Petro China Financial Analysis - Case Study Example

Table of Contents Petro China Financial Analysis 2 Introduction 2 Financial analysis 2 Profitability ratios 2 ROCE 3 Net Profit Margin 4 Efficiency Ratios 6 Account Receivables Turnover 6 Accounts payable turnover 7 Gearing/ Financial Risk Analysis 8 Gearing Ratio 8 Cash interest cover 10 Liquidity Ratios 11 Current Ratio 11 Operating Cash Flow to Current Liabilities 13 Investor Ratios 14 Dividend per Share 14 Dividend Cover 15 Conclusion 16 APPENDIX 19 Financial statements 19 19 20 21 21 22 22 23 23 24 24 25 Calculations 25 Competitors and Industry Performance 29 Petro China Financial Analysis Introduction The essence of this report is to gauge the financial health of Petro China by making use of various financial analysis tools in assessing how the company has performed over the last five years (2012-2016) and hence give a sound advice to a potential acquirer on the suitability of the company as an acquisition target. In so doing, the company’s profitability, efficiency, leverage, liquidity and investor ratios will be examined. The analysis will be conducted in comparison with the company’s close competitors as well as the industry in a bid to get a clearer picture on the company’s financial health vis a vis participants in the industry. It is on this basis that a recommendation on whether or not to acquire the company will be made depending on whether the company is seen to have the potential of being a profitable and stable investment option. Financial analysis Profitability ratios These ratios are helpful in analyzing how the company’s management has been successful in generating profits from the revenues the company makes. In this regard, the company’s net profit margin as well as return on capital employed have been analyzed with an aim of gauging whether the company has generated enough returns vis a vis the industry over the last five years. ROCE This ratio measures the company’s ability to earn a return on all of the capital it has employed in its operations (McClure, 2017). In other words, it tells us how many cents the company generated from the capital it employed. When compared with competitors or the industry, the company with a higher ratio is considered to have performed better. Petro China’s ROCE performance over the five years period observes a trend that is similar to that of the industry where the profitability has sharply declined over the five years period. The company’s ROCE was highest in 2013 where it reached 10.5% but this declined sharply to the company’s worst performance in 2016 when its ROCE was 2.38%. The trend though slightly worse is replicated by the industry given that the highest industry average was in 2012 when the ROCE average was 15.62 while it was lowest in 2016 at 0.22. As such, it is worth concluding that the declining performance is a reflection of the conditions in the operating environment where oil and gas product prices have sharply declined over the period under consideration. Petro China said it had succeeded in meeting its own expectations given “the severe and complicated operating situation at home and abroad”. The results cap off a gloomy week for both Chinese and international oil groups. On Wednesday fellow Chinese majors Sinopec and Cnooc reported falling revenues, with losses increasing more than fivefold at Sinopec. Norway’s Statoil, meanwhile, kicked off the international majors’ earnings season with an unexpected loss (Megaw, 2017) Net Profit Margin Net profit margin expresses how much of each dollar that the company collected as revenue has been translated into profit. The higher the ratio, the better the performance. The company initially has a far much worse performance than the industry when it recorded a net profit margin of 7.6% in 2012 in comparison to the industry average of 15.8%. The company attained its best performance in 2013 when it attained a net profit margin of 7.89% during which the industry performance sharply declined to 10.83%. It is worth noting that the company’s and industry’s net profit margin performance has been characterized by a sharp decline over the five years under consideration. However, Petro China’s performance though much worse than that of the industry is noted to be declining at a slower pace than the industry’s. As depicted from the graph, the company does eventually overtake industry performance in 2016 when it recorded a net profit margin of 2.79% compared to the industry’s 0.68%. However as stated above, the overall declining profitability is attributed to the prevailing market conditions of declining commodity prices. Efficiency Ratios Account Receivables Turnover This ratio gives an indication of how efficient the company has been in the management of its account receivables or how long it takes to collect the receivables. If the ratio is high, this is an indication that the business is being run efficiently and has tight credit policy while on the other hand, a lower ratio will indicate collection problems (Wilkinson, 2013) The company’s accounts receivables turnover has been stable throughout the five years period. The ratio was lowest in 2015 when it only took 11 days for the company to collect its debts while it was the highest in 2016 when it took the company 14 days to collect its receivables. Though a similar trend is observed for the industry, the company performs far much better than the industry since the industry’s best average was 22.75 days in 2014 while the worst performance was 36.75 days in 2016. As stated above, it could be concluded that the company is far much efficient or has a tighter credit policy compared with its competitors and the industry which is desirable since collecting receivables faster avails cash to be used in the company’s operations and in settling obligations. Accounts payable turnover This is the ratio that tells us how fast the company is able to pay off those suppliers it owes during a certain accounting period. A low accounts payable turnover may indicate the company is slow in paying the suppliers while the vice versa is true. From the graph above, it is clear that Petro China exhibits the trend that is also exhibited by the industry as far as accounts payable is concerned. However, the company takes longer to pay its suppliers compared to the industry. The company’s accounts payable turnover ranged from 91 days in 2012 to 119 days in 2016. On the other hand, the industry average was 64.5 days in 2012 compared to 93.25 days in 2016. It is thus not clear whether the longer period taken by the company is an indication of liquidity problems or whether it has better terms than its competitors. Gearing/ Financial Risk Analysis Gearing Ratio The ratio analyses the company’s level of debt compared to its equity capital and gives the company capital structure which is its mixture of debt and equity. The company’s leverage or capital structure seems to be an aggressive one with the level of debt being maintained above 50% throughout the five year period. The strategy has been chosen to keep the cost of capital low given that debt is cheaper than equity as a source of capital. The company has consistently kept its debt levels above 50% of equity in a bid to reduce the cost of capital as stated above. The company’s gearing ratio is however lower than the industry average meaning that on average, the company is exposed to less leverage risk than the industry. Its highest gearing ratio was in 2012 at 83.69% which may be attributed to increased investments then. On the other hand, the lowest gearing was recorded in 2014 at 69.18. On the centrally, the industry average was lowest in 2012 and the highest in 2015 as depicted in the graph. However, the company needs to lower its debts further in a bid to reduce the risk associated with a high gearing ratio while ensuring returns to shareholders are maximized. Cash interest cover This is the ratio that shows the number of times the cash available from the company’s operations is able to pay the company’s interest obligations. The company’s interest cover is generally very low compared to the industry average. This could either mean that the company does not have any idle cash as it optimally utilizes it in operations and development or the company has Cashflows problems that may hinder it from meeting its interest obligations on time. As such, the company ought to adopt an appropriate strategy to ensure that it usually has enough cash to meet its interest obligations. Liquidity Ratios Current Ratio This is a liquidity ratio that analyzes the company’s ability to meet its short term obligations to pay liabilities. The higher the ratio, the less the company’s operations are threatened by liquidity risk. The company’s current ratio has consistently been below 1 over the five years period meaning that it has more current debts than the current assets it has to pay the liabilities which might expose it to liquidity risk. The company’s current ratio, was the lowest in 2013 when it was 0.67 and the highest in 2016 when it was 0.76. This is far much low compared to the industry average which was the lowest in 2013 at 1.08 and the highest in 2012 when it was 1.34. As such, the company needs to take an appropriate action that will ensure the liquidity risk is minimized. Operating Cash Flow to Current Liabilities This ratio also measures the company’s ability to pay its short term liabilities from the Cashflows generated from operations. However, the ratio needs to be above 1 so that the company can be able to pay the obligations when they fall due while still continuing with operations. Despite the above facts, the company and the industry have had their averages consistently below 1 during the entire five year period meaning that their operations have not generated enough cash to pay their current liabilities. This is understandable given the kind of investment required in the industry as well as the current operating environment. Investor Ratios Dividend per Share Dividend per share refers to the total cash payments that shareholders receive from the investments they have made in the company every year. From the graph above, it is clear that the industry average has been a bit stable over the five years period while Petro China’s average did greatly decline from 2014 to 2016. The company’s best performance was in 2013, when a dividend of 0.32 was paid with the worst performance being in 2016 when a dividend of 0.059 was paid. It is thus concluded that the company’s dividends are far much below the industry average. However, the general decline in the level of dividend payment by the industry could be attributed to declining revenues and hence profitability arising from the lower commodity prices. Dividend Cover This ratio is important as it tells us the number of times the company can pay the dividend payments it has made (Accounting-simplified.com, 2013). A high dividend cover is preferable with a lower one being seen as a threat to the company’s ability to continue paying dividends especially in an environment of declining profitability. The industry and the company seem to have a similar trend as far as dividend cover is concerned .However, as depicted in the graph, the company’s dividend cover is stable until 2015 when it drastically drops from 2.16 in 2015 to 0.68 in 2016. On the other hand, the industry average drastically drops from 2.29 in 2014 to -0.323 in 2012 before rising to 0.46 in 2016. However, the sharp declines in dividends as explained above are not desirable as they indicate that the company will not be able to pay dividends in future if the trend continues. Conclusion This report has analyzed Petro China’s financial performance for the five years period between 2012 and 2016. From the analysis, important conclusions have been drawn with regard to the company’s profitability, efficiency, leverage, liquidity and investors returns. The company’s performance was also compared to that of its competitors and the industry as shown in the appendix. From the analysis, the company’s performance has been mixed in comparison with the industry. In other words, the company has performed above industry average while performing worse in other areas. However, the analysis has revealed that the company has generally performed worse than the industry with exception of such areas like accounts receivables turnover. As such, this report recommends that the potential investor should not acquire the company in its present state. The management needs to put in place measures that will improve its financial performance in a bid to increase its potential for acquisition in future. References: Petrochina.com.cn, 2017, Annual reports, Retrieved on 10th May 2017, from; http://www.petrochina.com.cn/ptr/ndbg/dqbg_list.shtml McClure, M2017, Spotting profitability with ROCE, Retrieved on 10th May 2017, from; http://www.investopedia.com/articles/stocks/05/010305.asp Megaw, N2016, Severe and complicated markets hit profits at Petro China, Retrieved on 10th May 2017, from; https://www.ft.com/content/b7878c7d-ed42-3bdb-8f34-b275e523f7fe Wilkinson, J2013, Accounts receivable turnover analysis, Retrieved on 10th May 2017, from; https://strategiccfo.com/accounts-receivable-turnover-analysis/ Accounting-simplified.com, 2013, Dividend Coverage Ratio, Retrieved on 10th May 2017, from; http://accounting-simplified.com/financial/ratio-analysis/dividend-coverage.h APPENDIX Financial statements Calculations Profitability Ratios Net profit Margin (Operating Profit Margin) = Net profit before tax (Operating profit)/Sales 2012= 166,811/2,195,296 * 100 = 7.60% 2013 = 178, O63/2,258,124 =7.89% 2014 = 158,759/2,282,962 = 6.95% 2015 = 57,815/1,725,428 = 3.35% 2016= 45,140/1,616,903 = 2.79% Return on capital employed (ROCE) = Net profit BIT (Operating profit)/Shareholders funds + Non-Current Liabilities (Capital Employed)*100 2012 = 166,811/1,594,148 = 10.46% 2013 =178,063 /1,696,621= 10.50% 2014= 158,759/1,825,644 = 8.70% 2015= 57,815/ 1,922,437 = 3.01% 2016 = 45,140/ 1,897,388 = 2.38% Efficiency Ratios Receivable Turnover = Account Receivables/ Sales *365 (Days) 2012 = 74,431/2,195,296* 365 = 12.37 = 13 days 2013 = 78,387/2,258,124*365= 12.67 = 13 days 2014= 65,931/2,282,962 *365 = 10.54 = 11 days 2015 = 60,495/1,725,428 *365 = 12.79 = 13 days 2016 = 58,600/1,616,903 *365= 13.23= 14 days Payables turnover = Account payables/Cost of sales *365 days 2012 =351,456/1,411,036*365 = 90.91 = 91 days 2013= 383,004/1,464,805*365 = 95.44= 96 days 2014= 364,060/1,468,225*365 = 90.51 = 91 days 2015= 331,040/1,056,795 *365 = 114.34 = 115 days 2016 =310,680/959,640 *365 = 118.17 = 119 days Gearing Ratios Gearing ratio = Total Debt/Total Equity 2012= (988,148/1,180,748)*100 = 83.69% 2013= (783,713/1,063,027)*100 =73.72% 2014= (760,159/1,098,812)*100 = 69.18% 2015= 1,049,810/1,344,034 *100 = 78.11% 2016 = 1,023,916/ 1,372,735*100 = 74.79 Cash interest cover = (Cashflows generated from operations + Dividends received + Interest received)/ Interest 2012 = 239,288/18,164 = 13.17 times 2013 = 288,529/ 23,081 = 12.50 times 2014=356,477/ 23,319 = 15.29 times 2015 = 261,312/24,328 = 10.74 times 2016 = 265,159/ 23,348 =11.36 times Liquidity Ratios Current Ratio = Current Assets/ Current Liabilities 2012= 414,432/574,748 = 0.72 2013 = 430,953/645,489 = 0.67 2014= 391,308/ 579,829 =0.67 2015 =349,344/471,407 = 0.74 2016 =381,665/499,263 = 0.76 Operating cash flow to Current liabilities = Net cash flow from operating activities / Current liabilities 2012= 239,288/574748 = 0.42 2013 = 288,529/454,874 =0.63 2014= 356477/398100 =0.90 2015= 261,312/471,407 = 0.55 2016 =265,159/499,263 = 0.53 Investor Ratios: Dividend per share = Total dividends paid/ No. of ordinary shares 2012 = 0.28356 2013 =0.31865 2014 =0.26351 2015 = 0.08733 2016 = 0.059 Dividend cover = EPS/ Dividend per share 2012= 0.63/0.28356 = 2.22 2013= 0.71/0.31865 =2.23 2014= 0.59/0.26351 =2.24 2015 =0.19 /0.08733= 2.16 2016 =0.04/0.059 = 0.68 Competitors and Industry Performance B.P Total SA CNOOC Petrol China Industry Net profit Margin 2012 4.8 11.89 36.41 7.60 15.18 2013 7.8 10.43 17.18 7.89 10.83 2014 1.4 5.45 17.20 6.95 7.75 2015 -4.29 3.89 9.99 3.35 3.24 2016 -1.25 4.79 -3.60 2.79 0.68 Return on Capital Employed 2012 8.42 19.47 24.13 10.46 15.62 2013 12.98 15.36 12.65 10.50 12.87 2014 2.24 7.30 11.44 8.70 7.42 2015 2.39 3.72 2.95 3.01 3.02 2016 -4.67 4.07 -0.92 2.38 0.22 Gearing Ratio 2012 150.96 136 47 83.69 104.41 2013 134.41 132 81 73.72 105.03 2014 152.40 146 74 69.18 110.40 2015 166.12 135 72 78.11 112.81 2016 171.90 127 67 74.79 110.17 Interest cover 2012 19.10 34.48 92.39 13.17 39.76 2013 19.76 32.05 42.35 12.50 26.67 2014 28.53 34.24 26.80 15.29 26.22 2015 14.20 20.63 13.09 10.74 14.67 2016 6.38 14.91 11.67 11.36 11.08 Current Ratio 2012 1.19 1.38 2.07 0.72 1.34 2013 1.33 1.37 0.93 0.67 1.08 2014 1.37 1.45 1.09 0.67 1.15 2015 1.28 1.38 1.66 0.74 1.27 2016 1.16 1.33 1.82 0.76 1.28 Operating cash flow to current liabilities 2012 0.26 0.46 1.12 0.42 0.57 2013 0.29 0.48 0.49 0.63 0.47 2014 0.51 0.48 0.51 0.90 0.60 2015 0.35 0.39 0.95 0.55 0.56 2016 0.18 0.30 1.09 0.53 0.53 Account Receivables Turnover 2012 34 35 45 13 31.75 2013 45 33 25 13 29 2014 32 25 23 11 22.75 2015 41 24 47 13 31.25 2016 45 30 58 14 36.75 Account payables turnover 2012 49 63 55 91 64.5 2013 53 43 64 96 64 2014 48 40 58 91 61.25 2015 63 63 78 115 79.75 2016 117 74 63 119 93.25 Dividend per share 2012 0.33 2.34 0.53 0.28356 0.871 2013 0.365 2.38 0.57 0.31865 0.908 2014 0.39 2.44 0.45 0.26351 0.842 2015 0.40 2.44 0.43 0.08733 0.839 2016 0.40 2.45 0.33 0.059 0.81 Dividend Cover 2012 1.75 2.01 2.38 2.22 2.09 2013 3.39 1.57 2.21 2.23 2.35 2014 3.15 0.77 3.00 2.24 2.29 2015 -5.3 0.89 0.96 2.16 -0.323 2016 0.1 1.03 0.03 0.68 0.46 Read More