The paper "Financial Analysis of British Petroleum PLC " is a perfect example of a finance and accounting case study. Analysis of different financial ratios represents an important approach for understanding the performance of a business enterprise. Financial management texts recommend several ratios. The ratios selected help present a clear picture of the performance and health of the company analyzed i. e. BP and help measure its profitability, liquidity, and operational efficiencies. More particularly, when we examine the trends in different ratios over time, a picture emerges of how the enterprise has performed over the past and how one may expect it to perform in the near future barring extraordinary events.
All data used comes from annual reports. All numbers are in millions of shares except per share calculation. Financial analysis Liquidity ratios This ratio shows the ability of the company to pay off short term obligations as they fall due. In this case, two ratios are considered that is Current ratio and Acid test ratio. The Current Ratio is a ratio between the current assets and current liabilities and shows the same indicator of performance as working capital.
While Acid Test Ratio is a refinement over the current ratio in that it assumes that inventory current assets may not be easy to convert to cash to pay off current liabilities in a hurry. Therefore, inventories are subtracted from the current assets for calculation of the acid test ratio. This is calculated as shown below the current ratio i. e. current assets as a ratio of current liabilities is not healthy for BP at between 1.29:1 to 1.44:1 since the recommended ration is 2:1 and this shows that their capacity to meet short-term liabilities is moderate.
It is in order to infer that BP has poor liquidity ratios and it cannot be able to meet their current obligations if compared with ideal rates at times of agency. The acid test ratio takes only those current assets that are readily convertible to cash i. e. it excludes inventory. This ratio ranges from 0.93:1 to 1.08:1 which shows a health position and it is a clear indication that the company does not keep a large number of stocks except 2013.
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