BP Company Financial Analysis - Case Study Example

BP’s COMPANY FINANCIAL ANALYSIS NAME: LECTURER: COURSE NAME: COURSE CODE: DATE: Executive summary Financial analysis is the process of scrutinizing the company’s operations in determining the going concern, stability and viability of the company. Company’s financial analysis unveils the profitability, Efficiency state, liquidity state as well as capital structure of the company hence gives a better opinion to the potential investors and the company’s management[Car13]. BP Company financial report analysis described by the Profitability analysis ratios which comprise of return on equity, return on assets, and profit margin ratios. The Current ratio as well quick asset ratio indicating the BP Company’s liquidity state. Capital structure ratios involves debt to equity ratio, debt ratio, equity ratio, interest coverage ratio and debt coverage ratio. Table of content BP’s COMPANY FINANCIAL ANALYSIS 0 Executive summary 1 Introduction 4 Profitability Ratios 4 Profit margin ratio 4 Return on Assets 5 Efficiency Ratios 7 Asset turnover 7 BP’s Company’s assets turnover ratio indicates an increasing trend in utilizing the assets to generate revenue. According to the graph above BP’s describes that an increase from 2010 assets turnover of 1.09 to 1.28 in 2011 while in 2012 and 2013 the company averages in 1.25 in utilizing the assets to generate revenue. This indicates that the management should emphasize in stringent measures in ensuring that the assets turnover ratio is maintain at acceptable increasing trend. 8 Days Inventory 8 Liquidity Ratios 9 Current ratio 9 Quick Ratio 10 Capital Structure Ratio 11 Debt to Equity Ratio 12 Conclusion 13 Reference list 14 Executive summary 1 Table of content 2 Introduction 3 Profitability Ratios 3 Profit margin ratio 3 Return on Assets 4 Efficiency Ratios 5 Asset turnover 5 Days Inventory 6 Liquidity Ratios 7 Current ratio 8 Quick Ratio 9 Capital Structure Ratio 9 Debt to Equity Ratio 10 Conclusion 11 Reference list 12 Introduction BP is a public limited company which was founded in 1908 as Anglo-Persian Oil Co. It has its registered office in London England and operates in the oil and gas industry and has a worldwide operation. The company main products are petroleum and natural gas. The company produces around 3.2 million barrels per day with an equivalent reserve of 17.9 billion barrels. The company has a total asset value of US$ 305.690 billion and total equity value of US$130.407 billion. BP PLC recent financial statements recorded a revenue of US$ 396.217 billion with an operating income of US$ 31.769 billion with US$ 23.758 billion attributable to ordinary shareholders. The company reported a net cash flow of US$ 22.52 billion. Profitability Ratios Profitability ratios refer to financial ratios utilized to evaluate the company’s effectiveness in making use of the invested assets to generate earnings in over the financial periods[Tho09]. The higher values of the company’s reported profitability ratio indicates that the business is advancing and worth of investment. The BP Company profitability ratios are discussed under profit margin, return on equity as well as return on assets. Profit margin ratio Profit margin ratio is a profitability ratio describing the company’s effectiveness in making use of its investments to generate earnings which is relative to the sales[Nex07]. Profit margin ratio unveils the company’s financial ability to gather for its operating expenses as well as generating surplus earning from sales of goods and services. The higher the company’s profit margin indicates viability of the company in converting its sales into actual earnings. Net profit margin = Profit Margin Ratio Years in US$ Millions Year 2013 2012 2011 2010 EBIT 31,769 19,769 39,815 -3,702 Sales 379,136 375765 375,517 297,107 Profit Margin Ratio 8% 5% 11% -1% BP’s company profit margin ratio indicates a growing trend in the company ability to generate earnings attributable to the shareholders through sales. The company’s reveals increasing trend from -1% in financial year 2010 while increase to 11% in the subsequent year 2011. Subsequently, BP’s company profitability margin decrease towards 2012 to 5% while an increases in 2013 to 8%. This shows that the company management has enhance quality control initiatives to enhance profitability. Return on Assets The return on assets refers to profitability ratio indicating the company’s ability to effectively use the invested assets in generating earnings attributable to the company’s shareholders. Return on assets is a main company’s profitability index which describe in detail the amount of company’s earnings in each dollar of the assets invested[Ali13]. The higher the company’s return on assets describes management efficiently utilizing company assets to generate earnings.  Return on Assets Ratio Amounts in US$ Millions Year's 2013 2012 2011 2010 EBIT 31,769 19,769 39,815 -3,702 Total Assets 305,690 300,466 293,068 272,262 Return on Assets Ratio 10.39% 6.58% 13.59% -1.36% BP Company’s return on assets ratio reveals a fluctuating trend where in financial year 2012 leads with 13.59%. The company’s profitability increases from -1.36% to 13.59% in year 2011 while decreases to 6.58% towards 2012. In 2013 the company’s reveals that management facilitate control of its assets to enhance profitability[Tho09]. However, this describes that management need to enhance managerial control on the assets to promote profitability. Efficiency Ratios BP Company’s efficiency ratios refers to the financial ratios utilizes in measuring the adeptness and effectiveness of the company in proficiently making use of the internal assets and mitigating the financial liabilities to increase its financial health. The efficiency ratios unveils the management initiatives of the company in enhancing advance competence in complying with the predetermine measures in enhancing the company’s operational incentives over the financial period. BP Company efficiency ratios includes asset turnover and day’s inventory turnover. Asset turnover Asset turnover ratio refer to the efficiency ratio describing the company’s efficiency in utilizing its assets investment to increase its earning in product or service sales[Cha10]. The asset turnover ratio measures the company’s management efficiency in utilizing its assets to vitalize the company’s sales in relation to the competitors. Asset turnover ratio enhances an analytical measures of the assets productivity of the company to the interested users such as potential investors as well company’s stakeholders. Assets Turnover ratio = Asset Turn Over Ratio Amounts in US$ Millions Year’s 2013 2012 2011 2010 Sales 379,136 375,765 375,517 297,107 Total Assets 305,690 300,466 293068 272,262 Asset Turnover 1.24 1.25 1.28 1.09 BP’s Company’s assets turnover ratio indicates an increasing trend in utilizing the assets to generate revenue. According to the graph above BP’s describes that an increase from 2010 assets turnover of 1.09 to 1.28 in 2011 while in 2012 and 2013 the company averages in 1.25 in utilizing the assets to generate revenue. This indicates that the management should emphasize in stringent measures in ensuring that the assets turnover ratio is maintain at acceptable increasing trend. Days Inventory Day’s inventory ratio describes the number of times a company inventory flows from selling and replacing of the entire inventory’s batch[Alf12]. The inventory turnover ratio is utilized in determining the efficiency of the company in managing the inventory. The higher inventory turnover ratio describes that the company has better financial performance since it can take shorter time in converting its inventory to sales revenue. Day Inventory Ratio Amounts in US$ Millions Year’s 2013 2012 2011 2010 Average Inventory 28717 26932 25939.5 24411.5 Cost of Goods Sold 298,351 292,774 285,618 216,211 Day Inventory Ratio(Days) 35 34 33 41 BP’s company efficiency ratio indicates the efficiency to utilize the company’s financial ratios as described in the annual reports[Nex07]. The company’s financial capability in utilizing the inventory fluctuates from 41 in financial year 2010 to 33 in subsequent year while the 2013 and 2012 financial year reveals a moderate of collection of 34 and 35 days in collecting cash from debtors. However, this reveals that, that the company’s gives an average time to their debtors before collecting cash enhance signifying good customer’s relationship which signifies standard growth in sales revenue. Liquidity Ratios Liquidity ratios is a financial ratio utilized in determination of the company’s ability of the company in gathering the outstanding current financial liabilities at the time of falling due. The liquidity higher values indicates that the company is of the better edge in financing the short term financial obligation when the fall due. The company’s liquidity is examine using current ratio, quick ratio, and cash ratio. Current ratio Current ratio refer to liquidity ratio describing the company’s efficiency in its operation while turning its inventory into cash to increase the company’s financial ability in gathering for the current liabilities[Cho08]. Current ratio indicates the company financial ability in meeting its current financial liabilities in the financial period utilizing the current internal resources. The desirable current ratio is describe to be 2, thus, the higher the current ratio indicates more financial liquidity in gathering for the current financial liabilities. Current ratio is calculated by dividing the current assets by the current liabilities Current Ratio = current assets / current liabilities Current Ratio Amounts in US$ Millions Year’s 2013 2012 2011 2010 Current Assets 96,840 92,069 89,164 89,725 Current Liabilities 72,812 76,329 83,780 82,832 Current Ratio 1.33 1.21 1.06 1.08 BP’s current ratio table above indicates a standardize increasing financial trend in meeting its current financial liabilities. The company current ratio increase from 1.08 in financial year 2010 to 1.06 in the subsequent year 2011 and 2012 and 2013 financial years, BP’s reveals an increasing financial ability to meet the current liabilities from 1.21 to 1.33. According to the BP’s Company current ratio increasing trend, the company accentuates pragmatic financial measures to ensure that the company has enough cash to gather for the business current liability[Car13]. Moreover, the increases trend indicates good liquidity of the company in meeting the current liabilities hence good for investment. Quick Ratio The quick ratio refers to the company financial ability to pay the current obligations without making use of the inventories. Quick assets in contextual reference are current assets which can be converted to cash within a period of 90 days[Tho09]. Quick assets include cash, cash equivalents market securities invested by the company and accounts receivables. The higher quick assets ratios describes a substantive company’s financial situation in efficiently converting quickly the quick assets without selling other assets to finance the current liabilities.  Quick Ratio Amounts in US$ Millions year's 2013 2012 2011 2010 Current assets - inventory& prepayment 96,840-29,231- 1,388 92,069-28,203-1,091 89,164-25,661-235 89,725-26,218-693 Current Liabilities 72,812 76,329 83,780 82,832 quick ratio 0.91 0.82 0.76 0.76 BP’s quick ratio table above indicates an increasing trend in meeting the current obligation without using the prepayment as well as the inventories. BP’s increasing trend shows an average of 0.76 in 2010 and 2011 while increasing to 0.82 to 0.91 in 2012 and 2013 financial years[Cha10]. The increasing financial ability to meet the current liabilities without utilizing the stock as well as prepayment indicates that company management executives has substantiated effective measures over the year in ensuring that there is enough cash to meet the current obligations. Capital Structure Ratio BP capital structure ratio measures the ability of the company to sustain its activity in the long run. This ratio accentuates the firm’s ability in payment of its obligation in the long term to enable its sustainability in the business[Cho08]. When the company has a better capital structure ratio, it will indicate that the firm is creditworthy and also financially sound in the long term. Debt to Equity Ratio The ratio is a comparison between the firms’ total debt and total equity. BP debt to equity ratio indicates the percentage of the company financing which comes from investors and creditors[Alf12]. A higher debt in comparison to equity gives the impression that the company is financed more by creditors to shareholder financing. Thus in light of this, a higher debt to equity ratio means that the company is more risky than when it has a lower debt to equity ratio. A lower debt to equity ratio indicates the company is financially stable. Quick Ratio Amounts in US$ Millions Year's 2013 2012 2011 2010 Total liabilities 175,283 180,714 180,586 176,371 Total Equity 130,407 119,752 112,482 95,891 Debt to Equity Ratio 1.34 1.51 1.61 1.84 BP’s debt to equity ratio reveals a decreasing financial trend which indicates that the company reduces its dependence in debt while enhance it financing using the company’s equity[Ala12]. In the year 2010, the company shows higher dependence on debt of 1.84 while in 1.61 in 2011. In 2012 BP reveal debt dependence of 1.51 while in 2013 the company decreases it dependence in debt while uses it equity to finances its investment. However, this shows that BP’s management is competent enough in lessening the debt financing risk and utilizing there equity. Conclusion BP’s financial ratio analysis describes that the company’s management are sensitive in enhancing the company’s profitability, liquidity, efficiency as well as substantiating the company’s sustainable financial measures. According to the profitability ratios describe by the company’s profit margin as well as the return on assets indicates that the company has substantive profitability growth towards 2013. The efficiency ratio’s indicates an improving financial ability to increase the amount of cash available to meet the financial obligations. Liquidity financial ratio’s indicates that BP’s company management has restructures its operation to improves its financial ability to meet the current obligations. Capital structure ratio accentuates a substantive measures to increase the dependence on the internal equity reliability as compared to the debt. Reference list Car13: , (James Reeve, 2013), Tho09: , (Ittelson, 2009), Nex07: , (Earl, 2007), Ali13: , (Alisdair McGregor, 2013), Cha10: , (Gibson, 2010 ), Alf12: , (Alfredson, 2012), Cho08: , (Chordia, 2008), Ala12: , (Alali, 2012), Read More