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22.2THE ENRON CASE
© Michael Allison, Trinity Grammar School.Author’s permission required for external use
Who was Enron?Created in 1985Sold and traded in electricity and gasTremendous growth during the mid to late 1990s
22.2 THE ENRON CASE
© Michael Allison, Trinity Grammar School.Author’s permission required for external use
By 2001, Enron was America’s 7 th largest company with assets valued at $65.5 billion
22.2 THE ENRON CASE
Apple McDonalds Johnson & Johnson
Hewlett Packard
Boeing Disney Enron0.0
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30.0
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70.0
6.8
21.7
31.3 34.0
42.045.0
65.5
2000 Assets in $US Billion
© Michael Allison, Trinity Grammar School.Author’s permission required for external use1994 1995 1996 1997 1998 1999 2000
0
10,000
20,000
30,000
40,000
50,000
60,000
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11,966 13,23916,137
22,552
29,35033,381
65,503Enron Assets 1994 - 2000 ($US million)
22.2 THE ENRON CASE
© Michael Allison, Trinity Grammar School.Author’s permission required for external use1994 1995 1996 1997 1998 1999 2000
0
20,000
40,000
60,000
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8,984 9,18913,289
20,273
31,26040,112
100,789
Enron Revenue 1994 - 2000 ($US million)
22.2 THE ENRON CASE
© Michael Allison, Trinity Grammar School.Author’s permission required for external use1994 1995 1996 1997 1998 1999 2000
0
200
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440489 493
105
703
893979
Enron Profit 1994 - 2000 ($US million)
22.2 THE ENRON CASE
© Michael Allison, Trinity Grammar School.Author’s permission required for external use1997 1997 1998 1998 1999 1999 2000 2000 2001 2001 2002 2002
0
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90 Enron Share Price ($US)
22.2 THE ENRON CASE
© Michael Allison, Trinity Grammar School.Author’s permission required for external use
$-
$10.00
$20.00
$30.00
$40.00
$50.00
$60.00
$70.00
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$90.00 Enron Share Price ($US)
22.2 THE ENRON CASE
© Michael Allison, Trinity Grammar School.Author’s permission required for external use
How could this happen? January 2001 – Enron is America’s 7th largest
company 2000 Revenue = $100.7 billion 2000 Profit = $979 million 2000 Assets = $65.5 billion
November 2001 – Enron is bankrupt
22.2 THE ENRON CASE
© Michael Allison, Trinity Grammar School.Author’s permission required for external use
How could this happen?
There were always key signs that something was wrong with the business
All anyone had to do was analyse and interpret the financial reports a little closer
22.2 THE ENRON CASE
© Michael Allison, Trinity Grammar School.Author’s permission required for external use
In March 2001, Bethany McLean from Fortune Magazine wrote an article questioning whether Enron’s financial statements were correct
Her article was titled “Is Enron overpriced?”
22.2 THE ENRON CASE
© Michael Allison, Trinity Grammar School.Author’s permission required for external use
What did Bethany McLean find? These are direct quotes from the article…Is Enron Overpriced? Fortune Magazine, 5 March 2001 by Bethany McLean
• “While Wall Street firms routinely earn north of 20% returns on their equity--Goldman's ROE last year was 27%--Enron's rate for the 12 months ended in September was 13%. Even less appealing is Enron's return on invested capital (a measure including debt), which is around 7%.”
• “Despite the fact that Enron has been talking about reducing its debt, in the first nine months of 2000 its debt went up substantially. During this period, Enron issued a net $3.9 billion in debt, bringing its total debt up to a net $13 billion at the end of September and its debt-to-capital ratio up to 50%, vs. 39% at the end of 1999.”
• “In 1999 its cash flow from operations fell from $1.6 billion the previous year to $1.2 billion. In the first nine months of 2000, the company generated just $100 million in cash.”
22.2 THE ENRON CASE
© Michael Allison, Trinity Grammar School.Author’s permission required for external use
Anyone with a calculator could have discovered the following worrying financial indicators from the 2000 Annual Report
6%
Gross Profit Margin
1%
Net Profit Margin
2%
Return on Assets
9%
Return on Investment
1.07
Working Capital Ratio
1.04
Quick Asset Ratio
0.17
Cash Flow Ratio
82%
Debt Ratio (Gearing)
• What do these financial indicators mean?
• You will learn them in this chapter.
22.2 THE ENRON CASE
