Financial analysis EDF

1.3        Return on assets

To analyse the return on assets it is important to mention the percentage in which total assets have changed from one year to another, because this makes us understand in what proportion the change on assets or the change of net profit have had an impact in the ROA. As we can see in the table above the change on assets has been meaningful just from 2008 to 2009 and the impact on the ROA was as expected because the increase of the net profit did not match the increase of the total assets. But in 2010 the net profit was the one that made the ROA smaller because the change on assets was very small to cause a variation as the one observed, so we can conclude that for year 2010 the change in ROA is totally due to the reduction of Net income. For year 2011, we can find a different approach because the ROA is close to 1,30% and the assets have been reduced for this period in  (3,68%), so this means the net income is still too small to show a good ROA that can compete with the first two years. This is not a good indicator because this means that even if the assets decrease and leave a proportion for the ROA to become bigger, the net profit is not showing signs of recovery and does not the ratio to  strengthen.

1.4   Return on equity

Here we also use the change in equity to determine if the behaviour of the ROE is due mainly to changes in equity or in profit or both.

The return on equity has had major changes since 2008, but depending on the year the explanation can be found in the changes of total equity every year. For example in 2009 the Return In equity was reduced from 13,94% to 11,26% because of the increase of 38,68% in equity that came from the augmentation of Comprehensive Income And Other, and Total common equity, and the positive change in the income was not positive enough to compensate the increase in the denominator. In 2010 the equity increased in 6,45% and the Return on Investment was reduced reaching 2,76% mainly explained by the reduction in net income that affected negatively the indicator.

3.1.2                 ACTIVITY RATIOS

To make an analysis of the financial indicators of EDF it is important to say that it is difficult to compare this company to the industry because it offers a wide range of services and has assets allocated in different parts of the energy industry so the turnovers and different indicators may vary. At the same time it is important to say that the working capital of the company has been increasing over the years which supposedly should bring as a consequence the increase of total revenue.

2.1. Total Asset Turnover

Total Asset Turnover for EDF is 0,28  in 2011 which means that is almost at the same level  of the industry (0,3). This means that for every euro invested in the company’s assets they receive 0,28 euro in revenue in the period. The evolution of this indicator has been positive over the four year period from 2009 to 2011. However in 2008 this indicator was higher and showed a better capacity of the company to generate revenue over the time, but as it has been demonstrated with the profitability indicators over the four years period the company’s capacity to generate revenue has remained good but the percentage of the increase in assets has been bigger so the augmentation in revenue does not compensate the changes in the denominator.

2.2. Inventory Turnover

In 2008 this indicator showed that the company had a better performance in renovating (selling) inventories than its competitors. However, from 2009 to 2011 it has shown that the company is behaving as its competitors in terms of the times they sell and replace their inventory, so the analysis that can be made is that the company has reduced its ability to generate income and replace inventory of just that the company was over performing due to the economic joint and the high prices of energy in the 2008 periods.

2.3. Collection and payables period

These two indicators should be analysed together because they allow knowing if the company is taking advantage of the payables period to finance the activity. Over the four-year period the collection period has been on the range of 110 to 122, reaching its maximum in 2009 and decreasing the next year. At the same time the payables period has been in the range of 125 to 150, showing a decreasing behaviour since 2009. This can be interpreted as a consequence of the change of internal management policies related to cash management and the need to strengthen the relations with suppliers.

3.1.3                     LEVERAGE RATIOS

Industry comparison (Blue line shows EDF’s position)

Leverage ratios for this company show that is highly leveraged specially with long term liabilities. It is important to say that the company’s activity is highly capital intensive and it requires a great amount of continuous investment to keep its development; this is why a high leverage is not an indicator of bad management but is almost a requirement because it is very difficult for an investor to have the quantity of money required to finance this activity. This can be supported by the fact that EDF’S leverage ratios compared to industry are the same, meaning that all the companies that belong to this industry are in the position of needing a huge amount of external financial resources to continue operations and expand their activities.

3.1        Debt to equity:

The behaviour of the debt to equity ratio is directly proportional to the changes in equity and liabilities for the period of analysis. From 2008 to 2009 the debt to equity ratio was significantly reduced due to the increase in 17,02% in liabilities and the simultaneous increase of 22,39% in equity for the same year, which have a big Impact in the value of the ratio showing less dependence of the company on liabilities and relying more in its own resources as profits increased (comprehensive income and others) and allowed to make this changes in equity. In the other three years, the value of the ratio remains almost constant in 5.94 to 5.64, which allows us to deduct that the debt policy has been consolidated since 2009 and may not change in the near future if there is not any major change in investments in infrastructure.

3.2        Debt to assets ratio

One more time to make this analysis it is very important to take into account the change in assets and in liabilities during the periods used for this case study. From 2008 to 2009 assets increased in 19,72% while liabilities grew 17,02%, so the value of the denominator determined in this case the change in the ratio negatively; but since this change the position of the debt to assets has been stable in a level of approximately 85%-86%. This means that for every euro the company has in assets they have 0.85 cents in liabilities, resulting in a high financial leverage that increases the ability of the equity resources to generate money via “leverage effect”(when there is a positive income).

3.3        Assets to equity ratio

The behaviour of this ratio is also a result of the changes in capital structures: increase and decrease of assets; liabilities and equity; and it also shows major changes from 2009 to next two periods of analysis.

3.1.4 LIQUIDITY RATIOS

Both the current ratio and the acid test ratio, show that the company has increasing ability to meet current obligations even in times where profit margins are decreasing. From 2008 to 2010 there were not major changes to observe in both indicators but in 2011 the values changed drastically due to the decrease in current liabilities and a simultaneous increase in current assets for that period. This shows the company is concerned about its short-term ability to meet obligations maybe to be able to ask for more long term financing.

3.2                          Income statement evolution

EDF is strongly followed by financial analysts; they provided forecasts up until the year 2016.

Currently, these analysts are negatively revising EDF earnings growth estimates, but as for sales and operating profit they are likely to increase, and both net and operating margins are expected to remain steady.

As we can see the net margin has a significant decrease from 2007 to 2010, which mostly caused due financial crisis and investments, but if compared to operating margin which stays stable we can say EDF is financially healthy company but with significant debts and interest respectively.

Here we’d like to make some examples of other reasons that prevent EDF achieve stability in the market.

1. As an example the crisis at EDF’s centres in UK, caused by the introduction of a €195 million computer system, and a staff battle with a new computer system – with some grievances still unresolved after eight years caused both profit and confidence loss. [1]

2. The fact that in 2006 the main competitor GDF merged with Suez and strengthened its position with a more strong company, as the revenue of GDF was around 22.4 billion euros in 2005, compared to 41.5 billion for Suez. In comparison in 2012 EDF is seeking control of Edison -and its natural-gas assets and infrastructure- as part of its expansion strategy in Europe and in the gas segment, after years of tension with the Italian municipalities that hold half of the utility's controlling shareholder.

A preliminary deal, announced in December 2011, would see EDF increase its stake in Edison from 50% to 80.7% at a cost of around EUR700 million.  The Milan-based company had a net debt of EUR3.88 billion at the end of 2011, slightly higher than a year earlier. [2] Nevertheless a capital increase would allow EDF to increase its shareholding position. But anyway for EDF it’s a step back to get influence on a financially weak company.

So the company is facing some problems dependant on big strategic investments and positive progress of its competitors but it’s likely to evaluate positively.

IV - Comparative analysis

In the sector of energy, EDF is in competition with a lot of companies. Its two main competitors are  Gazprom and E.ON .

Gazprom is the largest Russian company. It is the largest extractor of natural gas in the world. It extracts, treats and transports natural gas all over the world. In 2011, the company produced 510 billion cubic metres (BCM) of natural gas, amounting to 17% of the worldwide gas production.

E. ON is the world's largest investor-owned electricity provider based in Germany. It operates in over 30 countries and serves over 26 million customers.

In order to compare EDF with the others companies operating in the same industry sector, we have calculated typical profit indicator and ratios of these companies: gross profit margin, return on assets, return on equity, return on capital and the net profit margin. Below a table grouping all data calculated: