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Operational Efficiency

Oman Oil Marketing distributes and markets the lubricant and fuel products primarily over Sultanate of Oman. The company operates the business through commercial, retail and various other segments and has an operating network of more than 179 retail stations. It also operates the facilities of service stations that includes Ahlain stores that offers hot snacks, cold drinks, phone cards, milk and top up groceries (Oman-oil.com 2017).

On the other hand, Al Maha Petroleum Products marketing company distributes the petroleum products that include aviation fuel, marine fuel, lubricants and other associated products. It has a widespread retail network all over the country that provides the fuel requirements of the people even from the remotest location of Oman (Almaha.com.om 2017). 

Ratio

Formula

Oman Oil Marketing

Al Maha Petroleum products

2016

2015

2016

2015

a. Operational Efficiency

Receivable turnover ratio

Net credit sales/Average accounts receivable

2.32

2.38

6.43

7.12

Asset turnover ratio

Net revenues/Total assets

0.73

0.72

         3.61

       3.43

b. Liquidity

Current ratio

Current assets/current liabilities

1.24

1.19

1.36

1.42

Quick ratio

Current assets less inventories/current liabilities

1.16

1.09

1.30

1.38

c. Profitability

Net profit margin

Net profit/ Sales*100

2.29

3.03

2.02

2.63

Return on equity

Net income/Shareholder's equity

0.04

0.05

0.16

0.18

d. Capital structure/ Gearing ratio

Debt to equity ratio

Debt/Equity

1.17

1.40

1.17

1.03

Debt to total asset ratio

Total debt/Total assets

0.54

0.58

0.54

0.51

e. Market ratio

Earnings per share

Net earnings/Total no. of shares

0.033

0.041

0.12

0.13

Net asset per share

Shareholder's equity/No. of shares outstanding

0.90

0.78

0.75

0.73

The Oman economy had contributed various elements that include gas and oil. The approaches of the administration are the accessible source within the country. Further, the financial development with regard to the oil business is one of the strengthening factors in Oman. There is no doubt that the greater parts of the world are subject to the Persian Gulf oil which in turn makes the current economy to be relied on the supply of gas and oil in the bay location (Friederich and Payne 2015). Three major approaches to attract the FDI (foreign direct investments) are privatization of national oil refinery while pushing it for competing with the foreign companies on the equal basis; implementation of the mixed model with continues ownership of the state and creation of the new refineries by the foreign gas and oil companies in Oman. 

Liquidity – liquidity in financial term states the ability of the company to pay off its short term obligations with the available current assets of the company. Therefore, the liquidity ratio is the measurement used to pay-off the current debts (Bodie, Kane and Marcus 2014). High ratio for liquidity indicates that the company is holding more amounts of cash that can be used in various other areas. On the other hand, low ratio indicates that the company is struggling to pay off the obligations. Generally, the ratio of 1 is considered as ideal for measuring the liquidity. Looking at the above table it can be identified that the current ratio as well as the quick ratio of Oman oil marketing for the year 2015 and 2016 is in increasing trend whereas the same for the same period for Ai Maha petroleum products is in decreasing trend. However, though the liquidity position of Oman oil marketing is improving, the liquidity position of Al Maha petroleum products is better as compared to that of Oman oil for both the years (Khan and Guruli 2015).

Liquidity

Profitability – it states the profit generating capability of the company from the sales and the ability to return on the shareholder’s equity. It reveals the overall efficiency and performance of the company (Ogiela and Ogiela 2015). From the above table if the net profit margin of both the company for the year 2015 and 2016 is considered, it can be identified that the net profit margin of Oman oil marketing is 3.03 and 2.29 consecutively for 2015 and 2016 whereas the same for Al Maha petroleum products are 2.63 and 2.02 for 2015 and 2016. Further, if the return on equity is considered, it can be identified that the ratio for both the companies are in decreasing trend. Therefore, the profit earning capabilities of both the companies are reducing (Laitinen 2017).

Efficiency position – efficiency ratio is used for analyzing the efficiency of the company with regard to using of their liabilities and assets internally. It calculates the receivable turnover, repayment of the liabilities usages of the equity and use of the machinery and inventory (Sander and Kantšukov 2013). Looking at the receivable turnover ratio as well as the asset turnover ratio of both the companies from the above table it can be identified that the ratio of both the year for Oman Oil marketing company is significantly lower as compared to that of Al Maha petroleum products.

Therefore, if the efficiency, liquidity and profitability positions are considered to compare the financial position of the companies, it is quite clear that the financial position of Al Maha petroleum products is better as compared to Oman oil marketing.

Gearing ratio – it is the fundamental analysis of the company’s long term debt as compared to the equity capital. It reveals the business risk of the company as excessive debt can lead to various financial problems. Lower gearing ratio represents higher financial stability whereas the higher gearing ratio represents lower financial stability (Tahmoorespour, Mina and Randjbaran 2015). Looking at the gearing ratio as well as the return on equity of both the companies for 2015 and 2016 it is identified that both the ratios for both the companies are more or less same. However, Al Maha petroleum product is slightly lower leveraged as compared to Oman oil marketing. 

Market ratio – if the market ratios are considered, it can be identified that the earning per share for Oman Oil marketing for the year 2015 and 2016 are 0.041 and 0.033 whereas, the same for Al Maha Petroleum are 0.13 and 0.12.  Therefore, the EPS of Oman Oil is significantly lower as compared to Al Maha Petroleum (Detzel and Strauss 2017). However, the net asset per share of Oman Oil for 2016 is slightly better at 0.90 as compared to 0.75 of Al Maha petroleum.

Profitability

Therefore, as the financial advisor the client is suggested to invested in Al Maha Petroleum Product Company as the company is lower leveraged and carry lower business risk as compared to Oman Oil. Further, the earning per share of Al Maha Petroleum Product Company is significantly better as compared to Oman Oil marketing.

Role of non financial factors in the decision making for investment appraisal

Along with the financial factors the non-financial factors like number of employees, training organization, number of reports produced, meeting requirements of future and present legislation, meeting the industry standards and improving the morale of the staffs also plays important role in making the decisions. Non financial information measures and evaluates the internal performance, customer’s satisfaction, need of the environment as well as the society that the financial information does not take into consideration. Therefore, the non-financial information has direct effect on the future target of the company and assists the company in dealing and anticipating with the future threats like protecting the intellectual property against the potential competition (Masini and Menichetti 2013). Further, it helps in improving the reputation of the business and building relationships with local communities. Moreover, it assists in developing and building business skills and the experience in the new areas to strengthening the system of management.

Calculation of Net present value (NPV)

Particulars

Discounted rate @ 12% (i)

East

West

North

Cash flow (ii)

DCF (i*ii)

Cash flow (iii)

DCF (i*iii)

Cash flow (iv)

DCF (i*iv)

Initial cost

1

-24000.00

-24000.00

-48000.00

-48000.00

-96000.00

-96000.00

Year 1

0.893

9600.00

8572.80

8400.00

7501.20

37200.00

33219.60

Year 2

0.797

9600.00

7651.20

15600.00

12433.20

38400.00

30604.80

Year 3

0.712

6000.00

4272.00

19200.00

13670.40

36000.00

25632.00

Year 4

0.636

3600.00

2289.60

18000.00

11448.00

32400.00

20606.40

Total NPV

-1214.40

-2947.20

14062.80

Net present value – it is the difference among the present value of the cash inflows and the present value of the cash outflows. The NPV is utilized in the capital budgeting for analyzing the project or investment’s profitability. This method is considered as the most reliable as it takes into account the discounting factor (Pasqual, Padilla and Jadotte 2013).  The project is generally accepted if the project gives positive cash inflow. From the above calculation it is recognized that project East and West could not generate positive NPV over the period of 4 years and only project North was only able to generate positive NPV amounted to 14,062.80.

Calculation of payback period

Year

East

West

North

Cash flow

Cumulative CF

Cash flow

Cumulative CF

Cash flow

Cumulative CF

0

-24000.00

-24000.00

-48000.00

-48000.00

-96000.00

-96000.00

1

9600.00

-14400.00

8400.00

-39600.00

37200.00

-58800.00

2

9600.00

-4800.00

15600.00

-24000.00

38400.00

-20400.00

3

6000.00

1200.00

19200.00

-4800.00

36000.00

15600.00

4

3600.00

4800.00

18000.00

13200.00

32400.00

48000.00

Payback period of East = 2 + (4800/6000) = 2.80 years

Payback period of West = 3+ (4800/18000) = 3.27 years

Payback period of North = 2 + (20400/36000) = 2.57 years

Payback period – it is the time period required for recovering the funds invested in the project or in other words, time required to reach the break-even point. Whether to accept a project or reject, the payback period is taken into consideration as the longer period of payback are not desirable for any investor (Gorshkov et al. 2014). An investment that has shorter period for payback is considered better as the initial outlay of the investor is recovered in short period of time. It can be recognized from the above calculation that project North has the lowest payback period of 2.57 years whereas project East has payback period 2.80 years and project West has payback period of 3.27 years.

Capital Structure/Gearing Ratio

Though the NPV approach is the most reliable method to analyse the acceptability of a project, the payback period of the project is also taken into consideration while evaluating any project. For the given project of East, West and North, if the NPV method and payback period is used to evaluate the projects, it can be identified that under both the method project North is considered as best as the NPV of North is highest and payback period of North is lowest among the three. 

Particulars

Per unit

Total

Sales (Units)

1,08,000

Selling price

48

51,84,000

Less:

Material

19.2

20,73,600

Conversion cost

14.4

15,55,200

Dealer's margin (10% of sales)

4.8

5,18,400

Total variable cost

38.4

41,47,200

Contribution

9.6

10,36,800

Less: Fixed cost

6,00,000

Profit

4,36,800

Particulars

Per unit

Total

Sales (Units)

        1,08,000

Selling price

45.6

      49,24,800

Less:

Material

19.2

      20,73,600

Conversion cost

14.4

      15,55,200

Dealer's margin (10% of sales)

4.56

        4,92,480

Total variable cost

38.16

      41,21,280

Contribution

7.44

        8,03,520

Less: Fixed cost

        6,00,000

Profit

        2,03,520

Particulars

Per unit

Total

Sales (Units)

        1,08,000

Selling price

48

      51,84,000

Less:

Material

19.2

      20,73,600

Conversion cost

14.4

      15,55,200

Dealer's margin (10+25% = 12.5%  of sales)

6

        6,48,000

Total variable cost

39.6

      42,76,800

Contribution

8.4

        9,07,200

Less: Fixed cost

        6,00,000

Profit

        3,07,200

Under both the suggestions, the fixed cost does not change. Therefore, to maintain the profit at the level of 436,800, it must maintain the present contribution level of 10,36,800.

If the selling price is reduced by 5% then the contribution comes to 7.44 per unit. Therefore, required sales in units to maintain the same level of profit –

Total contribution required / contribution per unit = 10,36,800 / 7.44 = 139,355 units

However, if the dealer’s margin is increase by 25% then the contribution comes to 8.40 per unit. Therefore, required sales in units to maintain the same level of profit –

Total contribution required / contribution per unit = 10,36,800 / 8.40 = 123,429 units.

Therefore, after considering both the suggestions, it is recommended to implement the 2nd proposal that is, increasing the dealer’s margin by 25% owing to the following reasons –

  • Contribution under proposal 2 is higher as compared to proposal 1.
  • Number of units required to be sold for maintaining the same level of profit is lower in proposal 2 as compared to proposal 1.

Break-even point (BEP) recognizes total sales amount required for a business to cover up the costs and earn profit. As the BEP is related directly to fixed cost, controlling and reducing the fixed costs assist the business to achieve the BEP at lower level of sales. The BEP helps in following ways while making decisions –

  • Budgeting and target setting – the break-even calculation and charts used in the budgeting procedures as the business knows that exactly how many units are required to break-even. Further, the company will be aware regarding the profits it can earn at various sales levels which in turn will help in set the achievable and realistic business targets (Jones 2015).
  • Margin of safety – BEP and margin of safety are interrelated. This is required when the major part of the sales are expected to be declined or during the period of economic down turn or recession. Using the BEP, the business can predict the safety margin required to meet the target during seasonal demand.
  • Motivational tool – BEP helps in motivating the sales staffs as it clearly measures the profit level at various sales levels. Further, the chart clearly reveals the impact of the additional sales on the profitability (Chapman, Ferris and Zachary 2017)

References 

Almaha.com.om., 2017. Al Maha Petroleum. [online] Available at: https://www.almaha.com.om/ [Accessed 25 Dec. 2017].

Bodie, Z., Kane, A. and Marcus, A.J., 2014. Investments, 10e. McGraw-Hill Education.

Chapman, L.W., Ferris, K. and Zachary, C., 2017. Utilizing break?even analysis in a competitive laser market. Lasers in surgery and medicine.

Detzel, A. and Strauss, J., 2017. Combination Return Forecasts and Portfolio Allocation with the Cross-Section of Book-to-Market Ratios. Review of Finance.

Friederich, S. and Payne, R., 2015. Order-to-trade ratios and market liquidity. Journal of Banking & Finance, 50, pp.214-223.

Gorshkov, A.S., Rymkevich, P.P., Nemova, D.V. and Vatin, N.I., 2014. Method of calculating the payback period of investment for renovation of building facades. Stroitel'stvo Unikal'nyh Zdanij i Sooruzenij, (2), p.82.

Jones, J., 2015. Oil Prices: Lower 48 Companies and Plays–Break-even Analysis.

Khan, A.H. and Guruli, M.R., 2015. Predicting Bankruptcy by Liquidity Ratios Analysis. Journal UMP Social Sciences and Technology Management, 3, pp.372-380.

Laitinen, E.K., 2017. Profitability Ratios in the Early Stages of a Startup. The Journal of Entrepreneurial Finance, 19(2), pp.1-28.

Masini, A. and Menichetti, E., 2013. Investment decisions in the renewable energy sector: An analysis of non-financial drivers. Technological Forecasting and Social Change, 80(3), pp.510-524.

Ogiela, L. and Ogiela, M.R., 2015. Management information systems. In Ubiquitous Computing Application and Wireless Sensor (pp. 449-456). Springer, Dordrecht.

Oman-oil.com., 2017. Welcome to Oman Oil Company S.A.O.C. [online] Available at: https://www.oman-oil.com/index.php [Accessed 25 Dec. 2017].

Pasqual, J., Padilla, E. and Jadotte, E., 2013. Equivalence of different profitability criteria with the net present value. International Journal of Production Economics, 142(1), pp.205-210.

Sander, P. and Kantšukov, M., 2013. Effect of Corporate Taxation System on Profitability and Market Ratios–the Case of ROE and P/B Ratios. Research in Economics and Business: Central and Eastern Europe, 1(2).

Tahmoorespour, R., Mina, A.A. and Randjbaran, E., 2015. The Impact of Capital Structure on Stock Returns: International Evidence. Hyperion Economic Journal, 1(3), pp.56-78.

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