The Financial Performance of British Petroleum - Report Example

The Financial Performance of British Petroleum (BP)

Introduction

Oil and gas industry play an important role in the economy and is among the leading industries across the world. The main activities in the industry involve exploration of oil and gas, extraction, processing and marketing of its products. Many companies depend on products from oil and gas as a source of energy. British Petroleum (BP) is among the leading companies in world that deals with the production of oil and gas (Dayanandan & Donker, 2011). This paper will present a report to the newly appointed chairperson of British Petroleum addressing the following issues: a report that will identify six different groups of users of financial statements that the company uses and offer a summary of the users as well as offer a brief description of the purposes they use the financial statements. Besides this, the paper will analyze the performance of the company for the past five years. In the analysis, the report will present calculations of different ratios in relation to the performance of the company. Lastly the report will conclude with a summary of the key findings as well as offer recommendations on the performance of the company over those years.

Overview of the company

As a group, British Petroleum (BP) was established in 1909 after oil reserves were discovered in Arab, currently known as Iran (Peden & Bamberg, 2001). Initially, BP was known as Anglo-Persian Oil Company and later was renamed to BP. In 1906, BP incorporated in England and Wales while in 2001, the company changed its name to BP plc. Due to the increasing demand of its products, the company was forced in 1954 to increase the number of its oil reserves in the Alaska and the North Sea and changed its name to British Petrol due to the process of nationalization in Iran (Peden & Bamberg, 2001). The company has its headquarters in London and is listed among other companies in the London Stock Exchange (LSE).

Currently, the business of the company is divided into four major sectors (Biryukova & Valeyeva, 2015). The first sector is production and exploration of oil and gas across the world. The second sector is processing and marketing of natural oil into its products to different customers. The company owns approximately 30, 000 service stations across the world with majority stations in the USA. The third sector is petrochemical processing that produces chemical products. The company owns about 38 factories across the world. The last sector is gas, energy as well as renewable energy. As a result of the increasing demand in gas, BP pays an important role in the economy. The company operates in over 80 countries and has employed approximately 80,000 employees (Bp.com. 2017).

Users of financial statements

The six different groups of users of financial statements that would be interested in British Petroleum include: the owners and investors, management, employees, different governments, lenders and customers (Tsygankov, 2017). Users may be categorized into two, internal and external users. Internal users may include the managers who utilize the financial information to decide over matters related to the operations of the company (Cole, Breesch, & Branson, 2009). On the other hand, external users include those users who are not involved in the operations of the company but have financial interests. Below is the summary of six users interested on the use of financial statements.

Owners and investors

These users include potential and existing shareholders. Financial information assists then in decision making of whether to invest or not in a particular business. Investors into equity consider income and gain on their investment (Cole, Breesch, & Branson, 2009). Income is viewed in terms of dividends while gain is viewed in terms of share price. Potential investors requires information to analyze the potential of the company for profitability and success.9

Employees

The interest of employees on the financial statements of the company is on the stability and profitability of its operations (Cole, Breesch, & Branson, 2009). They focus on the capability of the company to provide benefits to employees and pay their salaries. In addition, they use the performance and financial position to evaluate the possibility of expansion in the company as well as opportunities for career development.

Government

The government through different governing bodies are interested in the financial performance of the company and more so the tax authorities. Tax authorities are interested in the financial information for purposes of taxation and regulation (Cole, Breesch, & Branson, 2009). The basis of calculating tax is on the outcomes of operations in a company as well as other tax bases. Generally, the government uses this information to understand the amount that a taxpayer makes in order to calculate the amount of tax to be paid.

Customers

Customers will be interested in short term and long term stability as well as the ability to offer quality services and products (Tsygankov, 2017). Over a long-term association between the company customers, the customers also gain the interest on the capability of the company to foresee the future in its operations, stability and existence.

Management

In large organizations, management normally includes professionals who are hired and entrusted by the company with the responsibility of running the business (Tsygankov, 2017). The fact that managers make major economic decisions, they require accounting information to facilitate their decision making for the company.

Lenders

These groups of users are normally referred to as loan creditor group. They may include the short term, medium, and long term lenders. Medium and long-term groups are interested with accounting information to review the potential of cash flow for the business (Benjamin & Stanga, 1997). In addition, they may have the interest in future and current growth and profitability projections of the company.

Profitability Ratios

A profitability ratio can be defined as a measure of profitability over a specific period (Velez-Pareja, 2012). It comprises of a number of financial metrics that are calculated to weigh the ability of a company to create earnings compared to its expenses as well as other costs incurred during a specific period.

Return on Equity

Return on equity (ROE) is a ratio that is associated with the equity holders of a company. It is used to measure the ability of earning return on the company’s equity investment. It is the key measure of profitability and many companies are trying to achieve it through their cost of capital.

Return on Equity Ratio = Net Income ÷ Shareholder’s Equity

In 2012, ROE = 11,582 ÷ 118,414 = 0.1

In 2013, ROE = 23,451 ÷ 300,193 = 0.1

In 2014, ROE = 3,780 ÷ 305,690 = 0.01

In 2015, ROE = (6,484) ÷ 284,305 = 0.02

In 2016, ROE = 115 ÷ 261,832 = 0.001

From the above calculation, the ROE for BP plc is decreasing over the past five years.

Return on Assets

Profits are measured in relation to expenses and costs. They are evaluated in relation to assets to show the effectiveness of a company in organizing assets to produce sales and finally profits. ROA ratio is amount earned out of sales after the expenses, costs, and taxes are deducted.

ROA = Net Income ÷ Total Assets

In 2012, ROA = 11,582 ÷ 110,981 = 0.0004

In 2013, ROA= 23,451 ÷ 96,840 = 0.002

In 2014, ROA = 3,780 ÷ 87,262 = 0.001

In 2015, ROA = (6,484) ÷ 70,602 = 0.001

In 2016, ROA = 115 ÷ 67,813 = 0.003

From the above calculation, it is evident that the company’s return on assets is low. This may also be attributed to the profits that the company has gathered over the last period of five years.

Liquidity Ratio

The term liquidity in accounting refers to the capability of a company to attain its financial objectives. Thus, liquidity ratio is the calculation that is used to measure the ability of a company to offset its debts in the short run. The three ratios calculated under liquidity ratio include current ratio, acid ratio and cash ratio.

Current Ratio

Current ratio is used to determine the ability of a company to pay its current liabilities from current assets. It is calculated as follows:

Current Ratio = Current Assets ÷ Current Liabilities

2012 Current Ratio = 110,981 ÷ 77,586 = 1.4

2013 Current Ratio = 96,840 ÷ 72,812 = 1.3

2014 Current Ratio = 87,262 ÷ 63,615 = 1.4

2015 Current Ratio = 70,602 ÷ 54,724 = 1.3

2016 Current Ratio = 67,813 ÷ 58,354 = 1.2

Over the period 2012 to 2016, the company has had a relatively constant current ratio. The company has been able to pay its current liabilities from current assets.

Acid Ratio

Acid ratio is the second ratio under liquidity ratio. It is also referred to as quick ratio and is used to measure the ability of a company to pay its short-term requirements using liquid assets (Cordis, 2014).

Acid Ratio is calculated as follows: Acid Ratio = (Cash and Cash Equivalents + Short term Investments + Accounts Receivables) ÷ Current Liabilities

Cash Ratio

Cash ratio is the last liquidity ratio. Cash ratio is the most stringent measurement of the liquidity of a company. It focuses mainly on the companies’ cash and cash equivalents.

Cash Ratio = (Cash + Cash Equivalents) ÷ Current Liabilities

In 2012, Cash Ratio = 23,484 – 58,354 = -34,870

In 2013, Cash Ratio = 26,389 – 54,724 = -28335

In 2014, Cash Ratio = 29,763 – 63,615 = -33,852

In 2015, Cash Ratio = 22,520 – 72,812 = -50,292

In 2016, Cash Ratio = 19,548 – 77,586 = -58,038

Working Capital Ratio

Working capital can be defined can be defined as the measure of the efficiency of a company and its financial status in the short run (Cordis, 2014). Working capital ratio shows whether a particular company has sufficient assets to manage its debt in the short run. Working capital ratio can be calculated as follows:

Working Capital = Current Assets – Current Liabilities

In 2012, Working Capital = 67,813 – 58,354 = 9,459

In 2013, Working Capital = 70,602 – 54,724 = 15,878

In 2014, Working Capital = 87,262 – 63,615 = 23,647

In 2015, Working Capital = 96840 – 72,812 = 24,028

In 2016, Working Capital = 110,981 – 77, 586 = 33,395

Over the past five years, the working capital of the company has been increasing progressively. This was as a result of overcoming the major loss from the oil spill.

Financial Summary

Over the past years, British Petroleum experienced major losses, which affected its profitability more so during the great oil spill (Bp.com. 2017). Over the past financial year, BP made profits as well as losses over the financial period. Over the last quarter, the company made a profit of $144 million and a comparable loss of $1,419 (Balance Sheet for BP PLC ADR (BP) from Morningstar.com. 2017).

Findings and Recommendations

Over the last decade, BP plc has experienced an era of financial decline and bad reputation as a result of the great spill in the ocean (Peden & Bamberg, 2001). However, from the calculations of different ratios, it is evident that the company is recovering with a progressive increase in its financial performance.

In order to improve on its financial performance, the company should implement better standards in order to limit losses that may occur. On the other hand, the company should consider strengthening its processes in auditing to improve verification of the financial performance of the company. The company should also consider improving the training and education of its staff to increase competency and capability for better performance of the company.

Conclusion

From the analysis of different ratios applicable to British Petroleum (BP), it is evident that the strategic moves that the company has considered over the past years have improved as compared to past years. Different users of the financial statements have been analyzed and it is evident that different users have different interests in relation to use of financial statements in oil and gas industry. On the other hand, the external and internal evaluation of performance is part of the corresponding ratio analysis. In order to gather sufficient information about a business, ratio analysis play an important part in providing accounting information as well as setting standards to collect the information. The external and internal measurement of performance offers sufficient information to comprehend trends, behaviors and numbers of ratio outcomes. Therefore, ratios offer a standard and regularized manner of analyzing and comparing gathered information. However, the information is not meaningful if the management does not include them into their process of decision-making. In addition, other users who utilize the information to make decisions such as the government, lenders and employees may use the information to determine their interest into the business.