"Accounting and Financial Management: Case of British Petroleum1 Executive SummaryAccounting and financial management are the main backgrounds of the report underwhich the financial evaluation of British Petroleum (BP) is conducted. BP is a leading companythat explores produces, refines and markets oil and gas products including fuel, lubricants,energy and petrochemicals product. It deals in different segments including upstream, midstreamand downstream to the oil and energy production. It serves customers’ demands across the worldthrough globalise operations. Financial performance of the company over the last 5 years isdepicting fluctuating trend as its net revenues has continuously been increasing and on the otherhand, profits have declined. Financial performance of BP is evaluated with using differentcategories of ratios, including long term capital, liquidity, investors, financial risk/workingcapital management, and profitability and cash flow ratios. On the basis of ratio analysis, it isevaluated that BP’s financial position is not satisfactory although it has enough liquid funds ascompared to other rivalry firms. Internal and external sources of finance are commonly used toobtain funds by the large company. New equity capital is commonly raised from retainedearnings, loans and debentures. Overall, the given report provides a comprehensive knowledgeof BP’s financial position in all material aspects. 2 Table of ContentExecutive Summary………………………………………………………………………….……2Introduction…………………………………………………………………………….………….5I. Analysis and History of the Development of British Petroleum Company ………..…………..7II. Financial Analysis………………………………………………………………….…………..7(i) Liquidity Analysis……………………………………………………………….….…………7(a) Current Ratio……………………………………………………………………..………8(b) Quick Ratio……………………………………………………………….………………9(ii) Working Capital Management Analysis………………………………………………………9(a) Stock Days and Stock Turnover………………………………………………...………10(b) Debtor’s Collection Period…………………………………………………...…………10(c) Creditor’s Collection Period………………………………………………….…………11(iii)Long Term Gearing………………………………………………..…………………………11(a) Capital Gearing………………………………………………….………………………12(b) Interest Coverage Ratio…………………………………………………………………12(iv) Cash Flow Ratios…………………………………………………………….………………13(a) Operating cash flow to maturing obligations ratio……………...………………………13(b) Free cash flow ratio…………………………………………..…………………………13(v) Profitability ratios……………………………………………………….……...........………13(a) Gross Profit Margin………………………………………………..……………………14(b) Return on Capital Employed……………………………………………………………14(vi) Investment Ratios……………………………………………………………………………14(a) Earnings per share (EPS) ………………………………………………….……………15 3 III. Source of Finance……………………………………………………………………………15(i) Key Areas to be considered……………………………………………...………16(ii) Aim and Purpose of Obtaining Finance………………………………….………18(iii) Factors Considering for the Source of Finance …………………………………18IV. BP and Sources of Finance……………………………………………………………..……19V. Conclusion……………………………………………………………………………………20Reference…………………………………………………………………………...……………22Appendix…………………………………………………………………………………………24(i) Ratio Calculation………………………………………………………………………24(ii) Balance Sheet………………………………………………………….………………30(iii) Income Statement………………………………………………………………………31(iv) Cash Flow Statement……………………………………………..……………………32 4 IntroductionThe given report is based on the rigorous financial analysis of British Petroleum (BP)over the financial period of 2011 to 2012. Financial analysis of the company is done on the basisof the relevant financial ratios to evaluate BP’s position in respect to liquidity, working capitalmanagement, profitability, long term capital and cash flow. Review of this report provides agood overview of the financial position of the company from the investment viewpoint. Inaddition to this, aims and objectives of getting finance, factors taken into account related to thesource of finance, key areas considered for getting loan and selection of the appropriate source offinance are also being included in the report. The report covers the history and development ofBP, financial analysis, sources of finance and lastly, the conclusion. Analysis and History of the Development of British Petroleum Company BP is a renowned company in the major integrated oil & gas industry, which serves fuel,lubricants, energy and petrochemicals product. In all the related areas, the company deals tomaintain its eminent image including exploration, production, refining, marketing anddistribution of oil and gas along with power and petrochemicals production and marketing (BP2013). There are three main segments within which the company operates including upstream,midstream and downstream. In the upstream segment, BP is involved in the production, fielddevelopment and exploration of oil and natural gas. Main operations performed under the upstream activities are offshore platforms,processing facilities and wells and pipelines. In around 30 countries, namely India, Russia,Tobago, Norway, Angola, Brazil, Azerbaija, etc., BP Company operates upstream activities. Onthe other hand, the midstream segment is engaged in the natural gas (natural gas liquids andliquefied natural gas) storage, processing, marketing and trade. Downstream segment of the 5 company is engaged in the petroleum and petrochemicals products related process includingrefining, manufacturing, transportation, marketing and trade. The operational activities in thedownstream segment are furnished at Asia, North America and Europe. In the world, 15refineries are owned by BP as per the recent figures of 2013. BP initiated its operations in 1889and is located in London, UK. Currently, BP works with 85700 employees to serve the demandof petroleum, natural gas, motor and aviation fuels throughout the world (BP 2013). Position ofBP in this industry is quite good as it efficiently focuses towards social and environmental issues,stakeholder engagement and transparency in operations. In this context, the company isst positioned on 1 rank as per ‘Tomorrow Value Rating’ (Oil and Gas 2011).Overall, BPCompany gives more emphasis on the corporate social responsibility for the welfare of thesociety and economy as a whole. As per the 5 year trend, net revenues/sales of the company decreased during 2008 to 2009i.e. 196.99 bn to 153.32 bn respectively due to the financial crisis. Later, in the following years,revenues have shown an increasing trend, it was 192.44 bn in 2010, 234.44 bn in 2011 and237.02 bn in 2012. Despite increased sales, the net income of the company declined during thesame period. It was 11.5 bn in 2008 that reduced to 10.6 bn 2009,-2.41 bn in 2010, 16.03 bnin 2011 and 7.31 bn in 2012 (BP Plc ADS 2013). This exhibits that year on year, BP’s netincome decreased and its profitability got affected. On an average, the growth rate divided overthe last 5 years equals to -4.84%, but dividend per share increased to 17.86% (BP Plc 2013). Thepositive trend of dividend payment is a good symbol for investment in the oil and gas industry.Overall, the financial position of BP is showing positive results which are evident from the yearon year growth.6 II: Financial Ratio AnalysisDetailed analysis of each ratio is explained under and their calculation part has beenincluded in appendix. (i) Liquidity AnalysisLiquidity ratio shows the company’s ability to pay its short term obligation/liabilities.The common ratios used to determine the liquidity position are Current ratio and Quick Ratio.Generally, higher the liquidity ratios are, higher the margin of safety and it shows the company’sposition to meet its current liabilities. (a) Current RatioRatio of Bp and other industry competitorsRatio 2012 2011 Competitors (Chevron Corp)Current ratio 1.45 1.16 1.63Quick Ratio 1.07 0.84 1.25(Chevron Corp – CVX 2013)(Refer appendix (i))2 1.5 Current Ratio 1 Quick Ratio 0.5 0 2012 2011 CompetitorsThe current ratio is the ratio between current assets and current liabilities. Current Ratioindicates the company’s ability to convert the current assets into cash and cash equivalentsquickly so that the current liabilities can be paid off at time (Brigham and Ehrhardt 2011). Onanalysing the current ratio of BP, it can be concluded that in the year 2011, the results were notsatisfactory but in the year 2012, the company showed some progress in maintaining good 7 amount of current assets to pay its liabilities. The ratio of the company in 2011 was 1.16 and in2012, it was 1.45. Therefore, the company’s liquidity position as compared to the idealbenchmark is not acceptable. On comparison with the other industry competitors, the ratio of BP shows unsatisfactoryfigures. This indicates that the company is working less efficiently in comparison with otherindustry leaders. The increase in the current ratio of the company was due to an increase inworking capital in 2012.(b) Quick RatioQuick Ratio, also known as Acid Test ratio, is another type of ratio that is used tomeasure the liquidity position of the company. This ratio is similar to the current ratio but theonly difference is that current assets do not include inventory and prepaid expenses. The reasonfor not including inventory is that many businesses are not able to convert the inventory easily.So, it is difficult to compare companies that maintain low level of inventory, like service sectors(Brigham and Ehrhardt 2011).The acid test ratio of BP Corporation stood at 0.84 in the year 2011 and it increased by27 % to be at 1.07 in the year 2012. The large gap between the current asset and quick assetratios indicates that the company uses its inventory to derive its liquidity. Therefore, thecompany achieved the ideal benchmark of 1:1 in 2012.On comparing with competitors’ ratios, results of BP Corporation are slightly low, whichshows that competitors maintain more inventory level than BP Corporation. One of the negativeimpacts on a company with lower acid test than that of the industry and/or competitors is thatlenders and creditors are likely to prefer dealing with other players in the industry as compared tothat company. Thus, it is difficult to convince lenders and creditors for short term purposes. 8 In summary, the liquidity position of the BP Corporation reflects inadequate results thanits competitors. It is advisable to BP Corporations that it should increase its investments in theshort term assets that will help the company to increase the proportion of liquidity driven bymore liquid assets. Hence, it will increase both current and quick ratio.(ii) Working Capital Management AnalysisFor any business, working capital management is one of the significant factors tomaintain the proper flow of entire production process. It refers to the effective management ofthe company’s working capital or assets required to run the business on daily basis (Sagner2010).Ratios of Bp and other industry competitorsRatio 2012 2011 Competitors (Chevron Corp)Stock Turnover Ratio 13.51 14.04 24.09Stock Days 27 days 26 days 15.15 daysDebtors collection period 35 days 41 days 32.27 daysCreditors payment period 58 days 67 days 58.24 days(Chevron Corp – CVX 2013)(Refer appendix (ii))70 60 50 Stock Turnover40 Stock Days30 Debtors Collection Period20 Creditors Payment Period10 0 2012 2011 Competitors(a) Stock Turnover Ratio and Stock DaysStock turnover ratio reflects the speed of movement of inventory outside the company soas to generate sales, whereas stock days show the number of days for the inventory to be sold out 9 and restocked (Sagner 2010). The stock turnover ratio of BP Corporation was 14.04 % in FY2011 which decreased by 3 % to be at 13.51 % in FY 2012. This indicates that there is nosignificant change in the inventory level in the present year. On looking at the stock days, whichis 26 days in FY 2011 and 27 days in FY 2012, indicate that the company can sell its inventoryin about a month, but it is not upto the desired level. On comparing both ratios with competitors in the market, the results are totallyunsatisfactory. The stock turnover ratio of competitors was 24.09 % which indicates that BPCorporation is not able to convert its stock in cash as fast as its competitors. Comparing the stockdays with competitors, i.e. 15.15 days, show that BP Corporation is not working effectively.(b) Debtor (Receivables) collection periodDebtor collection period states the capability of the company in turning out itsreceivables into cash so as to meet its current liabilities. This also leads to improve the liquidityposition of the company (Bull 2007). Debtor collection period of BP Corporation in FY 2011was 41 days, which was reduced by 6 days in FY 2012 i.e. 35 days. This significant decrease inthe collection period was due to the new policy adopted by the company to collect its receivablesmore quickly. (c) Creditors Payment PeriodCreditor’s payment period ratio is used to calculate the number of days taken by thecompany to pay its creditors for the amount of purchases made (Bull 2007). BP Corporationpayment period was 67 days in FY 2011, which decreased to 58 days in FY 2012. The decreasein payment period was mainly due to the decrease in receivables collection period.10 "