Strategic finance issues

This outline go forth monetaryly comp ar Santos Limiters financial performance for the year destination 31st December 2013 with the precedent years results, by way of dimension analysis. It leave alone similarly benchmark the latest result with that of Woodside Petroleum for the equivalent degree using the same ratio analysis of the 2013 financial statements of each telephoner.A double of these ratio analysis ar attached to this topic as appendage 1, which contains a through time comparison for the last two age for Santos Limited ND the across time comparison with Woodside Petroleum for the approximately recent year. As Basely and Hancock (2013 p. 358) depict there argon certain factors relevant to selecting an appropriate benchmark.Woodside Petroleum has been selected as the benchmarking company as Woodside also operates in oil and gas yield, focusing operations deep down the Australian ara. plot of ground Woodside operations are larger than that of Santos, the relative size of these companies is compar open and both follow the accounting policies required by the Corporations performance 2001 , Australian Accounting Standards and other authoritative pronouncements of the Australian Accounting standards board.Both companies are listed on the Australian Stock Exchange (ASS) which provides comparative data for the ratios canvas and presented in adjunct 1 with the following tables board 1 favourableness ratios Table 2 Efficiency ratios Table 3 Short- margin solvency ratios Table 4 Long- barrier solvency ratios and Table 5 Market-based ratios A copy of Santos Limiters 2013, 2012 and Woodside fossil oil s 2013 Annual reports are attached to this report as Appendix 2, Appendix 3 and Appendix 4 especially, for reference to the findings and tinges outlined in this review.One limitation of the comparison is that Santos Limited reports their financial data in Australian (ALLS) long horse signs, while Woodside Petroleum report their financial data in American (US) dollars. This is overcome by using ratios for a majority of comparisons and converting the US dollar amounts into ASS dollars when required. 2. 0 Ratio Analysis To look at the affinity between figures presented in the financial statements, this report rehearses a ratio analysis technique. To fully understand the ratios developed e will look at them in context of other information provided in various reports and the general goals of the company.From these ratios the report will then compare these against the benchmark and ultimately diagnose areas for improvement and, if necessary, change. 2. 1 Profit qualification. As we can see from Table 1 Profit king ratios, the net gelt valuation account and the gross lolly allowance account fell 1 . 74% and 4. 26% respectively in 2013. While sales increased 1 1 . 76% for the year, the gross profit brim decreased as previously stated which, was the main device driver for the decrease in net profit margin for the year as the interest expense o sales remained consistent.There was a slight carry in return on assets, however asset turnover remained plumb constant, advancedlighting that the drop in net profit margin is referable to the drop in gross profit margin and not a lower turnover of assets. The simplification in gross profit margin is overdue to the increase in financing termss like depreciation and depletion (up 1. 5% of sales for 2013) and third split upy product purchases (up 5. 6% of sales). The reduction in financing income also played a major part in pushing down profits. In comparison Woodside has a melloweder(prenominal)(prenominal)(prenominal) return on assets Han Santos due to the 16. 8% higher profit margin and they turnover assets more efficiently. Also, Santos continuing bully growth strategies in projects such as the Papua New Guiana Liquefied Natural Gas (PING LONG) and the Gladstone swimming Natural Gas (GLEN) transformational projects which are outl ined in the 2013 Annual report, are still in the developing phase, therefore not producing to try sales until the following years. Woodside had a low commitment to capital expenditure for the same financial year and after selling off major capital in 2012 their use of debt as far less(prenominal) ( depictn as the supplement ratio in Table 4).The return on ordinary shareholders paleness (ROE) ratio shows the return for the shareholders who supply fair play to the business. The ROE is higher for Woodside due to their higher profit margins however, the higher financial leverage ratio in Table 4 will benefit Santos shareholders when the return on assets increases compared to the financing costs. This will happen when the above mentioned projects begin production. This is congruent with the statement in a press release by Managing Director (M. D) and Chief decision maker Officer (C.E. O) Mr. David Knox on 21st of February 2014. In particular, our natural gas arriere pensee and reso urce base in eastern Australia, combined with our leading alkali localization, leaves Santos strategically well placed to meet growing market imply,. 2. 2 Efficiency ratios For the 2013 fiscal year the sales and also the snatch of debtors increased. The use of efficiency ratios helps determine whether the increase in debtors is due to the increase in sales alone or that it is caused by the debtors taking acheer to pay.These ratios show this by providing statistical relations on how effectively Santos Limited is electing its peachy owing money and converting the ancestry into sales. From Table 2 we see that comparison the last two fiscal years for Santos Limited has made improvements in their debt collection practices. The number of years taken to collect debtors accounts has reduce from 78. 71 to 65. 53 years but is still outside Santos Limiters standard 30 days for settlement of accounts. The closing balance is showing more debtors accounts existence past the 65. 3 day fair for 2013 fiscal year. Comparing these figures to Santos contention Woodside, whose debtor recovery is loser to the standard 30 days impairment at 31. 63 days. An article in the Sydney Morning Herald depicts that the suspicion has been asked whether there is a gas reservation policy by shareholders, of which Santos prexy Mr. Board denies. The ratio analysis of days taken to turn inventory into sales shows a possible reason for this question arising as the number of days taken to convert inventory into sales has rise in 2013 from 52. 19 to 53. 62 days.This is only a slight increase and with an expect increase in demand, this slight rise in inventory would be expected to cover n increase in demand. However, when compare this direct to the benchmark, Woodside inventory turnover is far less at 30. 46 days for a higher sales volume. 2. 3 Short-term solvency ratios While the previous ratios focus on performance of the company solvency ratios focus on helpering the company with decisions, short term and foresightful term. Table 3 shows the short-run solvency ratios which assist in the short term decision making.The sure ratio is the more or less basic test as to how liquid a company is. It expresses a companys ability to meet its short-term liabilities with its short-term assets. A actual ratio greater than or equal to one indicates that current assets should be able to satisfy short-term obligations. A ratio less than one indicated an inability to meet short term requirements. The quick ratio calculated for 2013 compared to 2012 shows the companys ability to pay is has reduced to below the 11 ratio, expressing that should the company be required to pay all current debts immediately, they could not do so.Due in part to the reduction in cash levels trim back the current assets from 34. 6% to 20. 3% of net assets. Also increases in the amount of short term interest bearing borrowings increases the current liabilities from 13. 6% of net assets to 16. 9 %. With the less cover to pay the increase in short-term liabilities, there is a higher financial risk. When comparing these ratios to that of Woodside, Cantons short term debt paying ability is carrying greater risks, but comparable with this benchmark. While the quick ratio twilight to . 31 is cause for concern, the Cash extend from operations to current liabilities ratio shows that 94% of current liabilities can be covered with usable cash flow. Compare this to Woodside, which can easily cover rent liabilities with 141% of its current liabilities covered with operational cash flow. 2. 4 Long-term solvency ratios As the short-term financial risk has previously been expressed, the long term decisions can be assisted by the long-term solvency ratios expressed in Table 4. The debt to equity ratio compares the innate liabilities of Santos Limited and compares it to the each dollar of shareholders equity.During 2013 Santos reliance has risen due to the increased borrowings and inte rest bearing loans, so for every $1 of shareholders equity there is $1. 02 worth of debt obligations. This level of debt is double than that of our benchmark, Woodside Petroleum however, the debt to total asset ratio suggests there is enough assets to cover the debt long term. This energy put the company under financial risk and indicate high use of debt compared to shareholders equity and a greater financial risk long term. This increases the cost of interest in operation, effecting negatively on profitability.The interest insurance coverage while currently is below the industry benchmark, there is sufficient coverage to ensure interest payment obligations will be met. The amount contributed to the long term room each $1 of operating cash flow has also been significantly reduced, sorrowful further away from the benchmark company. This will increase interest costs long term however, also effecting profit margins. 2. 5 Market-based ratios The price per bread ratio shown in Table 5 show how much the market would pay for shares of stock of the company per dollar of reported profit.About. Comas business finance reporter Rosemary Palaver suggests that the average price to earnings ratio is around 19 with Santos ratio higher at 27. 68 and the benchmark, Woodside, ratio marginally lower at 17. 49. Reasons for Santos higher than average price per earnings ratio would be due to the potentiality for Santos increase earnings per share in the foreseeable future and investors are trading accordingly. Other reasons for a high ratio are when companies are in a growth phase, which Santos financial statements suggest it currently is not.A high ratio also suggests that the company has financial risk which was expressed in the short-term and long-term solvency ratios. While the market is willing to pay a higher price for investment in shares per dollar Santos reports as profit, the earnings yield assists in evaluating whether returns on investment compensates the risk adeq uately. The yield of 3. 61% for 2013 is down on sasss 4. 53% and short of Woodside 5. 72%, which is at a lower risk. Thus, Santos shares did not perform to the industry benchmark and shareholders are not getting the yield expected for their investments.Dividends are also low, reflecting the companys growth set for the coming few years. 3. 0 Recommendations The increase in growing demand as expected by Mr. David Knox in a release and the sustain into production phase of the PING project will generate trim operating ash, primarily with already obtained assets. Therefore the focus moving out front should be cut the financing costs involved in the cost of goods sold. This will in turn increase profit margins, giving a greater return on assets due to lower interest costs, moving margins closer to that of the benchmark Woodside Petroleum.The rate at which inventory is used to generate sales should be reviewed as it is slightly behind the benchmark. One suggestion to come from these r atio findings is that debtor control needs to be tightened which in turn will improve operations cash flow. Steps lease been taken during the last fiscal year to reduce the number of days to collect outstanding debtor accounts, further improvement will also increase operating cash flow which will reduce the financial risk of the company to pay its current liabilities.The inventory level should be reduced to be more comparable to Woodside and increasing the quick assets level used to repay current liabilities. Further to assist in reducing the risk associated with the companys short-term solvency would be a focus on reducing the current interest-bearing loans and borrowings. 4. Conclusion. Through the usage of ratio analysis this report has analyses Santos Limiters financial performance over the last two years and benchmark it against Australias largest oil and natural gas producer.There are several other factors influencing position and performance like international economies, com petition and major long term growth projects etc. These play a decisive role in the changes in profits, earnings yield and dividend yield. The last two years prevail seen Santos profits and stock performances below industry averages but this is large in part to the investment in growth opportunities, which will begin production in the near future. Some findings and recommendations have been made to improve the financial position of the company so the entity and the shareholders that have invested in it can prosper.Although the companies are in the same field, factors like subsidiary companies or having some various end product can create problem in comparing the companies. The economic condition in the different region and the accounting techniques take by these companies while computing ratios and financial tenement also decreases the credibleness of the calculation (Charles and Patricia, 1983) 5. 0 References Charles H. Gibson & Patricia A. Brush-off. 1983. Z ND Edition. Kent Publishing Company.