Comparing Performance of Eog Resources Inc. And Advantage and Gas Company Using Financial Ratios

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Introduction

Present report compares the performance of two companies using standard financial ratios. The two companies under consideration are 1) EOG Resources Inc. and Advantage Oil and 2) Gas Company Ltd (AAV). The analysis data were obtained from the respective companies’ income statements, cash flow, and balance sheets. Following major financial ratios were used as an indicative source of companies’ performance namely:

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  • liquidity ratios,
  • Efficiency ratios,
  • Leverage ratios,
  • Coverage ratios,
  • Profitability ratios,
  • Z-score and
  • WACC

The analysis is presented is following sections and conclusion is provided using the results from the above indices.

Analysis

Liquidity Ratio

Liquidity ratio shows whether a firm has sufficient cash or asset to pay its debts. It shows cash flow of firm. This ratio is used here to compare the performance of two firms. In this respect, the balance sheet of both companies was used to collect the required data. Liquidity ratio compares current assets with current liability. A positive current ratio of greater than one shows that the company is in good health i.e. the company has enough assets to pay the debts and liabilities. On the other hand, low current ratio signal to liquidity problems in the company.

Current Ratio =  Formula

Figure 1 shows that EOG Resources have a constant decline in the current ratio except for the year 2013, where the company’s current ratio was 0.7228. On the other hand, AAV data shows fluctuation in current ratio with an overall increase. Therefore, it can be concluded that AAV is in a better position. However, it should be noted that for current year i.e. 2016 the current ratios of both these companies fall below 1, indicating both companies might face liquidity problems. In addition, the data also shows that AAV is better positioned than EOG which has a very low current ratio of 0.1019.

Table 1: Yearly comparison of the Current Ratio of the two firms.

Company Name 2016 2015 2014 2013 2012
AAV 0.5987 2.2934 0.3344 0.3474 1.1808
EOG Resources, Inc. (NYS: EOG) 0.1019 0.0856 0.2221 0.7228 0.1178
Comparison of Current Ratios
Figure 1: Comparison of Current Ratios.

Efficiency Ratios

Efficiency ratio shows the company’s ability to manage its assets and liabilities. It also shows whether the company’s performance is good or bad. In this respect following ratios are calculated namely asset turnover ratio, receivables day ratio, and payable day ratio.

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Formula

Receivable day shows the length of time a customer takes to payback its due to the business.

Formula

Payable day shows the length of time a business takes to payback its dues.

Formula

Table 2: Asset Ratio of AAV and EOG Resources, Inc from the year 2012-2016.

2016 2015 2014 2013 2012
AAV Revenue 161933000 132311000 215653000 289742000 268905000
Total assets 1496459000 1517443000 1454767000 1765244000 1913796000
Asset Turover 0.108210783 0.08719339 0.148238859 0.164137082 0.140508706
EOG Total Revenue 7650632 8757428 18035340 14487118 11682636
Total Assets 29459433 26975244 34762687 30574238 27336578
0.259700586 0.32464685 0.518813175 0.473834148 0.427362781
Trend in the Asset Ratio of AAV and EOG Resources
Figure 2: Trend in the Asset Ratio of AAV and EOG Resources

Table 3 shows that the both companies have similar receivable days in the year 2016 i.e. 59 days and 58 days. Table 4 shows that both the firms take far too long to pay back the money to their respective investors. Upon comparing the payback days of both companies the data shows that AAV takes much more time to pay back in comparison to EOG. For example, statistics of 2016 shows that the payback period of AAV and EOG are 543 and 405 days respectively. Therefore, it can be concluded that AAV needs to focus on paying back its debts and liabilities on time to gain the trust of its investors.

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Table 3: Number of days each of these firms take to receive the payment from its customers.

2016 2015 2014 2013 2012
AAV Receivables 26305000 13888000 21974000 32016000 32657000
Revenue 161933000 132311000 215653000 289742000 268905000
Receivable Days 59.29196026 38.31215848 37.19173858 40.33188147 44.32719734
EOG Receivables 1216320 930610 1779311 1658853 1656618
Revenue 7650632 8757428 18035340 14487118 11682636
Receivable Days 58.02877462 38.78680476 36.00977387 41.79446492 51.75763158

Table 4: Amount of days taken by both firms to pay back to its loyal supporters.

2016 2015 2014 2013 2012
AAV Total current liabilities 47965000 23050000 167682000 102233000 222615000
Cost of revenue 32240000 5837000 25488000 100145000 123355000
Payable Days 543.02 1441.36 2401.28 372.61 658.70
EOG Total Current Liabilities 2027291 1819287 3384308 2861716 2924058
Direct Costs 1825116 2192503 2582879 2141548 1714398
Payable Days 405.43 302.86 478.25 487.74 622.53

Leverage Ratios

Leverage ratio helps in assessment of the risks associated with a firm in long-term. It is useful for investors and company managers. In this respect, the debt ratio is the most important type of leverage ratio. Debt ratio shows the portion of company’s asset that is in debt or financed externally and the company is due to pay. Table 5 clearly shows that in the year 2016 only 16% of AAV’s assets were in debt, while the Table 6 shows that more than half of the EOG’s asset is in debt. In addition, Figure 3 shows distribution and trend of debt ratio for both the companies over last 5 years.

Formula

The trend line shows that the debt ratio of AAV has decreased over the last 5 years to 16% in the year 2016 from 38% in the year 2012. On the other hand, the debt ratio of EOG has remained almost constant with the debt ratio keeping up the half mark. This shows that EOG is highly debt company in comparison to AAV.

Table 5: Debt ratio of AAV from the year 2012-2016

AAV
Liabilities Asset Debt Ratio
2016 240221000 1467743000 16%
2015 372446000 1464580000 25%
2014 192759000 1398695000 14%
2013 588377000 1729728000 34%
2012 620479000 1650933000 38%

Table 6: Debt ratio of EOG from the year 2012-2016

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EOG Resources, Inc. (NYS: EOG)
Liabilities Asset Debt Ratio
2016 15477852 29459433 53%
2015 14032209 26975244 52%
2014 17050105 34762687 49%
2013 15155779 30574238 50%
2012 14051814 27336578 51%
Trend of debt ratio for both companies form the year 2012-2016
Figure 3: Trend of debt ratio for both companies form the year 2012-2016

Coverage Ratios

Coverage ratio measures a firm’s cash generating abilities. There are three important ratios under the coverage ratio namely the debt to total ratio, times interest earned, and cash debt coverage ratio. This study looks at company’s power to pay all its liabilities from cash operation. It is the ratio between the cash from operating activities and total current liabilities.

Formula

Figure 4 shows the trend of Coverage ratio for AAV and EOG. The coverage ratio has constantly increased for AAA, while the coverage ratio has decreased for EOG. On the positive side, the results show that both the companies have positive cash flow to pay back their current liabilities. However, AAV has 3.65 times cash flow in comparison to its liabilities, while EOG has 1.16 times the cash flow to its liabilities.

Trend of Cash-Debt-Coverage Ratio for both companies form the year 2012-2016.
Figure 4: Trend of Cash-Debt-Coverage Ratio for both companies form the year 2012-2016.

Profitability Ratio

Profitability ratio looks at business returns. In this respect, this report looks at two important type of profitability ratios namely Gross-Profit Margin and Operating Profit Margin. Figure 5 and Figure 6 shows the trend in profitability ratios of AAV and EOG respectively over the years from 2012-2016. Results show that for the year 2016 AAV and EOG registered gross profit margin of 80% and 76% respectively. However, when business overheads are considered and the operating profit is calculated, the picture looks completely different. Results show that both AAV and EOG have a negative operating profit margin of 10% and 16% respectively. This shows that both companies are having larger overhead, which reduces its net profit.

Profitability ratios of AAV from 2012-2016.
Figure 5: Profitability ratios of AAV from 2012-2016.
Profitability ratios of EOG from 2012-2016
Figure 6: Profitability ratios of EOG from 2012-2016.

Z-Score

Z-score is calculated by considering multiple financial ratios together. A Z-score above 2.99 is considered safe for companies i.e. company will not be bankrupt in next two years. On the other handm, a Z-score between 1.8 and 2.99 is shows that the company will go bankrupt in coming two years. Further, a Z-score of 1.8 and less is considered highly volatile stage for the company. In this respect, this report shows the Z-score of AAV and EOG respectively to judge their probability of going bankrupt.

Formula

Table 7 shows that Z-score of both companies is below 2.99. The Z-Score of EOG Resources, Inc is below 1.8 stating that the company is in a stressed situation and presently facing bankruptcy. On the other hand, AAV is safer with higher value of Z-Score being 2.59. The investors and management of AAV need to take immediate measures to save the company from bankruptcy in coming two years. It should be noted that EOG needs immediate attention to overcome its stressed financial situation.

Table 7: Z-Score of AAV and EOG Resources for the year 2016.

Z-Score
AAV 2.595869727
EOG Resources, Inc. (NYS: EOG) 1.632812802

Weighted Average Cost of Capital

Weighted Average Cost of Capital (WACC) shows companies relationship with investors and bank with respect to its total share of investment. Equation 8 can be used for calculating WACC of the company. Upon application of this equation WACC were calculated for both the companies. Table 8 shows that the WACC of EOG and AAV is 11% and 13% respectively.

Formula

Here:

  • E = Market value of the firm’s equity
  • D = Market value of firm’s debt.
  • V= Total market value of the firm’s financing
  • Re = Cost of Equity
  • Rd = Cost of Debt
  • Tc = Corporate Tax

Table 8: WACC of EOG Resources, INC. and AAV based on assumed values of cost of equity, cost of debt and corporate tax rate.

EOG Resources, Inc. (NYS: EOG) AAV
Market Value of Equity 29459433 1496459000
Total Debt 15477852 288186000
Cost of Equity * 15% 15%
Cost of Debt* 6% 6%
Tax Rate* 30% 30%
WACC 11% 13%

Conclusion

Results show that AAV is a safer company to invest, when compared with EOG. For example, the liquidity ratio of AAV in the year is 0.5 while the liquidity ratio of EOG was only 0.1. This indicates that EOG is more likely to face cash problem. Further, the debt ratio shows that AAV has far less asset under debt in comparison to the EOG. The debt ratio of EOG was 53% in the year 2016, while the debt ratio of AAV was lower. Nevertheless, both companies are facing difficulty in paying back investment and debts, as their payback period was found to be lengthy. Results also show that both the companies are having larger overhead, which reduces its net profit. In the end, the Z-score also shows that EOG is facing a serious stressful situation, while AAV is still stale. However, the Z-score of AAV is indicating that management and investor must focus on improving its performance in coming two years.

Recommendations

Based on the results this report recommends investing in AAV and focus on improving its performance in coming two years. On the other hand, EOG needs serious investment to overcome its bankruptcy situation. Further, this report was successfully able to use the financial ratios help in gauging the health of companies.

Limitations

Present study focused on the performance of two companies based on the data provided. Major finical ratios were calculated using Excel. In future work, this report recommends the use of cleaner data sheet, as most of the data in the balance sheet and income sheet required careful observation and shorting.

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BusinessEssay. (2021, December 31). Comparing Performance of Eog Resources Inc. And Advantage and Gas Company Using Financial Ratios. Retrieved from https://business-essay.com/comparing-performance-of-eog-resources-inc-and-advantage-and-gas-company-using-financial-ratios/

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BusinessEssay. (2021, December 31). Comparing Performance of Eog Resources Inc. And Advantage and Gas Company Using Financial Ratios. https://business-essay.com/comparing-performance-of-eog-resources-inc-and-advantage-and-gas-company-using-financial-ratios/

Work Cited

"Comparing Performance of Eog Resources Inc. And Advantage and Gas Company Using Financial Ratios." BusinessEssay, 31 Dec. 2021, business-essay.com/comparing-performance-of-eog-resources-inc-and-advantage-and-gas-company-using-financial-ratios/.

References

BusinessEssay. (2021) 'Comparing Performance of Eog Resources Inc. And Advantage and Gas Company Using Financial Ratios'. 31 December.

References

BusinessEssay. 2021. "Comparing Performance of Eog Resources Inc. And Advantage and Gas Company Using Financial Ratios." December 31, 2021. https://business-essay.com/comparing-performance-of-eog-resources-inc-and-advantage-and-gas-company-using-financial-ratios/.

1. BusinessEssay. "Comparing Performance of Eog Resources Inc. And Advantage and Gas Company Using Financial Ratios." December 31, 2021. https://business-essay.com/comparing-performance-of-eog-resources-inc-and-advantage-and-gas-company-using-financial-ratios/.


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BusinessEssay. "Comparing Performance of Eog Resources Inc. And Advantage and Gas Company Using Financial Ratios." December 31, 2021. https://business-essay.com/comparing-performance-of-eog-resources-inc-and-advantage-and-gas-company-using-financial-ratios/.