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Edison International (EIX) is one of the major Companies in the power generating industry in United States. As of 2009, it has annual total revenues in excess of $12 million dollars that recently peaked at $14 million in 2008 (YahooFinance, 2011a). Edison International is a conglomerate of three subsidiary Companies namely Edison Company, Edison Mission Energy and Edison Capital which is part of the reason that has led to the current trend of financial performance of the Company. Because EIX subsidiaries are all in the same line of business, it means that the Company is not diversified and therefore very vulnerable from any form of market shocks that are likely to affect the energy industry. This is one of the major reasons why the Company revenue sales and overall profit margins were at their lowest as of 2009 in the wake of the financial crisis that occurred in the same year and one of its weaknesses. However in general, Edison International financial performance is above average compared to other similar Companies in the same industry; this fact is well supported by key financial ratios of the Company that we are going to review shortly.
Theoretically, accurate business valuation process should scrutinize the five indicators of company stability i.e. Income Statement, Balance Sheet, Discounted Cash Flow Valuation, Ratio Analysis and Weighted Average Cost of Capital (WACC) Calculation (Helfert, 2001). The DCF analysis is one of the most important financial indicators used in Company valuation, thus we need to take a closer look at whether the DCF of EIX is relatively strong or weak. DCF is calculated using several models, one of the most common being Free Cash Flow to Equity; because it is calculated using sales revenues figures and net profits we can estimate that the DCF of EIX is going to be strong based on the high ratio of sales revenues versus net profit margin of EIX. Thus, as indicated on the report it is apparent that the share values of EIX are undervalue compared to their market value that is indicated as $38.47.
Other ratios that indicate the stability of EIX Company are the leverage ratios, liquidity ratio, ROE and ROA; the EIX long debt to equity ratio indicates that it is way above the 0.91 industry average which would mean it has enough equity to meet its long term debt commitments. The ROE index as well as the liquidity ratios of the Company is seen to be above average of those set by the industry thereby affirming the stability of EIX. It is thus on this backdrop that I summarize my assessment of EIX company to be above average for other Companies within the energy industry. Indeed, the resilience and stability of EIX financial performance is apparent when we look at it 2009 financial performance which we can see that it was still able to post net profits at a time when most Companies were making losses as well as give dividends to its shareholders. Overall, investment on EIX shares would provide a good return more so when you consider that the share value of the Company are primed to go several notches higher since at the moment they are marginally undervalued.
References
Helfert, E. (2001). Financial Analysis: Tools and techniques: a guide for managers. McGraw-Hill Professional
Yahoo Finance (2011a). Financial Statements. Web.
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