Comparison of the Financial Standing of Companies Generating Electricity from Renewable Sources and Fossil Fuels: A New Hybrid Approach

Abstract

Companies operating in the energy sector are under pressure to boost the level of green energy production. The use of renewable energy sources will have a positive impact on the environment, but the basic question is whether power plants that produce electricity using renewable energy sources are in better financial condition than those that use only traditional energy sources. We address the latter using a new hybrid approach that extends prior research by combining three analyses: ratio analysis with a large set of indicators, the Altman model and cluster analysis. To test the statistical significance of differences between groups, Student’s t-test is applied. The sample concerns companies from the Baltic States and Central Europe in the years 2008–2017. The results indicate that in most cases there is no statistical difference in the financial standing of companies that use renewable energy sources and those that generate only fossil fuel-based energy.

Is Investing in Companies Manufacturing Solar Components a Lucrative Business? A Decision Tree Based Analysis

“…We define six samples, both balanced and unbalanced samples and comprising large and small samples of companies and 25-fold cross-validation, which does not significantly improve the results. The literature reports on RES companies, with most of the existing literature related to power plants [21,22], electric utilities [24] or energy companies [30]. Our results are similar to other studies of RES companies.…”

“…Our results are similar to other studies of RES companies. On the basis of certain financial ratios, we find that green companies underperform red companies [21,22]. Our contribution lies in addressing the lack of studies that assess the relative financial performance of companies that provide equipment needed for renewable energy production.…”

“…The impact of legislation on electricity future contracts in examined by Reference [17]. Studies also investigate the financial performance of firms operating in the energy sector [18][19][20][21][22]. For example, Capece et al [18] focus on changes in the performance of the natural gas retail markets and analyze the financial statements of 105 companies by performing cluster analysis.…”

“…Based upon ratio analysis, Paun [21] concludes that RES companies are close to financial distress. Tomczak [22] investigates whether powerplants that produce electricity using renewable energy sources are in a better financial position than those that rely upon traditional (fossil fuel) energy sources using a sample of companies in Baltic and Central European countries, comprising a total sample of 37 companies. In order to assess financial performance, he considers a total of 16 ratios indicative of four aspects, namely liquidity, profitability, turnover and debt-ratios that are used in bankruptcy prediction.…”

“…Also, fossil fuel companies were found to be characterized by higher profitability but lower turnover ratios. Tomczak [22] concludes that investing in RES companies is not profitable business. Our study is similar to these studies; we also consider financial ratios, through the use of DTs, we identify and then analyze financial ratios to gain an insight into the performance of green companies.…”