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Financial Analysis

Importance of Finance Management in an Organization

Introduction to Financial Analysis

Financial analysis refers to the process of evaluating and analysing the actual position of business enterprise in the existing corporate market. However, it is considered as one of the significant management tools that assist in executing different aspects of an organisation like decision regarding future investment, costing, paying of dividends etc (Vogel, 2014). In analysing financial prospects, it is important for management to undertake different aspects such as industry environment, annual reports etc. In the present research report, investigator is focusing on carrying out financial analysis of two organisation named as British Petroleum and ExxnMobil. Both the firms operate in same oil and gas sector but in different market as BP function in UK while ExxonMobill operates in US. The main purpose behind carrying out this report is to compare the financial performance of both the organisation as well as evaluate the external factors that affects companies overall business performance. Lastly, researcher highlights different corporate strategies which are undertaken by oil companies to achieve desired goals and objectives.

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Summarizing the competitive environment influence change

At present, there are various factors related to external environment that impacts on functioning of oil and gas companies and creates obstacles or hindrance in executing business operations and maintaining better financial position.

Supply and Demand

Both these factors plays significant role in influencing the competitive market of US and UK oil and gas industry. Further, industry experts states supply and demand as the most risky element in the sector. However, there are certain factors that affect these elements such as operating cost in producing oil, economic environmental factors etc. Looking at the present condition, natural calamities and decreasing rate of natural resources have impact on production level which ultimately effects demand and supply (Rai and Evans, 2015). Along with this, recession and macroeconomic factors have influenced the decision of investors in investing money in business expansion. However, nowadays the population is highly depending upon the technology, which will increase the consumption of oil and gas significantly especially for developing nations which are growing at rapid pace.

Price Risk

Operating in such a competitive market, price is considered as the most significant factor that can influence overall financial position of both British Petroleum (BP) and ExxonMobill (Saxena, Shrotriya and Srivastava, 2014). Price of oil and gas are constantly fluctuating which ultimately affects the overall financial balance of business enterprise. Along with this, the geological obstructer's are highly influencing the pricing decision of giant companies in extracting oil and gas from different projects. On the basis of present condition, BP and ExxonMobill are managing their respective mining process on the basis of future price forecast and other related factors.

New Technologies

Day by day there is increase in demand for oil and gas whereas; companies are facing issues in extracting energy from existing resources. In this regard, BP and ExxonMobill are investing high in latest technologies so that; they can assess the new sources of oil and reserves. On the other hand, increasing competition is forcing firms to invest high amount of money in order to expand business operations and maintain its sustainability.

Social Licensing Issues

In different parts of world, organization faces several issues regarding maintaining better image in the existing market such as developing of negative image among the local citizen due to adverse media coverage and other as well (Coate, Holly and McAllister, 2014). Particularly, companies like BP and ExxonMobill who are operating environmentally and socially in such sensitive market needs to deal with different non-governmental organisation (NGOs) by maintaining strong track record and developing better stakeholder support. These factors encourage companies to invest high amount in benefiting society as whole as well as branding the products in eco-friendly environmental image.

Assessment of financial performance of British Petroleum and ExxonMobill Corporation

In order to assess the actual financial performance of both the cited organisations, management can use financial ratios as the tool and carry out whole analysis effectively and efficiently (Giordani, Jacobson and Villani, 2014). However, it is the responsibility of senior finance managers of both the firms to compare and asses the position of business and if require potential measures can be undertaken.

Profitability:

In this context, profitability ratios help in determining the amount of profit which the company is generating over its revenue. There are different types of profitability ratios which assist in understanding the actual position of business operations. Herein, on comparing operating profit ratio of BP and ExxonMobill it can be stated that, ExxonMobill has generated higher operating profit in comparison to BP in year 2013 as it states 8.38% and 13.71% respectively for both the firms. Similar to this, net profit is also showing same results as ExxonMobill is having higher NP with 7.74% in comparison to BP's at 6.27%. Therefore, on the basis of profitability ratios it can be said that, management of ExxonMobill is making valiant efforts and making use of available resources in the best possible manner to maintain higher profitability than its competitors.

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Liquidity

While comparing and assessing the liquidity position of both the firms it can be evaluated that, BP has higher current and quick ratio in comparison to ExxonMobill. However, current ratio for BP and ExxonMobill is 1.33 and 0.83 respectively. However, this clearly indicates that BP has maintained its current assets in meeting short term financial needs. On the other hand, quick ratio of BP is relatively high than ExxonMobill as it states 0.93 and 0.60 respectively. This outcome shows that, BP has more cash or cash equivalents in order to meet the short term financial obligations quickly and efficiently (Christiansen, 2002). Therefore, from the above analysis it can be said that, management of ExxonMobill should manage current assets as well as liabilities to maintain the liquidity position of the business. Having better liquidity position like BP in the present case, will assist them in mitigating the risks and uncertainties associated with working capital.

Efficiency

There are several efficiency ratios that act a significant tool in analysing financial position of business by comparing revenue generated on the basis of investment made by entity in assets (Ecer and Boyukaslan, 2014). The two most common and essential efficiency ratios are total asset turnover and fixed assets turnover ratio. In the present case, total assets turnover ratio for BP and ExxonMobill is 1.24% and 1.21% respectively. However, this clearly indicates that BP has generated higher revenues by making optimum utilisation of available assets. The main purpose behind having appropriate efficiency position is that, it shows positive flow of cash within the business enterprise. On the other hand, fixed assets turnover ratio of both the firms is 1.83 for BP and 1.73 for ExxonMobill. However, through this it can be identified that net sales on fixed of BP is higher as compared to ExxonMobill. Therefore, it can be recommended to management of ExxonMobill that they should increase sales and minimize cost of sales.

Gearing

Debt equity ratio is considered as one of the most significant ratio of evaluating and understanding the actual financial position of business (Robinson, Pirie and Broihahn, 2015). This ratio determines the value of total debt over total equity. By the means of this, managers can make decision on borrowing capacity of the firm. In the present case, debt/equity ratio of BP and ExxonMobill is 0.79 and 0.52 respectively. This states that, BP has raised more funds from debt financing which could create problems in near future. While for ExxonMobill, it can raise funds using debt financing as it will not make negative impact on overall financial position of the firm.

Comparative and critical evaluation of the corporate strategy currently being pursued by the companies

British Petroleum (BP) in order to maintain its sustainability has developed an smart and effective R&D department that facilitates in developing wide range of technical aspects that support in exploration, production and refining (Weygandt, Kimmel and Kieso, 2015). For instance, petrochemical team has developed new acetic acid and ethylene technologies that will support in all three above stated operations. Along with this, in order to improve the efficiency of oil recovery and maintaining lubricant process feasibly BP has undertaken advanced seismic imaging capacity by incorporating world's biggest civilian supercomputers. While in case of ExxonMobill, it has collaborated with XTO a upstream research company to enhance the level of Bakken recovery as well improving drilling and completion procedures. This relationship helped both the companies in several ways as it enhances the market share of XTO and improves the overall drilling unit for ExxonMobill.

In context to corporate tactics, relationship of BP with Russia helped the firm in executing its business operations adequately. As the partnership of 19.75% with Rosneft allows BP to explore in new divisions and expand its business functioning. Similar to this, ExxonMobill made efforts to enhance its market share by entering into Asian market as management forecasted the demand of oil and gas within this market to grow around 160% in between years 2010 to 2025. This proves to be correct move as ExxonMobill is generating high revenues from China, Japan and Taiwan.

With constantly increasing in the demand of oil and gas sector, management of BP is putting tons of efforts in involving strategic partners for new source of Hydrocarbon. Along with this, company has used upstream assets in deep-water for extracting oil and gas. While management of ExxonMobill has focused on investing downstream rather than upstream which helped them in increasing the production of only those products who are providing them high value.

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Furthermore, in coming years BP is concentrating on dis-investing almost $38 million of assets in order to reinvest in new and latest technologies as well as providing better returns to shareholders. Whereas, management of ExxonMobill is focusing on raising funds to invest in logistic management, operational efficiency so that cost can be managed and controlled.
Evaluation of performance of companies with reference to balance score card

In general, balance scorecard can be defined as the strategic forecasting and a management system that assist companies in aligning their operations on the basis of vision and strategies developed (Warren, Reeve and Duchac, 2011).

By the means of this strategic tool and technique, management of a business enterprise can implement changes in the operations effectively and smartly. According to the present case, balance scorecard helps in evaluating that, ExxonMobill has maintained its profit margin adequately in comparison to British Petroleum (Naumann and Philippi, 2014). Despite of low profit margin, BP has maintained its overall financial position stable in comparison to ExxonMobill and industry averages. In terms of learning and growth perspective both the firms are putting tons of efforts and incorporating different strategic moves technological advancement and expansion of business operations in new and existing target market. In this, ExxonMobill prefers Asian market as the managers sees growing opportunities are very high. However, this strategic move paid off to the firm as they are constantly generating increasing revenues from the market of few Asian countries. Product and service line of the BP and ExxonMobill is of wide range as it helps them in satisfying needs and wants different clients and customers in appropriate manner. Furthermore, by the means of logistic management approaches and cost reduction techniques top level management of ExxonMobill to enhance the level of business efficiency in carrying out business operations (SACHS, 2015). Whereas, BP tries to meet the requirements of clients and customers by enhancing production level of products and services and offering them at affordable prices.

Conclusion

In conclusion to the above report it can be evaluated that, analysing financial aspect of business helps managers in making quality of decisions and leads to generate desired results and outcomes. In the present report researcher evaluated financial prospects of two oil and gas industry giants British Petroleum and ExxonMobill. However, researcher understood that there are several external environmental factors that affects overall financial balance of both the firms. Thereafter, by the means of ratio analysis and balance scorecard economic position of business has been compared.

References

  • Coate, C. J., Holly, K. and McAllister, B. C., 2014. A Financial Analysis Exercise: Exxon Mobil vs. Royal Dutch Shell, US GAAP vs. IFRS. The BRC Academy Journal of Education.
  • Conner, H., 2015. Managing Environmental Risk in the Oil and Gas Industry. Routledge.
  • Ecer, F. and Boyukaslan, A., 2014. Measuring Performances of Football Clubs Using Financial Ratios: The Gray Relational Analysis Approach. American Journal of Economics.
  • Giordani, P., Jacobson, T. and Villani, M., 2014. Taking the twists into account: Predicting firm bankruptcy risk with splines of financial ratios. Journal of Financial and Quantitative Analysis.
  • Ihlen, Ø. and Roper, J., 2014. Corporate reports on sustainability and sustainable development:‘We Have Arrived’. Sustainable development.
  • Naumann, M. and Philippi, A., 2014. ExxonMobil in Europe’s Shale Gas Fields: Quitting Early or Fighting It Out. Journal of European Management & Public Affairs Studies.
  • Rai, A. T. and Evans, K., 2015. Hospital-based financial analysis of endovascular therapy and intravenous thrombolysis for large vessel acute ischemic strokes
  • Robinson, T. R., Pirie, W. L. and Broihahn, M. A., 2015. International financial statement analysis. John Wiley & Sons.
  • Saxena, A., Shrotriya, A. and Srivastava, D., 2014. Thermal Performance and Financial Feasibility of a Box Type Solar Cooker. TIDEE: TERI Information Digest on Energy and Environment.
  • Vogel, H. L., 2014. Entertainment industry economics: A guide for financial analysis. Cambridge University Press.
 
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