Centrica PLC's Financial Health and Investment Potential Assignment

Examining Centrica PLC's Business Operations, Financial Metrics & Investment Suitability for Goody Merchants Ltd.

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Introduction Of Centrica PLC's Financial Health and Investment Potential Assignment

The report is going to demonstrate CENTRICA PLC’s business performance along with the financial situation. The CORE framework has been used to evaluate a company’s financial health potentiality. Based on the analysis report of the CORE framework, the report is going to provide suggestions regarding investment in CENTRICA PLC’s shares for Goody Merchants Ltd. The core framework is going to provide the idea regarding the company's history and background, an overview of the business, financial ratio, and its evaluation. The context and overview discussion has been demonstrated with the help of Porter’s 5 forces and SWOT analysis, along with using the 4 key financial ratios analysis such as liquidity, efficiency, profitability, and gearing ratio evaluation.

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Main body: CORE framework

Context

The study can highlight the accounting and finance of Centrica Plc. This business has also highlighted the effective distribution of energy and power supplies approach the global platform for domestic as well as non-domestic customers. It has developed its financials by concluding effective technology and providing access to the customers in their supplies and products services. For example, the company has generated trades with trusted brands and also delivers huge “innovative energy and service solutions” for helping its customers (Centrica.com, 2023). Therefore, it is also supported by more than 7000 technicians and engineers, which have helped to reach this success. It has also identified that the overall evaluation of the company’s workforce in the current market.

SWOT analysis:

Strengths
  • largest gas and electricity supplier in the overall UK (Soegoto, 2021).
  • Having upstream, midstream, and downstream services.
  • Serves “1.5 billion cubic feet of gas per day”.
Weakness
  • Less demand, climate change, and labor strikes.
  • Indulging third parties have decreased revenue and trust.
  • Huge debt obligations.
Opportunities
  • Strategic business acquisitions and effective agreements.
  • Secured services of LNG supply.
  • Renewable energy supply and positive brand image.
Threats
  • A large number of competitors.
  • Huge costs and comparatively less revenue (Leslie et al. 2021).
  • Climate change affects the company's operations.

Table 1: SWOT analysis

The SWOT analysis of the business has highlighted major strengths, weaknesses, opportunities, and threads for the company in future operations.

Strength

Centrica PLC has highlighted major effective strengths such as it has upstream midstream and downstream services which have targeted the local customers' business opportunities as well as major organizations in the UK. It has also been considered one of the greatest gas and electric suppliers across the UK market which has helped this business to grow immensely. Further, this business served 1.5 billion cubic feet of gas regularly which has helped this business to expand its customers.

Weakness

It has highlighted major weaknesses such as having fewer demand changes in climate and strikes of laborers which have decreased its operational activities. The involvement of third parties has highlighted issues in trust and decreased revenue (Maihemuti et al. 2022). This business has also highlighted huge debt, which has been a major weakness for this company.

Opportunities

The major opportunities of this business are effective acquisition and creating an agreement with those acquired organizations has helped this business to grow. It also provides a secured LNG supply that has helped to create more opportunities in the future. It also provides renewable energy which has developed its brand image and concluded more customers in recent times.

Threats

The major threats to the company are having numerous competitors and the cost of operating their activities (Paraskevadakis et al. 2022). It has also highlighted less revenue margin in comparison with the cost and changes in climate that have reduced its overall operating activities in the UK.

Overview

Centrica plc is one of the significant energy and services companies that operates in the UK. It currently has more than 7000 engineers and operating technicians that have helped to reach the need of the customers and provide better services regularly (Centrica.com, 2023). The business generates electricity by combining Cycle Gas Turbines (CGT) and nuclear power plants in the EDF energy atomic generation and other areas.

Analysis of Centrica Plc’s revenue growth in the last few years

Figure 1: Analysis of Centrica Plc’s revenue growth in the last few years

(Source: Bbc.com, 2023)

It has highlighted 0.7bn in 2019, 0.4bn in 2020, and gained 14.7 billion British pounds in the last FY2021, which has evolved by more than 28.91% compared to FY2020. The FY2022 has highlighted 3.3 bn in 2022 (Bbc.com, 2023). The company has gained immense growth due to its overall development in product and services of the business (Ajayi and Pollitt, 2021). This factor has created a more engagement of customers and evolved performing capacity. Therefore, it has been determined that the business has critically evaluated the overall performing capacity by creating more effective performances and developing operating trades in the competitive market.

Porter's Five Forces analysis of Centrica plc:

Threats of New Entrants It can be identified as a major issue for Centrica to tackle the new entrance in this sector (Pezzutto et al. 2022). A new company with a lower pricing strategy, less costs, and more innovative ideas can create a barrier for this company and can reduce the potential profitability of this business. Mitigation strategies This company can focus on evaluating more products and services with less price and new services or products. These factors can help to create a larger scale and provide a drastic change in this business operation.
Bargaining Power of Suppliers The stakeholders of the company can aim to bargain with the prices of the products and services. It can reduce they are overall revenue margin and the negotiation can reduce their utility capacities. The company can develop an efficient supply chain concluding several suppliers (Frederick and Parappagoudar, 2021). It can also implement design for separate products with different materials which can increase its profitability per product.
Bargaining Power of Buyers The bargaining power of a customer can create more demand and the offerings from the company can reduce its long-term profits. The bargaining capacity of a consumer can impact effectively the price margins and its profitable scenario. Centrica PLC can effectively provide discounts that can attract more customers and reduce their potential for a product or service. It can also innovate new products that can limit the capacity of buyers to bargain.
Threats of Substitute Products or Services A new company can provide similar products or services at a cheap price which can be a major threat to this organization. It can also lead to generating a negative impact on the value proportion of this business and reduce its revenue-gaining capacity. This business can serve service-oriented products and identify the core need of the customers. It can help to switch the cost of a product for the customers.
Rivalry among the Existing Competitors It can effectively decrease the price of the products due to rivalry with previous competitors. It can also impact the long-term sustainability of the organization. This business can expand its operating market in several countries. It can also collaborate with major companies across the globe for capturing more markets rather than a specific one.

Table 2: Porter’s 5 focus for Centrica Plc

The overall analysis has helped to determine an effective analysis of porter's 5 forces for this company. Therefore, it has critically highlighted the threats of new France bargaining power of suppliers and buyers as well as threads of substitute products or services which can create a major impact on this business.

Ratios

Liquidity ratio

The liquidity proportion ratio is evaluated with the help of the company's current ratio and quick ratio proportion. It has been mentioned that the current ratio of the company is assessed as 0.93, 1.35, 1.10, and 0.95 from the financial year of 2019 to 2022. In this aspect, it has been referred to that the company's current assets increased along with the liabilities proportion. The cash ratio determination positively affected the company’s assets proportion and it has been indicated that CENTRICA PLC is capable of overcoming any financial lack point (Centrica.com, 2023). This situation affected the current ratio proportion of the company and mentioned that the liquidity proportion of the company is in a good position.

Table 1: Liquidity ratio

Profitability ratio

The profit margin ratio has been evaluated by considering the gross margin ratio and net profit margin ratio. CENTRICA PLC’s gross margin ratio determination has been mentioned as 34%, 29%, 13%, and 44% from the financial year 2019 to 2022. This determination has referred to the gross profit proportion of CENTRICA PLC fluctuating from 2019 to 2022. However, it has been noticed that the revenue of the company increased effectively in the same period. The net profit ratio of CENTRICA PLC is mentioned as -7%, -2%, 4%, and -3% from the financial year of 2019 to 2022 (Centrica.com, 2023). This situation has been mentioned that the company’s net profit proportion is better only in the financial year 2021 valuing 586 million pounds (Ansariet al. 2021). For the rest of the financial year, the company earned a net loss due to the effect of the pandemic and higher additional costs. It has been stated that the profit earnings capacity of CENTRICA PLC is critical and it might negatively affect the financial health in future aspects.

Table 2: Profitability ratio

Efficiency ratio

The financial efficiency ratio includes inventory turnover and fixed asset turnover ratio to demonstrate the company's financial condition. The inventory turnover ratio of CENTRICA PLC is 19.86, 26.92, 20, and 10.53 for the financial year of 2019 to 2022. This assessment has referred to the increased cost of goods sold valuation along with increased inventory proportion (Kliestiket al. 2020). This situation mentions that the company's financial efficiency is in a critical position. On the other hand, the fixed asset turnover ratio is mentioned as 4.14, 4.36, 7.42, and 13.58 levels for 2019 to 2022. It has been mentioned that the company's revenue proposition is in a good position but its fixed assets fluctuate from the financial period of 2019 to 2022. It has been addressed that Centrica PLC’s financial efficiency is in a critical situation as it might lead to a lack of funding (Centrica.com, 2023).

Table 3: Efficiency ratio

Gearing ratio

The company’s gearing situation is demonstrated with the help of the debt-to-equity ratio and debt-to-assets proportional ratio. CENTRICA PLC’s debt-to-equity ratio is 9, 11, 8.84, and 21 levels for 2019 to 2022. This proportional situation has been mentioned and the company's debt valuation increased from 2019 to 2022 effectively. Additionally, its equity proportion has declined in recent years (Hosaka, 2019). This situation mentions that CENTRICA PLC's financial getting proportion is critical and it is going to affect the financial health in future aspects. The assets proportion of the company increased but due to the increased debt valuation, it leads to a declining financial solvency proportion of CENTRICA PLC in future aspects (Centrica.com, 2023).

Table 4: Gearing ratio

Investment Ratio

CENTRICA PLC’s investment valuation ratio calculated by taking considered the EPS and price earnings ratio. Based on that, it has been referred that EPS for 2019 to 2022, mentioned as, -0.17, -0.05, 0.10 and -0.13. Price earnings ratio of CENTRICA PLC mentioned as -478.92, -976.86, 702.11, and -724.39 for the financial year of 2019 to 2022. This evaluation has been mentioned as company’s earnings valuation better only in the financial year 2021 that effected on the EPS proportion of the company. On the other hand, it has been referred that P/E ratio of the company better in the same period for having the better earnings determination. Additionally, it has been noticed that company’s improvised from the 2019 to 2022 along with the share outstanding valuation. It has been referred that this situation effected positively on the future investment aspects.

Table 5: Investment ratio

Evaluation

Financial analysis of CENTRICA PLC demonstrated with the help of a ratio analysis tool. This analysis indicated that the company’s profit earning capacity, financial efficiency, and financial health for the financial year of 2022 are more critical than in 2019 (Centrica.com, 2023). It has highlighted a huge growth by developing its overall productivity and enhanced its earning capacity in the market. The entire financial situation discussion of CENTRICA PLC mentioned that debt proportion and cost of sales continuously increased till the financial year of 2022 (Abdel-Bassetet al. 2020). The reason behind the critical financial situation of CENTRICA PLC mentioned is that it has invested a huge amount of money in the business development aspects but failed to earn net income.

Recommendation

The financial evaluation of CENTRICA plc has indicated that the company's financial efficiency and profit-earning situation is critical, as it will not be capable of providing a good amount of return to its investors. Potential investment should follow the potential earnings of the company. In this financial evaluation, it has been mentioned that CENTRICA plc failed to meet net income constantly from the financial year evaluation of 2019 to 2022. During the 4 years of the financial evaluation, the company improvised its financial situation for 2021, however, 2022 again faced a net loss, due to the excess business development cost. Hence, it has been recommended to Goody Merchants Ltd to not invest in the company’s shares.

Conclusion

This report has been derived to analyze the financial situation of CENTRICA plc by considering the financial year of 2019 to 2022’s data. Business performance and financial situation has been determined using the CORE framework of the company. The overall discussion of the business and financial performances of CENTRICA plc mentioned that the company faces a lack of positioning of profit earning capacity aspects. Additionally, it has been found that the company's current financial condition is not in a good position due to that aspect it has been recommended to Goody Merchants Ltd to not invest in the company’s shares.

References:

Abdel-Basset, M., Ding, W., Mohamed, R. and Metawa, N., 2020. An integrated plithogenic MCDM approach for financial performance evaluation of manufacturing industries. Risk Management, 22, pp.192-218.

Ajayi, V. and Pollitt, M.G., 2022. Changing Times: Incentive Regulation, Corporate Reorganisations, and Productivity in the Great Britain's Gas Network. Corporate Reorganisations, and Productivity in the Great Britain's Gas Network.

Ansari, M.A.A., Bilal, A., Khan, A.J. and Tahir, M.S., 2021. The effect of mergers and acquisitions on the financial performance of microfinance banks. Review of Education, Administration & LAW, 4(4), pp.833-845.

Frederick, D.P. and Parappagoudar, S.K., 2021. A Descriptive Analysis of Sustainable Business Strategy of the Online Food Service Industry.

Hosaka, T., 2019. Bankruptcy prediction using imaged financial ratios and convolutional neural networks. Expert systems with applications, 117, pp.287-299.

Kliestik, T., Valaskova, K., Lazaroiu, G., Kovacova, M. and Vrbka, J., 2020. Remaining financially healthy and competitive: The role of financial predictors. Journal of Competitiveness, 12(1), p.74.

Kontovas, C., Bras, A.A., Chang, C.H., Romano, A., Poo, M.C.P., Wang, J., McCormack, H., Qu, Z., Paraskevadakis, D., Lamb, L. and Yang, Z., 2022. Fostering innovation in the blue economy within the United Kingdom (UK): A stakeholders’ perspective. Ocean & Coastal Management, 224, p.106143.

Leslie, K., Moore, J., Robertson, C., Bilton, D., Hirschkorn, K., Langelier, M.H. and Bourgeault, I.L., 2021. Regulating health professional scopes of practice: comparing institutional arrangements and approaches in the US, Canada, Australia, and the UK. Human Resources for Health, 19(1), pp.1-12.

Maihemuti, S., Wang, W., Wu, J. and Wang, H., 2022. New energy power system operation security evaluation based on the SWOT analysis. Scientific Reports, 12(1), p.12680.

Pezzutto, S., Quaglini, G., Zambito, A., Novelli, A., Riviere, P., Kranzl, L. and Wilczynski, E., 2022. Potential Evolution of the Cooling Market in the EU27+ UK: An Outlook until 2030. Sustainability, 14(8), p.4461.

Soegoto, F.A., 2021. Product development using SWOT analysis. International Journal of Entrepreneurship & Technopreneur (INJETECH), 1, pp.1-10.

Websites:

Bbc.com (2023) Centrica Group's annual revenue from 2019 to 2022 Available at: https://www.bbc.com/news/business-64652142 [Accessed on: 03.04.23]

Centrica.com (2023) Home Page Available at: https://www.centrica.com/ [Accessed on: 03.04.23]

Centrica.com (2023) Home page Available at: https://www.centrica.com/who-we-are/#:~:text=As%20an%20energy%20services%20and,around%207%2C000%20engineers%20and%20technicians. [Accessed on: 02.05.23]

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