Financial Analysis of Georgia Power

Financial Analysis of Georgia Power

There are a number of different tools and strategies used to analyze the overall financial strength of the various companies. However, to fully understand if company is an attractive long-term buy requires that carefully examine a number of factors to include: the return on equity, the debt ratio and the quick ratio. In the case of Georgia Power, the company has a long established track record as the largest electric producer in Georgia. Yet, to fully understand if the stock is a good long-term buy requires that you carefully examine these factors. This will tell you if Georgia Power is an attractive long-term valuation or if it is a valuation trap.

Georgia Power is a subsidiary of Southern Company (NYSE: SO). The senior notes trade of the New York Stock Exchange under the symbol GAH. The company is involved in the production, transmission and distribution of electricity within the State of Georgia. They serve over 600 communities including: Atlanta, Athens, Savannah, Columbus, Rome and Macon. The company was founded in 1927.

Financial Review of Georgia Power

To determine the overall financial health of Georgia Power requires that you look at the return on equity, the debt ratio and the quick ratio. This will tell you if the company has the financial strength to continue to remain economically viable going forward. The return on equity, will tell you how much of a profit the company is making; off of the money that investors loan them. To calculate this number you would use the following formula: net income / shareholders equity = Return on equity. ("Return on Equity," 2010) in the case of Georgia Power, they have a net income of $392,065; while their shareholder equity is 8.29 million. Using the above formula you would have: 4.7% ($392,065 / 8.29 million = .047 * 100 = 4.7%. ("Georgia Power," 2010) the total return that the company is providing to shareholders on their investment is 4.7%.

However, to fully tell if the company has low amounts of debt requires that you examine the total debt ratio and the quick ratio. The debt ratio will tell you how much debt the company has in relation to it assets. This is important because during times of financial challenge, the more debt a company has the greater the possibility that they could face financial problems. The quick ratio will tell you the company's ability pay their short-term obligations. Together, these two will provide an overview as to the overall strength or weaknesses of Georgia Power's debt position. The total debt ratio for the company is .654. This was calculated using the formula of total debt / total assets = total debt ratio. ("Debt Ratio," 2010) in the case of Georgia Power, they have $15,602,991 in total debt and $23, 832,053 in total assets ($15,602,991 / 23, 832,053 = .654). ("Georgia Power," 2010) Any reading below 1.0 indicates that the company has more assets than their current liabilities. The quick ratio of Georgia Power would be: .61. This number was calculated by using the formula of: current assets -- inventories / current liabilities = quick ratio ($2,790,740 - $1,095,220 / $2,776,368 = .61). ("Quick Ratio,"2010) ("Georgia Power," 2010) the greater the number the better the short-term liquidity position the company is in. In this particular situation while Georgia Power is not facing a liquidity crisis, their level of short-term liquidity is lower than it should be.

Analysis

When you put all of the different pieces together, it is clear that there they are saying that Georgia Power is good long-term investment. This can be seen by the 4.7% return on equity that they are delivering to shareholders. The total amounts of debt are reasonable with the company having a total debt ratio of .654. This is below the number of 1.0, which indicates that the company has more than enough assets to cover any kind of liabilities. However, when you look a little further, the short-term indicators such as: the quick ratio; shows a different picture. In this particular aspect there was a reading of .61. What makes this number so troubling is the fact that it is below 1.0, indicating that the company's short-term liquidity position is its greatest weakness. Yet, when you place the current number into context, while it may be low it is not enough to force any kind of liquidity crisis for the company over the next few months. Together, all of these different indicators tell investors that Georgia Power is a good long-term investment. However, there will be some short-term challenges that the company is going through because of the lower short-term liquidity position. Beyond this factor, the company has all signs that it will continue to provide investors with consistent growth and income.