At HEC Paris, mvlti svnt vocati, pavci vero electi!

Sunday, April 01, 2007

Three Big Oil Companies & One Diversified Industrial Giant!

How ironical or coincidental is it that I am currently listening to C. K. Prahalad's Podcast on Democratising Commerce and, at the same time, analysing the commercial success of some of the world's biggest capitalist organisations; three big oil companies plus GE. Did you know that "80% of humanity or 5bn people have been below the radar screen of organised business" and the challenge for the 21st century is to get them involved in capitalism that is fair, socially equitable and profitable? What can you, as an enterpreneur, do to reach this market? Think about it and give me a shout! :-)

Taking advantage of my newly acquired skills in analysing financial statements, I tried analysing three big oil companies plus GE (as a reference to see if my values are the same as those discussed in class) and the results can be seen in the picture below.

If you are an expert in this subject, think of this as an amateur experimenting, and I take no responsibility if anyone decides to quote the values I have calculated. Moreover, financial analyses can be carried out in a variety of ways and I have just picked some ratios for my own simple study. If you do think there is a gross mistake in this or have a question, please leave a comment. For your reference, I got the data for these caluclations from Thomson. So, what can we interpret from these numbers? Firstly, just looking at the current and quick ratios, one might think that the companies are doing just fine except for GE. A ratio of below 1, as we are told, is an uncomfortable position for business but if one calculates GE's values taking into account their long term receivables (LTR), the values change to around 2. The oil companies also have a significantly higher percentage of current assets compared to GE but much lower Days Inventories. A higher Days Inventory value may be associated with a lack of demand but can we really compare GE to the oil companies as they represent different industries? Tell me. But, within the oil industry, the three companies have similar values. It is also interesting to note that GE has a longer days payable than days receivable, opposite to the trend for the oil companies. But, adding LTR, the numbers are 120 days and >2 years so the trend is reversed. The book leverage value for GE is higher than those of the oil companies but in each case, the market values the assets of the companies more than the book values. It is worth remembering that a highly leveraged company may be putting itself at risk of bankruptcy as it may not be able to back its debts and liabilities. The long-term solvency ratios for GE are also much higher than that of the oil companies. Lower values are better but, I am not sure if the differences within the oil companies are majorly significant. All the oil companies also better cover their interest expenses by earnings from operations and give higher return on assets and equity. A higher return on assets, I am told, signifies that a business is well opreated, managed better and is an overall sign of being a good business as this is the ability of a company to use its assets to create profits. But, let's not forget GE's gross margin, which beats those of the oil companies, may be except for XOM, by a mile. The same could be said of the operating and net margins.

To conclude, let me once again emphasise that this is my own personal experiment, for my own NPV gain, and should not be taken at face value. Please do your own research, if you are investigating these companies. Overall, these are all very profitable and successful companies - just look at their market capitalisation - but I have found some interesting differences and similarities. I hope, so have you! :-)

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