THE UNIVERSITY OF THE WEST INDIES ST.

AUGUSTINE, TRINIDAD & TOBAGO, WEST INDIES FACULTY OF ENGINEERING Department of Electrical & Computer Engineering BSc. in Electrical & Computer Engineering

ECNG 3021 Introduction of Engineering Management and Accounting Systems

Analysis of Entity Based on Annual Reports

Tremayne Durham Karissa Nandoo Marielle Ishmael Gregory John Dale Persad

809001765 810003062 408000902 406001776 810000263

Course Lecturer: Mr S. Lau Date Submitted: October 19th, 2012

Abstract
This document is an Annual Report Analysis of the National Gas Company of Trinidad and Tobago. Contained within this document is a complete analysis of the companys finances from which conclusions of its strengths and weaknesses where made. Based on these finding recommendations were made for the future success of the company.

Table of Contents
Abstract .................................................................................................................................................... i Table of Figures ...................................................................................................................................... iv List of Tables ........................................................................................................................................... v 1 Introduction .................................................................................................................................... 1 1.1 Problem Definition .................................................................................................................. 1 Financial Health and Performance .................................................................................. 1

1.1.1 2 3

Literature review............................................................................................................................. 2 Mission and Vision Statement of NGC ............................................................................................ 3 3.1 3.2 Mission Statement of the National Gas Company of Trinidad and Tobago ........................... 3 Vision Statement of the National Gas Company of Trinidad and Tobago .............................. 3

Presidents Report........................................................................................................................... 4 4.1 Current Status based on Analysis of NGC Presidents Report 2008 ....................................... 4 Financial Performance .................................................................................................... 4 Operations....................................................................................................................... 4 International market Analysis ......................................................................................... 5 Cooperate and Social Responsibility ............................................................................... 5

4.1.1 4.1.2 4.1.3 4.1.4 5

Liquidity Ratios ................................................................................................................................ 6 5.1 Definition ................................................................................................................................ 6 Current Ratio ................................................................................................................... 6 Quick (Acid-test) Ratio .................................................................................................... 6

5.1.1 5.1.2 5.2 6

Liquidity Ratio Analysis ........................................................................................................... 8

Profitability...................................................................................................................................... 9 6.1 Definition ................................................................................................................................ 9 The profit margin ............................................................................................................ 9 The return on assets ....................................................................................................... 9 The return on equity ....................................................................................................... 9

6.1.1 6.1.2 6.1.3 6.2 7

Profitability Analysis.............................................................................................................. 10

Debt Management ........................................................................................................................ 12 7.1 Definition .............................................................................................................................. 12 Debt Ratio ..................................................................................................................... 12 Capitalization Ratio ....................................................................................................... 12

7.1.1 7.1.2 7.2 8

Debt Management Analysis .................................................................................................. 13

Sensitivity Analysis ........................................................................................................................ 14 ii

Plot of Trends ................................................................................................................................ 16 9.1 9.2 9.3 9.4 9.5 Total Assets ........................................................................................................................... 16 Total Liability ......................................................................................................................... 17 Total Equity ........................................................................................................................... 18 Net Cash and Cash Equivalents ............................................................................................. 19 Retained Earnings ................................................................................................................. 20 Conclusion ................................................................................................................................. 21 Bibliography .............................................................................................................................. 22 Appendix ................................................................................................................................... 23

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Table of Figures
Figure 1 Liquidity Graph .......................................................................................................................... 8 Figure 2 Profitability Analysis Graph ..................................................................................................... 10 Figure 3 Debt Management Analysis Graph ......................................................................................... 13 Figure 4 Sensitivity Analysis Graph ...................................................................................................... 15 Figure 5 Graph of Total Assets Trend.................................................................................................... 16 Figure 6 Graph of Total Liability Trend ................................................................................................. 17 Figure 7 Graph of Total Equity Trend .................................................................................................... 18 Figure 8 Graph of Net Cash and Cash Equivalent trends ...................................................................... 19

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List of Tables
Table 1 Financial records for 2008 and 2007 .......................................................................................... 4 Table 2 NGC Market Analysis .................................................................................................................. 5 Table 3 showing liquidity ratios for 2004-2008 ...................................................................................... 8 Table 4 showing profitability ratios ...................................................................................................... 10 Table 5 showing debt management ratios ........................................................................................... 13 Table 6 Sensitivity Analysis for the year 2009 ...................................................................................... 14

1 Introduction
This document seeks to analyse the annual report of 2008 for the National Gas Company of Trinidad and Tobago. The significance of this analysis is to determine the companys strengths and weaknesses since the annual report gives a comprehensive report on the companys activities throughout the preceding year. This information can then be used by shareholders and stakeholders to determine the future for the company.

1.1 Problem Definition

In order evaluate the financial health and performance of NGC the annual reports for 5 years were analysed, therefore determining the NGCs Financial Health and Performance. 1.1.1 Financial Health and Performance Financial performance is done to evaluate the companys performance using analysis techniques. This evaluation is important to the company and even to shareholders as it is an indication of growth and success of the company. The analysis techniques consist of ratios that are calculated from the companys financial report. These ratios accurately show the companys progression over the given time period of the report These ratios include: Liquidity ratio Asset management Financial leverage management Profitability

In addition a plot of the trend over the years was done along with a sensitivity analysis.

2 Literature review
To many, the purpose of owning a company is to make as much money as possible. However, the presence of different companies leads to the provision of jobs. If a company is privately owned, and they make enough profit for their direct needs, then they do not need to write a financial statement. However, they do need to calculate the various ratios and do the relevant analysis. Conversely, if they need to expand the company but they do not have enough money, they can take on shareholders, which are people that are willing to invest in the company and therefore become part owners of said company. In addition to shareholders, companies also have stakeholders. A stakeholder does not necessarily have to invest money in the company so they may be employees, customers and suppliers. An Annual Report is a document with which a public company can educate their stakeholders and shareholders on the general financial health of the company. This is important because the shareholder must know what they are getting in return for their investments. The Annual report also gives information for those who would wish to be a shareholder in the company. That is if investing will be worthy. Financial statements such as these are not necessary for private companies. There are four sections that are of great importance in a financial statement: The balance sheet The profit and loss account The cash flow statement The funds statement

However, for the purpose of this project, only the balance sheet and the income statement, or profit and loss account, were used.

3 Mission and Vision Statement of NGC

3.1 Mission Statement of the National Gas Company of Trinidad and Tobago
To maximize value from our business transactions for the benefit of Trinidad and Tobago, by leveraging our competencies and unleashing our entrepreneurial spirit A mission statement can be described as a statement of the purpose of a company or organization, or in other words its reason for existing. An effective mission statement must have three distinct qualities. It must: State the aim of the organization. How the organization plans to provide value to its stakeholders. And a declaration of the organizations sole core purpose.

NGCs mission statement exhibits these three main qualities; the aim of the company is to maximize value from their business transactions. By doing this this provide value to their stakeholders. They method by which the company will maximize value is by leveraging their competencies and unleashing their entrepreneurial spirit. Finally the sole purpose of NGC being a state owned company is the betterment of Trinidad and Tobago.

3.2 Vision Statement of the National Gas Company of Trinidad and Tobago
To establish Trinidad and Tobago as a major player in the global natural gas business A vision statement can be described as a picture of a company in the future. Therefore it is a companys inspiration and the framework for all its strategic planning. The sole purpose of NGC is for the benefit of Trinidad and Tobago. Petroleum is Trinidad and Tobagos main natural resource, which has the potential to provide billions of dollars on revenue for the country. This can only happen through proper management and utilization. By envisioning Trinidad and Tobago as a major player in the global natural gas business NGC is aiming to maximize business from natural gas for Trinidad and Tobago; hence maximizing utilization of Trinidad and Tobagos main natural resource for the betterment of the country.

4 Presidents Report
The Presidents Report can be described as a review of a companys achievements for the last financial year. It may also be described as a short summary of the companys performance. Contained in the NGCs Presidents Report are: Financial Performance Company Operations International Market Analysis Corporate and Social Responsibility

4.1 Current Status based on Analysis of NGC Presidents Report 2008

4.1.1 Financial Performance
Table 1 Financial records for 2008 and 2007

Gross Sales Revenue After Tax Profit

2008 $15.76 billion $3.064 billion

2007 $11.48 billion $2.95 billion

Upon examining the above table one can see that a 37% increase in gross sales revenue was recorded from 2007 to 2008, whilst a 37% increase was also experienced in After tax profit for the same time period. 4.1.2 Operations Due to global decrease in demand and maintenance downtime, decreases were experienced across all markets. However there were many signification operational achievements such as: BUD pipeline commissioning which would increase NGCs transmission capacity to Point Lias. Construction of a 36-inch Loop to Ring Main which would minimise pressure drops and velocities in the distribution system at the Estate. An increase in Gas Compression operations by 6.5 % from 2007 in spite of technical difficulties. Increase in distribution networks inclusive of Tobago network.
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Finally the successful execution of gas sale contracts for a supply of gas with BPH Billiton Limited.

4.1.3 International market Analysis This section outlined the NGCs main international markets and their feasibility. The table below is a summary of these markets and their feasibility:
Table 2 NGC Market Analysis

Market Natural Gas LNG Petrochemicals Ammonia Methanol Metals Iron and Steel

Feasibility Very feasible due to the location of Trinidad and Tobago The Ammonia and Methanol markets are affected by the economic downturn, therefore they are not promising markets. The Iron Steel markets are also affected by the economic downturn. However outlook tend analysis for the term 2009 2010 appears to be less grim that the petrochemical market.

4.1.4 Cooperate and Social Responsibility NGC is committed to the well-being of Trinidad and Tobago and its employees. This can be clearly seen in its cooperate and social responsible, where the company engaged in a reforestation drive. All trees which were removed during the pipe laying process will be replanted. In total 315 hectares of land will be replanted. Due to this initiative they for the 2008 CSR award in the Category Sustaining the Environment: Making the Most of Green Opportunities. The company demonstrates its commitment to its employs by encouraging safety first policies which resulted in fewer loss time incidents in the year 2008 when compared to 2007.

5 Liquidity Ratios
5.1 Definition
The liquidity of a firm is deliberated by its ability to satisfy its short-term obligations and it is a major measure of financial health. Moreover, liquidity refers to a firms overall financial situation. Liquidity analysis is done, is by the use of a ratio which compares one asset to their liabilities. There are several ratios used to measure liquidity, for this research we will be only looking at two types of ratios, which are the Current Ratio and the Quick (Acid-test) Ratio. 5.1.1 Current Ratio The current ratio is another test of a company's financial strength. It calculates how many dollars in assets are likely to be converted to cash within one year in order to pay debts that come due during the same year. You can find the current ratio by dividing the total current assets by the total current liabilities. In most companies, by rule of thumb it is assumed that the result of this ratio being 1.5 or above is noted to be an acceptable. As this ratio starts to decrease and fall below 1 the firm should be critically concerned as the firm, may have a negative working capital. It must also be noted that the current ratio test ignores timing of both cash received and cash paid out. This may be explained by using the simple example below: Let's assume a company with no bills due today, but it has a lot of liabilities that are due tomorrow. The company also owns a large sum of inventories (part of its current assets). However the inventory cannot be easily converted into cash as it takes some time to sell it. This company may show a good current ratio but cannot be considered as having a good liquidity. 5.1.2 Quick (Acid-test) Ratio The quick ratio test is similar to the current ratio except that it excludes all inventories, which is generally the least liquid current asset. The generally liquidity of inventory results from two primary two factors: Many types of inventory cannot be easily sold because they partially completed items, or special-purpose items.
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Inventory is typically sold on credit, which means that it becomes an account receivable before being converted into cash.

A quick ratio of 1.0 or above is occasionally recommended, but as with the current ratio, and what value is acceptable is vastly dependent on the firm. However, the quick ratio provides a better measure of overall liquidity only when a firms inventory cannot be easily converted into cash. If inventory is liquid, the current ratio is a preferred measure of overall liquidity. The biggest advantage of acid-test ratio is that it helps the company in understanding the end results very feasibly. The only major issue with the acid-test ratio is its dependence of the accounts receivable and current liabilities which can cause trouble. If due to any dispute the contract with the creditor or debtors gets messed up whole of the process gets unbalanced. And also, a minor mistake in the calculation can just destroy and conclude misleading outcomes.

5.2 Liquidity Ratio Analysis

The current ratio and quick ratio were found using the balance sheet for NGC for the years 2004-2008. The results of the calculations are shown in the table below: Year
Current Ratio

Quick Ratio

2008 4 4

2007 3.7 3.7

2006 3 3

2005 1.7 1.8

2004 1.8 1.8

Table 3 showing liquidity ratios for 2004-2008

Liquidity Graph
4.5 4.0 3.7 4.0

3.5 3.0 3.0

2.5

1.8

1.8 1.7

2.0

1.5

1.0

0.5

0.0 2004 2005 2006 Current Ratio 2007 Quick Ratio 2008

Figure 1 Liquidity Graph

These figures show that NGC is of above average profitability ratio of 1.5. However, we do not know of the financial environment in the year 2006 to produce such a sharp hike in the ratios. So, it is clear that NGC can meet its long and short term obligations i.e. it has good working capital.
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6 Profitability
6.1 Definition
Profitability ratios are an indication of how successful the company is. That is, how it generates returns for its investments. The profitability ratios include: The profit margin, or return on sales The return on assets The return on equity, or net worth

These three ratios are necessary for the evaluation of how liquid, efficient and profitable a company is. 6.1.1 The profit margin The profit margin is calculated by dividing the net profit by the net sales. These values are found using the income statement. By definition, the return on sales determines the companys ability to handle competition, changes in financial environment (for example, hikes in costs, lower prices and declining sales). This ratio indicates the profit earned per dollar of sale and by extension the effectiveness of the company. 6.1.2 The return on assets This ratio is found by dividing the net profit, also known as the PBIT or profit before interest and taxes (found from the income statement) by the total assets (found on the balance sheet). The result indicates the ability of the company to use its assets effectively in order to earn a good return. The percentage of profit earned per dollar of asset is therefore found, and this also indicates the effectiveness of the company in utilizing its assets. 6.1.3 The return on equity This ratio is found by dividing the net profit by the net worth; where the net worth is the difference between the total assets and total liabilities. The net profit is found using the income statement whilst both the total assets and liabilities are found on the balance sheet. This ratio is necessary for informing shareholders about the utilization of their funds within the company. The average return is 10% for future growth of the company.

6.2 Profitability Analysis

The various ratios for NGC for the years 2004-2008 are shown below:

Year Profit Margin Return on Assets Return on Equity

Table 4 showing profitability ratios

2008 19.1% 32.0% 21.8%

2007 25.9% 29.1% 25.8%

2006 29.1% 29.2% 27.1%

2005 22.9% 28.3% 23.3%

2004 23.9% 29.8% 23.1%

Profitability Analysis Graph

35.00%

30.00%

25.00%

20.00%

15.00%

10.00%

5.00%

0.00% 2004 2005 Profit Margin 2006 Return on Assets 2007 2008 Return on Equity

Figure 2 Profitability Analysis Graph

These figures indicate that NGC made profits between the years 2004 and 2008. However, these percentages are found to be low compared to the high liquidity ratios. This may indicate the following: NGC may not have been making full use of its assets, and probably wasted finances.
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The shareholders might not be investing as much. NGC spent more than what was given to them. Increase is operation cost over the years.

In conjunction with the results from the liquidity ratio that last conclusion could be drawn. So, they have the means to operate even with changes in the financial environment, their profits will just be a bit less.

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7 Debt Management
7.1 Definition Debt management ratios are used to indicate a companys financial leverage which is a measure of the companys debt to total financing. It also indicates how much of the companys processes are financed by borrowed money. 7.1.1 Debt Ratio This ratio is found by dividing the total debt (which is the total liabilities from the balance sheet) by the total assets (also found from the balance sheet). The result of this ratio should be less than 1 to show that the company has more assets than debt, confirming to banks that the company is financially secure and can repay loans. 7.1.2 Capitalization Ratio This ratio shows long term debt usage by dividing the interest debt (the current portion of long term debt in the balance sheet) by the total capital ratio (the sum of the long term debt and the shareholders equity, both found in the balance sheet). The capitalization ratio is the most important debt management ratio as it paints the best picture for future lenders.

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7.2 Debt Management Analysis

The debt management ratios for NGC for the years 2004-2008 are shown in the table below: Year Debt/total assets ratio Interest debt/total capital ratio
Table 5 showing debt management ratios

2008 37.2% 0.9%

2007 41.3% 1.3%

2006 48.7% 1.6%

2005 40.4% 2.2%

2004 33.7% 1.6%

Debt Management Analysis Graph

60.00%

48.70%

50.00%

40.40%

41.30% 37.20% 40.00%

33.70% 30.00%

20.00%

10.00% 1.60% 2.20% 1.60%

1.30% 2007

0.90% 0.00% 2008

2004

2005

2006

Debt/Total Assest Ratio

Interest Debt/Total Capital Ratio

Figure 3 Debt Management Analysis Graph

The debt ratio is less than one hence showing that NGC has enough assets to fund their processes and they are far from debt. However, it can be seen from the figures that in the year 2008, when they had the highest return on assets, they also had the largest debt. This could have been a form of mismanagement on the companys part. The figures for the capitalization ratio are also acceptable.
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8 Sensitivity Analysis
Sensitivity analysis is known as a rough estimation of values to determine the characteristic ratios. This analysis is done to determine the impacts on the finances of a company. A company would normally develop a model where a range of estimated values for inputs would be used and its output values calculated. The sensitivity analysis is very important for decision making. With the trends from the different ratios, the company can quickly determine which decision and furthermore, outcome is better for the companys growth and financial health. The table below shows the Sensitivity Analysis of Profitability Data for the year 2009, based on a 2% increase and decrease.
Table 6 Sensitivity Analysis for the year 2009

Year 2008 2009 (2% increase) 2009 (2% decrease)

Profit Margin 19.1% 21.1% 17.1%

Return on Assets 32.0% 34.0% 30.0%

Return on Equity 21.8% 23.8% 19.8%

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Figure 4 Sensitivity Analysis Graph

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9 Plot of Trends
In this section the Five Year Financial Review of NGC will be investigated by examining key aspects of the companies, Income Statement and Balance Sheets. The examination of these general trends will provide an image of not only the companys current standing, but whether or not NGC has a positive future ahead.

9.1 Total Assets

Upon examining the graph below one can clearly see an upward trend throughout the five year period. NGCs assets increased over the years due their frequent expansion in the energy sector.

30000000

Total Assets

25000000 $24,798,965 20000000 $22,032,633 $18,550,033 15000000

10000000

$12,705,896 $9,740,739

5000000

0 2008
Figure 5 Graph of Total Assets Trend

2007

2006

2005

2004

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9.2 Total Liability

Total Liability may be defined as the companys debts which were incurred during an operating period which must the repaid before a set date. Upon examination of the graph below one will notice the large value of liabilities owed by NGC. This is indeed dangerous; however it is a necessary risk which must be undertaken for the company to be able to finance expansion and upgrades.

10000000 9000000 8000000 7000000 6000000 5000000

Total Liability
$9,226,359 $9,093,278 $9,029,276

$5,131,182 4000000 3000000 2000000 1000000 0 2008

Figure 6 Graph of Total Liability Trend

$3,280,410

2007

2006

2005

2004

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9.3 Total Equity

This may be defined as the total contribution of the stockholders of NGC in terms of resources. An equity graph which has an increasing trend indicates positive growth. Equity is a subset of the companys net assets; therefore it should increase as the year progress.

18000000 16000000 14000000 12000000 10000000 8000000 6000000 4000000 2000000 0 2008
Figure 7 Graph of Total Equity Trend

Total Equity

$15,257,110

$12,677,678

$9,290,424 $7,401,993 $6,270,802

2007

2006

2005

2004

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9.4 Net Cash and Cash Equivalents

Net cash flow is a measure of a companys operating, financing and investment levels over the years. For NGC the year 2006, a large sum of money was spent is the production of their goods and services. With all companies, investments in new sectors require an increase investment cost. In 2006 NGC expanded their offshore networks to Tobago.

1800000 1600000 1400000 1200000 1000000 800000 600000 400000 200000 0 2008

Net Cash and Cash Equivalents

$1,530,510 $1,458,031 $1,323,815 $1,233,746 $1,121,597

2007

2006

2005

2004

Figure 8 Graph of Net Cash and Cash Equivalent trends

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9.5 Retained Earnings

This is the value of profits which will be kept by the company to be used for reinvestment or to repay debts. A positive growth in retained earnings for NGC is good especially considering the growing liability rate of the company. A positive growth also signals that the company is profitable.

25000000

Retained Earnings

20000000

$21,280,727 $18,414,827

15000000 $15,084,526

10000000 $10,392,284 $8,157,412 5000000

0 2008 2007 2006 2005 2004

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10 Conclusion
The National Gas Company of Trinidad and Tobago is indeed a company which our country can be proud of. As of 2008, the company has managed to earn record profits in spite of global downturns in some of their major markets.

BLA BLAAAA

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11 Bibliography
2008 Annual Report. National Gas Company. 2009. Mackay, Carol, and Greg Branson. STRATEGY: Why produce an Annual Report?http://annualreportbestpractice.com.au/TheStrategy/WhyProduceAnAn nualReport.aspx (accessed 10 11 2012) Credit Guru. Financial Statement Analysis - Profitability Ratios http://www.creditguru.com/ratios/ratiopg3.htm (accessed 10 18, 2012). American Association of Individual Investors. Ratios. http://www.aaii.com/stockinvestorwiki/index.cfm?path=Ratios&event=Main&pri ntFormat=HTML#Liquidity_Ratios (accessed 10 15, 2012). wiseGEEK. What is an Annual Report ? http://www.wisegeek.com/what-is-anannual-report.htm (accessed 10 14, 2012). THE FREE DICTIONARY. return on equity. http://financialdictionary. thefreedictionary.com/Return+on+net+worth (accessed 10 13, 2012). Kennon, Joshua. Debt to Equity Ratio. http://beginnersinvest.about.com/cs/financialratio/g/debttoequity.htm (accessed 10 13, 2011). Investopedia . Debt Rato. http://www.investopedia.com/terms/d/debtratio.asp#ixzz1b62p26ng (accessed 10 09, 2011).

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12 Appendix

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