Accounting Representation of BangChak and Esso - Essay Example

Accounting representation in private sector: BangChak and Esso Accounting representation in private sector: BangChak and Esso Executive Summary This report presents a comprehensive financial performance evaluation of two Thai oil companies, namely Bangchak Petroleum Company and Esso Public Company Limited. The evaluation of the financial statements and the accompanying information presented therein shows that both the companies, Bangchak Petroleum Company and Esso Public Company Limited follow the TFRSs (Thai Financial Reporting Standards) to prepare their respective financial statements. The evaluation of the financial performance of both companies indicate that Bangchak is in a better position as compared to Esso, as it has been able to show satisfactory performance with respect to majority of the financial ratios calculated. Particularly, Bangchak has been reporting profits on a consistent basis as compared to Esso, which has been suffering from net losses during the past two years due to increased operating expenses. Context and Strategy Analysis The Bangchak Petroleum Public Company Limited operates in the oil, gas, and coal industry. The company is a state owned company, which operates oil refineries and gas stations throughout Thailand. The company has diversified into alternative energy sources (Bangchak Petroleum PCL/The, 2014). The company imports crude oil from Middle East and local sources and process it at its refineries. The competitive landscape is tough and has many companies including Exxon, Shell, Esso, etc. operating in Thailand. For this report, a comparison of the company’s financial performance is made with Esso (Thailand) Public Limited Company. The industry is dominated by the PTT Group which is a state owned company and controls majority of the country’s oil and gas infrastructure. The competition is based on diversification in energy businesses and also building strong customer relationships. Thailand’s economy only grew by 2.9% in 2013 and it is expected to further slowdown in 2014. The company’s business highly depends on global supply of oil and the oil prices, which declined in the last year. Due to scheduled turnaround maintenance by major refineries in Thailand in 2014, the supply is likely to be affected. Customers have low bargaining power as the government regulates prices. However, the local political instability affected sales of the company that has continued in 2014 (Bangchak Petroleum PCL/The, 2014). Overview and Accounting Analysis Both companies have prepared their financial statements in accordance with Thai Financial Reporting Standards (Bangchak Annual Report 2013, 2014; Esso Annual Report 2013, 2014). Furthermore, the company’s disclosures are prepared using guidelines provided by the Federation of Accounting Professions and the Thai Securities Exchange Commission. Both companies prepare its financial statements on a consolidated basis. The company adapted changes in TFRS related to Income taxes, Foreign Currency Translation and Operating Segments for preparing its financial statements for the year 2013 (Bangchak Annual Report 2013, 2014; Esso Annual Report 2013, 2014). The company uses historical cost accounting method for recording values of its assets, and transactions. Interest bearing liabilities are recorded at their fair value. For assets / liabilities classes, where it is not possible to ascertain historical values the company uses judgments. The company calculated depreciation of its assets using a straight-line method over the useful lives of assets based on their costs less residual value, which are subject to scrutiny every year. In some asset classes, both companies recognize impairment in their value on the basis of their recoverable amounts. It also amortized capital leasehold rights on a straight-line method and recognized operating lease payments in the income statement. The accounting strategy of both companies seemed to be appropriate that is to provide true and fair financial information and supporting data. Moreover, it is aimed at providing up-to-date information. Esso has also indicated revised accounting standards, which are expected to affect the financial reporting of the company from January 1, 2014. However, Bangchak has made no such disclosure in its annual report. This may affect the users ability to estimate the impact of changes in the Thai accounting standards on the financial statements of the company. Therefore, the relevance of financial information provided by the company can be questioned. The company made extensive non-financial disclosures with a looking-forward approach and the financial statements are supplemented by detailed information in the notes to financial statements. Based on the information provided in the company’s annual report cash flow projections could be made. However, it could also be suggested that it is not possible to project cash flows from different projects that are in process and therefore, overall cash flow projections could be limited (Bangchak Annual Report 2013, 2014; Esso Annual Report 2013, 2014). There are several potential red flags that can be identified for both companies. These are related to transactions with related parties. Esso provides detailed information about the purpose of these transactions. On the other hand, Bangchak provided limited information. It does not even disclose information on the balance sheet as Esso. Moreover, both companies recognized impairment in values of assets, however, the information lacks details of reasons of impairment. Furthermore, there are certain intangible assets recognized by both companies, which could be subjected to different assessment of their values. For example, Esso has recognized value of software developed and installed by the company. Bangchak made adjustments in their financial statements related to interest differentials. These adjustments are reported in the notes to financial statements as Note 34. On the other hand, Esso made adjustments related to employee benefits. However, there are no disclosures regarding the amount that has been adjusted related to the previous year (Esso Annual Report 2013, 2014). Financial Analysis Common Size Analysis The 5-year common size vertical financial statements of both Bangchak and Esso are provided in Appendix. From the analysis of Bangchak, it could be noted that there was a consistency in the company’s current assets profile over the last five years. Major changes have been observed in the company’s trade and other receivables. The company’s cash position has improved significantly since 2009. However, in 2013 it felt sharply due to the reduction in its operating cash flows. In comparison, Esso had comparatively low proportion of trade receivables, but it held large proportions of inventory in the last five years. Esso reports available for sale assets. Both companies have majority of non-current assets held as property, plant, and equipment. On the liabilities side, both companies hold a large proportion of current liabilities as trade payables. In addition, Esso had significant short-term borrowing as opposed to Bangchak, which relied on long-term borrowing for its projects. The equity analysis indicates that Bangchak has high level of unappropriated retained earnings as compared to Esso. Bangchak’s equity made up 48.3% of the company’s total equity and liabilities. In comparison, Esso’s equity made up only 30.51%. This implied that Bangchak had better leverage condition as compared to Esso. The common size income statement of both companies indicates that Bangchak generated higher gross profit margin as compared to Esso. However, in the last five years the company’s gross profit had a declining trend. It is suggested that oil-retailing companies in Thailand have low margins on their sales as the government regulates the price. On the expense side, Bangchak appeared to have better control over its selling and administrative expenses as compared to Esso. The company also recorded different gains from trading in crude oil that are not part of Esso’s income statement. The company experienced a sharp decline in its net profit in the year 2010 due to sharp decline in the gain from crude oil hedging contracts. On the other hand, Esso recorded a net loss from its operations in the last two years. From the analysis, it could be suggested that Esso faced problems related to its retailing business, which was majorly hit by the political instability in Thailand. Financial Ratio Analysis The current report calculated financial ratios under four categories of ratios including profitability, asset management, liquidity, debt and coverage, and sustainable growth. Each category has different ratios that assist in evaluating the financial performance of both companies. For profitability evaluation, the report calculated ROA, ROE, Gross profit margin operating profit margin, net profit margin and ROCE. For asset management of both companies different efficiency related rations including trade receivables turnover, days of sales outstanding, inventory turnover days of inventory on hand, trade payables turnover, and number of days of payable are calculated. Liquidity of both companies is assessed using current ratio, quick ratio, cash ratio, and operating cash flow ratio. Furthermore, leverage position of both companies is ascertained by using different ratios including debt-t0-assets ratio, liabilities to equity, financial leverage, and interest coverage ratios. From the equity growth perspective, two ratios including dividend payout ratio and sustainable growth rate have been used. Evaluation In this section of the report, a comprehensive analysis and evaluation of the financial performance of Bangchak Petroleum Company has been presented. This evaluation is based on a comparative analysis of Bangchak Petroleum Company and its competitor Esso Public Company Limited. Taking into consideration the activity, liquidity, solvency, profitability and DuPont ratios for a period of five financial years, has performed the evaluation. Activity Ratios The activity ratios calculated for the two companies include trade receivables turnover, days of sales outstanding, inventory turnover, days of inventory on hand, trade payables turnover and number of days payable. The trade receivable turnover has declined for Bangchak Petroleum Company, which in turn indicates that there are longer periods of sales on credit for the company during the period under analysis. On the other hand, Esso has a relatively better receivables turnover. On the other hand, the days of sales outstanding have remained more or less same, which is lower than Bangchak’s days sales outstanding. However, as far as inventory turnover days are concerned, Bangchak has performed better due to the fact that its sales have incurred more frequently as compared to Esso. Liquidity Ratios The liquidity position of Bangchak, as indicated by current, quick, cash and operating cash flow ratios indicate no significant change during the last five years. However, in 2013, the liquidity of the company has improved because the current liabilities of the company declined due to decrease in trade accounts payable in 2013. On the other hand, operating cash flow ratio shows a decline by almost 50 % in 2013 due to significant decline in operating cash flows. Comparing Bangchak’s liquidity position with Esso, it is noted that Bangchak’s position is better than Esso. Esso’s liquidity has constantly shown increasing and decreasing trends during the past five years. Solvency Ratios Bangchak’s solvency position has not changed considerably during the past five years. The primary reason behind this consistency is that with the growth in its non-current liabilities, the company has managed to show more or less equal increment in its assets and equity. However, it is important to note here that the interest coverage ratio in the last four years has ranged between 5.4 and 8.98, which is considerably lower than the ratio determined for 2009, which was 20.18. On the other hand, as far as solvency position of Esso is concerned, the company’s leverage has shown consistent increase during the past five years. This is because the total debt of the company has increased each year due to long-term borrowing and provisions made in the balance sheet. The comparison of the solvency position of the two companies indicate that Bangchak has placed less reliance on debt financing as compared to Esso. Profitability Ratios The profitability ratios for Bangchak indicate that the company has been experiencing decline in its gross, operating and net profit margins during the past five years. However, the return on equity and return on capital employed have remained relatively stable. The primary reason behind decline in profit margins is that the increase in numerators has not been proportionate to the increase in denominators for each profitability ratio. On the other hand, Esso has shown even worse conditions as far as profitability ratios are concerned. Due to the fact that the company has suffered net losses, the return on equity, assets and net profit margin have remained negative in the past two years. However, it is worth noting that although gross margin has also declined but it has not been as significant as other ratios, which indicates that the operating expenses of the company have been the main reason behind the decrease in its operating and net profitability. DuPont Analysis The DuPont ratio, which actually is a breakup of the ratio return on equity, has been determined for the two companies. For Bangchak, the ratio indicates that the profit margin has placed most significant influence on the determination of return on equity for the company. On the other hand, for Esso also, profit margin has played a key role in determining the direction and value of the return on equity. Since the company has shown losses, therefore overall return on equity has remained negative in 2013. List of References Bangchak Annual Report 2013. 2014. Bangkok: The Bangchak Petroleum Public Company Limited. Bangchak Petroleum PCL/The. 2014. [Online] Available at: [Accessed 22 May 2014]. Black, G. & Al-Kilani, M., 2013. Accounting and Finance for Business. London: Pearson. Bragg, S.M., 2002. Accounting Reference Desktop. New York: John Wiley & Sons. Esso Annual Report 2013. 2014. Bangkok: Esso (Thailand) Public Company Limited. Read More