10 pages double space financial report

Investor Analysis Report

Xiangzhou Song

2017/11/05

Introduction

Financial Analysis is the review of the financial statements of the company to determine the financial health of the company. It can be done for the purpose of the internal management of the company for decision making on an investment or for external use by potential investors. Financial statement analysis that this report is based on is that of an investor who seeks to invest their capital into the stocks of the company. Review of the financial statement to determine the financial health of the company can be done using two common styles i.e. ratio analysis and trend analysis. Ratio analysis is a mathematical comparison of different elements or accounts in a financial statement to determine how the business is performing in terms of profitability, leverage, asset management and liquidity. On the other hand, trend analysis is comparison of performance of the business between different periods. The account element under review is measured as a percentage of the previous year performance. In this report, the financial statement of Philips 66, Valero Energy and Marathon Petroleum will be analyzed. The recommendation section will indicate the company that will be best suited for investment.

Company Profiles

1. Philips 66

Philips 66 is a listed petroleum company located in Texas. It deals in refining of petroleum products, midstream operations, chemical production and marketing of the products. In the same line of business, the company has diversified into production of asphalt, distillates, petrochemicals, distillates and other products from the refineries. The company was part of ConocoPhillips up to the year 2012 when it separated and has operated independently ever since.

2. Marathon Petroleum

Marathon Petroleum (MPC) is located in Findlay, Ohio. It is an American company that is made of several subsidiaries and together they are one of the largest producers of petroleum products in the country. The subsidiaries include MPLX LP, Speedway LLC and Marathon Company LP. The company does not only refine, but also markets and transports petroleum products. It is the third largest refiner in the country. The company targets its major markets and have set up several plants which extensive retail and transportation network.

3. Valero Energy

It is considered as one of the largest independent oil refiner in the United States. Valero was a diversified company but it decided to drop the retail segment with an intention of concentrating on oil refining and ethanol operations. The ethanol business is set up in eleven plants that produces 1.3 billion gallons every year. Under the petroleum sector the business is known to produce 3 million barrels every day. The company has its links in the United Kingdom, Aruba and United States.

Ratio Analysis and Risk Factors

Ratio analysis is a technique in financial statement analysis that is used to conduct a mathematical comparison of the various accounts to determine how the business is performing (Accounting Course, 2017). The ratios are calculated using the income statement or the statement of financial position of the company. It is a valuable investment tool if it can be calculated and the meaning understood by the users.

They are important comparative tools that determine the profitability, assets management, liquidity and level of leverage in the company. For the basis of comparison, this report will conduct ratio analysis for the three companies and then analyze the differences and similarities.

The second part of this section looks at the risk factors associated with the stocks of the company. An investor needs to understand the nature of the stocks of the company in terms of the prices and volatility (Voronkova, 2004). Risk refer to the chances that the stocks of the company will deviate from the market expectations of the investor. The risk factors include the beta, stock prices, earnings per share and return on equity.

Profitability Ratio

Profitability ratio is the most important ratio for an investor who is concerned with the long-term returns of dividends (Christensen & Demski, 2002). When the profits are low, it means that the dividends earned will be low. Therefore, investors are concerned with the level of cost management by the organization. Under this section the paper looks at the gross margin ratio as the main profitability ratio. The gross profit ratio is the ratio which indicates how best the company can turn the revenues into profits. This section calls for good management of costs of goods sold by the company.

The data has shown that Marathon Petroleum is the best performer in terms of management of the costs of goods sold. For every dollar of revenues, the management has retained 67 cents as profits. The other two firms are not performing well in this regard where Valero has posted 13 cents and Phillips 66 has posted 20 cents for every dollar of revenues.

Leverage Ratio

The leverage ratio is used to determine the amount of assets of the company that is financed by debts (Kearney & Lucey, 2004). When a company has more debt liabilities it is said to be highly geared. In this section three critical ratios are used. Debt ratio calculates the relationship between the total liabilities and the total assets. The relationship is determined through dividing liabilities by the total assets.

The data shows that the highest debt ratio is held by Phillips 66 at 0.56 meaning that the other 44% is held by equity holders. Marathon Petroleum has the lowest debt ratio at 16% meaning that the remaining amount is 84%.

Debt to equity ratio compares the amount of debt in relations to the equity holders in the organization. The liabilities of the organization should not be higher than the amount of equity. Phillips 66 is highly leveraged at a ratio of 1.3 meaning that the amount of debts is more than equity by 0.3%. The best performing company in this regard is Marathon Petroleum which has a ratio of 0.52 which means that debt is only 52% of the equity. Valero Energy is also performing well but it has 96% of debts.

Equity should be compared with the assets of the company to determine whether the equity investors can gain from the company in any case the company is wound up (Godfrey et al., 2010). The equity holders are the last to receive payment from the assets of the company when the company is being wound up. The higher the level of leverage, the lower the chances that the investors will receive returns.

The equity is highest at Valero Energy at 50.8% meaning that the rest of the asset is financed by debt at 49.2%. The other two companies are struggling since a huge part of the asset is held through debt. Phillips 66 has 43% of the assets held through equity while the rest is through debts. At Marathon Petroleum 30.5% is held in equity and the rest is financed through debt.

Liquidity Ratio

This ratio analyzes the ability of the company to pay off the current liabilities using the current assets (Deegan, 2013). The operations of the company can be affected negatively when the company is not able to pay the short term liabilities when they fall due. It is an indicator of the cash levels in the organization and the ability of the company to change assets into cash.

In this section the analysis has utilized the quick ratio which is a modified form of current ratio. It is determined through dividing current assets (less inventory) by the current liabilities. The data has shown that Philips 66 has the most ideal ratio at 1.00. Valero Energy has a ratio of 1.33 and Marathon Inc. has a ratio of 1.5 meaning that all the firms are performing well in terms of meeting the daily operational costs.

Stock Analysis

The share price of a company is critical when it comes to determination of the value of the company. When issuing shares at a higher price, more capital will be raised at low cost. When the share prices are low, it will mean that more shares must be issued. When more shares are issued it affects the dividends earned and the earning per share and returns on equity. It makes the investment in the company less viable.

The information shows that Philips 66 and Valero Energy have the best options for any investor. Valero Energy has a return on equity of 8.55 which is the highest than Phillips 66 and Marathon Inc. Valero Inc. is the most profitable company of the two companies hence the reason for higher return on equity.

The risk element is very important when determining the best option to invest. Investment risk is the probability of losses or deviation from the expected returns. The uncertainty levels determine the risk of associated with a given stock. Risk is associated with the beta which is the determinant of the level of deviation.

The above data means that Marathon Petroleum has the worst beta performance. It has beta of 1.68 which indicates that the price movement is higher in the company. The beta figure of below 1 indicates that the company’s shares are stable. Valero Energy and Phillips 66 have beta that is below one meaning that is good to invest in either of the two companies. The low risk is associated with low beta, meaning that the risk is low when the beta is minimal.

The beta at Valero Energy at 0.01 meaning that the deviation from the expected return is minimal. It is a surety that the investment will yield the returns as expected. Any investor would want to be associated with the shares of Valero Energy because they are sure of the amount of returns.

Trend Analysis

The data shown under the appendix indicate that Valero Energy is the only company that has shown positive increment in profit between 2015 and 2016. The company has a 0.01944% increase while Marathon Petroleum has an increase of -0.588% and -0.6321% in Philips 66. Interest expense refers to the cost which is incurred by the company while financing the debt portfolio. Marathon Petroleum has not shown the interest expense over the past two years. The two companies (Valero Energy and Phillips 66) have increase of 0.08% and 0.09% respectively.

When the assets of the company are increasing it means that the company is well positioned to meet its operational and investment costs (Malik & Ewing, 2009). The levels of profits can increase when the company has increased amount of assets. The data that has been provided indicate that Valero Energy has increased its assets by 0.09 in assets. The change is higher than Philips and Marathon at 0.06% and 0.03% respectively.

The ratio of liabilities to the assets must be cut to ensure that the equity of the company is growing. When the assets of the company are increased the profitability of the company is assured. Valero Energy has cut the liabilities by -0.0026% and the Marathon Petroleum has reduced the liabilities by -0.0007% which is low reduction. Philips 66 has increased the level of liabilities by 0.15%.

The equity of the company is the best metric that is used to determine the financial health of the institution. The data in the appendix has shown that Phillips 66 has its shareholder equity reduced by -0.03. The other two companies have shown an increase in the amount of equity by 0.2% and 0.02%.

Recommendation and Conclusion

Using the element of profits calculated through the gross profit margin ratio, Marathon Petroleum is the ideal firm for investment. It has higher profitability assured through management of cost of goods sold. But after conducting trend analysis, which uses net profits, it has been shown that Marathon is not the best performer across the year due to the -0.5884 change in profits between 2015 and 2016.

Using the element of debt ratio, it is prudent to invest in Marathon Petroleum which is the least leveraged company. It will be irrational to invest in Phillips whose assets are heavily financed using debts. When an institution is heavily leveraged it means that the returns in terms of dividends are low due to higher interest expenses.

Debt to equity ratio has been determined above. It has indicated that Marathon is the best performing company in terms of leverage. It has low level of debt compared to the two other companies. When one invests in this company there are two important aspects, the interest expenses will be low and the returns on equity will be high. When the returns on equity is high, the investor will be receiving return that is proportionate to the investments.

Equity ratio is determined through comparing the equity and the assets. The data indicates that Valero Energy is the best performing in terms of financing the assets through equity. It means that investors at Valero Energy are well placed when the company will be winding up. Investors are not only concerned with the dividends but also the amount of return at the terminal end of the company.

Based on the data of liquidity it has been shown that Philips 66 is the most ideal firm to invest in. The company has maintained enough current assets that are liquid enough to meet the current liabilities with no remaining amounts. The other firms are able to meet their daily costs but they have extra amount of asset that could have been invested elsewhere.

Conclusion

In general, the best option to invest in is Valero Energy. The company has shown better return due to its higher profits, low risk and high returns on shares. The investor is usually concerned with the risk factor related to acquisition of the shares of a given company. Investment in Valero Energy shares mean that the investor will be assured of returns through the shares. The dividends in the company are assured since the company is profitable and will continue to provide returns to the investors.

References

Accounting Course, (2017). Liquidity Ratios. Retrieved from https://www.myaccountingcourse.com/financial-ratios/liquidity-ratios

Christensen, J. A., & Demski, J. (2002). Accounting theory. Irwin/McGraw-Hill.

Deegan, C. (2013). Financial accounting theory. McGraw-Hill Education Australia.

Godfrey, J., Hodgson, A., Tarca, A., Hamilton, J., & Holmes, S. (2010). Accounting theory.

Kearney, C., & Lucey, B. M. (2004). International equity market integration: Theory, evidence and implications. International Review of Financial Analysis, 13(5), 571-583.

Malik, F., & Ewing, B. T. (2009). Volatility transmission between oil prices and equity sector returns. International Review of Financial Analysis, 18(3), 95-100.

Voronkova, S. (2004). Equity market integration in Central European emerging markets: A cointegration analysis with shifting regimes. International Review of Financial Analysis, 13(5), 633-647.

Yahoo Finance, (2017). Marathon Oil Corporation. Retrieved from https://finance.yahoo.com/quote/MRO/financials?p=MRO

Yahoo Finance, (2017). Phillips 66. Retrieved from https://finance.yahoo.com/quote/PSX/financials?p=PSX

Yahoo Finance, (2017). Valero Energy Corporation. Retrieved from https://finance.yahoo.com/quote/VLO/financials?p=VLO

Appendix