Analyzing Financial Statements
Schlumberger Limited (SLB)
My analysis of Schlumberger Limited indicates presumes that the company will continue as a going concern in accordance with the Beaver Univariate Model. I have examined the cash flow/total debt, return on assets and the debt ratio and have concluded that Schlumberger (SLB) is financially stable. The following are major characteristics of a company that is financially stable: 1. Cash flow/total debt ratio of 0.26 which has remained stable over the last two years, although there was a decrease from 2009 to 2010. Receivables increased year over year, it is to be expected a year after the acquisition of Smith International family of companies. 2. Return on assets is 11.01% which is a decrease from 2010 but increased from 2009. Both cash and receivables have increased year over year. 3. Total debt/total assets ratio is 0.43 which has remained stable since 2009, a slight dip in 2010 to 0.39. This indicates a slight concern as SLB has leveraged a substantial amount of their Schlumberger does maintain a lower than desirable ratios on the three important indicators outlined by the Univariate Model, but they are in line with the Oil and Gas Industry averages. Risk averse investors may find these ratios too low versus investors knowledgeable in the industry. Schlumberger needs to focus its efforts in lowering its total debt and increasing total cash to improve the financial ratios and its creditworthiness.
I have chosen financial ratios emphasizing liquidity, profitability and long term debt. I believe these areas provide a financially accurate picture of the state of affairs at Schlumberger. The profitability ratios I chose are gross and net profit margin. A company with consistently high gross profit margins indicates a sound business model whereas a low gross profit margin can be an indication the company is struggling. The net profit indicates how much profit the company makes per dollar of revenue or how much money is going to the bottom line after expenses. SLB has gross profit margin ratios of 20.54%, 20.42% and 23.38% respectively for years 2011, 2010 and 2009; while net profit margin ratios range from 12.64% to 15.55% over the same time period. Liquidity ratios measure of how easily a business can meet its short-term obligations or debts due within one year. Businesses lacking liquidity may face financial hardship which is why I chose to evaluate the cash and current ratios. Schlumberger has maintained a current ratio of 1.88, 1.67, and 1.95 from 2009 to 2011. Companies with a current ratio of less than one may not be able to pay debt and could indicate financial insolvency. The cash ratio for years 2009-2011 indicate SLB may potentially have issues paying short term debt as the ratio results are 0.64, 0.46, and 0.46 respectfully. The ability to pay long term debt is important in identifying credit worthiness of a company. I selected operating cash flow/debt ratio and the debt to equity ratio to analyze Schlumberger. The 26% operating cash flow to debt for 2010 and 2011 could raise a flag to some investors, but this percentage does seem to fall within oil and gas industry averages. The debt to equity ratio is also out of preferred range with a three year average of 72% indicating high amount of debt with barely enough equity to cover payment at once. The Beaver Univariate Model indicates particular attention should be paid to three ratios when analyzing companies for financial failure cash flow/total debt, Net income/total assets and total debt/total assets (Gibson, 2011). The cash flow/total debt ratio of 0.26 has remained stable over the last two years, although there was a decrease from 2009 to 2010. Receivables increased year over year, it is to be expected a year after the acquisition of Smith International family of companies. Return on assets is 11.01% which is a decrease from...
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