Erm Power - Australian Energy Company

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ratios will be showed in the following table 2.

ERM Power

Efficiency Ratios

　 2012 2013 2014

PPE Turnover 2.02 3.35 4.56

Asset Turnover 1.15 1.61 2.03

Days Inventory Ratio 18.49 14.89 9.99

Days Debtors Ratio 1.73 3.70 3.52

Table 2

Graph 4

Fixed asset turnover ratio: The formula is that fixed asset turnover = net sales / average net fixed assets. This indicates how well companies are using their fixed assets such as equipment (PPE), plant and property to generate sales. The data from Table 2 shows us an upward trend of PPE turnover, which increased from 2.02 in 2012 to 4.56 in 2014. The upward trend means ERM Power had less and less money tied up in fixed assets for every dollar of sales revenue.

Asset turnover ratio: The formula is that asset turnover = net sales revenue / average total assets. This ratio also shows an upward trend and it rose from 1.15 in 2012 to 2.03 in 2014. The company, which has low asset turnover, tends to achieve low performance. In short, ERM Power generated more revenue per dollar of assets during 2012 and 2014.

Days inventory ratio and Days debtors ratio: These two ratios measure how effectively companies manage their assets. ERM Power’s day inventory ratio is 18.49 days and it means ERM Power could turn its inventory into cash in the nest 18.49 days. The larger the days inventory ratio is, the higher possibility the risk will expose. However, the days inventory ratio shows a downward trend, which means ERM Power took only few days to sell its inventory. And the figure decreased from 18.49 in 2012 to 9.99 in 2014. On the other hand, ERM Power’s days debtors ratio indicates that this company took in average 1.73 days in 2012 to receive money from its debtors. However, this index increased slightly from 1.73 in 2012 to 3.52 in 2014. It means number of the days ERM Power used to receive money became larger.

Therefore, according to the four efficiency ratios, both the asset turnover and PPE turnover shows an upward trend between 2012 and 2014. The two increased indexes indicate the management of inventory become increasingly effective. This trend will lead to the increase of liquidity and the company can turn the inventory into profit quickly without the risk exposure.

Graph 5

In conclusion, although the ROA increased sharply from 4.18% in 2012 to 8.89% in 2013, it witnessed an obvious decline between 2013 and 2014. The increase of ROA, which happened during 2012 and 2013, was caused by the decrease of operating expense ratio. Additionally, when operating expense ratio increased sharply in 2014, the ROA decreased obviously from 8.89% to 4.6%. This essay uses a series of index to analyze the profitability and efficiency of the ERM Power. Finally, The score of ROA is 5.