“May Liwanag Ang Buhay”

A Paper Presented to:

Professor Ma. Rona Corda-Prado, CPA

In partial fulfillment of the course requirements in BA 118.2 – Advanced Accounting 2

Prepared by:
Cascon, Mary Pauline
Cunahap, Kennah Marie
Estoque, Hazel
Rojas, Danielle
Sanico, Janina

MAY 23, 2018

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Contents
I. EXECUTIVE SUMMARY .......................................................................................................................... 3
II. INTRODUCTION ..................................................................................................................................... 4
Corporate Overview and General Information ......................................................................................... 4
Vision......................................................................................................................................................... 4
Mission ...................................................................................................................................................... 4
Goals ......................................................................................................................................................... 4
History ....................................................................................................................................................... 5
Organizational Structure ........................................................................................................................... 6
Corporate Governance.............................................................................................................................. 6
Dividend Policy .......................................................................................................................................... 7
III. Audited Financial Statements ........................................................................................................... 8
IV. Trend Analysis ................................................................................................................................. 13
.................................................................................................................................................................... 15
V. Financial Ratio Analysis ....................................................................................................................... 16
VI. Evaluation and Recommendation ................................................................................................... 23
References .................................................................................................................................................. 27
APPENDICES ................................................................................................................................................ 28

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 I. EXECUTIVE SUMMARY

Manila Electric Co., or more popularly known as Meralco, is the largest electric

distribution utility company and the largest private sector utility in the country. It provides to over

six million customers in the country. The company covers the core of the industrial, commercial,

and population centers of the country. The power distribution segment consists of the operations

of Meralco as well as its subsidiary. Through its subsidiaries in the service sector, Meralco also

provides engineering, construction, communications, energy management, and information

systems and technology services. The company has the largest market capitalizations among the

listed companies under the utility and power sector.

In the analysis of the financial performance and operations and the overall financial

position of the company, the financial ratios used are the liquidity, activity, debt, and profitability

ratios. These ratios were analyzed through time-series analysis; and items in the financial

statements were also analyzed through vertical analysis.

Meralco’s liquidity is declining overtime, especially during the year 2016, when it

completely went lower than the ideal ratio. This is a negative sign for the company’s long-term

cash flows which, if not improved, might be problematic for creditors and investors of the

company. The company has a good position, generally, with regards to the sales although profits

are decreasing due to high operating expenses. The company’s activity ratios, on the other hand,

show a much better result especially for the efficient system of receivable collection. And, the

return on equity of the company is increasing over time. Furthermore, the market ratios of the

company showed that there is an increasing trend for the year 2015, but it soon declined for the

year 2016. This shows the effects of how the investors generally perceive the operational

efficiencies of the company.

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 II. INTRODUCTION

Corporate Overview and General Information

MERALCO or the Manila Electric Railroad and Light Company is the Philippines' largest

private sector distributor of electrical power. It is Metro Manila’s only electric power distributor

and it covers 36 cities and 75 municipalities that includes the provinces of Rizal, Cavite, Bulacan

and parts of the provinces of Pampanga, Batangas, Laguna and Quezon. It serves 6.3 million

customers in a franchise area covering 9,685 km2.

The company was founded during 1903 where Charles M. Swift was awarded a franchise

to build the “Manila electric tramway”. Now, Meralco is on its 115th year of service.

Vision

“To be a world-class company and the service provider of choice.”

Mission

“To provide our customers the best value in energy, products and services.”

Goals

• Provide the customers with the highest quality products and services, consistent with their

requirements and with international standards;

• Treat the customers fairly, courteously and with integrity in all its business transactions;

• Act promptly on their immediate concerns and be receptive to their long-term needs and

interests; and

• Make every effort to ensure that the health, safety and general well-being of its customers

are enhanced by its products and services.

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History

The first electric company to provide electricity to Manila was La Electricista which was

organized in 1891 but began its operations in late 1894 towards the close of the Spanish era. On

January 17, 1895, its street lights were turned on for the first time and by 1903, it had about 3,000

electric light customers.

On October 20, 1902, during the American Colonial Period, the Second Philippine

Commission began accepting bids and Charles M. Swift, Detroit entrepreneur, was the sole bidder

who was granted the original basic franchise on March 4, 1903. The Manila Electric Railroad and

Light Company which acquired La Electricista was established in 1903 to provide electric light

and power and an electric street railway system to Manila and its suburbs. The company operated

52-miles of tramways until World War II. The equipment and tracks of the system was severely

damaged during the war and had to be removed. It had to give up its transportation business,

instead focused on providing electricity. By 1915, electricity generation and distribution became

the main income generator.

In 1961, a group of Filipino investors, led by the entrepreneur Eugenio Lopez Sr, bought

Meralco from its American owners, making it wholly Filipino-owned. Meralco was the first

Philippine company to issue mortgage trust indenture bonds successfully in the US financial

market on Wall Street. In 1969, it became the very first billion-peso company in the Philippines.

In 1970 the Philippine Government made it a state policy for the government to own all major

generating facilities. It sold its generating plants to the National Power Corporation (NAPOCOR),

and electric distribution became its core business which tripled its franchise area. In 1980, upon

request of the government, it organized and operated the country’s first elevated light rail transit

(LRT) system in Manila between Baclaran and Caloocan which it turned over to the government

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at the end of the decade. In 2009, major stock transportations took place and Meralco partnered

with two other giant Philippine conglomerates, the PLDT and San Miguel groups.

Organizational Structure

Corporate Governance

Meralco aims for excellence in the service that they give, guided by principles of Fairness,

Accountability, Integrity, Transparency and Honesty. With a customer-centric mindset, the

company aspires to be a total energy solutions partner, to know not only the needs and wants but

also the changing lifestyle patterns or business challenges of customers.

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 The company commits to strengthening its culture of good governance and responsible

management practices, while benchmarking with the international community and global

companies. Meralco believes that the reward of good governance is not just recognition but the

continuous improvement on company operations, breakthrough performance and sustainable

growth that will serve the best interest of all its stakeholders.

As the country’s largest power distribution utility that caters to the power requirement of

its more than 6 million customers in its franchise area, Meralco has been at the forefront in

promoting good governance regulations, policies and practices within its organization in its

dealings with private and public stakeholders. The structure, functions, policies and programs of

the Company are in accordance with the strict laws and policies enforced by regulatory agencies.

Policies and implementing rules are in place to set out the duties and responsibilities of the Board,

Management and Employees in safeguarding the rights of the shareholders and stakeholders.

As a testament to the trust accorded to it by the stakeholders, the Company’s consolidated

revenues and consolidated sales volume consistently grow. On June 21, 2017, the Standard &

Poor’s (S&P) global ratings raised its long-term corporate credit rating on Meralco to Investment

Grade at BBB- with Stable Outlook from BB+ with Positive Outlook. Moving forward, the

Company strives to continue improving its service and performance.

Dividend Policy

The company’s dividend policy calls for the payment of regular cash dividends equivalent

to 50% of core earnings for the year with a “look-back” basis, which allows the company to pay

special dividends up to 50% of the core earnings for the year, subject to availability of unrestricted

retained earnings and cash, in accordance with the guidelines of the Securities and Exchange

Commission (SEC).

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III. Audited Financial Statements

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10
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 IV. Trend Analysis

Based on the company’s consolidated statement of financial position, current assets

decreased by P 17,317 (-15%) in year 2015 and P 7,287 (-8%) in year 2016. Its non-current assets

however, increased by P 30,503 (19%) in 2015 and P 21,085 (11%) in 2016, having a total asset

increase of 13,186 (5%) in 2015 and P 13,798 (5%) in 2016. The current and non-current liabilities

increased in both years: P 9,651 (12%) in 2015; P 11,387 (12%) in 2016; and P 35,116 (48%) in

2015; P 8,126 (8%) in 2016 respectively, with a total increase of P 44,767 (29%) in 2015 and P

19,513 (10%) in 2016. For the company’s stockholder’s equity, there was an increase of P 1,387

(2%) in 2015 but a decrease of P 5,715 (-7%) in 2016. With these, total liability and stockholders’

equity increased by P 13,186 (5%) in year 2015 and P 13,798 (5%) in year 2016, balancing the

total asset increase in both years. Overall, the company’s financial position has a uniform increase

in its 3-year (2014; 2015; 2016) operation, which shows that the company is doing well financially

and is not in imminent danger of insolvency.

For the company’s operations, its total revenues have decreased (P 7,937 in 2015 and P

1,218 in 2016), wherein gross profit decreased by P 2,686 (-10%) in 2015 but increased by P 2,300

(10%) in 2016 - based on its consolidated statement of comprehensive income. Net income,

however, increased for both years: P 1,058 (6%) in the year 2015, which is a higher increase

compared to that of 2016 with only a 1% increase by the amount P 151. Despite the small

percentage increase in year 2016, the company is still earning income, so it can still be construed

that its operations are steady and it will continue as a going concern, with no danger of bankruptcy.

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 MERALCO
and Subsidiaries
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
Trend Analysis
(amounts in millions)

31, December Inc. (Dec.) Growth Rate Inc. (Dec.) Growth Rate
2016 2015 2014 2015 2015 2016 2016
ASSETS
Cash ₱ 46,656 ₱ 50,840 ₱ 69,469 - 18,629 -27% - 4,184 -8%
Trade and other Receivables 25,341 26,761 30,629 - 3,868 - 1,420
Inventories 2,792 2,273 2,212 61 3% 519 23%
Other current assets 13,219 15,421 10,302 5,119 50% - 2,202 -14%
Total Current Asset 88,008 95,295 112,612 - 17,317 -15% - 7,287 -8%

Noncurrent Assets
Utility plant and others 128,814 124,913 120,830 4,083 3% 3,901 3%
Investments in associates and interests in joint ventures 10,924 13,603 14,532 - 929 -6% - 2,679 -20%
Investment properties 1,513 1,538 1,526 12 1% - 25 -2%
Deferred tax assets - net 13,019 11,296 7,089 4,207 59% 1,723 15%
Other noncurrent assets 53,759 35,594 12,464 23,130 186% 18,165 51%
Total Non-Current Asset 208,029 186,944 156,441 30,503 19% 21,085 11%
TOTAL ASSET ₱ 296,037 ₱ 282,239 ₱ 269,053 13,186 5% 13,798 5%

LIABILITIES AND SHAREHOLDER'S EQUITY

31, December Inc. (Dec.) Growth Rate Inc. (Dec.) Growth Rate
2016 2015 2014 2015 2015 2016 2016
Notes payable ₱ 11,475 ₱ 1,043 ₱ 400 643 161% 10,432 1000%
Trade Payables and Other Current Liabilities 83,920 79,557 73,624 5,933 8% 4,363 5%
Customers' Refund 4,988 5,550 5,937 - 387 -7% - 562 -10%
Income Tax Payable 2,346 1,883 1,668 215 13% 463 25%
Current Portion of interest-bearing long term financial liabilities 1,873 1,895 1,895 #DIV/0! - 22 -1%
Current Portion of long-term employee benefits 3,287 1,899 1,388 73% - 3,287 -100%
Total Current Liabilities ₱ 104,602 ₱ 93,215 ₱ 83,528 9,687 12% 11,387 12%

Interest-bearing long-term financial liabilities- net of current portion 26,999 27,370 27,743 - 373 -1% - 371 -1%
Customers' deposits - net of current portion 23,501 23,584 24,344 - 760 -3% - 83 0%
Long-term employee benefits 3,119 3,620 4,887 - 1,267 -26% - 501 -14%
Provisions 19,170 21,014 16,073 4,941 31% - 1,844 -9%
Refundable service extension costs - net of current portion 4,927 4,234 7,006 - 2,772 -40% 693 16%
Deferred tax liabilities - net 36 17 5 12 240% 19 112%
Other noncurrent liabilities 38,537 28,324 25,993 2,331 9% 10,213 36%
Total Non-Current Liabilities 116,289 108,163 106,051 2,112 2% 8,126 8%
Total Liabilities ₱ 220,891 ₱ 201,378 ₱ 189,579 11,799 6% 19,513 10%

Shareholders’ equity:
Equity attributable to Equity holders of the parents
Common stock 11,273 11,273 11,273 - 0% - 0%
Subscriptions receivable - 8 8 -100% -
Additional paid-in capital 4,111 4,111 4,111 - 0% - 0%
Excess of acquisition cost over carrying valueof non-controlling
- interest
328 - acquired 328 - 328 - 0% - 0%
Employee stock purchase plan 1,049 1,049 1,049 - 0% - 0%
Unrealized fairvalue gains on available-for-sale financial
- assets 271 102 112 - 10 -9% - 373 -366%
Cumulative translation adjustments of subsidiaries and associates 1,085 - 72 355 - 427 -120% 1,157 -1607%
Share in remeasurement adjustments on associates' retirement
- liabilities
12 - 12 - 20 8 -40% - 0%
Remeasurement adjustments on retirement and other post-employment 3,384 liabilities935 1,302 - 367 -28% 2,449 262%
Treasury stock - 11 - 11 - 11 - 0% - 0%
Retained Earnings: -
Appropriated 11,000 11,000 - 0% - 11,000 -100%
Unappropriated 54,137 52,229 50,319 1,910 4% 1,908 4%
Equity attributable to Equity holders of the parent 74,417 80,276 79,154 1,122 1% - 5,859 -7%
Non-controlling interests 729 585 320 265 83% 144 25%
Total shareholders’ equity 75,146 80,861 79,474 1,387 2% - 5,715 -7%
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY ₱ 296,037 ₱ 282,239 ₱ 269,053 13,186 5% 13,798 5%
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 MERALCO
and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Trend Analysis
(amounts in millions, except per share data)

31, December Inc. (Dec.) Growth Rate Inc. (Dec.) Growth Rate
2016 2015 2014 2015 2015 2016 2016
Revenues:
Sale of electricity ₱ 249,206 ₱ 249,773 ₱ 261,740 - 11,967 -5% - 567 0%
Sale of other services 7,975 8,626 4,596 4,030 88% - 651 -8%
Total: 257,181 258,399 266,336 - 7,937 -3% - 1,218 0%
Costs and Expenses
Purchased power 189,853 192,117 203,242 - 11,125 -5% - 2,264 -1%
Salaries, wages, and employee benefits 12,841 12,420 11,008 1,412 13% 421 3%
Provision for probable losses and expenses from claims 9,373 11,628 10,720 908 8% - 2,255 -19%
Depreciation and amortization 7,312 6,910 6,093 817 13% 402 6%
Contracted services 5,618 4,668 4,292 376 9% 950 20%
Taxes, fees and permits 854 595 662 - 67 -10% 259 44%
Provision for doubtful accounts - net 171 502 460 42 9% - 331 -66%
Other expenses 5,451 6,151 3,765 2,386 63% - 700 -11%
Total: 231,473 234,991 240,242 - 5,251 -2% - 3,518 -1%
Gross Profit 25,708 23,408 26,094 - 2,686 -10% 2,300 10%
Other income (expenses)
Interest and other financial income 2,080 1,538 770 768 100% 542 35%
Interest and other financial charges - 1,343 - 1,216 - 1,439 223 -15% - 127 10%
Foreign echange gains 896 367 8 359 4488% 529 144%
Equity in net losses (earnings) of associates and joint ventures - 1,677 - 27 295 - 322 -109% - 1,650 6111%
Others 1,029 806 740 66 9% 223 28%
Total: 985 1,468 374 1,094 293% - 483 -33%
Income before income tax 26,693 24,876 26,468 - 1,592 -6% 1,817 7%
Provision for (benefit from) income tax 2,940 923 - 122 1,045 -857% 2,017 219%
Current 10,099 9,732 9,961 - 229 -2% 367 4%
Deferred - 2,746 - 4,045 - 1,624 - 2,421 149% 1,299 -32%
7,353 5,687 8,337 - 2,650 -32% 1,666 29%
Net income ₱ 19,340 ₱ 19,189 ₱ 18,131 1,058 6% 151 1%
Attributable to
Equity holders of the parent 19,176 19,098 18,053
Non-controlling interests 164 91 78
₱ 19,340 ₱ 19,189 ₱ 18,131
Earnings per share attributable to equity holders of the parent
Basic ₱ 17.01 ₱ 16.94 ₱ 16.02
Diluted 17.01 16.94
15 16.02
 V. Financial Ratio Analysis
2014 2015 2016
LIQUIDITY
CURRENT RATIO 1.3482 1.0223 (24% ↓) 0.8414 (18%↓)
QUICK RATIO 1.3217 0.9979 (24% ↓) 0.8147 (18%↓)

DEBT RATIOS
DEBT RATIO 0.7046 0.7135 (1%↑) 0.7462 (4.6%↑)
DEBT TO EQUITY 2.3854 2.4904 (4%↑) 2.9395 (18%↑)
TIMES INTEREST EARNED
RATIO 18.3933 20.4572 (10%↑) 19.8757 (2.8%↓)

PROFITABILITY
GROSS PROFIT MARGIN 0.2369 0.2565 (8%↑) 0.2618 (2.1%↑)
NET PROFIT MARGIN 0.0681 0.0743 (9%↑) 0.0752 (1.3%↑)
OPERATING PROFIT MARGIN 0.10 0.09 (8%↓) 0.09 (0)
EARNINGS PER SHARE 16.02 16.94 (6%↑) 17.01 (.4%↑)
RETURN ON TOTAL ASSETS 0.0674 0.0680 (1%↑) 0.0653 (3.9%↓)
RETURN ON COMMON
EQUITY 0.2281 0.2373 (4%↑) 0.2574 (8.5%↑)

ACTIVITY RATIOS
RECEIVABLE TURNOVER 8.696 9.656 (11%↑) 10.149 (5.1%↑)
AVE COLLECTION PERIOD 41.975 37.801 (10%↓) 35.965 (4.9%↓)
INVENTORY TURNOVER 91.882 84.521 (8%↓) 67.999 (19.5%↓)
AVE AGE OF INVENTORY 3.973 4.318 (9%↑) 5.368 (24.3%↑)
AP TURNOVER 2.761 2.415 (13%↓) 2.262 (6.3%↓)
AVE PAYMENT PERIOD 132.221 151.149 (14%↑) 161.340 (6.7%↑)
TOTAL ASSET TURNOVER 0.990 0.916 (8%↓) 0.869 (5.1%↓)

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 Liquidity Ratios
1.60
1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.00
2014 2015 2016

Current Ratio Quick Ratio

Both the current and quick ratios of the company are declining overtime, although it can

be observed that from the year 2014 to 2015, the company had a much larger decrease as compared

to the period between 2015 and 2016. From the results shown, the decrease during the period

between 2014 to 2015 is actually still within the ideal ratio of 1.1-2.1, but the company’s

continuously decreasing ratios until 2016 signifies that it had problems in managing its current

assets to satisfy its short-term obligations, and if this trend continues, it can lead to having assets

which are not sufficient enough to cover its current liabilities.

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 200.00
Activity Ratios
150.00
100.00
80.00 100.00

60.00
50.00
40.00
0.00
20.00
2014 2015 2016
0.00
2014 2015 2016 Average Collection Period
Receivable Turnover Inventory Turnover Average Age of Inventory
Total Asset Turnover Payable Turnover Average of Payment Period

These activity ratios show the efficiency of the company in its operations. First, the

inventory turnover is decreasing through the three-year period but the decline is small that there is

only a minimal increase to the age of inventory. Despite this, the decline can still result to a much

longer period to generate cash from inventories. Second is the company’s receivable turnover

which shows that the company has an efficient system of receivable collection and the credit sales

are also decreasing overtime. On the other hand, the company’s ability to pay its current liabilities

is decreasing as evidenced as well by the decreasing liquidity ratios, thus the company needs a

longer period of time to pay its obligations.

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 Debt Ratios
25.00
20.00
15.00
10.00
5.00
0.00
2014 2015 2016

Debt Ratio
Debt to Equity Ratio
Times Interest Earned Ratio

The debt ratio measures the proportion of total assets financed by the company’s creditors.

As shown in the graph, this ratio increases over time which means that most of the firm’s assets

are acquired through financing. In 2016, it shows that the company has financed almost 75% of its

assets with debt. Moreover, there is also a slight increase every year in its debt to equity ratio that

when if continues will indicate that the firm may not be able to generate enough cash to satisfy its

obligations. The times interest earned of the firm also grew in 2015 maybe due to its long-term

power supply agreement for a 455-MW capacity and electrical output with San Buenaventura

Power Ltd. (SBPL), a power firm based in Thailand. This agreement was to support its project to

build a highly fuel efficient, reliable and environment-friend coal-fired power plant in Quezon.

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 Profitability Ratios 0.30
RETURN
0.15 ON
Net Profit 0.20 TOTAL
Margin ASSETS
0.10
Operating Profit
0.10
0.05 Margin
Return on Total
0.00 Assets 0.00
2014 2015 2016 2014 2015 2016

In terms of its profitability, the company sales are increasing overtime as compared to its

cost of goods sold. In 2014, Meralco detailed various factors to which it can attribute its power

sales boost. According to its disclosure in the Philippine Stock Exchange, these factors include

sustained economic activity and personal consumption, increase in consolidated electricity sales

volume by 3% from 2013, increase in customer base, improved contributions from major

subsidiaries and affiliates (gmanews companies, 2014). Despite the issuance of the Supreme Court

of a temporary restraining order on its planned power rate increase, the company performed well

(manila times, 2015). In 2015, Meralco beat its profit guidance as it recorded a net income of P19.1

billion in 2015, higher by 6% than the previous year’s, as the company was given approval to

collect prior years’ under recoveries while posting financing and divestment gains (business world

online, 2015). Energy sales volume rose 5.6% to 37124 GWh from 35,160 in 2014. However, of

its revenues, electricity accounted for P249.8 billion, down 5% from the previous year’s P261.7

billion which we can attribute the decrease in operating profit margin and increase in net profit

margin. Meralco attributed several factors for this including the drop in fuel prices in the second

half of the year, the switch of captive sales volume to retail electricity suppliers, the

implementation of lower distribution rate from July, low inflation, and according to

BusinessMirror, El Nino which meant higher temperatures and greater demand from customers.

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Meralco said, the “very low” inflation rate recorded in 2015 resulted in “more purchasing power

for consumers” that drove electricity demand up. The significant increase in its other income at

P1.47 billion from P374 million in 2014 is caused by gains from its partial divestment in Indra

Philippines which can be attributed to the increase in net profit margin and decrease in return on

total assets. Non-electricity sales or other revenues helped offset the reduction in electricity

revenues as this rose by 88% to P8.63 billion from P4.6 billion (business world online, 2015). In

2016, its audited consolidated core net income grew by 4% to P19.3 billion from P19.2 billion in

2015. Meralco President and CEO Oscar Reyes said that this was due to a number of factors. These

include that the company was buoyant and strong with growth at around 6.8 percent, the country

had much warmer temperatures particularly during the first five months of 2016, low inflation,

and low interest rates, all of which are favorable for consumers. Its gross revenues amounted to

P257.2 billion, down 0.5% from P258.4 billion due to continued decline of pass-through fuel prices

throughout the year, which muted the impact of the 8.1% (40,142 GWh) increase in the volume of

distributed energy. This decrease can be attributed to the small decrease in operating profit margin

and increase in net profit margin. Sales in the first half were higher than during the second half

when temperature more or less mirrored the 2015 average. Its customer base increased 4% from

the previous year and its electricity sales reached 40,142 GWh with an increase of 8%, the year

when the country experienced “perfect weather” (business world online, 2016). In addition,

average retail rates dropped by 9.2% to P7.5 per kWh in 2016 from P8.26 per kWh. The “perfect

weather” and decrease in retail rate contributed to a decrease on return on total assets.

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 Market Ratios
20.00
18.00
16.00
14.00
12.00
10.00
8.00
6.00
4.00
2.00
-
2014 2015 2016

PRICE EARNINGS RATIO M/B RATIO

For the market ratios of the company, its price-earnings ratio greatly increased for the

period between 2014 and 2015 but declined thereafter. This may be attributed to the fact that

although earnings per share was steadily increasing, the market price was not. The market price

spiked for 2015 but decreased dramatically by the next year. The market-book value, ratio on the

other hand, shows almost the same trend because both the market and book values per share had

the same trend which is an initial increase followed by a decrease.

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 VI. Evaluation and Recommendation

Over the years, investors and analysts have developed numerous analytical tools, concepts

and techniques to compare the relative strengths and weaknesses of companies. These tools,

concepts and techniques form the basis of fundamental analysis. MERALCO’s financial ratios for

three years, 2014-2016, presented different trends. The liquidity ratios for three years reflected a

decreasing trend. This may imply that the company is becoming less liquid this recent years. Such

low current ratio indicates that the company may have a hard time paying their current liabilities

in the short run and deserves further investigation between the management. This decreasing

liquidity ratios must not be tolerated for the coming years of operation because it will inevitably

hurt the company’s credit capabilities towards their creditors.

Activity ratios are used to measure how efficiently a company utilizes its assets. The ratios

provide investors with an idea of the overall operational performance of a firm. The inventory

turnover of the company for the past three years is evidently declining. This implies that

inventories are not sold at a faster rate, signaling inventory management ineffectiveness. A low

inventory turnover rate means more company resources are tied up in inventory. On the other hand,

the company has an increasing receivable turnover which may imply that cash is collected more

quickly for use in the company. Therefore, the company is quick and efficient in the collection of

its outstanding bills. The company’s Accounts Payable turnover has a decreasing trend, signaling

that it has to review their efficiency in paying off money owed to suppliers. This decreasing trend

is anchored with the decreasing liquidity ratios of the company. The less liquid the company is,

the less efficient it settles accountabilities with their supplier. This may hurt the relationship it had

established with their supplier. The company’s asset turnover has also a decreasing trend which

may imply that it is becoming less efficient in using its total assets to generate revenues. This may

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mean that the company is operating in a capital-intensive environment. Additionally, it may point

to a strategic choice by management to use a more capital-intensive as opposed to a more labor-

intensive approach.

Profitability ratios measure the firm’s ability to earn an adequate return. The company has

a positively increasing gross margin and net profit margin ratios. This means that the company

holds a competitive advantage in product cost due to efficient production techniques or economies

of scale. The company has an outstanding ability to translate sales into earnings, with respect to

their increasing net profit margin ratio. MERALCO has high equity ratios (ROA and ROE) which

may imply that the company is able to efficiently generate earnings using its assets very well. It

signals that the company’s income attributed to shareholders against the investment that

shareholders put into the firm is increasing. It is also visibly in the financial ratio analysis that the

company has an increasing trend of EPS figure. A higher EPS is the sign of higher earnings, strong

financial position and, therefore, a reliable company to invest money. This may imply that more

and more investors are attracted to make an investment in company. A consistent improvement in

the EPS figure year after year is the indication of continuous improvement in the earning power of

the company.

Surprisingly, the company has a high debt ratio which is approximately 75% as computed

in the financial ratio analysis above. This means that the company’s liabilities are ¾ of its total

assets. This level of debt ratio signals a less stable business affecting its longevity because the

company has a high debt ratio thus having also a high overall debt. This analysis may be anchored

to the low liquidity ratio of the company, implying that it may need to sell off some of its assets in

order to pay off liabilities. This is a fundamental analysis of company’s debt ratio because the

creditor is always concern of being repaid. If MERALCO would opt to borrow more money in the

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future, their debt ratio increases high enough that the creditors will no longer loan them money.

Additionally, the company reflected an increasing debt to equity ratio which means that the

company relies more on external lenders thus putting that company at a higher risk. The assets of

Meralco are financed by debt rather than those of the shareholders. This increasing trend in of

debt-to-equity ratio is also alarming because it means that the percentage of assets of the company

which are financed by the debts is increasing.

On the other hand, the company’s market ratios significantly fluctuate from high to low

between the years 2014 to 2016. This fluctuating market ratios may give the investors some

uncertainties regarding the stability of their investment in the company given that these ratios

determine what they may receive in earnings from their investments and predict what the trend of

a stock will be in the future.

Given all the calculated financial ratios and based on the analysis made, it is highly

recommended for MERALCO to focus more on their liquidity and debt standing. As presented

above, the company is becoming less liquid with its decreasing trend of liquidity ratios signaling

that when its liabilities became due, it may have a hard time paying off their creditors. The

company should also pay attention to their increasing debt ratio. If they tend to borrow more money

to finance their operation, debts would spike up more than what it can manage. The company

should focus on finding for a feasible way to finance its operation rather than opt to borrow more

from outside creditors. The company should try to make an effort in decreasing its average

payment period given that they have a significant level of liabilities with respect to its total assets.

If this increasing trend continues, it may give a negative impression from their creditors and the

company’s credit reputation may be greatly affected. Additionally, MERALCO should improve

its inventory turnover because the company may have a hard time generating cash from its

25
inventories which is an implication of inefficient operation. Furthermore, the company should

continue its excellent standing in the profitability aspect with increasing trend of gross profit

margin and net profit margin ratios.

26
References
business world online. (2015). Retrieved from bworldonline:
http://www.bworldonline.com/content.php?section=Corporate&title=meralco-tops-2015-
profit-guidance&id=123683.

business world online. (2015). Retrieved from bworldonline :

http://www.bworldonline.com/content.php?section=Corporate&title=meralco-tops-2015-
profit-guidance&id=123683 .

business world online. (2016). Retrieved from bworldonline:

http://www.bworldonline.com/content.php?id=141362

company histories. (2016). Retrieved from funding universe:

http://www.fundinguniverse.com/company-histories/manila-electric-company-meralco-history/

corporate governance. (2016). Retrieved from meralco company:

https://company.meralco.com.ph/corporate-governance/corporate-governance-in-meralco

corporate profile. (2016). Retrieved from meralco company:

https://company.meralco.com.ph/corporate-profile/mission-vision-values-and-principles

documents . (2017). Retrieved from meralcomain ap southeast amazonaws: https://meralcomain.s3-ap-

southeast-1.amazonaws.com/documents/pdf_listing/2017-
09/02292016_consolidated_financial_results.pdf

financial ratios. (2012). Retrieved from American Associations of Individual Investors:

http://www.aaii.com/journal/article/16-financial-ratios-for-analyzing-a-companys-strengths-
and-weaknesses.touch

gmanews companies. (2014). Retrieved from gmanetwork:

http://www.gmanetwork.com/news/money/companies/441971/meralco-2014-core-net-
income-up-5-to-p18-1b/story/

manila times. (2015). Retrieved from press reader: https://www.pressreader.com/philippines/manila-

times/20140219/281479274319580 .

ratio analysis. (n.d.). Retrieved from investopedia:

https://www.investopedia.com/terms/r/ratioanalysis.asp#ixzz5GGzk045x

27
APPENDICES

MERALCO INC.
Statement of Financial Position and Common Size Ratios
As of December 31, 2014, 2015 and 2016

2014 2015 2016

ASSETS

Current Assets
Cash 25.8% ₱ 69,469.00 18.0% ₱ 50,840.00 15.8% ₱ 46,656.00
Trade and other Receivables 11.4% ₱ 30,629.00 9.5% ₱ 26,761.00 8.6% ₱ 25,341.00
Inventories 0.8% ₱ 2,212.00 0.8% ₱ 2,273.00 0.9% ₱ 2,792.00
Other current assets 3.8% ₱ 10,302.00 5.5% ₱ 15,421.00 4.5% ₱ 13,219.00
Total Current Assets 41.9% ₱ 112,612.00 33.8% ₱ 95,295.00 29.7% ₱ 88,008.00
0.0%
Noncurrent Assets 0.0%
Utility plant and others 44.9% ₱120,830.00 44.3% ₱124,913.00 43.5% ₱128,814.00
Investments in associates and interests in5.4% ₱ 14,532.00
joint ventures 4.8% ₱ 13,603.00 3.7% ₱ 10,924.00
Investment properties 0.6% ₱ 1,526.00 0.5% ₱ 1,538.00 0.5% ₱ 1,513.00
Deferred tax assets - ne 2.6% ₱ 7,089.00 4.0% ₱ 11,296.00 4.4% ₱ 13,019.00
Other noncurrent assets 4.6% ₱ 12,464.00 ₱ 35,594.00 18.2% ₱ 53,759.00
58.1% ₱ 156,441.00
Total Noncurrent Assets 66.2% ₱ 186,944.00 70.3% ₱ 208,029.00

TOTAL ASSETS 100.0% ₱ 269,053.00 100.0% ₱ 282,239.00 100.0% ₱ 296,037.00

28
LIABILITIES & NET ASSETS
Current Liabilities
Notes payable 0.1% ₱ 400.00 0.4% ₱ 1,043.00 3.9% ₱ 11,475.00
Trade payables and other current liabilities
27.4% ₱ 73,624.00 28.2% ₱ 79,557.00 28.3% ₱ 83,920.00
Customers’ ref und 2.2% ₱ 5,937.00 2.0% ₱ 5,550.00 1.7% ₱ 4,988.00
Income tax payable 0.6% ₱ 1,668.00 0.7% ₱ 1,883.00 0.8% ₱ 2,346.00
Current portion of long-term employee 0.0% ₱ - 1.2% ₱ 3,287.00 0.6% ₱ 1,873.00
Current portion of interest-bearing long-term
0.7% ₱ 1,899.00
f inancial liabilities 0.7% ₱ 1,895.00 0.0% ₱ -
Total Current Liabilities
31.0% ₱ 83,528.00 33.0% ₱ 93,215.00 35.3% ₱ 104,602.00
Noncurrent Liabilities
Interest-bearing long-term f inancial liabilities
10.3% ₱ current
-net of 27,743.00
portion 9.7% ₱ 27,370.00 9.1% ₱ 26,999.00
Customers’ deposits - net of current portion
9.0% ₱ 24,344.00 8.4% ₱ 23,584.00 7.9% ₱ 23,501.00
Long-term employee benef its 1.8% ₱ 4,887.00 1.3% ₱ 3,620.00 1.1% ₱ 3,119.00
Provisions 6.0% ₱ 16,073.00 7.4% ₱ 21,014.00 6.5% ₱ 19,170.00
Ref undable service extension costs -net of
2.6% ₱ portion
current 7,006.00 1.5% ₱ 4,234.00 1.7% ₱ 4,927.00
Def erred tax liabilities - net 0.0% ₱ 5.00 0.0% ₱ 17.00 0.0% ₱ 36.00
Other noncurrent liabilities 9.7% ₱ 25,993.00 10.0% ₱ 28,324.00 13.0% ₱ 38,537.00
Total Long-Term Liabilities
39.4% ₱ 106,051.00 38.3% ₱ 108,163.00 39.3% ₱ 116,289.00
Total Liabilities 70.5% ₱ 189,579.00 71.4% ₱ 201,378.00 74.6% ₱ 220,891.00
Net Assets
Common stock 4.2% ₱ 11,273.00 4.0% ₱ 11,273.00 3.8% ₱ 11,273.00
Subscriptions receivable 0.0% -₱ 8.00 0.0% ₱ - 0.0% ₱ -
Additional paid-in capital 1.5% ₱ 4,111.00 1.5% ₱ 4,111.00 1.4% ₱ 4,111.00
-0.1%of-₱
Excess of acquisition cost over carrying value non-controlling
328.00 -0.1% -₱
interest acquired 328.00 -0.1% -₱ 328.00
Employee stock purchase plan 0.4% ₱ 1,049.00 0.4% ₱ 1,049.00 0.4% ₱ 1,049.00
Unrealized f air value gains on available-f orsale ₱
0.0% f inancial
112.00
assets 0.0% ₱ 102.00 -0.1% -₱ 271.00
0.1% ₱and associates
Cumulative translation adjustments of subsidiaries 355.00 0.0% -₱ 72.00 0.4% ₱ 1,085.00
Share in remeasurement adjustments on associates’
0.0% -₱ retirement
20.00 liabilities 0.0% -₱ 12.00 0.0% -₱ 12.00
Remeasurement adjustments on retirement0.5% ₱ post-employment
and other 1,302.00 liabilities
0.3% ₱ 935.00 1.1% ₱ 3,384.00
Treasury shares 0.0% -₱ 11.00 0.0% -₱ 11.00 0.0% -₱ 11.00
Retained earnings:
Appropriated 4.1% ₱ 11,000.00 3.9% ₱ 11,000.00 0.0% ₱ -
Unappropriated 18.7% ₱ 50,319.00 18.5% ₱ 52,229.00 18.3% ₱ 54,137.00
Equity Attributable to Equity Holde 29.4% ₱ Pare
rs of the 79,154.00
nt ₱ 80,276.00 25.1% ₱ 74,417.00
Non-controlling Interests 0.1% ₱ 320.00 ₱ 585.00 0.2% ₱ 729.00
Total Equity 29.5% ₱ 79,474.00 28.6% ₱ 80,861.00 25.4% ₱ 75,146.00

TOTAL LIABILITIES & NET ASSETS 100.0% ₱ 269,053.00 100.0% ₱ 282,239.00 100.0% ₱ 296,037.00
29