"qwertyuiopasdfghjklzxcvbnmqwertyui opasdfghjklzxcvbnmqwertyuiopasdfgh jklzxcvbnmqwertyuiopasdfghjklzxcvb nmqwertyuiopasdfghjklzxcvbnmqwer FINANCIAL RATIO ANALYSIStyuiopasdfghjklzxcvbnmqwertyuiopas OIL & GAS INDUSTRY ROYAL DUTCH SHELL & BRITISH PETROLEUMdfghjklzxcvbnmqwertyuiopasdfghjklzx cvbnmqwertyuiopasdfghjklzxcvbnmq wertyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmqwertyuiopasdfghj klzxcvbnmqwertyuiopasdfghjklzxcvbn mqwertyuiopasdfghjklzxcvbnmqwerty uiopasdfghjklzxcvbnmqwertyuiopasdf ghjklzxcvbnmqwertyuiopasdfghjklzxc vbnmqwertyuiopasdfghjklzxcvbnmrty uiopasdfghjklzxcvbnmqwertyuiopasdf ghjklzxcvbnmqwertyuiopasdfghjklzxc vbnmqwertyuiopasdfghjklzxcvbnmqwContentsIntroduction: .................................................................................................................................... 4Rationale for Choosing Oil and Gas Industry and the Considered Companies for Analysis: ........ 5Comparative Analysis of the Performance through Ratio Analysis: .............................................. 6Comparative Analysis of the Profitability Ratios: .......................................................................... 6A) Net Profit Margin ................................................................................................................... 6B) Return on Equity: ................................................................................................................... 8Return on Capital Employed ....................................................................................................... 9Comparative Analysis of the Liquidity Ratios: ............................................................................ 10A) Current Ratio ........................................................................................................................ 10B) Quick Ratio .......................................................................................................................... 12Comparative Analysis of Gearing and Capital Structure Ratio: ................................................... 14A) Total Debt to Asset Ratio: .................................................................................................... 14B) Debt - Equity Ratio: ............................................................................................................. 15Comparative Analysis of the Activity Ratio: ................................................................................ 16A) Inventory Turnover Ratio: ................................................................................................... 17B) Total Asset Turnover Ratio: ................................................................................................. 18C) Fixed Asset Turnover Ratio: ................................................................................................ 20Limitations of the Ratios:.............................................................................................................. 22Conclusion .................................................................................................................................... 23APPENDIX: .................................................................................................................................. 25Appendix 1: ................................................................................................................................... 26Calculation of Net Profit margin of British Petroleum for the year 2013 & 2014:................... 26Appendix 2: ................................................................................................................................... 27Calculation of Return on Equity of British Petroleum & Royal Dutch Shell for the year 2013 &2014: .......................................................................................................................................... 27Appendix 3: ............................................................................................................................... 29Calculation of Return on Capital Employed of British Petroleum & Royal Dutch Shell for theyear 2013 & 2014: ..................................................................................................................... 29Appendix 4: ................................................................................................................................... 30Calculation of Current Ratio of British Petroleum & Royal Dutch Shell for the year 2013 &2014: .......................................................................................................................................... 30 Appendix 5 .................................................................................................................................... 32Calculation of Quick Ratio of British Petroleum & Royal Dutch Shell for the year 2013 &2014: .......................................................................................................................................... 32Appendix 6 .................................................................................................................................... 33Calculation of Total Debt to Asset Ratio of British Petroleum & Royal Dutch Shell for theyear 2013 & 2014: ..................................................................................................................... 33Appendix 7: ................................................................................................................................... 35Calculation of Debt Equity ratio of British Petroleum & Royal Dutch Shell for the year 2013& 2014: ...................................................................................................................................... 35Appendix 8: ................................................................................................................................... 36Calculation of Inventory Turnover ratio of British Petroleum & Royal Dutch Shell for the year2013 & 2014: ............................................................................................................................. 36Appendix 9: ................................................................................................................................... 37Calculation of Total Asset Turnover ratio of British Petroleum & Royal Dutch Shell for theyear 2013 & 2014: ..................................................................................................................... 37Appendix 10: ................................................................................................................................. 38Calculation of Fixed Asset Turnover ratio of British Petroleum & Royal Dutch Shell for theyear 2013 & 2014: ..................................................................................................................... 38 Introduction:In this particular report, a ratio analysis is done so as the make a comprehensive analysis of thefinancial position of the Royal Dutch Shell and British Petroleum. Since this report is on so as tomake a analysis so that investor can actually make a investment decision, the companies in oil &and gas sector is chosen (Lord and Farr, 2003). It is essentially done because the consumption ofthe oil and gas are increasing on daily basis and thus the industry has a tremendous potential inthe years to come. Therefore to enable the investors with a solid financial analysis and to helpthem in the investment decision for the long run perspective, the two blue-chip stocks in thisparticular sector, namely Royal Dutch Shell and British petroleum is considered for the analysis. It is essential to mention that for an in-depth analysis for propositioning a strong investmentguideline based on the financial position of the considered companies, a comparative ratioanalysis is done. Moreover the reason along with the suitable logic about the industry scenario isgiven for the considering the industry for this particular analysis. This particular also contains a holistic performance analysis through profitability analysis,liquidity analysis, gearing and leverage analysis and activity ratio analysis. The incorporation ofdifferent ratio analysis under each of the different types of ratio analysis will enable tounderstand the financial position of Royal Dutch Shell and British Petroleum. In addition to it ainter firm comparison has been done for two consecutive year based on the ratio analysis whichhas been calculated through the published financial statement of the company (Jackson andTownsend, 2007). These will effective help to analyze the current financial standing of thecompanies in relation to the previous financial years and help to analyze the improvement ordetoriation in financial condition of the firms. Ultimately the comparative analysis between thetwo above mention considered firm based on the different ratio analysis which has been done isperformed so as to facilitate a concrete investment decision between the two firms of theconsidered analysis. The limitations of the used ratio for the analysis are also mentioned so thatinvestor should incorporate the mentioned limitations while talking an investment decisions. Rationale for Choosing Oil and Gas Industry and the ConsideredCompanies for Analysis:The oil and gas exploration industry requires highly specialized companies for the purpose ofexploration of the natural resource. It is apart from the high requirement of the specialization forexploration; it also requires huge capital investment for conduct of the entire business operation.Therefore with all the reasons into consideration the entry of new firms in thus industry is quiettough. Taking into consideration of the existing firms which have huge expertise in oil and gasexploration and their constant investment in technology up-gradation, the firms operating withinthis particular industry will have a tremendous advantage and is set to witness huge profitability.Moreover according to estimate the of the International Energy Agency, it is expected that in thisyear 2015 the demand for oil is set to rise by 1.1million barrels per day for the entire year.Moreover the agency estimated that demand for oil and gas is expected to raise manifold withstrong demand coming from developing nations across the world (Kumar and Rabinovitch,2013). Therefore the firms operating within this particular oil and gas sector will have a strongpotential for huge profitability given the technology investment they are doing and expertise theypossess. Thus oil and gas industry will remain an attractive industry to invest for highprofitability for the investors.Royal Dutch Shell and British Petroleum are two most leading pioneers of the oil and gasindustry in the European region (Lev, 2006). It is essential to mention that these both are bluechip stocks in the index which is widely followed by investors and finance professionals acrossthe world. It is essential to mention that both these companies, namely Royal Dutch Shell andBritish Petroleum, are a major constituent of the FTSE 100 index and have a marketcapitalization £ 200 billion and 130 billion respectively. Both the players being such a enormouscompanies in size and also being the industry benchmark have the required reputation andcredentials for being a leading players not only in the European region but also in the entireworld. It is also essential to mention that being a listed public companies all the financialinformation are published from time to time which enables the investors and professionals acrossthe industry to access the company’s financial position and take a investment decisions in thecompany. Comparative Analysis of the Performance through Ratio Analysis:Comparative Analysis of the Profitability Ratios:The overall profitability analyses of the companies are assessed through the propagation of theprofitability ratios. The profitability ratios are segmented through the analysis regarding thefollowing ratios that are net profit margin o f the company along with the returns on equity andcapital employed of the companies. The profitability ratios are calculated for the year 2014 andthe 2013 of the Royal Dutch Shell along with the British Petroleum.A) Net Profit MarginNet profit margin generally establishes the relationship between the net profit earned andrevenue from operations, i.e., net sales. It shows the percentage of net profit earned on sales. Netprofit is computed by deducting all direct costs and indirect costs. But, non operating expensesand also non operating incomes are excluded (Brandt, 2008). The formula for Net Profit Marginis given below: Net Profit Margin = (Net Profit/ Revenue from Operations) * 100 The summary of the Net Profit Margin of the Royal Dutch Shell and British petroleum ascalculated in Appendix 1 is given below:Net Profit Margin (in %)2014 2013Royal Dutch Shell 3.50% 3.60%British Petroleum 1.13% 6.26% Net Profit Margin(in %) of Royal Ducth Shell and Britishpetroleum for 2013 & 2014Royal Dutch Shell British Petroleum 6.26% 3.60% 3.50% 1.13% 2014 2013 It can be analyzed from above tables showing the Net profit margin of the both the companieswhich is operating in the oil and gas exploration sector mainly in the European region that RoyalDutch Shell has generated a profit margin of 3.5% in the year 2014. The profitability that isgenerated by the same company in the year 2013 is 3.6%. Thus it can be analyzed from theanalysis of the results of the Net profit margin for the company Royal Dutch Shell that thecompany has marginally lower Net Profitability margin in the year 2014. Even though thecompany has a lower sale in the year 2014 compared to the year 2013 but the company has beenable to generate a higher profitability because of efficient management of the cost of sales. Thishas lead the company to generate a marginally higher net profitability in 2014 inspite of havinglower sales in 2014.It can also be analyzed from the table given above that British petroleum as a company hasgenerated a Net profitability Margin of 1.13% in the year 2014 and that for the year 2013 is6.26%. It is particularly because the company has witnesseda lower sales in the year 2014 andat the same time the company has been unable to manage the ost of operation of the businessresulting in lower net profit margin as compared to the year 2013. Thus it can be analyzed from the analysis of the net profitability margin of both the companiesthat the there is fall in Net Profitability Margin for the year 2014 compared to their respective net profitability margin in 2013. The main reason is basically because of lower demand of oil andenergy demand in the years 2014 which has lead to the lower sales and thus have an impact onthe net profit margin of both the companies. B) Return on Equity:Return on Equity is the earnings of a company attributable to the Equity Shareholders divided bythe number of Equity Shares (Klein, 2015). In other words, this ratio measures the earningsavailable to an Equity Shareholder on per share basis.Preference Share dividend is deducted from the net income to arrive at the income available forEquity Shares. This income is divided by the number of Equity Shares. Formula:Return on Equity= {(Profit after tax- Preference dividend)/Number of Equity Shares} * 100The summary of the Return on Equity of the Royal Dutch Shell and British petroleum ascalculated in Appendix 2 is given below:Return on Equity (in %)2014 2013Royal Dutch Shell 8.31 8.97British Petroleum 3.55 18.21Return on Equity(in %) of Royal Dutch Shell &British Petroleum for 2013 & 2014 Royal Dutch Shell British Petroleum 18.21 8.97 8.31 3.55 2014 2013The above table portrays the Return on Equity of two players in the oil and gas industry inUnited kingdom, namely, Royal Dutch Shell and British Petroleum. It can be analyzed thatBritish Petroleum as accompany has a better ROE in the year 2013.Furthermore it can also beanalyzed that British petroleum as a company has only generated a ROE of 3.55% in 2014 which is much lower than its major competitor Royal Dutch Shell as well as in comparison tofigures of 2013. Therefore the management of Royal Dutch Shell & British Petroleum must takeappropriate decisions so as to improve the ROE to maintain the investors’ confidence in thecompany. This will help them to maintain the market capitalization in the long run andsustainability of the organization. Return on Capital Employed Return on Capital Employed is generally defined as the returns that are generated to the investoror shareholder’s of the company from the total capital of the company.Therefore ROCE can be calculated as the = Net profit / Total capital.The summary of the Return on Capital Employed of the Royal Dutch Shell and British petroleumas calculated in Appendix 3 is given below:RETURN ON CAPITAL EMPLOYED2014 2013Royal Dutch Shell 8.52% 9.12%British Petroleum 3.59% 18.37% Return on Capital Employed (in %) 20.00% 15.00% Royal Dutch Shell 10.00% British Petroleum 5.00% 0.00% 2014 2013 From the following table it can be analyze that the return on capital employed of the companyRoyal Dutch shell for the year 2014 is 8.52% which implies that the procurement of the capital isefficient for assuming the performance of the total assets of the company. But the value is lowerthan the past year which has been measured to 9.12%. Apart from these the analysis have beendone by measuring the values of capital employed of British Petroleum which is 3.59% and it ismuch more lower than the value of the year 2013 which is 18.37%.Therefore it can be said that, due to impact of low sales the companies are generating lowercapital employed. The demand for the oil and the natural gas are also surpassing an unstablecondition in the economy which inculcate negative aspects in the future.Comparative Analysis of the Liquidity Ratios:A) Current Ratio Current Ratio is a relationship of Current Assets to Current Liabilities and is computed todetermine the short term financial position of the enterprise. It is an indicator of the enterprise’sability to meet its short term obligations (Paramasivan and Subramanian, 2009). It is an acceptednorm that current assets should be two times the current liabilities. The current ratio can be calculated as per = Total Current Asset / Total Current LiabilitiesThe summary of the Current ratio values of the Royal Dutch Shell and British petroleum ascalculated in Appendix 4 is given below: CURRENT RATIO 2014 2013Royal Dutch Shell 1.15 1.1British Petroleum 1.38 1.33It is from the summarization table which has been presented after doing the calculation o thecurrent ratios; it can be observed that the current ratio of Royal Dutch Shell for the year 2014 is1.15 and that of the year 2013 is 1.1. Thus it can be estimated from the figures of this particularratio; that the company has a better current ratio in the year 2014. Since current ratio denotes theability of the firm to pay its short term liability from its current asset, it signifies that in the year2014, Royal Dutch Shell as a company has a better ability to pay off its current liabilities from itscurrent asset.It is also can be analyzed from the above table that British petroleum has a better level of currentAsset in the year 2014 in comparison o the year 2013. It is particularly because of the loweramount of current liabilities that the company has in the year 2013 than in the year 2014. Therefore from the overall analysis it can be significantly analyzed that British Petroleum as acompany has a better current Asset position as compared against its competitor for both theconsidered year of analysis. In fact, it can also be analyzed that both the companies have a betterfinancial position in the year 2014 as far as the Current Ratio is concerned. The betterment in theimprovement in the current ratio also indicates that the management of the both the companieshas taken considerable steps so as to improve the current asset position of the company andreduction in the current liabilities which includes debtors. Current Ratio of Toyal Dutch Shell & BritishPetroleum for 2013 & 2014 1.4 1.2 1 Royal Dutch Shell 0.8 0.6 British Petroleum 0.4 0.2 0 2014 2013B) Quick RatioQuick Ratio is also known as Liquid Ratio or Acid Test Ratio. It is a relationship of LiquidAssets (Current Assets- stock- prepaid expenses) with Quick Liabilities (Current Liabilities-Bank Overdraft). This ratio is also used to compute the short term liquidity of the enterprise. Thisis an improved version of Current Ratio. Quick ratio or the acid test ratio of the company = {(Total Current Asset – Inventories) / (TotalCurrent Liabilities – Bank Overdraft)}The summary of the Quick ratio values of the Royal Dutch Shell and British petroleum ascalculated in Appendix 5 is given below:QUICK RATIO 2014 2013Royal Dutch Shell 0.479 0.425British Petroleum 1.08 0.92 Quick ratio of Royal Dutch Shell and British Petroleum for2013 & 2014 1.2 1 0.8 Royal Dutch Shell 0.6 British Petroleum 0.4 0.2 0 2014 2013 The significance of the Quick Ratio is to understand the short term solvency of the company. Asper the data given, in the year 2013 Royal Dutch Shell had a quick ratio of 0.425 whereas in theyear 2014 it went up to 0.479. There is a prominent hike in the quick ratio which shows that theshort term solvency has got much better position in the year 2014 as the company is in a positionto meet its short term liabilities by utilizing the quick assets. So in this company it is shown thatin 2014 the company became a better indicator of its liquidity. According to the data of British Petroleum in the year 2013 the quick ratio was 0.92 whichturned up to 1.08 in the year 2014. As per norms and regulations, the ideal quick ratio should be1:1 as for every currency of quick or liquid liability; there is a currency of quick or liquid assets.In the year 2013, the company is in a risky position since the quick assets are in less proportionto the quick liabilities. The Quick Ratio, being 0.92:1, British Petroleum has less quick assetwhich will be required for meeting the short term solvency of the firm. Whereas in the year2014, the Quick Ratio being 1.08:1, the company is in much safer position as far as the shortterm solvency is concerned since the proportion of current assets is more than the proportion ofcurrent liabilities.Thus the management should take a proper decision in this field. As per the internal comparisonof the companies like Royal Dutch Shell and British Petroleum, the movement is in a better way so the management should know how to keep up the situation and move towards furtherbetterment.Comparative Analysis of Gearing and Capital Structure Ratio:The gearing and the capital structure ratio has always measured the financial leverages of thecompany to ascertain the probable amount of the debt financing that has to be reliant for thisrespective purpose (Howe, 2003). The comparison between the total debts considering the totalcapital structure has been ascertained for the assessing the overall equity capital for the business.A) Total Debt to Asset Ratio:Total Assets to Debt Ratio establishes relationship between total assets and total long termborrowings or debts. The two components of this ratio i.e., total assets and borrowings or debtsare computed as follows:Total Assets: Total Assets include Non Current Assets and Current Assets.Debts: It includes long term borrowings and long term provisionsThe calculation of the ratio can be done = Total Debt / Total AssetThe summary of the Total Debt to Asset values of the Royal Dutch Shell and British petroleumas calculated in Appendix 6 is given below:Total Debt to Asset Ratio2014 2013 Royal Dutch Shell 0.0204 0.0233British Petroleum 0.02418 0.02414 Total Debt to Asset ratio0.025 0.024 0.023 Royal Dutch Shell 0.022 British Petroleum 0.021 0.02 0.019 0.018 2014 2013 From the representation of the tables it can be analyzed that the debt to asset ratio of thecompany Royal Dutch Shell is .0204 in the year 2014 and .0233 in the year 2013. Theobservation can be obtained to determine the relationship of the total assets to the debt of thecompany is relatively linked as because the company is avoiding taking the risk of debt. Fromthe analysis the ratio of the company British Petroleum has been measured that implies .02418 inthe year 2014 and .02414 in the year 2013. The overall analysis has justified the aspects that the company should take the risk of the debt asbecause the company has ample investors to structure the capital of the company. This will leadthe company to generate more investors and also increase the values of the retained earnings toincrease the value of the total assets.B) Debt - Equity Ratio:Debt Equity Ratio expresses relationship between borrowings (debts) and the equity (internalequities). Debt Equity Ratio shows the proportion between shareholders’ fund and the long termborrowings of the enterprise (Longbrake, 2011). A higher ratio will show risky financial positionand the lower one shows safer in terms of riskiness.Debt equity ratio can be calculated as = Total Debt / Total Shareholders’ EquityThe summary of the Debt Equity Ratio values of the Royal Dutch Shell and British petroleum ascalculated in Appendix 7 is given below: "