ExxonMobil Financial Analysis - Case Study Example

ExxonMobil Financial Analysis Student’s Name Institution Date Table of Contents Introduction 3 1.0 Profitability Ratios 4 1.1 Net profit margin 4 1.2 Return on equity 4 1.3 Gross Profit Margin 5 2.0 Management Efficiency Ratios 5 2.1 Receivables turnover 6 2.2 Payables turnover 7 2.3 Inventory turnover 7 3.0 Liquidity Ratios 8 3.1 current Ratio 8 3.2 Quick Ratio 9 4.0 Gearing ratios 9 4.1 Gearing 9 4.2 Debt-to-Equity 10 References List 11 Appendices 12 Introduction ExxonMobil is the world’ largest public-traded oil and Gas Company with its headquarters located in Texas, United States of America. It also operates other notable subsidiaries like Mobil, XTO Energy and Imperial Oil. It also operates both Downstream and Upstream business segments that contribute lots of revenue to the company as a whole. The focus of this report lies in conducting a five-year period ratio analysis for this company for the period starting 2012 until 2016. The report focuses on such important ratios as profitability, gearing, management and liquidity over this period and determine its performance in comparison to the industry average and its immediate rival; Shell. 1.0 Profitability Ratios 1.1 Net Profit Margin 2012 2013 2014 2015 2016 Exxon Mobil 10.7% 8.3% 8.9% 6.8% 3.9% Shell 10.8% 7.4% 6.7% 1% 2.4% Industry 9.6% 7.6% 7.26% 4.7% 2.7% Net profit margin is strong indicator that helps to show the profitability levels of a company and it is computed by dividing the level of net income by the underlying level of revenues within a particular operational period (McCue & Nayar, 2009). Exxon Mobil’s net profit margin deteriorates within the five-year period from 10.7% to 3.9%. A similar pattern is replicated by Shell whose ratio falls from a high of 10.8% to a low of 2.4%. Taking a closer look at the industry averages within this period, it can be noted that deterioration cuts across all competitors. This rather negative growth in profit margins is highly attributed to the recently witnessed negative surge in oil prices across different oil and petroleum markets across the globe. 1.2 Return on Equity Analysis Return on Equity (ROE) is ratio analysis model used to ascertain the level of profits that have been generated by equity funds from different investors (Ahrendsen & Katchova, 2012). A high percentage of this ratio is always preferred. Looking at the graph above, it can be seen that Exxon Mobil ratios continue to deteriorate at an alarming rate in a similar manner when compared to the industry average. It seems that the entire industry faced a challenging operational year in relation to market prices offered for oil and related product being too low to effect enough profit margins over the period. Exxon Mobil has recently put in place a distinct framework aimed at reducing the level of costs and thereby improving operational efficiency. For instance, in Permian, the firm has ensured to double its footage drilled per day since 2014 in the horizontal Wolfcamp wells and thereafter, reduced the per-foot drilling costs by about 71% (ExxonMobil, 2017). As a result of this, there has been a successful reduction in cash field expenses within the Permian horizontal initiative to about $5 per barrel, which represents about 46% reduction since 2014 (ExxonMobil, 2017). This is one of the notable indications of how equity funds within the company have continued to be used efficiently to generate earnings that are later translated into profits for shareholders. 1.3 Gross Profit Margin 2012 2013 2014 2015 2016 Exxon Mobil 25.83% 25.08% 24.85% 27.45% 28.09% Industry 43.76% 43.02% 42.74% 38.93% 38.43% Gross profit is a profitability metric that is adopted for the measurement of a company’s overall financial health and its business-level strategies thereby portraying the degree of money left that remains from the sales revenues after the immediate accounting of costs of goods sold (Poznanski, SadowniK, & Gannitsos, 2013). From the table above, it can be noted that despite the ratio value improving slightly over the period, it still remains way below the recommended industry averages. This can be attributed to the low pricing of the oil and gas products in both the local US and international markets as well as higher costs of goods sold within the five-year period. A higher cost of goods sold could result from high transportation; refinery and storages costs that arise from getting the final product to the consumer (Poznanski, SadowniK, & Gannitsos, 2013). This low pricing could also be a result of poor marketing strategies by the company and, in fact, this explains the recent improvement of the marketing expenses budget over the last two financial periods. A proper marketing campaign helps to improve on the level of customer-base while still maintaining the underlying loyalty customer-base; a factor necessary for sustaining high sales. 2.0 Management Efficiency Ratios 2.1 Receivable Turnover The receivables turnover ratio is an activity ratio that is used to determine the capacity of a company to offer its products on credit policy and thereafter, devise effective policies needed to collect accounts receivables on a timely manner (Ahrendsen & Katchova, 2012). Taking a closer look at Exxon Mobil ratios, the number of days for which the collection of credit sales takes place increases within the period from 28 to 35 days in 2012 and 2016 respectively. In comparison to both shell and industry average ratios, these ratios are far much above, which is an indication the ExxonMobil, has either not yet devised efficient policies to collect accounts receivables on time or that it already operates on a heavy cash flow platform to bother its credit customers to pay-off their accounts quickly. In fact, it is noted that the firm is currently experiencing an enormous level of solid cash flows that is currently being generated from ExxonMobil’s Downstream segment. It is as result of this that the company’s cash operating costs in the refinery remains above the overall industry averages. 2.2 Payables Turnover 2012 2013 2014 2015 2016 Exxon Mobil 57 57 50 63 72 Shell 1 2 4 11 5 Industry 5 6 7 4 4 The payables turnover is an activity ratio that shows how efficient management has been able to devise policies that relates to how long it takes to pay-off its suppliers during an accounting period (Ahrendsen & Katchova, 2012). Currently, ExxonMobil’s ratio’s stand way above the industry averages as well as its immediate rival Shell. It increases over the period from 57 to 72 days. This is a likely indication that the management has not been efficient in coming up with proper policies needed to meet the commitments owed to the suppliers at hand. It might also be attributed to the fact that the management has formulated an agreement with suppliers to be receiving their monies in specific periods of about 3 or so months given that the cash flow of the company has been seen to be steady enough over the period. 2.3 Inventory Turnover 2012 2013 2014 2015 2016 Exxon Mobil 16 days 19days 21 days 32 days 35 days Industry 20 18 17 12 days 15 days From the table above, it can be seen that ExxonMobil’s ratio increases within the five-year period from 16 days to 35 days in 2012 and 2016 respectively. On the other hand, the industry averages has continued to decrease and remain way below from 20 to 15 days within the same period. This is a bad indication since it means that ExxonMobil is taking more time to translate its stocks into sales revenues. In fact, this explains the inability of the company to meet its short-term obligations due to inefficient cash flows and the little that is accessed is used for long-term investment opportunities (Poznanski, SadowniK, & Gannitsos, 2013). The firm should now come up with efficient marketing and pricing strategies needed for translating the existing stock base into sales at a much faster rate. 3.0 Liquidity Ratios 3.1 Current Ratio Current ratio is a liquidity that is used to measure the capacity of a company to meet its short-term obligations as and whenever they fall due (Ahrendsen & Katchova, 2012). A higher current ratio is always preferred since it shows that a company’s level of short-term assets is enough to meet the short-term liabilities at any given moment. Taking a look at the current ratios, it can be seen that ExxonMobil’s ratios have continued to lag behind both its immediate rival; Shell and, the industry averages as a whole. This is an indication that the company has not been fairly-positioned to meet its short-term obligations as and whenever they fall due. This is indeed a risky affair as it might distort its relationships with the existing suppliers and creditors who also need the money to continue with their business operations. It should be noted that the short-fall in current assets is attributed to the company’s policy of utilising the cash and cash equivalents to execute long-term investment strategies thereby creating a deficit in the day-to-day cash flows needed for conducting operations. 3.2 Quick Ratio 2012 2013 2014 2015 2016 Exxon Mobil 0.78 0.60 0.56 0.55 0.65 Industry Averages 1.09 0.94 0.81 0.73 1.33 Quick ratio is another liquidity ratio that is also used to measure the level of capacity for which a company has in meeting its short-term obligations without having to rely on the sale of inventories (Brigham & Ehrhardt, 2013). A higher quick ratio is normally preferred. For this case, it can be noted that the quick ratio of ExxonMobil decreases within the five-year period from 0.78 to 0.65 in 2012 and 2016 respectively. These ratios are positioned fairly-below the industry averages for which within the same period stood at 1.09 and 1.33 respectively. In this regards, it means that ExxonMobil is not able to meet its short-term obligations to creditors without having to utilise its stocks. This is also attributed to the fact that a significant portion of the cash flows of the company has been used for long-term investments thereby depriving the company of necessary money needed for meeting short obligations as and whenever they fall due. 4.0 Gearing Ratios 4.1 Gearing 2012 2013 2014 2015 2016 Exxon Mobil 4.4 3.6 6.02 10.12 14.26 Shell 19.2 12.7 10.6 2.75 3.7 4.2 Debt-to-Equity Gearing ratios are used to ascertain the degree for which a company adopts debt funds to finance its projects both short and long-term visa vie the available equity funds. A balanced gearing ratio is always preferred since it means that the company has made enough efforts to protect the control of its operations from external creditors (Brigham & Ehrhardt, 2013). A company with a huge gearing or debt-to-equity ratio is an indication that it is solely focused on utilising debt as opposed to equity funds to conduct its operations, which is a risky affair as it could result to cash flow deficits that could arise due to payment of interest expenses as and whenever they fall due. Looking at the graph and table above, it can be noted ExxonMobil has made significant efforts to cut down on the level of debt financing. This is a strategy that it uses to free its cash flows from paying off possible interest costs and, thereby commits them to funding long-term projects in Guyana and the recently adopted Mozambique oil wells. References List Ahrendsen, B.L. & Katchova, A.L., 2012. Financial ratio analysis using ARMS data. Agricultural Finance Review, 72(2), pp.262-272. Brigham, E.F. & Ehrhardt, M.C., 2013. Financial management: Theory & practice. Cengage Learning. ExxonMobil. 2017. 2016 Summary Annual Report. Accessed from http://cdn.exxonmobil.com/~/media/global/files/summary-annual-report/2016_summary_annual_report.pdf McCue, M.J. & Nayar, P., 2009. A Financial Ratio Analysis of For‐Profit and Non‐Profit Rural Referral Centers. The Journal of Rural Health, 25(3), pp.314-319. Poznanski, J , SadowniK, & Gannitsos, I. 2013. Financial Ratio Analysis: A Guide to Useful ratios for understanding your social entreprise’s financial performance. Accessed from https://www.demonstratingvalue.org/sites/default/files/resource-files/Financial%20Ratio%20Analysis%20Dec%202013.pdf Stock Analysis on Net. 2017. ExxonMobil & Industry Average Ratio Analysis. Accessed from https://www.stock-analysis-on.net/NYSE/Company/Exxon-Mobil-Corp/Ratios/Profitability Appendices Profitability ratios: 2016 2015 2014 2013 2012 Return on equity 7840*100/167325= 4.68% 16150*100/170811= 9.45% 32,520*100/174,399=18.65% 32,580*100/174,003=18.72% 44,880*100/165,863=27.06% Net Profit Margin (%) 7,840/197,518 *100= 3.96% 16,150/23,6180 *100 = 6.8% 32,520/364,763 *100= 8.9% 32,580/390,247 *100= 8.3% 44,880/420,714 *100= 10.7% Gross Profit Margin 61,420/218,608 *100= 28.09% 71,220/259,488 *100= 27.45% 97,932/394,105 *100= 24.85% 105,566/420,836 *100= 25.08% 117,044/453,123 *100= 25.83% Management Efficiency: 2016 2015 2014 2013 2012 Inventory turnover 15080 * 365/156573= 35 days. 16245 * 365/185161= 32 days. 16678 * 365/ 285797= 21 days. 16135 * 365/ 303839= 19 days 14542 * 365/ 321398= 16 days. Receivable turnover 21,394*365/218608= 35 days. 19875*365/259488= 27 days. 28,009*365/394,105= 25 days. 33,152*365/420,836=28 days. 34987*365/451509=28 days. Payables turnover 31193*365/156573= 72 days 32412*365/185161=63 days 42227*365/285799= 50 days 48085*365/303839= 57 50728*365/321398= 57 Liquidity Ratios: 2016 2015 2014 2013 2012 Current ratio 41,416/47,638= 0.87 42,623/53,976= 0.79 52,910/64,633= 0.82 59,308/71,724= 0.83 64,460/64,139= 1.005 Quick ratio 42,623-4,208-2,798/53,976= 0.65 41416-10,879-4,203/47638= 0.55 52,910-12,384-4,294/64633= 0.56 59,308-12,117-4,018/71,724= 0.60 64,460-10,836-3,706/64,139= 0.78 Gearing Ratios: 2016 2015 2014 2013 2012 Gearing ratio 28932*100/(173830+28932)= 14.26% 19925*100/(176810+19925)=10.12% 11653*100/181064+11653= 6.02% 6891*100/(180495+6891)=3.6% 7928*100/(171660+7928)=4.4% Debt: equity ratio 28932*100/173830=16.64% 19925*100/176810= 11.26% 11653*100/176810=11.26% 6891*100/180495= 3.8% 7928*100/171660= 4.6% Industry Averages Read More