Accounting Business Decision

Question: Write a report on "ADX Energy Ltd". Answer: Introduction ADX Energy Ltd is a listed company and has its listing on the Australian stock exchange that has its presence in the oil, as well as gas Exploration Company. The operation in scattered in two main areas. The company has operated and performed effectively through its strategy and cementing its place in the area of exploration. The company strives to manage the market through exploration, as well as appraising the happening of the asset cycle that leads to strong influence and maintenance of the core skills that enables to grabbing of strong opportunities. 1. Balance sheet review a. Current Assets Current assets can be termed as the major component of the balance sheet that helps to provide a clear cut understanding of the liquidity of the company. These can be stated as assets that can be readily transformed into cash in a matter of a year (Brigham Daves, 2012). From the balance sheet it can be projected that the company retained the assets that are very useful. In 2015, the cost cutting method was introduced by the company that helped in preserving the position of cash. The adequacy of the current asset is an important consideration because it helps to meet the current liabilities. However, in the case of ADX, the current asset decreased in 2015 as contrast to 2014 (ADX Energy, 2015). The probable reason for this is due to decline in the level of cash, as well as, trade receivables. From the table it can be seen that the level of current assets declined. It was 77% in the year 2014 that reduced to 22% in the year 2015. Current Assets 2015 2014 Cash and cash equivalents 622021 707167 Trade and other receivables 197012 2144191 Other financial assets at fair value 0 0 Total current assets 819033 2851358 % increase/decrease 22.31459809 77.68540191 b. Noncurrent assets As per the balance sheet, it is observed that the non-current assets increased. The non-current assets are the ones that cannot be converted into cash within a span of one year and hence provides solidity to the company (Williams, 2012). From the table, it is clear that there is a percentage increment in the non-current assets indicating a better position of the company. It was 26% percent in 2014 that jumped to 74% in 2015 (ADX Energy, 2015). Non Current Assets 2015 2014 Receivables 0 15932 Property, plant and equipment 46783 78665 Other financial assets at fair value 267647 0 Investment in associate 0 17355 Total Non Current Assets 314430 111952 % increase/decrease 73.74373 26.25627 c. Current Liabilities Current liabilities are those liabilities that are payable in a short span of time probably in a year. Hence, it is essentially needed that the company should have a line of balance between current assets, as well as current liabilities. When it comes to ADX it can be seen that the current liabilities declines in 2015 in contrast to 2014 that indicates the company has been able to meet the obligations with ease and flexibility (ADX Energy, 2015). There is a decline in the trade and other payable part indicating that the company discharged the obligations. This implies a strong by the company (Deegan, 2011). As indicated in the table, the drop in the percentage is a good sign for the company. Current Liabilities 2015 2014 Trade and other payables 185009 664727 Provisions 760 8395 Total current liabilities 185769 673122 % increase or decrease 21.62894 78.37106 d. Non-current liabilities Non-current liabilities are unavailable in the case of ADX Energy Ltd. The non existence of non-current liabilities indicates that the liabilities of more than a year are not present. Hence, the company is not under a pressure. Moreover, it strikes the fact that the debt obligations or payment obligations are not present (Davies Crawford, 2012). e. Stockholder equity Shareholder equity also called as stockholder equity is a vital part of the balance sheet because the accounting equation mainly depends on it. The projection of the stockholder equity is provided in the form of paid-in-capital, retained earnings and other comprehensive income (Williams, 2012). The table clearly shows that the shareholder equity has declined. From the computation done in the table it can be observed that the stock holder equity has fallen by 58.62% that can be attributed due to the variations in the current assets, as well as receivables that is generated through the sale of the farm. Accumulated losses have even dented the stockholder equity. Stockholder equity 2015 2014 Issued capital 64161036 64161036 Reserves 5960243 5606829 Accumulated losses -691,73,585 -674,77,677 Stockholder equity 947694 2290188 Comment The evaluation of the balance sheet strikes that the company has performed well in some aspects while in major it has deficiencies that needs to be covered (ADX Energy, 2015). The current liabilities has decreased while the current assets has declined that is not ideal. The sharp fall in the stockholder equity is not a good indicator. 2. Evaluation of the income records a. Total operating revenues The income that derives from the functioning of day to day business is termed as operating revenue. The operating revenue is a strong indicator of the health, as well as stability of the business. Such income is observed from the regular conduct of business (Graham Smart, 2012). From the calculation of the operating revenue in total, it is observed that there is a fall in the operating revenue that is not a good signal for the company. ADX Energy Ltd. is a holding company and the major income is derived from interest, as well as farm-outs because it posses huge financial assets (ADX Energy, 2015). Computation of operating revenue Particulars Year Ended 31.12.2015 ($) Year Ended 31.12.2014 Interest Revenue 2,535 14,440 Gain on sale of permits or Farm- outs Nil 1,694,063 Total 2,535 1,708,503 b. Cost of goods sold It is associated with the carrying value or the goods being sold by the company during the regular course of the business. Cost of goods sold is more concerned when it comes to the business that is product based or when the production is into operation. However, ADX Energy Ltd is involved in the business of sale of permits that is achieved through exploration. Hence, it appears more in the exploration serve then the production so the concept of COGS cannot be linked in this case. c. Total expenses before taxes The total expenses that derive before income tax can be linked with the expenses that happens before the taxes are levied. The calculation indicates that there is a fall in the percentage of entire expenses done before income tax and this can be linked to the fact that there is a strong grasp over the expenses (Williams, 2012). It is to be noted that the administration, as well as corporation expenses are kept under a strong control and hence a difference is witnessed as compared to the previous year. The decline in the exploration expenses is a strong indicator that the company has managed the expenses properly. In the year 2014, the expense before income tax was projected at 59.45% while in 2015 it was reduced to 40.54% that sheds light on the strong performance. It is indicated in the table below: Particulars Year Ended 31.12.2015 ($) Year Ended 31.12.2014 ($) Exploration expensed 1,248,727 1,569,610 Loss on sale of financial assets (249,872) - Depreciation 50,256 75,527 Net foreign exchange losses 48,685 68,923 Operating lease rental expense 77,114 108,883 Share based payments - 100,111 Other administration and corporate expenses 522,569 566,339 Total 1,697,479 2,489,393 d. Any non-operating or extraordinary gains and losses The profit or losses that happens due to changes in items and that is not associated with the companys operation is stated as extraordinary gains or losses. It is seen that the exchange differences enhanced in the year 2015 (ADX Energy, 2015). Those are: Particulars Year Ended 31.12.2015 ($) Year Ended 31.12.2014 ($) Exchange differences on translation of foreign operations 353,414 237,152 e. Earnings per common share The EPS can be evaluated as net profit that can be associated with the parent company members and adjustment is provided to strike off any equity cost of service. Moreover, it is divided by the weighted number of the ordinary shares and even provided adjustment for the bonus element (Brealey et. al, 2011). On the other hand, diluted EPS is calculated as net profit attributed to the members of the parent and even adjusted for the cost of service, impact of tax and dividend (Libby et. al, 2011). From the table, it can be concluded that the EPS of the company has enhanced and therefore a strong signal for the investors. This will helps in attracting investments. Particulars Year Ended 31.12.2015 Cents per share Year Ended 31.12.2014 ($) Cents per share Basic earnings/(loss) per share (0.26) (0.14) The percentage changes that can be seen in the financial operations are as follows: Year ended 31.12.2015 Year ended 31.12.2014 Percentage change in respect of year ended on 31.12.2014 Total (operating) revenues 2,535 1,708,503 -99.85 % Total expenses (before income taxes) 1,697,479 2,489,393 -31.81% Non-operating (or extraordinary) gains and losses 353,414 237,152 49.02% Earnings per common share (0.26) (0.14) -85.71% Comment The company is involved in the exploration of oil, gas, gold and metal that happens inside and outside Australia. Such a business model appears to attract revenue only through sale of permits, farms that undertakes a long time span and enough research that requires immense investment (Parrino et. al, 2012). In 2014, the company sold farm-out and permits that enabled the company to have huge flow of revenue and hence, in the current year when there was no sale a steep fall can be witnessed. The operating expenses is mainly linked to exploration and is a crucial expense for the company that decreased by $320883 and share based payment were done that declined to a considerable extent. However, oil exploration is a regular process expenses have not reduced. The increment or decline is normal for a group company because it pertains to an adjustment (ADX Energy, 2015). Going by the normal tendency it is normal that when the revenue of a company falls, there appears to be an impact on the shareholders wealth because the net profit is affected. Where the decline in revenue is 99.85%, the EPS declined by 85.71% that is better in nature. Conclusion As per the discussion and analysis it can be commented that ADX Energy Ltd is operating under a mixed chain of reaction. Though the fundamental is strong yet there are areas of deficiencies that need to be covered up. The operations and the financial statements are clearly indicating that the company is facing problem and hence, the stock holder equity has declined sharply. However, going by the entire scenario and the position of balance sheet it can be said that the company should not be selected for any investment purpose because the operations as well as certain indicators are against the company (Choi Meek, 2011). Though the EPS is high in 2015 as compared to 2014 but that cannot justify the selection. Stock holder equity, operating revenue, and current assets have declined and hence, must be kept on the radar for observation. When it comes to the current scenario, investment should not be done in ADX Energy. It is high time for the company to build its current assets and renew the position of financing activities that will change the entire scenario for the company. Though growth is not doubted as energy sector is keeping a strong pace but currently it is not a good time to invest in this company. References Albrecht, W., Stice, E. and Stice, J 2011, Financial accounting, Mason, OH: Thomson/South-Western. ADX Energy 2015, ADX Energy Annual report 2015, viewed 22 May 2016, Brealey, R., Myers, S. and Allen, F 2011, Principles of corporate finance, New York: McGraw-Hill/Irwin. Brigham, E. Daves, P 2012, Intermediate Financial Management , USA: Cengage Learning. Choi, R.D. and Meek, G.K 2011, International accounting, Pearson . Davies, T. and Crawford, I 2012, Financial accounting, Harlow, England: Pearson. Deegan, C. M 2011, In Financial accounting theory, North Ryde, N.S.W: McGraw-Hill. Graham, J. and Smart, S 2012, Introduction to corporate finance, Australia: South-Western Cengage Learning. Libby, R., Libby, P. and Short, D 2011,Financial accounting, New York: McGraw-Hill/Irwin. Merchant, K. 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