Business Performance Management - of Santos Ltd - Case Study Example

SANTOS LIMITED FINANCIAL ANALYSIS; 2013 & 2014 PERFORMANCE OUTLOOK Prepared by (Student’s Name) Professor’s Name Course Name Institutional Affiliation 1.0 Objectives in Measuring Organisational Performance Organisations performance measurement is a distinctive process for which companies’ monitors’ crucial aspects of its underlying operations in relation to systems and processess. The process provides organisations with sufficient information that relates to how its underlying systems and output are working and how best present resources can be allocated in order to optimise the operation’s efficiencies and effectiveness. In essence, organisational performance measurement is concerned with assessing three specific areas that include; financial-which relates to profits, returns on assets and equity; product market performances, which is concerned with analysing sales and market share; and, also shareholder returns, which is associated with total shareholders and economic values. In today’s business environment, modern organisational performance measurement is directed towards assessing ways of assessing competition within the modern markets. Considering that there are more demanding customers and more competition within the global markets, the process of performance measurement is necessary for purposes of ensuring responsiveness and an external focus for distinctive levels of operations. 2.0 Financial Statements Analysis 2.1 Profitability Ratio Ratios 2013 2014 Net profit margin=net income/sales or revenues 516/3,602*100% = 14.32% (935)/4,037*100% =-23.16% Gross Profit Margin(%)= sales-COG/sales *100% 3,602-2,502/3,602*100% =30.45% 4,037-2,899/4,037*100% =28.19% Return on Assets= net income/total assets 516/20,609 = 2.5% (935)/ 22,345 =-4.18% Earnings per share= net income weighted average common shares outstanding 516,000,000/961,184,172 =0.54 (935,000,000)/ 972,088,279 = -0.96 2.2. Efficiency Ratios Ratios 2013 2014 Accounts Receivable Turnover= sales/ accounts receivables 3,602/793 = 4.54 4,037/633 =6.38 Inventory turnover= cost of goods sold/ inventories 2,505/419 = 5.98 2,899/443 =6.54 2.3 Short-Term Solvency Ratios 2013 2014 Current ratio= current assets/current liabilities 2078/1726 = 1.2 2065/1946 =1.06 Acid Test Ratio= cash and cash equivalents+ trade and other receivables+ other financial assets /current liabilities 644+793+3/1726 = 0.83 775+633+66/1946 =1.72 Cash flow from Operations to liabilities ratio= cash flow from operations/ current liabilities 1628/1726 = 0.94 1843/1946 = 0.95 2.4 Long-Term Solvency Ratios 2013 2014 Debt-to-Equity= total liabilities/ total stockholder’s equity 10,397/6,749 = 1.54 12,932/6,905 = 1.87 Debt-to-total assets= total debt/total assets 189+5582/20609 = 0.28 327+7925/22345 = 0.37 2.5 Market-Based Ratios Ratios 2013 2014 Price-Earnings=market value per share/EPS 11.04/0.54 =20.44 6.48/-0.96 = -6.75 Dividend Yield= cash dividends per share/market value per share 0.21/11.04 =0.02 0.29/6.48 = 0.04 3.0 Trend Analysis 3.1 Profitability Santos net profit margin decreases significantly from 14.32% to -23.16% in 2013 and 2014 respectively. The gross profit margin decreases slightly from 30.45% to a low of 28.19%; return on assets decreases from 2.5% to a low of -4.18%; and, earnings per share decreases from 0.54 to a low of -0.96 within the same period. Thus, it can be said that the company’s overall profitability ratios are significantly bad over the two years. All of these ratios have all decreased significantly within the two-year period and this is attributed to the net loss made in 2014. It can be noted that Santos sales revenues increased within the two-periods by at least 12% due to the start up of PNG LNG as well as higher sales volume. However, despite this increase in the sales revenues the company still made a significant amount of loss, which is associated with increased impairment losses that amounted to almost $1,563M after taxes due to a heightened fall in overall global oil process. In fact, it can be noted that Santos’ profitability positioned has dwindled to a level that it cannot properly award its existing shareholders with dividends. 3.2 Efficiency The accounts receivables increases slightly from 4.54 to 6.38 in the period between 2013 and 2014 respectively as inventory turnover ratio also increases slightly from 5.98 to 6.54 within the same period. The company’s overall efficiency ratios indicate a slight improvement over the two-year operational period. The increase in the accounts receivable turnover ratios means that Santos management team has devised effective ways and even developed policies deemed necessary in collecting receivables for all energy-related products sold on credit. It thus means that it has sufficient flow of cash resources that can be used for other purposes. Subsequently, the improvement perceived in inventory turnover indicates that it the management team has employed efficient ways of translating underlying oil and gas stocks to revenues. 3.3 Short-term Solvency The company’s current ratio decreases significantly within the two periods from 1.2 to 1.06 in 2013 and 2014 respectively. The acid test and cash flow operations to liabilities however; increase slightly from 0.83 to 1.72 and 0.94 to 0.95 within the same period respectively. Despite this slight increase, it can be noted that the company’s overall short-term solvency or liquidity position is unhealthy in comparison to the standard ratio of 2. It thus means that the firm is not positioned fairly to meet its short-term obligations as and whenever they fall due. It is important to note that this unhealthy position is attributed to a significant decrease in trade and other receivables as well as prepayments made within the period as the management team makes effort to come up with strategies related to eliminate credit sales as much as possible while curtailing possible cash resources that could arise from these sales activities. 3.4 Long-Term Solvency The company’s debt-to-equity ratio increases slightly from 1.54 to 1.87 in 2013 and 2014 respectively; this pattern is also seen in debt to total assets that increases slightly from 0.28 to 0.37 within the same period. The increase indicates that Santos Limited is still using enormous amounts of debt funds to pay for its assets purchased and, also depends highly on debt funds as opposed to equity funds. In fact, during the operation period, the company used lots of debt funds to acquire interests in Block S and R in Malaysia. It also engaged in intensive capital expenditure on fundamental development projects that include; PNG LNG and GNLG as well as the Cooper Basis. In essence, it is also related to the impact of the Australian dollar exchange rate on the US dollar denominated debt levels that was insignificantly offset by the underlying net operating cash inflows. 3.5. Market-Based The company’s price-earnings ratio decreases significantly from 20.44 to a low of -6.75 in 2013 and 2014 respectively. Dividend yield however increases insignificantly within the same two-year period from 0.02 to 0.04 respectively. This poorly-placed ratio indicates that Santos is unfairly positioned to attract substantial investments since its future outlook is somehow a risky affair for potential stockholders. 4.0 Future Outlook The company’s seems to be in a fair position in future especially with the plummeting of the oil prices. According to Bartholomeusz (2015), Santos is set to enjoy great benefits from the valuation exercise attributed to selling of Stag oilfield in offshore Western Australia- a venture it held with Quadrant Energy. The sale of this rather mature asset is set to stabilise its underlying fluctuating debt funds level that stood at $8.8B. Considering the fact that the firm needs to raise a significant amount of capital in order to lower its debt burden and thus, escape of the unstable relations with the ultra-wealthy oil-rich families and sovereign wealth funds in relation to the $7B approach by its immediate investment banker Scepter Partners. Consequently, according to Macdonald-Smith (2015) it is presumed that Santos Shares are indeed worthless at the current low oil prices and foreign exchange rates- a phenomenon that is expected to persist for a long period. In fact, it is argued that the effect of the assumption on other ASX-listed oil and gas companies will also be enormous with Woodside Petroleum’s base net present value being calculated at its lowest of $18.74 while Oil Search being positioned at $3.70; both of which are all half of their underlying current price levels. 5.0 Limitations of Financial Ratio It is argued that financial accounting information is sometimes affected by aspects related to estimates and assumptions. For instance, it is possible that accounting standards would allow for adoption of different accounting policies hence impairing comparability aspect of ratio analysis (Brigham & Ehrhard, 2013). Ratio analysis is only focused on expounding on past information while most of the accounting end users are far much interested with the current and future performance capabilities of a firm (Brigham & Ehrhard, 2013). Another important limitation of financial ratio analysis rests with the fact that it only focuses on numbers as opposed to the exact causation factors. For this reason, it is important to conduct an extensive analysis that covers a fair amount of period while also ensuring to adopt different industry averages. It is important that the assessment of Santos Ltd should include non-financial performance indicators like the management of the human resource, which is made up of expert executives and staffing personnel. It is important to look at the level of staffing turnover, productivity rates and competence surveys in order to establish their imminent contribution to the company. It is also important to assess the aspect related to product and service quality for purposes of eliminating intensive levels of customer dissatisfaction and loss due to poor future sales capacity Abdel-(Maksoud, Cerbioni, Omran, & Ricceri, 2015). The analysis should also focus on Santos Ltd brand awareness as well as company profile in regards to degree of customer loyalty, name awareness and perceived products and service quality levels. References List Abdel-Maksoud, A., Cerbioni, F., Omran, M.F. & Ricceri, F., 2015. The use of non-financial performance indicators and organisational performance: an empirical analysis of Italian firms. International Journal of Business Performance Management, 16(4), pp.421-441. Bartholomeusz, S. 2015. Oil Outlook lifts Santos Spirits. The Australian. Retrieved on May 10, 2016 from http://www.theaustralian.com.au/business/opinion/stephen-bartholomeusz/oil-outlook-lifts-santos-spirits/news-story/bc14d55eddd54530c5bcdbfb7bc33c51 Brigham, E. & Ehrhardt, M., 2013. Financial management: Theory & practice. Cengage Learning. Macdonald-Smith, A. 2015. “Santos Shares Worthless at Current Oil Price, Broker Says”. The Sydney Morning Herald, http://www.smh.com.au/business/santos-shares-worthless-at-current-oil-price-broker-says-20150107-12jahi.html Read More