Financial Analysis Of ITM Power Plc - Ratio And Balance Sheet Essay.

Background of ITM Power plc

This report aims at analysing the financial situation of the chosen company that is ITM Power plc. This report will analyse different financial statements like cash flow and balance sheet and conduct ratio analyse to understand the current financial of the company.

ITM Power plc. is the clean fuel and energy storage corporation of the United Kingdom which was incorporated in the year 2001 (Hyde, Ellis and Power 2019). The company is generally involved in designing, manufacturing, and integrating the electrolysers on the basis of the proton exchange membrane technology for producing the green hydrogen utilising the tap water and renewable electricity (Ramachandran, Balducci and Wu 2020). Moreover, the hydrogen manufactured through the electrolysis is utilised for industry, Power-to-X and mobility (Dicks 2019). This company generally floated on AIM (alternative investment market) in the year 2004 and became the 1^st hydrogen company which was publically listed on the LSE (London stock exchange). The London stock exchange has also granted the green economic mark to the company (Power 2019). The headquarters of this company is located in Sheffield within the biggest electrolyser factory around the globe.  The company also carries out its operations from further 2 sites based on Sheffield and the office which is situated in Hesse, Germany. In addition, this company has signed the collaboration agreement with the Iwatani Corporation of the United States which is a completely-owned subsidiary company of Iwatani Corporation of Japan. The company acknowledged this collaboration for the deployment of the multi megawatt hydrogen energy systems based on electrolyser in North America.

Ratio analysis has been performed to understand the profitability and growth of this chosen company (Haralayya 2021). Ratio analysis generally makes comparison between the line-item data from the financial statement of the firm in order to disclose the insights regarding the solvency, operational efficiency, solvency and liquidity (Walmsley et al. 2018). It can determine how this organisation is performing over the time while making comparison of the company’s current performance with respect to past performance ( Kourtis, Kourtis and Curtis 2019). For the chosen company, profitability and solvency ratios were evaluated to analyse the required growth process and profitability of the company. Gross profit margin, return on equity, return on assets, net profit margin and operating margin are profitability ratios which will be computed for the current two years 2020 and 2021. Likewise, debt ratio, equity ratio and debt-to-equity ratio are the solvency ratio which are evaluated for these year. The table below showcases the computation of these ratios.

From the above table, it is observed that the company has an adverse gross profit margin but the gross loss has reduced from -177.12 per cent in 2020 to 152.37 per cent in 2021. This indicate that the company’s gross profitability has improved significantly. In addition, operating profit margin is also unfavourable; however the operating loss has significantly reduced from -893.19 per cent to -623.56 per cent. Moreover, the net profit margin of this company was also negative in both the years which means the company was bearing net losses in these years. However, the net losses has significantly minimised from 2020 to 2021. This company’s return on assets is also negative for both the years which indicates that the corporation is not able to utilise or acquire its assets in an effective manner to produce the profitable return. However, the return on assets has drastically improved from -35.54 per cent in 2020 to -12.09 per cent. Furthermore, the return on equity was also unfavourable in the case of this company which implies that the company is not making profits. Nevertheless, the return on equity of the company has also improved but still it is not vibrant. As per the solvency ratios are concerned, it is found that debt ratio of this company has significantly reduced from 32.98 per cent in 2020 to 13.80 per cent which is a good sign for the company. This indicates that the company is more stable with a high potential of longevity and enhances company’s creditworthiness. Likewise, it is observed that equity ratio of the company has significantly enhanced from 67.02 per cent in 2020 to 86.20 per cent in 2021 which is again a good sing for the company. This means more contribution of the shareholders to the company’s capital which showcases better solvency position of this company in long run. The debt-to-equity ratio of this company has crucially fallen from 49.20 per cent in 2020 to 16.01 per cent in 2021 which is also favourable for the company. This indicates the company is operating at low debt means low risk and more stability of the company in long run. Thus, overall it can be said that the company is not making profits from the past 2 year and the major reason could be the outbreak of this Covid-19 pandemic. However, the company has improved its performance significantly in the year 2021 which is a good sign for the company and further improvement can lead the company to make significant profits and strive extensive growth process since the company already has a viable solvency position in 2021.

Ratio Analysis of ITM Power plc

Balance sheet is considered as one of the major financial statement which demonstrates the shareholder’s equity, liabilities and assets of the company for a particular fiscal year (Young 2018). It enables the companies to assess their financial position as on a particular reporting date (Jurakulovna 2021). The below table showcases the balance sheet of this company:

From the above table, it is observed that the company’ non-current assets have reduced drastically from144.24 per cent in the year 2020 to 50.65 per cent in the year 2021. Moreover, the total current assets has significantly enhanced from 73.20 per cent in the year 2020 to 204.33 per cent in the year 2021. In addition to that, total current liabilities has drastically reduced from -£21,114 in the year 2020 to -£25,337 in the year 2021. Furthermore, the non-current liabilities has increased from -£6,315 in the year 2020 to -£6,282 in the year 2021. The company’s called up share decreased from 46.07 per cent in 2020 to 16.35 per cent in the year 2021. The retained earnings of the company has also reduced from 3.23 per cent in 2020 to 26.23 per cent in the year 2021 

Cash flow statement is another crucial financial statement which demonstrates the ways in which alterations in income and balance sheet account influences the cash and cash equivalents and divides the analysis into three activities namely financing, investing, and operating activities (Soboleva et al. 2018). The cash flow statement of this company ITM power has been demonstrated below:

From the above table, it is observed that net cash utilised in the operating activities is being negatively and has become more unfavourable since it has enhanced from -£12,040 in the year 2020 to -£20,141 in the year 2021. This implies that the company’s overall condition has worsened and it would not be able to pay off its due bills without raising an additional capital or borrowing the required amount. If the company overlooks this negative cash flow then the company will not be able to earn profit in future and has to face more significant losses (TEXTS 2018). Moreover, the net cash utilized in the investing activities has also drastically fallen from -£20,141 in the year 2020 to -£12,403 in the year 2021 and it is negative. This implies a poor and ineffective performance of the company. Nevertheless, it is also generally known that the companies which tries to strive growth has an unfavourable net cash flow from the investment activities which takes place because it purchases more assets than it sells (Miao, Teoh and Zhu 2016). So, it might happen that this company is also trying to extend its operations which is leading to such negative cash flow from this activity. In addition, the net cash from the financing activities has significantly enhanced from £57,833 in the year 2020 to £168,725 in the year 2021 and is positive. A positive cash flow from this activity implies that more amount is flowing into the corporation than the amount flowing out which ultimately enhances the overall assets of the company (Chen and Teng 2015).

Profitability ratios

Generally for growing a particular business, the firms seek for an appropriate source of finance. Funding which is also regarded as financing typically demonstrates the act of contributing the resources so as to finance the project or a program and it can be initiated for long-term or short-term process. Sources of funding can be defined as the origin of funds which are involved in the occasional transaction and business relationship. There are various kinds of sources of financing such as crowd funding, venture capital, angel investment, equity, debenture, debt, earnings, and working capital loans and so on. However, in general most of the companies utilise debt and equity capital as the main source of financing. Equity financing is the procedure of raising the required capital via the sale of company’s shares. It generally involves the sale of the portion of the firm’s equity in exchange of the required capital. The investors who purchases these shares get certain purchasing rights; however the company do not have to repay the amount. On the other hand, debt takes place when the firm raises the money by selling the debt instruments to those investors in exchange of the required money. The company generally borrows the money at a fixed rate and the obliged to repay them within the specified period. However, investors in this case do not have any direct control or right on the company’s operations. In the case of the chosen company, the primary sources of finance are debt capital and equity capital. However, it is observed that the company has significantly reduced the level of debt or loan capital and enhanced the level of equity capital.

Conclusion

From the above discussion, it can be concluded that the company has been significantly influenced by the outbreak of this uncertain situation. The financial performance of the company was affected and the company is till 2021 was not able to make profits. However, the company’s overall performance has improved and if the company takes the necessary steps then the company will be able to make profits again as it used to earn earlier.    

References:

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