Financial Analysis Of BP essay

Financial performance of the company is calculated from the financial statements of the company. Every company prepares the financial statements at the end of their financial year, the accounts are prepared by the accountant in the company which is audited by the external auditors who are appointed by the shareholders of the company. The financial statement must be prepared in a fair manner according to the accounting standards.

The Research consist of only secondary resources collected from websites, journals, articles etc. The analysis is done by comparing the current year’s financial reports of the company with the previous reports of the company and it is compared with its competitors (Exxon Mobil and Shell). The results found in the analysis will be explained in the conclusion. Background of the company In 1 908 oil was found in a rugged part of Persia by explorer George Reynolds. In 1 998 Amoco and BP merged together and they were known as BP Amoco.

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In 2000 Amoco stations in America was renamed as BP. In 2002 Oral became a subsidiary company of BP. It runs its business in more than 80 countries across the globe. It has around 85,900 employees working from the year 2008-2012. In 2011 BP hastened a partnership deal with Reliance Industries in India. In 2013 BP has fallen from the world’s second largest company to fourth place. British petroleum is one of the leading oil and Gas producing company which converts the raw materials like oil and gas to finished products like fuel, energy, lubricants and petrochemicals.

Literature Review “Financial analysis means selection, evaluation and interpretation of financial data and other pertinent information to assist in evaluating the operating reference and financial condition of a company or an industry’ Peterson, p. And Booze, F. (1999). “Financial statements are the only direct source for gauging a business’s financial performance, they tell the story about profitability financial health, and ability to pay obligations, including returning earnings to stockholders” Kline, B. (2007). Therefore financial performance of a company is calculated by financial analysis.

Financial analysis use financial statements of a company to analyze their performance. According to Kline, B. There are four different hypes of financial statement they are Balance Sheet (or) Statement of financial position, Income Statement, Statement of Cash Flow and Statement of Shareholder’s Equity. Each statement provides specific information about the company, but none of them will tell the whole story by itself, that is why financial analysis is done by using the ratios in order to compare the numbers from one statement to another.

According to Robert Peterson (Business Editor, BBC News) the gulf oil disaster will cost the shareholders Of BP to lose income Of Been*. In 2001 he said that the suspension of the dividends for nine months cost shareholders E. Bon*. However he said the shareholders will be getting a dividend of E. Bon* a year which is less compares to what they were receiving in the year 2009. The profits during the fourth quarter of 201 0 were $4. Bon* which is three times higher than the same quarter in the previous year. The profits were higher because the oil price has risen up to $90 a barrel by the end of 201 0.

According to Jamie Ashcroft Lully 30 3013) Bp has almost paid SIS$bon* as a compensation fund relating to the oil spill in Gulf of Mexico. Due to additional litigation charges the accounts relating to the gulf disaster reached up to US$4. Bon*by increases of CSS$Milne* at the end of the quarter. According to Jamie Ashcroft report, Up’s financial performance faced difficulties by high tax rates and lower tax income from Russia. Research Objectives Every research has an objective. The objective of a research can be either a hypothesis or an ongoing problem for which you are willing to know the answer for.

The number of objectives vary in different researches. The financial performance of a company can be known by comparing with their competitors or by comparing with previous year’s performance. There are woo objectives in this research, they are: To compare the company’s performance for past three years. To compare the company’s performance with the competitors. Research Methodology Research methodology explains the methods used in researching. The information for the research can be collected either primary research or secondary research. Primary data includes first-hand information.

The primary research can be conducted by using questionnaires, sampling, interviews and surveying. But in this research we mainly focus on secondary data. In this research the secondary data is collected from the annual reports f the company, and articles relating to the company. Research Approach According to the first objective the company’s performance must be compared with the previous years performance of the company. In order to compare the numbers, ratio analysis will be conducted. Ratio analysis will explain the company’s performance which is divided into three sections they are: Profitability, Liquidity and Gearing.

According to the company’s annual report 201 2 the ratios are as follows: All the values are in US $mol. Profitability Ratios Year 2010 of BP 1. Return on Capital Employed (%)= Operating Profit ‘Capital Employed * 100 (-3702)/ 188,383* 100 2. Return on Equity (%)= Net Income ‘Average Shareholder’s Equity 00 3. Net Profit Margin (%)= Net Profit/ Total Revenue * 100 (-3,324)/ 4. Gross Profit Margin (%) = Gross Profit / Total Revenue * 1 00 = 94,330/ 100 5. Asset Turnover = Total Revenue / Total assets – Current liabilities = 308,928/ (272,262- 83,879). =1. 7 equity Ratios year 2010 of BP 1 .

Current Ratio = Current Assets / Current Liabilities. = 1. MOM 2. Quick Ratio = Current assets – Closing Inventory / Current Liabilities. = (89,735- 26,21 = 0. 7:1 3. Accounts Receivables = Receivables / Credit Sales * 365. 36,549/ 266,751* 365. = 50 Days. 4. Accounts Payable Payable / Purchases * 365. = 46,329/ 21 365. = 78 Days. 5. Inventory Turnover = Inventory / Cost of Sales * 365. = 26,218/ 21 365. = 45 Days. Gearing Ratios Year 201 0 of BP 1 . Gearing Ratio (%) Total Long Term Debt / Shareholder’s Equity + Total Long Term Debt * 100. = 45,336/ (94,987+ OHIO. = 32. 3%.

Profitability Ratios Year 2011 of BP 1. Return on Capital Employed (96) = Operating Profit ‘Capital Employed * 100 = 39,817 / 208,750 * 100 2. Return on Equity (%)= Net Income /Average Shareholder’s Equity *100 = 26,097 / 112,482 o 3. Net profit Margin Net profit / Total Revenue * 100 = 26,097/ = 6. 7% 4. Gross profit Margin = Gross profit / Total Revenue * I = 101 ,402 / 386,463* 100 386,463/ (293,068- 84,318). -1. 9 Liquidity Ratios year 2011 of BP = 1. 07:1 2. Quick Ratio = Current assets – Closing Inventory / Current Liabilities. – (89,164- 25,661) / 83,780. = 0. 5:1 3.

Accounts Receivables Receivables / Credit Sales * 365. = 43,526/ 344,1 16* 365. = 46 Days. = 52,405/ 285,618* 365. 67 Days. = 25,661 / = 32 Days. Gearing Ratios Year 201 1 of BP Long Term Debt * 100. = 44,213/ (111 ,465+ 44,21 100. = 28%. Profitability Ratios Year 2012 of BP 19,733/ 22,607 o 11,816/ 119,420 *100 = 11,816/ 388,285 *100 = 3. 04% 4. Gross profit Margin = Gross profit / Total Revenue * I = 92,387 / 388,285 * 100 -23% 5. Asset Turnover = Total Revenue / Total assets – Current liabilities – – 388,285 / (300, 193 – 77,586). equity Ratios Year 2012 of BP -91 ,666 / 76,740. 1. 2:1 2. Quick Ratio = Current assets – Closing Inventory / Current Liabilities. ? (91 ,666 – 27,867) / 76,740. = 0. 8:1 3. Accounts Receivables ? Receivables / Credit Sales * 365. = 37,664 / 346,491 * 365. = 40 Days. 4. Accounts payable = Payable / purchases * 365. 47,154 / 365. = 59 Days. 5. Inventory Turnover = Inventory / Cost of Sales k 365. 27,867 / 295,448 * 365. = 34 Days. Gearing Ratios Year 201 2 of BP 1 . Gearing Ratio (%) = Total Long Term Debt / Shareholder’s Equity + Total Long Term Debt * 100. = 48,797 / (1 18,414+ 48,797) * 100. 29%. Analysis of Objective One According to the first objective, information about the company’s performance was collected from ratio analysis. The company’s performance will be compared with its three year’s performance. The company’s performance are divided into three categories, they are: Profitability Ratio: This ratio is use for assessing the company’s ability to generate enough income so that the expenses of the company can be met in a specific period of time. Liquidity Ratio: This ratio is used to assess the company’s ability to pay its short term debts.

The higher the value of the ratios the company is more prone to be safe so that it has more time to cover the debts. Gearing Ratio: This ratio helps to compare the amount of money which is invested by the owner and which is borrowed from the creditors. It explains if the company is running on the owner’s money or the money borrowed from the redirectors. Analysis of Profitability ratios: 1 . Return on Capital Employed: According to the ratio analysis in the year 201 2 the ROCK was 873% which is higher than the year 2010. The higher the percentage it is good for the shareholder’s earnings. . Return on Equity: According to the ratio analysis ROE in the year 2011 was 23%. In the year 201 2 the profit generated will be low because of ROE. 3. Net profit Margin: According to the ratio analysis the company faced a loss in the year 2010. Due to the Gulf oil spill disaster the company needed to pay a huge amount of money as compensation. But in the year 2011 the net profit margin increased to 6. 7%, but then in the year 2012 it decreased to 3. 4%, because of the ROE. 4. Asset Turnover: The ratio of asset turnover is not steady, in the year 201 0 it was 1. , then in the year 201 1 it was 1. 9, then in the year 2012 it again reached 1 . 7. The ratio is not increasing or decreasing. 5. Current Ratio: The ratios in the year 2010, 2011 and 2012 are as follows 1. 08:1, 1. 07:1 and 1 . 2:1. In the year 2012, the company has a good ratio compared to the previous year. This states that the company has enough money to pay its debt off. 6. Quick Ratio: This ratio gives a clear view if the company has enough money to pay its debts. Compared to all three years in the year 2012 the company’s performance was good because the ratio was 0. Which is higher compared to previous year. 7. Accounts Receivable: The debtor period has become worse in the year 201 2 compared to previous year. The lesser the amount of days the faster you will receive money from the debtors. 8. Accounts payable: The creditor period has become worse in the year 201 2 because the number of days are less. If the number of days are less, then the credit period will crease. 9. Inventory Turnover: The inventory turnover of the company is getting better. If the stock is held too long then the stock will either get stolen, lost or become obsolete. 10.

Gearing Ratio: The Company is not risky, because the pressure on the cash is decreased. The percentage Of Risk has gone down in the year 2012 by 3 percent compared to year 2010. Shell and Complexion The company’s performance must be compared so that you can understand the current situation of the company among the competitors.