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Profitability Analysis

Discuss about the Monetary Analysis of Balance Sheet Policies.

The main purpose of this assignment is to analyze the financial statement of Santos ltd in order to understand whether the financial performance of the business is up to the mark. The assessment will also be using ratios which are computed and shown in the table below and the same will also be compared with other business competitors of Santos ltd which are engaged in same Industry (Santos.com. 2018). This way the financial performance of the Santos ltd can be analyzed for the purpose of making investments decisions.

The analysis of the profitability of the business is to be done on the basis of the performance of the business in the current year as well as in previous year. In addition to this the performance of Santos Ltd will also be measured in terms of the performance of its competitor (Makori and Jagongo 2013). The competitor which is selected for this assessment is Premier Oil ltd which is engaged in the same business as Santos ltd which is engaged in extraction and distribution of natural gas and oil. The profitability comparison of the business is shown below in table:

As per the table which is shown above, the product sales of Santos ltd has increased from the previous year which is shown in 2017 as $ 3107 million which was in 2016 as $ 2594 million. The sales of Santos ltd is even better than the sales achieved by Premier Oil ltd as shown in the table above, which suggest that the business of Santos ltd is performing better than Premier Oil ltd and the focus of the company is sales maximization (Grant 2016). The cost of sales for the business is high as shown for 2017 as $ 2272 million which has increased from previous year and is significantly more than Premier Oil ltd. It is understandable that the cost of sales of Santos ltd is high as the overall sales of the business is also high but the former needs to be controlled to generate more profits for the business (Enqvist, Graham and Nikkinen 2014). The gross profit margin of Premier Oil is much more than Santos ltd which is due to the fact that Premier Oil ltd has better control over the cost of the business as compared to Santos ltd. In addition to this, due to the high operational costs of the business, Santos ltd have negative net profit which signifies that the business has earned losses. The net loss of the business is shown to be $ 360 million for the year 2017 which has improved from the estimates of 2016 which was $ 1047 million. The net profit margin of the business has improved from 2016 estimate which was - 40.36% and the same is shown in 2017 as – 11.59%. The net profitability of Santos ltd is much better than Premier Oil ltd as per the table which is shown above (Niresh and Thirunavukkarasu 2014). The return on equity of Santos ltd has improved from the previous year’s estimate and is much better than the return on equity of Premier Oil ltd of the business. Thus, on the basis of the comparisons which can be made to Santos ltd and Premier Oil ltd for the year 2017, it can clearly be identified that the performance of Santos ltd has significantly improved in financial terms as compared to 2016 estimates and the company is at a better position as compared to Premier Oil ltd.

Analysis of Cash Flow Statement

As per the cash flow statement of Santos ltd which is prepared, on the basis of following direct method of preparation of the cash flow statement of the company. As per the cash flow statement, the receipts from the customers during the year has increased which is shown to be $ 3217 million in 2017 and the same was $ 2708 million in 2016. This shows an improvement in business and this is majorly due to the increase in the overall sales of the business which is shown in the profit and loss statement of the business (Reid and Myddelton 2017). The cash from operations also shows that the business has incurred $ 1611 million as payments which are made to the suppliers of the business and the same has slightly increased from previous year’s estimate. The borrowing costs of the business has also increased as shown in the cash flow statement of the company. In an overall estimate, the cash which is generated from operating activities of the business is shown to have increased tremendously which is shown to be $ 1248 million in 2017 and the same was shown as $ 840 million in 2016. This suggest that the business has improved its operational structure and the cash outflows of the business has reduced in such a case.

The cash from investing activities of the business are investment made in exploration and evaluation assets, oil and gas assets, other land and building equipment and other equipment as well. The company has also sold a part of the assets of the business during the year as shown by the cash flow statement of the business (Call, Chen and Tong 2013). The cash which is generated from investing activities are shown in the cash flow statement is shown in negative which is $ 534 million which may be due to the various investments which are made by the business.

The financing activities of the business includes borrowings which are taken by the business and also repayment of borrowings which is also shown to be of significant amount and the business has also purchased shares from the market. The debts which have been repaid by the business is shown to be $ 2442 million in 2017 which is of significant amount as shown in the cash flow statement of the business. The cash from financing activities of the business is also shown in negative which is mainly due to the borrowings of the business which has been repaid and the same is shown to be $ 1518 million. The closing cash and cash equivalent figure which is shown to be $ 1231 million for the year which is shown positive and is favorable as well (Farshadfar and Monem 2013).

Analysis of Balance Sheet

The balance sheet of the company depicts the financial performance of the business and the cash and cash equivalents of the business has reduced from previous year which is mainly due to repayments of debts which are made by the business during the year (Bobryshev et al. 2014). The inventory of the business has also reduced during the year which is shown to be $ 266 million during the year. The total non-current assets of the business has decreased slightly over the period which is not a favorable sign for the business and the management of Santos ltd needs to focus on the assets of the company. There has been a slight decrease in the current liabilities of the business which is good sign for the business. The loans of the business has also reduced which signifies that the management of Santos ltd has decided to make changes in the capital structure of the business. The equity of the business has increased which is due to the increase in the issued shares of the business as shown in the balance sheet of the business (Hörmann and Schabert 2015). The accumulated losses of the business show that there is a loss of $ 1934 million which is shown in the balance sheet of the company.

As per the above table, the return on assets of the company shows that it has improve significantly from the previous year’s estimate and the same is shown to be -2.63% for 2017 and – 6.86% for the year 2016. This signifies that the returns still are not favorable but have improved from the previous year’s analysis (Delen, Kuzey and Uyar 2013). The inventory turnover ratio of the business has increased from the previous year’s estimate which is a positive sign for the business as this suggest that the company has an efficient inventory management system and also that the sales structure of the business is pretty good. The quick ratio of the business is shown to be 1.764 for the year 2017 and the sane has showed improvements from the previous year’s estimate which suggest that the business has improved tremendously from the view point of liquidity of the business as shown in the financial statement of the business. The price to earning ratio of the business has fallen significantly during the year and the same is shown as 0.032 for the year 2017.

Corporate Governance of the Company

The corporate governance of the company is the responsibility of the board of directors of the business. The company diligently follows the board charter and is responsible for overseeing the strategic management and formulation of the strategies of the business as per the financial requirements of the business as per the corporate governance statement of the company (Davies 2016). The company is committed to high ethical standards of the business and expects the employees of the business to act in an ethical manner (H?ebí?ek et al. 2014). The management has developed a Santos Management System (SMS) which sets the mandatory performance requirements for the employees of the business and also states the code of conduct of the business.

The basic strategy of the business is to transform the business by minimizing the costs and increasing the production, building an identity of the business in the market and taking advantages of every opportunity available and further more grow the business by generating more revenues, unlocking core assets of the business and develop the low carbon energy generation projects of the business. In pursuance of such strategic objectives the business faces risks such as environmental and safety risks, strategic risks, operational risks which the management of the company needs to mitigate. The management considers the safety of the employees as a must and also focuses on restoration projects for minimizing the environmental impacts of the activities of the business. There is a risk of cancellation of the license and therefore the business needs to consider all the risks and dealt with the same by formulating appropriate strategies.

The business operations of the business include exploration projects, mining activities, energy generation projects. A future business operation which the company is considering for 2019 and 2020 perspective are n energy generation project which utilizes low amount of carbon as a fuel and the business also wants to further expand the operations of the business in future.

The investment and financing activities of the business has increased in 2017 as shown in the cash flow statement of the company. The business has invested in various assets such as exploration drills and machines, gas and oil extraction machines, other property and equipment as shown in the cash flow statement. The financing activities of the business includes takinga loan and repayment of a part of the loan which is done in 2017.

As per the Industry size the business can be considered to be a large business and is significant one in the natural gas and oil industry. The major competitor of Santos Ltd as pointed out in the assessment is Oil Premier ltd which is also a big business.

Conclusion

As per the financial analysis of Santos ltd annual reports, it can be clearly identified that the business is performing well in terms of profitability cash inflows and in terms of significant ratios of the business. Therefore, the investors should invest in the shares of Santos ltd as tne financial performance of the business is exceptionally good. This is confirmed by the analysis of the significant ratios of the business which is shown in the above paragraphs.

Reference

Bobryshev, A.N., Uryadova, T.N., Lyubenkova, E.P., Yakovenko, V.S. and Alekseeva, O.A., 2014. Analytical and management approaches to modeling of the accounting balance sheet. Life Science Journal, 11(8), pp.502-506.

Call, A.C., Chen, S. and Tong, Y.H., 2013. Are analysts' cash flow forecasts naïve extensions of their own earnings forecasts?. Contemporary Accounting Research, 30(2), pp.438-465.

Davies, A., 2016. Best practice in corporate governance: Building reputation and sustainable success. Routledge.

Delen, D., Kuzey, C. and Uyar, A., 2013. Measuring firm performance using financial ratios: A decision tree approach. Expert Systems with Applications, 40(10), pp.3970-3983.

Enqvist, J., Graham, M. and Nikkinen, J., 2014. The impact of working capital management on firm profitability in different business cycles: Evidence from Finland. Research in International Business and Finance, 32, pp.36-49.

Farshadfar, S. and Monem, R., 2013. Further evidence on the usefulness of direct method cash flow components for forecasting future cash flows. The international journal of accounting, 48(1), pp.111-133.

Grant, R.M., 2016. Contemporary strategy analysis: Text and cases edition. John Wiley & Sons.

Hörmann, M. and Schabert, A., 2015. A monetary analysis of balance sheet policies. The Economic Journal, 125(589), pp.1888-1917.

H?ebí?ek, J., Soukopová, J., Štencl, M. and Trenz, O., 2014. Integration of economic, environmental, social and corporate governance performance and reporting in enterprises. Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, 59(7), pp.157-166.

Makori, D.M. and Jagongo, A.O., 2013. Working Capital Management and Firm Profitability: Empirical Evidence from Manufacturing and Construction Firms Listed on Nairobi S ecurities Exchange, Kenya.

Niresh, A. and Thirunavukkarasu, V., 2014. Firm size and profitability: A study of listed manufacturing firms in Sri Lanka.

Reid, W. and Myddelton, D.R., 2017. Cash flow statement. In The Meaning of Company Accounts (pp. 16-16). Routledge.

Santos.com. (2018). Santos - 2017 Annual Report. [online] Available at: https://www.santos.com/media-centre/announcements/2017-annual-report/ [Accessed 27 May 2018].

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