Financial Analysis and the Investment Decisions

Question : Obtain annual financial reports of BP (petrol company) for the period 2010 to 2013 inclusive. Do a financial analysis based on Consolidated data and write a brief report from the perspective of financial analysts of the firm. Answer : Introduction In order to take finance decisions it is very important that proper analysis is being conducted on the various available opportunities for a firm and an enterprise. The relationship between the sources of investments is to be judged after proper analysis could be done. The investors generally compare the opportunities from the bank rate of interest which is always prefixed and also risk free return is being earned by them for this. The analysis of the financial position of BP ltd is as under for the period commencing from 2010 to 2013 Types Of Ratios BP LTD 2013 2012 2011 2010 Liquidity Ratios Current Ratio 1.33 1.19 1.06 1.08 Quick Ratio 0.91 0.82 0.74 0.76 Cash Ratio 0.23 0.21 0.16 0.22 Activity Ratios Inventory Turnover 10.39 10.96 10.61 6.25 Debtor's turnover 8.28 8.85 7.85 3.82 Asset Turnover Ratio 1.24 1.25 1.28 1.28 Working Capital Turnover Ratio 15.79 25.33 69.75 23.76 Solvency Ratios Debt Equity Ratio 0.37 0.41 0.39 0.47 Proprietary Ratio 0.48 0.45 0.37 0.39 Capital Gearing Ratio 3.17 2.44 2.70 3.16 Profitability Ratios GP Ratio 14.05% 13% 17.51% 5.48 % Return On Capital Ratio 18.22 10% 19.95 (3.47) EPS Ratio 123.87 60.86 135.93 (19.81) NP Ratio 6.27 3% 8.78 (1.12) EPS Per Share Particulars 2013 2012 2011 2010 Total Earnings 23758 11816 26097 -3324 No of Shares 191.80 194.15 191.99 167.794 EPS 123.87 60.86 135.93 -19.81 Net Tangible Asset backing Per Share Particulars 2013 2012 2011 2010 Net Tangible Assets. 96187 83718 79280 72995 No of Shares 191.80 194.15 191.99 167.79 NTA/Per Share 501.502 431.202 412.941 435.027 Profitability Analysis The profitability ratios are being used to find the position of the profits that the business that is being earned by the business and it is very important to judge the decisions of investment based on these ratios. The gross profit makes us clear about the trading profits which is being decreased by other expenses in the net profit ratio and hence such ratios are important to get the knowledge that whether the business is profitable or not. It can be witnessed by the above calculations for BP Ltd that the company is improving in the profitability structure by the time as seen by the figures of 2013. The overall profits of the company including EPS had shown a great improvement along with the total return on capital employed. This shows that it had focused on its weakness and improved with time. Liquidity Analysis The liquidity ratios indicate the strength of the business in terms where there will be some issues related to the payment of short term liabilities and it is very dangerous to have low ratios and it although company is able to able to pay off the liabilities with the present current assets but the liquidity position is not too strong for the company as the quick or acid test ratios are less than one which indicates that company has assets but lacks quick and liquid assets. The cash is also not as much as needed for maintaining the liquidity of the firm. The company BP Ltd should focus on the liquidity of the company by managing the working capital levels effectively. Activity/ Solvency Ratios These are ratios that investor will look at the most when they are looking for long term investments in the business as they would like that the operating cycle of the company goes on very well so that the liquidity is being maintained as well as the efficiency of the working can be well determined by the above ratios. The collection period indicates how well the debtors are being realized from credit sales as lower is the collection period it is better for the company. The turnover ratios are a good proof that the company is working in the correct direction or not. It shows that the operating effectiveness which effects the business a lot. The debtors and inventory turnovers needs a look as the stock held in hand is less but the collection period is high for BP Ltd which also somewhere shows that the working capital cycle of the company is not so strong to manage future shocks. The debt equity ratios for the company is the most attractive part of the company as it is very low which shows that the firm has a good capital base and it also maintaining it over the years of trade. The company should ensure that the same is maintained as it decreases the cost of capital for the investors and makes the firm less risks and fundamentally strong. Overall Attractiveness The most significant thing that a layman can also understand is the EPS as well as the ROCE as this can be used to judge the performance on a overall basis and its easier to have better idea of the corporate. It is very good for the company and has improved with time to the great extent in the long run and would increase in the near future also. As the company is in the phase of growth and this would itself lead the company to establish itself in the corporate world. Recommendation It is being recommended that the investors should invest in the company from a long term prospective as the company has good potential along with the investments compare the returns with the bank return in the country Australia which is about 3.55% on the deposits but it can be seen that in the companies taken above it is lower than these and it is very hard for the investors to look over it and thus it is very important to look over the ratios well before any decisions can be taken. So the investors should go for investment in this company due to the growth feature. Conclusion It can be concluded that the decision of investment is to be taken with due care and before any such decisions is taken proper analysis should be done in order to establish certain goals related to the enterprise. The investment opportunities are subject to the market risk which should also be considered before any decisions could be taken on the same References https://www.aaii.com/journal/article/financial-ratio-analysis-putting-the-numbers-to-work https://www.academia.edu/5180572/Financial_Ratio_Analysis_of_Firms_A_Tool_for_Decision_Making https://onlinelibrary.wiley.com/doi/10.1111/j.1468-5957.1987.tb00106.x/abstract.