VCE Accounting Unit 4

1. 22.2
THE ENRON CASE

2. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 Who was Enron?
Created in 1985
Sold and traded in electricity and gas
Tremendous growth during the mid to late 1990s
22.2 THE ENRON CASE

3. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 By 2001, Enron was America’s 7th largest company with assets valued
at $65.5 billion
22.2 THE ENRON CASE
6.8
21.7
31.3
34.0
42.0
45.0
65.5
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
Apple McDonalds Johnson &
Johnson
Hewlett
Packard
Boeing Disney Enron
2000 Assets in $US Billion

4. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
11,966 13,239
16,137
22,552
29,350
33,381
65,503
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
1994 1995 1996 1997 1998 1999 2000
Enron Assets 1994 - 2000 ($US million)
22.2 THE ENRON CASE

5. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
8,984 9,189
13,289
20,273
31,260
40,112
100,789
0
20,000
40,000
60,000
80,000
100,000
120,000
1994 1995 1996 1997 1998 1999 2000
Enron Revenue 1994 - 2000 ($US million)
22.2 THE ENRON CASE

6. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
440
489 493
105
703
893
979
0
200
400
600
800
1,000
1,200
1994 1995 1996 1997 1998 1999 2000
Enron Profit 1994 - 2000 ($US million)
22.2 THE ENRON CASE

7. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
0
10
20
30
40
50
60
70
80
90
1997 1997 1998 1998 1999 1999 2000 2000 2001
Enron Share Price ($US)
22.2 THE ENRON CASE

8. © 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
$80.00
$90.00
Enron Share Price ($US)
22.2 THE ENRON CASE

9. © 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

10. © 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

11. © 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

12. © 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

13. © 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