Enron Case Study

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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
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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 fees or commissions.

Even the small profits reported by Enron in 2000 were eventually determined to be only a illusion by court-appointed bankruptcy examiner Neal Batson. Batson’s report reveals that over 95% of the reported profits in these two years were attributed to Enron’s misuse of MTM and other accounting techniques. But while financial analysts could not be expected to know that the company illegally manipulated the earnings, the reported profit margins in 2000 were so low and were declining so steadily that they should have merited ample skepticism from analysts about the company’s profits. Table 2. Profitability and Return Ratios for Global Energy Companies32

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