Agbayani, Almario, Bagabaldo
Homework 2
VERTICAL ANALYSIS
Balance Sheet: Meralco (2020 vs. 2021)
Group 2
Managerial Accounting
Total assets of meralco increased by around from 2020 to 202, with majority of it coming from
the non-current assets - specifically from the utility plant, generation plant and others account.
This might mean that they are expanding the power that they may provide for future
consumption of customers. In terms of current assets, a decrease was observed mostly due to
the trade and other receivables account which means that the amount owed by the customers
to Meralco decreased from 2020 to 2021. The decrease in cash also contributed to this
decrease.
Total liabilities decreased by a small margin at about 1%. This is due to the simultaneous
occurrence of the decrease in current liabilities and the increase in non-current liabilities. The
trade payables and other current liabilities and interest-bearing long-term liabilities accounts
seemed to be the dynamic players in the changes previously mentioned. Meanwhile, a small
increase in equity can also be observed.
Balance Sheet: ACEN (2020 vs. 2021)
Total assets for ACEN decreased by quite a large amount, equating to almost a 5% decrease
from 42% to 37% despite having an increase in cash accounts. This is due to the massive
decrease in short-term investments amounting to an 18% decrease in terms of total assets of
the company. As a result the total cash and short-term investments decrease by a huge margin.
The substantial decrease in both the total current and non-current liabilities of ACEN ultimately
led to the decrease in total liabilities, which means that it has tried to reduce some debts for
2021.Equity increased by a huge margin from 38% to 51.42% mostly due to the Additional
Paid-in Capital, and Common stock accounts.
Income Statement: Meralco (2020 vs. 2021)
Total revenue increased from 2020 to 2021 for Meralco. Net income also increased significantly
from 5.87% to 7.56% of the total revenue. This can be attributed to the decrease in the
percentage of the total cost and expenses of the company from 92.38% to 90.79%, with the
purchased power being the major player in the said decrease - contributing up to a 4%
decrease from 2020 to 2021. Generally, the profitability of Meralco is in good shape.
Income Statement: ACEN (2020 vs. 2021)
The total revenue for ACEN increased from 2020 to 2021. Ironically, the net income decreased
by almost 1%. This may be attributed to the big increase in the total operating expenses of the
company which equates to around 5%. Despite a significant decrease in the selling, general,
and administrative expenses, there has been a noticeable increase in the interest expense of
the company. Overall, the company suffered a loss in 2021, but should be able to get back up
as soon as a compromise is reached.
Intercompany Comparison (Balance Sheet)
The total assets of Meralco is substantially higher than ACEN in both financial years. Both
companies had a decrease in current assets from 2020 to 2021. Simultaneously, their
non-current assets increased. ACEN slightly has a competitive advantage against Meralco in
terms of increase in assets.
The change in the total liabilities of the companies portrays quite a remarkable difference.
Meralco only had around a 1% decrease in total liabilities while ACEN had around a 14%
decrease, which means that ACEN has decreased debt in 2021 by a large margin, especially in
terms of non-current liabilities.
The total equity of both companies, like liabilities, showed a noticeable difference. Meralco still
had a small change in total equity, but unlike their total liabilities, it had increased. ACEN had a
big change in equity, amounting to almost a 14% increase. ACEN’s shareholders definitely
benefited from the business. All in all, ACEN’s performance for the financial year 2021 serves
them a competitive advantage against Meralco.
Intercompany Comparison (Income Statement)
Net income for meralco increased by 2% while ACEN’s decreased by 1%. Both companies had
an increase in total revenue. This is most likely due to the large increase in operating expenses
of ACEN amounting to 5% in relation to the total sales. They must find a way to decrease their
operating expenses to regain their loss and sustain a competitive advantage against Meralco.
Ratio Analysis
Current Ratio Analysis determines the liquidity of a business, as well as the decision whether
a business should shut down giving us the picture of a company’s ability to pay off its liabilities.
So for every dollar of current liabilities, MERALCO has 0.90 dollars of current assets in 2020
and a smaller value of 0.85 in 2021 while ACEN has four to five times of MERALCO’s value
which is 4.83 in 2020, which doubled up in 2021, giving us the value of 8.2.
Acid Test Ratio also determines the liquidity of a business, most specifically its immediate
liquidity so it also determines the ability of a company to pay its bills as it comes due. So again,
MERALCO has given us a smaller value in 2021 (0.79) compared to the previous year (1).
ACEN, on the other hand is three times more liquid than that of MERALCO, giving us a value of
3.26 in 2020 and a bigger value of 3.87 in 2021.
AR Ratio indicates how fast the company collects credits from its customers. MERALCO shows
a higher AR Ratio in 2021 (6.18) compared to 2020 (5.34) which means that MERALCO was
able to collect from its creditors much faster in 2021. ACEN has a much higher AR Turnover
ratio than that of MERALCO (17.06 in 2020 and 21.73 in 2021). A very high AR Turnover ratio is
desirable but this could impact the sales if the policies get too restrictive. A low AR turnover
ratio, on the other hand means that policies imposed by the company may be too lenient, thus
may affect the liquidity of the company.
Inventory Turnover shows us how fast the company sells a product and replenishes the
inventory during a given period. Both MERALCO and ACEN has increased its inventory
turnover from 2020 to 2021. However, MERALCO has a much higher value of 33.24 and 37.80
in 2020 and 2021 respectively compared to ACEN with a value of 8.51 and 14.05 in the
respective years. This simply means that ACEN has weaker sales, thus an excess inventory
compared to MERALCO which has a high inventory turnover which can cause an insufficient
inventory for its consumers.
Profit Margin, by the name itself, represents the profitability of the company. It represents how
much the company is earning for every sale they make. MERALCO has a higher profit margin in
2021 (0.07) than in 2020 (0.05). When compared to ACEN, ACEN has a higher profit margin of
0.13 in 2020 and 0.17 in 2021. It simply means that ACEN profits more than its competitor,
MERALCO.
Asset Turnover Ratio determines how good the company is in generating revenue through its
assets - how well they use their assets to generate revenue. Despite ACEN having a much
higher current ratio, MERALCO has a higher asset turnover (0.63 in 2020, 0.73 in 2021)
compared to ACEN (0.13 in 2020 and 0.17 in 2021). This means that ACEN should learn how to
use their assets more in generating revenue.
Return on Asset tells us how profitable the company is in relation to its assets. It tells us how
efficient the company is in using its assets for generating profit. This is similar to Asset Turnover
Ratio, so we can also see that MERALCO is more efficient in using its assets to generate profit
in the later year (2021) and also when compared to ACEN.
Return on Equity is also a gauge of the company’s profitability and how efficient it is in
generating profit. It shows how good the company is in converting its equity financing into profit.
Again, we could see that both companies did a better job in 2021 than in 2020. Aside from
MERALCO being efficient in turning its assets into profits, it is also more efficient in turning
equity into profit compared to ACEN.
Earnings per Share tells us how much money a company make for each share of its stock and
it estimates the corporate value of a company. MERALCO and ACEN have higher corporate
value in 2021 compared to 2020. Investors would pay more for MERALCO than in ACEN
because of its higher EPS, this is because MERALCO would profit more relative to its market
share price.
Debt to Total Assets Ratio tells us the degree in which the company has used debt to finance
its assets. The higher the ratio, the higher the risk of investing in the company. MERALCO has a
lower Debt to Total Asset Ratio in 2021 than in 2020 while ACEN has the opposite. However,
from the ratio, we can see that it is more risky to invest in MERALCO than in ACEN due to the
lower Debt to Total Assets Ratio of ACEN.
HORIZONTAL ANALYSIS
Balance Sheet: Meralco
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ASSETS
○ Almost everything increased except
■ Receivables - could be because they’ve been realized already
LIABILITIES
○ Some decreased values may be indicative of items that have been paid already
○ Overall assets increased more than liabilities (percentage-wise)
EQUITY
○ Increased by 31%
Balance Sheet: ACEN
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ASSETS
○ Overall increased by 21%, primarily driven by non-current assets which
increased by 31%
■ Mainly because of the massive increase in property, plant, and equipment
LIABILITIES
○ Decreased by 5%, mainly driven by a 37% decrease in current liabilities
■ While payable increased, there was a drastic decrease in other current
liabilities and debt/capital leases which the company might have been
able to pay already
EQUITY
○ Increased by 63% mainly driven by massive growth in paid in capital and
common stock
Income Statement: Meralco
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While most of the costs and expenses increased, income also increased drastically, by
47% which was able to offset the increase in expenditures, resulting into a 49% increase
in net income
Income Statement: ACEN
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Operating expenses increased, however net income still increased overall by 22%,
which is an indication of growth
Statement of Cash Flow: Meralco
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Among the source of cash flow activities, only the operating activities produced a net
positive amount with a 45% increase, while both the investing and financing activities
had massive decreases in value with -1882% and -154% respectively. Which all resulted
in a net 63% decrease in cash and cash equivalents.
○ This is not necessarily a bad thing as the company may have focused to spend
more on expansion and growth of the company
Statement of Cash Flow: ACEN
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All sources of cash flows resulted in positive increase: 10% in operating activities, 3% in
investing activities, and 83% in financing activities; however, the net change in cash
came up to be -86%.
Intercompany Comparison (Horizontal Analysis)
Balance Sheet
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Based on the comparative balance sheets, the following are observed:
○ The increase in total assets of Meralco outperformed ACEN
■ Though their percent changes were similar. Which is a good sign for a
smaller-sized firm (ACEN)
○ Total liabilities of Meralco increased, while ACEN’s decreased by 5%
○ Total equity of ACEN increased by 63%
■ Maybe because of the massive traction the company got during the
pandemic as they had more investors
Income Statement
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ACEN’s percentage increase in revenue outperforms Meralco
○ This is expected as Meralco is a bigger company and is more established while
ACEN is still growing
Operating expenses of ACEN increased by 37% which is a bit odd as the percent
change outperforms the percent change in revenue
Meralco’s net income performed way better in percentage compared to ACEN
Statement of Cash Flow
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Meralco had negative changes in investing and financing activities. These may be
indicative of cash used in growth and expansion
ACEN’s sources of cash flow showed an increase in all aspects but the net change in
cash was a drastic decrease with -86%. It can be an accounting error