10 pages double space financial report

Financial Analysis

Student’s Name

Institutional Affiliation

Introduction

This form of analysis is widely done using ratio analysis with an aim of looking at whether the organization in question is healthy. The trend lines can be used in the analysis to extrapolate the financial statement into the future. The internal analysis is conducted for the sake of the business, and it is not going to be part of this analysis. The analysis that is conducted in this report gathers information for three different organizations in the Oil and Gas Industry. The companies that will be analyzed include Marathon Petroleum (MPC), Valero Energy Corporation (VCO) and Philips 66 (PSX). The analysis will be conducted using the financial statements of the company whereby the ratios of the company will be created, trend lines will be developed and the comparisons between the firms developed. At the end of the report there will be a report on whether or not to invest in the companies.

Overview of the Companies

a. Marathon Petroleum (MPC)

Marathon Petroleum (MPC) is an American company located in Findlay, Ohio. The company is made up of several other subsidiaries such as Marathon Company LP, MPLX LP and Speedway LLC. The company is considered as one of the largest petroleum products refiners in the United States (Marathon Petroleum (n.d). The company also takes part in marketing and transportation of Petroleum products. It is the largest refiner in the Midwest and the third largest in United States. The operations of the company are set up with a strategy of serving major markets and they are made up of seven plants, extensive wholesale and retail as well as a transportation and terminal system.

b. Valero Energy Corporation (VCO)

The company was named after the mission San Antonio de Valero and is on a mission of being one of the largest independent oil refiner in the United States. The company has a reputation of churning out up to 3 million barrels each day (Reuters, 2017). The company has continued to refine the low-cost residual oil as well as heavy crude oil into cleaner higher margin products such as low sulfur diesel. The company has an extension of refineries in the United States, Aruba and the United Kingdom. The company also has 11 ethanol plants that can combine a capacity of 1.3 billion gallons each year. It was once a diversified company but decided to leave the retail segment and concentrate on ethanol and oil refining operations.

c. Philips 66 (PSX)

Philips 66 (PSX) is an American company located in Texas and the company primarily deals in refining, midstream operations, chemicals, and marketing of specialty and petroleum products. The company is in the business of manufacturing asphalt, gasoline, distillates, jet fuel, petrochemicals and other refined products (Market Realist, 2017). The company started its operations as independent publicly traded company in 2012 away from ConocoPhilips and it has continued to show stability in its operations.

Trend Analysis

It is an analysis model that calculate the percentage change of accounts from one period to another (Godfrey et al., 2010). It is used to analyze the finance of a company for a single period or more. In the case of the three companies, the trend analysis will be conducted for accounts that are related to profitability, debts and equity (Deegan, 2013). The bias in analysis is due to the fact that this financial analysis is concerned with the debt and equity segments of the company.

From the data in the Appendix, of the three companies the one that has shown positive profit between 2015 and 2016 is Valero Energy. The company has a percentage change of 0.01944 while Philips 66 and Marathon Petroleum had negative change of -0.6321 and -0.5884 respectively.

The interest expense is a cost that is incurred by the company while financing long term debts. From the trend data it has been shown that only Marathon Petroleum has not paid interest expense for the past two years. Both Valero Energy and Philip 66 have a positive increase of 0.08 and 0.09 respectively.

A company is considered to be performing well when the assets are on the increase. When the management is provided with more assets from which to derive sales, it is expected that profitability will be assured. From the information provided, Valero has had an increase of 0.09 in terms of assets. It is higher than 0.06 for Philips and 0.03 in Marathon Petroleum.

Every company that seeks to grow the shareholder’s equity strives to cut on the level of liability on its assets. Valero Energy has shown that its liabilities are reducing at -0.0026 while at Marathon Petroleum the liabilities are reducing at -0.0007 which is lower. The case is worse at Philips 66 which seems to have increased its liabilities by up to 0.15.

The shareholder’s equity is the best metric that is used in investment analysis to determine the financial health of the company. It is calculated though subtracting the liabilities from the assets of the company. The data in trend analysis has shown that Philips has the lowest shareholder’s equity where the amount has reduced by -0.03. While the equity has been reducing at Philips, Valero Energy and Marathon Petroleum have increased their numbers by 0.2 and 0.02 respectively.

Ratio Analysis

Financial ratios refer to mathematical comparison that is conducted on the financial statements of the company. The relationship that exist between the accounts in the financial statements help the potential investors and creditors understand the performance of the organization. The ratio analysis is a common and the most widespread tool that is used to determine the financial health of an organization. The use of ratios is advantageous because they are easy to calculate and to understand.

In the case of these report, financial ratios are important in comparing the performance of the three companies in question. The ratios are mathematical comparisons that are done through proportions hence they are critical in conducting financial comparisons. The financial ratio does not take into consideration the size of the company in determining the financial performance. In this report, the ratios will compare the strength and weaknesses of the company and then determine the best option for an investor. Even though there are several categories of financial ratios, in this report the main focus will be in solvency and leverage ratios.

A. Debt Related Ratios

It is also known as financial leverage ratio and it measures the value of equity in a company through analysis of the debt picture. The ratios compare the debt to the assets or the equity of the company in its bid to measure the real equity held in the company. It measures the overall debt load that is on the company when compared to the assets and the equity. It indicates the amount of the company’s asset that is part of the owner’s equity and not the creditors. For the purpose of investment, a less leveraged company is the best option that should be utilized.

The first ratio that calculated as shown under the appendix is debt ratio which is calculated by dividing the total liabilities with the total assets. The information indicates that all the companies have a ratio that is satisfactory. Philips 66 has a ratio of 0.56 and Valero Energy has a ratio of 0.49. The lowest ratio is shown by Marathon Petroleum at 0.1.

The second debt ratio that has been calculated in the appendix is debt to equity ratio. This ratio looks at the relationship between the debt and equity of the company. It is calculated through divided the total liabilities with the total equity in the company. Even though the growth of equity at Marathon is the lowest, the company has maintained low debt in relation to equity since it is the best performing company at 0.52 compared to Philip 66 which has a ratio of 1.3 times the equity. Valero is doing fine at 0.92 which is not idea but better than Philips 66.

B. Equity Related Ratios

Equity ratio is considered as a solvency ratio which determines the amount of asset that are financed by the investments of the owners through comparison of the equity to the assets of the company. This ratio highlights the two concepts which are sustainable business and solvency. It is an indicator of the amount of asset that is held by the equity holders. During the process of winding up the company, the assets of the company will benefit the shareholders.

The data in the appendix has shown that all the companies are struggling against the debts portion in the assets. The only company that can measure the liabilities and equity is Valero Energy at 0.508 which is higher than Marathon Petroleum at 0.3 and Philips at 0.4.

C. Quick Ratio

Quick Ratio is a measure of the ability of the company to pay off its short term debts using the most liquid of its current assets. It is determined through dividing the current assets (less inventory) with the current liabilities. All the companies have shown positive figures but the most ideal data has been shown by Philips 66 which has a ratio of 1. It means that the company does not hold an extra asset that could have been invested elsewhere in its liquid form. Valero Energy has a ratio of 1.33 and Marathon has a ratio of 1.53.

D. P/E Ratio

This is an indicator of what the market is willing to pay on the stock based on its current status. It is calculated by dividing the market price of the shares by the earnings per share. The data indicates that potential investors will be willing to pay more for Marathon Inc. shares at 14.9 followed by Phillips 66 at 13.0 and lastly Valero Energy at 12.1.

Stock Prices

When a company has the desire to raise money it will be better placed to raise more when the share prices are high. The company will be permitted to issue less of the shares to raise the amount of money that they need (Schroeder et al., 2011). When the share prices go down it will mean that they will have to issue more shares for lower amount of money, hence it will lower the value of the existing equity. The higher the number of shareholders the lower the return on equity.