Letter to the Chief Executive Officer - Research Paper Example

Letter to the Chief Executive Officer 1. LETTER TO THE CHIEF EXECUTIVE OFFICER MEMORANDUM REPORT TO : The Chief Executive Officer From : Financial Consultant Subject : Report on BP-Plc Analysis I am pleased to submit my report on the analysis done with our competitor, BP-Plc, for your information. Highlight of the report is the comparison of performance of the company for 2008 and 2009 to show relative growth of profitability. Using ratios, the performance of the company is also compared with the industry in which we are operating in to find its positioning. Submitted by: FINANCIAL ANALYST 2. THE REPORT Introduction of the company BP- PLC is an international oil and gas company incorporated in 1909. At present, the company operates in more than 80 countries, providing fuel for transportation, energy for heat and light, retail services and petrochemicals products. The company has two operational divisions, one is the exploration and the other is the refining and marketing. It has a market capitalization of 120,365,890,531 Gbp and 80,300 employees as of 2009 Market It has diverse portfolio of energy that serves the needs of households, business and roads. Products and services The company produces products for home consumption are liquefied petroleum gas (LPG) and solar powered energy. For business, company sells Air BP, ARCO aluminum, Aromatics and Acetyls, Asphalt and bitumen, BP crudes, BP franchising, BP shipping, gas and fuel cards, gas and power energy, industrial lubricants, invoice tracking system, and marine fuels and lubricants. On the road products are BP biofuels, gas and fuel cards, gas and petrol stations, route and journey planner, gas and petrol station locator, and target neutral – a non-profit carbon offsetting initiative. FINANCIAL PERFORMANCE FINANCIAL RATIOS Shown below are the five financial ratios used in analyzing performance of the company: the growth, profitability, liquidity, efficiency and leverage. The two years financial performances of the company are gathered and changes are determined to show positive or negative growth in performances. It is also compared with the industry benchmark to know the relative position of BP Plc in the industry. Financial ratios are important tools in analysis to find out viability of the company. Information gathered is used for decision making by investors and problem solving of the management in areas of concerns. In general, it will be observed that the company has acquired negative changes from 2008 to 2009. Exceptions are in the categories of net profit margin, current ratio and dividend policy ratio that earned positive changes during the period. The current ratio which is positive shows strength of the company in paying its short term obligations. It has increased by 13.55% that means it is more in a position to pay its obligations in 2009. The current ratio considers inventories in its calculations (investopedia) Shown below is as chart showing comparison of revenue, net income and profit margin of BP-PLC for 2008 and 2009. Source: http://www.google.com/finance?q=NYSE:BP&fstype=ii Calculations are attached as Annex 1 a. BP Plc revenues in 2009 were much lower in 2009, and went down by 32%. It is way behind the industry that has a benchmark of 11.20%. Consequently, its net income is affected by 5.8% decline. Comparing this figure, the industry benchmark had a much lower net income growth for 2009. b. The gross profit margin, or what remains from sales after company pays cost of goods sold is higher in 2009, showing an increase of 28% from 2008. As a result of operations, company managed to have a higher net margin for 2009, and higher than industry. The net profit margin is an indication of how good the company is in cost control and a good way of comparing companies in the same industry since they are subject to similar business environments.(Investorwords.com) c. BP Plc has no liquidity problems as its current and quick ratios show ability to pay its maturing obligations. It is higher than the industry benchmark. The generally accepted principle is the higher the ratio, or a ratio should be more than one. The quick ratio calculation does not consider inventories because of experiences in turning inventories quickly into cash. (investopedia) A higher quick and current ratio shows company is in a healthy financial situation, which BP-Plc has indicated in its ratios. It has gathered a ratio of more than 1 in both calculations. However, BP-Plc is more liquid in 2008 than in 2009. d. The company’s efficiency in turning inventory slowed down in 2009 showing 53% change from 2008. It has a slower inventory turnover than the industry. Likewise, asset use of the company has gone down in 2009 but is more efficient than the industry. A low inventory ratio shows low sales that keep the cash tied up in inventory that gets in the way of cash flows. e. The present number of employees of the company generates a higher income per employee than the industry. Income per employee is an indicator of management efficiency and looks at the ratio of the number of employees required to maintain that income level. f. A 15% change is noted from the debt/equity of the company, as the D/E went down in 2009. This means that the company has toned down its leverage towards equity and uses less debt in financing its growth. The industry observes the same leverage as it has lower debt than equity. BP PLC KEY FINANCIAL RATIOS 2009 2008 % change industry Growth rates Revenue 246,138.00 367,053.00 -0.329 11.20 Net income 16,759.00 21,666.00 -5.80 -38.90 Profitability Gross profit margin 22.19 17.3 28.26 30.9 Net profit margin 6.80 5.90 15.351 6.7 Return on asset 7.10 9.49 -0.251 6.4 Return on equity 16.49 23.72 -0.305 13.6 Liquidity Current ratio 1.14 0.48 13.55 1.1 Quick ratio 2.50 4.83 -0.53 0.8 Efficiency ratio Inventory turnover 8.43 17.99 -0.53 12.6 Total Asset turnover 1.04 1.56 -0.33 1.0 Income/employee 208,705 n/a n/a 147,946 EPS 0.89 1.15 -0.23 N/A Leverage/gearing ratio Debt/equity 0.34 0.40 -0.15 0.28 Source of data: Google Finance. BP Plc, Financial Statements Conclusions: Based on the financial figures reviewed, the general observation is that the decline in sales and revenue has a rippling effect on the overall performance of the company. Parallel to this is that the industry has also experienced decline in revenues as an effect of the economic downturn. Strength of the company lies on its long years of operations in the industry, efficiency in managing costs of operation, and the healthy financial status of the company. Weakness of the company is shown on declining sales caused by various factors not covered by the study. High inventory is probably one of the reasons as during the economic recession people tend to cut down on over all expenditures. Opportunities are seen in technological advancement as one of the company’s products is the development of solar power energy that goes well with the environmental concerns of sustainable development. Threat to the company is in long term that is seen as the exhaustion of minerals and oil supply which are the main source of company. Likewise, environmental issues like climate change and depletion of natural resources are some threats the company has to reckon with. Annex 1. Calculation for Key Ratios BP-PLC Financial Figures 2009 2008 Revenue 246,138.00 367,053.00 Cost of revenue 190,726.00 302,691.00 Gross profit 54,620.00 63,626.00 Total operating Expenses 219,712.00 331,814.00 Operating income 26,426.00 35,239.00 income before taxes 25,124.00 34,283.00 Income tax Income After Tax 16,759.00 21,666.00 BALANCE SHEET Total current assets 67,653.00 66,384.00 Total Assets 235,968.00 228,238.00 Total Current Liabilities 59,320.00 69,793.00 Total Liabilities 134,355.00 136,935.00 Total Equity 101,613.00 91,303.00 Total Liabilities & shareholders’ equity 235,968.00 228,238.00 Total Common Shares outstanding 18,755.38 18,730.31 PROFITABILITY 1. Gross profit margin Gross Profit ÷ Total Revenue Gross PROFIT 54,620.00 63,626.00 Total Revenue 246,138.00 367,053.00 Gross profit margin 0.221908035 0.173342814 2. NET PROFIT MARGIN Net Income After Taxes ÷ Revenue Net income after taxes 16,759.00 21,666.00 Revenue 246,138.00 367,053.00 0.068087821 0.059026898 Net Profit margin 6.80878 5.9026898 3. Return on asset Net Profit Margin x Asset Turnover = Return on Assets Asset turnover Total Revenue ÷ Average Assets for Period Total revenue 246,138.00 367,053.00 Ave. asset for period 235,968.00 228,238.00 Asset turnover 1.043099064 1.608202841 Net profit margin 6.80878 5.9026898 Asset turnover 1.043099064 1.608202841 Return on asset 7.10223229 9.492722506 4. Return on equity Return on Equity = Net Income/Shareholder's Equity Net income 16,759.00 21,666.00 Shareholders’ equity 101,613.00 91,303.00 Return on equity 0.164929684 0.237297789 ROE 16.49297 23.7297789 LIQUIDITY RATIO 1. Current ratio Current assets divided by current liabilities Current assets 67,653.00 66,384.00 Current liabilities 59,320.00 136,935.00 1.140475388 0.484784752 2. Quick ratio Current assets - inventories/current liabilities Current assets 67,653.00 66,384.00 Inventories 22,605.00 16,821.00 45048 49563 Current liabilities 18,040.00 10,263.00 Quick ratio 2.497117517 4.829289681 3. Operating cash flow Cash flow from operations divided by current liabilities Cash from operations Current liabilities OCF Efficiency ratios 1. inventory turnover Cost of goods sold divided by inventory Cost of goods sold 190,726.00 302,691.00 inventory 22,605.00 16,821.00 Inventory turnover 8.437336872 17.99482789 2 Total Asset turnover Sales divided by total assets Revenue 246,138.00 367,053.00 Total Asset 235,968.00 235,145.00 TAT 1.043099064 1.560964511 3. GEARING RATIO Debt to equity ratio Debt to Equity Ratio = Short Term Debt + Long Term Debt Total shareholders’ equity total debt 34,627.00 36,555.00 Total shareholders’ equity 101,613.00 91,303.00 D/E 0.340773326 0.400370196 EPS= net earnings /ave. common shares outstanding net earnings 16,759.00 21,666.00 outstanding shares 18,755.38 18,739.59 EPS= 0.893556942 1.156198303 P/E= stock price/EPS stock price P/E 4. Sales Growth 246,138.00 367,053.00 -120915 -0.329148652 Net income growth 16,759.00 21,666.00 -120915 -5.580864027 References BP Global. About BP. Viewed 20 April 2010 from http://www.bp.com/bodycopyarticle.do?categoryId=1&contentId=7052055 …. History, Products and Services. Viewed 20 April 2010 from http://www.bp.com/bodycopyarticle.do?categoryId=1&contentId=7052055 Google Finance. BP-Plc, Financial Statements viewed 20 April 2010 from http://www.google.com/finance?q=NYSE:BP&fstype=ii Investorwords. Net Profit margin definition. Viewed 20 April 2010 from http://www.investorwords.com/3260/net_profit_margin.html msn Money Central (2010), BP-PLC Financial Results. Viewed 21 April 2010 from http://moneycentral.msn.com/investor/invsub/results/compare.asp?Page=ManagementEfficiency&Symbol=BP Reuters. BP-Plc Profile viewed 21 April 2010 from http://www.reuters.com/finance/stocks/companyProfile?rpc=66&symbol=BP Read More