Finance & Accounting for Business Assignment Sample
Introduction
“BP Plc, a leading global energy company, has been a key plainer in the oil and gas industry for decades”. With business involving research, manufacturing, refining and distribution, BP has an important presence in more than 70 countries worldwide. As one of the largest publicly listed companies in the FTSE 100 index, BP has continued to attract investors due to its size, portfolio and strategic position in the energy industry In in recent years BP is undergoing a rapidly changing environment It must provide potential investors with a comprehensive analysis of BP’s financial performance, focusing on profitability, efficiency, cash on investment, gearing and financing terms, and insights into key investor considerations and factors affecting investment decisions of UK-based entities.
BP Plc performance based on the profitability, efficiency, liquidity, gearing and investment aspects
A) Liquidity ratios
Figure 1: Liquidity ratios
(Source: Self-created in MS EXCEL)
“Current ratios of the company’s ability to meet its short-term obligations with its current assets show a positive trend. The current ratio in 2023 is 1.21, meaning the company has £1.21 in current assets for every £1 of current liabilities”. “The ratio was slightly higher than in 2022 (1.08) and 2021 (1.13), improving the company’s financial position over the years (Fridson et al., 2022)”.
But the quick ratio, which is a more conservative use of clayish since it is not current assets retained, paints a different picture. The quick ratio decreased from 0.84 in 2021 to 0.79 in 2022, although in 2023 in 1999 and returned to 0.0 de. It reached 94. A rapidly declining ratio below 1.0 could indicate potential financial issues, as the company may find it difficult to meet its short-term obligations on its inventory.
“While the current outlook suggests a relatively stable financial environment, the more agile outlook suggests that the company may have some difficulty meeting immediate cash obligations without relying on its extensive inventories to maintain balances between current assets and current liabilities and adequate funds it is important to carefully manage your inventory levels to ensure (Palepu et al., 2020)”.
To improve cash management, the company can consider strategies such as improving working capital management, negotiating with suppliers on better payment terms of, or, if necessary, seek additional short-term funding.
B) Profitability ratios
Figure 2: Profitability ratios
(Source: Self-created in MS EXCEL)
“Gross profit margin, which measures the company’s ability to generate profit from sales after deducting cost of goods sold, shows mixed results and increased from 7.47% in 2022 to 13.01% in 2023 in 2010, indicating an improvement in the overall profitability of the company”. However, the coefficient is lower in 2022 compared to 2021 (11.46%), indicating potential difficulties in managing cost or price pressures (Robinson, 2020).
Profitability, which measures a company’s ability to generate revenue from sallies, also reflects change. Although it was positive at 7.56% in 2023 and 5.38% in 2021, the company posted a loss in 2022, resulting in a positive return of -0.56%.
The Return on Equity (ROE) and Return on Assets (ROA) ratios provides insight into a company which is performing well in terms of return on shareholders investment and its assets ROE improved significantly from -2.01% in 2022 into 22.59% in 2023, as of shareholders’ funds. It shows efficient use. However, the ROA, although positive, remained relatively low at 5.67% by 2023, indicating potential areas for improvement in asset utilization (Hasanuddin et al., 2021).
BP Plc’s profitability ratios confirm a return to growth in 2023 after a storing year in 2022. However, the company must remain focused on cost control, price managing and improving asset utilization to sustain and grow its profitability in the long run.
C) Efficiency ratios
Figure 3: Efficiency ratios
(Source: Self-created in MS EXCEL)
“Assets turnover ratio is known as are a measure of a company’s ability to generate revenue from its assets. BP plc’s asset turnover ratio increased from 0.55 in 2021 to 0.75 in 2023, showing better use of its assets to make revenue”. However, the asset turnover ratio decreases somewhat from 0.84 in 2022 to 0.75 in 2023, which may require further analysis to identify any possible uselessness or underutilization of assets (Irman et al., 2020). The inventory turnover ratio, which shows the company’s efficiency in management of inventory, shows strength in firm. It increased from 7.26 in 2021 to 8.91 in 2022, improving management of inventory. However, the ratio decreased to 7.30 in 2023, indicating a small decrease in the number of consumption sales or inventory (Rosa, 020). BP Plc’s efficiency ratios show a mixed perfoormance. While asset turnover rates have improved over the years, which is a good indicator of asset utilization, some attention may be needed in 2023. Although the inventory to sales ratio, although relatively stable, could benefit from further adjustments to improve inventory management and reduce the cost of a transmission (Maisharoh et al., 2020). Finance & Accounting for Business Assignment Sample
D) Gearing ratios
Figure 4: Gearing ratios
(Source: Self-created in MS EXCEL)
“Debt and equity measures the proportion of debt and equity that finance a company’s assets. BP plc’s debt-to-equity ratio has increased over the years, from 0.62 in 2021 to 0.77 in 2022, and the high ratio of 0.87 in 2023 indicates a commitment to debt financing greater, potentially increasing financial risk but also increasing financial risk tax benefits”.
The net interest margin, which measures a company’s ability to coiner interest expense with operating profit (EBIT), improved from 5.33 in 2021 to 5.70 in 2022, increasing to 7.12 a year 2023. Higher ratios indicate a stronger ability to meet interest obligations, which is a good sign for both lenders and borrowers (Sihombing et al., 2022).
BP Plc’s gearing ratio paints a mixed picture. While higher debt levels may contribute to the problems of the firm’s reliance on debt financing, improved interest margins mean that the firm is able to generate sufficient operating margins to pay its interest costs in comfortably.
E) Investment ratios
Figure 5: Investment ratios
(Source: Self-created in MS EXCEL)
The earnings per share (EPS) ratio measures the dividend of a company’s profits allocated to each share outstanding. BP plc’s EPS showed significant fluctuations, falling from £37.58 in 2021 to a negative £13.10 in 2022, but returning to £87.78 in 2023. Higher EPS is generally attractive to investors since that represents an increase in earnings per share.
“The price-to-earnings or P/E ratio which measures the market’s valuation relative to a company’s earnings also showed a change of 7.85 in 2021 to a negative 27.49 in 2022 (due to earnings a not because of good), then 5 in 2023 (Haddad et al., 2020)”. It improved to 52. “A low P/E ratio may indicate an undervalued stock, while a high ratio may indicate an overvalued, or investor included expects future”. BP plc financial projections highlight the company’s growth in 2023 after a strong the year 2022 focus.
An interpretation of the ratio analysis and the commentary
Profitability aspects
The average analysis for BP PLC for the years 2021-2023 reveals important insights into the financial health and performance of the company:
Gross profit margin: This ratio has changed, with a significant increase in 2023 (13.01%) compared to 2022 (7.47%). This indicates that BP plc has been able to contrail or increase selling prices, resulting in higher profitability.
Figure 6: GP ratios
(Source: Self-created in MS EXCEL)
Net profit margin: For 2022, a negative ratio (-0.56%) implies a loss, which could be due to higher costs or decreased revenues. However, the growth rate for 2023 (7.56%) is a good sign, indicating better cost control and profitability (Walters et al., 2020).
Figure 7: NP ratios
(Source: Self-created in MS EXCEL)
Return on Equity (ROE): A negative ROE (-2.01%) in 2022 could be alarming for investors as it indicates that the company was not earning a good return on its investments. However, a higher growth rate for 2023 (22.59%) indicates a significant turnaround, likely due to improved earnings and more efficient use of funds.
Figure 8: ROE
(Source: Self-created in MS EXCEL)
Return on assets (ROA): ROA improved from (-0.47%) in 2022 to (5.67%) in 2023, showing better utilizationss of assets for generating the returns.
Figure 9: ROA
(Source: Self-created in MS EXCEL)
The relation between these ratios implies that negative numbers in 2022 could come from weak study of market or internal factors, but the company has shown flexibiliity and bounced back in 2023 in. It is important for investors to consider these trends whine making a investment decision (Briggs et al., 2022).
Efficiency aspects
BP plc’s efficiency ratios show how well the company is managing its assets for the geneartion of revenue:
Asset-turnover ratio: This particular ratio measures how well a company uses its assets for the geneartion of the sales. The ratio has decreased from 0.838 in 2022 to 0.750 in 2023, showing an underutilization of assets or a decrease in sales relative to total assets. The higiher ratio in 2022 may be due to increased sales temiporary or efficient use of assiets.
Figure 10: Asset turnover ratio
(Source: Self-created in MS EXCEL)
“Inventory Turnover Ratio”: “This ratio calculates the number of times a company’s inventory is replaced and sold during a period”. If it dropped from 8.91 in 2022 to 7.30 in 2023, it indicates a slowdown in inventories, which could be due to low demand or excess inventories.
Figure 11: Inventory turnover ratio
(Source: Self-created in MS EXCEL)
“The correlation between these ratios indicates that the company’s overall efficiency in using its assets to generate income is slightly reduced by 2023”. This could be due to various factors such as market conditions, volatility in terms of planning, operational complexity and managing inventory.
Liquidity aspects
The liquidity ratios of BP plc for the years 2021-2023 provide insight into the short-term financial stability of the company:
C Ratio: “This ratio measures the company’s ability to pay short-term liabilities with its short-term assets”. The C ratio increased from 1.13 in 2021 to 1.21 in 2023, indicating that BP plc has a good puffier to pay its C liabilities, which is a good sign of viability.
Figure 12: C ratio
(Source: Self-created in MS EXCEL)
Quick Ratio: Also known as the acid test ratio, it measures a company’s ability to meet its short-term obligations with its most liquid assets. The quick ratio showed an improvement from 0.79 in 2022 to 0.94 in 2023, indicating a stronger position to make immediate payments without relying on sales.
Figure 13: Q ratio
(Source: Self-created in MS EXCEL)
The q ratio is showing company has very good performance in very short term liquidity.
Gearing aspects
The gearing ratios of BP plc from 2021 to 2023 indicate that the company has the financial viability and ability to meet long-term financial commitments:
“Debt-to-Equity Ratio”: This ratio has increased over the years, from 0.622 in 2021 to 0.870 in 2023. This means that BP plc takes on more debt compared to its equity. “A higher ratio indicates financially the more profits the more risks can be and so, because the company relies heavily on debt to finance its operating expenses (Zhao et al., 2022)”.
Figure 14: Debt to equity ratio
(Source: Self-created in MS EXCEL)
Interest coverage Ratio: “Interest Ratio has improved from 5.33 in 2021 to 7.12 in 2023. This means that BP plc increased its earnings before interest tax (EBIT) by compared to interest expense, it is a good indication of the company’s ability to pay its interest liability from its operating income”.
Figure 15: Interest coverage ratio
(Source: Self-created in MS EXCEL)
The relationship between these ratios shows that although BP plc has increased debt levels, it is also improving its ability to raise funds to pay interest expenses. Assuming the company can maintain or improve its EBIT, it could be a strategic option to finance expansion or investment opportunities (Ahmad et al., 2024). However, stakeholders should monitor these measures to ensure that increased leverage does not cause financial distress, especially if market conditions change or interest rates rise. The primary study shows that BP plc manages its costs responsibly while increasing its working capital [Refer to appendix 1].
Investment aspects
The investment forecast for BP plc for the years 2021-2023 reveals the company’s earnings and valuation from an investor’s perspective:
Earnings per Share (EPS): The company’s EPS recovered significantly in 2023, reaching 87.78, compared to a negative EPS in 2022 (-13.10). This indicates a strong change in profitability, as net shareholder income has grown substantially.
Figure 16: EPS
(Source: Self-created in MS EXCEL)
Price-Earnings or P/E Ratio: The P/E ratio also strengthened to 5.52 in 2023, indicating that the market is positive about the company’s earning potential. A negative P/E ratio in 2022 is due to negative EPS, which generally means the company was not profitable [Refer to appendix 2].
Figure 17: Price earnings ratio
(Source: Self-created in MS EXCEL)
The correlation between EPS and P/E ratio is significant. A higher EPS tends to result in a lower P/E ratio if the share price does not increase at the same rate as earnings.
Explanation of the investor considerations for BP Plc investment decision making
When considering an investment in a UK company, investors generally examine a variety of factors in order to make an informed decision.
Economic and political stability: Investors should monitor the stability of the UK economic and political environment, as this could affect business activity and macroeconomic returns Factors such as Bruit, and its impact on trade, tax and labor markets is a great detail.
Regulatory framework: Understanding the regulatory framework is important, especially in areas such as finance, healthcare, and energy, where regulation can impact profitability and business freedom.
Market Potential: The investor could make a analysis of market size, potential of growth and competitive landscape that could helps investors assess potentials for market share expansion and revenue generation.
Financial health: Investors review financial statements to evaluate profitability, liquidity and efficiency. Investment parameters like these are as the company’s debt ratio, interest coverage, EPS, and P/E ratio are also considered.
Corporate governance: Strong corporate governiance, including board compiosition, executive compensation and shareholder rights, can influence investment decisions.
ESG factors: Environimental, social, and governance (ESG) issues are becomiing increasingly important, and investors are considiering how companies manage ESG risks and oppoirtunities.
Strategic Policy: A company’s dividend payment histiory and future dividend yield can be a deciding factor, especially for cash-focused investors.
Management Quality: The perforimance and competence of a ciompany’s executive team is evaluated to determine its ability to meet cihallenges and take advantage of opportunities.
Product/Service Innovation: A coompany’s ability to innovate and adapt to technological change is critical to long-term success.
Global exposure: For companies operating internatioonally, investors could have consider geopolitical risks, exchange rate fluctuations and global economic developments.
Investors can search for additional information, e.g.
Comprehensive Business Plan: Include strategic growth, markket penetration and management of risk.
Figure 18: Metrics for investment ratios
(Source: Self-created in MS EXCEL)
Industry Research: Current trends, challenges and regulatory changes could have done the affecting the industry.
Conclusion
BP Plc has validated flexibility and a performance to improved financial performance in 2023 after the challenges faced in 2022. The company’s profitability, efficiency, and liquidity ratios show positive trends, although areas like asset consumption and inventory management require further attention. While BP Plc has incrieased its debt levels, its ability to cover inteirest expenses remains strong. The recovery in earnings per share and price-earniings ratio in 2023 signals a positive outlook for investors. However, poteintial investors should continue to monitor economic conditions, reguulatory changes, and BP’s strategic initiiatives to make informed investment decisions aligned with their risk appetite and return expectations.
Reference List
Journals
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Cui, R., Wang, Y. and Wang, Y., 2024. The Impact of Data Elements on Enterprises’ Capital Market Performance: Insights from Stock Liquidity in China and Implications for Global Markets. Sustainability, 16(9), p.3585.
Fridson, M.S. and Alvarez, F., 2022. Financial statement analysis: a practitioner’s guide. John Wiley & Sons.
Haddad, A.E., Baalbaki Shibly, F. and Haddad, R., 2020. Voluntary disclosure of accounting ratios and firm-specific characteristics: the case of GCC. Journal of Financial Reporting and Accounting, 18(2), pp.301-324.
Hasanuddin, R., Darman, D., Taufan, M.Y., Salim, A., Muslim, M. and Putra, A.H.P.K., 2021. The effect of firm size, debt, current ratio, and investment opportunity set on earnings quality: an empirical study in Indonesia. The Journal of Asian Finance, Economics and Business, 8(6), pp.179-188.
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