Enron was an energy trading company that grew tremendously in the 1990s to become the 7th largest company in America by 2001 with assets of $65.5 billion. However, in late 2001 it filed for bankruptcy. A journalist had questioned Enron's accounting in early 2001 based on signs like increasing debt, declining cash flows and poor returns. An analysis of Enron's 2000 annual report also revealed worrying financial indicators such as low profit margins, returns and high gearing that suggested problems but were overlooked.

1. 22.2
THE ENRON CASE

2. © Michael Allison, Trinity Grammar School.
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 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.
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 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.
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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.
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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.
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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.
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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.
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$-
$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.
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 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