Ratio Analysis to Determine Corporate Health

Topics: Balance sheet, Financial ratios, Asset Pages: 3 (1260 words) Published: September 29, 2011
Ratio Analysis to Determine Corporate Health; Exxon Mobile Corp & BP Petroleum Financial statement analysis centers on one or more aspects of a company’s financial state and performance (Wild, 2011, p.565). According to Wild, there are four areas of inquiry that must be given emphasis to when completing a financial analysis (2011, p. 565). These four areas include: (1) liquidity, (2) solvency, (3) profitability, and (4) market prospects (Wild, 2011, pp. 565-582). A ratio analysis expresses a mathematical relation between two quantities, and can be expressed as a percent, rate, or portion (Wild, 2011, p.575). Analyzing BP Petroleum’s (BP) and Exxon Mobile Corp’s (Exxon) financial statements using ratio analysis will show the relation between the two companies and determine the state of their corporate health. Liquidity and Efficiency

Liquidity refers to the accessibility to meet short term cash requirements, and efficiency refers to how productive a company is in using its assets. Liquidity and efficiency can be analyzed by measuring a company’s: (1) Current ratio, (2) Acid-test ratio, (3) Accounts receivable turnover, (4) Days sales uncollected, (5) Inventory turnover, (6) Day’s sales in inventory, and (7) Total asset turnover. According to Wild, if a company’s current ratio would approach one (1) it would face challenges in covering liabilities; if its ratio was less than one (-1), the company’s current liabilities would exceed its current assets and the company’s ability to pay short –term obligations could be in doubt (Wild, 2011). Both BP and Exxon’s current ratios, BP’s at 1.2, and Exxon’s at .9 indicate that Exxon is more likely to face challenges paying its short-term debts than BP. Companies with acid-test ratios of less than one (-1) may not be able to pay their current liabilities and should be examined with great caution (Wild, 2011, p. 576). Both BP and Exxon have an Acid-Test Ratio of less than one. BP is currently at 0.69 and Exxon Mobile is at...
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