,438,257,000 respectively).

Net profit margin: The formula is that Net profit margin = Net profit / Sales revenue. Net profit margin is an important index, which can be used to evaluate the competitiveness of enterprises. The graph 2 shows that the ERM Power earned 1.24 cents of profit per dollar of sales in 2012. The figure witnessed an obviously rise in 2013 which increased from 1.24% to 3.97%. Similarly, the EBIT (earnings before interest and tax) Margin also increased from 4.55% in 2012 to 7.44% in 2013. However, the net profit margin decreased from 3.97% to 1.28% and the EBIT margin also witnessed a decline (from 7.44% to 3.01%). According to the Graph 3, we find that the operating expense ratio increased sharply between 2013 and 2014.

Operating expense ratio: The formula is that operating expense ratio = operating expense / sale revenue. This index indicates how much cents a companies used to pay the operating expense for one dollar. In 2012, 97.385 cents were used to pay the operating expense for one dollar. And the figure decreased from 97.385% in 2012 to 92.192% in 2013. Lower operating expense ratio is beneficial to a company because it means more profits. However, this ratio rose from 92.192% in 2013 to 96.629% in 2014.

In order to evaluate the ERM Power’s profitability, we will analyse the return on assets (ROA) of this company. ROA can be used to compare competing companies in the same industry (Birt, 2014). It can be calculated by the formula, which is ROA = Net Income / Average Total Assets. According to the table 1, we find that every dollar of assets could generate 4.18 cents. And the ROA witnessed a sharp increase from 4.18% in 2012 to 8.89% in 2013. Unfortunately, the ROA decreased sharply from 8.89% to 4.6% in 2014. Because the ROA of ERM Power fluctuated between 2012 and 2014, we cannot predict the future profit of ERM Power. But we can use the ROA to compare competing companies in energy industry.

Efficiency ratios: Efficiency ratios, which measure how effectively companies manage its operations and use its assets. Those important