Trend Ratio Analysis for EXXON

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Introduction

For effective sustainability of every business organization, running on profitability is not an option for the concerned business. This is observed by calculating its trend or ratio analysis. Trend analysis, therefore, is a key component of determining business sustainability and profitability amongst others. Organizations may get profits, but still end up in inadequate profitability; this is why the calculation of ratio analysis is essential and should be done regularly. This is usually done at the end of every trading period. Nevertheless, very large businesses with extensive activities do theirs in quarterly as well as annually (EBIT Financial Analyses Center 1). Multinational companies run different branches and projects throughout the globe. These branches are managed with a view to expansion and those that are unprofitable are usually closed down. To determine these elements, trend ratio analysis is done. This paper will try to define trend analysis, its elements, their calculations in relation to EXXON Company, and their implications on the same company.

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Trend analysis is defined as the process of comparing consecutive ratios of a firm. This is done by establish a trend of performance of the firm and from that it can be established whether the organization is moving towards profitability and sustainability. This is vital in understanding the business and helps when planning for the business in the future.

Exxon

Exxon is a multinational gas company that operates in various parts of the world. It is a brand name and it deals in various products that related to fuel. In 1973, it replaced the brands of Esso (Exxon Mobil Corporation 1), Humble as well as Enco in the U.S and has since then emerged to be a multinational company. Formerly known as Standard Oil of New Jersey, the company relocated to Texas in 1989, citing economic reasons as they looked to cut down on their expenses in New York (Pearson and Bivins 1-2). This paper looks at its financial ratios for the purpose of establishing its trend analysis.

Liquidity Ratios

Liquidity is defined as the financial ratios used to find out if a company is in a position to pay its short-term debts/liabilities. The ratios commonly used are the quick, cash flow and current ratios (EBIT Financial Analyses Center 1). The assets considered for use in these calculations are different depending on the financial analyst involved. They help in uncovering the firm’s short term financial position as well as its weaknesses, which can be mitigated.

Calculation of Current ratio involves division of the current assets (CA) by the current liabilities (CL). CA consists of the entire liabilities contingent while CL consists of the net debt for the year (Brigham and Houston 142). On the other hand, if we divide the accounts receivable, marketable securities and, cash at hand with the short-term liabilities we get the Quick ratio. The CA, CL and, the subsequent quick and current ratios for EXXON are shown in the table below (Capital IQ 1).

Year 2008 2009
Current Assets 72,266 55, 235
Current liabilities 49,100 52, 061
Quick Assets (Total) 56, 709 38, 507
Quick ratio 1.1550 0.7396
Current Ratio 1.4718 1.0610

Source: Based on data from Exxon Mobil Corp. Annual Reports.

As can be seen from the table, 2009 saw a general fall in current ratio while the opposite happened in quick ratio, as there was an increase. This was mainly due to reduced quick assets in the year 2009.

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Asset Management Ratios

These ratios are utilized in analyzing the possibility of converting the company’s resources into sales or cash (Reuters 1). The firm is able to manage its assets to realize greater sales. Its ratios help in predicting success in the organization’s inventory management and policy in credit. The most common ratios calculated here are Day sales outstanding (DSO), inventory turnover (IT) and net assets turnover (TAT). To calculate for DSO we take the number of days of the specific year and divide it with the turnover receivable. The IT is the result of dividing the cost of sales by stock. In addition, TAT is got by dividing sales by Total assets (Brigham and Houston 142). The table below shows Exxon’s Assets management ratios (Lane 1).

Year 2009 2008
Cost of goods sold 185, 833, 000 288, 810, 000
Inventory 11, 553, 000 11, 646, 000
Receivable turnover 27,645,000 24, 702, 000
Assets 233, 323, 000 228, 052, 000
Sales 310, 586, 000 477, 359, 000
Inventory Turnover 16.0852592 24.7990726
Day sales outstanding 0.000013203 0.000014776
Total assets turnover 1.33114181 2.09320243

Source: Based on data from Exxon Mobil Corp. Annual Reports.

Inventory turnover reduced from 24.8 in 2008 to 16.1 in 2009. This conversely led to the fall in Total assets turnover as well as the day sales outstanding.

Debt Management Ratios

These are ratios utilized in evaluating an organization’s solvency or financial advantage in the long-term. This helps the company prevent financial crisis in the future. The most commonly used ratios in this category are EBITDA coverage, total Debt (TD), and total Assets ratios (TAS).EBIDTA is got by dividing the sum of lease paid and earnings before interest by the sum of interest, lease paid and principal paid. TD is what the firm owes creditors, while TAS is calculated by dividing TD by total Equity of the owner (Capital IQ 1).

Element 2009 2008
Debt 9.45 11.56
Total Assets ratio N/A N/A
EBTDA coverage ratio 43.20B 47.54B

Source: Based on data from Exxon Mobil Corp. Annual Reports.

The EBTDA ratio deteriorated in EXXON in 2009 as compared to 2008, similarly, debt-to-equity ratio also reduced. This was because there is a great drop in the total debt in that year (Lane 1).

Profitability Ratios

These are ratios utilized to measure an organization’s potential to generate earnings as compared to cost it incurs and other expenses. The ratios include Returns on equity (ROE), total assets (RTA), and margin of profit on sales (MPS). Higher ratios indicate that the firm is performing well (Brigham and Houston 142). ROE is calculated by dividing the difference between Net income and Dividends by the difference between equity and preferred stock. On the other hand, RTA is calculated by either multiplying net profit by the asset turnover or dividing net income by the average Assets while; MPS is got by dividing income by net sales. It represents sales after subtracting all the expenses (Daily Finance 1). The higher the RTA, the lower a business is in terms of asset intensity and vice versa. The table below shows calculations for EXXON profitability ratios.

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Element 2009 2008
Profit margin of sales 6.98% 7.26%
Returns on Assets 8.27% 10.24%
Return on Equity 19.16% 22.48%

Source: Based on data from Exxon Mobil Corp. Annual Reports.

The profit margin of sales fell slightly in 2009 as compared to 2008. Similarly, there was a very significant fall in return on equity as well as return on Assets. This shows higher asset intensity(s) for the same period.

Market Value Ratios

These are the ratios used to compare the seen market value, price of stock to the book values is usually found in the financial statements of the organization. They include price-earning (P/ER) and market-to-book ratios (MBR). P/ER is calculated by dividing price per share by the earnings per share while, MBR is got from dividing price per share by book value per share (Reuters 1). The table below shows calculations for Market value ratios.

element 2009 2008
Price per share 4 2.5
Earnings per share 4.39 2.63
Price-earning 0.91 0.91
Book value per share 23.96 20.16

Source: Based on data from Exxon Mobil Corp. Annual Reports.

The price-earning share was stable. There was also a significant increase in price per share, which was four in 2009 and 2.5 in 2008 (Daily Finance 1).This showed great improvement in investor confidence as depicted by the surge in price per share (Capital IQ 1).

Summary

From the trend analysis above, it can be deduced that there was a significant improvement in the performance of EXXON, as suggested by the increase in price per share, profitability ratios and debt management ratios, which decreased significantly, implying that more debtors paid. Liquidity ratio showed a significant reduction between the years, 2008 and 2009. It was noted that Asset management ratios also fell from their previous higher levels in 2008 (Reuters 1). Another notable fact was the reduction in debt management ratios, signifying payments of debts, which was much healthier for the company. In addition, there was a slight reduction in profitability ratios although it did not seem to affect the Market value ratios as it surged forward with and an increase of about 39%.

Conclusion

Multinational companies study trend analysis very closely to establish ways of improving on their profitability and sustainability (Project Management Book of Knowledge 334). This also helps them gauge where to expand and where not. EXXON being one of them has to take clear warnings from the ratios analysis. The liquidity ratios show significant reductions, as well as asset management ratios. Further falls from 2008 were observed in profitability ratios, and debt management ratios. A significant increase witnessed in market value ratios was due to the surge in price per share. Given the significance of the trends to the improvement of the company, it is imperative that these studies be given a great deal of consideration.

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Works Cited

Brigham, Eugene and Houston, Joel. Fundamentals of Financial Management, 12th Edition. Thomson South-western. 2009. pp. 142.

Capital IQ. Key statistics for Exxon Mobil. Yahoo Finance. 2010. Web.

Daily Finance. Exxon Mobil Corp key ratios. 2010. Web.

Reuters, Thomson. Financial statements for Exxon Mobil Corporation. Google finance. 2010. Web.

EBIT Financial Analyses Center. Exxon Mobil Corp. (XOM). Stock analysis on. 2010. Web.

Exxon Mobil Corporation. Products and services. ExxonMobil. 2010. Web.

Pearson, Anne and Ralph Bivins. Exxon moving corporate headquarters to Dallas. Houston Chronicle. 1989. Web.

“Project Management Book of Knowledge”, PMBOK, PMI, 1997, pp. 334.

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