Financial analysis of an energy company (Case Study Sample)

Title: Student’s name: Institution: Course: City: Date: Part one: Analysis 1 Current ratio for SME Petroleum Current ratio: = Current AssetsCurrent liabilities => for FY 2011;= 6,9314,899= 1.4244 for FY 2010;= 6,6754,114= 1.6225 Quick ratio for SME Petroleum Quick Ratio: Current Assets-InventoryCurrent liabilities = for FY 2011;= 6,931-9754,899= 1.2158 for FY 2010;= 6,675-5724,114= 1.4835 2 SME Petroleum’s debt to equity ratio Debt to equity ratio: Total Long-term debtTotal equity = for FY 2011;= 27,89718,105= 1.5408 for FY 2010;= 26,00620,684= 1.2573 The debt to equity ratio has increased from 1.2573 in the financial year 2010 to 1.5408 in the year 2011. This implies that the company was highly leveraged in the year 2011 than it was in the previous fiscal year (Simkins & Simkins R. 2013). 3 Working capital Working capital (WC) = current assets – current liabilities WC 2011; 6,931m-4,899m=$2,032,000,000 WC 2011; 6,675m-4,114m=$2,561,000,000 Part two: Reporting Relevance of financial analysis in ascertaining company performance Financial analysis refers to a process of examining the financial health of a firm. It offers a good management tool that is essential in assessing the general performance of the firm. Financial analysis helps in the interpretation of the books of accounts and financial statements in determining the liquidity or solvency of the organization (Abdel-Khalik R. 2011). The most common financial analysis method adopted by most of the businesses is ratio analysis. It involves comparison of two or more financial data in the financial statements to measure the financial health of the firm. Moreover, various ratios are used for the above purpose, and they help in deciding on the risk that the firm is more likely to face. For instance, energy companies are capital intensive and hence the huge amount of money needs to be invested. Financial analysis is vital to these business sectors as it also helps the investors in managing the financial risk that the firm is about to face and even avoiding future financial distress. In this case, we have used liquidity ratio and leverage ratio to assess the financial health of SME Petroleum; Liquidity ratios evaluates the firm’s ability to settle off its current obligations as they fall due. The higher the ratios, the more profitable the firm. Current ratio and quick ratio have been used to assess the financial health of the firm. SME Petroleum has got a current ratio of 1.42 in the year 2011 and 1.62 in the year 2010. Even though this ratio indicates good perfomance and financial health, the ratios are below the recomennded rate of 1:2. There is also an importance of comparing the financial ratios of a company to the average industry ratios. For a good performing company, the ratios should be equal or higher than the industry rates (Abdel-Khalik R. 2011). Project financing and financial analysis Financial analysis plays a great role in project financing as it help m...