The balance sheet of a company provides a clear picture of the assets, debt and capital financing of the company and the level of investments and gearing it has. The ratios of the working capital, current ratio, and debt to equity ratio, along with a discussion of the management in the company’s annual report provide the analysis and evaluation of how the earning of the company is being put to use and how financially stable it is and viable it is for investment. The income statement or the profit and loss statement presents the income report of the company along with the expenses incurred during a financial year. From the income statement of a company the information regarding the profit margin, basic earnings per share, interest coverage and share price to earnings per share can be analysed to find out financially viability of a company for investment.
The paper provides a fundamental analysis of the company regarding its market, productive and financial performance based on its internal financial records to provide an informed, viable decision regarding investing the company. Balance sheet and income statement figures that have been analyzed using the following financial ratios: Working capital, current ratio, debt to equity ratio, basic earnings per share, profit margin, and interest coverage ratio. Based on these findings of the fundamental analysis, recommendation is provided.
Tullow Oil Plc is a company that has its operations expanded across the globe with each region meeting constant challenges in the industry. There recent financial and operational activities in the last two years include the heavy investments in the basins in Ghana and Uganda that have been met with fast track development to achieve world class performance. There is a separate discussion under ‘business review’ regarding the hedging and risk management policies and procedures the company is undertaking for its investments. According to the report, the major risk that the company anticipates in 2010 is to come from the commodity price, major projects’ delivery and safety of operations in the worldwide locations of its factories and transactions. These are especially associated with the latest developments of the Jubilee first Oil and the Uganda pre-emption plant. Also, the maintaining an adequacy in the hedging programme is also potentially risky, which the company has been open to report in the business review section of the report for investors to be informed regarding the market performance of the company.
The basic earnings per share for the company is £1.87 which has fallen considerably from £30.6 from 2008. This is due to the fall in the profits of the company in 2009 with a very large percentage, which is an alarming situation for the investors2.
Profit margin accounts for the percentage of revenues that is left as profit for the company after all expense and dividend share deductions have been made. With a considerable fall in profits it was expected that Tullow would have a low profit margin as well. The following figure proves this hunch right:
Profit Margin = Net Profit / Revenue
Profit Margin = 18.5 / 582.3
Profit Margin = 0.03 or 3%
The last year’s profit margin was 32%. This is quite an alarming and eyebrow raising decline. The major cause of this is the loss the and a very low return the company obtained from the disposal from the subsidiaries and the oil and gas assets, compared to last year’s disposal. The sales were also low and together with lower disposal returns the operating costs and eventual net profit declined tremendously.
Tullow Oil Plc’s balance sheet presents a very strong position of the company, upon an overview of the last years’ performance. Its new debt facilities account for US$2.25 billion while having raised £1.3 billion from equity shares. Its total assets for the year 2009 account for £3218 million which rose from £2932.2 million from 2008. A major portion of these assets belongs to fixed and non-current assets. Property, plant and equipment which accounted for the major portion of total assets, around £1380 million which rose from £986.4 million due to the recent investments in the plants in Uganda and Ghana. This shows that the company does not merely rely on inventories and receivables as its main assets which are dependent upon the incoming payments from debtors and shorter or larger days of receivables. Through this capital and liability balance it has attempted to maintain an appropriate structure for the quarter to come in 2010.
The current assets of the company are those which are in the company’s possession for a short time. These include, inventories, receivables, cash at hand, cash at bank, prepaid expenses, etc. the value of inventories change overtime through inventory turnover, as the company’s products get sold or not, based on the sales, and the money collected or left to be collected from the debtors accounts for the receivables which the company owns but are not in current possession of the company. There are also prepaid expenses which are assets for the company as their owing period has not come yet. Other than cash, the current assets are able to be converted into cash, the receivables are of highest liquidity, while inventory the lowest as it takes an entire working capital cycle to extract money from the inventory and then from the debtors.
The working capital is (472.3 – 396.3) £76 million. As for the current ratio, it is 2:1.
This shows that for every liability there more than one asset to pay it off. Thus this implies that Tullow can take on more short term investments and financing of new short term projects with the working capital as there are fewer current liabilities to worry about with heavy backing of the current assets at the side. But when compared with the current ratio of the previous year the situation gives a clear red signal for an investment as in 2008 the current ratio was 0.77:1, which means that for every liability there were less than £1 worth of assets reserved to cover it.
For Tullow, the debt to equity ratio is 1.1:1. In contrast with the 2008’s ratio which was 1.2:1, the situation does not seem to match the ideal 40:60 ratio which should be followed in the company. These ratios which may be declining in terms of debt financing, represent a situation that is highly geared. The company has financed the new projects in Ghana and Uganda primarily and majorly through debt financing, and while it has paid off its old debts and reduced the ratio slightly, it is still highly geared and at a risky position.
The market conditions seem fierce that demand companies to expand more and charge higher to attain higher profitability. Oil companies need to seek new markets to extract oil from and sell to. This adds to the pressure of investing new extraction projects. The financial position is deteriorating and it is a warning signal for Tullow Oil.