The main purpose of this report is to analyse the financial performance of Caltex and BHP Billiton Petroleum which are considered as major petroleum companies across Australia. In order to analyse the financial performance, top down analysis and bottom up analysis has been performed in this report. The company analysis, industry analysis and economical analysis are vital aspects for the top down analysis which has been used in this report. The entire analysis is based on the key statistics of petroleum industry across Australia. Further, different financial ratios have been analysed for both companies on basis of 2017 data during the bottom up analysis. The different ratios like profitability, capital structure, and market performance as well as efficiency ratios have been analysed in order to compare the financial performance of two companies in this report.
The petroleum industry is selected for this report in order to analyse the financial performance of two companies named Caltex Australia and BHP Billiton Petroleum. Petroleum remained major energy source for Australia in 2016 followed by cola and natural gas. The production of petroleum products in Australia has been significantly increased from 2000 (APPEA, 2016). The amount of exploration has been the key factor for growth of petroleum industry in Australia. The depression within the prices of crude oil is significantly affecting activities of petroleum exploration which has also reduced overall revenues of companies due to lower expenditure on exploration.
(Source: APPEA, 2016)
The different amount of petroleum or its related products have been imported and exported by Australia from past several years. But due to reduction of oil production at domestic level, the country is mainly indulged in import activities. The industry is very significant for the economical conditions of Australia and provides several opportunities for petroleum companies to invest in the region (Petty et al, 2015). Australia has rich sedimentary basins, free marketing policies; competitive taxation system, closer proximity to Asia-pacific market and several are other benefits which can be provided by this industry to different companies across the globe as well as domestic level.
Caltex Australia is one of the major petroleum companies listed in Australian Stock Exchange (ASX) which has equal ownership shared between Australian Shareholders and Chevron. The company was started in 1936 and was renamed as Caltex in 1968. The company is performing its business operations in above 60 countries across the globe including Southern Africa, Middle East as well as Asia-Pacific region. The main mission of the company is to be leading oil refining company mostly admired for company’s performance, partnership and people (Caltex, 2017). The company is also focussed to maintain its sustained profitability with leadership in supply chain, asset and brand management by developing more opportunities under favourable business environment. The company has generated about 17,619M AUD in 2016 and has also witnessed great increase in its earnings per share which was good sign for the company in terms of its financial stability and overall profitability.
BHP Billiton Petroleum:
BHP Billiton Petroleum is a major Australian multinational company listed in ASE which is petroleum, metals and mining company headquartered at Melbourne in Australia. The company was established in 1885 and considered as biggest mining company of the world in terms of market values in 2016 and also fourth biggest company of Australia in terms of its overall revenues and market capitalisation. The main mission of the company is to enhance value of company by focusing on key areas including cost efficiencies, latent capacity, exploration, major projects, technology as well as onshore activities (BHP, 2017). The main organizational strategy of company to operate and own large, low cost, long life, upstream and expandable assets diversified with market, geography and commodity. The company has generated 30,912M AUD revenues in 2016 which are less as compared with past years due to variations in the prices of crude oil across the international market. The company has also witnessed reduction in its earnings per share which is also not good for its financial performance and may affect its economical stability in coming years.
Top Down analysis:
Top down analysis is significant approach for analysing the industrial and economical factors which can help organizations for their investment objectives. The specific industries are analysed using this approach that surely helps the organizations for better return on investments (Renz, 2016). The various factors can be used for analysing the true economical conditions including interest rates, exchange rates, GDP rates, productivity or energy prices for better investment strategy for the organizations like Caltex Australia and BHP Billiton Petroleum.
From the economical data, it has been analysed that GDP of Australia was expanded about 1.8% in the last quarter of 2017. The GDP was about 2.7% in the 2015. From that, it analysed that GDP has been expanded about 1.1% which is a good sign for economical and business conditions (Brigham, 2014). As the value of GDP has been increased for the country, it will certainly enhance economical activities and will create more business opportunities for companies like Caltex Australia and BHP Billiton Petroleum. The increase in GDP of Australia is beneficial for the Companies as there is an increase in the economic activity of the country.
Current rate of Interest:
Interest rate plays very significant role for economical stability and enables the government to form effective monetary policies in order to enhance economical developments. The interest rate of Australia was 1.5% and 2% in years 2016 and 2016 respectively. It is analysed that reduction in interest rates will surely affect Australian currency as its value has been lowered that will create more exploration opportunities for petroleum companies (Finkler et al, 2016). The variations in economical conditions will affect interest rates and petroleum companies can take benefits of lower rates and can take more loans in order to enhance business operations. This will enable companies to purchase more drilling equipments or tools for petroleum exploration and provide several economical benefits to companies.
$AUD’s Current Value:
From the economical statistics, the current value for one AUD is almost equal to 0.79 US Dollar. This indicates that value of US dollar is significantly high as compared with Australian Dollar. The fluctuation in value of currency will always affect petroleum industry or companies in a huge manner (Gitman et al, 2015). The price changes of crude oil at international market is also affecting overall economical conditions of petroleum companies but at the same time, is also creating more opportunities for companies in Australian market. The reduction of exchange rates is also one of factors which are affecting economical stability of petroleum companies.
Current rate of Inflation:
Inflation rate is also significant in analysing the economical conditions of country as due to this value of currency decreases whereas, rise in the prices for goods or services. The rate of inflation has been increased in past few months by 1.3% in last quarter of 2017 for Australia (McKinney, 2015). This is low as compared with the past inflation rates in 2015 and 2016 which were about 1.8% and 1.6% respectively. The petroleum companies like Caltex, BHP Billiton Petroleum can take benefits from these lower rates and can create more business expansion opportunities for them.
It is also analysed that reduced inflation rates will also help to reduce the rate of interest rates that will create more exploration or business opportunities for petroleum companies like Caltex Australia and BHP Billiton Petroleum. There is direct impact of interest rates on the inflation and can also affect borrowing costs for long term or short term debts of the companies (Bryce, 2017). Increase in rates of interest will make companies to consider mortgages or loans accomplishing their financial needs and at the same time will also affect supply or demand for the petroleum products or services of the companies.
Personal income for Disposable:
The personal income disposed by the individuals remained after payment of all taxes is also one of the key indicators to measure the economical conditions for business. The present income for disposable in Australia has been increased by 123.09% from 122.52% for years 2015 to 2016. The changes have been also witnessed in income level which is about 0.46% in the present scenario which is a huge difference as compared with 1.03% in the last financial year (Armour et al, 2016). The increase in value of personal income is a good sign for the trades across the region and will create more business opportunities for petroleum companies.
It is also analysed that income level of individual across Australia has been raised in significantly in past years which has encouraged petroleum companies to leverage more financial aspects for their exploration and mining activities and also enables them to create more employment opportunities in the petroleum industry (Schiavo-Campo, 2017). This will also provide skilled workforce for petroleum companies to handle their complex business operations like exploration and mining activities and at the same time, also help to expand overall business operations of Caltex Australia and BHP Billiton Petroleum within Australian region.
Bottom Up analysis:
Bottom up analysis is a significant approach for analysing the investment prospects for the macroeconomic business conditions of the organizations. This approach also enables investor to effectively analyse the financial performance of specific companies instead of overall industry or economy and gives them in-depth information in order to accomplish their investment objectives in more efficient manner (Campbel et al, 2016). The different financial ratios have been analysed for comparing the financial position of Caltex Australia and BHP Billiton Petroleum.
(Source: Morning Star, 2017)
Overall efficiency of the companies is generally measured by the profitability ratio. Net income, operating income and operating margins are important aspects to analyse this ratio. Operating margins enable the companies to transform their sales into overall revenues. This is important criteria to evaluate performance of business operations of companies and main indicator for different creditors or investors (Henderson et al, 2015). Operating margin for Caltex is 3.5% and for BHP Billiton Petroleum is 20.2% in 2017 which indicates that BHP Billiton Petroleum has generated more revenues in 2016 and performed far better than Caltex.
Operating income helps to evaluate overall profits for the companies. Operating income for Caltex is 620M AUD and for BHP Billiton Petroleum is 6,852M AUD in 2017 which indicates that BHP Billiton Petroleum was more able of payment for its debts and also gained more profits as compared to Caltex (Sweeting, 2017). Net income is also called by net profits and defines the financial stability of the companies. Net income for Caltex is 610M AUD and for BHP Billiton Petroleum is 2,488M AUD in 2017 which indicates BHP Billiton Petroleum has higher profitability ratio and has more stable financial position and performance as compared to Caltex.
The effective use of company’s assets or liabilities can be measured by the efficiency ratio. Fixed asset turnover and asset turnover ratio are important aspects of efficiency ratios. The investment returns obtained by companies is determined with help of fixed assets turnover (Burton and Brown, 2014). This ratio for Caltex is 6.66 and for BHP Billiton Petroleum is 0.41 in 2017 which indicates that BHP Billiton Petroleum is not able to effectively uses its assets as compared to Caltex which is not a positive sign for BHP Billiton Petroleum for its financial market.
The amount of revenues generated from company’s assets is effectively determined from asset turnover ratio. Asset turnover ratio for Caltex is 3.39 and for BHP Billiton Petroleum is 0.29 in 2017 which indicates that BHP Billiton Petroleum has lower turnover ratio for its assets that also represents that business operations of BHP Billiton Petroleum is less efficient as compared to Caltex on basis of different efficiency ratios (Weygandt et al, 2015).
The ratio which enables the companies to determine financial leverage for their investment and also defines financial position of companies in case investment is not done in appropriate manner is called as capital structure. Debt / equity ratio and gearing ratio are important aspects to analyse the capital structure for the companies (DRURY, 2013). Debt / equity ratio for Caltex is 0.25 and for BHP Billiton Petroleum is 0.54 in 2017 which indicate that Caltex is in better financial position for equity dependency of its shareholders as compared to BHP Billiton Petroleum.
The financial leverages for the companies are determined from the gearing ratios. This also helps to determine amount of finance done by the companies on their overall assets. Gearing ratio for Caltex is 1.90 and for BHP Billiton Petroleum is 2.11 which indicates that BHP Billiton Petroleum has invested more on its assets and has better financial leverage as compared to Caltex (Kaplan, 2014). This also signifies that more shareholders are willing to invest in BHP Billiton Petroleum as compared to Caltex which indicates that financial performance of BHP Billiton Petroleum is far better than its competitor Caltex in the petroleum industry.
The present share prices for the companies help to analyse their market performance at both domestic as well as global level. Earnings per share (EPS), Dividend per share (DPS), payout ratio as well as book value per share are important aspects to analyse the market performance of the companies. The ratio of net income with respect to average outstanding shares is defined by EPS (Takayasu, 2013). The distribution of profits will be better for the companies in case of higher value for EPS. EPS for Caltex is 4.63 and for BHP Billiton Petroleum is 0.93 in 2017 which indicates that Caltex has higher value for EPS as compared to BHP Billiton Petroleum that also signifies that Caltex will efficiently distribute its profits within the marketplace (Coleman, 2016).
The amount of dividends will be received by the investors from companies is mainly determined from the dividend per share (DPS). DPS for Caltex is 2.51M AUD and for BHP Billiton Petroleum is 1.56M AUD in 2017 which indicates that Caltex has paid higher dividends to its different investors that also signifies better market performance of Caltex as compared to BHP Billiton Petroleum (Ledgerwood et al, 2013). The amount of net income distributed by the companies among all their shareholders is analysed using the payout ratios.
The sustainability for market performance is indicated the payout ratios. Payout ratio for Caltex is 54.1% and for BHP Billiton Petroleum is 64.5% in 2017 which indicates that dividend distribution capability of BHP Billiton Petroleum is better than Caltex and also signifies that BHP Billiton Petroleum will be in better position to pay dividends to their shareholders and determines amount of stakes sold to stakeholders by companies (Taylor, 2013).
The adequate business valuation of companies as compared with their competitors in same industry is analysed using the book value / share. The outstanding shares for stocks are effectively related with their shareholders using the book value / share (Zeff, 2016). BVS for Caltex is 15.97 and for BHP Billiton Petroleum are 21.29 in 2017 which indicates that BHP Billiton Petroleum has higher value for BVS as compared to Caltex which also signifies that market performance of BHP Billiton Petroleum is far better that Caltex and also has higher market capitalisation (Danthine and Donaldson, 2014).
From the above discussion and measuring different financial ratios, it has been analysed that there is a huge increment of overall assets for BHP Billiton Petroleum as compared to Caltex in 2017. The company has earned higher profits as compared to different competitors in the petroleum industry. BHP Billiton Petroleum has higher value for different profitability ratios in 2017 which also indicates better financial performance of the company in 2017 (Horowitz, 2014). The amount of revenues generation, operating margins, net income and other factors has also indicated that financial performance of BHP Billiton Petroleum is far better than Caltex in the international as well as domestic market and also has strong market capitalisation.
From the report, it is concluded that investor will prefer to invest their money in BHP Billiton Petroleum as compared to Caltex on the basis of their financial performance in 2017. It is analysed that market capitalisation of Caltex is far behind than BHP Billiton Petroleum in 2017 which is not suitable for investors or other creditors. The financial figures has also signified that Asset turnover ratio for Caltex is 3.39 and for BHP Billiton Petroleum is 0.29 in 2017 which indicates that BHP Billiton Petroleum that company has not efficiently used its assets in order to enhance its financial performance (Greenbaum et al, 2015). This signifies that BHP Billiton Petroleum needs to raise more funds from their equities in order to enhance their profitability level. The company also needs to focus on use of their assets in efficient manner that will also help the company to generate more revenues in coming financial years.
Further, it is also analysed from this report that profitability level of companies are surely affected from different economic factors that can also hamper their financial performance. Both companies as discussed in this report are major petroleum companies in Australia. The amounts of profit for companies are also affected from increased value for interest rates (Bascom, 2016). From the different financial ratios, it is also concluded that financial performance, capital structure as well as profitability level of BHP Billiton Petroleum is far better than Caltex in both domestic as well as international marketplace.
APPEA (2016) Key Statistics. [Online]. Available at: https://www.appea.com.au/wp-content/uploads/2016/06/Key-Stats_2016.pdf (Accessed: 15 September, 2017).
Armour, J., Awrey, D., Davies, P., Enriques, L., Gordon, J., Mayer, C. and Payne, J. (2016) Principles of financial regulation.UK: Oxford University Press.
Bascom, W. (2016) The economics of financial reform in developing countries.USA: Springer.
BHP (2017) About Us. [Online]. Available at: https://www.bhp.com/our-approach/our-company/about-us (Accessed: 15 September, 2017).
Brigham, E. (2014) Financial management theory and practice.AU: Atlantic Publishers & Distri.
Bryce, H. (2017) Financial and strategic management for nonprofit organizations.UK: Walter de Gruyter GmbH & Co KG.
Burton, M. and Brown, B. (2014) The financial system and the economy: Principles of money and banking.UK: Routledge.
Caltex (2017) About Us. [Online]. Available at: https://www.caltex.com.au/our-company#show-menu (Accessed: 15 September, 2017).
Campbell, J., Jardine, A. and McGlynn, J. (2016) Asset management excellence: optimizing equipment life-cycle decisions.USA: CRC Press.
Coleman, W. (2016) Financial services, globalization and domestic policy change.USA: Springer.
Danthine, J. and Donaldson, J. (2014) Intermediate financial theory.UK: Academic press.
DRURY, C. (2013) Management and cost accounting.USA: Springer.
Finkler, S., Smith, D., Calabrese, T. and Purtell, R. (2016) Financial management for public, health, and not-for-profit organizations. AU: CQ Press.
Gitman, L., Juchau, R. and Flanagan, J. (2015) Principles of managerial finance.AU: Pearson Higher Education.
Greenbaum, S., Thakor, A. and Boot, A. (2015) Contemporary financial intermediation.UK: Academic Press.
Henderson, S., Peirson, G., Herbohn, K. and Howieson, B. (2015) Issues in financial accounting. AU: Pearson Higher Education.
Horowitz, N. (2014) Art of the deal: Contemporary art in a global financial market.USA: Princeton University Press.
Kaplan, J. (2014) Financial markets and the economy.UK: Jay Kaplan.
Ledgerwood, J., Earne, J. and Nelson, C. (2013) The new microfinance handbook: A financial market system perspective.USA: World Bank Publications.
McKinney, J. (2015) Effective financial management in public and nonprofit agencies.UK: ABC-CLIO.
Morning star (2017) BHP Billiton Ltd ADR. [Online]. Available at: https://financials.morningstar.com/ratios/r.html?t=BHP®ion=usa&culture=en-US (Accessed: 15 September, 2017).
Morning star (2017) Caltex Australia Ltd ADR. [Online]. Available at: https://financials.morningstar.com/ratios/r.html?t=CTXAY (Accessed: 15 September, 2017).
Petty, J., Titman, S., Keown, A., Martin, P., Martin, J. and Burrow, M. (2015) Financial management: Principles and applications. AU: Pearson Higher Education.
Renz, D. (2016) The Jossey-Bass handbook of nonprofit leadership and management.USA: John Wiley & Sons.
Schiavo-Campo, S. (2017) Government Budgeting and Expenditure Management: Principles and International Practice.UK: Taylor & Francis.
Sweeting, P. (2017) Financial enterprise risk management.UK: Cambridge University Press.
Takayasu, H. (2013) Empirical science of financial fluctuations: The advent of econophysics.USA: Springer Science & Business Media.
Taylor, J. (2013) Getting off track: How government actions and interventions caused, prolonged, and worsened the financial crisis.UK: Hoover Press.
Weygandt, J., Kimmel, P. and Kieso, D. (2015) Financial & Managerial Accounting.USA: John Wiley & Sons.
Zeff, S. (2016) Forging accounting principles in five countries: A history and an analysis of trends. UK: Routledge.