BP Financial Statement Analysis - Example

BP Financial Statement Analysis Name: Course: College: Tutor: Date: Company Overview BP is one of the well established companies in the oil and exploration industry. It was founded by William Knox D'Arcy. The company went through a variety of challenges including two bankruptcy threats in its earlier days of operation along with the First and Second World Wars. From that first uncertain search for oil in Persia BP has grown to become a global energy company. BP not only provides large quantities of oil but is also making strides along a promising path towards oil’s alternatives. The company’s headquarters is located in London, U.K. It has subsidiaries all over the globe with main concentration in the U.S.A, Russia, Azerbaijan, Angola, the U.K, North Africa, Canada, the Middle East and Asia. It is involved in the exploration, production, refining and distribution of natural gas, petroleum and other related products. Major competitors in the oil and exploration industry include Apache, Exxon Mobil, and ConocoPhillips (all based in the US), as well as LUKOIL along with Tatneft (Russia), National Iranian Oil Company, Royal Dutch Shell (the Netherlands), PETROBRAS (Brazil) also Saudi Aramco (Saudi Arabia) (BP, 2013; First Research, 2013). Horizontal Financial Statement Analysis Financial statement analysis is the analysis of financial information to understand the information and apply it in decision making. The analysis can either be horizontal or vertical. Horizontal analysis compares specific financial items over different accounting periods. The two approaches used are absolute figures or percentages. The absolute approach is preferred when trying to decide whether a company is cautious or extreme in spending on certain items. This method also helps in determining the outcomes of outside sways on the company. The second method is simply the conversion of the absolute figures into percentages. It is mainly worthwhile when matching small companies to large companies (Edmonds et al, 2006; Beranek, 1963). Table 1: Horizontal Analysis of the Balance Sheet Horizontal analysis Group balance sheet At 31 December 2012 2010 Absolute Change Percentage Change Non-Current Assets Property, plant and equipment 120,448 110,163 10,285 9.34 Goodwill 11,861 8,598 3,263 37.95 Intangible assets 24,041 14,298 9,743 68.14 Investments in jointly controlled entities 15,724 14,927 797 5.33 Investments in associates 2,998 13,335 (10,337) (77.52) Other investments 2,702 1,191 1,511 126.87 Fixed assets 177,774 162,512 15,262 9.39 Loans 695 894 (199) (22.26) Trade and other receivables 4,754 6,298 (1,544) (24.52) Derivative financial instruments 4,294 4,210 84 2.00 Prepayments 809 1,432 (623) (43.51) Deferred tax assets 874 528 346 65.53 Defined benefit pension plan surpluses 12 2,176 (2,164) (99.45) 189,212 178,050 11,162 6.27 Current assets Loans 247 247 0 0 Inventories 27,867 26,218 1,649 6.29 Trade and other receivables 37,664 36,549 1,115 3.05 Derivative financial instruments 4,507 4,356 151 3.47 Prepayments 1,508 1,574 (66) (4.19) Current tax receivable 456 693 (237) (34.20) Other investments 319 1,532 (1,213) (79.18) Cash and cash equivalents 19,548 18,556 992 5.35 91,666 89,725 1,941 2.16 Assets classified as held for sale 19,315 4,487 14,828 330.47 110,981 94,212 16,769 17.80 Total assets 300,193 272,262 27,931 10.26 Current liabilities Trade and other payables 47,154 46,329 825 1.78 Derivative financial instruments 2,658 3,856 (1,198) (31.07) Accruals 6,810 5,612 1,198 21.35 Finance debt 10,030 14,626 (4,596) (31.42) Current tax payable 2,501 2,920 (419) (14.35) Provisions 7,587 9,489 (1,902) (20.04) 76,740 82,832 (6,092) (7.35) Liabilities directly associated with assets classified as held for sale 846 1,047 (201) (19.20) 77,586 83,879 (6,293) (7.50) Non-current liabilities Other payables 2,102 14,285 (12,183) (85.29) Derivative financial instruments 2,723 3,677 (954) (25.95) Accruals 448 637 (189) (29.67) Finance debt 38,767 30,710 8,057 26.24 Deferred tax liabilities 15,064 10,908 4,156 38.10 Provisions 30,334 22,418 7,916 35.31 Defined benefit pension plan and other post-retirement benefit plan deficits 13,549 9,857 3,692 37.46 102,987 92,492 10,495 11.35 Total liabilities 180,573 176,371 4,202 2.38 Net assets 119,620 95,891 23,729 24.75 Equity BP shareholders’ equity 118,414 94,987 23,427 24.66 Minority interest 1,206 904 302 33.41 Total equity 119,620 95,891 23,729 24.75 Source: BP 2012 and 2010 annual financial reports The figures show improved performance over the three year period of 2010-2012. This is evidenced by increases in asset items and major reductions in liabilities. Non-current assets increased by 6.3 percent to $189,212 million in 2012. The major increase was the other investments item that posted a 126.9 percent jump to $2,702 million in 2012. This may be attributed to the company’s initiative to venture in alternative energy. Current assets were up by 17.8 percent to reach $110,981 million in 2012. Interestingly, other investments in this category shed off a massive 79.2 percent. Total current liabilities went down by 7.5 percent down to $77,586 million in 2012. On the other hand, total non-current liabilities were up by $10,495 million, an 11.4 percent increase. Non-current liabilities pushed total liabilities up by 2.4 percent to reach $180,573 million in 2012. Other payables posted the greatest decline by 85.3 percent as deferred tax liabilities increased by 38.1 percent. The increase in total assets pushed net assets up by 24.8 percent to $119,620 million in 2012; total equity went up in the same proportion. Table 2: Horizontal Analysis of the Income Statement Source: BP 2012 and 2010 annual financial reports Total revenues and other income inched 25.7 percent to hit $388,285 million in 2012. Interest and other income went up by 133.5 percent as earnings from jointly controlled entities – after interest and tax shed off 36.7 percent. The increase in revenue pushed Profit (loss) before interest and taxation from a loss of $3,702 million in 2010 to a profit on $19,733 million in 2012. The increased revenue can be attributed to the economic recovery across the globe contributed significantly to an increase in crude oil prices along with recovery from the Gulf of Mexico tragedy that impacted 2010 operations negatively. After tax profit went up to $18,809 million in 2012 leading to a profit of $11,816 million from a loss of $3,324 million in 2010. Ratio Analysis The study shall focus on three major measures of liquidity; the current ratio, quick ratio and the cash to current liabilities ratio. Table 3: Company ratios Ratio 2012 2010 Change Current ratio 1.19 1.08 +0.11 Quick ratio 0.83 0.77 +0.06 Cash to current liabilities ratio 0.25 0.22 +0.03 Table 4: Company Ratios versus Industry Average (2011) Ratio Company Industry average Variation Current ratio 1.14 1.34 -0.20 Quick Ratio 0.81 1.01 -0.20 Cash to current liabilities ratio 0.31 0.54 -0.23 The current ratio for both periods was above 1 indicating that BP would be able to pay off its debts with its assets. However the quick ratio and the cash to current liabilities ratio were below 1. This means inventory along with cash are significant current assets to the company without which the company could face serious liquidity problems (Blecke & Gotthilf, 1980). In the industry, BP’s performance was poorer for both periods as all ratios were well below the industry averages in 2011. The company is in worse liquidity situation as compared to its competitors in the oil and exploration industry. However, the margin is not large. The company is fairly solvent (Bizminer, 2013; Beranek, 1963). Conclusion and Recommendation Generally, BP’s performance is going up; an indication of better prospects in future based on its improved performance over the 2010-2012 periods. The horizontal analysis of both the balance sheet and the income statement show improved performance over the three year period of 2010-2012. This is evidenced by increases in asset items and major reductions in liabilities along with an increase in total revenues and other income that went up 25.7 percent to hit $388,285 million in 2012. The company also posted good profits for the year ended in 31 December 2012. The ratios also reflect improved performance of the company although they are slightly lower compared to the industry averages. However, the oil and exploration industry is susceptible to price changes. Irrespective of this challenge, investment in BP is welcome as the company is diversifying its activities to alternative energy. I would recommend any potential investors to put their money in BP. References BP., (2013), About BP, retrieved on 25 April 2013 from: http://www.bp.com/sectionbodycopy.do?categoryId=2&contentId=7065607 Beranek, W., (1963), Analysis for financial decisions, Homewood, Ill, R. D. Irwin Blecke, C. J., and Gotthilf, D. L., (1980), Financial analysis for decision making, 2nd edn Englewood Cliffs, N.J, Prentice-Hall Edmonds, C., Edmonds, T., Olds, P., and Schneider, N., (2006), Fundamental Managerial Accounting Concepts, New York, McGraw-Hill Irwin Bizminer, Industry Financial Reports, retrieved on 25 April 2013 from: http://www.bizminer.com/products/analysis/industry/financial-ratios-profiles.php Read More