The most common way to analyze the financial data is to calculate ratios from the financial data and compare it with the historical data. Financial analysis is used to know whether a firm is in a profitable position and the performance of the firm is enough to allow the investors to show interest in the firm to invest. To analyze the financial performance we need to look into the firm's balance sheet, income statement, and cash flow statement.
To identify the major issues or problems, we must analyze and evaluate the situation, present alternatives, and make recommendations and develop implementation plans. The internal situation analysis normally requires financial analysis. Based on available financial information available to us from the BP Annual Reports we have assessed the firm's financial performance, its strengths and weaknesses, and provide suggestions for future planning. We have used a common approach to calculate various ratios using major items from the firm's balance sheet, income statement, and stock market data. Ratio analysis is a powerful means to evaluate the firm's financial position and help understand the overall picture of the firm. The information that the firm had released through its annual report is readily available for financial analysis. We have selected the relevant and pertinent data for critically analyzing and interpreting it to help the decision makers for taking decisions for increasing the efficiency and better performance of the Company
The financial analysis is made on a historical basis by comparing the firms past year performance. The focus of this section is the cross-sectional analysis and the evaluation of the firm based on its relative position in the industry.
As to calculate the four type of ratios to know the firm's financial standing we have used the Financial Statements published in the BP Annual Report 2009,
(See Appendix A)
Ratio Analysis
In general ratio analysis is based on the evaluation of four types of ratios:: (1) current ratios, which measure the firm's ability to fulfill its short-term debt obligations, (2) leverage ratios, which measure the level of the firm's borrowing and its debt-serving ability based on its earnings prospect, (3) activity ratios, which measure the efficiency level of the firm in utilizing the assets for business operations, (4) profitability ratios, which measure the firm's earnings capacity.
The major ratios in these categories are as follows.
Liquidity Ratios
Current ratio
67653
-------- = 1.14
59320
Measures the extent to which the firm's short-term debts are covered by its cash and the assets that can be converted to cash in the near future.
Quick ratio
67653 - 22605 45048
------------------- = --------- = 0.759
59320 59320
A measure of a firm's ability to pay its short-term debt without relying on the sales of its inventory
Leverage Ratios
Debt to assets ratio
46557
----------- = 0.19
235968
An indication of the extent to which the business is financed by the borrowed funds.
Debt to equity ratio
46557
----------- = 0.45
102113
This is the alternative measure for the firm's debt using, comparing the fund financed by debts and that provided by the owner.
Time interest earned
26426 + 1110
------------------- = 81.46
338
A multiple of earnings available to pay interest costs and the interest cost, which measures the level of comfort for the firm to serve its interest obligations based on its earnings prospect.
Fixed charge coverage
An alternative measure with the purpose similar to Time Interest Earned, showing the firm's capacity to serve its debt obligations plus fixed obligation charges.
Activity Ratios
Inventory turnover
239272
---------- = 10.58
22605
Based on a comparison with the industry average, it shows whether the firm has excess inventory stock or inadequate inventory.
Total asset turnover
239272
---------- = 1.01
235968
It shows the relation between sales and the assets employed to generate the sales, which measures the efficiency of business operations.
Account receivable turnover
239272
---------- = 8.10
29531
Based on a comparison of sales with the credit granted to generate the sales, it shows the average length of time to collect the credit.
Profitability Ratios
Profitability ratios are used to know how successful a firm is in terms of generating revenue on the investments made in the business. If the business is liquid and efficient it should be in a profitable position.
Gross profit margin
239272 - 190726
---------------------- = 0.20
239272
This ratio is used to assess the firm's financial health showing proportion of profit left from the revenues generated after deducting the cost of goods sold, It also serves as a source of paying additional expenses and saving for the future such as reserves for unforeseen contingencies
Operating Profit
Operating Profit = Operative Revenue - Operative Expenses
26426
------------ = 0.11
239272
Operating profit means Profit earned for firms normal core business operations and the above does not include any profits earned by way of Investments and the Interests and taxes Operating Profit Margin is the ratio of operating profit to sales. This ratio indicates how much of each dollar of sales is left over after operating expenses.
Net profit margin
16759
----------- = 0.070
239272
This ratio is a measure to express how much of each dollar is earned by the company it generates into profits . Profit margins vary by industry, If all is equal, the higher the company's profit margin, the better it is compared to its competitors
Return on total assets
16759
----------- = 0.071
235968
A ration which measures the firm's EBIT which is Earnings before interest and taxes against its total net assets. It is also considered as a indicator of highlighting the company effectiveness is using its assets so as to generate the earnings before all the contractual binding obligations to be paid out
The higher the company's revenues in proportion to its assets means the more effectively the company is using it assets.
Return on equity
16759
----------- = 0.164
102113
Return on Equity measures the company's profitability by calculating how much profit company is generating with investors/share holders money, it is also called as Return on Net Worth. In simple terms it is profit earned by the owner for each of his/her dollar invested in the business.
Return on capital employed/Return on investment (ROI)
26426
--------------------- = 0.14
235968 - 59320
This ratio indicates the profitability and efficiency of the capital investments made by the company. Return on Capital Employed should always be higher than the rate at which the company borrows otherwise any increase in borrowing will reduce shareholders' earnings.
