Summary
ARAMCO is a leading company in the energy and chemicals sector. The company is privately-owned and mainly leads in the production of oil globally. ARAMCO is based in Dhahran, Saudi Arabia and has on various occasions come out as the most profitable company in the world (ARAMCO, n.d.). This report presents a horizontal and vertical financial statement analysis and financial ratio analysis of the company for two recent years, 2020 and 2019.
Horizontal and Vertical Financial Statement Analysis
Financial statement analysis is the breakdown of financial statistics to comprehend the information and apply it for the purpose of making decisions. The financial statement analysis can either be vertical or horizontal. Horizontal analysis equates particular items in the financial statements over different accounting years. The vertical analysis compares particular items in the financial statements relative to either the total revenue or the total assets. Either the absolute or the percentage approach can be used, but both methods help to determine whether a company is restrained or extreme in expenditure on various items (Blecke and Gotthilf, 2019). The results of the analysis on ARAMCO are presented in the excel file attached.
Discussion
The figures show varied performance over various items for the two years under consideration; 2020 and 2019. The analysis shows an overall increase in balance sheet items. However, items in the statement of comprehensive income show a general decline. For instance, the non-current items went up by 39 percent from 2019 to 2020 (ARAMCO, n.d.). The current assets also went up by 28 percent. The non-current liabilities and the current liabilities went up by 145 percent and 28 percent, respectively (ARAMCO, n.d.).
Therefore, the company spend many resources on investments that were greatly financed through borrowings. In specific, the borrowings went up by a massive 189 percent while the company’s total revenues fell by close to 32 percent (ARAMCO, n.d.). In addition, the operating income and the net income went down by an almost equal share of 43 percent and 44 percent, respectively (ARAMCO, n.d.).
Ratio Analysis
Ratio analysis involves an examination of financial data in an easy way to understand the financial results whose outcome help in making critical decisions pertaining to the company under review. In general, it is a basic tool for analyzing the performance of employees, the efficacy of business structure, as well as the company’s capital mix and credit worthiness. Statistics used for analysis are drawn from the company’s annual reports, which include the income statement and the balance sheet. The information obtained is then used to calculate financial ratios. Financial ratios are preferred because they are easy to understand and interpret (Blecke and Gotthilf, 2019). Moreover, potential investors find the ratios critical given that the final statements of accounts as prepared are not easy to understand.
Financial ratios are represented in form of a mathematical correlation between one measure of financial information and another. The ratios are classified depending on how they are calculated and their prominence. Therefore, dozens of ratios can be calculated from all financial data that can be obtained in regard to a given company (Blecke and Gotthilf, 2019). However, the ratios considered for analyzing ARAMCO are mainly measures of profitability and capital structure.
Discussion
Table 1 below presents the results for the ratios calculated in regard to ARAMCO. The analysis involves six main ratios; return on assets (ROA), return on equity (ROE), profit margin, debt/equity, and earnings per share (EPS). The ratios were computed for the years 2020 and 2019:
The results in Table 1 above show an overall decline in profitability for the year 2020 compared to 2019. The ROA declined from 74 percent in 2019 to 40 percent in 2020, an indication of reduced profit generation per asset. The ROE also fell from 106 percent in 2019 to 76 percent in 2020, showing reduced earnings per equity that were used during the period. The profit margin went down marginally from 30 percent in 2029 to 24 percent in 2020, indicating an overall decline in the amounts of profits generated by the company in 2020 relative to the total sales income. The last measure of profitability, EPS also fell from 0.44 to 0.25, an indication of reduced income per share for the shareholders of the company. The overall fall in profitability and revenue is attributed to the attack on the company’s wells in late 2019 (ARAMCO, n.d.). Moreover, the performance was impacted by COVID-19 which led to reduced economic activities all over the world.
On the other hand, the debt/equity ratio shows a significant increase from 25 percent in 2019 to 67 percent in 2020. The increase shows the increase in debt capital used by the company in the year 2020 compared to equity capital (ARAMCO, n.d.). While equity capital went up slightly from $279 billion in 2019 to $293 billion in 2020, debt increased significantly from $40 billion in 2019 to $116.5 billion in 2020. The company borrowed great sums of money meant to restore its operations and make up for the reduced performance in 2020.
References
ARAMCO (n.d.). Saudi Arabian Oil Company: Consolidated financial statements for the year ended December 31, 2020. Web.
Blecke, C. J, & Gotthilf, D. L, (2019). Financial analysis for decision-making. 4th ed. Englewood Cliffs, N.J, Prentice-Hall.