|Name of Company||Country of Origin/ Exchange Traded||Sector||Stock Price|
|NRG ENERGY INC||US/
|Utilities – Utilities – Independent Power Producers – Utilities – Independent Power Producers||USD31.02|
|@ 26 Jun 2018|
|COMPANY PROFILE||NRG Energy Inc is engaged in the utilities sector. Its primary business involves operation of power generation facilities, trading of energy, capacity and related products, transacting in and trading of fuel & transportation services.
NRG Energy is one of the largest U.S. independent power producers, with 28 gigawatts of nuclear, coal, gas, and oil power generation capacity in Texas, California, and the Eastern United States. NRG also owns a controlling stake in NRG Yield, which has 2.8 gigawatts of renewable energy as of November 2017. NRG is one of the largest retail energy providers in the U.S., with roughly 2.8 million residential customers. NRG exited Chapter 11 bankruptcy as a stand-alone entity in December 2003.
|Financial Condition Analysis Below|
|It is important to analyze the financial condition of the company you want to invest in because if a company goes bankrupt, the chances are high that you will lose all your investment. Even if the company does not go bankrupt, the deterioration in financial condition will cause more and more investors to avoid the company and valuation will drop. Weak financial condition also limits the opportunities that a company has to grow its business.|
|In order to determine the financial condition of the company, we usually use the Z score, which was introduced by Edward Altman, a Professor of Finance at New York University. This score is a composite measure of a firm’s financial condition and has been proven to be able to predict with high accuracy whether a firm will go into bankruptcy within the next two years.|
|Z-score has been deteriorating since 2009. The main reasons for this are:
* lower working capital
* lower retained earnings as a proportion of total assets
* lower EBIT as a proportion of total assets
* higher level of borrowings
The latest Z-Score of the company as at Dec 2017 was 0.2, which is in the distressed zone.
|The latest shareholders’ equity of the company is negative, which is not a good sign. It means that the company has incurred accumulated losses in the past that has totally wiped out its shareholders’ equity.|
|We use the Altman Z-Score formula for non-listed companies instead. Altman Z-Score formula for listed companies uses Market Cap instead of Book Value of equity and therefore does not penalize companies for having negative shareholders’ equity.|
|The various components that go into the Z-Score are shown below:|
|This is the Revenue Turnover ratio and it reflects the amount of revenue the company is able to generate from the use of its assets. Companies that have difficulty generating revenue cannot generate consistent cash flow to pay its bills.
The amount of revenue generated from assets has been on an uptrend since 1997.
|The more profits are retained within the firm, the greater the buffer of reserves for the company to weather difficult times.
The level of retained earnings relative to assets has been on a downtrend since 2011. Currently, the company still has accumulated losses at 26.9% of total assets.
|This measures the ability of the company to generate EBIT (earnings before interest and taxes) from its assets.
EBIT as a % of assets has been on a downtrend since 2009. Currently, the company is making losses amounting to 2.8% of total assets.
|This is an indication of the level of borrowings of the firm. A high level of borrowings will affect survivability as it may not have enough cash flows to meet its debt obligations.
The level of borrowings has been on an uptrend since 2013.
|Working capital is essential to the operations of the company and a low level of working capital may result in liquidity problems. Working capital relative to total assets has been on a downtrend since 2013.|
|Financial condition analysis is an important part of stock analysis because an investor will make a loss on a stock if it goes bankrupt. The financial condition of a company is also important because investors will attribute a discount to the theoretical fair valuation of the company depending on how bad the financial condition is. ProThinker uses multiple valuation indicators to value a stock and then attribute a discount when necessary depending on the financial condition.|
|The five ratios we use are Price to Earnings, Price to Sales, Price to Cash Flow, Price to Book and Dividend Yield. We use multiple methods to value a stock because each has its benefits as well as shortcomings. Price to Earnings and Price to Cash Flow Ratios relate stock price to profitability but are meaningless when the comany has negative earnings or cash flows. Price to Sales Ratio is more stable because sales are never negative. However, this does not tell us whether the company is able to sell profitably. Price to Book Ratio gives us an indication as to how much we are paying for the company’s assets but it is not directly related to the company’s profitability. Dividend Yield cannot be used for companies that are paying little to no dividends.|
|While it is important to value stocks based on multiple valuation methods, this often leads to differing views on valuation. One indicator may suggest that a stock is overvalued while another suggest that it is undervalued. This does not help an investor who needs to make a definite decision whether to buy, hold or sell the stock. That is why we advocate the use of a Composite Valuation Indicator, which is derived from the best combination of the five indicators above. A Composite Valuation Indicator will give you ONE conclusion on whether a stock is under or over valued.|
|To find out more about our valuation methodology, click here.|
|Source of Data: Price to Sales chart is from ProThinker Stock Report. Company description, historical financial statements data and price data are from gurufocus.com. Estimates are from gurufocus and/or 4-traders.com – Thomson Reuters.|
|Disclaimer: This report is for information purposes only and should not be considered a solicitation to buy or sell any security. Neither ProThinker nor any other party guarantees its accuracy or makes warranties regarding results from its usage. Redistribution is prohibited without the express written consent of ProThinker. Copyright(c) 2018. All rights reserved.|