Financial Ratio Analysis On Company Performance Commerce Essay

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Critically evaluating the financial analysis position of the two major UK based Companies BP plc and Royal Dutch Shell plc by calculating the ratios which seems to be an appropriate to bring-out the performance and the strategic financial management of the companies.

BP PLC AT Glance

BP is one of the world's largest energy companies, providing its customers with fuel for transportation, energy for heat and light, retail services and petrochemicals products for everyday items with Core BP Brands are:

Castrol

Arco

Aral

Am Pm

Wild bean café

Starting in 1908 with oil found in a rugged part of Persia after a long and difficult search. Still commencing its development in this 21st century with the long-term projects in Russia, the Gulf of Mexico, North America, Azerbaijan, Indonesia were it has a lot of oil and gas in the proverbial pipelines. The BP group operates across six continents, were products and services are available in more than 100 countries with 80,300 employees (at 31st Dec 2009).the sales and other operating revenues comes to $239 billion (2009).the number of service stations expanding to 22,400 with an active exploration and production in 30countries.

SHELL PLC at Glance

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The parent company of the Shell group is Royal Dutch Shell plc, which is incorporated in England and Wales. Shell is a global group of energy and petrochemical companies and headquarters are in The Hague, the Netherlands, were Chief Executive Officer is Peter Voser.

Its aim is to meet the energy needs of society, in ways that are economically, socially and environmentally viable, now and in the future. The brand oils are:

Shell Advance :-Shell Advance oil's unique performance package is dedicated to bikes and bikers, backed by years of know-how and expertise in lubricants and biking experience.

Shell Donax :-Shell Donax Heavy Duty Transmission fluids. Protecting the fleet and reducing the maintenance costs.

Shell HelixHYPERLINK "javascript:void('#')":-Shell Helix motor oil contains active cleansing agents that continuously clean and protect the engine, allowing it to operate at its full potential.

Shell Retinax :-The superior performance of Shell Retinax greases is recognised by many of the world's leading truck manufacturers, many choosing Retinax as their 'factory-fill' grease of first choice.

Shell Rimula :-Shell Rimula is one of the world's leading brands of heavy duty diesel engine oils with top quartile brand preference in many of the markets in which they operate.

Shell Rotella :-Shell Rotella portfolio includes heavy duty diesel engine oils, coolants, multi grade oils, designed to provide excellent performance for vehicles, farm implements and construction equipment.

Shell Spirax :-Shell Spirax is a leading brand of transmission and gear fluids.

Shell Plc operates in above 90countries with 101,000 number of employees on sale of 145 billion litres of fuel. It produces 2% of world's oil and 3% of world's gas containing of 44,000 thousand shell service stations and above 35 refineries and chemical plants all over the world.

What Is PIMS?

Profit Impact of Marketing Strategy (PIMS) is a data base of the market profiles and business results of major American and European companies developed with intention of providing empirical evidence of which business strategies lead to success with in particular industries. Data from the study is used to craft strategies in strategic management and marketing strategy. The study identified several strategic variables that typically influence profitability. Some of the most important strategic variables studied were

Market share

Product quality

Investment intensity

Service quality

The PIMS project was started by Sidney Schoeffler working at GE in the 1960s, then picked up by Harvard's Management Science Institute in the early 1970s, and has been administered by the American Strategic Planning Institute since 1975. It was initiated by senior managers at GE who wanted to know why some of their business units were more profitable than others. With the help of Sidney Schoeffler they set up a research project in which each of their strategic business units reported their performance on dozens of variables. This was then expanded to outside companies in the early 1970s. The survey, between 1970 and 1983, involved 3,000 strategic business units (SBU), from 200 companies. Each SBU gave information on the market, within which they operated, the products they had brought to market and the efficiency of the strategies they had implemented. (http://www.economicexpert.com).

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The PIMS project analysed the data they had gathered to identify the options, problems, resources and opportunities faced by each SBU. According to Tellis and Golder (1996) claim that PIMS defined markets too narrowly. Respondents described their market very narrowly to give the appearance of high market share. This self reporting bias makes the conclusions suspect. They are also concerned that no defunct companies were included, leading to survival markets. (http://www.economicexpert.com).

PIMS Between BP PLC and SHELL PLC

BP operates at the frontiers of the energy industry wit world class assets, technology, and capability it knew how to meet the energy needs and deliver the long-term value. BP stays ahead of Shell in restructuring the efforts were the energy management have acknowledged more work is required and is to cut further 5,000 jobs globally in an effort of re-align the business to better meet the operational challenges into the global economic recovery.

Shells third quarter 2009 earnings, on a current cost of supplies basis were $2.99 billon compared to $10.9 billion a year ago were the CCS earnings per share decreased by 72%in the same quarter and the cash flow operating activities also raised 42% from $12.6 billion (2009) to $7.35 billion (2008).When it comes to BP the profit fell to $4.98 billion compared to $10.03 billion an year earlier using the industry standard replacement cot profit calculation. The firm reduced the headcount by 3000 last year and is set to cut another 5,000 jobs by the end of 2009.

Despite shells good operating performance in this difficult environment it is embarked on an ambitious programme of stringent measures to further improvement of performance .BP shares the remain favoured relative to shell for most buy and holds investors requiring the exposure to the firms relative progress in 2009 to maintain a trend. (http://seekingalpha.com).

Performance P/L Sheet of BP PLC and SHELL PLC for the years 2009-08.

 Transactions

BP

Shell

2009

2008

2009

2008

Revenue

239272

361143

278188

458361

Purchases

163772

266982

203075

359587

Gross profit

75500

94161

75113

98774

Production and manufacturing expenses

26954

35709

25301

25565

Selling and administrative expenses

14038

273441

18555

18136

Depreciation and amortization

12106

10985

14458

13656

Exploration expenses

1116

882

2178

1995

Net Interest and other income

5140

262095

6941

12579

Finance costs

1302

956

542

1181

Profit/loss before tax

25124

34283

21020

50820

Taxation

8365

12617

8302

24344

Profit/loss after tax for financial year

16759

21666

12718

26476

Fair Calculations of ratios are as follows

Calculation of Selected Ratios for Companies Performance:

Using the financial information of the companies the few selected ratios are calculated and explained as follows -

1) (ROCE) Return On Capital Employed =

       Company

       2009 YR

     2008 YR

BP

15

22.35

SHELL

10.48

29.67

 

BP 2009= 15

BP 2008 = 22.35

Shell 2009=0.48

Shell 2008=29.67

Gross profit margin ratio tells the profit a company makes on its cost of sales or cost of goods sold. Here, BP shows an approx 7% fall in 2009 when compared to 2008. Shell shows a fall of 18% in 2009 which more compared to 2008.

2) Gross Profit Margin =

       Company

       2009 YR

     2008 YR

BP

31.55

26.07

SHELL

27

21.55

BP 2009 = 31.55

Bp 2008= 26.07

Shell 2009 = 27

Shell 2008= 21.55

Gross profit margin ratio tells the profit a company makes on its cost of sales or cost of goods sold. Both the companies BP and Shell had show a result of 5.50% goods sold during 2009 which is quite better than the 2008.

3) Mark up =

       Company

       2009 YR

     2008 YR

BP

46.10

35.27

SHELL

36.99

27.47

BP 2009=46.10

BP 2008= 35.27

Shell 2009= 36.99

Shell 2008= 27.47

Mark-up is the amount, or percentage, a trader adds to the cost price of goods, in order to achieve a profit. The mark-up is the profit percentage based on the cost of goods sold. Both the companies have showed an increase of 10% mark up price in 2009 than the previous year 2008.

4) Current ration =

       Company

       2009 YR

     2008 YR

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BP

1.14:1

0.95:1

SHELL

1.14:1

1.10:1

BP 2009= 1.14:1

Bp 2008= 0.95:1

Shell 2009=1.14:1

Shell 2008=1.10:1

Measuring the both company's efficiency and short-term liabilities gives out the current ratio of working capital. In the year 2009 BP and SHELL shows an equal ratio of efficiency than the year 2008.

5) ACID TEST RATIO =

       Company

       2009 YR

     2008 YR

BP

0.76:1

0.17:1

SHELL

0.81:1

0.92:1

BP 2009 = 0.76:1

BP 2008= 0.17:1

SHELL 2009 = 0.81:1

SHELL 2008 =0.92:1

Quick or liquidity ratio is also known to be Acid test ratio. Working out with the current assets minus stock divided by current liabilities gives the value of the company's liquidity. This tells whether company have short term assets to cover the immediate liabilities without selling inventory. BP had given a quick raise of 0.60:1 between 2008-09 than the SHELL.

Analytical Methods Suitable

Horizontal Analysis: - The analyzing of financial information for two or more years for a single company it is known as horizontal analysis. When comparing the amount in dollars computing percentage changes from year to year for all financial statement balances, such as cash and inventory. Trend analysis involves calculating each year's financial statement balances as percentages of the first year known as the base year. For example the below horizontal analysis  table of the two companies are :-

 

Horizontal Analysis 2009/2008 (%)

BP

Shell

Revenue

-33.75

-39.31

Purchases

-38.66

-43.53

Gross profit

-19.82

-23.95

Production and manufacturing expenses

-24.52

-1.03

Selling, and administrative expenses

-94.87

2.31

Depreciation and amortization

10.20

5.87

Exploration expenses

26.53

9.17

Net Interest and other income

-98.04

-44.82

Finance costs

36.19

-54.11

Profit/loss before tax

-26.72

-58.64

Taxation

-33.70

-65.90

Profit/loss after tax for financial year

-22.65

-51.96

Vertical Analysis: - The term vertical analysis applies because each year's figures are listed vertically on a financial statement. The total on the income statement is net sales revenue, while on the balance sheet it is total assets. This approach to financial statement analysis, also known as component percentages. Common-size balance sheets and income statements can be more easily compared, whether across the years for a single company or different companies. 

 

Vertical Analysis 2009/2008 (%)

BP

Shell

2009

2008

2009

2008

Revenue

100

100

100

100

Purchases

68.45

73.93

73.00

78.45

Gross profit

31.55

26.07

27.00

21.55

Production and manufacturing expenses

11.27

9.89

9.09

5.58

Selling and administrative expenses

5.87

75.72

6.67

3.96

Depreciation and amortization

5.06

3.04

5.20

2.98

Exploration expenses

0.47

0.24

0.78

0.44

Net Interest and other income

2.15

72.57

2.50

2.74

Finance costs

0.54

0.26

0.19

0.26

Profit/loss before tax

10.50

9.49

7.56

11.09

Taxation

3.50

3.49

2.98

5.31

Profit/loss after tax for financial year

7.00

6.00

4.57

5.78

http://www.economicexpert.com/a/Profit:impact:of:marketing:strategy.html

http://seekingalpha.com/article/170391-bp-stays-one-step-ahead-of-shell-in-restructuring-efforts