Finance Analysis for British Petroleum Oil Corporation - Case Study Example

Finance Analysis for BP Oil Corporation Contents Finance Analysis for BP Oil Corporation 1 Introduction 3 Financial Analysis 3 Profitability Ratios 3 Operating Margin 3 Profit Margin 4 ROA 4 ROE 5 Price Earnings 5 Liquidity Ratios 6 Current Ratio 6 Quick ratio 6 Asset Management Ratios 6 Inventory Turnover 6 Days Sales Outstanding 7 Fixed Asset Turnover 8 Debt Management Ratio 8 Debt to equity 8 Recommendation Overall 9 Summary of Findings 9 Bibliography 11 Appendices 12 Introduction The report focusing ascertaining the financial performance for British Oil Corporation. The chosen rations will be worked out and contrasted with other oil companies like the Exxon Mobil. This will provide a comprehension of the firm’s profitability, financial risk, earning as well as the company’s cash flow for the last four financial periods. By contrasting the British in oil with similar company in oil industry, the report intends to provide a just and equitable perception of the previously mentioned ratios. The ratio examines as well as benchmarks the company’s performance to provide an insight to whether to invest in BP oil or not with regards to business viability. Financial Analysis Profitability Ratios Operating Margin The operating margin for BP oil for the financial period ending 2016 is -1.1 while the trend in Operating margin has been declining each year from 2012 to 2016. this negative value is as a result of the loss in oil spills. Operating Margin % 2012 2013 2014 2015 2016 BP oil 5 8 4.3 -2.7 -1.1 Exxon Mobil 16 16.4 16.4 16.4 16.4 The earning for Exxon Mobil was very high as compared to those of BP oil. It is evident in the table above that the company depicts a growth in operating margin. The overall industry depicts a growth in operating margin while for BP it was decline. As a result, BP oil must struggle to ensure that the company reputation is not at risk by ensuring that the company improves its reported sales level each year. Profit Margin It is evident from the table below that THE PROFIT MARGIN FOR Bp oil is decline each year and below those of Exxon Mobil. The drastic effect of oil spill will take BP oil to improve on its financial performance[Jop12]. It is therefore advisable that BP oil to manage its operating cost to grow their report earning and ensure that the reported profit is more than those of the industrial average are. Profit Margin 2012 2013 2014 2015 2016 BP oil 15.8 17.8 13.8 10.7 13.6 Exxon Mobil 30.4 30.4 30.4 30.4 30.4 ROA The return for ABP oil is declining each year and far below as compared to those of Exxon Mobil. The implication is that the company does not perform well in term of using the shareholders capital to realize more returns to the business. The investors are venturing in the business tom realize positive returns in the future. Exxon Mobil depicts a decline return on asset and below those of the industrial average. As a result, investors should not venture in Bp oil since, there return will not be guaranteed on investing on the company's current financial, situation. ROA 2012 2013 2014 2015 2016 BP oil 3.9 7.74 1.28 -2.37 0.04 Exxon Mobil 13.5 9.57 9.34 4.71 2.35 ROE The ROE for BP oil depicts a declining trend from 2102 to 2016. The return on equity for Exxon Mobil is decline as well but it is above those of BP oil. The implication is that the ability of the company to use the equity capital to realize more returns in the business sis declining which is risky to the business. As result, BP oil must reconsider on the best investment alternative that will guarantee no oil spillage, improve corporate governance and business re-structuring strategy in order to ensure that the company’s corporate image is improving in the market. ROE 2012 2013 2014 2015 2016 BP oil 10.08 18.93 3.14 -6.22 0.12 Exxon Mobil 28.03 19.17 18.67 9.36 4.64 Price Earnings The price earning for BP oil is declining from 2012 to 2016. This is because of the decline in reported net profit and deceline in business operation and the cost incurred because of oil spill. The price earning for Exxon Mobil is as well declining but it is above those of the BP oil. This implies that a decline in price earning will lead to a decline in value of the company’s share price in the market[Gru12]. To ensure that BP oil is having an improved price earning, the company must shift from investing in stocks and marketing more on bonds as form of debt capital to finance the business operations. EPS 2012 2013 2014 2015 2016 BP oil 3.45 7.39 1.23 -2.12 0.03 Exxon Mobil 9.7 7.37 7.6 3.85 1.88 Liquidity Ratios Current Ratio The current ratio for BP oil is above those of the Exxon Mobil as much as they are decline from 2012 to 2016. The reason for the decline is because of the increase in the demand for gasoline, which is steady in growth. As a result, BP oil must venture more in promoting the company and its new strategy after the serious impact of oil spill on company’s financial performance. The company must as well invest in bond to ensure that there is sufficient, optimal capital mix for the business. Current Ratio 2012 2013 2014 2015 2016 BP oil 1.43 1.33 1.37 1.29 1.16 Exxon Mobil 1 0.83 0.82 0.79 0.87 Quick ratio The quick ratio for BP is somehow improving each year while for Exxon Mobil; it is below those of the BP oil company. This signifies an indication of business expansion possibilities for BP oil. In this regards. The company must focus on venturing more on marketing the company and its new strategy that focus more on sustianbility compliance. Quick Ratio 2012 2013 2014 2015 2016 BP oil 0.75 0.87 0.98 0.91 0.78 Exxon Mobil 0.69 0.53 0.5 0.44 0.53 Asset Management Ratios Inventory Turnover The Inventory turnover rate for BP and Exxon Mobil are both decline with the inventory turnover for BP oil being lower than those of Exxon Mobil are. The decline in inventory turnover is an indication of the decline in sales for the business which not ideal since it depict how the business performance is declining each year. Inventory Turnover 2012 2013 2014 2015 2016 BP oil 12.22 11.41 12.99 12.41 10.15 Exxon Mobil 22.73 20.55 18.05 11.44 10.04 As a result, to ensure that there is improved inventory turnover, the company must ensure that market its product as well as device the best strategyy toe ensures that there is an affective inventory management. Days Sales Outstanding The DSO or days sales outstanding depict the average amount that BP oil and Exxon Mobil anticipate to acknowledge the cash for goods sold. The days sales for BP oil has been growing each year while those of Exxon Mobil has been declining from 2012 to 2015 as observed in the table below[Cly09]. This depicts that both firm waits much longer to acknowledge cash. This is not ideal since, a growth in days sales outstanding would lead to ineffective debtors management and thus the working capital of the company may not be guaranteed and so is the going concern assumption for the company. Days Sales Outstanding 2012 2013 2014 2015 2016 BP oil 29.86 31.98 28.09 29.4 35.97 Exxon Mobil 25.36 22.64 19.73 21.57 23.63 As a result, Bp oil must revise its debtors control by ensuring that debtors takes the shortest time possible to pay for good sold while the company takes long time to pays its creditors, in doing so, the working capital management will be guaranteed hence, the company will be in a position of paying its debt as and when they fall due for repaying. Fixed Asset Turnover The Fixed asset turnover for Bp is decline from 2012 to 2016 as observed in the table below. This would imply that the ability of the company to use its asset to generate income is decline and hence it is not recommended since, the company will be forced to incur the redundant cost of some fixed asset since, they are not effectively used to generate more income. Fixed Asset Turnover 2012 2013 2014 2015 2016 BP oil 3.24 3.12 2.71 1.74 1.44 Exxon Mobil 2.18 1.86 1.66 1.07 0.91 Debt Management Ratio Debt to equity This ratioap apriase the effective of capital mix of the company in term of the amount size of equity and debt capital. From the table below, it can be observed that the debt to equity ratio for BP oil is growing each year fromm2012 to 2016, which is a good sign of capital management effeciency. An ideal source of capital would be to use more of debt capital unlike equity since, debt capital is deem the cheapest source of finance for the business. Debt to Equity Ratio 2012 2013 2014 2015 2016 BP oil 0.33 0.32 0.41 0.48 0.54 Exxon Mobil 0.05 0.04 0.07 0.12 0.17 As a result Bp oil must focus on increasing the debt capital whilst observe the industrial debt to equity level[Rus97]. This is because, an investor would wish to invest in a business with high debt capital unlike those of the industrial average which is not the case for both Bp oil and Exxon Mobil as a result of the effect of oil crisis of the year 2010.. Recommendation Overall From the above financial analysis for Bp oil and for Exxon Mobil, it is evident that there has been a decline in the liquidity ratio, profitability ratio as well as efficient ratio for both firms and we anticipate that the shall still be a decline in the overall business operation for Bo oil and Exxon Mobil. As a result, the company must focus on holding a portfolio of asset in order to diversify the risk whilst at the same time focus more on marketing the company and re-engineering the entire business operation for Bp oil. Summary of Findings The wide perception of Bp oil is that the company is constantly growing because of the recent increase in demand for oil. The financial performance for BP, Exxon Mobil and the industrial average were declining on average. There is a result of huge oil spill and the serious concern for sustainability compliance by all oil producing companies. The factors that led to a serious decline in financial performance for Bp oil is because of oil sill that cost detrimental damages to both aquatic life and the enviroment. this effect made BP oil to incur million of dollars for cleaning up the environment as well as investing more on business re-engineering and marketing in order to win back the public trust on company business situation and its new strategy on sustainability compliance. The integrated oil market is very competitive; more specifically if the firm is international. Bp oil was a leading oil company globally prior to the oil spill. The effect of the oil spill made the company's client as well as investors to shift to its main competitor Exxon Mobil. The oil market is growing since refined oil is becoming a necessity in our lives. We may be keen on venturing on BP oil since the company is experience a drastic measure with regards to financial perfomance and concern for environment after the oil spill. Even though , in looking at the boomers, Exxon Mobil is more steady unliek Bp oil, but the price earning for BP oil is declining while those for Exxon increases. Investors still believe that Bp oil is a company worth investing since, the negative financial position is merely because of the cost incurred in cleaning the ocean and the environment because of oil spill, which is short terms business decline in performance. Bibliography Jop12: , (Coetzee, 2012), Gru12: , (Grudnoff, 2012), Cly09: , (Stickney, 2009), Rus97: , (Swansburg, 1997), Appendices Profit Margin 2012 2013 2014 2015 2016 BP oil 15.8 17.8 13.8 10.7 13.6 Exxon Mobil 30.4 30.4 30.4 30.4 30.4 ROA 2012 2013 2014 2015 2016 BP oil 3.9 7.74 1.28 -2.37 0.04 Exxon Mobil 13.5 9.57 9.34 4.71 2.35 EPS 2012 2013 2014 2015 2016 BP oil 3.45 7.39 1.23 -2.12 0.03 Exxon Mobil 9.7 7.37 7.6 3.85 1.88 ROE 2012 2013 2014 2015 2016 BP oil 10.08 18.93 3.14 -6.22 0.12 Exxon Mobil 28.03 19.17 18.67 9.36 4.64 Liquidity Ratios Current Ratio 2012 2013 2014 2015 2016 BP oil 1.43 1.33 1.37 1.29 1.16 Exxon Mobil 1 0.83 0.82 0.79 0.87 Quick Ratio 2012 2013 2014 2015 2016 BP oil 0.75 0.87 0.98 0.91 0.78 Exxon Mobil 0.69 0.53 0.5 0.44 0.53 Asset Management Ratio Inventory Turnover 2012 2013 2014 2015 2016 BP oil 12.22 11.41 12.99 12.41 10.15 Exxon Mobil 22.73 20.55 18.05 11.44 10.04 Days Sales Outstanding 2012 2013 2014 2015 2016 BP oil 29.86 31.98 28.09 29.4 35.97 Exxon Mobil 25.36 22.64 19.73 21.57 23.63 Fixed Asset Turnover 2012 2013 2014 2015 2016 BP oil 3.24 3.12 2.71 1.74 1.44 Exxon Mobil 2.18 1.86 1.66 1.07 0.91 Debt Management Ratio Debt to Equity Ratio 2012 2013 2014 2015 2016 BP oil 0.33 0.32 0.41 0.48 0.54 Exxon Mobil 0.05 0.04 0.07 0.12 0.17 Formulae Shareholders ratios Measurement   Numerator   Denominator Return on equity %   Profit attributable to equity holders   Equity attributable to owners of the parent (exclude non controlling interests) Return on equity %   Comprehensive Income   Equity attributable to owners of the parent (exclude non controlling interests) Basic EPS pence         Diluted EPS pence         Dividend per share pence   Total ordinary dividends   No. of equity shares Dividend cover no. of times   Profit attributable to equity holders   Total ordinary dividens PE (Price/EPS ratio) no. of times   Market price per share   Earnings per share Dividend yield %   Dividend per share   Market price per share Profitability Measurement   Numerator   Denominator (1) ROCE Return on capital employed %   Profit before interest and tax (PBIT)   Capital Employed (2) ROCE Return on capital employed %   Profit before interest and tax (PBIT)   Capital Employed (3) ROCE Return on capital employed %   Profit before interest and tax (PBIT)   Capital Employed Asset Turnover no. of times   Revenue   Net Assets (1) Net Profit margin %   Profit before interest and tax (PBIT)   Revenue (2) Net Profit margin %   Profit before interest and tax (PBIT)   Revenue Gross Profit margin %   Gross Profit   Revenue Expenses a percentage of sales %   see Vertical Analysis of Income Statement Liquidity Measurement   Numerator   Denominator Current ratio no. of times   Current assets   Current liabilities Liquid ratio no. of times   Current assets less inventories   Current liabilities Management Efficiency Measurement   Numerator   Denominator (1) Inventory holding period no. Days   Inventories   Cost of sales (2) Inventory holding period no. Days   Average inventories   Cost of sales Payable payment period no. Days   Trade payables   Credit purchases Receivable collection period no. Days   Trade receivable   Credit sales Working capital cycle     Inventory hold.period+receivable collection period-payable payable period Gearing Measurement   Numerator   Denominator (1) Gearing %   Debt (current and non-current borrowings)   Equity (total equity= parent+non-controlling interests) (2) Gearing %   Net debt   Equity (total equity= parent+non-controlling interests) (3) Financial Leverage no. of times   Capital Employed (Net Assets)   Equity (4) Financial Leverage no. of times   Net Asset (Total assets less current liabilities)   Equity Interest cover no. of times   Profit before interest and tax   Interest (finance costs) Other Ratios Measurement   Numerator   Denominator Quality of Profit no. of times   net operating cash flow   Operating profit DuPont Analysis Measurement   Numerator   Denominator Return on equity %   Net Profit   Equity (4) ROCE Return on capital employed %   Net Profit   Capital Employed (3)Financial Leverage no. of times   Capital Employed (Net Assets)   Equity Check ROE     (4) ROCE X (3) Financial Leverage (2) Net profit margin     Net Profit   Revenue Asset turnover     Revenue   Net Assets Check ROCE     (4) Net Profit Margin X Asset turnover Read More