ACCT5021: Accounting for Managers - Financial Statement Analysis - ASX - Report Writing Assessment Answer

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Assignment Task

Task: Financial Statement Analysis

To consolidate your learning in ACCT5021 Accounting for Managers, you are to undertake a financial analysis of Santos Ltd (ASX Code: STO) and Woodside Petroleum Ltd (ASX Code: WPL), two Australian Securities Exchange (ASX) listed companies. Apart from examining each company’s annual reports, all other relevant disclosures made (e.g., quarterly and half yearly reports), ASX disclosures and other information relevant to the performance and position of each company and the industry report for Oil and Gas Extraction in Australia. It is expected that your research effort will extend beyond each company’s annual reports and Morningstar DatAnalysis. Accordingly, your team will need to identify and evaluate other sources of information such that a thorough and well-founded analysis of each company’s past performance and position adequately supports the provision of a well-argued investment recommendation (e.g., to buy, hold or sell shares in either company and the Australian industry sector to which they belong).

Accordingly, your team may choose to access and interpret publicly available information on each company from sources such as the ASX, the Australian Accounting Standards Board; online databases such as ABI, IBIS World, ORBIS, ProQuest, Factiva, Morningstar DatAnalysis Analysis, etc; stock broker research reports; relevant websites such as https://www.bloomberg.com.au; business publications such as the Australian Financial Review and business oriented periodicals.

Group Project Report

The product of your research and collaborative effort is a report that is to be submitted to the senior management group of ABC Equities Ltd (ABC), a very large client firm who is currently undertaking a due diligence on both companies. The report must include the following:

1. Covering letter, table of contents and executive summary.
2. Introduction: including company profile and strategic overview.
3. Profitability and market based ratios - where relevant financial data is available, which company has performed better over the past five (5) years? Why?
4. Where appropriate, which company has better managed the working capital management relationship between inventories, accounts payable and accounts receivable? Why? Comment on the relevance of the three ratios of (a) days inventory, (b) days payable and (c) days receivable to understanding the working capital financial management practices of ASX listed companies operating primarily in the Australian Oil and Gas Extraction industry.
5. Comment on and compare the short-term liquidity (i.e., current and quick) positions of both companies.
6. Comment on and compare the long term debt/equity positions of both companies.
7. Identify and discuss the significance of the differences between the net profit after tax and operating cash flows of both companies in the 2013 - 2015 financial years. What are the accounting variables that are the most significant in explaining the difference between the cash versus accounting measures of each company’s operating performance for the 2013 - 2015 financial years?
8. Identify and discuss each company’s investing and financing activities during the 2013 - 2015 financial years. In particular, explain what might be the impact of the current global and domestic economic environment upon each company’s (a) decision to invest in new property, plant and equipment and (b) in the valuation of existing investments in property, plant and equipment and other significant tangible and intangible non-current assets?
9. Corporate responsibility practices and disclosures.
10. Strengths, Weaknesses, Opportunities and Threats (SWOT) analysis of each company.
11. Investment Recommendation - which company would you recommend that ABC Equities Ltd invest in? Why?
12. References and appendices (include all sources i.e. annual reports, databases etc).

Please note the following:

• Presentation standards: As indicated in the marking guide, approximately 9% of the assessment of Group Report is weighted towards the presentation quality of the submission made. Apart from drawing upon relevant ratios in support of the provision of concise yet clear discussion of the issues posed in each question, the team should give proper consideration to the benefit of using graphs and other exhibits to illustrate the team’s response to each question.
• Report format: Your report should include a cover page (see Blackboard/Assessment Folder/Report 2), brief executive summary, introduction, body (using sub-headings based upon questions 1 to 6 above) and a conclusion (with the recommendation to ABC). The report use 12 point Times New Roman font, 1.5 line spacing, with 2.5cm margins, and printed single-sided using A4-sized paper.
• Report length: The maximum of the report is 2,500 words, excluding cover page, figures, graphs, tables, references, and appendices). Do not exceed the word Note, that it is the quality, not the length of the report that determines the grade of the assignment.

• Referencing: You can refer to real world cases, recent news, book chapters, research papers, and annual reports to support your arguments or analysis. Do NOT use another student’s paper or a website as your reference. This report must be your own work.

Executive summary

Investment in one firm is a difficult decision to take which obviously put great effect on the future of any company. We have prepared following report to reduce this difficulty. The following report contrasts two Australian oil and gas companies – Santos Limited (STO) and Woodside Petroleum Limited (WPL). The report compares financial data of two companies and also their financial performance on the basis of available data. In the end, report clearly describes the most appropriate company to invest in. This report is prepared on the grounds of industry practices that are followed nationally and around the globe.

Furthermore, it was very difficult to assess which company has performed better but available financial data proved helpful in determining that. To prepare this report we have analysed profitability and market based ratios, working capital management in terms of inventory, accounts payable and accounts receivable, long term and short term liquidity to examine debt position of two organizations. Apart from this, SWOT analysis has been performed to assess effects of internal and external factors on the financial position of both companies.

From the overall analysis, we have found in our report that:

• It is cleared from the profitability indexes of two companies that Woodside Petroleum (WPL) performed better as compared to Santos Limited (STO). WPL has generated more revenue than STO.
• Market based ratios show that WPL has expanded its business and it has better reputation in international market than STO.
• Moreover, working capital management is better in WPL as compared to STO.
• Overall, it is estimated from the available data that WPL will bring more economic benefits in the future than STO and it is evaluated by carefully considering available current and past financial data of two companies.

According to our analysis, Woodside Petroleum performed better than the Santos Limited.

Introduction

Oil and gas sector is one of the most important resource of any country which can give boost to the economy of any nation. But as every coin has two sides, this sector is needed to be handled carefully because without any doubt it gives rich resources to any community but it causes harm to environment and to itself as well if not handled carefully and changing environment is a burning issue nowadays. A changing climate, including increased temperatures, changes in precipitation patterns, sea level rise, and more frequent extreme weather events, poses many challenges to the oil and gas sector. This sector depends on infrastructures that are complex, interconnected, expensive, and have long economic lifetimes. (Cruz, Maria and Krausmann 2013, 43)

Corporate Social Responsibility(CSR) is an effective business ethic which can help up to a great extent in solving environment problem and it contributes towards society as well. CSR can be defined as businessmen’s decisions and actions taken for reasons at least partially beyond the firm’s direct economic or technical interest (Freeman and Hasnaoui 2011, 421). But most of the companies do not give importance to this concept. CSR plays vital role in oil and gas sector. The contention is not that a single company should accept the responsibility for the wider societal impact of corporate activities. Rather, the unwillingness of both companies and governments to face up to governance challenges (such as the reality of the ‘resource curse’ in oil-producing countries) constrains the CSR agenda (Frynas 2010, 177).

Woodside Petroleum Limited and Santos Limited are the two renowned oil and gas Australian companies which contributed a lot to the Australian economy and both follow the agenda of sustainability and eco-friendly business. In the following parts we are going to compare the Financial position of two companies on the grounds of logical data and business ethics which want to become leader in oil and gas sector:

Woodside Petroleum Limited (WPL)

Woodside Petroleum Limited is Australia’s leading oil and natural gas company with global presence. It provides world class services to its customers and shareholders as well. The Company was founded to search for oil in the Gippsland region of south east Victoria, taking its name from a small town in the Lakes Entrance district. The Company was incorporated in Victoria as Woodside Oil Company in July 1954 (Morningstar 2016). Woodside Petroleum Limited acts as a producer, supplier, developer and explorer in the field of oil and gas. It provides reliable, efficient and safe services in its field and these are the three main elements of Woodside Petroleum Limited. Woodside pays great importance towards the use of innovation and modern technology and that is the main reason of its continuous success in oil and gas field. It has ongoing strong relationships with its customers, shareholders etc. which are the foundation of Woodside Limited. Furthermore, it equally focuses on the safety of environment that makes it different from others. To increase the value of its fundamental assets, capabilities and enhancing its organizational reputation are the three main concerns on which Woodside is concentrating by providing quality of services, strong relationships with its shareholders and customers and by working on the concept of sustainability and social participation (Woodside 2016).

Santos Limited (STO)

Santos Limited (STO) is an Australian based company which is a well-known producer of oil and gas. It fulfils energy needs of homes, businesses and of big industries. It was founded in Cooper Basin. It believes in secure and sustainable operations and it has fair links with its shareholders, governments, customers and its industry partners. It has unique infrastructure for domestic services. The Company was established to explore and develop petroleum reserves in South Australia. The Company was incorporated in South Australia in March 1954 as Santos Limited (Morningstar 2016). In the year 2014, it has celebrated its 60 years of success. It believes in having safe and healthy environment. Mr. Kevin as CEO and Managing Director of Santos Limited has implemented effective strategies that comprises of having a strong leadership team, cost effective business and better operating performance that ultimately leads to improved financial condition. He has also launched international expansion plan which helped Santos Limited to expand its business in other countries of the world for instance, US, Canada, UK, Africa and Asia. It plans to be Australia’s leading organization in providing energy (Santos Limited 2016).

Answer 3:

Woodside Petroleum Limited Company has performed better than Santos Limited Company over the past five years since 2011 because when comparing profitability and market based ratios between two companies, the result of Woodside Petroleum Limited Company has no number under zero, and free of debt. Below are two tables which portray the profitability of two companies from 2011 to 2015 in detail.

For profitability segment, both companies had a downward trend of net profit margin, but a percentage of Woodside Petroleum Limited Company was higher than that of Santos Limited Company. It was proved that a high net profit margin a good management of cost which subtracted all expenses such as the cost of purchasing merchandise or service. Especially, the percentage of Santos Limited Company decreased dramatically, -167.78% in 2015. The return on asset which shows the revenue that companies earn are evaluated to reinvestment in assets. The return on equity compares the net profit after tax with the investment of shareholders, and computes which company has a high return on equity that is a high investment opportunities and well manages the expenses. The return on invested capital which presents the net profit after tax, and uses this profit properly is a significantly important to check the profitability. According to table 1 and table 2 above, the return on assets, the return on equity, and the return on invested capital had a slight fluctuation between 2011 and 2014. Most percentage of Woodside Petroleum Limited Company was over 10% whereas all percentage of Santos Limited Company was under 6%. However, both companies suddenly changed in 2015. To Santos Limited Company, the percentage was -23.89%, -53.38%, and -32.29% respectively. To Woodside Petroleum Limited Company, nothing was more than 1%. Besides, in 2015, EBIT, and EBITDA margin of Santos Limited Company which stood at minus hundred percent were totally different from those of Woodside Petroleum Limited Company. Moreover, Woodside Petroleum Limited Company had amortization, except the fiscal year 2015. Therefore, the profitability of Woodside Petroleum Limited Company was higher than that of Santos Limited Company.

For market based ratios segment, EPS which portrays the value of each share in common stock is utilized to measure of companies’ profit. In this case, EPS of Woodside Petroleum Limited Company was higher than that of Santos Limited Company during 5 years, so Woodside Petroleum Limited Company gained more profit. Dividend Yield which shows the amount of money that company annually pays out a dividend based on its share price. The proportion of dividend yield in both companies had an upward trend, except Santos Limited Company 2.05% in 2013, and Woodside Petroleum Limited Company 5.29% in 2015. Price earnings ratio which shows how many times market price per ordinary share divided by EPS is a measure of the valuation of that company. It is supposed that people investing in a high price earnings ratio company will earn a high profit in the future. Therefore, Woodside Petroleum Limited Company has a potential opportunity to gain high earnings.

Answer 4:

Working capital provides the internal financial information of companies. Baidh (2013) stated that it is important to decide the profitability and liquidity of companies based on the working capital management. Return on Working Capital measures the company's profitability to its working capital.

If people evaluate inventories, accounts payable, and accounts receivable as table 5, and table 6, Woodside Petroleum Limited Company has better managed the inventories than Santos Limited Company because it did not have too much inventories. It has to sell all of merchandise purchased from suppliers in order to generate the cash to pay the bills and return on investment. However, when calculating the accounts payable and the accounts receivable, both companies had more accounts payable than accounts receivable. If both companies comprise the inventories and the accounts receivable as assets to compare with the accounts payable, below table will be portrayed to see which company has managed well by computing the earnings after subtracting the accounts payable.

To begin with, it is seen that Santos Limited Company has better performed because it had more assets and earnings as well while Woodside Petroleum Limited Company was loss. After that, Woodside Petroleum Limited Company has enhanced its performance and it had the earnings and its assets were gradually higher than before. Hence, it will overcome Santos Limited Company in the near future. Apart from this, when considering cash flow ratios in accordance with table 8, and table 9 below, the number days of Santos Limited Company were approximately double longer than that of Woodside Petroleum Limited Company. Although both companies tend to decrease the number of days, Woodside Petroleum Limited Company also had fewer days than Santos Limited Company. Days inventory can be defined as days to sell goods, the less days to sell goods the more goods to sell the more profits companies receive. Therefore, Woodside Petroleum Limited Company presented a good performance in 2015.

Answer 7:

Net profit after tax is earned revenues subtracted incurred expenses and taxes. Operating cash flows is the result of inflows and outflows through operating activities. From 2013 to 2015, the net profit after tax of both companies was also lower than operating cash flows. Operating cash flow plays an important role in the company to measure the financial performance better than net profit after tax although many investors are attracted by net profit after tax. The reasons why it is important are that cash is crucial to manage the financial problem, and it is difficult to manipulate under the Generally Accepted Accounting Principles. According to table 10, and table 11, it is clearly portrayed that both companies increased net profit after tax and operating cash flows from 2013 to 2014, but after that they decreased. In particular, net profit after tax of Santos Limited Company was minus over five thousand million in 2015 while operating cash flow in this company was more than one thousand million. As a result, it is better to calculate operating cash flows than net profit after tax when investing in companies.

5. Current ratio is the financial ratio used to compute the liquidity of the firm. Current ratio is a measure that provides for the company’s ability to pay off the short term obligations. Ideally the industry ratio stands at 1. However any ratio above reflects the firm’s extremely liquid and profitable situation to pay off its obligations.

Current ratio for Santos Limited stands at 2.29 for 2015, whereas the same ratio for Woodside Petroleum Limited Company stands at .827. In contrast to Woodside Petroleum Limited Company, Santos Limited Company is more liquid and stands a more favorable position to withstand any uncertainty.

Quick ratio refers to more liquid ratio. It is a measure that calculates the firm’s ability to pay its most immediate obligations. Quick ratio for Woodside Petroleum Limited Company stands at .697. However quick ratio for Santos Limited stands at 1.90. This proves that the firm Santos Limited is financially sounder to meet its obligations in contrast to Woodside Petroleum Limited Company.

6. The Debt to Equity ratio is a financial leverage to indicate how much debt a company is employing to finance its assets in relation to the amount of value represented in shareholders’ equity. A high debt to equity ratio indicates that the company is aggressive in financing it growth with debt. Aggressive leveraging indicates higher levels of risk with a risk of volatile earnings as a result of interest expenses. Debt to equity ratio for Santos Limited stands at 2.178 and for Woodside Petroleum Limited Company stands at .97. This refers that Santos Limited is more risky in contrast to Woodside Petroleum Limited Company.

SWOT refers to a structured planning methodology that analyses the Strength, Weakness, Threats and opportunities for a company, product, place, industry or person. However SWOT analysis of a company is a beneficial tool as it points out the firm’s core competencies and inherent weaknesses. This makes the firm aware of it short comes and leads to leveraging of upcoming opportunities thereby deterring all form of threats.

SWOT analysis of both the companies: