A Financial Analysis is defined in the business dictionary as “an Assessment of the (1) effectiveness with which funds (investment and debt) are employed in a firm, (2) efficiency and profitability of its operations, and (3) value and safety of debtors’ claims against the firm’s assets. ” This writing assignment will consist of a financial analysis of Exxon Mobil.
The goal of this assignment will be met through research and examination of the financial information delivered from either Finance. yahoo. com or Exxon Mobil. com. In the course of this assignment there will be many formulas implemented to ensure that the effectiveness with which funds are employed in Exxon Mobil, the efficiency and profitability of its operations, and the value and safety of debtors’ claims against Exxon Mobil.
Corporate Background
It was not until 1998, when Exxon Mobil became the power house they are today.
Exxon Mobil Corporation is located in Irving, Texas. The CEO, Rex W. Tillerson and other management work day by day with this mission statement in mind, Exxon Mobil Corporation is committed to being the world’s premier petroleum and petrochemical company. To that end, we must continuously achieve superior financial and operating results while simultaneously adhering to high ethical standards. Throughout the past Exxon Mobil has slightly changed their mission statement, but it has always been their mission to be a premier company.
The reign of Exxon Mobil began with Standard Oil, who eventually got broken up into 34 different companies caused by the US Supreme Court. Two of the spin-off companies were Jersey Standard and Socony, the chief predecessor companies of Exxon and Mobil respectively. In 1931 Socony purchased assets of Vacuum Oil and changed its name to Socony-Vacuum which eventually became Mobil Oil Co. In 1972 Jersey Standard changed its name to Exxon Corporation and established Exxon as a trademark throughout the United States. In 1998, Exxon and Mobil merged to form what we know now as Exxon Mobil Corporation.
Lou Noto and Lee Raymond, chairmen and CEO’s of Exxon and Mobil respectively at the time commented that, “This merger will enhance our ability to be an effective global competitor in a volatile world economy and in an industry that is more and more competitive. ” They are now the largest publicly traded international oil and gas company.
Industry
Exxon Mobil competes in the Major Integrated Oil and Gas industry. The Major Integrated Oil and Gas industry has companies that are engaged in the exploration, production, refinement and distribution of oil and gas.
These companies usually have global operations and are involved in both exploration/ production and refining/marketing. The Major Integrated Oil and Gas industry is highly competitive and is an industry with high costs. It is very difficult to enter this industry.
Products
Exxon Mobil is the industry leader in the inventory of global oil and gas resources. They are the world’s biggest refiner and marketer of petroleum products, and their chemical company ranks high among the world’s largest.
They do not end with the products they have, they are constantly using science and innovation to find better, safer and cleaner ways to deliver the energy that the world needs. Exxon, Esso, and Mobil are three of Exxon Mobil’s brands that provide fuels, services and lubricants to fulfill personal and business needs. Their products drive modern transportation, power cities, lubricate industry and provide petrochemical building blocks that lead to thousands of consumer goods.
Target market
Exxon Mobil being the world’s largest publicly traded international oil and gas company has a very large target market because they supply a high percentage of the people who use energy on a daily bases. Exxon Mobil’s customer mission statement is “Success depends on our ability to consistently satisfy ever-changing customer preferences. We commit to be innovative and responsive, while offering high quality products and services at competitive prices. ”
Competitive environment
The Major Integrated Oil and Gas industry is a very competitive environment.
There is no room for relaxation, for a company to be at the top, they must always have to strive to make their product or product better. Below is a list of the top ten competitors of Exxon Mobil. As you can see from the chart below, Exxon Mobil is the leader in this industry and is the largest publicly traded international oil and Gas Company. Exxon Mobil’s Net income compared to its number of employee’s is where one can see how much better Exxon Mobil utilizes their employees. Also Exxon Mobil’s Market cap is significantly higher than its competitors, the closest company is PetroChina and they are 152,724 less than Exxon Mobil. Many of these companies are familiar such as BP, Shell, and Chevron. These are familiar because they are major gas stations that everyone all around the world uses.
Income Statement Measures and Discussion
Exxon Mobil Income Statement
The income statement is a financial statement that shows the revenue, expenses and profit for the company during a given period of time. This period of time is generally quarterly or annually. The income statement allows investors to look at the “bottom line” of the give period of time. This helps investors and creditors determine the past of a business, at the same time it will give them an idea of possible future performance and revenue. All numbers in thousands|
Net Cash Flow
A business’s net cash flow generally differs from its accounting profit because some of the revenues and expenses listed on the income statement were not received or paid in cash during the year. Net income and net cash flow differ because of noncash revenues and noncash charges. The primary examples of noncash charges are depreciation and amortization, which is the reason why the Net Cash Flow is measured by adding the net income and depreciation/ amortization.
In Chart 1, one can see that Exxon Mobil’s net income increased substantially from 2009 to 2010 and the depreciation also increased. The increase in both income and depreciation caused the net cash flow to increase by $14,023,000(thousands) between 2009 and 2010. Investors are interested in this increase because it is cash, not paper profit, that is paid out as dividend or plowed back into the business to produce growth.
Net Operating Profit after Tax (NOPAT)
Net operating profit after tax also known as NOPAT, is the after-tax profit a company would have if it had no debt and no investments in non-operating assets.
NOPAT is a better way to measure operating performance than net income because it excludes the effects of financial decisions. This allows you to evaluate the performance of a company’s operations or the effectiveness of its operating managers. In 2010 Exxon Mobil had an after-tax operating profit of $30,084,135. 40 about $10,000,000 better than 2009.
This shows there is an increase in actual cash yield generated from recurring business activities and shows that managers are being more effective. h. Operating Cash Flow (OCF) Operating cash flow can be thought of as the cash generated from the operations of a company. OCF is generally defined as revenues less all operating expenses, but calculated through a series of adjustments to net income. It can be argued as a better measure of a business’s profits than earnings because a company can show positive net earnings and still not be able to pay its debts. Exxon Mobil has increase its operating cash flow which shows that they are increasing their profits from operations. This increase is primarily place on their increase in NOPAT, which increased a bit under $10 billion dollars in a single year.
Balance Sheet Measures and Discussion
Exxon Mobil Balance Sheet
The balance sheet shows assets on the top and liabilities and equity, or claims against assets, on the bottom. The balance sheet is a snap shot of the company’s financial position at a given time.
The basic theory of the balance sheet is that the total assets equal total liabilities plus equity. A lot of investors tend to focus on the income statement, but the balance sheet is just as important a source of information. You can use the balance sheet to determine the firm’s liquidity, to see how leveraged the company is, or just to see all the specific assets and liabilities of the company. The balance sheet is shown on the next page.
Net Operating Working Capital (NOWC)
Net operating working capital is the difference between operating current assets and operating current liabilities.
In other words it is the working capital acquired with investor-supplied funds. The operating current assets (OCA) are calculated by adding the Cash, accounts receivable, and inventory. The operating current liabilities are calculated by adding the accounts payable and the accruals. In 2009 the NOWC was positive and then in 2010 is dropped drastically. This shows that the liabilities outweigh the assets, which is not a good sign.
Total Operating Capital
Total operating capital is the sum of net operating working capital and operating long-term assets. This shows the total amount of capital needed to run Exxon Mobil.
Although the NOWC in 2010 was negative the fixed assets increase by $47,094,000 causing a large increase in the total operating capital.
Net Investment in OPC and Gross Investment in OPC
These two figures are the foundation of finding the free cash flows. Net investment in operating capital is calculated by subtracting the current year and the past year’s total operating capital. The word “net” allows you to know that depreciation is already deducted. This brings us to the Gross investment in operating capital; this is calculated by using the net investment in operating capital and adding back the depreciation.
Free Cash Flow (FCF)
Free cash flow is the amount of cash flow remaining after a company makes the asset investments necessary to support operations. It can also be explained as the amount of cash flow available for distribution to investors.
The way for management to make Exxon Mobil more valuable is to increase free cash flow. The managers have used their free cash flow to try and add value to Exxon Mobil. If I was asked to give the managers a grade for the free cash flow in 2010, it would be a B+. This grade would be given because although having a negative free cash flow may not be all that bad. Because Exxon Mobil has a high NOPAT this shows that management is possibly making large investments in operating assets to support growth.
The financial manager is an important position within the structure of any firm. All companies must have a person who has the role to create value from the firm’s capital budgeting, financing, and net working-capital activities. Financial managers are employees who supervise the preparation of financial reports, execute cash management strategies, and direct a corporation’s investment activities.
Increasingly, this job has also included detailing and implementing a corporation’s long-range goals as well as those in the short term. The performance determined above is consistent with that role because the financial manager is the backbone of every financial decision made, whether the decision is right or wrong, all responsibility lies on that person. If the manager decides to invest a substantial amount into the growth of the company we will see directly affect the free cash flows. It is possible that industry, products, target market, and competitive environment can account for the negative free cash flows.
The Major Integrated Oil and Gas industry is a tough industry to be in and there always needs to be improvements to all products which affect the free cash flows. Also with more and more wars happening, price rise hurts the industry and also causes Exxon Mobil to seek other ways of retrieving the gas which also causes an increase in spending. There are many circumstances that can be accounted for a negative free cash flow.
Financial Ratios
Quick ratio
The quick ratio which can also be referred to as the acid test ratio is calculated by deducting inventories from current assets and then dividing the result by current liabilities.
This ratio is part of the few liquidity rations which show the relationship of a firm’s current assets to its current liabilities, and thus its ability to meet maturing debts. Exxon Mobil has a quick ratio of 73. 4%. This means that Exxon Mobil has a high ability to immediately extinguish or retire its current liabilities. This shows that when worst come to worse Exxon Mobil can quickly get funds.
Debt to total asset ratio
This ratio shows the amount of financing creditors have funded. In this case, Exxon Mobil has 51. 5%, showing that its creditors have supplied more than half the total financing. This number can be scary for creditors because Exxon Mobil has over half its debt compared to its assets. The industry shows and average of 77. 8% which is 26. 3% greater than Exxon Mobil’s. This shows that Exxon Mobil is in a much better standing than other companies in the Major Integrated Oil and Gas industry. . TIE ratio TIE is a ratio used to measure a company’s ability to meet its debt commitment. It is calculated by taking a company’s earnings before interest and taxes (EBIT) and dividing it by the total interest expense. It indicates how many times a company can cover its interest charges on a pretax basis. Failing to meet these obligations could force a company into bankruptcy. Exxon Mobil can cover its interest charges 205. 5 times, which is quite an accomplishment.
P/E ratio
The P/E ratio is one of the few market value ratios which relate the firm’s stock price to its earnings, cash flow, book value per share, thus giving management an indication of what investors think of the company’s past performance and future prospects. In the year ending 2010 Exxon Mobil has a 13. 40 price per earnings ratio. The industry average is at 13. 47 which indicate that Exxon Mobil is right under the average.
Market/Book Ratio
The ratio of a stock’s market price to its book value gives an indication of how investors regard the company. The Market/Book ratio is calculated by dividing the Market price per share by the book value price per share. Exxon Mobil’s Market/ Book ratio is 2. 82. This means that investors are willing to pay more for stocks than the actual accounting book value. Exxon Mobil is . 6 higher than the industry average which is 2.
Stock Analysis
XOM- Exxon Mobil
This graph depicts the stock price change of Exxon Mobil Corporation over a 3 year period. The stock price for Exxon Mobil from the beginning of the graph steadily goes down until July 2010 where it hits the lowest price of $57. 00 dollars. From July 2010 until today the stock price has been steadily rising and today, April 26, 2011, closed at $87. 42 dollars. Graph 1 Many events can explain the performance of Exxon Mobil’s stock price, including both firm specific and economic wide factors. Because Exxon Mobil is an oil company there are numerous factors that can cause the incline or decline of the XOM stock price.
The recession the United States went through is a definite cause of the stock price to decrease, although oil is somewhat of a necessity so the decrease in the economy would not affect their stock price too much. Companies like Exxon Mobil all-risk the fact of oil spills, while shipping or retrieving the oil, although Exxon Mobil hasn’t had one since March 1989, Exxon Valdez, these spills have negative effects on the company including their stock price. During July 2010, when Exxon Mobil’s stock price dropped to its lowest in the past three years, was right around the time BP’s Deepwater Horizon rig disaster.
This disaster which was not caused by Exxon Mobil affected their stock price by much. Also in July Exxon Mobil (XOM), Chevron Corporation (CVX), CONOCOPHILLIPS (COP) and Royal Dutch Shell (RDS’A) agreed to pool $1 billion to establish a new company, which would be tasked to respond to offshore oil spills at up to 10,000 feet underwater. Apache Deepwater LLC, a subsidiary of Apache (APA), subsequently joined on March 16, 2011. This showed the public that they are organized and they can react now on a quick and timely manner; which allowed the stock to begin its increase until today where it has risen over $30. 0 dollars since this incident. One of the main factors that affect the stock price of Exxon Mobil is the constant change in oil prices. There are so many events that can cause the change including politics, war, terrorism, etc. OPEC is an organization of petroleum-producing nations that controls global oil prices by holding about 40% of the world’s crude oil supply, they dictate what the cost of the oil and gas is going to be. Libya, an oil-rich nation in North Africa, leadership of Col. Muammar el-Qaddafi, but in February 2011, the unrest swept through much of the Arab world erupted in several Libyan cities.
This unrest in the people of Libya has caused uncertainty in the stock as shown in the graph above and because Libya is such an oil-rich nation this unrest has caused a steady increase in gas prices. o. Exxon Mobil versus S;P 500 The graph below shows the past three years of Exxon Mobil’s stock price compared to S;P 500 over the same period. The blue line shows Exxon Mobil and the green line shows S;P 500. By comparing the XOM stock to an equity benchmark like S;P 500, one can see how the company is doing compared to the benchmark.
Exxon Mobil has outperformed the S;P 500 for the past three years. Although the S;P 500 is less, you can see the trends are the same, when one is increasing the other is too. This relationship is most of the time a positive correlation, yet you can see in graph two that 5 years ago S;P 500 was raising while Exxon Mobil was staying steady.
Return On Assets (5-Year Avg. )
Exxon Mobil performs better than its industry and the S;P 500. For example Exxon Mobil’s five year average for its return on equity is $29. 8 which when compared to the S;P 500’s return on equity is $10. 40 dollars more. p. Managerial Performance Managerial performance has a positive correlation with how well the corporate stock is doing. Exxon Mobil’s managers do a great job managing the company and this is shown through their revenue and their stock price.
A company with bad management could never do what Exxon Mobil does on a day to day basis. Management decided to explore new opportunities and they have begun to place more and more investments in natural gas. In 2009 the company completed a $30 billion project to develop the world’s largest natural gas field, deemed the North Field. These efforts show investors that Exxon Mobil is a strong company and will be a driving force for many years to come.
Management efficiency of Exxon Mobil compared to the Major Integrated Oil and Gas industry and the S&P 500. It is surprising that the income per employee is just under three and a half times the S&P 500 income per employee. Exxon Mobil exceeds both its industry and the S&P 500 in their managerial efficiency.
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