International Accounting and Finance Issues of Sinopec Corporation - Case Study Example

INTERNATIONAL ACCOUNTING AND FINANCE ISSUES Client Insert Name Client Insert Institution International Accounting and Finance Issues Introduction Financial reporting and accounting is a very critical attribute of any business as it provides a good positional understanding of how an organization is performing in the market. According to Lins (2014), there are many different financial documents and elements that are foundational in the assessment and analysis of business performance of a company to give an overview of its viable prospects and ambitions within the market. In addition to this, accounting and financial details of a company can provide a good comparative understanding of how different companies compare to each other within the market and how this can be used to understanding their standing in the market. There are standards that have been established around the world to guide financial recording systems which is common and standardized so as there is a clear capacity to compare different parts of business so that there is a clear understanding of how different companies perform within their respective markets. This analytical paper uses different financial and accounting units to compare the performance of Sinopec and BP Plc. Financial Ratios Comparison Sinopec Corporation is a large energy and chemical company in China that has operations that span many years of excellence business performance and development. Its main areas of operation include exploration and production, pipeline transportation and sale of petroleum and natural gas, storage, sale, and transportation of petroleum products as well as synthetic fibre (Söhnke & Aretz 2010). In addition to this, the company also operates in areas of coal, chemical products, fertilizer among other chemical products engaging in both importation and exportation and importation of these products across the broad Asian as well as North American region (Sinopec Corporation 2014). On the other hand, BP is a large integrated oil and gas company with extensive operations around the world. Its corporate objective is to create a long-term value for shareholders by helping in the meeting growing demand for energy in a safe and responsible way. The company prioritizes value over volume by actively managing a high-value upstream and downstream portfolio and investing only where it can apply the distinctive strengths, capabilities and technologies that we have built up over decades (BP 2014). Sinopec Corporation Financial Information Principle Financial Data Items RMB Millions RMB Millions Percentage Change 2012 RMB Millions Operating Income 2,825,914 2,880,331 (1.9) 2,786,045 Operating Profit 65 481 96 453 (32.1) 87 926 Profit before taxation 66 481 96 982 (31.5) 90 107 Net Profit attributable to equity shareholders of the company 47 430 67 179 (29.4) 63 496 Net profit attributable to equity shareholders of the company excluding extraordinary gain and loss 43 238 66 658 (35.1) 61 922 Net cash flow from operating activities 148 347 151 893 (2.3) 143 462 Source: (Sinopec Corporation 2014) From this financial data, it can be seen that Sinopec Corporation has a significant operational income surpassing that of BP Plc and this can be attributed to the fact that Sinopec Corporation has specialized and created a niche within its market that enables it to appreciably invest with greater capacity to realize return on investment (Bamberg 2015). Sinopec Corporation Financial Ratios Source: (Sinopec Corporation 2014) BP Plc Financial Ratios Source: (BP 2014) Analysis of the Financial Ratios of the Two Companies Looking at the finacial ratio summaries for the two companies there are some specific ratios that stand out. For instance, the cash return on assets ratio, or simply cash ratio. This ratio accordign to Bodie, Kane & Marcus (2014), compares the way a business is performing among other competitors in the same industry even though the companies under cosnideration are not necessarily operating in the same geographical location. It provides both internal and external understanding of the performance of a busines in comparison to its competitors in the market. The cash ratio of Sinopec Corporation from 2011 to 2014 was 35.23%, 29.09%, 26.56% and 24.55% respectively where as the cash ratio for BP Plc for the same period was 17%, 26%, 32% and 47% (Bamberg 2015). According to Bodie, Kane & Marcus (2014), a high cash ratio usually means that there was a high likelihood that there was a high return on investment for the business. This therefore means that since BP Plc cash ratios are higher than Sinopec Corporation’s for all the years except 2012, it then means that as far as return on investment was concerned, BP Plc performed better than Sinopec Corporation for the time period under consideration. To provide a good comparison of some of the key financial ratios for the two companies, table 1 below summarizes the importance of the ratios for an organization and how the two companies fair on in their respective markets. Table 1: Financial Ratio Comparison between BP Plc and Sinopec Corporation Ratio Formula for Calculation BP PLC Sinopec Corporation Inventory turnover ratio This ratio is calculated by taking the cost of all goods that are sold in a given period and dividing it with an organization’s inventory (Bodie, Kane & Marcus 2014). From the financial records, the company’s inventory turnover ratio declined steadily between 2012 and 2013 after which it started improving and growing thereafter to reach an ultimate high in 2014, higher than it was in 2012. From the financial records, the company’s inventory turnover ratio was stagnant for most of the years under review being held at 11 percent between 2011 and 2013 and sharply increases to 14 percent in 2014 Receivables turnover This ratio is obtained by dividing revenue by receivables within the company’s business operation (Weston 2010) Just like the inventory turnover ratio, the company’s receivables declined between 2012 and 2013 and in the next phase of the business between 2013 and 2014 they improved. There is no significant growth or decline in the receivables turnover for the company as the ratio remains relatively stagnant tied at 13 percent throughout the period under consideration Payables turnover This ratio is calculated by taking the cost of goods that are sold and dividing it by the payables that are received thereof The company’s payables turnover experienced steady increase between 2012 and 2013 as well as between 2013 and 2014 The case was the same for this company as there was a steady increase in the payables turnover throughout the period of review for the company Working capital turnover This ration is calculated by taking the total revenue for an organization and dividing it with the working capital for the business (Groppelli & Nikbakht 2014). There was a noticeable increase in the working capital turnover for the company in the first two years but this was then followed by a slight dip in performance in the last sections of the 2014 fiscal year The working capital turnover for the company experienced a steady growth throughout the period under review becoming an indication of the successes that the business was experiencing in its business investment fortunes Average inventory processing period ratio This ratio is calculated by taking the number of days in a given period and dividing it with the inventory turnover over the same length of days taken for the same period. The company’s average inventory processing period declined from 2012 to 2013 and started to improve through 2013 and 2014 to levels that were higher than those experienced in 2012. The company’s average inventory processing period increased from 2012 to 2013 and started to decline through 2013 and 2014 to levels that were lower than those experienced in 2012 Average receivable collection period ratio This ratio is computed by taking the number of days in a given period and dividing it by the turnover for the same number of days within the same period (Williams, Haka, Bettner & Carcello 2014) The company’s average receivable collection period had challenges from 2012 to 2013 experiencing extensive deterioration but the case improved in 2013 and 2014 where the ratio increased to exceed the levels that it was in 2012 The company’s average receivable collection period had challenges from 2012 to 2013 experiencing extensive deterioration but the case improved in 2013 and 2014 where the ratio increased to exceed the levels that it was in 2012 Cash conversion cycle According to Weygandt, Kieso & Kell (2009), this is a financial metric that is used in the measurement of the length of time that is required for an organization to convert cash that is invested in its operations to tangible cash that can be accrued for business investment. This ratio is calculated by taking the average inventory processing period and adding it to average receivables period of collection and deducting from this sum the average payables payment period (Bodie, Kane & Marcus 2014). This ratio for this company declined between 2012 and 2013 and started to take up momentum thereafter in 2013 and 2014. The same was the case for this company as there was a slow start of this ration in 2012 and 2013 but between 2013 to 2914, there was a notable increase and growth Comparison of Financial Statements for BP and Sinopec Corporation Financial statements and recording is an important attribute of any business that determines how effective financial reporting ought to be done. In this regard, the financial statements for BP and Sinopec Corporation as has been indicated in the preceding section have many similarities given that the companies are largely similar in their business operations and nature of governance. According to Söhnke, Brown & Conrad (2011), similarly run and managed organization have similar financial statement attributes and share the financial standing of worth of their business in the market. As regards these two organizations, the content of the financial statements that are used in the financial reporting is largely similar having many vote heads that are similar and related to each other in one way or another. Despite these similarities, there are also a number of differences that can be observed from close analysis and review of the statements and some of the key areas that show difference and similarities in the financial statements of the two firms include the following: Letter and accomplishments – given that the two companies are involved in energy industry to varying degrees, they are also involved in corporate social responsibility to differing degrees. In this regard, BP has a larger non-profit making program that it runs in support for the community within which it operates as compared to Sinopec Corporation. Despite this difference, both the financial statements for the two companies start with a letter from the CEO of the respective companies as a way of showing the authority that is responsible for the financial performance of the business (Yonker, McGinty & Donaldson 2002). This is slightly different from what is observed for non-profit organizations which usually start with accomplishments where the report provides an overview of the objectives and things that are important to the business. Budgets and Cash Flows – this refers to the section of the financial report that provides the general manner in which cash flows within the organization providing a view of how well the organization manages its resources, those pertaining to both incoming and outgoing resources as a well of showing investors and shareholders credibility and authenticity (Scott 2012). Both of the reports for the two companies have budgetary estimates as well as cash flow projections within their financial statements and as indicated in the financial ratios, they show that they are well performing in the market. Objectives and Goals – this section of the financial records indicate the objectives and goals that are important for the respective organization. At the start of the BP Plc financial report, it provides a brief review of the objectives and goals of the company in its business and niche market. This is different from the Sinopec Corporation, the objectives and goals of the business are not indicated at the start of the business but instead provide them mid way through the report. Financial Predictions – this is another element of financial statements that usually accompanies some financial reporting strategies for companies where it gives the reader about the financial projections intended for the company in the coming days (Scott 2012). For Sinopec Corporation, there is no clear cut projected business revenue generation based on new products and business frontiers which is quite different from the case with BP Plc which has a detailed indication of the new products that they are lining up for business in future. From a broader point of view, both of these companies have largely presented their financial report in accordance to the recommendations of the International Financial Reporting Standards (IFRS). According to Weetman & Gordon (2008), this is a global system for reporting business affairs for organizations as a way of ensuring uniformity in company accounts around the world. This system establishes basic harmonized approaches and content that are required by legislation and protocol to be used for companies when making financial reports so that they can be understood across the whole world. These guidelines are mostly applied in the financial statements which present a structured perception of information that show the position of a company in the market as well as indicating the financial performance of the organization (Cutlip 2014). In this regard, there are important pieces of information that IFRS requires in order to meet this objective and these pieces of information include the following: Assets for the respective company Liabilities for the respective company Equity for the respective company Income and expenses for the respective company Cash flows for the respective company Profits and Losses for the respective company Limitations of Financial Reporting and Analysis Financial reporting as has been explained in the preceding discussion and under the guidelines of IFRS is very key in understanding how different companies compare to each other in their respective performance in the market. Despite this great convenience that these reporting system provides, there are inherent limitations that make it difficult to fully exploit the benefits that the system can bring to the understanding of business performance especially when comparing companies that are operating in different countries and market areas (Weetman & Gordon 2008). In this regard, the following are some of the key limitations that can be associated with financial records and reporting particularly as have been applied in the case of these two companies that are operating in different countries and markets: They rely on historical costs – when reviewing balance sheet, the value of assets and liabilities are usually based on previous experiences without the appreciation that over time these values actually change appreciably and this means if most projections are based on historical costs, the financial statement may be misleading and limiting in their accuracy in being appropriate tools for comparison (Weetman & Gordon 2008). Effects of inflation – fluctuation in inflation affects the amounts that are associated with liabilities and assets. When there is a high rate of inflation, the costs for assets and liabilities would be appreciably low and this may create a wrong impression about the financial standing of the companies unless there is an appropriate adjustment for inflation (Buzzell & Gale 2014). Lack of recording of intangible assets – there are cases where financial statements do not take into account intangible assets even when they are costly to record them as asset while at the same time recording any expenditures incurred while creating an intangible asset. When this is consistently engaged, there can be a drastic underestimate of the value of business especially those that may be spending considerable amount of money in the building of a brand image or in developing of products (Weetman & Gordon 2008). This is particularly so for the case of the case of manufacturing companies such as BP Plc and Sinopec Corporation which engage a lot of resource in the development of their end products that are largely considered intangible. Specificity to a given time period – financial statements are usually prepared based on a given financial statement this means that they should be viewed and studied based on the specific details of what happened during that time period. This means that when one looks at financial statements at a glance they may end up having a wrong impression of financial results or cash flows of a given business for a given reporting period as this period may have an appreciable variation in the normal operating results for the business (Mulcaster 2009). Different periods of time have different and unique attributes that it would be erroneous to assume that a business reacts the same way at all times throughout business operational times. This is a limitation that financial statements have from time to time. Inability to be comparable across different companies – this is a general limitation for financial statements as they do not always provide a comprehensive capacity for comparing the results of different companies. This is particularly so because different companies use different accounting practices which make it difficult to wholly compare financial performance across different business models and experiences (Alexander, Britton & Jorissen 2005). Lack of indication of non-financial issues – the performance of an organization in a given market is not solely determined by its financial position and resources. There are a number of non-financial issues that are important in explaining how organizations operate and perform in the market and of the key issues that needs to be understood and appreciated is governance (Dodd & Benjamin 2014). In most financial reporting, there is no documentation of such issues of governance that may provide an understanding of how an organization operates in the market since a business that is doing excellently in its financial performance may be doing woefully in these areas (Son 2010). Comparison of the Share price over the last 12 months to 31 December 2015 for the two companies The most foundational importance of business strategy is to cause change within an organization and ensure that objectives and goals that are set are met in their entirety. According to Buzzell & Gale (56), good business strategy helps an organization respond to specific changes within the organization’s operations so as to move from a worse position to a better position as established in the objectives and goals of the organization. In this specific case, appropriate strategies are required to be customized to the developments within the Greatest Image Company especially as regards its financial leverage and improvement. This paper therefore provides suggestions strategy implementation approaches that would address three strategic priorities identified for the firm which are as follows: 1) Decreasing the company debt; 2) Increasing the company’s P/Q rating; and 3) Repurchasing stock. Strategy for Decreasing for the Company Debt In order to leverage a company’s financial performance within the market, it is paramount to ensure that debt ratio is maintained at a constant minimum at all times. From the financial records provided, the company has an annual L-T debt drawn against credit line not due of $28932 which is significant for the business and requires to be reduced. The first strategy is to re-think saving strategies for the company and focus more on working under a strict budget (Buzzell & Gale 182). This strategy requires basic budgeting skills that ensure that only the key things important for the running of the business are spent on. The second strategy is to move away from the practice of using cash rather than credit cards in its operations. With this practice, it is easier to control expenditure based on the available money rather than the money that is not at hand which causes accumulation of debt (Mulcaster 73). The last strategy is to ensure that the company expenditure is focused on the habits within the organization regarding the success of the business. The Main Financial and Accounting Issues Faced by the two Companies There are different challenges that are finance and accounting related that these two companies continue to face from time to time. BP for instance, it greatest financial challenge comes from a disaster that occurred five years ago which has continued to have financial implications half a decade later. According to Bamberg (2015), there have been many lawsuits that have been filed after the BP Deepwater Horizon Oil Rig exploded killing eleven people and discharging over 3 million barrels of oil into the ocean for 87 days. Businesses and workers who suffered from the disaster in Louisiana, Alabama, Texas, Mississippi and Florida filed for many different lawsuits wanting compensation for various injuries they received on their businesses and society as a result of the accident. SWOT Analysis for BP Plc in the wake of its Financial Position in the Market Strengths The company is one of the largest player in the oil/gas industry around the world It is the most profitable company in the world within the industry It has high quality operations and an extensive geographic reach around the world It has a very strong brand that is known around the world Weaknesses There are extensive environmental hazards that the company has to contend with from time to time which have financial implications Due to the increased criticism of environmental protection, the firm is now reaching its maturity with declining production margins Opportunities Globally increasing fuel/oil prices promises good business for the firm The natural gas market and export markets around the world are increasing promising better business The company is investing in alternative sources of energy as well as other alternate businesses Threats Governments are increasing in their regulations There are many environmental regulations There is an increasing level of operational costs as well as competitors around the world On the other hand, Sinopec Corporation has had less financial problems over the years experiencing a steady growth and development of its business. Given that the firm is well established within its market, its financial performance has been well accustomed to its niche market which makes it operation effective and sustainable (Aizhu 2015). A look at its SWOT analysis indicates that the firm has greater capacity to even perform better and grow its brand to greater heights as indicated below. Strengths The company is very dominant in the domestic market The company has invested well in strong technologies for its business The company has vertically integrated operations Weaknesses The company depends on third-party raw materials suppliers which limits its business flexibility There are declining oil reserves in the country and around the world Opportunities The economy of China is growing promising good business for investors There is room for greater investment to meet the ever increasing energy demand in China There is room for strategic mergers, acquisitions and joint ventures in the market Threats There is a lot of government regulation limitations There are many environmental laws and regulations that infringe on the business There are many operational risks in the business Bibliography Aizhu, C. 2015. China's Sinopec The Model of Asian Conglomerate Business. Beijing: Sage. Alexander, D., Britton, A. & Jorissen, A. 2005. International Financial Reporting and Analysis. 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New York: McGraw-Hill Irwin. Yonker, L., McGinty, C. & Donaldson, D. 2002. The Kingdom Currency. New York: Sage. Read More