Mid Term Exam – Individual

Assignment
Enron Case Analysis
Detail Student

Wahyu Gunawan | 29321356

Jakarta, 08 November 2022

Financial Management & Policy Course –

MM5006
Lecturer: : Dr. Subiakto Soekarno, MBA

ENEMBA 7

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 Question-1

Evaluate Enron’s profit, leverage and cash flow

performance during the period 1998 – 2000

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 Enron’s
PROFITABILITY
Refer Exhibit Enron’s revenue, operating profit and net income are increased
between 1998 to 2000, this seems good briefly, however when we
2Parameter 1998 1999 2000 calculate the Operating Profit Margin and Net Profit Margin, it is
Revenue 31,260 40,112 100,789
decreased between 1998 to 2000

Operating Profit 1,439 1,243 1,953 Operating Profit Margin is decreased, and Net Profit Margin is
decreased as well. This concludes that even though sales is
Net Income 703 893 979
increased, the company spend more cost that reduce their
Total Asset 29,350 33,381 65,503 Operating Profit Margin and Net Profit Margin

Total Equity 7,048 9,570 11,470

Operating Profit Margin 4.6% 3.1% 1.9%

Return on Asset (ROA) is also decreased between 1998 to 2000. A
falling ROA indicates the company might have over-invested in
Net Profit Margin 2.2% 2.2% 1.0% assets that have failed to produce revenue growth, a sign the
company may be in some trouble
ROA (Return on Asset) 2.4% 2.6% 1.5%

ROE (Return on Equity) 10.0% 9.3% 8.5% Return on Equity (ROE) is decreased, the falling in ROE indicates
that company is less efficient at utilizing equity financing provided
Note: units are in by shareholders
Millions

In conclusion:
Profitability of Enron is decreased from 1998 to 2000

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 Enron’s
LEVERAGE
Enron’s total debt is increased between 1988 to 2000, and while its
Refer Exhibit EBITDA is increased within the same period the Debt to EBITDA
Ratio is increased. Both in 1998 and 2000, Debt to EBITDA ratio is
3Parameter 1998 1999 2000 extremely high and higher than 1, this means the company carrying
high degree of weight which also indicates high leverage.
EBITDA 2,266 2,113 2,808

Total Asset 29,350 33,381 65,503 Both of Debt to Asset Ratio and Debt to Equity Ratio is increased
between 1998 to 2000 which translates that the company will be
Total Equity 7,048 9,570 11,470 unable to pay all their debt using their asset or equity if they go
default (bankrupt)
Total Debt (Liabilities) 22,302 23,811 54,033

Debt to EBITDA Ratio 9.84 11.27 19.24 Equity to Asset Ratio is decreased from 1998 to 2000, it is very low
in 1988 and even getting lower in 2000. A high equity to asset
Debt to Asset Ratio 0.76 0.71 0.82 ratio means that a company is more likely to be able to pay back
Debt to Equity Ratio 3.16 2.48 4.71 its debtors. A low equity to asset ratio means that a company is
more likely to go bankrupt
Equity to Asset Ratio 0.24 0.28 0.18

Note: units are in In conclusion:

Millions Enron’s leverage is high in 1998 and getting higher in
2000, which indicates the company is not in good
condition since it is mostly financed by debt

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 Enron’s CASH FLOW
PERFORMANCE Enron’s operating cash flow is increased almost triple between
Refer Exhibit 1998 and 2000, this indicates company’s business activity result in
a lot cash flow. As for investing cash flow, it is also increased which
2Parameter 1998 1999 2000 means company investing more in 2000 than in 1998. Financing
Net Sales 31,260 40,112 100,789 cash flow is decreased but still positive, where we can say the
company still get financing from debt or equity
Total Debt 22,302 23,811 54,033
Operating Cash Flow to Net Sales ratio is decreased between
Operating Cash Flow 1,640 1,228 4,779
1998 to 2000, this means the ability of company to produce cash
Investing Cash Flow (3,965) (3,507) (4,264) out of its sales is reduced.

Financing Cash Flow 2,266 2,456 571 Free Cash Flow is negative in 1998 and 1999 but positive in 2000,
Operating Cash Flow to Net Sales Ratio 5.2% 3.1% 4.7%
this means company can meet its obligations, including funding its
operating activities and paying dividends
Free Cash Flow (FCF) (2,325) (2,279) 515
Operating Cashflow – CAPEX (Investing Cashflow)
Cash Flow Coverage ratio is very low, less than 1 for 1998, 1999
Cash Flow Coverage Ratio 0.07 0.05 0.09 and 2000. This means company can not cover their debt with their
Operating Cashflow / Total Debt
operating cash flow and if there is interruption in operation activity,
Note: units are in the company will be in difficult position to pay their debt
Millions
In conclusion:
Enron’s cash flow performance in 2000 is better than in
1998, however some parameters show that its cash
flow is not good enough

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 Question-2

Evaluate Enron’s long-run financial performance.

Does the data reflect Enron’s transformation from a
pipeline company to a trading company?

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 Enron’s LONG RUN
PERFORMANCE
Parameter 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Revenue 7,510 10,253 7,453 5,916 5,708 9,836 13,165 5,563 6,325 7,972 8,984 9,189 13,289 20,273 31,260 40,112 100,789

Operating Income 582 545 259 335 306 337 431 498 620 617 716 618 690 790 1,439 1,243 1,953
Total Cost
Revenue – Opt. Income
6,928 9,708 7,194 5,581 5,402 9,499 12,734 5,065 5,705 7,355 8,268 8,571 12,599 19,483 29,821 38,869 98,836

Net Income 297 (55) 78 (29) 109 226 202 242 306 333 453 520 584 105 703 893 979

Investment at Equity 140 361 496 571 455 491 516 560 636 697 1,065 1,216 1,701 2656 4,433 5,036 5,294

Total Asset 6,122 9,596 8,484 9,529 8,695 9,105 9,849 10,424 10,664 11,504 11,966 13,239 16,137 23,422 29,350 33,381 65,503

Cost per Revenue 92% 95% 97% 94% 95% 97% 97% 91% 90% 92% 92% 93% 95% 96% 95% 97% 98%

ROA 4.9% -0.6% 0.9% -0.3% 1.3% 2.5% 2.1% 2.3% 2.9% 2.9% 3.8% 3.9% 3.6% 0.4% 2.4% 2.7% 1.5%

ROI
Based on Investment at 2.12 -0.15 0.16 -0.05 0.24 0.46 0.39 0.43 0.48 0.48 0.43 0.43 0.34 0.04 0.16 0.18 0.18
Equity

If we look at Enron’s Cost per Revenue Ratio, it shows that during 1984 to 2000, the Cost per Revenue is increased. This means despite Enron’s revenue grew
overtime, their cost grew as well and concludes their performance is decreasing.

Same condition is also occurred with ROA and ROI where the trend for such parameters is decreasing. There are quite steep decreasing in ROA and ROI for
Enron’s
long run performance
In conclusion:
Enron’s long run performance from 1984 to 2000 is decreasing

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 Enron’s BUSINESS
TRANSFORMATION
Refer Exhibit 3 – Consolidated Balance
Sheet
Parameter 1999 2000

If we take a look at Balance Sheet for Assets, Asset from price risk management activities 2,205 12,018
the figure of Asset from Price Risk Management
Activities is increased for both in Current Assets Total Current Asset 7,255 30,381
and Investment.

This indicates that Enron’s has transformed itself % of Asset from price risk management activities to
30% 40%
from ordinary pipeline company that rely on Total Current Asset
hard asset business to trading company that
conduct transaction of soft asset business (with Investment of Asset from price risk management activities 2,929 8,988
price risk exposure)
In conclusion:
Enron’s long run performance showed Total Investment and Other Asset 15,445 23,379
that they transform into trading
company and supported by respective
data % of Investment of Asset from price risk management
19% 38%
activities to Total Investment and Other Asset

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 Question-3

What is your assessment of Enron’s earning quality?

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 Enron’s EARNING
QUALITY
• The margins of the company have dropped significantly, and this Refer Exhibit
is shown by the operating profit margin ratio. Compared with
1998, the operating profit margin ratio has dropped more than 2Parameter 1998 1999 2000
double.
Net Sales 31,260 40,112 100,789
• One of other the important ratios to test the earnings quality of
Enron is the Net income over the cash flow from operations ratio. Operating Profit 1,439 1,243 1,953
The cash flows of the company should be in line with the net
Net Income 703 893 979
profits of Enron.
Operating Cash Flow (OCF) 1,640 1,228 4,779
• However, if we look at the Net income over Operating Cash Flow
ratio, then we can see that this ratio has declined clearly. This
means even though the cash flow from operations for the Operating Profit Margin 4.6% 3.1% 1.9%
company have increased, the company ability to turn it into net
income has been decreased.
Net Income to OCF 43% 73% 20%
In conclusion:
Enron’s quality earning has been decreased
significantly over the period from 1998 to 2000

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 Question-4

Evaluate Enron’s financial leverage at the end of 2000

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 Enron’s FINANCIAL LEVERAGE IN 2000
Disclaimer:
Refer Exhibit In exhibit 3, record of Total Asset is 65,503 Million and Total Equity is 11,470 Million, however
Total Liabilities is only recorded for 43,289 Million. It seems other liabilities are not recorded in
3Parameter 2000 the balance sheet, since Total Liabilities should be Total Asset minus Total Equity and equal of
54,033 Million
EBITDA 2,808
Leverage analysis:
Debt to EBITDA Ratio is very high, this means the company carrying high degree of weight
Total Asset 65,503 which also indicates high leverage.

Total Equity 11,470 Debt to Asset Ratio is very high and more than 0.5, this explains that Enron’s asset is mostly
came from debt and only small equity is involved. Consequently, Equity to Asset Ratio is very
Total Liability (Debt) small with less than 20% while Debt to Equity ration is extremely high and more than 1,
Total Asset – Total Equity
54,033
concluding that Enron debt is overwhelm its equity
Debt to EBITDA Ratio 19.24 Low equity to asset ratio means that a company is more likely unable to pay back its debtors.
A low equity to asset ratio means that a company is more likely to go bankrupt.
Debt to Asset Ratio 0.82
Enron’s FLM is extremely high and a company with high equity multiplier has financed a small
Equity to Asset Ratio 0.18 portion of its assets with equity, meaning they are highly levered.

Debt to Equity Ratio 4.71 In conclusion:

Financial Leverage Multiplier (FLM) Enron’s leverage in 2000 is very high, meaning
5.71
Total Asset/Total Equity that they rely on debt to finance their business
Note: units are in Millions

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 Question-5

Enron’s stock price traded around 62.72 USD per share

at the end of April 2001. Do you thin Enron was
worth that much?

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 Enron’s WORTH (STOCK
PRICE)
Parameter 2000 2001 Proper Value 2021

Net Income 979 - -

1.80 1.80
Forecasted by Wall Street
EPS (Earning Per Share) 1.47 (Salomon Smith Barney and
Forecasted by Wall Street (Salomon Smith
Barney and Morgan Stanley Dean Witter)
With current stock price of 62.72
Morgan Stanley Dean Witter)
USD per share, PEG ratio is
Stock Price - 62.72 39.60
1.58 which is more than 1.0

P/E (Price per Earning Ratio) -

= 62.72 / 1.80 = 39.60 / 1.80 This means the stocks is overvalued
Share Price divided by EPS = 34.84 = 22

Proper value for the stock price

= (1.80 – 1.47) / 1.47 = (1.80 – 1.47) / 1.47
Earning Growth Rate
= 22% = 22% is
39.60 USD per share, whereas it
PEG (Price/Earning to Growth) = 34.84 / 22 = 22 / 22 will give PEG ratio of 1.0
P/E divided by Earning Growth Rate = 1.58 = 1.0

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 Thank
You Wahyu Gunawan
29321356 –
ENEMBA7

Confidential & Proprietary | Any use of this presentation materials with no prior permission is strictly SBM ITB – Jakarta