Prospective Analysis

Prospective Analysis

Prospective analysis of a business is process that an analyst uses to evaluate the economic and risks prospects of a firm by investigating the firm’s strengths and weaknesses. This is done by valuating the business on the intrinsic value of the organization. An enterprise value is a proxy valuation of the firm by approximating the market value of the company currently. This is done by taking the account of the liquid assets, equity instruments and outstanding debts presented in the balance sheet. Accordingly, the enterprise value of the AGL Energy will be calculated by using the market capital, debts and cash it is holding. Business valuation involves forecasting the future value through the discounted cash flows from income statement and balance sheet. This is based on the expected actual conditions of the business during the forecasted period.

The value of a business is forecasted by understanding the value of the share in future. This is done by evaluating the market condition and the performance of the firm. The value of the stock represents the future cash flows an investor expects to earn in future through dividends. Thus, the stock value is the present value of future cash flows that one expects to receive in future. The stock price of AGL Energy Corporation in stock market is $49 and 1119.54 million outstanding shares. Thus, the value of the firm will be computed by multiplying the stock price with the outstanding number of shares. The stock price is used to calculate the market value of the firm by calculating it with the number of the outstanding shares. This is done as shown in the valuation equation below.

Market value = stock price * number of outstanding shares
AGL market value = $49 * 1,119.54 millions = $5.49 billions. 

This value is likely to differ with the book value of the firm that takes into consideration the value of the firm’s asset as reflected in the balance sheet. The balance sheet of the firm illustrates the asset position of the firm that is used reflecting the book value of the whole firm. The book value of the business according to the balance sheet amounts to $7132.9 millions against a market valuation of $5.49 billions. This very huge difference illustrates that investors in the market have high confidence on the capacity of the firm in making huge returns in future. A positive confidence by the investors on the firm’s capability of generating huge incomes for the shareholders in future has the capability of influencing the high value of the share price against the book value of the firm’s asset. This could have been contributed by the increasing profit margins ratios of the firm in the last three years. Financial ratios play a vital role informing the investors in the market on the future performance of a firm. The profitability ratios namely the return on equity, return on asset and net income ratio of the firm in the last three years have been increasing significantly. This has influenced the investors in believing that the management of the firm is utilizing the resources of the firm efficiently to increase the income levels of the firm distributable to the shareholders. Consequently, the dividend payout of the firm is expected to grow constantly in the coming years due to the increasing income. Thus, the investors’ earnings in future are expected to be high.

Consequently, to benefit in future dividend distribution of the firm, investors have increasingly been purchasing AGL Energy shares. This has caused the demand of the shares to increase at a constant demand. Thus, the equilibrium price of the shares has considerately gone up to push the market valuation of the firm high against the book value of it assets reflected in the balance sheet. In addition, the profitability increases of the firm in the past years reflect that the firm’s retained earnings are increasing. This will enable the firm to expand it investments to earn higher returns in future.

Consequently, investors are highly purchasing the firms stock to benefit from future high returns. This has played a role in increasing the price of the share that has caused the market valuation of the firm to increase significantly. Similarly, the advantage level of the firm in acquiring debt finances has been increasing in the last three years. This implies that the firm is reducing it debts financing to acquire assets. Thus, the interest expenses the firm has been incurring in the past are reducing to increase the net income of the firm. This will help the firm to source for debt financing at favorable terms with essay help to finance it investment expansions in future. Consequently, investors in the market are expecting the dividend payout of the firm to be high in future when it expand it investment in the market. This has contributed to the high share price of the firm that has boosted the market valuation of the firm in the capital market compared to it book value.

One of the reasons that are causing the profit levels of the firm to continue rising is the value that the management of the company has continued to add. The management of the firm has adopted a contractual performance agreement with the employees and distributors in rewarding their effort. This has seen the output of the employees in the firm increasing significantly. In addition, the morale of the employees has been boosted by the recognition of the management in rewarding their effort. Consequently, the production process in the organization has become more efficient and effective compared to it rival firms in the market. This has significantly lowered the cost of production in the firm that has enhanced the income generation and revenue. Similarly, the distributors of the firm’s product in the market have increased their effort of distributing the organization’s products to benefit from the incentives of making hire sales in a given period. This arrangement has seen the sales revenue of the firm increasing significantly in the last three years causing the profit margins to increase significantly. In addition, the firm’s management has invested heavily on research and development to improve their production plants production capacity. This has seen the production input lowering while the production output has been increasing. Thus, the efficiency of it equipment and machines has lowered the production cost significantly to enhance profitability. Accordingly, the management of the firm has added the value by employing cost management strategies to increase the income levels of the entity. These strategies are expected to increase the profitability of the firm in the coming future that is pushing the prices of the firm’s shares up.


AGL Energy Corporation faces a number of potential opportunities in improving it operations in future. Similarly, the firms faces a number of challenges in it future operations that are likely to hinder or derail it growth objective. One of the opportunities the firm faces in the market is the unexploited economic opportunities in the developing and emerging markets in the global market. The emerging markets and developing markets are currently facing unprecedented economic growth that is demanding energy investment to support the production. These markets have not been fully exploited by energy firms to benefit from the current economic growth. The developed countries that the firm has invested heavily are facing stagnated economic growth that has seen the income levels of many firms operating in such markets experiencing declining profit margins or stagnated profits. Consequently, if the firm extends it investment in the developing and emerging markets, it will be able to increase it growing profit significantly. Another opportunity that is likely to improve the operations of the firm is investing in information and communication technology. ICT has become the pillar of development in the modern economics due to it capacity of allowing the management to access vital information in the market and communicate it efficiently across the relevant departments. Investing in the ICT infrastructure will allow the firm to manage it resources efficiently since the management will be able to acquire new and advanced information on production methods. Similarly, the management will be able to monitor the production process of the firm efficiently through the use video links and robots. This will enable the firm to reduce the cost of production significantly that will enhance it profitability in future for the shareholders. Investing in renewable energy is another opportunity that is likely to enhance the operation of the firm. Owing to the growing concern on environmental damages caused by carbon emissions, energy firms that are investing in renewable energy that emits very low amount of carbon in the atmosphere are facing favorable terms from the government. This involves reduced taxation and land incentives to invest in due to the effort of the firms in reducing carbon emission. Thus, the firm will be able to reduce it taxation cost that is among the highest proportion of the expenses the firm incurs. Similarly, consumers are highly changing their loyalty to firms that have proven to be socially conscious in taking care of their health and safety. Accordingly, by investing in renewable energy the firm will be able to attract loyal consumers to purchase their products. This will significantly increase the income margins of the firm that will be distributed to the shareholders or utilized in expanding the investment of the firm.

However, a number of challenges in the market are likely to hinder the attainment of the firm’s objectives. One of the challenges that are likely to derail the improvement of the firm’s operation is the increasing interest rates in the financial market. High interests increase the cost of acquiring capital to finance the operations of the firm. Thus, the firm is likely to face difficulties in financing it investment expansion due to the high interest rates the financial institution are charging. To reduce the cost of financing it investment expansion, the firm should consider financing it activities through equity financing due to the favorable share prices the firm is enjoying in the capital market.

This will enable the firm to acquire expansion assets using cheaper capital compared to debt financing. Another challenge that firm is likely to face is lack of raw materials due to the high bargaining power of the suppliers. The growing competition in the energy sector has seen the bargaining power of the suppliers in setting the price of the raw materials. This is likely to cause the firm to face operation difficulties if the suppliers set the price of the raw materials at unaffordable prices for the firm. The firm should consider entering into contract with specific suppliers to eliminate the uncertainties in acquiring the raw materials for it production. Furthermore, the firm will be able to control the quality of the raw materials supplied to ensure it products are of high quality in the market. Carbon taxation is another challenge that the firm is likely to face in future that will affect it operations negatively. There is a growing debate in the market to tax energy firms emitting carbon heavily to cut their production capacity. This will significantly affect the income levels of the firm if the governments in countries it operates implement the proposal. Investing in renewable energies such as wind power will enable the firm to reduce the carbon taxation when the concerned governments implement the proposal.

Furthermore, the firm should consider employing technological advancement to control the carbon emission that the production plants emit in the atmosphere. This enable the firm to continue with it conventional operations while maintaining low carbon emissions to avoid the high carbon taxations suggested. Political and legal instability is another crucial challenge the firm is likely to face if it extends it operations in developing countries. The unstable trade laws and policies of the developing countries that have high potential returns for energy firms intending to invest there is likely to impact on the profitability of the firm it extends it operation in developing countries. In addition, the political uncertainty in most of the potential markets in developing market is likely to cause the firm to lose it investment. Thus, firm faces the challenge of not been able to benefit from the rich potential in the developing and emerging markets due to political and legal uncertainties. Entering into legal agreement with the governments of the developing countries will help the firm in eliminating the uncertainty of losing it properties if the there is a regime change under the international law.

Competition in the modern market is one of the critical challenges the firm is likely to face in improving it operations in future. The technological advancement of the rival firms has the potential of affecting the competitiveness of the firm in the market. Competing firms have employed advanced technology that has seen the cost of production going down significantly. This has enabled the competing firms to reduce their unit sales prices significantly that are likely to affect the market share of the firm due to the customer shifting. Consequently, the sales revenue and net income of the firm is likely to reduce significantly in future. To counter this possible outcome, the firm should invest heavily on advancing it production facility to reduce the input costs. This will allow the firm to reduce the prices of it product to compete effectively with the rival firms in the market.

Last updated:7/31/2020 12:21:42 PM
Zeta Holmes

Zeta Holmes

Zeta is a freelance writer offering coprywriting and blogging services. She works with B2B and B2C services and helps small companies to grow up. Now working closely with essayhelpontime, providing content that gains social media attention and increases the search engine visibility


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