Xavier University- Ateneo de Cagayan

School of Business and Management

Coralles St. Cagayan de Oro, 9000

A Financial Statement Analysis Report on:

Cagayan Electronic Power & Light Inc. (CEPALCO)

Submitted by:

Mia Grace Ausmolo

Michelle Mabao

Zaira Comodas

John Christian Abragan

Arbby Alcoran

Bea Filasol

Caryl Altomera

Marchelette Maique

Dara Macabinlar

Submitted to:

Mark Anthony Jamis

FEBRUARY, 2017
 Cagayan Electric Power & Light Company Inc. or better known as CEPALCO
was granted a legislative franchise covering Cagayan de Oro City and its suburbs and
the municipalities of Tagoloan, Opol, Villanueva and Jasaan, all in the Province of
Misamis Oriental. It is one of the oldest and biggest companies in the electricity
distribution sector. Being a Parent Company, among its subsidiaries are: Mindanao
Energy Systems, Inc. (MINERGY), CEPALCO Energy Services Corporation (CESCO),
Olongapo Electricity Distribution Company, Inc. (OEDC) and Bubunawan Power
Company, Inc. (BPC). CEPALCO is not only aiming for profitability, but such is an
environmental advocate pursuing the supply of solar energy, a healthier alternative. The
company is regulated by the Energy Regulatory Commission (ERC).

As a requirement for Financial Management, students are required to make

financial analysis of the statements of the parent company, namely CEPALCO. This
paper is not an extensive analysis but such is formatted according to the guidelines of
the subject. The proponents aim to address the issue concerning the usage of Long-
term debt for working capital operations, resulting to low Returns on Equity. Financing
level by debt is at 39.24%, while the equity is at 60.76%. There is actually nothing
wrong with the companys capital structure since this range of debt to equity ratio is
guided by the ERC-prescribed regulatory WACC under PBR, which has been set using
a regulatory debt-to-equity ratio of 45:55. The problem arises on the combination of
current and non-current liabilities

As shown in the horizontal analysis of the financial position, the companys long-
term debt has the sharpest increase of which is 644.35%. The analysts believe that the
use of long-term debt financing is normal for an industry such as an electricity
distribution company in order to achieve expansion; but much reliance on long-term
debt financing carries certain drawback, especially when it is used for working capital
operations.

Since the general yield curve is upward sloping, reliance on long-term debt
results to higher interest expense. As shown in horizontal analysis of the statement of
comprehensive income the increase yields up to 215.58%. This factor highly affects the
profitability of the company, computations as to be shown are:
 Profit Margin

14.00%

12.00%

10.00% Profit Margin

8.00%

6.00%

4.00%

2.00%

0.00%
10.47%
2014 12.91%
2013

A decrease in profit margin is shown from 12.91% (2013) to 10.47% (2014).

Although the effect is only of a minimal movement, later it would be shown how it would
affect the company as a whole.

With regards to working capital, it is financed with a combination of short-term

and long-term liabilities; therefore CEPALCOs financing policy is relative and flexible.
One of the policies that they have used is the conservative approach; it is one that
introduces fixed assets, permanent working capital and temporary working capital to be
financed by long-term debt, it is actually advantageous and safe since there is a high
level of cash and working capital, meaning smooth operation is achieved. It avoids risks
brought by short-term debt such as refinancing and fluctuations of interest expense.
However, a high level of such asset would in turn result to a low total asset turnover:
 Total Asset Turnover

0.66
0.64
Total Asset Turnover
0.62 0.66
0.6
0.58 0.59

0.56
0.54
2014 2013

The figure shows the decrease in the total asset turnover, from 66.29x (2013) to
58.93x (2014).This means that there is a low level of asset utilization as consequence of
a great deal on long-term debt financing.

The 3rd point regarding the matter is how it influences the movement of returns on
equity. The perspective now diverts to the company as whole entity. This shall be
demonstrated by the Du Pont Equation:

ROE=Profit MarginTotal AssetsTurnoverEquity Multiplier

ROE = 10.47 % x 58.93 times x 1.65 times= 10.18%

(Figures may differ due to rounding off of values)

As discussed earlier, the first division is with regards to the profit margin, this is
important since net income is well influenced by interest expense from various liabilities.
The next factor is to consider the total asset turnover. A decrease of such is attributable
to conservative policy rendering some assets idle. The combination of these two
formulas would now lead us to a return on asset of 6.17% (2014), in comparative to
8.56% (2013) which is a decline on how many times profit margin has been earned by
its assets. It is to be noted that 6.17% belongs to shareholders since interest expense
associated to credit holders had already been deducted. The third component is simply
an equity multiplier to convert return on assets to return on equity. The analysts consider
that the decrease of ROE from 12.65% (2013) to 10.16% (2014) would be due to heavy
usage of long-term debt.

The proponents believe that there is no need to use long-term debt financing for
working capital operations as such would only lead to higher costs. Presenting the
current ratio:

Current Ratio Comparison

1.3
1.29
1.28
Current Ratio
1.27 1.3
1.29
1.26
1.25
1.25
1.24
1.23
1.22
2014 2013 Loan Requirement

We can observe that the ratio is a range from 1.25x (2013) to 1.29x (2014).
Although the ratio has decreased, it is still in a safe range in compliance with the loan
covenants of having a 1.3x current ratio. The analysts believe that there are already
enough current assets and current liabilities to support working capital operations, an
excess would only be costly. The optimal policy that CEPALCO must aim is one that
allocates only the necessary working capital to stimulate maximization of revenues and
minimization risks involved, and not in excess thereof.
Statement of the Solutions:
Computations:

1. Horizontal Analysis
1.1 Balance Sheet
 1.2 Income Statement

2. Vertical Analysis
2.1 Balance Sheet
2.2 Income Statement
3. Financial Ratios
C.

Difficulty of the company to pay the liabilities due to the insufficiency of

cash flows. =debt
The company has poor debt management due to the use of short term
deb(n/p)t to finance the construction in progress. =liquidity HAS ALSO
USED LONG TERM DEBT
Higher interest expense due to extensive borrowings. =debt effect of int
extp
Effect of LTDEBT