Financial Review objective:
This analysis will financially compare Santos Limited’s financial performance for the year ending 31st December 2013 with the previous year’s results, by way of ratio analysis. It will also benchmark the latest result with that of Woodside Petroleum for the same period using the same ratio analysis of the 2013 financial statements of each company. A copy of these ratio analysis are attached to this report as appendix 1, which contains a through time comparison for the last two years for Santos Limited and the across time comparison with Woodside Petroleum for the most recent year. As Bazely and Hancock (2013 p.358) depict there are certain factors relevant to selecting an appropriate benchmark. Woodside Petroleum has been selected as the benchmarking company as Woodside also operates in oil and gas production, focusing operations within the Australasian area. While Woodside’s operations are larger than that of Santos, the relative size of these companies is comparable and both follow the accounting policies required by the Corporations Act 2001, Australian Accounting Standards and other authoritative pronouncements of the Australian Accounting standards board. Both companies are listed on the Australian Stock Exchange (ASX) which provides comparative data for the ratios analyzed and presented in Appendix 1 with the following tables;
Table 1 - Profitability ratios
Table 2 - Efficiency ratios
Table 3 - Short-term solvency ratios
Table 4 - Long-term solvency ratios and
Table 5 - Market-based ratios
A copy of Santos Limited’s 2013, 2012 and Woodside petroleum ‘s 2013 Annual reports are attached to this report as Appendix 2, Appendix 3 and Appendix 4 respectively, for reference to the findings and suggestions outlined in this review. One limitation of the comparison is that Santos Limited reports their financial data in Australian (AUS) dollars, while Woodside Petroleum report their financial data in American (US) dollars. This is overcome by using ratios for a majority of comparisons and converting the US dollar amounts into AUS dollars when required.
2.0 Ratio Analysis
To look at the relationship between figures presented in the financial statements, this report uses a ratio analysis technique. To fully understand the ratios developed we will look at them in context of other information provided in various reports and the overall goals of the company. From these ratios the report will then compare these against the benchmark and ultimately identify areas for improvement and, if necessary, change.
As we can see from Table 1 – Profitability ratios, the net profit margin and the gross profit margin fell 1.74% and 4.26% respectively in 2013. While sales increased 11.76% for the year, the gross profit margin decreased as previously stated which, was the main driver for the decrease in net profit margin for the year as the interest expense to sales remained consistent. There was a slight drop in return on assets, however asset turnover remained fairly constant, highlighting that the drop in net profit margin is due to the drop in gross profit margin and not a lower turnover of assets. The reduction in gross profit margin is due to the increase in financing costs like depreciation and depletion (up 1.5% of sales for 2013) and third party product purchases (up 5.6% of sales). The reduction in financing income also played a major part in pushing down profits. In comparison Woodside has a higher return on assets than Santos due to the 16.28% higher profit margin and they turnover assets more efficiently. Also, Santos’ continuing capital growth strategies in projects such as the Papua New Guinea Liquefied Natural Gas (PNG LNG) and the Gladstone Liquid Natural Gas (GLNG) transformational projects which are outlined in the 2013 Annual report, are still in the developing phase, therefore not producing to generate sales until the following years....
References: Charles H. Gibson & Patricia A. Frishkoff. 1983. 2 ́nd Edition. Kent Publishing
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