Ratio Analysis Of BP And Shell: A Comparative Study

Profitability ratio

Above table shows the calculation of ratio analysis of BP and Shell. Ratio analysis helps in analysing financial performance of company by taking data from financial statement of company. With help of ratio analysis insights of company’s profitability, liquidity and solvency is easily ascertained.

Profitability ratio is calculated for ascertaining how well company is generating profit from its operations. Net profit ratio, return on assets are common example of profitability ratio (Haralayya 2021). Based on calculation of net profit ratio it has been seen Shell company has NP ratio of 5% whereas BP has NP ratio of 2% which indicates that Shell company is carrying its operation and providing value to shareholder more efficiently as compared to BP. Based on return on assets ratio it has been seen that ROA of Shell company is 4% whereas ROA of BP is 1% which indicates that Shell company is making maximum use of assets in generating more revenue as compared to BP. Therefore, based on profitability ratio it can be said that profitability position of Shell company is better in comparison with BP.

Liquidity ratio is calculated for ascertaining how well company is meeting its short-term debt obligations when they are becoming due (Ghasemi, M. and Ab Razak 2016). Current ratio and quick ratio are common examples of liquidity ratio. Based on calculation of current ratio it has been seen Shell company has CR of 1.16 (Shell 2021) whereas BP has CR of 1.03 which indicates that Shell company is paying its creditors and meeting current liabilities more effectively as compared to BP. Based on quick ratio it has been seen that QR of Shell company is 0.86 whereas QR of BP is 0.73 which indicates that Shell company has more quick assets and assets are also converted quickly into cash as compared to BP. Therefore, it can be said that liquidity position of Shell is better in comparison with BP.

Solvency ratio is calculated for ascertaining how well company is meeting its long-term debt obligations and carrying its operations in future. Debt ratio and debt equity ratio are common example of solvency ratio (Ibendahl 2016). Based on calculation of debt ratio it has been seen Shell company has DR of 53% whereas BP has DR of 66% which indicates that Shell company has less risk and it is in position to meet its liabilities effectively. Based on DE ratio it has been seen that DE of Shell company is 112% whereas DE of BP is 193% (BP 2021) which indicates that in Shell company lower amount of financing is done via debt as compared to BP. Therefore, it can be said that solvency position of Shell is better in comparison with BP.

Therefore, based on ratio analysis it can be concluded that financial health and performance of Shell company is better as compared to BP as Shell company is carrying its operations efficiently and effectively and meeting its debt obligations and also generating profit.

Macroeconomic Environment Analysis

With the help of the Pestle analysis framework, the following macroeconomic forces of both the companies are discussed and mentioned below:

Liquidity ratio

Political Factors: The political conflict between various nations may adversely influence the oil & gas industry. For instance, the tensions between Iran and the US can disturb the oil prices because the Iran oil supply is important to the global supply.

Economic Factors: The Coronavirus pandemic has considerably influenced global economic affairs, producing an atmosphere of financial uncertainty. The pandemic has dropped the economy into a downturn, which has an adverse effect on the companies’ financial consequences and business (BP & Shell).

Social Factors: Over the past few years, there has been a stable increment in oil consumption, especially before the covid in emerging and developing nations due to the emergence of the new middle classes. Countries like India, China, Brazil, and Russia are some of the top consumers varying upon the consumption of oil worldwide.

Technological Factors: It is a well-known fact that the oil & gas sector is slow with respect to technological advancements and technological developments. Therefore, the pandemic has caused digitalization with various organizations increasing dependence and reliance on analytics, robotics, 5G networks, the Internet of Things, big data, and machine learning. In 2020, Royal Dutch invested around $907 million as R &D to revolutionize and develop sustainable energy.

Legal Factors: Different countries have different legal acts or norms that oversee and rule the oil & gas industry players. At the same time, some nations have more than one legal act, while on the other hand, some nations enable multinational companies to purchase local gas and oil firms imposing specific restrictions regarding ownerships.

Environmental Factors:  Gas and oil organizations are heavily assessed for their levels of pollution and the appropriate environmental cause. Thus, this is mainly due to their environmental footprint & is related to the depletion of natural resources. All firms should reduce their reliance on natural resource.

Consumer Demand: In today’s world economy, the demand or requirement for energy is quite consistent and firms which are involved in the energy industry are straining to change to sustainable means. However, a survey consequence demonstrates that both the companies are trying to confirm that the energy is mainly based on the product differentiation and sustainable strategy is implemented so that the client can be appealed and more net revenue can be created from the business operations.

Competition: The Shell company faces severe competition in all its operations with the firm pursuing to distinguish its products in Chemical and Oil Products businesses that are contesting in the commodity kind markets. Thus, it also occurs to compete with the gas and oil entities to gain access to the financial resources. Whereas, BP also faces considerable rivalry from a quickly evolving range of participant in the industries in which it functions and operates.

Reference

(2022) Bp.com. Available at: https://www.bp.com/content/dam/bp/country-sites/nl-nl/netherlands/home/documents/corporate-and-finance/bp-annual-report-and-form-20f-2019.pdf (Accessed: 8 January 2022).

Disclaimer – Shell Annual Report 2019 (2022). Available at: https://reports.shell.com/annual-report/2019/servicepages/disclaimer.php (Accessed: 8 January 2022).

Ghasemi, M. and Ab Razak, N.H., 2016. The impact of liquidity on the capital structure: Evidence from Malaysia. International journal of economics and finance, 8(10), pp.130-139.

Haralayya, B., 2021. Ratio Analysis at NSSK, Bidar. Iconic Research And Engineering Journals, 4(12), pp.170-182.

Ibendahl, G., 2016. Using solvency ratios to predict future profitability. Journal of ASFMRA, pp.195-201.

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