Company Overview
BP Plc is the multinational oil company of Britain that has its headquarters in London, England. BP is regarded as one of the seven oil and gas supermajors and regarded as world’s sixth largest energy company in terms of the market capitalization (BP global 2018). The company is vertically integrated that operates in all the areas of oil and gas industry that includes the exploration and production, purifying, distributing and marketing of petrochemicals, power production and trading.
BP has the primarily listed on the London Stock Exchange and it is regarded as the main constituent of FTSE 100 index. The company provides its customers with the transportation fuel, energy for light and heat, lubricants to keep moving the engines and petrochemical products that is used to make each day items namely paints, clothes and packaging. BP has unique partnership with the Rosneft that helps in differentiating the business from its peers (BP global 2018). BP creates value by seeking evolution in hydrocarbon resources or divesting them if the resource does not fit with its strategic priorities.
The chairman of BP also addressed its shareholder by stating that the business had posted a strong year with $3.4 bn profit is attributable to the shareholders of BP (BP global 2018). The strong profitability of company enabled giving dividends of 10 cents per ordinary share in 2017 where shareholders can still take the dividends in the shares instead of cash.
Use of ratio analysis:
The financial ratio is aimed at assessing the financial performance of the business and ascertaining the financial position of the company with the help of profitability, liquidity, activity and leverage. The financial ratios are helpful in assessing the performance of business over the long period of time. The ratio helps the business in comparing the financial results with those of the competitors (Robson, Young and Power 2017). The financial ratios are helpful for the managers in decision making as they point out the problem areas and areas that have strength. The financial ratios are divided into below stated groups;
- Profitability ratios:The profitability ratio is used to assess the ability of the company in producing income in comparison to the expenses and cost related with production of income.
- Liquidity ratios:The liquidity ratios are helpful in ascertaining the ability of debtors in paying off their present obligation of debt without raising any external capital.
- Activity Ratios:This ratio is viewed as metric that ascertains the ability of company in converting its balance sheet accounts into revenue (Henderson et al. 2015).
- Investment ratios:The investment ratio is useful in addressing the performance of a company’s shares.
- Gearing ratios:Gearing ratio helps in the general classification by describing the financial ratio that compares the equity of owners and funds borrowed by the company.
- Ratio analysis helps in validating or disapproving the financial investment and operating decision of an organization.
- It helps in simplifying the difficult accounting statements and financial data into the simple operating, financial, solvency and long term position (Hoskin, Fizzell and Cherry 2014).
- Ratio analysis is beneficial in recognizing the problems and bringing into the attention of the management to the problem areas.
- Ratio analysis overlooks the changes in price level when inflation is prevalent.
- Ratio analysis disregards the qualitative aspects of a company.
- Different types of accounting practices can misrepresent the comparison even with the similar company.
BP Financial Statement Analysis from 2014 to 2017:
The operating profit ratio is one of the profitability ratio that assess the percentage of total revenue is made up of the operating income (Khan 2015).
Operating profit Ratio = Operating Profit / Sales Revenue x 100
BP’s operating profit ratio represents a tumultuous trend as the ratio stood positive in 2014 to stand at 1.81% however in the subsequent year of 2015 and 2016 it declined negatively to -3.55% and -0.23%. Later in 2017 the operating profit stood positive, the growth can be attributable to the wide scale of operations across Europe, North and South America.
Gross profit ratio is useful in comparing the gross of a business with respect to net sales.
Gross margin Ratio = Gross Margin / Net Sales x 100
The gross profit ratio stands positive all through the four-year span which signifies that BP’s operations of purchase and sale is smooth. The company reported an underlying profit of $6.2 billion which was mainly helped by the improving price of oil. Though the sales revenue of the company declined in 2015 and 2016 but eventually increased to $240,208 in 2017. The increased production from the low-pressure wells of BP existing acreage and wide operation across Australiasia, Asia and Europe resulted in improved gross margin for BP.
Ratio Analysis
The return on capital employed is the profitability ratio that measures how effectively the company can produce the profits from its employed capital (Barth 2015).
ROCE = Net Operating Profit / (Total Assets – Current Liabilities)
In case of BP, the return on capital represented a declining trend for the period of three years with the ratio declining as low as -3.82% in 2015. The decline in ratio is mainly because of higher investment in gas and oil production with major start up projects of 900,000 barrels of production each day by 2021. This ultimately resulted a decline in assets with decrease in operating profit as well.
Current Ratios:
The current ratio represents the liquidity and efficiency ratio that measures the ability of the firm of in paying of its short-term business liabilities (Deegan 2013).
Current Ratio = Current Assets / Current Liabilities
BP’s currently ratio exceeds the common rule of 2:1 which signifies that the company has the better ability of paying off its short term debt obligation. The ratio stood in accordance with the industry standard and expresses that BP’s current debt is in terms with the its current assets.
Acid Test Ratio:
This ratio determines the ability of a business in paying its current liabilities when they become due quickly from its quick assets.
The acid test ratio for the recent years of 2016 and 2017 represents less than 1:1 which signifies that if BP’s creditors were to request payment straightaway then BP may not have the sufficient amount of fund or assets to pay cash. This signifies that a significant portion of the BP’s current assets is reliant on the inventories.
Trade receivables collection period:
This ratio measures the time taken by a business to pay their debt to the company.
Trade receivable collection period =
|
Trade Receivables |
x 365 |
|
Total Sales |
The collection period in the earlier years of 2014 and 2015 stood 21.41 and 36.06 days but later declined to 2.88 days and 2.14 days respectively. This implies that the clients take longer amount of time to pay debts to BP. The ratio represents a minimum change relatively takes lesser collection period.
The trade payables ratio computes the average amount of time taken by the business to pay-off their bills and invoices to the other companies (Carlon et al. 2015).
Trade payable payment period =
|
Trade Payable |
x 365 |
|
Cost of Sales |
The above stated results states that the trade payable period increase in 2016 which implies that BP is paying its creditors at much longer time. Nevertheless, the longer period is better for BP because it would have a free source of finance and may have the positive effect on the liquidity ratios.
The inventory turnover ratio explains the time taken by the company to convert its inventories in sales.
Inventories Turnover Period = Average Inventories / Cost of Goods Sold x 365 days
During the year 2014 BP reported the lower inventory turnover period of 26.54 days. However, the ratio has gone upwards with as high as 32.88 in 2016 and declining subsequently in 2017 to 30.24. As the ratio declined from the previous year it is assumed that BP is managing its inventory in better manner.
Conclusion:
The analysis conducted on BP financial statement ranges from 2014 to 2017. The ratio analysis conducted have represented a significant organizational change for 2016 and 2017. The wide range of operations in Europe, North and South America, Asia and Africa have enabled the company to attain record crude oil production. Furthermore, the performance of BP improved significantly as the profit attributable to shareholder stood $3.4 bn. The study would have provided more detailed if a comparative study has been conducted with the company of same industry.
References:
“Annual report | Home | BP”. BP global, 2018. Online. Internet. 23 Dec. 2018. . Available: https://www.bp.com/en/global/corporate/investors/results-and-reporting/annual-report.html.
Barth, M.E., 2015. Financial accounting research, practice, and financial accountability. Abacus, 51(4), pp.499-510.
Carlon, S., McAlpine-Mladenovic, R., Palm, C., Mitrione, L., Kirk, N. and Wong, L., 2015. Financial accounting: Reporting, analysis and decision making. John Wiley and Sons Australia.
Deegan, C., 2013. Financial accounting theory. McGraw-Hill Education Australia.
Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial accounting. Pearson Higher Education AU.
Hoskin, R.E., Fizzell, M.R. and Cherry, D.C., 2014. Financial Accounting: a user perspective. Wiley Global Education.
Khan, M., 2015. Accounting: Financial. In Encyclopedia of Public Administration and Public Policy, Third Edition-5 Volume Set (pp. 1-6). Routledge.
Robson, K., Young, J. and Power, M., 2017. Themed section on financial accounting as social and organizational practice: exploring the work of financial reporting. Accounting, Organizations and Society, 56, pp.35-37.
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