financial management report- ravi chandra ghanta (1)

8/17/2019 Financial Management Report- Ravi Chandra Ghanta (1)

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-RAVI CHANDRA GHANTA FINANCIAL ANALYSIS OF


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Contents

Business Profile 2

Mission Statement 2

Vision 2

Shifts in supply and demand 3

Slowdown of economy 3

Liquidity changers 3

Other factors 4

S ! O " analysis 4

Ma#or competitors $

%he&ron corporation o&er&iew $

'inancial analysis of ())onMo*il and %he&ron +

())onMo*il Balance Sheet o&er&iew +

Liquidity ratios ,

!or-ing capital management ..

O&er&iew of /ncome statement .2Measures of Profita*ility .2

%ash flow statement .4

'inancial le&erage .0

"he winner .$

1eferences .+

())onMo*il Balance sheet .

())onMo*il /ncome statement 2

())onMo*il %ash flow statement 2.

%he&ron Balance sheet 23

%he&ron /ncome statement 20

%he&ron %ash flow statement 2+

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Business Profile:

())on Mo*il %orp ())onMo*il56 an 7merican multinational oil and gas corporation formed *y

the merger of ())on and Mo*il on 8o&em*er 3 6 .,,, Both ())on and Mo*il were the largest

direct descendants of 9ohn : 1oc-efeller;s Standard Oil %ompany which was originally

esta*lished in . + ())onMo*il has se&eral di&isions and many groups of affiliates li-e

())onMo*il6 ())on6 Mo*il or s premier petroleum and

petrochemical company "o that end6 we must continuously achie&e superior financial and

operating results while simultaneously adhering to high ethical standards

Vision: "o *e at the leading edge of competition in e&ery aspect of our *usiness

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7s a glo*al company operating worldwide ())onMo*il is su*#ected to &arious ris-s in their

*usinesses Perhaps6 this could affect their financial and operating results ad&ersely Some of the

factors affecting the financial condition are as follows?

Shifts in Supply and Demand:

Being in a commodity *usiness6 ())onMo*il;s earnings may *e significantly affected *y the

price fluctuations in oil and gas /t can also *e affected *y the changes in margins on the refined

products Oil and gas prices6 margins depend upon regional6 local or glo*al situations that ha&e

an impact on supply and demand for the rele&ant commodity

Slowdown of Economy:

"he demand for energy and petrochemicals depends upon the current economy of the country

and its rate of growth 'requent recession periods will typically impact the *ottom line of the

company 7dditionally6 in a region or in any part of the world6 changes in population growth6

political insta*ility or currency e)change rate fluctuations can impact the demand for energy and

petrochemicals

Liquidity changers:

Some of the other factors that impact the demand and ultimately create liquidity crisis includes

technological ad&ancements in using the energy efficiently6 seasonal weather patterns where

there is a demand for heating or cooling6 competition from go&ernment su*sidi@ed oil and gas

companies and change in consumer preferences especially in case of alternati&e fuels 7lso the

laws for accidents where there is a huge amount of puniti&e damage especially in countries li-e

=nited States will ha&e an ad&erse outcome

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Other factors:

/nflation causes negati&e *usiness results "here is a direct relationship *etween oil and inflation

*ecause oil acts as a ma#or input in the economy for critical acti&ities such as transportation6running the machines6 heating homes and many others 7part from inflation6 changes in interest

rates6 currency e)change rate fluctuations6 political de&elopments6 import and e)port restrictions

depending upon country and local conditions may impact the financial health 7dditionally6 this

also includes increase in go&ernment ta)es and en&ironmental regulations Let us now loo- at the

strengths and wea-nesses of the company

S ! O " #nalysis:

Strengths:

• ())onMo*il is a wellAesta*lished company since many decades creating a sense of

security and trust among its customer *ase• /mpro&ement in financial performance• "hey are one of the leading refiners in 8orth 7merica• "he company is -nown for its timely technological ad&ancements as it has a &ery strong

1 : that stri&es to focus mainly on industry needs and sta-eholder e)pectations• "hey ha&e a di&ersified re&enue stream• "hey ha&e around 36 employees and 3+ oil refineries in 2. countries Moreo&er6 due

to the presence in such huge mar-etplaces6 they ha&e a di&ersified re&enue stream

!ea$nesses:

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• "a-ing the en&ironmental concerns into account the company is not doing enough for the

en&ironment Sta-eholders and others often accuse the company for e)cess pollution and

o&eruse of natural resources "he company is still finding it difficult to control their

car*on emissions in order to meet the en&ironmental policies• (n&ironmental groups are still s-eptical a*out ())onMo*il;s emissions and how

transparent they are in communicating to them claiming to *e a greener company• /t may not *e a successful sustaina*le strategy if the company continues to focus only on

oil rather than focusing on alternati&e fuels for future• (n&ironmental ha@ards and oil spills• /t is difficult to manage all the employees across the world• 'rauds and incidents of *ri*ery in glo*al operations

Opportunities:

• /ncreasing demand for energy especially in de&eloping economies li-e Middle (ast6 7sia6

South 7sia and South (ast 7sia• %apital in&estments• "he company has the opportunity to *uild its image in all other countries where they can

*e in&ol&ed in community ser&ice and other social responsi*ility initiati&es

"hreats:

• Slowdown of economy in =S7 and the (uropean =nion• (n&ironmental regulations• Cigh competition and declining oil prices• %ompetitors in the same industry are ad&ancing in alternati&e energy sources in order to

meet their shareholder e)pectations ())onMo*il is lagging *ehind in this area and thiscould pressure the company to change its strategy

• "echnological ad&ancements in &ehicles6 therefore *eing fuel efficient than *efore or

using alternati&e fuels

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Ma%or &ompetitors:

Ma#or competitor of ())onMo*il in energy and petro chemical industry is Chevron Other top

competitors are BP British Petroleum56 Shell6 %onocoPhillips6 Valero (nergy and Marathon Oil

&he'ron &orporation o'er'iew:

%he&ron is also an 7merican multinational energy company6 *oth ())on and %he&ron were part

of 9ohn : 1oc-efeller;s Standard Oil until the Supreme %ourt declared that it was an

Dunreasona*leE monopoly and was *ro-en into , independent companies %he&ron made its

presence in e&ery aspect of oil6 natural gas and geothermal energy industries which includes

e)ploration and production of hydrocar*ons6 refining6 mar-eting and transport and power

generation

%he&ron is one of the world;s largest oil companies ran-ing si)teenth in 'ortune Flo*al 0

worldwide %he&ron;s alternati&e energy operations include *iofuel6 solar energy6 wind power6

hydrogen and fuel cells "here are $26 people wor-ing in %he&ron6 of which 3.6 are

employed in =S operations

(inancial analysis of E))onMo*il and &he'ron

E))onMo*il Balance Sheet o'er'iew with their corresponding ratios:

/n this report we are going to compare the financial statements of ())onMo*il with %he&ron and

find out their financial health6 also let us see which company is *etter in terms of efficiency


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Financial health of the company:

"he *alance sheet of *oth the companies show the total assets6 lia*ilities and equity till

:ecem*er 2. 4 "he a*ility to increase the cash indicates that the company is healthy to meet its

e)penses and can also leads to #ump in the stoc- price 'rom an in&estor;s standpoint6 too much

cash in hand may indicate that the company is not loo-ing to grow into new areas

Starting with ExxonMobil 6 the items that needs attention which too- a sharp drop are cash and

cash equi&alents6 from G4$44 million to G4$.$ million net change in cash was AG2 million5 and

there is a #ump in its assets 'luctuating oil prices se&erely reduced the company;s earnings

during this period

/f we loo- at their current lia*ilities6 it is G$46$33 million6 their current assets is G026,. million

which gi&es us a quic- snapshot of their financial health "he num*ers imply that their wor-ing

capital is negati&e and as a result they are una*le to meet their short term o*ligations "his could

*e a critical issue that might need some attention and also they may not *e a*le to in&est in new

products or a&enues due to the fact that their current lia*ilities are e)ceeding their current assets

Chevron’s *alance sheet re&eals that there is a significant decreased in their cash and cash

equi&alents !hich means they are also struggling to impro&e their cash from the year 2 .3 to

2 .4 =nli-e ())onMo*il6 %he&ron has a positi&e wor-ing capital6 which means they are a*le to

meet their short term o*ligations and other e)penditures

Capital is raised by taking on debt and through equity:

8ow6 let us loo- at their *alance sheet and find out how they raised capital /t appears that they

ha&e raised capital *y ta-ing on de*t and also *y issuing stoc- %ommon stoc- is G. 6+,2

million and longAterm de*t is G..6$03 million "he num*ers are pretty close to each other which

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means that they ha&e raised capital *y ta-ing on de*t and also *y issuing stoc- "here is a

possi*ility that the de*t to equity is close to each other when calculated the de*t to equity ratio

is .$+5 'rom the shareholders standpoint increasing the stoc-holder;s equity might dilute the

ownership of e)isting shareholders

Company is less leveraged:

"hey are less le&eraged /f they had a lot of de*t and #ust little *it of equity then that;s a

le&eraged company and if they are more le&eraged then they tend to *e more ris-y "heir de*t to

equity is a*out the same so they are less ris-y "heir return on equity will *e impacted if they are

more le&eraged

Vertical integration:

7ppropriate signs for highly integrated are if they ha&e a lot of in&entory and if they ha&e a lot of

fi)ed assets6 from the *alance sheet6 yes they ha&e and therefore highly integrated "hey appear

to *e asset intensi&e as well Vertical integration of the oil company was pioneered *y 9ohn :

1oc-efeller in the ., th century ())onMo*il is still adopting a &ertically integrated structure

where they play a -ey role in supply chain effecti&ely 7s part of it they e)tract crude oil and

transport it worldwide for sale to their customers 7s mentioned earlier6 due to the speedy growth

in the 7sian economy6 it gi&es ())on a ma#or argument for *eing &ertically integrated than that

of their ri&als

Lastly6 the in&entory le&els ha&e raised which is not a good sign during falling energy prices

which is resulting a decrease in sales

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8ow let us discuss the liquidity ratios simultaneously of ())onMo*il and find out how the

company performed compared to pre&ious year and also let us find out if it had outperformed

%he&ron or not

Liquidity ratios:

())onMo*il %he&ron2 .4 2 .3 2 .4

%ash 'low to :e*t1atio

3 3$$ 33

!or-ing capital A..6+23 A.264.$ . 63 $%urrent 1atio 2 3 . 32Huic- 1atio 0$ $ ,4

C#s$ %o& to 'e (t

)o*+,n C#.,t#/

C0**ent *#t,o

0, + *#t,o

-15 -1 -5 5 1 15

L, 0,',t

E66on-2 14 E66on-2 13 C$e7*on-2 14

&ash flow to de*t ratio: "his ratio indicates to what e)tent the company is a*le to pay*ac- their

de*t "he higher the num*er the *etter chances it has to meet its long term o*ligations

())onMo*il;s cash flow to de*t ratio decreased from the year 2 .3 to 2 .4 /t is 3 which

means that they ha&e to ta-e de*t or issue more stoc- *ut the cash flow generated *y their

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operations may not *e sufficient enough 7s the ratio is similar to %he&ron which is 336 same

applies for %he&ron too

!or$ing capital: 7s mentioned earlier ())onMo*il;s wor-ing capital is negati&e as current

lia*ilities has e)ceeded current assets /t appears that the company is in financial trou*le and

additional capital is needed to run the *usiness But6 compared to last year ())onMo*il is doing

*etter in 2 .4 Cowe&er6 it has to *e strict in terms of cash in order to face their short term

o*ligations %he&ron is doing well *y surpassing ())onMo*il;s wor-ing capital6 in this case they

ha&e a positi&e wor-ing capital and ha&e no issues in their short term

&urrent ratio and +uic$ ratio: %urrent ratio helps to assess a rough measurement of

company;s financial health /n this case ())onMo*il;s ratio is under . which is sufficient enough

to go *an-rupt *ut not necessary enough Because sometimes the company;s su*stantial returns

may outdistance the short term de*t that is due Similarly6 ratio greater than . may *e *ecause of

ta-ing on more long term de*t 7ll in all6 ratio *elow . is not a good sign Similarly quic- ratio

for ())onMo*il is &ery less compared to %he&ron

!or$ing &apital Management:

())onMo*il %he&ron2 .4 2 .3 2 .4

:ay SalesOutstanding

2 2 3. 3. 0

71 "urno&er .. ,2 . $ months5 .. 40 , ,, . 2 months5/n&entory "urno&er .$ 3+ . 0$ . ,

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In7ento* T0*no7e*

AR T0*no7e*

D# s S# /es O0tst#n',n

5 1 15 2 25 3 35

)o*+,n C#.,t#/ M#n# e9ent

E66on-2 14 E66on-2 13 C$e7*on-2 14

DSO and #, turno'er: "he a&erage num*er of days for ())onMo*il to collect re&enue is 2

days ())onMo*il;s 71 turno&er has *een raising and :SO is decreasing /t means that

())onMo*il has impro&ed o&er its pre&ious year *y managing payments from customers

Loo-ing at the accounts recei&a*le turno&er ratio6 in a year6 ())onMo*il is collecting its

recei&a*les appro)imately e&ery month whereas %he&ron is collecting it #ust . times

-n'entory turno'er: O&er a period of .2 months ())onMo*il sold .$ times *ut %he&ron sold

., times Low in&entory turno&er may not *e a *ad thing in case of oil companies as their

products do not deteriorate faster o&er a period of time But low turno&er implies poor sales

resulting e)cess in&entory But higher ratio means they ha&e strong sales or it could e&en *e

ineffecti&e *uying

O'er'iew of -ncome Statement with their corresponding ratios:

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'rom the income statement6 loo-ing at the fi&e years trend6 sales went down steadily from 2 ..

to 2 .4 and as a result their *ottom line has hardly seen any growth Possi*le reasons could *e

either they are losing mar-et share or they might *e under pricing pressures 7s mentioned

earlier fluctuating oil prices impacts the sales "herefore6 it has a negati&e impact on gross

margin percentage !hat could ha&e *een done to impro&e is their efficiencies and managing

their throughput /n 2 .. gross margin percentage is 2 and in 2 .4 it is 2$ which means they

are losing efficiencies as well as economies of scale 'i)ed costs in 2 .. is G046230 million and

in 2 .4 it is G346 2 million So6 o*&iously they ha&e not reduced their fi)ed costs enough to

maintain their le&el of income But6 reducing costs doesn;t mean they are reducing their fi)ede)penses /f re&enue goes down then gross margin percentage goes down Margin may*e

maintained *ut ultimately gross margin dollars are ta-ing a hit 'i)ed costs could *e same in

order to maintain that le&el of income *ut it is going to decrease net income

Measures of Profita*ility:

())onMo*il %he&ron2 .4 2 .3 2 .4

Fross Profit Margin 2$ 3I 2$ 0I was 2 I in2 ..5

2+ + I

1eturn on 7ssets , 4 I , 32I + 0,I

1eturn on (quity . $+I ., .+I .. 0$I

1eturn on Sales ,I 3I . I

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Ret0*n on S#/es

Ret0*n on E 0,t

Ret0*n on Assets

G*oss .*o:t 9#* ,n

; < 5; < 1 ; < 15; < 2 ; < 25; < 3 ; < 35; <

Me#s0*es o= .*o:t#(,/,t

E66on-2 14 E66on-2 13 C$e7*on-2 14

.ross profit margin: Loo-ing at the gross profit margin for ())onMo*il it appears that they

lost economies of scale and also are losing efficiencies %he&ron has a *etter gross profit margin

in 2 .4

,eturn on assets: 1eturn on assets is an effecti&e metric to measure the efficiency of a

company :espite the deterioration of net income ())onMo*il;s return on assets ha&e increased

and also it is more than %he&ron;s returns Cence ())onMo*il has *etter management for a

*etter consistent deli&ery of profits

,eturn on equity: /n the past fi&e years ())onMo*il has continuously outperformed %he&ron in

terms of return on equity of course6 they can *oost their returns *y issuing on more de*t which

may not necessarily mean the company is profita*le5

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,eturn on sales: %he&ron is doing *etter than ())onMo*il in terms of return on sales "his

could *e *ecause %he&ron has a *etter supplier or they are ma-ing a profit out of the economies

of scale ())onMo*il could increase their return on sales *y reducing their staff

&ash (lows Statement:

())onMo*il;s wor-ing capital is ta-ing a hit *ecause their net income is going down and it loo-s

li-e they are losing their mar-et share yet they are in&esting on lot of equipment "o me it occurs

that they are willing to impro&e their efficiency or they are e)panding their presence in other new

mar-ets

&ash flow from operating acti'ities:

E))onMo*il: %ash flow from operating acti&ities ha&e increased from G446,.4 million to

G406..$ million net increase of G2 2 million in 2 .45 "his shows that they ha&e increased their

production and other ser&ices it could also mean they are creating a new product5

&ash flow from in'esting acti'ities:

E))onMo*il: ())onMo*il has generated G+ *illion cash from in&esting acti&ities "his e)cludes

short term o*ligations *y focusing on purchasing fi)ed assets6 plant and machinery

&he'ron: 8egati&e cash flows are not always *ad if they are *ecause of in&estment e)penses

9ust li-e in case of %he&ron they ha&e spent AG2,6 ,3 million in in&esting acti&ities

&ash flow from financing acti'ities:

E))onMo*il: "his section in the cash flow statement indicates the additions or reductions to

long term and short term de*ts ())onMo*il spent G.+6 million in financing acti&ities in the

form of issuing cash di&idends to their shareholders6 repayment of their loans and others

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&he'ron: %he&ron;s cash flow from financing acti&ities is AG46,,, million 8egati&e cash flow

implies when they *ought *ac- their shares6 repayment of de*t or payment of di&idends

(inancial Le'erage:

())onMo*il %he&ron

2 .4 2 .3 2 .4

:e*t to (quity .$ + .3 . .+ ,4

Long "erm :e*t to(quity

$ $ 3 , .0 0

:e*t Ser&ice%o&erage

0 0+ . ,$0

De(t Se*7, e Co7e*# e

Lon Te*9 De(t to E 0,t

De(t to E 0,t

2 4 " 1 12 14 1 1" 2

F,n#n ,#/ Le7e*# e

E66on-2 14 E66on-2 13 C$e7*on-2 14

:e*t to equity ratio helps to measure a company;s financial le&erage /n this case %he&ron has

attempted to increase its &alue *y ta-ing more long term de*t %he&ron;s current and quic- ratios

may decei&e the fact that they are in a *etter position *ut from the *ar graph we can see that the

actual reason for those higher current and quic- ratios is *ecause they too- a higher de*t than

())onMo*il

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The winner:

/t is no secret that *oth ())onMo*il and %he&ron has ta-en an a*solute *eating in the last year

struggling under pricing pressures which worried their in&estors Cowe&er6 *oth companies ha&e

planned their growth for future "hough %he&ron is a small company it is planning to in&est G3

*illion o&er oil and gas pro#ects than ())onMo*il for 2 .+ "his means that %he&ron is see-ing

for growth and ())onMo*il is see-ing for sta*ility Based on these figures %he&ron might attract

growth in&estors and ())onMo*il might attract income in&estors %urrently6 %he&ron is paying

*igger di&idend than ())onMo*il 8ow *y this analogy it appears that %he&ron could *e the *est

pic- for growth and ())onMo*il for *oth income and sta*ility Moreo&er6 ())onMo*il is

generating *etter returns than %he&ron and shines in many areas compared with its peers despite

the recent economic challenges / might go with ())onMo*il *ased on their long term goals /t is

*ecause you might ta-e less di&idend today *ut the company is capa*le of6 has the potential for6

di&idend growth and share repurchases 7dditionally6 1ussian interests in this situation are a *it

uncertain as ())onMo*il has continued to in&est in 1ussian drilling rights and it would *e

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worthless if the relations *etween 1ussia and the !est continue to deteriorate "here can *e a lot

of potential growth otherwise and if Putin *ac-s down

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,eferences:

http?JJwww annualreports comJ%ompanyJe))onAmo*il

http?JJquotes ws# comJ


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E))onMo*il Balance Sheet / #ssets

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E))onMo*il Balance sheet 0 Lia*ilities and Shareholder1s Equity

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E))onMo*il / -ncome Statement

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E))onMo*il / &ash (low Statement

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&he'ron Balance Sheet 0 #ssets

&he'ron Balance Sheet 0 Lia*ilities and Shareholder1s Equity

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&he'ron / -ncome Statement

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&he'ron / &ash (low Statement

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financial management report- ravi chandra ghanta (1)

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