Corporate Finance and Financial Markets
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1309 Downloads I Published: 08 Jul ,2019
Financial market is a place in which the investors make investment in different financial securities as well as various commodities. Different types of securities and commodities such as bonds, shares, valuable metals, agricultural products are traded in the financial market. The present report shows financial comparison between two companies such as Energlas de Portugal and Galp Energia SGPS SA which are operating in the energy sector. Further it describes relations among goals and objectives of the firm as well budget and investment appraisal techniques. Apart from this it emphasises on comparison among share prices between EDP and GAPL business entities.
Ratios or measurements which helps to the management in order to determine financial performance of the company in their respective industry are known as financial ratios. The measurement is very helpful for all the stakeholders of the firm in order to make investment, purchasing goods and services etc (Ehrhardt and Brigham, 2016). In the present case there are two companies financial performance is analysed such as Energlas de Portugal as well as Galp Energia SGPS SA using different financial ratios. Various types of ratios are such as profitability, efficiency, liquidity, gearing etc. Used to compare between both the respective firms. Financial ratios of both energy sector firms are enumerated below:
|Type of financial ratios||2015||2016|
|gross profit ratio||35.15%||39.03%|
|operating profit ratio||10.28%||12.42%|
|net profit ratio||5.88%||5.46%|
|debt to equity ratio||1.79||2.02|
|Stock turnover ratio||49.32||43.12|
|Total asset turnover ratio||0.36||0.35|
|Fixed asset turnover ratio||0.42||0.64|
|Dividend payout ratio||66%||84.1%|
|Return on invested capital||5.53%||4.93%|
|Type of financial ratios||2015||2016|
|gross profit ratio||9.71%||11.04%|
|operating profit ratio||2.40%||2.79%|
|net profit ratio||0.79%||0.81%|
|debt to equity ratio||0.70||0.87|
|Stock turnover ratio||16.05||14.07|
|Total asset turnover ratio||1.21||0.99|
|Fixed asset turnover ratio||1.79||2.43|
|Dividend payout ratio||0%||220.5%|
|Return on invested capital||1.57%||1.21%|
In the present case there are two companies EDP and which are listed the stock market and has different different share prices. When the investor try make investment in the equity of shares then it considers various factors. One of them is share prices which are varied according to the index values. In the February 2015 share prices of EDP and GAPL increases with 8.03% and 23.59% respectively. Further, in the month of April 2015 share prices fluctuated by 1.77% and 18.70% for EDP and GAPL both (Davidson, Dey and Smith, 2015). While considering the share prices the investment will be beneficial when investor put money in the GAPL enterprise. In the September 2015 share prices are reduced due to decreasing index prices. Prices of shares of EDP as well as GAPL reduce with -9.49% and -27.19%, hence the investment will be beneficial in the previous business organisation. Afterwards in the month of July 2016 prices of sahres reduced by -6.41% of the EDP firm on the other side share prices increased of the GAPL by 35.65% which shows that later firm will be give more return compare than another business. In the recently in 10th January 2017 price of share of EDP and GAPL was 2.74 GBP and 14.07 GBP respectively. On the basis of above analysis it can be said that GAPL organisation is better to make an investment and it will give higher return in comparison to another mentioned firm.
Budget is process which helps to the management in order to determine future financial performance and data such as inflows, outflows, profit etc. Further, it is very helpful in order to know issues which are creating in the firm such as increasing cost, reason of reduce profit, unable to use effective business strategies etc. Better and effective business plans can be made when the firm has adequate financial resources which can be allocated with helps of proper budget. With helps to this the management able to meet with its different goals and objectives (Dietz and et.al., 2016). Apart from this each and every business organisation wants to maximize its level of profit whether it operates in oil and gas sector or any other industry. Controlling cost as well as making investment in better and benefited avenue lead to increase profitability ratio of the business. With help of budgeting process the organisation able to know that in which activity cost and expenses are increases and decrease. By which management of the firm can make strategies and tactics to control over the cost of production and achieve objective of profit maximization.
Moreover, in the financial markets there are different avenues in which the company can make investment and generate higher rate of return. Various criteria for making investment are such as equity, bank, commodity etc. In terms of the commodity numerous types of commodities available in the financial market where firm can invest which are like as Brent, Diesel, Gasoline, LPG, Benzine, different metals and many more etc. In order to take better decision to choose one avenue from two or more mutually exclusive commodities there are capital investment appraisal techniques are used by investor. These various tools and methods helps to the management that which one commodity will give better and higher return of the potential or initial investment. Further, which one avenue or criteria will give more return in which investment is to be made by the company (Acharya and Xu, 2016). With this the firm able to make effective budgeting plan as well as give motivation to the employees in terms of monetary. Higher the rewards and motivation given to organisational members will lead to become more efficient and productive. With this productivity of the enterprise will increase and helps to maximise level of profitability in the overall industry.
Hence, from the above analysis it can be said that budgets as well as different capital budgeting techniques linked with the goals and objectives of the firm. Further, it helps to choose the best commodity for making investment and achieve objective in proper manner.
The model which helps to the company as well as investors in order to determine required rate of return of the potential avenue in which it makes investment, known as capital asset pricing model (CAPM). Further, there are different types of assumptions of the CAPM are such as the investors must make investment at the risk free rate as well as there are not any type of market costs are considered (Chand, 2016). Main components of the CAPM are such as risk free rate of return, market return as well as systematic risk of the stock that is beta value. In order to calculate required rate of return with help of CAPM model respective formula is to be used:
CAPM = Rf + β (Rm – Rf)
Rate of return of EDP and GAPL company with help of capital asset pricing model is given is as follows:
= 2.43 + 0.96 (3.6-2.43)
= 2.43 + 0.90 (3.6-2.43)
From the above mentioned CAPM model it can be interpreted that both the companies are giving better rate of return when the investor make investment in such firms. In comparison to both the firms EDP is unable to give better return while GAPL provide higher expected rate of return. Further, with visualizing beta value it can be analysed that EDP has 0.96 and GAPL has 0.90 beta which shows that when the investor put investment in the later firm then he has not to bear more risk (Hoberg and Maksimovic, 2015). Higher the beta value of particular asset lead to reduce return of the investment and increase risk. In the present case required rate of return of EDP and GAPL is 3.55% and 3.48% respectively. Hence, the later company will give higher return and beneficial for the investors for invest money in that stock or shares.
It can be concluded from the above mentioned report of financial markets as well as corporate finance that respective market offers different investment avenues to investors such as commodities, shares, bonds, precious metals, crude oil etc. From the financial ratios it can analysed that the GAPL company is performing well in the energy sector in comparison to another firm that is EDP. On the basis of share prices it can be said that EDP gives lesser return in comparison to GAPL business entity. Further, budget as well as investment appraisal tools are helpful for management and related with firm's objectives for making investment and achieve goals and objectives. It can be summarised that as per the CAPM model the GAPL has lower beta value and higher rate of return in comparison to EDP firm. Hence, it can be analysed that GAPL is better to make an investment which gives higher return with lower risk.
It can be recommended on the basis of above analysis that the investors should make investment in the GAPL business organisation which has better financial performance in the energy sector in comparison to EDP firm. Hence, it will be able to give better return to them. Apart from this rate of return as well as risk of GAPL is higher and lowest compare than another firm so shareholders and investors needs to make investment in GAPL in order to get high return.
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