Finance Analysis of British Oil Company - Case Study Example

Finance Analysis British Oil Company Contents Finance Analysis 1 British Oil Company 1 Contents 2 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 7 Inventory Turnover 7 Days Sales Outstanding 7 Fixed Asset Turnover 8 Debt Management Ratio 8 Debt to equity 8 Suggestion 9 Conclusion 9 References 10 Appendices 11 Workings 11 Formulas 13 Introduction The report will focus on ascertaining the financial situation of Bp oil company with the use of key ratio Analysis as well as contrast the company performance with its competitor (Exxon Mobil) in order to establish whether Bp oil company is ideal for investment as depicted the by the state of the company’s profitability, liquidity and efficiency ratios which all of them justify the company’s going concern. Financial Analysis Profitability Ratios Profitability ratio is a ratio that provides managers with important information with regard to company’s income creation and if the shareholders wealth maximization is realized. Operating Margin The operating margin for BP is declining from 2012 to 2015. The implication is that the reduction in operating margin signifies a decline ion shareholders income and thus it will be risk to the company is operating working capatal. With respect to the working capital for Exxon Mobil, it was seen in the table over that the organization revealed an enduring development in overall revenue. This is a result of clients and financial specialists moving from Bp oil to Exxon Mobil, which is the greatest contender for BP oil. Operating Margin %           2012 2013 2014 2015 2016 BP oil 5.00 8.00 4.30 -2.70 -1.10 Exxon Mobil 16.00 16.40 16.40 16.40 16.40 Profit Margin The profit margin for BP is reducing each from the financial 20012 to financial year ending 2016. The decline in net profit is as result of the negative implication because of the detrimental implication of the oil spill, which affected the environment and thus making the stakeholders to and customer to shun from investing in BP Oil. Profit Margin             2012 2013 2014 2015 2016 BP oil 16 18 14 11 14 Exxon Mobil 30 30 30 30 30 ROA The return on Asset for BP oil is declining every year from 3.9 in the year 202 to 0.04 in the year 2016 and below when contrasted with those of Exxon Mobil. This suggests that the organization does not perform well in term of utilizing the shareholders money to acknowledge more comes back to the business. The speculators are wandering in the business tom acknowledge positive returns later on. Exxon Mobil portrays a decay return on resource and beneath those of the mechanical normal. Subsequently, speculators ought not wander in Bp oil since, there return won't be ensured on contributing on the organization's present money related, circumstance ROA             2012 2013 2014 2015 2016 BP oil 3.900 7.740 1.280 -2.370 0.040 Exxon Mobil 13.500 9.570 9.340 4.710 2.350 ROE It was apparent in there table below on return on equity for BP oil that use of equity capital to generate more income to shareholders of BP oil is decline from 10.08 in the year 2012 to 0.012 in the year 2016 and far below as compared to the returns on equity for Exxon Mobil. This implies that the company is not using the shareholders fund effectively to generate more income and hence a growth to shareholders inform of dividend. Shareholders must dievidend approach to ensure that shareholders wealth maximization is guaranteed in the business. ROE             2012 2013 2014 2015 2016 BP oil 10.1 18.9 3.1 -6.2 0.1 Exxon Mobil 28.0 19.2 18.7 9.4 4.6 Price Earnings It was observed that the price earning form BP oil for the financial period 2012 to 2016 was 3.45 and 0.03 respectively. This drastic decline in price earning for Bp oil is below those of Exxon Mobil as much as botht firms depict a general decline price earning because of the oil crisis and the increase in demand for gasoline product. The price earning for Exxon Mobil is decline also due to the constant demand of gasoline product and the implication of oil crisis to oil producing firms. The ramifications of the decrease in price earning are that the share estimation of the organization's stock will decline thus making the investor to disregard from putting resources into the organization. Thus BP must guarantee that it, rebuild its capital blend by concentrating more on obligation capital not at all like interest in value capital. EPS             2012 2013 2014 2015 2016 BP oil 3.450 7.390 1.230 -2.120 0.030 Exxon Mobil 9.700 7.370 7.600 3.850 1.880 Liquidity Ratios Current Ratio The current ratio for BP Oil Company depicts a declining trend each year, which signify that the ability of the company to meet its short-term debt will be at risk. To guarantee effective working capital management, the company must strive to ensure that the current ratio is more than one. Which implies that the amount of current asset existing in the company should be more than current liability, which will all be attainable when the business is having an efficient debts and creditors control management? Current Ratio             2012 2013 2014 2015 2016 BP oil 1.430 1.330 1.370 1.290 1.160 Exxon Mobil 1.000 0.830 0.820 0.790 0.870 Quick ratio The quick ratio for Bp oil from the financial period ending 2012 to 2016 is 0.75 and o.79 respectively while for Exxon Mobil, the quick ratio is declining. The average performance of Bp oil is due to investtment in advertising and improving the company’s corporate image after the devastating effect of oil spill that affect the business operations and company’s image. Quick Ratio             2012 2013 2014 2015 2016 BP oil 0.750 0.870 0.980 0.910 0.780 Exxon Mobil 0.690 0.530 0.500 0.440 0.530 Asset Management Ratios Inventory Turnover The inventory management is an indicator that depict the company perfomance since, an inventory ion inventory turnover wioupd imply growth in sales turnover and hence growth in company’s profitability. With regards to inventory turnover for Bp oil, it was observed in the table below that Bp oil is having an improved inventory turnover while those of Exxon Mobil depicts a decline in inventory turnover. This serious decline in inventory turnover shows how the effect of oil crisis and the constant demand of gasoline in recent years are affecting the oil producing company. Inventory Turnover             2012 2013 2014 2015 2016 BP oil 12.220 11.410 12.990 12.410 10.150 Exxon Mobil 22.730 20.550 18.050 11.440 10.040 Days Sales Outstanding For Bp Oil Company, it delineates an extraordinary normal Amount of day’s sales outstanding and it has been in developing every year while the day’s sales for Exxon Mobil has been decreasing as portrayed in the table beneath. The suggestion is that, BP oil sets aside long opportunity to acknowledge money for good sold while Exxon sets aside the most brief opportunity to acknowledge money for good sold. The effect to BP Oil Company is that there will be a powerful debtors’ management strategy in the organization, which may comprise of the effective organization's of company’s working capital. To limit the effect. BP oil ought to amend its present debtor’s collection period to take the briefest time. Days Sales Outstanding             2012 2013 2014 2015 2016 BP oil 29.860 31.980 28.090 29.400 35.970 Exxon Mobil 25.360 22.640 19.730 21.570 23.630 Fixed Asset Turnover It is evident from the table below that the fixed asset turnover for BOP oil is declining each financial period from 2012 to 2016 as much as Bp oil and Exxon Company depict a decline 9n asset turnover; the asset turnover for Bp oil is much higher unlike those of Exxon Mobil. This is a result of the detrimental effect of oil spill combine with oil crisis and the new demand of gasoline product. Fixed Asset Turnover   2012 2013 2014 2015 2016 BP oil 3.240 3.120 2.710 1.740 1.440 Exxon Mobil 2.180 1.860 1.660 1.070 0.910 Debt Management Ratio Debt to equity Debt ratio value the mix of debt and equity capital for the business that is deem optimal in terms of less costly and with high value to the firm. From the table below, it is apparent that the debt to equity ratio for Bo oil is increasing each year unlike those of Exxon Mobil, which would mean that Bp oil is using more of debt capital unlike equity capital, which is, deem ideal since debt capital is considered cheap unlike equity capital.\ Debt to Equity Ratio             2012 2013 2014 2015 2016 BP oil 0.330 0.320 0.410 0.480 0.540 Exxon Mobil 0.050 0.040 0.070 0.120 0.170 Suggestion After a complete Analysis of the ratio for BP oil and Exxon Mobil, it is evident that the impact of oil crisis and the emergence of gasoline fuel have made both organizations to encounter a decrease in business execution. The business performance of BP oil is performing below those of the Exxon Mobil because of the impact of oil spill that which negative affected the business operation and the company’s corporate image, which made Exxon, the best competitor of BP oil to perform well in the oil market. Conclusion From the financial analysis of BP oil and those of Exxon Mobil, it was evident that both firms depict a decline on financial permanence of the company because of the decline in the oil crisis d the constant demand for gasoline product. The financial performance for Bp oil was drastically affected by the effect of the oil spill, which depict a detrimental effect on the environment, and stakeholders, which eventually lead to shift in the demand of Bp Oil to those of Exxon Mobil. This is the reason why the financial performance for both firms is declining while for BP oil is below those of Exxon Mobil. As a result, BP moil must hold portfolio of diversification in other investment in order to diversify risk and increase business return tom shareholders since, the directors must ensure that shareholders wealth maximization is guaranteed from their investment in the company. References Bagad, S. (2008). Managerial Economics And Financial Analysis. London : Cengage Learning . Böhm, A. (2008). Interpretation of Key Figures in Financial Analysis. New York : John Wiey & Son's. Herriott, S. (2016). Metrics for Sustainable Business: Measures and Standards. New York: Cengage learning . Peterson, P. (1999). Analysis of Financial Statements. London : Pearson Education . Stickney, C. (2009). Financial Accounting: An Introduction to Concepts, Methods and Uses. London : Cengage Learning . Swansburg, R. (1997). Budgeting and Financial Management for Nurse Managers. New York: John Wiley $ Son's. Tracy, A. (2012). Ratio Analysis Fundamentals: How 17 Financial Ratios. London : Pearson Education . Vandyck, C. (2006). Financial Ratio Analysis: A Handy Guidebook. New York: Cengage Learning . Walton, P. (2006). Global Financial Accounting and Reporting: Principles and Analysis. New York : John Wiley & Son's. Warren, C. (2006). Financial & Managerial Accounting - Page 531. London : John Wiley & Son's. Appendices Workings Ratios Shareholders ratios 2014 2015 2016 Return on equity 0.6% 46.3% 50.5% Return on equity 35% 17% 18% Basic EPS 1.23 -2.12 0.04 Diluted EPS 1.23 -2.12 0.03 Dividend per share 17.3 13.2% 12.1% Dividend cover 2.18 178.07 207.31 PE (Price/EPS ratio) 254.96 -122.22 6832.50 Dividend yield 5% 7% 4% Profitability 2014 2015 2016 (1) ROA (Return on Asset) 12.3% 6.5% 6.7% (2) OE (return on Equity) 18.1% 8.6% 9.0% (3) ROCE Return on capital employed 11.3% 9.7% 8.8% Asset Turnover 0.5 0.3 0.2 (1) Net Profit margin 27.3% 21.34% 27.10% (2) Operating profit 0.3% 0.35% 0.38% Gross Profit margin 13.8% 10.7% 13.6% Expenses a percentage of sales       Liquidity 2014 2015 2016 Current ratio 1.37 1.29 1.16 Liquid ratio 1.16 1.12 0.91 Management Efficiency 2014 2015 2016 (1) Inventory holding period 35 48 53 Payable payment period 2 4 5 Receivable collection period 0.13 0.16 0.19 Working capital cycle 33 44 49 Gearing 2014 2015 2016 (1) Gearing 0.4% 0.4% 1.0% (2) Gearing 0.1% 0.2% 0.1% (3) Financial Leverage 0.68 0.76 0.75 Other Ratios 2014 2015 2016 Quality of Profit 0.3 0.4 0.2 DuPont Analysis 2014 2015 2016 Return on equity 12% 6% 6% (4) ROCE Return on capital employed 12% 6% 6% (3)Financial Leverage 100% 100% 101% Check ROE 12% 6% 6% (2) Net profit margin 28% 20% 26% Asset turnover 45% 30% 25% Check ROCE 12% 6% 6% Formulas Ratios 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