Financial Evaluation And Assessment: A Study Of British Petroleum And Royal Dutch/Shell Corporations

Case Overview

Introduction:

Financial evaluation and assessment on an organization is always done by the management of the company and stakeholder of the company to evaluate and find the position of the company in the industry. This study evacuates about the financial position of the company in context with the inventors perspective, shareholder perspective, debt holder perspective, bond holders perspective, suppliers and customers perspective and other stakeholder perspective of the company. It evaluates that how the better strategy could be planned for the company to manage and enhance the profitability and solvency level of the company.

Financial evaluation is a study which includes various methods to evaluate about the financial performance of an organization such as ratio analysis, capital assets pricing method, trend analysis, industry analysis, dividend growth models, price earnings model etc. these methods make it easy for the professionals to evaluate the performance of the company. Further, the case studies, economy position of the country, annual reports of the company etc also assist the company to make and manage a better conclusion about the position of the company.

In this report paper, the study has been conducted on two companies which are BRITISH PETROLEUM and ROYAL DUTCH/SHELL CORPORATIONS to evaluate their financial performance ad impact of financial crisis on their market share and financial position.

Case Overview:

BRITISH PETROLEUM and ROYAL DUTCH/SHELL CORPORATIONS are one of the biggest corporations of Europe market. Both of these companies are performing and operation their business in the market very well. But due to financial crisis, the position of the companies has been affected and it has directly impacted on the financial position of the company. The technological advances, profits, innovative products etc of both the companies are quite attractive and managing the performance of the company every well.

In this study, financial position of both the companies has been evaluated and it has been found that how the position has been impacted due to the financial crisis in the market. The report explains that the company has faced few issues due to the financial crisis and though, currently few new strategies have been made by both of the companies to manage the performance and the financial level of the company. In this paper, those strategies have been studied and eventually, the study on literatures has also been done to evaluate the performance of the company and the changes into the financial structure of the company.  

Company overview

The impact of financial crisis was quite higher on UK economy rather than other economies due to various factors. The manufacturing base of UK is not much bugger and on the other hand, the previous growth of the economy has been fuelled by financial activities and financial services only which includes high retail sales which directly depend on the credit sales.

Company overview:

British Petroleum:

British petroleum is an international company which headquarter is in England. The company is operating its business under oil and gas industry. The company is one of the seven largest oil and Gas Company in worldwide. The market capitalization of the company is quite large and it has around 18000 service stations worldwide. The main products of the company are natural gas, aviation fuels, petroleum, petrochemicals, oil equivalents etc. the company is mainly listed in the London stock exchange. The company is performing in a great manner in the market (Home, 2018). Though, it has been recognized that due to the economy changes and the financial crisis, the profitability level and the turnover of the company has been affected. Further, it has also been found that the current strategies of the company are quite competitive.

Royal Dutch Shell:

Royal Dutch Shell is an international company which headquarter is in London, England. The company is operating its business under oil and gas industry. The company was the largest oil and Gas Company in worldwide in 2013. The market capitalization of the company is quite large and it has around 44000 service stations worldwide. The main products of the company are natural gas, aviation fuels, petroleum, petrochemicals, oil equivalents etc. the company is mainly listed in the London stock exchange. The company is performing in a great manner in the market. Though, it has been recognized that due to the economy changes and the financial crisis, the profitability level and the turnover of the company has been affected (Home, 2018). Further, it has also been found that the current strategies of the company are quite competitive

Financial performance of the companies:

Further, the financial position, place and performance of the company have been evaluated and it has been found that the financial crisis has impacted on the financial position and market stock position of the company. the financial performance of both the companies have been evaluated through analyzing the ratio analysis study on both the companies and it has been found that how both the companies have been affected:

Financial performance of the companies

British petroleum Limited:

Profitability ratio:

Profitability ratio study has been done on British petroleum limited to evaluate the financial position and performance of the company and through the study it has been found that the profitability level of the company in terms of return on shareholder funds has been reduced to 0.12% in 2016 from 3.39% in 2014 and 9.78% in 2012 due to the financial position and crisis of the company (Hillier, Grinblatt and Titman, 2011). It explains that the company has faced huge loss due to the changes into the economy and fear of the investors.

Further, the operating profit margin ratio of the company has been evaluated. It explains about the lower profitability position of the company and at the same time, it explains that the 2015 was the worst year for the company in terms of profitability as in 2014, the position of the company has been affected a lot (Annual report, 2016). Though, few changes have helped the company to manage it back.

Further, the gross profit margin ratio of the company has been evaluated. It explains about the average profitability position of the company was quite higher before the financial crisis. Following graph explains about the changes:

		2016	2015	2014	2013	2012
Profitability
Return on shareholder funds	NPAT/ Total equity	0.12%	-6.67%	3.39%	18.14%	9.78%
Operating profit margin	Operating net profit / Sales	-1.23%	-4.24%	1.38%	7.63%	4.84%
Gross Profit Margin	Gross Profit / Sales	13.56%	10.69%	13.77%	17.75%	15.74%

Liquidity ratio:

Liquidity ratio study has been done on British petroleum limited to evaluate the financial position and performance of the company and through the study it has been found that the liquidity level of the company in terms of current ratio has been reduced to 1.16 in 2016 from 1.37 in 2014 and 1.43 in 2012 due to the financial position and crisis of the company. It explains that the company has faced huge loss due to the changes into the economy and fear of the investors in 2014. And currently, company is required to enhance the current assets level so that it becomes easy for the company to pay off the short term debt.

Further, the quick ratio of the company has been evaluated and it has been found that the quick ratio level of the company has been reduced to 0.86 in 2016 from 1.08 in 2014 and 1.07 in 2012 due to the financial position and crisis of the company. It explains that the company is required to enhance the quick assets level so that it becomes easy for the company to pay off the short term debt in current situation (Horngren, 2009).

Liquidity		2016	2015	2014	2013	2012
Current ratio	Current assets/current liabilities	1.16	1.29	1.37	1.33	1.43
Acid test ratios	Current assets-Inventory/current liabilities	0.86	1.03	1.08	0.93	1.07

(Annual report, 2014)

Efficiency ratio:

Efficiency ratio study has been done on British petroleum limited to evaluate the financial position and performance of the company and through the study it has been found that the efficiency and working capital management level of the company in terms of receivable collection period has been enhanced to 43.28 in 2016 from 32.78 days in 2014 and 36.07 days in 2012 due to the financial position and crisis of the company. It explains that the cash turnover ratio for operations and short term of the company has been enhanced.

Further, that the payable payment days have been enhanced to 48.82 days in 2016 from 27.23 days in 2014 and 33.14 days in 2012 due to the financial position and crisis of the company. It explains that the cash turnover ratio for operations and short term of the company had been managed by the company.

Lastly, that the inventory turnover days have been enhanced to 39.95 days in 2016 from 21.68 days in 2014 and 31.09 days in 2012 due to the financial position and crisis of the company. It explains that the cash turnover ratio for operations and short term of the company should be managed by the company (Damodaran, 2011).

Efficiency		2016	2015	2014	2013	2012
Receivables collection period	Receivables/ Total sales*365	43.28	37.46	32.78	37.36	36.07
Payables collection period	Payables/ Cost of sales*365	48.82	30.45	27.23	52.82	33.14
Inventory days	Inventory/ cost of goods sold *365	39.95	25.58	21.68	32.74	31.09

(Annual Report, 2015)

Gearing ratio:

Gearing ratio study has been done on British petroleum limited to evaluate the capital structure position and performance of the company and through the study it has been found that the gearing ratio of the company in terms of non bearing debt and equity has been enhanced to 0.35 in 2016 from 0.34 in 2014 and 0.14 in 2012. It explains that the gearing ratio of the company has been managed by the company.

Gearing Ratios		2016	2015	2014	2013	2012
Gearing	Noncurrent interest bearing debt / noncurrent interest bearing debt + equity (Bromwich and Bhimani, 2005)	0.27	0.24	0.18	0.17	0.14

Investment ratio:

Investment ratio study has been done on British petroleum limited to evaluate the investment position and performance of the company and through the study it has been found that the earnings per share of the company has been reduced to 0.04 in 2016 from 1.23 in 2014 and 3.65 in 2012. It explains that the investment position of the company has been reduced.

Further, the price earnings ratio of the company is quite higher. Though, it has been evaluated that the company is not a good opportunity to invest for the investors in current position.

Investment ratio		2016	2015	2014	2013	2012
Earnings per share	NPAT/ Number of ordinary shares	0.04	(2.12)	1.23	7.43	3.65
Price earnings ratio	Market price per share / earnings per share	888.31

The above evaluation on British Petroleum explains that the various changes have taken place into the position of the company in last few years. It explains that the company is required to make new policies and strategies to manage and enhance the performance.

Profitability ratio study has been done on Royal Dutch Shell Limited to evaluate the financial position and performance of the company and through the study it has been found that the profitability level of the company in terms of return on shareholder funds has been reduced to 2.45% in 2016 from 8.65% in 2014 whereas it was 14.11% in 2012 due to the financial position and crisis of the company. It explains that the company has faced huge loss due to the changes into the economy and fear of the investors.

Further, the operating profit margin ratio of the company has been evaluated. It explains about the lower profitability position of the company and at the same time, it explains that the 2015 was the worst year for the company in terms of profitability. Though, few changes have helped the company to manage it back (Arnold, 2013).

Further, the gross profit margin ratio of the company has been evaluated. It explains about the average profitability position of the company and at the same time, it explains that due to the strong policies and future strategies of the company, gross profit margin has been managed by the company (Annual report, 2014).

Profitability
Return on shareholder funds	NPAT/ Total equity	2.45%	1.19%	8.65%	9.09%	14.11%
Operating profit margin	Operating net profit / Sales	2.34%	0.75%	6.56%	7.31%	10.44%
Gross Profit Margin	Gross Profit / Sales	20.42%	18.16%	17.16%	16.97%	17.79%

Liquidity ratio:

Liquidity ratio study has been done on ROYAL DUTCH SHELL PLC to evaluate the financial position and performance of the company and through the study it has been found that the liquidity level of the company in terms of current ratio has been enhanced to 1.17 in 2016 from 1.16 in 2014 whereas it was 1.18 in 2012. It explains that the company has managed the liquidity position of the company (Davies and Crawford, 2011).

Further, the quick ratio of the company has been evaluated and it has been found that the quick ratio level of the company has been reduced to 0.88 in 2016 from 0.93 in 2014 whereas 0.87 in 2012 due to the financial position and crisis of the company. It explains that the company is required to enhance the quick assets level so that it becomes easy for the company to pay off the short term debt.

Figure 15: Acid Test ratio

Liquidity		2016	2015	2014	2013	2012
Current ratio	Current assets/current liabilities	1.17	1.32	1.16	1.11	1.18
Acid test ratios	Current assets-Inventory/current liabilities	0.88	1.09	0.93	0.79	0.87

(Gapenski, 2008)

Efficiency ratio:

Efficiency ratio study has been done on ROYAL DUTCH SHELL PLC to evaluate the financial position and performance of the company and through the study it has been found that the efficiency and working capital management level of the company in terms of receivable collection period has been enhanced to 53.98 in 2016 from 34.30 days in 2014 whereas 49.56 days in 2012 due to the financial position and crisis of the company. It explains that the cash turnover ratio for operations and short term of the company has been enhanced (Annual Report, 2017).

Further, that the payable payment days have been enhanced to 53.64 days in 2016 from 0 days in 2014 and 39.12 days in 2012 due to the financial position and crisis of the company. It explains that the cash turnover ratio for operations and short term of the company had been managed by the company.

Lastly, that the inventory turnover days have been enhanced to 41.61 days in 2016 from 20.12 days in 2014 whereas it was 58.37 days in 2012 due to the financial position and crisis of the company. It explains that the cash turnover ratio for operations and short term of the company should be managed by the company (Morningstar, 2018).

Efficiency		2016	2015	2014	2013	2012
Receivables collection period	Receivables/ Total sales*365	53.98	39.44	34.30	39.99	49.56
Payables collection period	Payables/ Cost of sales*365	53.64	38.99	–	40.10	39.12
Inventory days	Inventory/ cost of goods sold *365	41.61	25.93	20.12	28.70	28.37

Gearing ratio study has been done on ROYAL DUTCH SHELL PLC to evaluate the capital structure position and performance of the company and through the study it has been found that the gearing ratio of the company in terms of non bearing debt and equity has been enhanced to 0.27 in 2016 from 0.18 in 2014 whereas it was 0.14 in 2012. It explains that the gearing ratio of the company has been managed by the company.

Gearing Ratios		2016	2015	2014	2013	2012
Gearing	Noncurrent interest bearing debt / noncurrent interest bearing debt + equity	0.27	0.24	0.18	0.17	0.14

Investment ratio:

Investment ratio study has been done on ROYAL DUTCH SHELL PLC to evaluate the investment position and performance of the company and through the study it has been found that the earnings per share of the company has been enhanced to 1.17 in 2016 from 0.00 in 2014. It explains that the investment position of the company has been better.

Further, the price earnings ratio of the company is quite higher. Though, it has been evaluated that the company is not a good opportunity to invest for the investors in current position.

Investment ratio		2016	2015	2014	2013	2012
Earnings per share	NPAT/ Number of ordinary shares	1.17	0.00	0.00	0.00	0.00
Price earnings ratio	Market price per share / earnings per share	22.33

The above evaluation on ROYAL DUTCH SHELL PLC explains that the various changes have taken place into the position of the company in last few years. It explains that the company is required to make new policies and strategies to manage and enhance the performance (Baker and Nofsinger, 2010). Though, the investment opportunity of the company is getting better.

Further, the analysis has been done on the financial position, stock position of the company and the exact impact of the financial crisis on its performance. The financial crisis impact on both the companies have been evaluated through analyzing the annual reports, financial analyst reports, newspapers, articles and the case study on both the companies. The studies of financial crisis impact of both the companies are as follows:

BBC (2015) has shown in one of its reports about the impact of financial crisis on oil and gas industry of UK. It has explained that the performance of the industry has been worst in 2014.

Further, it has explained that the financial analyst forecasted that this crisis has impacted on the FTSE 100 and due to it, the trust of inventors have affected. The report of Cash float explains that the financial position of British petroleum has been lower suddenly in 2014 due to the large impact of financial crisis (Cash Float, 2018). Further, it has been explained by PWC that though the company had very strong polices and strategies, still the financial crisis has impacted on the performance of the company. The investment level of oil and gas industry has been reduced a lot and that is why the profitability level and the solvency level of the company have been affected (Business insider, 2018).

Annual report (2014) of ROYAL DUTCH SHELL PLC has explained that stock price of the company has been lowered due to less interest of the investors in the industry. Further, economical report of oil and gas UK (2014) explains that the oil and gas price has also been lowered in 2014 due to lower demand and higher supply in the market. Financial crisis has impacted on the GDP share of oil and gas industry in UK. Further, BP (2018) has explained that the capital investment in the industry has been lowered from euro 15 billion to Euro 5.4 billion.

FXCM (2018) has explained that the customers found that the prices of the company are quite high and it is not of worth and due to which the prices of the industry has been lower. Further, the annual report (2015) of British petroleum and annual report (2015) of ROYAL DUTCH SHELL PLC expressed that the cost has been reduced by the companies to manage the performance and the financial level of the company. Though, the revenue of the company has also been lowered due to the less unit cost of the companies and the concept of value for customers of the company (Economic Report, 2018). Risk logic (2018) has explained that the customers were finding the cost of oil and gas lot in 2014 and thus it was not worth for the company and that is why the unit cost of the company has been reduced. Further, Lee and Yue, (2017) has explained that the new strategy of reducing the cost and level of net profit to offer the value to the customers of both the companies are great.

In addition, it has also been evaluated that the suppliers of the ROYAL DUTCH SHELL PLC, BRITISH PETROLEUM and Oil and gas industry of UK have also reduced the level of profit to manage the performance and the demand of the products in the market. Though, Home (2018) has criticized this step of the companies and explained that the companies were not supposed to reduce the prices, they must adopt other strategies to manage the position of the company. FXCM (2018) has further argued that the price changes were the best strategy which has helped both the companies and the industry to offer value to their customers (PWC, 2018). It has also helped the companies to rearrange the financial position of the company.

The companies have also changed in their strategies about financial risk, return, cost etc so that the financial position of the company and the performance of the industry could be managed again (Abdelrehim, Maltby and Toms, 2015). Before 2014, the financial position of both the companies were quite impressive but in 2014, the profitability level, solvency level, efficiency level, liquidity level etc has been lower (Yahoo finance, 2018). Further, Morningstar (2018) explains that both the companies have managed the position again and currently, the financial analyst describe that in future years, the position of the company would be better again.

More, it has been evaluated through various studied that financial crisis has not only impacted on the companies but it has impacted on all the related parties of the company (Gourevitch et al, 2016). Due to it, the sales turnover of the company has been lower; capital investors have also reduced their level, suppliers have also faced the financial crisis impact. BBC (2018) described further that due to the oil and gas industry’s financial impact, position of the company has been lowered.

Through the above study, it has been found that the financial crisis has impacted the US economy a lot. In the year of 2014, oil and gas industry of UK has been impacted a lot due to the financial crisis. The above evaluation on ROYAL DUTCH SHELL PLC, BRITISH PETROLEUM and Oil and gas industry of UK explains that the various changes have taken place into the position of the company in last few years. The study explains that the financial crisis has impacted the profitability and the stock price of the company and due to it, the economical position of UK has also been lowered.

Conclusion:

To conclude, both the companies had strong policies and thus the impact of financial crisis is not much bigger. But though, the financial level of the companies has been lowered and the capital investors of the company have divestment from the company. It explains that the company is required to make new policies and strategies to manage and enhance the performance. Though, the investment opportunity of the company is getting better in current scenario and the company is suggested to maintain and follow the current strategies.

References:

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