Financial Statement Analysis over ENI’s Financial Statements

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Financial Statement Analysis over ENI’s Financial Statements

Category: Scholarship Essay

Subcategory: Accounting

Level: College

Pages: 15

Words: 4125

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Financial Statement Analysis over ENI’s Financial Statements
Abstract
Financial reports offer summaries of a company’s accounting and accounts statement. They include the principal indicators that affect earnings, expenditures, loss and profit. A review of ENI reveals that it is a global based company and has been operational for as a corporation for more than 60 years. In this case, the company is shown to be engaged in energy (including oil, gas and electricity) production across the world and its sale in Europe. The present research report reveals that the company is performing badly with regards to its financial position and has low profits. The results of ratio analysis show that its financial health is worsening, with the current assets exceeding liabilities and placing a strain on the inventory. In addition, there is low inventory turnover, an indication that there is low demand and low sales for its products. Besides that, it is experiencing operational inefficiency, low earnings on shares, and undervaluation. These are indications that there is poor leadership within the company. As a result, the analysis reveals that ENI is not an attractive investment opportunity.

Introduction
A financial report is a collection of facts and figures concerning a company that presents a brief accounting and accounts statement that an institution publishes to inform its investors and shareholders (who include suppliers, government and so on) of its financial operations and conditions. In fact, it contains accounting statements that narrate the institution’s business activities during a definite period, typically annual or quarterly basis. The financial report covers elements such as corporate information, audited reports, financial statements, management analyzes and discussions, narratives, shareholders information, and finance highlights (Mohana 22). In this respect, financial reports are brief statements that are concerned with presenting the financial and corporate position of an institution that helps shareholders in understanding the performance of the company.
Discussion
Company Overview
ENI is an Italy-based energy producing, transporting, and marketing company that was incorporated in 1953. In fact, the company has operations in 53 countries across the world that include Australia, Kazakhstan, Gulf of Mexico, North Sea, Africa and Italy that explore and my petroleum based fuels such as oil and gas. Although most of the exploration and mining operations are conducted outside Europe, all the company’s products are principally marketed in Italy and Europe. In addition, the company added to its portfolio by beginning an electricity section by generating and trading it as a commodity (Reuters). Therefore, the company is engaged in producing and marketing oil, gas, and electricity within the energy sector.
ENI has five principal management divisions. Firstly, the company engages in energy production and exploration activities, with the focus being on oil and natural gas. Secondly, it has a gas and power segment that engages in supplying, trading, and marketing electricity and gas. Thirdly, it has a refining and marketing section that supplies, refines, and markets petroleum based products in Italy and Europe. Fourthly, it has a chemicals division that produces and markets chemicals as byproducts of the oil refinery. Finally, it has an engineering and construction division that constructs and services oil and gas management infrastructure that include mining facilities, refineries, and offshore rigs (Reuters). The company attributes its growth and success within the energy sector to its commitment to offering the best services and products for its customers by delivering high-quality products that are based on extensive innovation. This has been facilitated by employing the most qualified personnel who can translate the company’s goals into products and services that enhance its capacity to attract and retain customers. It is no wonder that the company is very successful and has become an integral part of the energy landscape in Europe and across the world. In this respect, ENI has built a well-known and successful brands in Europe and around the world, using innovation to position it as one of the more successful energy companies (Reuters).
ENI’s Financial Analysis and Report
Firm Liquidity
Current ratio
The current ratio is the measure of a business entity’s financial health. It informs on whether the business can meet its current financial obligations. A high figure implies that the business is healthy while a low value indicates that the business is unhealthy. It is determined by dividing a company’s current assets by the current liabilities (Megginson, Smart and Lucey 43).
Current ratio = current assets / current liabilities
ENI’s consolidated balance sheet reports that the as of December 31, 2014, the company’s current assets stood at € 27,486 million, an increase from € 30,425 million that was reported in the previous year of 2013. As of December 31, 2013, the company’s current liabilities stood at € 31,766 million, rising to € 32,778 million on December 31, 2014. ENI’s current ratio increased from 0.8386 in 2013 to 0.9578 in 2014 (see Table 1). The current ratio results indicate that the company was not financially healthy in the two years under review, although that health was improving from 2013 to 2014.
Table SEQ Table * ARABIC 1. ENI’s current ratio for 2013 and 2014
December 31, 2013 (€ million) December 31, 2014 (€ million)
Current assets 30,425 27,486
Current liabilities 31,766 32,778
Current ratio 0.9578 0.8386
Acid test ratio
The acid test ratio is a determinant of whether the company has enough short-term assets to cover the immediate liabilities without affecting the inventory. Ratios of less than one show that the company is performing poorly. If the figure is less than the current ratio, then the current assets are heavily dependent on inventory. Calculating the acid test ratio requires the addition of cash, accounts receivable and short-term investments then dividing the figure by the current liabilities (Megginson, Smart and Lucey 44).
Acid test ratio = [(cash + accounts receivable + short term investments) / current liabilities]
In the case of ENI, the company’s cash value increased from € 11,026 million in 2013 to € 15,110 million in 2014. The account receivables rose from € 1,339 million in 2013 to € 1,861 million in 2014. The short-term investments dropped from € 6,180 million in 2013 to € 5,130 million in 2014. The current liabilities increased from € 31,766 million in 2013 to € 32,778 million in 2014. Using these figures produced an acid test ratio of 0.5838 that rose to 0.6743 in 2014 (see Table 2). The acid test ratio indicates that the company was performing badly in 2013 and 2014 since it did not have enough short-term assets to cover the immediate liabilities without affecting the inventory. In fact, the current assets were heavily dependent on inventory. Besides that, all the acid test ratio results are less than the current ratio results for the respective years to indicate that the current assets are heavily dependent on inventory.
Table SEQ Table * ARABIC 2. ENI’s acid test ratio for 2013 and 2014
December 31, 2013 (€ million) December 31, 2014 (€ million)
Cash 11,026 15,110
Account receivables 1,339 1,861
Short term investment 6,180 5,130
Current liabilities 31,766 32,778
Acid test ratio 0.5838 0.6743
Inventory turnover
The inventory turnover is a determination of how often a company’s inventory is sold and replaced over a period. It is calculated by dividing the sales against the inventory (Megginson, Smart and Lucey 44).
Inventory turnover = sales / inventory
The total sales figures decreased between the two years under review. In 2013, the total sales figure was € 114,697 million and decreased to € 109,847 million in 2014. Similarly, the inventory decreased for the two years under review. It decreased from € 76,012 million in 2013 to € 75,894 million in 2014. The turnover inventory figures varied between 2013 and 2014. The figure decreased from 1.5089 in 2013 to 1.4474 in 2014 (see Table 3). The low inventory turnover figures imply that the company either has good production that meets the market demand or is experiencing low demand and low sales.
Table 3. ENI’s inventory turnover for 2013 and 2014
December 31, 2013 (€ million) December 31, 2014 (€ million)
Sales 114,697 109,847
Inventory 76,012 75,894
Inventory turnover 1.5089 1.4474
Operating profitability
Operating return on assets
Operating return on assets is a measure of how profitable a company is before interest and taxes have been deducted. It is determined by dividing the earnings before interest and taxes by the total company assets. It indicates the income generated for every investment made (Megginson, Smart and Lucey 48).
Operating return on assets = earnings before interest and taxes / total company assets
ENI reported increasing earnings before interest and taxes (EBIT) for the two years under review. In this case, a figure of € 11,026 million was reported in 2013, and it increased to € 15,110 million in 2014. This was matched by increasing company assets, which rose from € 138,341 million in 2013 to € 146,207 million in 2014. The company reported an operating return on assets figure of 0.0797 for 2013 and improved to 0.1033 in 2014 (see Table 4). The improvement shows that profitability improved in 2014 to imply that the company is becoming more profitable.

Table 4. ENI’s operating returns on assets for 2013 and 2014
December 31, 2013 (€ million) December 31, 2014 (€ million)
Earnings before interest and taxes 11,026 15,110
Total company assets 138,341 146,207
Operating return on assets 0.0797 0.1033
Operating profit margin
Operating profit margin is a measure to determine how efficient a company is operating and its pricing strategy. It is determined by dividing the operating income from the net sales (Megginson, Smart and Lucey 48).
Operating margin = Operating Income / Net Sales
ENI reported decreasing operating income for the two years under review. This reduction was from € 116,084 million in 2013 to € 110,948 million in 2014. Similarly, the net sales decreased for the period. In this case, they reduced from € 114,697 million in 2013 to € 109,847 million in 2014. The company’s operating margin also decreased from 1.0121 in 2013 to 1.01 in 2014 (see Table 5). The figure is healthy, but the decrease indicates that the company is getting more inefficient at operating, is adopting bad pricing strategies, and is finding it difficult to pay its fixed costs that include interest on the debt.
Table 5. ENI’s operating margin for 2013 and 2014
December 31, 2013 (€ million) December 31, 2014 (€ million)
Operating income 116,084 110,948
Net Sales 114,697 109,847
Operating margin 1.0121 1.01
Total asset turnover
Total asset turnover is the measure of how efficient a company is in deploying its assets to generate sales. It is a determination of how many units of sales are generated for every unit of asset deployed. Higher asset turnover values are preferable since they are an indication that the company is more efficient at using its assets (Megginson, Smart and Lucey 49).
Total Asset Turnover = Sales /Total Assets
ENI’s net sales and assets improved for the two years under review. The total sales figures decreased between the two years under review. In 2013, the total sales figure was € 114,697 million and decreased to € 109,847 million in 2014. In contrast, company assets increased. The assets rose from € 138,341 million in 2013 to € 146,207 million in 2014. The company reported an asset turnover figure of 0.8296 in 2013, before digressing to 0.7513 in 2014 (see Table 6). The figures imply that the company was becoming more inefficient at applying its assets to generate sales and income.

Table 6. ENI’s total asset turnover for 2013 and 2014
December 31, 2013 (€ million) December 31, 2014 (€ million)
Net sales 114,697 109,847
Total company assets 138,341 146,207
Total asset turnover 0.8291 0.7513
Financial decisions: Debt ratio
The debt ratio is a determination of a company’s leverage state. In fact, it is the proportion of the company assets that are financed by credit or debt (Megginson, Smart and Lucey 47).
Debt ratio = total debt / total assets
ENI’s total debt increased from € 25,560 million in 2013 to € 25,581 million in 2014. Similarly, the company assets rose from € 138,341 million in 2013 to € 146,207 million in 2014. The company debt ratio decreased from 0.1848 in 2013 to 0.1771 in 2014 (see Table 7). The figures imply that although a large percentage of the company assets were financed by credit, that proportion was reducing.
Table 7. ENI’s debt ratio for 2013 and 2014
December 31, 2013 (€ million) December 31, 2014 (€ million)
Total debt 25,560 25,891
Total company assets 138,341 146,207
Debt ratio 0.1848 0.1771

Return on equity
Return on equity is a determination of income returns s percentage of shareholder’s equity. It is determined by dividing the net income by shareholders’ equity (Megginson, Smart and Lucey 49).
Return on equity = Net income / shareholders’ equity
ENI reported increasing net income for the period under review. In this case, the net income improved from € 3,164 million in 2013 to € 5,995 million in 2014. Similarly, the shareholders’ equity increased from € 61,049 million in 2013 to € 62,209 million in 2014. The company reported that its return on equity improved from 0.0518 in 2013 to 0.0964 in 2014 (see Table 8). The return on equity shows that although the shareholders were receiving profits, they were very low and improved over time. In essence, they would be expecting increased profits and returns on their investment even as time went by.
Table 8. ENI’s return on equity for 2013 and 2014
December 31, 2013 (€ million) December 31, 2014 (€ million)
Net income 3,164 5,995
Shareholders’ equity 61,049 62,209
Return on equity 0.0518 0.0964
Market value ratio
Price/earnings ratio (P/E ratio)
The price-earnings ratio is a determination of how well the company shares are performing. Calculations involve dividing the reported share price against earning per share. High P/E ratios imply that investors should expect high earnings in the future while low P/E ratios imply low earnings (Megginson, Smart and Lucey 180).
P/E ratio = Reported Share Price / Earnings Per Share
ENI’s share prices drastically dropped from € 17.49 in 2013 to € 14.51 in 2014. These were matched by increasing earnings per share from € 1.1 in 2013 to € 1.12 in 2014. The results of P/E ratio analysis show that in 2013 the P/E ratio was 15.9, and it decreased to 12.9554 in 2014 (see figure 9). The results imply that earnings for investors have drastically reduced in the two years under review, with the possibility that the reduction will continue into the future. As a result, the share value dropped consistently in the two years between 2013 and 2014. Investors should expect lower earnings in the future.
Table 9 SEQ Table * ARABIC . ENI’s price/earnings ratio for 2013 and 2014
December 31, 2013 December 31, 2014
Reported share price (€) 17.49 14.51
Earnings per share (€) 1.1 1.12
Price/earnings ratio 15.9 12.9554
Price/book ratio
Price to book ratio is a contrast of a company’s market value to is book value. It is calculated as the share price divided by the difference between total assets and the intangible assets and liabilities (Megginson, Smart and Lucey 180).
Price/book ratio = [share price / (total assets – intangible assets and liabilities)]
ENI’s share prices reduced from € 17.49 in 2013 to € 14.51 in 2014. The company’s assets rose from increased in the two years under review. In 2013, the company reported € 138,341 million in company assets, before increasing to € 146,645 million in 2015. Its intangible assets and liabilities decreased from € 3,876 million in 2013 to € 3,645 million in 2014. The results of the price/book ratio analysis show that it decreased from 1.3007X10-10 in 2013 to 1.0178X10-10 in 2014 (see Table 10). The results imply that the company stock is undervalued, with the situation only worsening as time goes by.
Table SEQ Table * ARABIC 10. ENI’s price/book ratio for 2013 and 2014
December 31, 2013 (€) December 31, 2014 (€)
Share price 17.49 14.51
Total company assets 138,341,000,000 146,207,000,000
Intangible assets and liabilities 3,876,000,000 3,645,000,000
Price/book ratio 1.3007X10-10 1.0178X10-10
DuPont Analysis
The DuPont equation is a mathematical expression that provides a better understanding of the business aspects that drive profitability. It captures the nature of expense control by showing how changes in sales affect profit margin, bottom line, and overall ROE. In this case, a reduction in the profit margin would be indicative of the fact that sales bring in less money to cause the overall ROE to decrease. In addition, the equation captures the efficiency of asset management by showing how the assets correlate to sales to affect the ROE. Besides that, the equation captures the financial leverage of the company by showing how much debt financing the company has and how they match interest payments and tax deductibles (Megginson, Smart and Lucey 49).
DuPont Equation = (Net Profit Margin) x (Asset Turnover) x (Asset / Equity Ratio)
= (Net Profits / Sales) x (Sales / Total Assets) x (Total Assets / Total Shareholder Equity)
The results indicate that ENI’s net profit margin decreased from 0.0368 in 2013 to 0.0346 in 2014 to indicate that it was less profitable, and the sales brought in less money. Similarly, the asset turnover decreased from 0.8291 that was reported in 2013 to 0.7513 that was reported in 2014 to indicate that fewer sales were generated per asset that the company owns. The asset/equity ratio increased from 2.2661 in 2013 to 2.3503 in 2014 to show that the company is using less debt financing that brings lower interest payments. The DuPont results show a drop from 0.0691 in 2013 to 0.0611 in 2014 to indicate that the company needs to improve its expense control, asset management and financial leverage management (see Table 11).
Table SEQ Table * ARABIC 11. ENI’ DuPont analysis for 2013 and 2014
2013 (€ million) 2014 (€ million)
Net Profits 4,224 3,799
Net Sales 114,697 109,847
Total company assets 138,341 146,207
Total shareholder equity 61,049 62,209
Net profit margin 0.0368 0.0346
Asset turnover 0.8291 0.7513
Asset/Equity ratio 2.2661 2.3503
DuPont 0.0691 0.0611
General Analysis
The analysis reveals that ENI is an industry leader that reports annual earnings more than € 110 billion. In addition, it reveals that the company has employed knowledgeable and experienced persons in its executive team to drive the company agenda and ensure that strategic goals are set and met. Still, this has not guaranteed good results for the company. Firstly, the current ratio analysis figures reveal that the ENI’s financial health is worsening. In fact, the liabilities values exceed the assets value thereby placing the company at risk. Secondly, the acid test ratio reinforces the company’s overview of dropping health by showing that it has been performing badly. The acid test ratio results for the two years are less than the current ratio to indicate that the current assets are unable to cover the liabilities and must dependent on the company inventory for that coverage. Thirdly, there is low inventory turnover to indicate that the company either has good production that meets the market demand or is experiencing low demand and bad sales. This is an indication that the production and sales departments are either coordinating well or are unaware of the market trends. The production department needs to meet the market demand while the sales department needs to anticipate market demand (Megginson, Smart and Lucey 43-44).
Fourthly, the operating returns in assets indicate that the company is barely profitable. This is ascertained by the operating profit margin where it is clear that the company is finding it difficult to pay its fixed costs that include interest on the debt. The implication is that profitability can be improved using more efficient operational approaches, and better pricing strategies. In addition, the total asset turnover shows that the company is inefficient at applying the present assets to generate sales and income thereby providing further validation for the assertion that profitability can be improved. The situation is exacerbated by the fact that a lot of company assets are being financed using credit, as is seen in the increasing debt ratio figures, although the situation is improving. Fifthly, the return on equity shows that investment in the company is not doing well, but the situation is improving with higher returns expected in the future (Megginson, Smart and Lucey 47-49). This is also revealed in the P/E ratio where it is shown that investors should expect lower earnings on their shares. Sixthly, the price/book ratio shows that the company has consistently been undervalued with the situation only getting worse (Megginson, Smart and Lucey 180). Finally, the DuPont analysis reveals that the company can improve its financial performance and outlook by reducing its expenses, managing its assets better, and controlling its financial leveraging (Megginson, Smart and Lucey 49).
The financial analysis results indicate that ENI’s top management is underperforming and failing. In fact, they have consistently failed to provide the company with good direction. The worsening company health, poor performance, high inventory turnover, low profitability, operational inefficiency, low earnings on shares, and undervaluation are all indicators of poor leadership by the top management personnel. As such, any investment in the company would be unwise for two reasons. Firstly, the company stock price is dropping at a steady pace with the prevailing conditions indicating that this will only worsen in the future. Secondly, the company stock has been undervalued. Thirdly, the top management is likely to remain in their present position for long, thereby making it difficult to introduce a change that would address the company problems. In this respect, the present financial results for ENI indicate that it presents an unattractive investment opportunity.
Conclusion
One must accept that ENI is in a precarious position in as far as its financial performance is concerned. In fact, the company still has a long way to go before it can be financially healthy and stable. The financial statements indicate that the company has more liabilities than assets, its stock is undervalued, is barely profitable, has dropping share prices, and is by and largely inefficient. In fact, these are strong deterrents that prevent potential investors from considering the company as an opportunity. The DuPont analysis bears the same results to show that it does not have a good handle on its expenses, asset management, and leverage financial management. As such, there is a need for expenses to be reduced, assets increased to surpass liabilities, and debt reduced. Therefore, ENI’s financial reports have presented a brief statement on the financial and corporate position of the company that could help in making investment decisions.

Works Cited
ENI. Integrated Annual Report 2014. Rome: ENI, 2014. Print.
Megginson, William, Scott Smart and Brian Lucey. Introduction to Corporate Finance. London: Cengage Learning, 2008. Print.
Mohana, Rao P. Financial Statement Analysis and Reporting. New Delhi: PHI Learning Private Limited, 2011. Print.
Reuters. Eni SpA (E). Author. 2015. Web. 28 Nov. 2015. <http://www.reuters.com/finance/stocks/companyProfile?symbol=E#5xKb6M5yUeq3sQqC.97>.