Financial Analysis: British Petroleum - Case Study Example

FINANCIAL ANALYSIS: BRITISH PETROLEUM By Student’s Name Code + Course Name Professor’s Name University Cite, State Date Table of Contents Executive Summary………………………………………………………………………………..3 Introduction…………………………………………………………………………………………4 Ratio Analysis………………………………………………………………………………………4 A. Profitability Ratios…………………………………………………………………………..4 B. Asset Efficiency Ratios….………………………………………………………………….6 C. Liquidity Ratios……………………………………………………………………………..7 D. Capital Structure……………………………………………………………………………..8 E. Market Performance Ratios………………………………………………………………….9 Recommendation and Conclusion………………………………………………………………10 Reference List……………………………………………………………………………………12 Executive Summary BP operates within an oil and gas industry. It is based in the United Kingdom and was founded in 2001. Financial analysis of its annual reports postulate that it has continued to improve on its liquidity, efficiency, capital structure, profitability as well as market performance ratios over a four year period. This is a positive indication given that the firm has been able to adopt effective pricing and marketing strategies to affect a favourable profitability ratio. It has also ensured that debt funds have been minimised in order to protect it from future burden of excessive payment of interest. Following this line of reasoning, it can be attributed that potential investors as well as creditors should go ahead and make business with it. Creditors are assured of future payments as investors are also assured of future earnings due to favourable profitability and market performance ratios. Introduction British Petroleum Plc is a multinational company, British-owned that deals with international oil and gas exploration, extraction and refinery based activities (BP, 2014). It is considered to be the leading firm operating within a fairly competitive and resource intensive international oil and gas industry. It was founded in the early 2001 and currently employs about 83,000 people across the globe (BP, 2014). It is engaged in the manufacturing and distribution of such commodities as natural gas, petroleum and its related products as well as aviation and motor fuels. This paper examines the company’s financial performance through a four-year period through ratio analysis. Ratio Analysis A. Profitability Ratios Year/ Ratio 2010 2011 2012 2013 Profit= net income/ Sales (3,324)/ 297,107 = -0.12 26,097/375,517 =0.07 11,251/375,765 =0.03 23,758/379,136 =0.06 ROA=net income/ total assets (3,324)/ 272,262 =-0.01 26,097/293,068 =0.09 11,251/300,466 =0.04 23,758/305,690 =0.08 ROE=net income/ total equity (3,324)/ 95,891 =-0.03 26,097/112,482 =0.23 11,251/119,752 0.09 23,758/130,407 =0.18 Analysis Profit margin ratio increases tremendously within the four year-period from -0.12 to 0.06 in the period between 2010 and 2013 respectively. This means that the firm has devised effective ways of translating sales into massive levels of net income. This has been achieved through efficient pricing strategies as well as marketing campaigns for its oil related products. The firm’s return on asset ratio also increases within the four-year period from -0.01 to 0.08 in 2010 and 2013 respectively. This is an indication that BP has been able to devise ways of optimising the use of its asset base to affect sales positively. This has been achieved through constant maintenance and replacement of worn out machines as well as hiring of fairly experienced personnel in the oil industry. The return on equity ratio increases tremendously within the four-year period from -0.03 to 0.18 between 2010 and 2013 respectively. This is an indication the BP has maximised the level of its equity base in order to affect sales level positively. This has been achieved through formulation of effective profitability policies so that lots of earnings are reinvested back into the company rather than being distributed to shareholders. This is meant to improve the level of investment projects hence a positive revenue returns from these projects. This can be seen by the increase in the level of revenues from associates and jointly controlled entities. B. Asset Efficiency Ratios Year/ Ratio 2010 2011 2012 2013 Asset turnover ratio= sales/net assets 297,107/95,891 = 3.09 375,517/112,482 =3.34 375,765/119,752 =3.14 379,136/130,407 =2.90 Inventory turnover= cost of goods sold/ inventories 216,211/26,218 =8.25 285,618/25,661 =11.13 292,774/28,203 =10.38 298,351/29,231 =10.20 Receivables turnover= sales/accounts receivables 297,107/36,549 =8.13 375,517/43,526 =8.63 375,765/37,611 =9.99 379,136/39,831 =9.52 Analysis BP’s asset turnover ratio decreases significantly in the four-year period from 3.09 to 2.90 between 2010 and 2013 respectively. This is an indication that BP has opted to extend credit to more customers that results from poor and ineffective trading policies with the customers. Subsequently, it means that the amount of sales revenue that is derived from each dollar of asset has significantly reduced. The firm’s inventory turnover ratio increases tremendously within the four-year period from a low of 8.25 to 10.20 between 2010 and 2013 respectively. This is positive indication since more stock are being translated to sales as much as possible. It also means that the management has been able to devise new ways of affecting immense sales. Receivables turnover ratio increases within the four-year periods from 8.13 to 9.52 between 2010 and 2013 respectively. It is an indication that the firm’s management has effectively devised efficient ways of extending credit while collecting debt at a positive and favourable rate within the period. C. Liquidity Ratios Year/ Ratio 2010 2011 2012 2013 Current ratio= current assets/current liabilities 89,725/82,832 =1.08 89,164/83,780 =1.06 92,069/76,329 =1.21 96,840/72,812 =1.33 Quick ratio= current assets-inventory/current liabilities (89,725-26,218)/82,832 =0.77 (89,164-25,661)/83,780 =0.76 (92,069-28,203)/76,329 =0.84 (96,840-29,231)/72,812 =0.93 Cash ratio=cash/current liabilities 18,556/82,832 =0.22 14,067/83,780 =0.17 19,635/76,329 =0.26 22,520/72,812 =0.31 Analysis BP’s current ratio increases insignificantly in the four-year period from 1.08 to 1.33 between 2010 and 2013 respectively. This means that the firm’s ability to meet its short-term obligations has increased on an insignificant level. A standard current ratio is 2:1, which means that for every liability held, a company should have at least two assets to counter its effects. The company’s quick ratio increases from 0.77 to 0.93 in the four year period between 2010 and 2013. This means that BP’s capacity to meet its short term commitments without relying on the amount of its inventory base has improved for the period at hand and efficient for that matter. The firm’s cash ratio increases insignificantly in the four-year period from 0.22 to 0.31 between 2010 and 2013 respectively. This means that BP’s liquidity position has increased given that the capacity of cash available to meet short term debt has improved over time. D. Capital Structure Year/ Ratio 2010 2011 2012 2013 Debt-to-equity ratio= total debt/total equity (14,626+30,710)/ 95,891 =0.47 (9,044+35,169)/ 112,482 =0.39 (10,033+38,767)/ 119,752 =0.41 (7,381+40,811)/ 130,407 =0.37 Total debt ratio= Total assets-total equity/total assets 272,262-95,891/ 272,262 =0.65 293,068-112,482/293,068 =0.62 300,466-119,752/300,466 =0.60 305,690-130,407/ 305,690 0.57 Analysis BP’s debt-to equity ratio decreases significantly within the four year period between 2010 and 2013 from 0.47 to 0.37 respectively. This is an indication that the firm has continued to put much effort to balance the level of debt and equity funds in regards to its entire capital structure. BP must have taken stringent measures to ensure that debt funds are minimised as much as possible within its capital composition in order to ensure that it does not overburden itself from payment of excessive interests on the amounts. Total debt ratio decreases from 0.65 to 0.57 in the four year period between 2010 and 2013 respectively. This means that the firm has been able to minimise the amounts of its immediate asset base that has been financed by debt funds. This is also in a bid to ensure that it does not over-rely on debt funds to conduct operations due to interest burden associated with it. E. Market Performance Ratios Year/ Ratio 2010 2011 2012 2013 EPS=net income/ordinary outstanding shares (3,324)/ 263,306,722 = -0 .000126 26,097/374,500,712 =0.00000696 11,251/374,500,712 =0.00003 23,758/374,500,712 =0.00064 Price-earnings ratio= Price per share/EPS 26.75/ -0 .000126 =212,301 33.62/0.000696 =48,304 36.25/0.00003 =120,833 39.99/0.00064 =62,484 Analysis The firm’s EPS improves from a negative value to a positive one within the four-year period. This is an indication that the firm’s ability to pay shareholders value for their money has increased tremendously. This has the ability to attract even more investors. The price-earnings ratio also remains positively higher within the four year period, which is an indication that the firm has been able to maintain a higher investor expectation. Recommendations & Conclusion It can be seen that the company has improved its profitability, efficiency, capital structure, liquidity as well as market performance ratios. This means that a potential investor can go ahead to make investments with the company given that there is a higher probability of future earnings from investments made. BP’s capacity to manage a balanced capital structure is a positive indication to potential investors since it postulates that their money would not be used to repay off loans due to the manageable level of borrowings in relation to shareholders equity. Creditors like banks and other financial institution can also go ahead and avail funds to the company given that it has a positive liquidity position. Year/Item 2010 2011 2012 2013 Total Revenues 308,928 (386,463-308,928)/308,928 *100% = 25.10% (388,074-308,928)/308,928 *100% =25.62% (396,217-308,928)/308,928 *100% =28.25% Profit after Tax (3,324) (26,097-3,324)/3,324*100% =685.11% (11,251-3,324)/3,324*1s00% =238.48% (23,758-3,324)/3,324*100% =614.74% EBIT (3,702) (39,817-3,702)/3,702*100% =975.55% (19,769-3,702)/3,702*100% =434.01 (31,769-3,702)/3,702*100% =758.16% Trend Analysis In comparison to total revenues of the financial year ending 2010, it increases by 25.10% to 25.62% and later increases to 28.25% in the years 2011, 2012 and 2013 respectively. This increase in the percentage revenues is attributed to increases in earnings from joint ventures and associates. It can also be attributed to improved sales mechanisms that include effective pricing and marketing strategies hence increase from sales revenues. In comparison to profits after tax for the year ending 2010, it can be seen that BP’s subsequent profits after tax increases tremendously as shown by the graph. This is attributed to increased total revenues in these years that are above the proportion of expenses met within the year. In comparison to EBIT for the year ending 2010, the subsequent EBIT increases significantly within the next three years. This might also be attributed to increased overall revenues in comparison to the expenses incurred within the period. Reference List BP.2014. 20-F and SEC Filings. Retrieved on January 10, 2015 from http://www.bp.com/en/global/corporate/investors/regulatory-news-service-and-filings/20-f-and-sec-filings.html Read More