Evaluation Of Accounting Process And Financial Data Of AWE And ERA Limited - Essay.

Evaluation of Shareholder Value

Discuss about the Project Report of AWE and ERA Limited.

Accounting information is a system and a process to collect, store, process and evaluate the accounting and financial data of a company which is used in making the decisions. In the report, two companies, AWE limited and ERA limited has been evaluated and the  accounting process and limitations have been studied.

AWE (Australian worldwide exploration) limited is an oil and exploration manufacture company which operates the functions in Australia, New Zealand and Indonesia. The company is situated in Sydney and operating its business from 1997 (Home, 2018). On the other hand, ERA (energy resources of Australia limited) is also an oil and exploration manufacture company. It is subsidiary company is Rio Tinto (Home, 2018).

Shareholder value is the total value which is delivered to the shareholders. The total value of shareholders is recognized on the basis of total ability of the management to enhance the sales, free cash flow and the earnings in a particular time period. Shareholder value of an organization depends on the strategic decisions of the top level management of the organization. If the shareholder value of an organization is created over long term than the share price of the organization enhances the organization could pay high dividends to the stockholders (Zellweger & Nason, 2008).

The shareholder worth of AWE limited and ERA limited has been evaluated and it has been found that the Net income of both the comapny is minus and thus the stockholder worth of both the companies have been lower. Further, it has been found that the current stockholder worth of both the company is AUD 30,66,92,44 and AUD 23,60,39,533 which is lower than the book value of the company (Yahoo Finance, 2018).

However, it has been found that the ERA limited’s stockholder value has been enhanced more than the stockholder’s value of AWE limited from last years. Further, it has been found that the policy of stockholder’s value of ERA has been changed. The company has reduced the outstanding share to manage the stockholder’s worth.

Return on assets is the measurement of total profit of an organization on the basis of total assets of the company. Return on assets explains that how much profit could be generated by the company on the basis of total resources which has been used to generate the sales and the earnings of the company (Ali, Klasa & Yeung, 2008). Return on assets of AWE limited and ERA limited has been evaluated to identify the performance and the efficiency position of both the companies. The ROA of both the companies are as follows:

Evaluation of Return on Assets

(Annual report, 2018)

ROA of AWE limited was -13.71%, -39.04% and -42.64% in 2015, 2016 and 2017. It explains that the return on assets of the company has been lowest in last 3 years. It explains that the profitability level of the company is quite lower and company is required to make few changes into the operations to make the performance better. Further, the efficiency position of the company also briefs that the company is not efficient at all. Company is required to make huge changes to enhance the level of profitability as well as efficiency position of the company.

Further, ROA of ERA limited was -25.03%, -33.08% and -5.46% in 2015, 2016 and 2017. It explains that the return on assets of the company has been better in 2017 in last 3 years. It explains that the profitability level of the company is quite better and company is required to make fewer changes into the operations to make the performance better. Further, the efficiency position of the company also briefs that the company is efficient enough in the industry (Annual report, 2018). Company is required to make few changes to enhance the level of profitability as well as efficiency position of the company.

The profitability data and the assets level of both the companies brief about huge changes. In 2015, the assets of both the comapny were quite higher and with the time, both the companies have reduced the level of the assets to manage the efficiency position and the profitability level of the company. However, the AWE position has not been better due to huge losses of the company. In case of ERA limited, the performance of the company has been better (Yahoo finance, 2018).

The oil industry of Australia has been evaluated further to recognize the industry position and the macro economical factors due to which both the companies are facing huge losses. According to the conservation (2018), Australian oil industry needs a reform. From the last few years, industry has faced huge losses and which have directly impacted on each of the firm if the industry.  The economical position and the decline in international trade have also lead to the company towards the huge losses.

Thus, it has been found that the AWE limited is not performing well in the market. The board of directors and the chief financial officer of the company are required to identify the issues which have impacted on the profitability and the efficiency position of the company. However, the policies of ERA limited are far better and from 2015, the performance of the company has been better in 2017. On the basis of evaluation, it has been found that the investment position and the financial position of ERA are better than AWE.

Assessment of Accounting Policies

Investors and the financial analyst could not evaluate the internal functions and the unannounced information of the company. They can only evaluate the financial performance, financial position and cash flow statement on the basis of financial statement of the company. On the basis of income statement, revenue, expenses, net earnings, profit growth etc could be evaluated and on the basis of balance sheet, total assets, total liabilities and the stockholder’s equity could be evaluated.

These are the only sources through which the company could evaluate the total wealth of the company and the total resources which are available for the company. The net profit is best item in the final financial statement of the company to analyze the wealth of the company and the asset is the best item in balance sheet to evaluate the total resources of the company (Saleem & Rehman, 2011).

For the formula of ROA, net earnings and the total assets of the organization are concerned. And the investment position of an organization is evaluated on the basis of that. However, there are various problems with the return on assets of an organization such as intangible assets, difficulty in comparison, borrowed capital etc. The intangible assets enhances the total worth of assets and which directly affects the ROA of an organization such as in case of ERA, intangible assets is 0 and in AWE, huge intangible assets. It has affected the ROA level of the company and the decision has also been manipulated because of it.  

Further, the policies and the  accounting principles of both the companies are also different which make it difficult for the analyst to evaluate and compare both the firms on the basis of ROA. Another issue with ROA is that it does not take the concern of borrowed capital (Ali, Klasa & Yeung, 2008). The success of an organization depends on the total fund of the company. Thus, the ROA is not a factor to analyze, evaluate and compare the investment position, efficiency position and profitability position of organization.

In case of AWE, it has been found that the company has changed the accounting policies to manage the performance and the accounting process of the company. Following are some of the changes which have done by the organization in last 3 years:

It briefs that the changes have been done by the company to update the accounting process of the company. Further, in case of ERA, it has been found that the company has changed the accounting policies to manage the performance and the accounting process of the company. Following are some of the changes which have done by the organization in last 3 years:

It also explains that the company is following the IFRS rules to manage the accounting process and record all the transactions of the company. On the basis of both the company’s accounting policy, it has been recognized that the accounting process of both the comapny is different and thus the comparison could not be done among both the companies.

Conclusion:

On the basis of the above study, firstly, it has been recognized that the AWE limited is not performing well in the market in comparison with the EAR limited. The return on assets ratio briefs that the efficiency and profitability position of AWE is not at all good and thus the EAR is better option in the industry. On the basis of evaluation, it has been found that the investment position and the financial position of ERA are better than AWE.

Further, it has been recognized that the accounting process of both the comapny is different and thus the comparison could not be done among both the companies. It leads to the conclusion that the performance and the efficiency of ERA could not be compared with the efficiency and the profitability level of AWE. The analyst must chose the different basis to identify the performance of the comapny and make decision about the performance of the company.

References: 

The conservation. (2018). Australian oil industry. (Online). Retrieved on 6^th April 2018 from: https://theconversation.com/australias-energy-sector-is-in-critical-need-of-reform-61802.

Yahoo finance. (2018). AWE Limited. (Online). Retrieved on 6th April 2018 from: https://finance.yahoo.com/quote/awe.ax?ltr=1.                                      

Annual reports. (2018). AWE Limited. (Online). Retrieved on 6th April 2018 from: https://www.awexplore.com/irm/content/annual-reports.aspx?RID=454.

Annual reports. (2018). ERA Limited. (Online). Retrieved on 6th April 2018 from: https://www.energyres.com.au/media/reports/annual-reports/.

Yahoo finance. (2018). ERA Limited. (Online). Retrieved on 6th April 2018 from: https://finance.yahoo.com/quote/era.ax/.

Zellweger, T. M., & Nason, R. S. (2008). A stakeholder perspective on family firm performance. Family Business Review, 21(3), 203-216.

Ali, A., Klasa, S., & Yeung, E. (2008). The limitations of industry concentration measures constructed with Compustat data: Implications for finance research. The Review of Financial Studies, 22(10), 3839-3871.

Saleem, Q., & Rehman, R. U. (2011). Impacts of liquidity ratios on profitability. Interdisciplinary Journal of Research in Business, 1(7), 95-98.

Home. (2018). AWE Limited. (Online). Retrieved on 6th April 2018 from: https://www.awexplore.com/IRM/content/default.aspx.

Home. (2018). ERA Limited. (Online). Retrieved on 6th April 2018 from: https://www.energyres.com.au/.