British Petroleum Financial Analysis - Example

British Petroleum Financial Analysis Student’s Name Instructor’s Name Course Code and Name University Date of Submission: British Petroleum Financial Analysis Introduction BP one of the largest petroleum companies by market share in the oil and gas industry. It is listed in both the London Stock Exchange and New York Stock Exchange where its shares are traded and constitute the FTSE 100 index. More so, as at 2012 the company was the largest company trading in the US stock market based on market share (BP 2012, p. 5). The company is involved in exploration, extraction, refining and distribution of petroleum products in the 80 countries it operates. The company also operates service stations across the world where they sell gasoline to customers. The aim of this research paper is to analyze the consolidated financial statements for the years 2008 to 2011 of BP by carrying out a trend analysis as well as financial ratio analysis. The analysis would be provide valuable information that would aid analyze the asset efficiency, profitability, liquidity, market performance and capital structure of the company. Trend Analysis The trend analysis would involve a vertical analysis of consolidated financial statements for BP with year 2008 being the base year for comparison of the changes reflected through the years. Item 2008 2009 2010 2011 Total revenues and other income 367,700 246,138 308,928 386,463 Profit(loss) before interest and taxation 35,239 26,426 (3,702) 39,817 Finance costs 1,547 1,110 1,170 1,246 Profit(loss) before taxation 34,283 25,124 (4,825) 38,834 Net profit (loss) for the year 21,666 16,578 (3,719) 26,097 Total Assets 228,238 235,968 272,262 293,068 Total liabilities 136,129 133,855 176,371 180,586 Total equity 92,109 102,113 95,891 112,482 Trend analysis 2008 2009 2010 2011 Total revenues and other income 100% 67% 84% 105.1% Profit(loss) before interest and taxation 100% 75% -10.5% 113% Finance costs 100% 71.8% 75.6% 80.5% Profit(loss) before taxation 100% 73.3% -14.1% 113.3% Net profit (loss) for the year 100% 76.5% -17.2% 120.5% Total Assets 100% 103.4% 119.3% 128.4% Total liabilities 100% 98.3% 129.6% 132.7% Total equity 100% 110.9% 104.1% 122.1% From the vertical analysis the trend in the financial items of interest is almost the same as it shows elements of growth and decline for the period under analysis. From the consolidated income statements for BP in the period 2008 to 2011 the total revenues decreased from 100% in 2008 to 67% in 2009 and later increased to 84% in 2010 and settled at 105.1% in 2011. This shows that the company’s revenue elements have been on an upward trend since 2009 as increased revenues were recorded. Gross profit/loss recorded 75%, -10.5%, and 113% in 2009, 2010 and 2011 respectively. The negative growth of -10.5% represented the loss of $3.702 billion incurred by the company in 2010. The financing costs reported in the income statements declined in 2009 to 71.8% but increased to 75.6% and 80.5% in 2010 and 2011 respectively. This had the impact of increasing the operating expenses and reducing the earnings before taxation. Profit before taxation over the period declined in 2009 to 73.3% and further decreased to record a loss in 2010 represented by -14.1% but later rebounded and increased to record an increase of 113.3% in 2011. This was an increase equal to that of gross profit and was attributed to the reduced operating expenses and improved revenues in 2011. The net profit recorded the highest increase in 2011 at 120.5% from a drop of 76.5% and -17.2% in 2009 and 2010 respectively. From the trend the profitability of BP is on a growing trend although it is hard to forecast future profitability based on the trend alone. The vertical analysis of the balance sheet analyzed total assets, total liabilities and equity. There has been substantive growth of these elements based on the analysis. Total assets grew by 103.4%, 119.3% and 128.4% in 2009, 2010 and 2011 respectively reflecting an increase in investment in assets by the company over the year. Total liabilities decreased to 98.3% in 2009 but later increased by 129.6% and 132.7% in 2010 and 2011 respectively as the company incurred more debt in both years to finance its operations. Shareholders’ equity also grew resulting in growth of shareholders wealth by 110.9%, 104.1% and 122.1% in 2009, 2010 and 2011 respectively. The decline in shareholders’ equity in 2010 was attributed to the losses incurred in the same period. Financial Ratio Analysis The ratio analysis would cover among others profitability, liquidity, activity, financial leverage, shareholders’, and return ratios. These ratios would be instrumental in decision making on grounds of assets efficiency, market performance and capital structure of the company. Profitability Ratios The profitability ratios provide more information of items that make part of the company’s income (Drake 2013, p. 6). The ratios include gross profit margin, net profit margin, return on equity, return on assets and cash flow to sales ratio. RATIO FORMULA 2008 2009 2010 2011 Gross Profit margin Gross income/Sales 35,239/365,700 =9.6% 26,426/246,138 =10.7% (3702)/308,928 =-1.2% 39,817/386,463=10.3% Net income margin Net income/sales 21,666/365,700 =5.9% 16,759/246,138 = 6.8% (3324)/308,928 = -1.1% 26,097/386,463 = 6.7% Cash flow to sales ratio Cash flow from operating activities/Sales 38,095/365,700 =10.4% 27,716/246,138 =11.3% 13,616/308,928 =4.4% 22,154/386,463 =5.7% Return on equity Net income/Shareholders’ equity 21,666/91,303 = 23.7% 16,759/101,613 = 16.5% (3324)/94,987 = -3.5% 26,097/111,465 = 23.4% Return on assets Net income/Total assets 21,666/228,238=9.5% 16,759/235,968=7.1% (3324)/272,262=-1.2% 26,097/293,068=8.9% PROFITABILITY RATIO 2008 2009 2010 2011 Gross Profit margin 9.6% 10.7%% -1.2% 10.3% Net income margin 5.9% 6.8% -1.1% 6.7% Cash flow to sales ratio 10.4% 11.3% 4.4% 5.7% Return on equity 23.7% 16.5% -3.5% 23.4% Return on assets 9.5% 7.1% -1.2% 8.9% The gross profit margin provided the amount of income that is represented in the revenues earned by an entity (Drake 2013, p. 5). The ratio shows how much of a revenues or sales remain after cost of sales are deducted from them. From the analysis of the income statement for BP, the gross profit margin has increased from 9.6% in 2008 to 10.7% in 2009. This can be interpreted to mean that for every dollar of sales or revenues earned in 2008 and 2009 9.60 cents and 10.70 cents were earned as income to BP in 2008 and 2009, respectively. However, there was a negative gross profit margin in 2010 as every dollar of sale represented a loss of 1.20 cents. This was attributed to the loss incurred by the company and high cost of sales. The case was different in 2011 as the gross profit margin grew to 10.3%. The net profit margin is also used to measure the proportion of sales or revenues that are earned as net income (Drake 2013, p. 5). BP earned 5.90 cents and 6.80 cents in 2008 and 2009 respectively for every dollar or revenue they generated as net income. However, a similar case as mentioned above was repeated in 2010 but later in 2011 increased to record a growth of 6.7%. This was attributed to the high sales recorded in 2011 as opposed to the previous years. Cash flow to sales ratio measures profitability on the basis of cash flows from operating activities (Drake 2013, p. 5). From the ratio analysis the cash flow to sales ratio has not reflected a negative return as the other two ratios but the ratio has been on a decline from 2009 to 2011 as it reduced from 11.3 in 2009 to 4.4% in 2010 to rebound and record a growth in 2012 of 5.7. However, the changes have been slim compared to the growth in both 2008 and 2009. Return on equity relates to shareholders’ equity and it’s the return a shareholder earns from the profits generated in a financial year (Drake 2013, p. 12). It also assesses whether shareholders’ equity was used in generating income for the company. From the analysis BP’s return on equity in 2008 was 23.7% indicating that for every dollar of shareholders’ equity that was employed in the production of income it earned 23.70 cents. In 2010, the negative return indicated that the company did not distribute revenues to shareholders because they had recorded a loss therefore reduced the shareholders’ earnings by 3.5%. However, in 2011 BP went to its previous returns for their shareholders as the return on equity was 23.4%. The assets that the company has been using in generating income may also be used to measure profitability based on the return on asset ratio. The ratio measures the level of income earned by assets that have been used by management to generate the revenues (Drake 2013, p. 12). From the analysis, the same trend as that of return on equity was reflected although the returns were lower. The results were 9.5%, 7.1%, -1.2% and 8.9 in 2008, 2009, 2010 and 2011 respectively. Asset Efficiency Ratios Asset efficiency ratios measure how a company as effectively used their investments in assets to generate income (Drake 2013, p. 9). The ratios include inventory turnover, accounts receivable turnover, total assets turnover and fixed assets turnover. RATIO FORMULA 2008 2009 2010 2011 Inventory turnover Cost of goods sold/inventory 331,814/29,261=11.3 times 219,712/29,531=7.4 times 312,630/26,218=11.9 times 346,646/25,661= 13.5 times accounts receivable turnover Credit sales/Accounts receivables 367,053/29,261 =12.5 times 246,138/29,531= 8.3 times 308,928/36,549 =8.5 times 386,463/43526 = 8.9 times total assets turnover Sales /Total assets 367,053/228,238 = 1.6 times 246,138/235,968 = 1.04 times 308,928/272,262 = 1.1 times 386,463/293,068 = 1.3 times Fixed assets turnover Sales/ Fixed assets 367,053/152,019 = 2.4 times 246,138/158,269 = 1.6 times 308,928/162,512 = 1.9 times 386,463/183,342 =2.1 times Summary of Asset Efficiency Ratios Ratio 2008 2009 2010 2011 Inventory turnover 1.3 times 7.4 times 1.9 times 13.5 times accounts receivable turnover 12.5 times 8.3 times 8.5 times 8.9 times total assets turnover 1.6 times 1.04 times 1.1 times 1.3 times Fixed assets turnover 2.4 times 1.6 times 1.9 times 2.1 times Asset efficiency ratios provide information about the management of resources available to a company. The inventory turnover ratio indicated the numbers of time inventories are generated are sold during a financial year (Drake 2013, p. 9). From BP’s financial statements the inventory turnover in 2008 was 1.3 times indicating that it every tem of inventory that has been created was easily converted into a sale for the company. The same ratio indicates that it took a long period to convert inventories into sales in 2008 compared to 2009 where the ratio was 7.4 times. This meant that for every item of inventory that was created it had a possibility of being converted into a sale almost 7 folds. The loss incurred in 2010 by BP was attributed to the long time it took to convert the inventories into sales as the level of uncertainty was high among debtors and creditors. However, the inventory had a chance of being converted into a sale by 13.5% in 2011 meaning the company had short credit terms with both its creditors and debtors and cash flows were available for the company to exploit. Accounts receivable ratio has been on a decline indicting that it took a long time for debtors to pay for inventories taken on credit from BP. From the analysis the accounts receivable ratio declined from 10.4 times in 2008 to 8.3 in 2009 and increased to 8.5 times in 2010 to settle at 8.9 times in 2011. This reflected the time it takes for debtors to pay their debts to the company. The total assets turnover indicates how assets are converted into revenue by a company. For BP the time it takes the total assets to be converted was very long based on the results of the analysis. The total assets turnover was too low recorded as 1.6, 1.04, 1.1 and 1.3 in 2008, 2009, 2010 and 2011 respectively. This implied that the assets for the company were converted at a rate of 1.6 to sales in 2008. The trend is that the total asset turnover is also declining. The fixed asset turnover is also showing the same trend as total assets turnover. Liquidity Ratios Liquidity ratios are essential for assessing whether a company is able to meet short term financial obligations that take place in the course of their operations. The liquidity ratios include current ratio and quick ratio. RATIO FORMULA 2008 2009 2010 2011 Current ratio Current assets/current liabilities 66,384/69,793 = 0.9:1 67,653/59,320 = 1.1:1 94,212/82,832= 1.1:1 97,584/83,780 = 1.2:1 Quick ratio Current assets – inventories/current liabilities 49,563/69,793 = 0.7:1 45,048/59,320 = 0.8:1 67,994/82,832 = 0.8:1 71,923/83,780 = 0.9:1 Cash flow Ratio Net cash flow from operation/CL 38,095/69,793 = 0.5 times 27,719/59,320 = 0.4times 13,616/82,832 = 0.2 times 22,154/83,780 = 0.3 times Summary of Liquidity Ratios Ratio 2008 2009 2010 2011 Current ratio 0.9:1 1.1:1 1.1:1 1.2:1 Quick ratio 0.7:1 0.8:1 0.8:1 0.9:1 Cash flow Ratio 0.5 times 0.4times 0.2 times 0.3 times The current ratio measures a company’s ability to ensure its current assets cover for its short term financial obligations. The rule of the thumb requires that a company maintains the ratio at 2:1. However, from the analysis this is not the case indicating that BP has cash flow problems that are essential for the day-to-day operations of the company. In 2008 the current ratio was 0.9:1 indicating that the company was unable to pay its current liabilities which were more than the cash flows. The current ratio in 2009 was 1.1:1 still lower than the required but indicated that the company could only cover for the current liabilities alone. This ratio was constant in 2009 and 2010 and only increased slightly in 2011 to 1.2:1. The quick ratio measures the ability of the most liquid assets of the company to pay the current liabilities. The quick ratio is required at 1:1 as it does not include inventories which are not considered liquid assets. For BP the ratios in the four years under review were lower than the standard rate also indicating that BP was unable to cover its short term financial obligations. Finally, the cash flow ratio also displayed the shortages that BP is facing in terms of cash inflows. From the analysis in 2008 the cash flow ratio was 0.5 indicting for every 0.5 cents the company had it had one dollar of liabilities. This ratio has been declining from 0.4 in 2009 to 0.3 in 2011. Market performance Analysis To be able to measure the performance of BP in the oil and gas industry it is important to consider certain aspects that relate to the financial statement that include earning per share, net tangible assets backing per share, operating cash flows per share, price earnings ratio, dividend payout ratio and dividends per share. RATIO FORMULA 2008 2009 2010 2011 Net tangible asset per share Common stock-intangible assets/common stock on issue 5067-10,260/18,962,517=0.002 5,158-11,548/20,629,665= 0.003 5,183-14,298/20,647,160 =0.04 5.224-21,102/20,813,410 = 0.07 earnings per share Net income/no. of shares outstanding 112.56 88.49 (19.81) 135.93 operating cash flows per share Net cash flow from operations – preference dividends/ shares outstanding 38,095 – 2/91,303 =0.42 27,716-2/101,613 = 0.27 13,616-2/93,690 = 0.15 22,154-2/91,303 = 0.24 price earnings ratio Market price per share/EPS 657.25/112.56 = 5.8 613.4/88.49 = 6.9 658.2/(19.81) = -33.2 514.9/135.93 = 3.8% dividend payout ratio Dividends/Earnings 176.3/112.56 = 1.57 218.5/88.49 = 2.47 52.07/(19.81) = -2.63 104.42/135.93 =0.77 dividends per share Dividends paid/ No. of shares outstanding 176.3 218.5 52.07 104.42 The net tangible assets backing per share relates to the book value of a company’s tangible assets in relation to each ordinary share issued. From the data the NATB for BP has been on an increase indicating that the assets have been gaining from the profits of the company as well as the company gaining market share in the oil and gas industry. The earnings per share express a company’s income or profits in terms of an ordinary share issued by the company. Since the company is listed in two stock markets the financial statements provide the EPS in both pounds and dollars and the researcher preferred to use the pounds in making his analysis. The EPS declined from 112.56 in 2008 to 88.49 in 2009 due to reduced income to the company. However, the EPS in 2010 was negative due to the losses incurred which were also reflected in the earnings per share but the EPS rebounded in 2011 to 135.93. Capital Structure Analysis Capital structure analysis involves assessing equity and debt financing for BP over the four year period ended 2011. The ratios used are used to measure the company’s long term viability. The ratios include debt to equity ratio, debt ratio, equity ratio, interest coverage ratio and debt coverage ratio. RATIO FORMULA 2008 2009 2010 2011 debt to equity ratio Total liabilities/total equity 136,129/92,109 = 147% 133,855/102,113 = 131.1% 176,371/95,891= 183.9% 180,586/112,482 = 160.5% debt ratio Total liabilities/total assets 136,129/228,238 = 59.6% 133,855/ 235,968 = 56.7% 176,371/272,262 = 64.8% 180,586/293,068 = 61.6% equity ratio Total equity/total assets 92,109/228,238 =40.4% 102,113/235,968 = 43.3% 95,891/ 272,262 = 35.2% 112,482/293,068 = 38.4% interest coverage ratio EBIT/finance expense 35,239/1,547 = 22.8 26,426/1,302 = 20.3 (3,702)/1,170 = -3.2 39,817/1,246 = 32 debt coverage ratio Non-current liabilities/net cash flow from operation 66,336/38,095 = 1.7 133,855/27,716 = 4.8 92,492/22,154 = 4.2 96,268/13,616 = 7.1 Summary of BP Capital Structure 2008 2009 2010 2011 Debt to equity ratio 147% 131.1% 183.9% 160.5% Debt ratio 59.6% 56.7% 64.8% 61.6% Equity ratio 40.4% 43.3% 35.2% 38.4% Interest coverage ratio 22.8 20.3 3.2 32 Debt coverage ratio 1.7 4.8 4.2 7.1 From the analysis of the capital structure, the debt to equity ratio revealed the problem affecting BP. From the results, it can be concluded that the company is highly depended on debt to finance its investing activities. In 2008, the debt to equity ratio was 147% indicating that for every dollar of equity there was 1.47 dollars in debt incurred by the company. The debt to equity ratio declined in 2009 to 131.1% but increased to 183.9 in 2010 only to slightly decline to 160.5% in 2011. This ratio is supported by the debt ratio which from the results is above 50% indicating that BP is highly dependent on debt to finance its operations. The problem with debt financing is that it is a costly source of funding for an entity and requires collateral. The debt ratio was 59.6%, 56.7%, 64.8% and 61.6% in 2008, 2009, 2010 and 2011, respectively. Conclusion From the analysis, BP is still on a recover path from the losses incurred in 2010 as revenues have started growing as well as cash flows. The value of the company’s shares has also been on an incline. However, the profitability of the company has for long been affected by a huge financing cost from the debt facilities it has been using to finance its projects. This has diluted the ownership of the company as debt takes the lion’s share of the capital structure of the company. The company needs to explore cheaper methods of financing its projects so as to be sustainably heading into the future. The company should work hard to ensure the operating cost do not increase at a faster rate than the revenues as they reduce the profits attributable to shareholders. List of References BP 2009, “Consolidated Financial Statements of the BP group”, BP Annual Report and Accounts 2009. P.112- 115. Viewed from http://www.bp.com/assets/bp_internet/globalbp/globalbp_uk_english/set_branch/STAGING/common_assets/downloads/pdf/BP_Annual_Report_and_Accounts_2009_Financial_ Statements.pdf BP 2012, Summary Review: Building a Stronger, Safer BP. p. 175-181. Viewed from http://www.bp.com/assets/bp_internet/globalbp/globalbp_uk_english/set_branch/STAGING/common_assets/bpin2012/downloads/BP_Summary_Review_2012.pdf Drake, PP 2013, Financial Ratio Analysis, P.1-13. Viewed from http://educ.jmu.edu/~drakepp/principles/module2/fin_rat.pdf Read More