Trend Analysis for British Petroleum for 2008 to 2011 - Report Example

Table of Contents Contents Page No. 1) Introduction 2 2) Trend Analysis 2 3) Financial Ratio Analysis 5 a. Profitability Ratios 6 b. Asset Efficiency Ratios 8 c. Liquidity Ratios 9 d. Capital Structure Ratios 10 e. Market Performance Ratios 11 4) Conclusion 12 5) Calculation of Ratios 13 6) References 28 Introduction British Petroleum (BP) which performs in the petrochemical industry has is one of the pioneer in the industry and contributes positively by taking decisions which has helped to develop the business. The company has its headquarters in London, United Kingdom and has continuously looked to innovate so that the society is able to gain. This report analyzes the financial report for BP for the year 2008 to 2011 where the report analyzes the trend analysis and the different ratios which will have a role in decision making. Proper understanding of the financial statement will help to take better decisions and will help to project the future performances based on past figures. To understand the financial statement better and to understand the manner in which decision gets influenced the paper analyzes the 4 years financial statement from 2008 to 2011 of BP and will help to highlight the different areas through which better decisions can be taken. Trend Analysis Trend analysis presents the changes in the past performance based on absolute and percentage gain so that the users are able to understand the manner in which business has progressed over the years. Analyzing the financial figure will help to understand the manner in which the performance is evaluated. This thereby looks to present the financial performance of BP for 2008 to 2011. The trend analysis which has been presented below shows that BP has witnessed an increase in sales along with the growth in the bottom line which has grown from 2008 to 2011 except in 2010 where a loss of $3324 million was incurred. A change was witnessed in 2011 where BP got a profit of $26097 million highlighting that the business was able to improve its performance. The reason for the loss in 2010 could be due to the prevailing economic conditions as world economies were reeling under recession which might have impacted the performance of BP is an area which needs to be considered for better decision making. Trend Analysis for BP for 2008 to 2011 Figures in $’000 2011 (in millions) 2010 (in millions) 2009 (in millions) 2008 (in millions) Sales Revenue 386463 308928 246138 367053 EBIT 39817 (3702) 25124 34283 Profit after Tax 26097 (3324) 16759 21666 Trend Analysis Sales Revenue 105.28 84.16 67.05 100 EBIT 116 (10.79) 73.28 100 Profit after Tax 120.45 (15.34) 77.35 100 Graphical Representation The percentage representation for the changes in trend analysis has been shown through a graphical representation which shows a dip in 2010 due to loss and highlights the manner in which the performance of BP has fluctuated over the period of 4 years. BP Cash Flow Statement for 2008 to 2011 2008 $ M 2009 $ M 2010 $ M 2011 $ M Cash from Operating Activities 38095 27716 13616 22154 Cash from Investing Activities (22767) (18133) (3960) (26633) Cash from Financing Activities (10509) (9551) 840 482 Currency Differentiation (184) 110 (279) (492) Increase in cash & cash Equivalent 4635 142 10217 (4489) Cash & cash Equivalent at the beginning of the year 3562 8197 8339 18556 Cash & cash Equivalent at the end of the year 8197 8339 18556 14067 Source: Information from BP 2008, 2009, 2010, 2011, Annual Reports. The analysis of the cash flow statement for the period of 4 years as shown above also shows fluctuations and changes due to the changing business environment. This has thereby impacted the overall performance of BP and has made the cash flow change which has also changed the ending cash balance each year (Finance, 2011). Financial Ratio Analysis The calculation of the different financial ratio is as below Ratio 2008 2009 2010 2011 Profitability Ratios Return on Equity (ROE) 23.52% 16.41% -3.46% 23.2% Return on Assets (ROA) 15.02% 10.64% -1.35% 13.58% Gross Profit Margin 14.54% 16.64% 3.23% 14.29% Profit Margin 9.34% 10.2% -1.19% 10.3% Cash flow to sales revenue ratio 10.37% 11.26% 4.4% 5.73% Asset Ratios Asset turnover ratio 1.6 times 1.04 times 1.13 times 1.31 times Inventory turnover (days) 19.46 days 40.21 days 32.01 days 28.27 days Debtors turnover (days) 8.46 days 43.79 days 43.18 days 41.10 days Liquidity Ratios Current ratio 0.95 times 1.14 times 1.08 times 1.06 times Quick asset ratio 0.71 times 0.25 times 0.76 times 0.75 times Cash flow ratio 0.54 times 0.46 times 0.16 times 0.26 times Capital structure Ratios Debt to equity ratio 160.54% 183.92% 131.08% 147.79 % Debt ratio 61.61% 64.77% 56.72% 57.88% Equity ratio 38.39% 35.23% 43.28% 43.03% Interest coverage ratio 31.95 times -3.16 times 22.63 times 22.16 times Debt coverage ratio 4.34 times 6.79 times 2.68 times 1.74 times Market Performance Ratios Net tangible asset backing(NTAB) per share 3.63/share 4.04/share 3.61/share 4.05/share Earning per share 112.59 cents/share 88.49 cents/share (19.81) cents/share 135.93 cents/share Operating cash flow per share 170 cents/share 124 cents/share 61 cents/share 99 cents/share Dividends per share 55.05 cents/share 56 cents/share 14 cents/share 28 cents/share Ratio Analysis Ratio analysis develops the required relationship between the different financial figures and helps the user to understand the manner in which one financial figure has an impact on the other. Using ratio analysis helps the user to determine the manner in which different factors have relevance on decision making. The paper examines the different ratios like Profitability Ratios, Assets Efficiency Ratios, Liquidity Ratios, Capital Structure Ratios and Market Performance Ratios. Profitability Ratios This ratio helps to determine the manner in which the organization is able to generate profits from the daily operating activities of the business. This helps to determine the manner in which the business is able to use the different resources and generate adequate profits which will help the different stakeholders to gather valuable information about the organization. The different ratios which has been analyzed on the basis of profitability are return on equity, return on assets, gross profit margin, profit margin and cash flow to sales revenue ratio The profitability ratios on the whole for BP shows fluctuations and improvement except in 2010 where it turned out to be negative. This could be due to the prevailing economic conditions which might have impacted the business and generating revenues would have become difficult. The return on equity and return on assets shows efficiency in the use of both i.e. equity and assets except in 2010 where the business incurred a loss. The calculation of the ratios shows that ROA was (1.35%) in 2010 and ROE to be (3.46%) in 2010 which is a slight concern. In the year 2011 things changed and BP was able to demonstrate better use of both assets and equity in generating profits The net profit margin shows that BP had been able to generate profits all the year except in 2010 where they incurred a loss as the net profit margin was at -1.19% highlighting a loss. A comparison with the gross profit ratio also shows that the business incurs a high proportion on indirect expenses which had also resulted in a drastic fall in the profit from gross profit margins (Deloof, 2003) The gross profit margin ratio shows that the business was able to generate profits in every year after deducting the direct expenses associated with the product. This will make the company stand in good light and will help to attract more and more people to invest in the company as the business is able to generate profits from its daily operations The cash flow ratio shows fluctuation and a sharp decrease from 2010 to 2011 as it has decreased from 10.37% in 2008 to 5.73% in 2011 raising concerns regarding the manner in which the organization has been able to generate liquidity from their daily operations. Asset Efficiency Ratios This ratio helps to understand the manner in which the organization is able to use its current and non current assets and liabilities to generate the require revenues for the business. Understanding the ratio will help to understand whether the business has more or less assets and will determine the manner in which the assets has been used. The analysis of the asset turnover ratio for BP shows that the organization has revolved its assets more than once all the year from 2008 to 2011. The ratio has decreased in the year 2010 but apart from it a consistency rate of 1.3 has been maintained. This highlights that the business has been able to revole its assets properly and has used the assets to generate the required revenues from the business. The debtors turnover ratio highlights that BP has been efficient to collect dues from the market as it has revoled its debtors more than 8 times in a year. This corresponds to the fact that money from the market is collected within a period of 45 days and will thereby reduce the chances of bad debts (Gandy, 2011). This will ensure that the money is rotated easily and will help to reduce the risk for the business The inventory turnover ratio shows that BP looks to have inventory for a period of one month or 30 days apart from 2010 where it increased to 40 days. BP then reduced the inventory to 32 days in 2011 and ensured that funds are not blocked in this direction. The analysis also depicts that it will reduce the chances of the inventory becoming obsolete and will thereby ensure better management of funds and resources. Liquidity Ratios This ratio looks towards examining the short term liquidity position of the organization by examining the short term assets and liabilities so that a relationship between them can be established. The liquidity ratio will help the investor and suppliers to understand the short term debt paying ability of the business and will help to reduce the risk for the different stakeholders The current ratio for BP shows that the ratio was 0.95 times in 2008, 1.14 times in 2009, 1.08 in 2010 and 1.06 in 2011. The ratio shows that BP has ensured consistency and ensured that the liquidity position remains stable all the year and is sufficient to pay their short term debts. Further, improving the ratio will help to further consolidate their position and ensure that better liquidity is ensured within the system (Lyroudi & Lazaridis, 2000) The quick ratio shows a dip from current ratio highlighting that the business has inventories and receivables. It is seen that the inventories and receivable holding in 1/4th which has thereby reduced the liquidity ratio to ¾ showing that the business has some degree of lesser liquidity. BP needs to improve the ratio further and ensure more liquidity so that investors and other stakeholders feel that their investment is safer (Filbeck & Krueger, 2005) The cash flow ratio shows that in 2008 it was 0.54 times whereas it continuously decreased and felt to 0.46 times in 2009 and then 0.16 times in 2010 and finally 0.26 times in 2011. This is a concern for BP as it shows fluctuations in the liquidity position that the organization has been able to generate for the daily activities. This is a slight concern for BP and need to work on improving the ratio for better safety of investments (Eljelly, 2004) Capital Structure Ratios Capital structure ratio which is also termed as gearing ratio helps to determine the manner in which the business has financed their business and looks to identify whether the business uses debt or equity financing (Antony, 2004). Analyzing the ratio helps to understand the debt structure and brings forward the manner in the manner in which the business is able to use different source of financing. Debt to equity ratio shows that BP has a higher debt component than equity and has increased there debt component as it is 1.5 times the equity highlighting that the business finance its business through debt Interest coverage ratio also highlights that BP is able to ensure that the interest is easily paid and has developed a framework through which the business ensures that the required efficiency to pay off their interest easily (Padachi, 2006) The debt coverage ratio shows that in 2008 the ratio was 1.74 times, 2009 it was 2.68 times, 2010 it was 6.79 times and 2011 it was 4.34 times. This thereby shows that the business is able to pay its debt easily and will be able to ensure better liquidity within the organization Market Performance Ratio This ratio helps to understand the manner in which the share prices fluctuate due to changes in the business working style. This ratio highlights the manner in which the business has been able to bring a change in the share prices due to changes in different fundamentals and is as The net tangible asset backing shows that the business has adequate asset per outstanding shares highlighting that the business will be able to pay its shareholders easily The earnings per share shows that BP has continuously ensured better earnings for the organization through which the earnings has increased apart from 2010 where they incurred a loss resulting in the EPS to be -19.81 per cents. The dividend per share shows that the dividend in 2008 is 55.05 cents, 2009 is 56 cents, 2010 is 14 cents and 2011 is 28 cents. This shows that the business jas declared dividend all the year and have ensured that the shareholders get something in return for the risk that has been taken Conclusion The report which analyzes the performance for BR for the period 2008 to 2011 shows that the performance has continuously changed over the years as seen from the trend analysis. The trend analysis shows that BP has witnessed an increase in sales along with the growth in the bottom line which has grown from 2008 to 2011 except in 2010 where a loss of $3324 million was incurred. A change was witnessed in 2011 where BP got a profit of $26097 million highlighting that the business was able to improve its performance. A look at the financial ratios shows that the profitability ratios on the whole for BP shows fluctuations and improvement except in 2010 where it turned out to be negative. The return on equity and return on assets shows efficiency in the use of both i.e. equity and assets except in 2010 where the business incurred a loss. The calculation of the ratios shows that ROA was (1.35%) in 2010 and ROE to be (3.46%) in 2010 which is a slight concern. The asset efficiency ratios highlighted that BP shows that the organization has revolved its assets more than once all the year from 2008 to 2011. The ratio has decreased in the year 2010 but apart from it a consistency rate of 1.3 has been maintained. In a similar manner the debtors turnover ratio highlights that BP has been efficient to collect dues from the market as it has revolved its debtors more than 8 times in a year. This corresponds to the fact that money from the market is collected within a period of 45 days and will thereby reduce the chances of bad debts. The current ratio shows that BP has ensured consistency and ensured that the liquidity position remains stable all the year and is sufficient to pay their short term debts. BP has been able to maintain sufficient liquidity and has ensured better operations (Saleem & Rehman, 2011). The market efficiency ratio confirms the same as BP has thereby witnessed a growth in their share prices highlighting better use of resources in generating profits which has thereby impacted the organization in a positive manner. Calculation of Ratios Profitability Analysis Return on Equity (ROE) Formula: x100 2008= 21666 / 92109 x 100 = 23.52% 2009= 16759 / 102113 x 100 = 16.41% 2010=  (3324) / 95891 x 100 = 3.46% 2011= 26097 / 112482 x 100 = 23.20% Return on Assets (ROA) Formula: x100 2008 = 34283 / 228238 x 100 = 15.02% 2009 = 25124 / 235968 x100 = 10.64% 2010 = (3702)/ 272262 x 100 = 1.35% 2011 =39817 / 293068  x100= 13.58% Gross Profit Margin Formula: x100 2008 = 53377 / 367053 x 100 = 14.54% 2009= 40973 / 246138 x 100 = 16.64% 2010=10005 / 308928 x 100 = 3.23% 2011=55227 / 386463 x 100 = 14.29% Profit Margin Formula: x100 2008 = 34283 / 367053 x 100 = 9.34% 2009 = 25124 / 246138 x100 = 10.20% 2010 = (3702) / 308928 x100 = 1.19% 2011= 39817 / 386463 x100 = 10.30% Cash Flow to Sales Revenue Ratio Formula: x100 2008 = 38095 / 367053 x100 = 10.37% 2009= 27716 / 246138 x100 = 11.26% 2010= 13616 / 308928 x100= 4.40% 2011= 22154 / 386463 x100 = 5.73% Assets Efficiency Analysis 2008 Asset Turnover Ratio Formula: Sales Revenue / Average Total Assets = X times 367053 / 228238 = 1.60 times Days Inventory and Days Debtors Ratio Days Inventory Formula: Average Inventory / Cost of Sales * 365 = X days 16821 / 315409 * 365 = 19.46 days (approx.) Days Debtors Formula: Average Accounts Receivable / Sales Revenue * 365 = X days 8510 / 367053 * 365 = 8.46 days (approx.) Times Inventory Turnover Formula: Cost of Sales / Average Inventory = X times 315409 / 16821 = 18.75 times Times Debtors Turnover Formula: Sales Revenue / Average Accounts Receivable = X times 367053 / 8510 = 43.13 times 2009 Asset Turnover Ratio Formula: Sales Revenue / Average Total Assets = X times 246138 / 235968 = 1.04 times Days Inventory and Days Debtors Ratio Days Inventory Formula: Average Inventory / Cost of Sales * 365 = X days 22605 / 205165 *365 = 40.21 days(approx.) Days Debtors Formula: Average Accounts Receivable / Sales Revenue * 365 = X days 29531 / 246138 * 365 = 43.79 days(approx.) Times Inventory Turnover Formula: Cost of Sales / Average Inventory = X times 205165 / 22605 = 9.07times Times Debtors Turnover Formula: Sales Revenue / Average Accounts Receivable = X times 246138 / 29531 = 8.33times 2010 Asset Turnover Ratio Formula: Sales Revenue / Average Total Assets = X times 308928 / 272262 = 1.13 times Days Inventory and Days Debtors Ratio Days Inventory Formula: Average Inventory / Cost of Sales *365 = X days 26,218 / 298,923 * 365 = 32.01days (approx.) Days Debtors Formula: Average Accounts Receivable / Sales Revenue*365 = X days 36,549 / 308,928 *365 = 43.18days (approx.) Times Inventory Turnover Formula: Cost of Sales / Average Inventory = X times 298,923 / 26,218 = 11.40 times Times Debtors Turnover Formula: Sales Revenue / Average Accounts Receivable = X times 308,928 / 36,549 = 8.45 times 2011 Asset Turnover Ratio Formula: Sales Revenue / Average Total Assets = X times 386,463 / 293,068 = 1.31 times Days Inventory and Days Debtors Ratio Days Inventory Formula: Average Inventory / Cost of Sales * 365 = X days 25,661 / 331,236 * 365 = 28.27days (approx.) Days Debtors Formula: Average Accounts Receivable / Sales Revenue * 365 = X days 43,526 / 386,463 *365 = 41.10days (approx.) Times Inventory Turnover Formula: Cost of Sales / Average Inventory = X times 331,236 / 25,661 = 12.90 times Times Debtors Turnover Formula: Sales Revenue / Average Accounts Receivable = X times 386,463 / 43,526 = 8.87times Capital Structure Analysis 2008 Figures in (in Million $) Capital Structure Ratios - Debt to Equity Ratio Formula: Total Liabilities/Total Equity*100 = X% 136,129 / 92,109 * 100 =147.79 % Debt Ratio Formula: Total Liabilities/Total Assets*100 = X% 136,129 / 235,968 * 100 = 57.68% Equity Ratio Formula: Total Equity/Total Assets*100 = X% 92,109 / 235,968 * 100 = 39.03% Interest Servicing Ratio Interest Coverage Ratio Formula: EBIT/Net Finance Costs = X times 34,283 / 1,547 =22.16times Debt Coverage Ratio Debt Coverage Ratio Formula: Non-Current Liabilities/Net Cash flows provided by operating Activities = X times 66,336 / 38,095 = 1.74times 2009 Figures in (in Million $) Capital Structure Ratios - Debt to Equity Ratio Formula: Total Liabilities/Total Equity*100 = X% 133,855 / 102,113 * 100 = 131.08% Debt Ratio Formula: Total Liabilities/Total Assets*100 = X% 133,855 / 235,968 * 100 = 56.72% Equity Ratio Formula: Total Equity/Total Assets*100 = X% 102,113 / 235,968 * 100 = 43.27% Interest Servicing Ratio Interest Coverage Ratio Formula: EBIT/Net Finance Costs = X times 25,124 / 1,110 = 22.63times Debt Coverage Ratio Debt Coverage Ratio Formula: Non-Current Liabilities/Net Cash flows provided by operating Activities = X times 74,535 / 27,716 =2.68times 2010 Figures in (in Million $) Capital Structure Ratios - Debt to Equity Ratio Formula: Total Liabilities/Total Equity*100 = X% 176,371 / 95,891 * 100 = 183.92 % Debt Ratio Formula: Total Liabilities/Total Assets*100 = X% 176,371 / 272,262 *100 = 64.77% Equity Ratio Formula: Total Equity/Total Assets*100 = X% 95,891 / 272,262 * 100 = 35.22% Interest Servicing Ratio Interest Coverage Ratio Formula: EBIT/Net Finance Costs = X times (3702) / 1,170 = -3.16 times Debt Coverage Ratio Debt Coverage Ratio Formula: Non-Current Liabilities/Net Cash flows provided by operating Activities = X times 92,492 / 13,616 = 6.79 times 2011 Figures in (in Million $) Capital Structure Ratios - Debt to Equity Ratio Formula: Total Liabilities/Total Equity*100 = X% 180,586 / 112,482 *100 = 160.54% Debt Ratio Formula: Total Liabilities/Total Assets*100 = X% 180,586 / 293,068 *100 = 61.61% Equity Ratio Formula: Total Equity/Total Assets*100 = X% 112,482 / 293,068 * 100 = 38.38% Interest Servicing Ratio Interest Coverage Ratio Formula: EBIT/Net Finance Costs = X times 39,817 / 1,246 = 31.95 times Debt Coverage Ratio Debt Coverage Ratio Formula: Non-Current Liabilities/Net Cash flows provided by operating Activities = X times 96,268 / 22,154 = 4.34 times Liquidity Analysis 2008 Current Ratio = Current Assets / Current Liabilities = 66,384 / 69,793 = 0.95 times. Quick Asset Ratio = (Current assets-Inventory) / Current Liabilities = (66,384 -16,821) / 69,793 = 0.71times. Cash Flow Ratio = Net Cash Flows from Operating Activities / Current Liabilities = 38,095 / 69,793 = 0.54 times. 2009 Current Ratio = Current Assets / Current Liabilities = 67,653 / 59,320 = 1.14 times. Quick Asset Ratio = (Current assets-Inventory) / Current Liabilities = (67,653 – 22,605) / 59,320 = 0.75 times. Cash Flow Ratio = Net Cash Flows from Operating Activities / Current Liabilities = 27,716 / 59,320 = 0.46 times. 2010 Current Ratio = Current Assets / Current Liabilities 89,725 / 82,832 = 1.08times. Quick Asset Ratio = (Current assets-Inventory) / Current Liabilities = (89,725 – 26,218) / 82,832 = 0.76times. Cash Flow Ratio = Net Cash Flows from Operating Activities / Current Liabilities = 13,616 / 82,832 = 0.16times. 2011 Current Ratio = Current Assets / Current Liabilities = 89,164 / 83,780 = 1.06times. Quick Asset Ratio = (Current assets-Inventory) / Current Liabilities = (89,164 – 25,661) / 83,780 = 0.75times. Cash Flow Ratio = Net Cash Flows from Operating Activities / Current Liabilities = 22,154 / 83,780 = 0.26times. Net tangible asset backing (NTAB) per share = Ordinary shareholders’ equity-Intangible assets = x cents/share Number of ordinary shares on issue at year-end Year 2008 =$ 91303m-$ 10260 = 3.63/share 22311397567 shares Year 2009 =$101613m-$ 11548m = 4.04/share 22311397567 shares Year 2010 =$ 94987m-$ 14298m = 3.61/share 22311397567 shares Year 2011 = $ 111465m-$ 21102m = 4.05/share 22311397567 shares Earnings per share = Profit available to ordinary shareholders = x cents/share Weighted number of ordinary shares on issue Year 2008 = 112.59 cents/share Year 2009 = 88.49 cents/share Year 2010 = (19.81) cents/share Year 2011 = 135.93 cents/share Operating cash flow per share = Net cash flow operating activities-Preference dividends = x cents/share Weighted number of ordinary shares on issue Year 2008 =$ 38095 -$ 0 =170 cents/share 22311397567 shares Year 2009 =$ 27716 -$ 0 = 124 cents/share 22311397567 shares Year 2010 =$ 13616 -$ 0 = 61 cents/share 22311397567 shares Year 2011 = $ 22154 -$ 0 = 99 cents/share 22311397567 shares Dividends per share =Dividends paid to ordinary shareholders in the current reporting period = x cents/share Weighted number of ordinary shares on issue Year 2008 = 55.05 cents/share Year 2009 = 56 cents/share Year 2010 = 14 cents/share Year 2011 = 28 cents/share References Antony, T. 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