Enron case study
Q 1: Evaluate Enron profit and cash flow performance during the period 1998 – 2000?
Profitability Measures
Enron’s reported net income grew from $703 million in 1998 to $979 million in 2000, totaling 35.1% profit growth for the three-year period. Enron was among the leading of “high performing” companies by sustaining a high earnings growth insight. However, as Table 1 indicates, Enron’s reported profits were microscopic relation to revenues. Net income did not grow at anything near the same rate as revenues, which grew a remarkable rate of more than 3 times of the income from 1998 to 2000. As a result, there was a steady decline in net profit margin, from 2.2% in 1998 to a paltry 1% in 2001. Similarly, Enron’s gross profit margin (gross profits as a percent of revenues) declined from 15.6% in 1998 to 13.3% in 1999, and took a dramatic drop to 6.2% in the following year as earnings more than doubled. Enron’s rapidly declining profitability was not questioned by Wall Street analysts, as long as the reported net profits continued to grow at 15% plus per year—regardless of how small these profits actually were as a percentage of revenues.
Table 1: Declining Gross Profit Margin and Net Profit Margin, 1998-2000
1998
1999
2000
Revenues
$31,260
$40,112
$100,789
Gross profit
$4,879
$5,351
$6,272
Gross profit % of Revenues
15.6%
13.3%
6.2%
Net Income
$703
$893
$979
Net Income as % of Revenues
2.2%
2.2%
1.0%
Table 2 displays data relating the profitability of chief global energy companies. In terms of net profit margin (NP), return on assets (ROA) and return on equity (ROE), Enron’s financial enactment was at the bottom end for this cluster. Only El Paso Corp. had worse profitability and return ratios.
The rapid decline in Enron’s gross profit margin exposed a main drawback. The combination of merchant model and MTM accounting allowed Enron to book the whole value of the commodity traded as revenues, rather than just the trading
Profitability Measures
Enron’s reported net income grew from $703 million in 1998 to $979 million in 2000, totaling 35.1% profit growth for the three-year period. Enron was among the leading of “high performing” companies by sustaining a high earnings growth insight. However, as Table 1 indicates, Enron’s reported profits were microscopic relation to revenues. Net income did not grow at anything near the same rate as revenues, which grew a remarkable rate of more than 3 times of the income from 1998 to 2000. As a result, there was a steady decline in net profit margin, from 2.2% in 1998 to a paltry 1% in 2001. Similarly, Enron’s gross profit margin (gross profits as a percent of revenues) declined from 15.6% in 1998 to 13.3% in 1999, and took a dramatic drop to 6.2% in the following year as earnings more than doubled. Enron’s rapidly declining profitability was not questioned by Wall Street analysts, as long as the reported net profits continued to grow at 15% plus per year—regardless of how small these profits actually were as a percentage of revenues.
Table 1: Declining Gross Profit Margin and Net Profit Margin, 1998-2000
1998
1999
2000
Revenues
$31,260
$40,112
$100,789
Gross profit
$4,879
$5,351
$6,272
Gross profit % of Revenues
15.6%
13.3%
6.2%
Net Income
$703
$893
$979
Net Income as % of Revenues
2.2%
2.2%
1.0%
Table 2 displays data relating the profitability of chief global energy companies. In terms of net profit margin (NP), return on assets (ROA) and return on equity (ROE), Enron’s financial enactment was at the bottom end for this cluster. Only El Paso Corp. had worse profitability and return ratios.
The rapid decline in Enron’s gross profit margin exposed a main drawback. The combination of merchant model and MTM accounting allowed Enron to book the whole value of the commodity traded as revenues, rather than just the trading