Financial Situation Evaluation Of Petrochina Company (2015-2016) Essay.

a)Analyse the 2016 Petrochina financial statements in terms of profitability, performance, liquidity, working capital and long term solvency, comparing the results with 2015. You should use the attached Petrochina group financial statements.

b)“Independent audit (also known as external audit) of companies is an important part of confidence and assurance”. Explain and discuss this statement using academic references and evidence from Petrochina as appropriate.
 
To what extent did the financial crisis in 2007/2008 affect businesses globally? What lessons can be learned from this crisis for global companies such as Petrochina?

The report is deemed to provide with an opportunity to develop written communication skills along with working with global finance and accounting issues. Petrochina has established its business as a joint stock organization along with less liability within the Company law of the People’s Republic of China as an aspect of restructuring “China National Petroleum Corporation” (Unda, 2015). The objective of the paper is to evaluate the financial situation of Petrochina Company for the past two years. Moreover, the report will also evaluate the independent audit of the organizations is a vital aspect of maintaining assurance and confidence. Moreover, it will also explain the extent to which the financial crisis of 2007/08 impacts the company’s business internationally. Additionally, it will also explain the lessons regarding the crisis for international organizations like Petrochina.

Petrochina Company is selected for the reason that it is positioned as the renowned oil and gas manufacturer and seller attaining a major position within the oil and gas sector. The company is positioned as among the oil companies all through the world. The objective of the paper is to evaluate the financial situation of Petrochina Company for the past two years. Ratio analysis will be carried out to understand the financial position of the organization that will include ratios such as liquidity, solvency, working capital, profitability and performance.

Profitability analysis:

The profitability analysis of Petrochina has been carried out with the help of the following ratios, which are presented in the form of a table as follows:

Profitability Ratios:-
Particulars	Details	2015	2016
Sales	A	17,25,428	16,16,903
Operating profit	B	56,430	48,874
Net profit	C	42,364	29,414
Operating margin	B/A	3.27%	3.02%
Net margin	C/A	2.46%	1.82%

Table 1: Profitability ratios of Petrochina for the years 2015 and 2016

(Source: Petrochina.com.cn 2018)

Figure 1: Profitability ratios of Petrochina for the years 2015 and 2016

(Source: Petrochina.com.cn, 2018)

Based on the above figure, it could be cited that the operating margin of Petrochina has declined from 3.27% in 2015 to 3.02% in 2016. This is due to the fall in operating income although the cost of sales has fallen as well. In addition, there is increase in the overall selling expenses of the organisation, which is the main cause behind the downfall in operating margin (Abad, Sánchez?Ballesta & Yagüe, 2015). The similar trend is observed in case of net margin as well for the organisation, since it has dropped to 1.82% in 2016 from 2.46% in 2015. The possible reasons identified behind this downfall include the fall in market demand, increase in non-operating expense and decline in non-operating income as well (Contessotto & Moroney, 2014). Hence, from the profitability point of view, Petrochina is not in a healthy position in the oil and gas sector of the nation.

Liquidity Analysis

The liquidity analysis of Petrochina has been carried out with the help of the following ratios, which are presented in the form of a table as follows:

Liquidity Ratios:-
Particulars	Details	2015	2016
Current assets	A	3,49,344	3,81,665
Inventories	B	1,26,877	1,46,865
Current liabilities	C	4,71,407	4,99,263
Current ratio	A/C	0.74	0.76
Quick ratio	B/C	0.47	0.47
Working capital	A-C	-1,22,063	-1,17,598

Table 2: Liquidity ratios of Petrochina for the years 2015 and 2016

(Source: Petrochina.com.cn, 2018)

Figure 2: Liquidity ratios of Petrochina for the years 2015 and 2016

(Source: Petrochina.com.cn, 2018)

The above figure clearly states that the current ratio of the organisation has increased slightly from 0.74 in 2015 to 0.76 in 2016. With the help of this ratio, it is possible to identify the ability of an organisation in setting its short-term dues and obligations with the current asset base available (Avkiran, Kanol & Oliver, 2016). However, the ideal current ratio in this particular industry is considered as 2. In case of Petrochina, the ratio is well below the industrial standard, which signifies that the organisation is struggling to clear its existing obligations and dues.

Quick ratio is an advanced version of current ratio, since it excludes the value of inventory while assessing the liquidity position of an organisation (Beaumont, 2015). An idea quick ratio in the oil and gas industry is considered as 1. In case of Petrochina, the ratio has remained fixed at 0.47 in both 2015 and 2016; thus, signifying that it is well below the desired standard. The organisation is struggling indeed due to lack of short-term asset base for clearing its debt obligations. Along with this, the working capital of the organisation has remained negative in both the years. Hence, from the liquidity point of view, it could be stated that Petrochina needs to devise out ways for minimising its short-term dues in order to stay competitive in the market.

The long-term solvency analysis of Petrochina has been carried out with the help of the following ratios, which are presented in the form of a table as follows:

Long-Term Solvency Ratios:-
Particulars	Details	2015	2016
Non-current liabilities	A	5,78,399	5,24,659
Total shareholders' equity	B	13,44,288	13,73,028
Operating profit	C	56,430	48,874
Interest expense	D	23,826	20,652
Gearing ratio	A/(A+B)	0.30	0.28
Interest cover ratio	C/D	2.37	2.37

Table 3: Long-term solvency ratios of Petrochina for the years 2015 and 2016

(Source: Petrochina.com.cn, 2018)

Figure 3: Long-term solvency ratios of Petrochina for the years 2015 and 2016

(Source: Petrochina.com.cn, 2018)

In accordance with the above figure, it could be found out that the gearing ratio of the organisation has declined from 0.30 in 2015 to 0.28 in 2016. The gearing ratio helps in depicting the capital structure of an organisation in terms of long-term debt and equity. More specifically, it is used to determine the mix of long-term debt and equity for investment purpose (Benson, Faff & Smith, 2014). A gearing ratio of below 0.35 is considered ideal for the oil and gas industry. In case of this organisation, the ratio is well below the above-stated standard. In addition, the lower the ratio, the better it is for an organisation to minimise its overall debt burden (Bradbury, 2016). The gearing ratio of Petrochina implies that the organisation has placed more emphasis on raising funds through issuance of equity shares rather than relying on obtaining bank loans, which would be treated as debt. This is because it is already struggling to pay its short-term dues and obtaining additional long-term bank loan would raise its burden of overall liabilities and bankruptcy risk. Thus, funds are raised more through issuance of new equity shares in the market by providing additional returns on the investments of the shareholders and investors (Chen & Jermias, 2014).

Long-Term Solvency Analysis

Interest cover ratio helps in gauging the capability of an organisation to meet its interest expense with the help of earnings before interest and tax or operating profit (Chua, Lowe & Puxty, 2015). A ratio above 2 is considered as ideal for this particular industry. In case of Petrochina, the ratio has remained constant at 2.37 in both 2015 and 2016. This denotes that despite the fall in overall revenues, it has managed to minimise various expenses; thus, enabling the organisation to maintain the same rate. Moreover, the ratio is above the stated ideal standard implying the overall efficacy of the organisation to strike an appropriate balance between revenue and expenditure. Hence, from the solvency point of view, Petrochina is enjoying stable position in the oil and gas sector of the nation.

Independent audit that is also referred as external audit oaf the organisations is a vital part of assurance and confidence. With every new fraud as well as audit failure present in the financial statements of any company, several direct questions are asked regarding the independent audit value. It can be said that, it is vital for the auditors to remain positioned to offer assurance on financial reporting based on the global standards. This is related to auditing, accounting and independence (Vogel, 2014). Additionally, the importance of independent audit will continue to enhance the impact as an aspect of properly operating international capital markets that impacts investors all through the world. This concept can be explained in a better manner through taking the example of Petrochina Company. Price Water House Coopers is observed to provide an independent audit report on the company for all its shareholders to consider it. This audit report is established within the People’s Republic of China with decreased liability. This independent audit report of the company has audited the company’s financial statements that include consolidated balance sheets, cash flow statements, profit and loss amount along with changes in equity statement (Floyd & List, 2016).

The independent audit report also checked assurance regarding directors’ responsibility in consideration to the financial statements, auditors’ responsibility, auditor’s opinion along with other matters. The audit report explained assured that the directors of Petrochina Company are accountable for the development along with true and fair presentation of the consolidated financial statements (Vogel, 2016). It is also assured that this is conducted in accordance with the Financial Reporting Standards along with the requirements of disclosure regarding Hong Kong Companies ordinance. As per this report, directors responsibility encompass designing, implementing along with sustaining internal control important for the generation along with true and fair financial statements presentation.

Importance of Independent Audit

Moreover, the audit report confined that this will also be free from material misstatement whether because of error or fraud along with choosing and implementing suitable accounting policies. This will also consider making accounting anticipations that is reasonable in such instances. As per the opinion of the independent auditor, the consolidated financial statements of the company offer a true and fair view regarding the Petrochina’s financial position and group performance (Zhang et al., 2016). The report also ensured that the company’s annual cash flows are prepared in consideration to International Financial Reporting Standards. Moreover, this has been developed efficiently, as per the disclosure needs of the Hong Kong Companies ordinance (Gaunt, 2014).

From analysing the independent audit report of Petrochina Company it is observed that the auditors’ responsibility is to provide an opinion on the consolidated financial statements relied on their audit. The report ensured that the auditors carried out their audit in consideration to International Auditing Standards. These standards need that the company will require being in accordance with the ethical standards along with the plan. The auditors also carried out the audit in order attain important assurance regarding the fact whether the financial statements are devoid of any material misstatement (Floyd &List, 2016). The report also elucidates that an audit focuses on carrying out procedures in order to attain audit evidences regarding the amounts along with disclosures within the financial statements. The processes those are chosen rely on the judgement of the auditors that encompasses the evaluation of risks. This can include material misstatements present n the company’s financial statement that takes place because of fraud or error.

In carrying out such risk evaluations, the auditors include internal control associated with the organization’s generation along with true and fair financial statements presentation. This is in order to develop certain audit processes which are suitable within any situation but not with the purpose of indicating a viewpoint. Such viewpoint might be related to the efficiency of the Petrochina Company’ audit control. An audit also encompasses analysing the suitability of the accounting policies employed along with the reasonableness accounting anticipations (Titman, Keown & Martin, 2017). This can be prepared by the management along with analysing the total presentation of the company financial statements. From the independent auditors report it is perceived that the audit evidence that is gathered from the company is enough and suitable to offer a basis for the auditor’s audit opinion (Chua, Lowe & Puxty, 2015). From the audit report, it can be analysed that the major function of internal audit within the oil and gas sector is not distinct from the internal audit within any other industry. This is in order to evaluate and review independently the effectiveness of the company.

Conclusion

The 2007/08 financial crisis is deemed to have a drastic impact on the businesses internationally. Considering the same, few lessons are learned from the international organizations like Petrochina. Such financial crisis is deemed to have a considerable effect on the oil and gas sector. After the international financial crisis a drastic de-leveraging by the financial institutions resulted in the collapse in the oil price. An international economic slowdown is generating a drastic decrease in the oil demand that is deemed to be present for few years. In the year 2010, PetroChina Company responded to the effect derived from the international financial crisis along with attaining a stable and increased growth with sustainable development (Gerrans, Faff &Hartnett, 2015). After dealing with difficult macroeconomic surrounding along with drastic natural disasters, the company drastically implemented the major strategies of internationalization, marketing and resources.

This effectively supported the total balance between transportation, production, storage and marketing. The organization sped up the development of vital projects along with strategic projects with improving supply in order to satisfy the demands of the market. The organization also increased the transformation of the business development of the pattern. Petrochina Company attained drastic advancement within the operation and production in the year 2010 with a considerable increase in total operating results in comparison to the year 2009. A drastic decrease in the oil prices takes place at the time natural gas is developing fast within China. This brought both opportunities and challenges for the company (Gippel, Smith & Zhu, 2015).

After the financial crisis, it has been observed that the organization recorded a profit that is attributable to equity holders of the organization of RMB139.87 billion of RMB139.87 billion as per “China Accounting Standards”. This represents an yearly increase of 35.6%, or RMB139.99 billion as per the “International Financial Reporting Standards (IFRS)”. This also indicates a yearly increase of 35.4%. In the 2010 and in accordance with CAS, the organization attained a turnover of around RMB1,465.42 billion that indicates an yearly increase of 43.8%. This also has a basic earnings each share in which RMB0.76, a boost of RMB0.20 in comparison to the previous year. As per the IFRS, the organization’s turnover is deemed to be around RMB1,465.42 billion, that indicates an yearly increase of 43.8%. Basic earnings per share were RMB0.76 which indicates an increase of around RMB0.20 on a yearly basis (Loughran & McDonald, 2016).

Certain increase in the net profit and the turnover was more than the price of the crude oil indicating that the organization’s production along with operations strategies was scientific, well-targeted along with being effective. As per the revolution of board of directors of the organization, the business will distribute around 45% of the net profit within the IFRS as the overall dividends for every year. The likely financial dividend is RMB0.18357 per share (Sun et al., 2017). The likely overall dividend for 2010 is RMB0.34420 for each share that encompasses an interim dividend of RMB0.16063. For this reason, it can be stated that in the year 2010, Petrochina responded actively to the effect from the international financial crisis along with attaining a stable along with increased growth with sustainable advancement (Mhedhbi & Zeghal, 2016).

Financial crisis has impacted all the oil and gas companies all through the world drastically. It is indicated that a massive de-leveraging by the financial institutions that resulted in the downfall of the oil price. An international economic slowdown is generating a drastic decline for the oil demand that will remain for few years. Moreover, the drying up of availability of new credit along with highly restrictive terms is deemed to impact the normal financing of business of certain players. After the financial crisis, the company observed a drastic decline in the price of crude oil that is deemed to have great impact on the international natural gas industry chain (Ratiu, 2015). Such issue started to take place within the oil and gas industry regarding the ways to survive a situation. In a situation of low oil price, oil and gas companies such as Petrochina in the recent years had to cut capital expenditures to a great extent in a way that the oil and gas output will turn out to be a specific concern in the upcoming years. Financial crisis of the year 2007/08 is observed to result in low oil price that will compel the falls of international prices of natural gas to distinct degrees (Scholes, 2015).

In such scenario, the natural gas economy including Petrochina Company has greatly decreased in comparison with the prices of crude oil. Along with having such low price cause from the financial crisis there is a dramatic effect on high cost unconventional natural gas industry. This is the reason for which several unconventional oil and gas organisations along with Petrochina have dealt with constant bankruptcy in foreign lands. However, these organisations in China attain distinct attitudes for alternative natural gas (Stent, Bradbury & Hooks, 2017).

Conclusion:

The report is deemed to provide with an opportunity to develop written communication skills coupled with working with global finance and accounting issues. The company is positioned as among the oil companies all through the world. The objective of the paper is to evaluate the financial situation of Petrochina Company for the past two years. From the evaluation of ratios, it has been found that Petrochina is struggling in terms of profitability, liquidity and working capital due to falling demand in the market and increasing short-term dues and obligations. However, it has effective solvency position in the market, since it has placed additional emphasis on raising funds through issuance of equity shares, instead of relying on debt financing.

Additionally, it will also explain the lessons regarding the crisis for international organisations like Petrochina. After the international financial crisis, a drastic de-leveraging by the financial institutions resulted in the collapse in the oil price. An international economic slowdown is generating a drastic decrease in the oil demand that is deemed to be present for few years. In the year 2010, Petrochina Company responded to the effect derived from the international financial crisis along with attaining a stable and increased growth with sustainable development.

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