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Liquidity Ratio

Question:

Discuss about the Depth Analysis Of The St Lucia Electricity Services and Dominica Electricity.

The current study is based on the analysis of the ratio relating to the publicly listed non-financial organizations that are from the same industry. An in depth analysis of the St Lucia Electricity Services and Dominica Electricity will be performed. A comparative analysis of the profitability ratio, liquidity ratio, capital structure ratio and market price ratio will be performed. An interpretation of the ratio will be provided with the theoretical concepts by comparing the same with the industry peer.

Liquidity ratio is regarded as those ratios that helps in measuring the organization ability. The ratio better analyses the obligations of debt and its margin of safety (Scott 2015). The liquidity ratio is computed to determine the organizations both the short and long term debt obligations. In the present context, current ratio is undertaken to determine the financial health of both the St Lucia Electricity Services and Dominica Electricity.

Ratios

Formula

2015

2016

Liquidity Ratio

Current Ratios

Current Assets/Current Liabilities

LUCELEC

2.63

0.76

DOMLEC

2.40

2.16

Current ratio can be defined as the ratio that is largely used to provide an idea of the organizations ability to pay off the debt liabilities with the assets. As evident the current ratio for the St Lucia Electricity Services for the year 2015 stood 2.63 while in the subsequent year of 2016 the current ratio of the company declined to 0.76. Dominica Electricity on the other hand reported the current ratio of 2.40 in the year 2015 while in the subsequent year of 2016 the ratio stood 2.16. The industry average though stood 1.54. St Lucia Electricity Service current ratio represented a fall in 2016 and the ratio fell below the industry standard (Schaltegger and Burritt 2017). While the current ratio for Dominica Electricity stood relatively strong, reflecting the Dominica Electricity is more efficient than St Lucia Electricity Services in paying off its debt obligations.

The profitability ratio can be defined as the ratio that helps in measuring the profitability of the organization. In other words, profitability ratio helps in measuring the organizational performance (Williams 2014). Profitability ratio is regarded as the easiest means of determining the profit made by the firm and expenditure occurred in generating the income. As evident under the profitability ratio, the return on equity is computed for St Lucia Electricity Services and Dominica Electricity.

Ratios

Formula

2015

2016

Profitability Ratios

Return on Equity

Net Profit/Equity

LUCELEC

11.16%

12.30%

DOMLEC

12.97%

12.45%

The return on equity for St Lucia Electricity Services during the year 2015 stood 11.16 while in the subsequent year of 2016 the return on equity subsequently increased to 12.30%. Dominica Electricity on the other hand, reported the return on equity of 12.97 in the year 2015 which marginally felled in to 12.45 in the subsequent year of 2016. The industry average stood 11.96%. As evident from the analysis, it can be stated that the return on equity for the St Lucia Electricity Services stood relatively lower than the Dominica Electricity (Warren and Jones 2018). This represents that amount of net income in respect to the shareholder’s equity of Dominica Electricity is better revealing that the firm has been successful in generating higher return to the shareholders for their invested funds.

Profitability Ratio

The capital structure ratio helps in measuring the extent of long term financing of the business concern in the form of debentures, preference share capital and equity share capital. In the present context debt ratio has been computed to determine the extent of organizations leverage (Henderson et al. 2015). This ratio is regarded as the debt of the total asset represented the proportion of the organizations asset, which is financed by debt.

Ratios

Formula

2015

2016

Capital Structure Ratio

Debt Ratio

Debt /Total Assets

LUCELEC

0.25

0.21

DOMLEC

0.15

0.12

The debt ratio for the St Lucia Electricity Services stood 0.25 for the year 2015, which subsequently declined to 0.21 in the year 2016. The Dominica Electricity on the other hand reported the debt ratio of 0.15 in the year 2015 while in the subsequent year of 2016 the debt ratio for the firms stood 0.12. An assertion can be bought forward by stating that the debt ratio for the Dominica Electricity is lower which signifies that the company uses lower amount of debt in financing its debt in proportion to its total assets (Freeman et al. 2017).

The market performance ratio is based on the measurement of the capital based measure to determine the market value and the cost of capital which is driven by the equity and debt market perceptions of the organizations valuation. In context of the market performance ratio the price earnings ratio is computed to indicate the amount of dollar an investor can anticipate to invest in the organization to determine the amount of dollar received by the organizational earnings (Wang 2014). The price earnings ratio is at times referred as the price multiple since it helps in showing what the investors are willing of pay each for each dollar of earnings.

Ratios

Formula

2015

2016

Market performance Ratio

Price Earnings Ratio

Price/Earnings

LUCELEC

15.9

16.2

DOMLEC

1.18

1.24

As evident from the computation, the price to earnings ratio for the St Lucia Electricity Services stood 15.9 for the financial year of 2015 while in the subsequent year of 2016 the price to earnings ratio increased to 16.2. On the other hand, Dominica Electric reported a price to earnings ratio of 1.18 in the financial year of 2015, which in the subsequent year increased marginally to 1.24. Therefore, an assertion can be bought forward the investors can anticipate higher amount of return from their investment in St Lucia Electricity Services since the price to earnings ratio for the firm stood relatively higher than the Dominica Electric (Hoyle, Schaefer and Doupnik 2015). The investors that are willing of pay each for each dollar of earnings would receive a higher value dollar by the organizational earnings.

Capital Structure Ratio

Computation of Share evaluation:

Particulars

Amount

Risk Free Rate of Return

A

2%

Market Risk Premium

B

7%

Beta

C

1.285

Cost of Capital

D=A+(BxC)

11.00%

Dividend paid per share

E

2.2

Dividend Growth Rate

F

4%

Expected Dividend

G=Ex(1+F)

2.288

Market Value of Shares

H=G/(D-F)

32.70908

As evident from the latest financial report of the St Lucia Electricity Services it is noticed that the organizations share price closed at EC $24 in the financial year of 2016 that resulted the price earnings ratio to stand at 16.2 times (Barberis et al. 2015). An evidence can be drawn from the above stated calculations that with dividend per share standing $2.2 and dividend growth rate being 4% the computed value of market value of the shares stands at 32.70.

The actual market value of the share is different from the computed value of shares this is because in the present context St Lucia Electricity Services has issued 22,920,000 ordinary shares. Additionally the incremental cost of the shares is directly attributable to the issue of ordinary shares (Kuehn, Simutin and Wang 2017). Because of this, the share options are identified in the form of deductions from the equity with net amount of tax effects. The profit after tax for the St Lucia Electricity Services increased by 17.6%, resulting in earnings per share of $1.48, which additionally created a differences between the actual price and the calculated price. 

Computation of price of bond:

Particulars

Amount

Face Value

A

$ 1,000

Coupon Rate

B

5.75%

No. of Payments in a year

C

2

Coupon Payments

D=(AxB)/C

$ 28.75

Years to Maturity

E

10

Market Rate p.a.

F

2.37%

Semi-Annual Market Rate

G=F/2

1.19%

Total Nos. of Payments

H=CxE

20

Price to Bond

I=Dx[1-(1/(1+G)^H)]/G+[A/(1+G)^H]

$ 1,299

As evident from the above stated computation, an important assertion can be bought forward in this situation by stating that the price at which the bond will be trading in the market stands at $1.29.

Conclusion:

A conclusion can be drawn by stating that an in depth ratio analysis has been performed for both St Lucia Electricity Services and Dominica Electricity. A conclusively the return on equity for the Dominica Electricity is found to be on the higher side. An assertion can be bought forward in this regard by stating that the investors might prefer investing in the shares of Dominica since the company has generated higher amount of return on equity. This represents that amount of net income in respect to the shareholder’s equity of Dominica Electricity is better revealing that the firm has been successful in generating higher return to the shareholders for their invested funds. /

References:

Barberis, N., Greenwood, R., Jin, L. and Shleifer, A., 2015. X-CAPM: An extrapolative capital asset pricing model. Journal of financial economics, 115(1), pp.1-24.

Freeman, R.J., Shoulders, C.D., McSwain, D.N. and Scott, R.B., 2017. Governmental and nonprofit accounting. Pearson.

Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial accounting. Pearson Higher Education AU.

Hoyle, J.B., Schaefer, T. and Doupnik, T., 2015. Advanced accounting. McGraw Hill.

KUEHN, L.A., Simutin, M. and Wang, J.J., 2017. A labor capital asset pricing model. The Journal of Finance, 72(5), pp.2131-2178.

Schaltegger, S. and Burritt, R., 2017. Contemporary environmental accounting: issues, concepts and practice. Routledge.

Scott, W.R., 2015. Financial accounting theory (Vol. 2, No. 0, p. 0). Prentice Hall.

Wang, C., 2014. Accounting standards harmonization and financial statement comparability: Evidence from transnational information transfer. Journal of Accounting Research, 52(4), pp.955-992.

Warren, C.S. and Jones, J., 2018. Corporate financial accounting. Cengage Learning.

Williams, J., 2014. Financial accounting. McGraw-Hill Higher Education.

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My Assignment Help. Essay: Ratio Analysis Of St Lucia Electricity Services And Dominica Electricity. [Internet]. My Assignment Help. 2019 [cited 15 June 2024]. Available from: https://myassignmenthelp.com/free-samples/depth-analysis-of-the-st-lucia-electricity.

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