Financial Statement Analysis Of PETRONAS Dagangan Berhad

Ratio Analysis

Financial statement analysis deals with evaluation of company’s financial data presented in its annual reports in order to measure and assess its position and performance during a specific accounting period. It includes the assessment of past year data on the basis of which the future growth of the organization is estimated and projected by the management.

The report contains a financial analysis of a Malaysian company named as PETRONAS Dagangan Berhad (PDB). A brief introduction about the firm is provided in the first part of the report followed by the ratio analysis in second. The report explains the calculation and interpretation of various categories of ratios based on the financial data of PETRONAS for year 2016 and 2017. In the later part, peer review analysis is also conducted where the selected organization is compared with its competitors in the industry to measure and evaluate its performance against them. In the last, a recommendation is provided regarding the financial position of PETRONAS followed by the conclusion in the end.

PETRONAS Dagangan Berhad is a Malaysia based company that deals in the retailing and marketing of oil and gas products. The company operates through commercial, retail and other segments. It also offers petroleum products including aviation fuel, kerosene, diesel, fuel oil, motor gasoline and many others. Further, the firm is also engaged in providing lubricants to its customers across the country. The products include passenger car motor oils, marine lubricants, automotive functional fluids, automotive gear oils and many others. Other business of the company includes supermarkets, banking facility, food and restaurant services, courier and car wash services (Bloomberg 2018).

The company was found in 1982 and is almost seventy percent owned by Malaysia’s national oil company, PETRONAS (Petroliam Nasional Berhad). The products and services are sold and offered through approximately 1000 PETRONAS stations and 760 Kedai Mesra convenience stores. It owns a network of infrastructure assets which is located throughout the country to stimulate the distribution of its oil products including pipelines, petroleum gases and many others. Mainly the firm supplies motor gasoline and diesel to the retail market and commercially it distributes jet fuel along with the products of smaller volume such as bitumen, sulphur and petroleum coke. It is listed on Malaysian stock exchange and has its headquarters situated at Kuala Lumpur, Malaysia (Bloomberg. 2018).

It is a technique of financial analysis which focuses on reflecting the entire performance of the enterprise in a nutshell to the potential investors and management of the company. It deals with the calculation of several ratios that covers all the aspects in financial terms. Ratio analysis is performed on the basis of the quantitative data presented in the financial statements of the company. Usually, many investors look up to the key ratios of the entity to measure and evaluate its past performance so as to forecast its future growth and position (Bragg, 2012). There are five categories of ratios which are been calculated and interpreted further in the section and they help understanding the position of PETRONAS easily.

Peer Review Analysis

This category deals with the measurement of company’s liquidity position by analysing the fact that how efficiently it manages and utilize its liquid assets to meet its short term debt. The ratios show the working capital management of the firm (Godwin & Alderman, 2012). 

1. Current ratio

It compares company’s current assets against its current liabilities. In other words, it reflects the capability of the firm in paying off its CLs with the help of its CAs. The ideal ratio is 2:1 which is to be maintained by every entity (Jenter & Lewellen, 2015).

Current ratio	2016	2017
Current assets (A)	5,067,207	5,902,934
Current liabilities (B)	3,771,629	3,487,548
CR (A/B)	1.34	1.69

In case of PETRONAS, it can be interpreted that its current ratio increases from 1.34 to 1.69 in 2017 as compare to the prior year. This was due to the significant decrease in company’s current liabilities and a noteworthy increase in its current assets. This fluctuation boosted up the ratio in 2017 and improves company’s liquidity position. The CA rises due to the huge upsurge in the cash balance of the company which ultimately get set off against the payments. However, the ratio is below the standard of 2:1.

1. Quick ratio

Another liquidity ratio which takes into account the most liquid assets that comprises of those assets which can be easily and quickly converted into cash as and when required. They include debtors, cash and bank balance and many others. The ideal ratio is 1:1 which means firm should have its QA equal to its CL (Saleem & Rehman, 2011).

Quick ratio	2016	2017
Quick Assets (A)	4263833.0	5033693.0
Current Liabilities (B)	3,771,629.0	3,487,548.0
QR (A/B)	1.13	1.44

The same trend follows in the QR of PETRONAS as it rose from 1.13 to 1.44 in 2017. The ratio was way higher than the standard benchmark reflecting a sound liquidity position of PETRONAS. The reason for such upsurge is the increase in company’s quick assets that only include cash balance and trade receivables. Reduction in debtors leads to the inflow of cash in the business which ultimately resulted in high ratio.  

These ratios help in measuring the profitability of the company by evaluating its capability in making profits and returns on its assets, revenue and shareholder’s equity. Generally, many of the investors rely on these ratios to make their investment related decisions (Bragg, 2012). 

1. Net profit margin

It compares the net profit made by the firm with the total revenue earned during the year. The amount of profit is expressed as a percentage of total revenue and it indicates the profitability position of the entity during for the year (Gibson, 2011). 

Net profit margin	2016	2017
Net profit (A)	946,467	1,544,969
Total revenue (B)	21,534,558	26,737,860
NPR (A/B)	4.40%	5.78%

In 2016, the NPR of PETRONAS was 4.40% which rose to 5.07% in 2017 due to a huge upsurge in company’s net profit from RM946, 467 million to RM1, 544, 969 million. This was due to the better inventory management and the cost optimization initiatives taken up by PETRONAS during the year. Moreover, the increased sales from retail and commercial segment also contributed in the upsurge of profit margin.

1. Return on assets

Recommendations

It shows the portion of firm’s net profit which is earned by employing total assets and available resources within the company. A high ratio is favourable and it indicates that the company is using more of its assets to make more profit (Higgins, 2012). 

Return on Assets	2016	2017
Net profit  (A)	946467.0	1544969.0
Total Assets (B)	9,364,913	9,748,233
ROA (A/B)	10.11%	15.85%

In case of PETRONAS, the ROA increases from 10.11% to 15.85% due to high profits and increased total assets. The assets shows an overall increase of 4% during the year which was majorly contributed by the upsurge in its cash and cash equivalents and reduction in its property, plant and equipment. The disposal of subsidiary’s property also increased company’s total assets. All such events led to the hike in PETRONAS’s ROA for the year 2017 (PETRONAS. 2017).

1. Return on equity

It measures the amount of return offered by the company to its shareholders on the portion of their capital invested in the business. A high ROE is considered more favourable than the lower one from investors’ view point (Krantz & Johnson, 2014). 

Return on Equity	2016	2017
Net income available to shareholders (A)	946467.0	1544969.0
Shareholder’s equity (B)	5,336,526	6,040,681
ROE (A/B)	17.74%	25.58%

The ROE of PETRONAS has shown a noteworthy increase from 17.74% to 25.58% in the past two years. The only reason for such hike was the increased profits and equity capital of the firm. As PETRONAS has made huge profits in 2017, it offer high returns to its shareholders which ultimately attracted many of the investors towards the company. All this eventually enhances its profitability position (PETRONAS. 2017).

These ratios are also known as turnover or activity ratios which deal with the evaluation and measurement of company’s efficiency in generating revenue from its assets. The ratios reflect how efficiently and effectively a firm uses its assets for the purpose of making revenue (Kimmel, Weygandt & Kieso, 2010).  

1. Inventory turnover ratio

It determines the capability of the firm in converting its inventory into cash and generating revenue from it. A high ITR means the entity is efficient enough in making revenue from its inventory (Lee, Lee & Lee, 2009). 

Inventory turnover ratio	2016	2017
COGS (A)	19,462,997	24,407,684
Average inventory (B)	1,428,932	836,308
ITR (A/B)	13.62	29.19

PETRONAS’s ITR has also shown an upward trend and reached to 2919 times from 13.62 times. This was due to the huge fall in company’s average inventory from RM1, 428,932 million to RM836, 308 million. The initiative taken for proper inventory management leads the company towards such hike.

1. Receivable turnover ratio

It is another efficiency ratio which measures how efficiently and quickly a company collects its receivables on time. It shows the turnover made by collecting cash from trade debtors during a particular time period (Nikolai, Bazley & Jones, 2009)

Receivable turnover ratio	2016	2017
Sales (A)	21534558.0	26737860.0
Average receivables (B)	3,481,448	3,508,147
DTR (A/B)	6.19	7.62

Conclusion

The DTR of PETRONAS rose from 6.19 to 7.62 due to increased sales of the company in 2017. Although its average receivables rose in the past year but the change in sales was more than the percentage change in debtors which ultimately boosted up the ratio.  

1. Asset turnover ratio

It evaluates the ability of the firm in making revenue by utilizing its assets effectively and efficiently in the business. A high ratio is considered to more favourable as it makes the firm profitable and efficient (Tracy, 2012).

Asset turnover ratio	2016	2017
Sales (A)	21534558.0	26737860.0
Average total assets (B)	17,435,518	19,113,146
ATR (A/B)	1.24	1.40

The same trend is observed in the ATR of PETRONAS when it rose to 1.40 in 2017 from 1.24 in 2016. Reason being, increase in its average total assets due to the upsurge in cash balance as well as disposal of PETRONAS’s fixed assets. Both the sales and TA increased during the last year which eventually makes the ratio to get a hike (PETRONAS. 2017).

These ratios analyse the capital structure of the firm by comparing its debt portion against its shareholders’ equity. They also indicate the degree of financial risk taken by the company during a specific accounting period (Vogel, 2014). 

1. Debt to equity ratio

It determines the portion of entity’s assets that are financed through debt and equity by measuring both the elements against each other. A high D/E ratio indicates that the firm rely more on borrowings rather than equity (Warren, Reeve & Duchac, 2011). 

Debt to equity	2016	2017
Total debt (A)	118771.0	67275.0
Shareholder’s equity (B)	5336526.0	6040681.0
D/E (A/B)	2.23%	1.11%

The D/E of PETRONAS declined from 2.23% to 1.11% in 2017. This reflects that company has less financial risk and is capable enough to reduce its debt portion during the year. It relies more on equity which is reflected form the increase in its share capital. The borrowings reduced following the disinvestment of the subsidiaries.

1. Debt ratio

This ratio measures the amount of company’s total liabilities against its total assets. It measures the extent of entity’s financial leverage and shows the portion of assets financed through debt.

Debt ratio	2016	2017
Total Liabilities  (A)	4,028,387	3,707,552
Total Assets (B)	9,364,913.0	9,748,233.0
DR (A/B)	43.0%	38.0%

The debt ratio has also reduced from 43% to 38% in 2017 due to the significant reduction in company’s total liabilities. On the contrary, the total assets of the firm increased by 4% which resulted in low debt ratio of the company. This also indicates that company has low financial leverage and is capable of paying its borrowings.

They reflect the performance of company’s stock in the market and within the industry in which it operates. They take into account current share price, dividends and other factors that reflect the market value of the firm (Warren & Jones, 2018). 

1. Earnings per share

It shows the portion of entity’s profit attributed to the each outstanding share of the firm’s common stock.

Earnings per share	2016	2017
Net income available to shareholders (A)	893,845	1,082,467
Number of outstanding shares(B)	993,454	993,454
EPS (A/B)	0.90	1.09

The EPS of PETRONAS increased from 0.90 cents to 1.09 cents due to high profits and increased equity. As the profitability situation of the firm has increased last year, its EPS also got improved.

1. Dividends per share

It reflects the dividend paid and declared by the company on each of its outstanding share during the period

Dividend per share	2016	2017
Dividends  (A)	596,072	774,894
Number of outstanding shares(B)	993,454.0	993,454.0
DPS (A/B)	0.60	0.78

Due to huge profits, the company has offered high dividends to its shareholders last year amounted to RM774, 894 million. The figure was way more than the dividends paid in 2016. All this brought an upsurge in its dividend per share from 0.60 cents to 0.78 cents.

1. Price-earnings ratio

This ratio reflects the willingness of the investor in paying for per dollar of investment. It is also known as price multiple.

Price earnings ratio	2016	2017
Market share price  (A)	23.8	24.3
Earnings per share (B)	0.9	1.1
P/E (A/B)	26.45	22.27

PETRONAS’s P/E ratio reduced from RM26.45 to RM22.27. This indicates that the stock of the company was traded lower last year and the investors have made profits due to the higher share price in 2017 as compare to 2016.

Comparison for 2017	PETRONAS Dagangan Bhd	Exxon Mobil	ConocoPhillips	Petrofac
Revenue	26,737,860	237,162	29,106	6,395
GP margin	8.71%	23.20%	15.80%	11.70%
NP margin	5.78%	8.31%	-2.94%	-0.45%
Debt/Equity	0.01	0.13	0.56	1.41
Current ratio	1.69	0.82	1.76	1.12
Quick ratio	1.44	0.50	1.53	1.01
EPS	1.09	4.63	-0.7	-0.04
Inventory turnover ratio	29.19	11.36	23.57	594.21

(Morningstar. 2018).

The above table shows the comparison of PETRONAS with its competitor operating in same industry. There are many other companies engaged in oil and gas industry such as Petrofac, Exxon Mobil and others who are considered as the competitor of PETRONAS Dagangan Bhd. It can be interpreted from the table that despite having highest revenue, the gross margin and net margin of PETRONAS is lower than Exxon Mobil. However, the company has low debt ratio as compare to its competitors and is liquidity position is way better than Exxon and Petrofac. The EPS of the company is higher than ConocoPhillips and Petrofac but is lower than Exxon Mobil. Nevertheless, its ITR is higher than its competitor Exxon.

Conclusion 

From the above report, it is concluded that PETRONAS has improved its overall financial performance in year 2017 as compare to 2016. It profitability enhanced to a great extent along with the strong liquidity and efficiency. The company also has optimal capital structure and low debt which makes its less risky as compare to the others operating in the industry. However, it is recommended to PETRONAS to focus more on its profitability and liquidity position so that it can beat its competitors like Exxon Mobil in the market. Overall, the performance and position of the company has shown a considerable increase in the past two years.  

References 

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PETRONAS (2017). Annual Report. Retrieved from: https://www.mymesra.com.my/assets/contentMS/pdf/PDB_Annual_Report_2017.pdf 

Saleem, Q. &Rehman, R.U (2011). Impacts of liquidity ratios on profitability. Interdisciplinary Journal of Research in Business, 1(7), pp.95-98.

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