Finance & Accounting for Business Assignment Sample
1.0 Introduction
The performance of the operation and health of finance evaluation of a company is important for investors for informed making of decisions. Into BP Plc this analysis delves, which is a multinational company, which deals with gas, and oil, through the comprehensive set usage of ratios of finance across liquidity, efficiency, profitability, investment, and gearing metrics. The major insights are provided through these ratios into the ability of BP Plc in terms of profit generation, asset utilization effectively, obligations of short-term meetings, levels of debt management, and shareholders’ value creation.
Upon three years, this analysis is drawn of data on finance from 2021 to 2023, which allows for the identification of the trends, and major areas of identification of strength, and concern. Through the interrelationship examination among different ratios, regarding the position of finance of BP Plc, a holistic understanding presence is noticed regarding the position of finance and dynamics of operation of BP Plc which can be gained by enabling investors in terms of attractiveness of the company assessment in the form of an opportunity.
Moreover, unique opportunities and challenges are considered in this analysis that are present in the sector of energy, including regulations of energy, volatility of price of the commodity, and sustainable sources of energy transition. Through the performance of BP contextualization within the broader landscape of the industry, the investors can evaluate better the strategic positioning and long-term prospects of this company.
2.0 Discussion
a) Analysis of company analysis
1. Profitability ratio
Figure 1: Profitability ratio
(Source: Self-created in MS Excel)
It is indicated through the gross profit ratio, the ability of BP Plc to generate profits from its major operation after for direct costs of services, and production doing the accounting. Over three years, the relatively stable ratio of gross profit is maintained by BP Plc, which is ranging from 9.61% in 2020 to 22.82% in 2022. In 2021, and 2022 a higher ratio presence is noticed, which is respectively 14.49%, and 22.82% respectively (Huang et al. 2021). This indicates that the effectiveness is present in BP Plc in its direct cost management, and margins of profit maximization from its sales in these years. However, in 2021, a major increase was noticed by 14.49%, and the attribution of it can be attributed to different factors, which include higher costs of input, disruptions in the chain of supply, and in the power of pricing to decline temporarily.
The ratio of net profit is the ratio, through which the ability of BP Plc is measured to convert the revenue into profits of the bottom line after for all expenses doing the accounting, and it has been low majorly throughout all three years. The ratio of net profit has remained in 2022 at -0.01% merely, and it indicates that only a small revenue fraction of BP Plc is translated into loss for shareholders. In 2022 the ratio stayed lower at -0.10%, which implies that, BP Plc incurred a loss overall during the year (Cetinkaya 2022). In 2021 slight improvement is noticed in this ratio by 0.048%, and it stayed low majorly, and it indicates that, BP Plc faces major challenges in managing its costs of operation and sustainable net profit generation.
2. Efficiency ratio
Figure 2: Efficiency ratio
(Source: Self-created in MS Excel)
The ratio of asset turnover is measured in terms of the way efficiently BP Plc utilizes to generate profits from its total assets. Over three years, the improvement is noticed in this ratio, which is from 0.25 to 0.57 is rising from 2020 to 2022 (McLeod 2020). It is indicated through this positive trend that is more effectiveness is noticed in BP Plc in leveraging its base of assets for sales driving, which is a sign that is for investors is favorable. However, irrespective of the improvement, the ratio of turnover of asset is low still in 2022 by 0.57. This indicates a major room for optimization further in the utilization of assets.
The evaluation is done through the ratio of accounts receivable turnover in terms of the way effectively its credit sales are managed by BP Plc with the collections. The upward trajectory is exhibited through this ratio, which increases from 2020 to 2022 from 0.25 to 0.57 (Clancy 2020). A higher ratio of accounts receivable turnover implies that the payments are collected by BP Plc more promptly from its credit customers. This improves its management of the flow of cash and reduces bad debt risks. It is indicated through this positive trend that more efficient policies of credit, and practices of collection are implemented by BP Plc throughout the years Finance & Accounting for Business Assignment Sample
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3. Liquidity ratio
Figure 3: Liquidity ratio
(Source: Self-created in MS Excel)
The assessment is done through ratio current regarding the ability of BP Plc to meet its obligations of short-term through the use of current assets. Throughout three years, the ratio current is maintained by BP Plc above 1.0, which is from 1.22 to 1.09 is ranged from 2020 to 2022. Above 1.0 a current ratio indicates that the current assets are sufficiently present with BP Plc for covering its current liabilities, which for liquidity is a position that is favorable (Fowlkes 2020). However, it is needed to be noted that, slightly above 1.0 the current ratio does not provide a buffer, and any changes that is not expected in the current liabilities, or assets can strain majorly the position of liquidity of BP Plc.
The ratio quick is present in the form of a measure that is more conservative of liquidity, and in this regard, from current assets the inventory gets excluded in this regard. The ratio quick of BP Plc over the years has fluctuated, and from 0.32 to 0.23 from 2021 to 2022 it ranged. In 2022, in the ratio quick, the decline is noticed, and it remains low relatively. This indicates that challenges might be faced by BP Plc in terms of meeting its obligations of short-term solely from its major liquid assets (Brown 2020). It includes accounts receivable, and cash. In the form of a major area of concern this can be present for investors, majorly at the time of downturns of the market, and volatility of the market.
4. Gearing ratio
Figure 4: Gearing ratio
(Source: Self-created in MS Excel)
Insights are provided through the ratio of debt to equity into leverage of finance of BP Plc, and its ability to meet obligations of long-term. Over three years, the high ratio of debt-to-equity is maintained by BP Plc which is from 2.61 to 3.04 is ranged from 2021 to 2022. The ratios are elevated through these, and this indicates that BP Plc relies on debt financing to fund in terms of its growth, and operations initiatives (Bailey 2020). On the side, the returns are amplified through the financial leverage in conditions that are favorable. The exposure to risk of the company is also increased through it at the time of uncertainty of the economy, and downturns of the economy.
The total assets proportion is measured through the equity ratio of total assets by equity of shareholders (Thomas 2020). For BP Plc it has remained low relatively, which is ranged from 2021 to 2022 from 26.27% to 23.45%. This low equity ratio enforces further the financial leverage at a high degree which is by BP Plc is employed, because assets majorly are funded through debt rather than equity. The evaluation should be made by the investors carefully regarding the ability of BP Plc to service its obligations of debt and manage the related risks effectively.
5. Investment ratio
Figure 5: Investment ratio
(Source: Self-created in MS Excel)
The insights are provided through the P/E ratio into the perceptions and expectations of the market of BP Plc’s major earnings. In 2022, when a net loss is reported by BP Plc, at that time, a high value is spiked exponentially in the P/E ratio at -41.75, and this indicates that, the pricing is done by investors regarding the shares of BP Plc, which is dependent on the profit of the future rather than the performance of the present year (Retuerto 2023). However, in 2021 a more moderate nature is noticed in the P/E ratio at 10.75 which is indicating a valuation which more balanced depending on earnings that are reported.
The ROE, or Return on Equity measures the profit of BP Plc, which is to the equity of the shareholders is relative which is in the company is invested. The ROE of the BP Plc has been volatile highly, which is ranging from -0.02% in the year of loss-making of 2022 to a relatively strong in 2021 at 0.07%. At -0.02% the latest ROE is present in 2022, and it is indicating a level that is reasonable loss level for the industry (Baines and Hager, 2022). Although the cyclical nature is highlighted through it regarding the business of BP Plc, and on external factors, a major impact presence is noticed in this regard. It includes prices of the commodity and conditions of the market on its profit.
b) Interrelationships and interpretation
The analysis of the ratio of BP Plc shows an interplay that is complex of weaknesses and strengths across different aspects of its performance of finance (Baasandavaa 2021). On the side, relatively stable gross margins of profit are maintained by the company, and it indicates its ability for generating profits from its major operations. Its net margin of profits has been low majorly. It indicates challenges in costs of operation management, and sustainable bottom-line profit generation.
The ratio of asset turnover and the ratio of accounts receivable indicates that progress has been made by BP Plc in the utilization of its assets more efficiently, effectively doing the collections and its credit sales management. However, the low quick, and current ratio raises the major concerns regarding the ability of BP to meet its obligations of short-term, specifically in the unexpected flow of cash event of description, or constraints of liquidity.
With a highly leveraged structure of capital, the operation is conducted by BP Plc. It is by its consistently low equity ratios and high debt-to-equity ratios. The high level of leverage of finance amplifies both the major risks and rewards that are related with the operations of BP Plc (Fenske 2020). The returns can be enhanced through the leverage at the time of favorable conditions of the market, and it increases also the vulnerability of the company to downturns of the economy, other external shocks, and volatility in the price of commodity.
Between these ratios, the interrelationships highlights the maintenance importance regarding balance that is delicate between leverage, liquidity, efficiency, and profitability. In this regard, the low margins of profit of BP Plc can strain majorly its ability to generate a sufficient flow of cash to service its obligations of debt, specifically in downturns of the industry, and economic stress periods. In addition to that, the high level of leverage in finance can do the impact exacerbate regarding any inefficiencies of operations, or challenges of liquidity on the overall health of finance of BP.
Furthermore, the ROE, or Volatile return on equity ratios underscore the nature that is cyclic of business of BP, and the major impact of external factors presence is noticed in this regard. It includes conditions of the market and prices of the commodity on its profit. In ROE, the fluctuations highlight also the effectiveness and importance regarding the management of risk strategies with the need for BP Plc for a diverse portfolio, and model of resilience of business for the mitigation of the volatility of the market effectiveness mitigation.
The stable gross margins are indicated through the profit of BP Plc in the range of 22% to 23%, but very low margins of net profit over the past three years under the average of 1% are noticed in this regard. This indicates that the struggle is noticed in the company regarding revenue conversion into profits of the bottom line, majorly because of the higher leverage of operation, and costs in the sector of gas, and oil. Below 0.6x, the low turnover of assets demonstrates the assets of BP Plc that are not being utilized efficiently in terms of sales generation. However, the turnover of receivables that are improving shows the better management signals of collections, and sales credit in the present time majorly. .
c) Further information and consideration of investor
Considering BP Plc for major investors, there are many major factors presence are noticed for the additional information, and evaluation that might be needed for making an important decision regarding investment.
1. Earnings and profit growth potential
The stable nature is noticed in the gross profit margin of BP Plc in terms of its ability to generate substantial, and consistent net profits that remain in the form of a concern. The analysis needs to be made thoroughly by the investors in terms of the streams of revenue of BP Plc, structures of cost, and drivers behind the low margins of net profit (POSWAL and CHAUHAN, 2021). Understanding the initiatives of the company for operational efficiency enhancement, strategies of price optimization, and costs of control that could provide insights into its profit improvement potential, and growth earnings.
2. Management of the flow of cash generation and management of debt
In terms of the high leverage of finance, the close examination can be closely looked after regarding the ability of the company to the appropriate flow of cash generation to service its obligations of debt, and expenditures of fund capital (Poirier 2022). The trends analysis in the flow of cash operation, requirements of capital expenditure, and maturity of debt will be important in the evaluation of the position of liquidity of BP Plc, and serviceability of debt.
3.0 Conclusion
From the discussion above the conclusion is made that, this analysis of ratio is comprehensive of BP Plc, and major insights are provided in this regard into the performance of finance, efficiency of the operation, and profile of risk. On the other side, stable gross margins are demonstrated by BP Plc, and with that, the demonstration is also done by this company regarding the utilization of assets. In this regard, the presence of concerns is noticed in terms of its ability to do the revenue conversion into consistent profits of bottom line, and strong flow of cash generation. The volatile returns and high leverage of finance on equity show the nature that is cyclic of the industry of gas, and oil. This highlights the effective strategies for management effectiveness importance.
For making major decisions regarding investments, major investors should explore further the strategic direction of BP Plc with the priorities of allocation of capital, and sustainable practices commitment. In addition to that, a detailed analysis of the generation of flow cash, capabilities service of debt, and relative metrics of valuation against peers of the industry will do the analysis of ratio complement.
Reference list
Journals
Baasandavaa, N., 2021. Renewable Energy Group, Inc. Financial Analysis.
Bailey, C., 2020. Comprehensive Case Studies of Financial Reporting Principles and Professional Development Topics.
Baines, J. and Hager, S.B., 2022. Drilling Down: UK Oil and Gas Financial Performance.
Brown, H., 2020. A Compilation of Case Studies Focusing on Financial Reporting Issues.
Cetinkaya, N., 2022. Denetçi Raporunda Önemlilik (Materiality in Auditor Report).
Clancy, S., 2020. A Comprehensive Analysis of Financial Reporting Through Case Studies.
Fenske, N., 2020. A Series of Case Studies in Financial Reporting.
Fowlkes, T., 2020. An Analysis of the Principles of Financial Reporting and their Applications Through the use of Case Studies.
Huang, N., Jiang, S., Sun, Y. and Yuwen, Z., 2021, December. The Hedging Policies of BP with the Systematical Analysis. In 2021 3rd International Conference on Economic Management and Cultural Industry (ICEMCI 2021) (pp. 1129-1134). Atlantis Press.
Jiang, C., 2022, December. The Influence of the Russia-Ukraine War on BP. In 2022 2nd International Conference on Economic Development and Business Culture (ICEDBC 2022) (pp. 245-250). Atlantis Press.
McLeod, C., 2020. Financial Reporting Principles and Accounting Concepts: A Collection of Case Studies.
Poirier, N., 2022. Wishing to Be Part of That Court: How the Supreme Court’s Decision in BP PLC v. Mayor of Baltimore Lets Energy Companies Wander Free and Drown the Shore up above. Vill. Env’t LJ, 33, p.221.
POSWAL, D. and CHAUHAN, P., 2021. Do oil and gas companies comply with requirements of IFRS 6?: Evidence from India and global companies. The Journal of Asian Finance, Economics and Business, 8(3), pp.399-409.
Retuerto Almagro, G., 2023. Firm resources and capabilities for achieving an enviromental sustainability strategy: BP plc case.
Thomas, B.A., 2020. A Study of Key Accounting Principles for Financial Reporting through Analysis of Case Studies.
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