Select and justify at least 10 financial ratios and calculate 2 non-financial ratios to analyse the performance and financial position of the two companies.

Assignment of finance and accounting
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Question 1

The following financial data is for two Oil and Gas companies that are listed on the London Stock Exchange.

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BP Plc (Global Business Browser)
BP plc

Annual Ratios

[GBP Thousands]

31-Dec-2015 31-Dec-2014 31-Dec-2013 31-Dec-2012 31-Dec-2011

Financial Strength

Current Ratio 1.29 1.37 1.33 1.44 1.17

Quick/Acid Test Ratio 0.91 0.98 0.87 0.76 0.70

Working Capital (1) 10,709,130 15,185,394 14,543,913 21,177,453 9,139,695

Long Term Debt/Equity 0.48 0.41 0.32 0.33 0.32

Total Debt/Equity 0.55 0.47 0.37 0.41 0.40

Long Term Debt/Total Capital 0.31 0.28 0.23 0.23 0.23

Total Debt/Total Capital 0.35 0.32 0.27 0.29 0.28

Pay-out Ratio -113.03% 192.21% 29.47% 57.00% 21.00%

Effective Tax Rate – 19.13% 21.39% 37.95% 33.01%

Total Capital 101,428,513 105,505,323 107,435,385 103,206,116 100,235,506

Efficiency

Asset Turnover 0.82 1.20 1.25 1.27 1.33

Inventory Turnover 12.48 13.12 11.59 12.34 12.15

Days In Inventory 29.25 27.82 31.48 29.58 30.05

Receivables Turnover 8.05 9.72 9.61 9.12 9.21

Days Receivables Outstanding 45.36 37.56 37.97 40.01 39.62

Revenue/Employee 1,883,883 2,686,991 2,735,248 2,692,377 2,898,753

Operating Income/Employee -93,022 6,627 102,654 50,965 225,627

EBITDA/Employee 35,608 144,880 200,121 141,868 313,250

Profitability

Gross Margin 8.99% 11.69% 12.19% 10.89% 15.47%

Operating Margin -4.94% 0.25% 3.75% 1.89% 7.78%

EBITDA Margin 1.89% 5.39% 7.32% 5.27% 10.81%

EBIT Margin -4.94% 0.25% 3.75% 1.89% 7.78%

Pre-tax Margin -4.29% 1.40% 7.97% 4.83% 10.17%

Net Profit Margin -2.91% 1.07% 6.18% 2.93% 6.71%

R&D Expense/Revenue 1.06% 1.03% 0.91% 0.39% 0.40%

COGS/Revenue 91.01% 88.31% 87.81% 89.11% 84.53%

SG&A Expense/Revenue 5.18% 3.59% 3.45% 3.55% 3.72%

Management Effectiveness

Return on Assets -2.34% 1.36% 7.84% 3.79% 9.06%

Return on Equity -6.22% 3.14% 18.92% 9.57% 24.41%

Valuation

Free Cash Flow/Share 0.02 0.36 -0.11 -0.09 0.14

Operating Cash Flow/Share 0.70 1.15 0.69 0.66 0.75

Royal Dutch Shell Plc (Global Business Browser)
Royal Dutch Shell Plc

Annual Ratios

[GBP Thousands]

31-Dec-2015 31-Dec-2014 31-Dec-2013 31-Dec-2012 31-Dec-2011

Financial Strength

Current Ratio 1.32 1.16 1.11 1.18 1.17

Quick/Acid Test Ratio 0.91 0.72 0.64 0.74 0.88

Working Capital 15,114,726 8,711,678 6,104,352 10,991,426 11,014,735

Long Term Debt/Equity 0.32 0.22 0.20 0.17 0.19

Total Debt/Equity 0.36 0.26 0.25 0.22 0.23

Long Term Debt/Total Capital 0.24 0.18 0.16 0.14 0.16

Total Debt/Total Capital 0.26 0.21 0.20 0.18 0.19

Payout Ratio 612.78% 79.77% 69.17% 40.32% 33.86%

Effective Tax Rate -7.47% 47.98% 50.80% 46.63% 44.02%

Total Capital 149,228,413 139,675,832 135,953,634 131,552,295 125,896,017

Efficiency

Asset Turnover 0.76 1.19 1.28 1.36 1.42

Inventory Turnover 12.54 14.38 12.55 13.25 13.60

Days In Inventory 29.11 25.39 29.07 27.54 26.84

Receivables Turnover 7.24 9.27 8.75 7.06 7.45

Days Receivables Outstanding 50.42 39.39 41.71 51.68 48.99

Revenue/Employee – 2,876,819 2,968,784 3,324,094 3,361,510

Operating Income/Employee – 135,887 177,324 269,583 304,514

EBITDA/Employee – 303,255 318,837 373,578 399,088

Profitability

Gross Margin 15.93% 15.15% 15.44% 15.24% 15.65%

Operating Margin -1.23% 4.72% 5.97% 8.11% 9.06%

EBITDA Margin 8.85% 10.54% 10.74% 11.24% 11.87%

EBIT Margin -1.23% 4.72% 5.97% 8.11% 9.06%

Pretax Margin 0.77% 6.72% 7.44% 10.81% 11.81%

Net Profit Margin 0.73% 3.53% 3.63% 5.72% 6.56%

R&D Expense/Revenue 2.57% 1.29% 1.46% 0.94% 0.72%

COGS/Revenue 84.07% 84.85% 84.56% 84.76% 84.35%

SG&A Expense/Revenue 4.51% 3.32% 3.25% 3.10% 3.05%

Management Effectiveness

Return on Assets 0.63% 4.15% 4.67% 7.84% 9.42%

Return on Equity 1.16% 8.45% 9.23% 16.03% 20.12%

Valuation

Free Cash Flow/Share 0.39 1.35 0.03 1.31 1.06

Operating Cash Flow/Share 3.14 4.60 3.89 4.47 3.74

You are required to:

(a) Select and justify at least 10 financial ratios and calculate 2 non-financial ratios to analyse the performance and financial position of the two companies.

You are expected to use charts to compare performance of the two companies. You will need to look at the audited financial statement and carry out further research to explain the performance of the company over the five years.

For clarity, you are expected to rank the companies based on the individual benchmarks and overall. (50 Marks)

(b) Write a memo to the managing director of the number two (poor performing) company with recommendations of how the financial performance of the business can be improved. (15 marks)

(c) Outline the limitations of relying on financial ratios to interpret firm performance? (5 Marks)

(Total 70 Marks)

You are expected to research for more information on the companies and cite the material correctly. You can use the Global Business Browser database to access analysts’ and SWOT reports.

Question 2: Advanced: Discussion of alternative investment appraisal techniques and the calculation of payback and Net Present value for two mutually exclusive projects.

Peer Ltd has the opportunity to become involved in one of two potential and mutually exclusive (but not both) projects. Each project will involve the purchase of machines.

The following data relates to the two projects:

Project PE3 ER5

£ £

Initial Cost 205,000 150,000

Profits: Year 1 35,000 30,000

Year 2 50,000 25,000

Year 3 10,000 – 50,000

Year 4 10,000 10,000

Year 5 50,000 3,000

Year 6 2,000

Additional Information:

All cash flows take place at the end of the year apart from the original investment in the project which takes place at the beginning of the project.
Project PE3 machinery is to be disposed of at the end of year 5 with a scrap value of £5,000.
Project ER5 machinery is to be disposed of at the end of the year 3 with a nil scrap value and replace with new project machinery that will cost £100,000.
The cost of this additional machinery has been deducted in arriving at the profit projections for ER5 for year 3. It is projected that it will last for three years and have a Nil scrap value.
The company’s policy is to depreciate its assets on a straight line basis.
The discount rate to be used by the company is 10%.

Required:

Using appropriate investment appraisal techniques advise senior management whether they should opt for project PE3 or Project ER5.
(20 marks)

Discuss the limitations of using investment appraisal technique to aid long term decision making.
(10 marks)

(Total 30 marks)

ADDITIONAL GUIDANCE

All calculations must be detailed and presented clearly.
Use of published work (citing references) within text is expected.
A full list of references should be presented at the end of the case study.
Please avoid the use of ‘I, We, Us’ in your case study. You are expected to write in third person.
Include the assignment front sheet and marking scheme which is attached to the assignment brief.
Your answer should not repeat the question as it will be included in your word count.
Formatting:
Font Type: Arial.
Font size 11/12.
Line spacing 1.5 to 2.
All pages must be numbered
All graphs, charts and tables should have a number and a title.
All text must be aligned to the left.
Good use of English, referencing, presentation will earn marks.
Submit online and on time, late submissions will not be accepted.
For extensions or deferral of assessment, please refer to the University policy on mitigating circumstances.

Accounting and Finance Penalties

Word Count*: All assessments have a word count with a tolerance of 10% only. Submissions that exceed the word count will be penalised as follows-one grade point* for every 150 words or part thereof.
Missing References – penalty is three grade points minimum (see module guide for further details).
Front sheet missing-penalty one grade point.
Word count missing or inaccurate-penalty one grade point.
** Front sheet, contents page, references and any appendices do not count in the word count.

 

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