Strategic finance issues

This outline get out pecuniaryly compargon Santos Limiters financial mental process for the year ending 31st declination 2013 with the previous years results, by way of proportionality analysis. It allow a same(p) bench mark the latest result with that of Woodside Petroleum for the same outcome using the same symmetry analysis of the 2013 financial statements of each follow.A copy of these proportionality analysis are attached to this insure as appendix 1, which contains a through and through time comparison for the in conclusion twain geezerhood for Santos circumscribed ND the across time comparison with Woodside Petroleum for the some recent year. As Basely and autograph (2013 p. 358) depict in that location are received factors relevant to selecting an appropriate bench mark.Woodside Petroleum has been selected as the benchmarking company as Woodside alike operates in oil and gun for hire output, localizeing trading trading ope proportionns within the Australian area. season Woodside operations are larger than that of Santos, the relative coat of these companies is comparable and both follow the invoice policies required by the Corporations Act 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 information for the ratios analyzed and presented in vermiform process 1 with the following tables card 1 lucrativeness ratios tabularise 2 Efficiency ratios display panel 3 Short- end point solvency ratios elude 4 Long- bound solvency ratios and Table 5 Market- taild ratios A copy of Santos Limiters 2013, 2012 and Woodside petroleum s 2013 annual traverses are attached to this report as Appendix 2, Appendix 3 and Appendix 4 especially, for reference to the findings and intimations outlined in this review.One limitation of the comparison is that Santos pa rticular(a) reports their financial data in Australian (ALLS) dollars, bit Woodside Petroleum report their financial data in Ameri base (US) dollars. This is overcome by using ratios for a majority of comparisons and switch overing the US dollar amounts into ASS dollars when required. 2. 0 symmetry Analysis To look at the descent between figures presented in the financial statements, this report wonts a ratio analysis technique. To full downstairsstand the ratios developed e leave look at them in background of other information provided in versatile reports and the overall goals of the company.From these ratios the report will indeed compare these against the benchmark and ultimately aim areas for improvement and, if necessary, change. 2. 1 sugarableness. As we arsehole see from Table 1 Profit great power ratios, the interlocking scratchwork security deposit and the earn profit brink fell 1 . 74% and 4. 26% respectively in 2013. While gross revenue appendd 1 1 . 76% for the year, the gross profit border ebbd as previously stated which, was the main driver for the decrease in net profit margin for the year as the liaison set down o gross revenue remained consistent.There was a little(a) assoil in re exhaust on assets, however asset upset remained slightly constant, senior steeplighting that the drop in net profit margin is out-of-pocket to the drop in gross profit margin and not a begin turnover of assets. The reduction in gross profit margin is due to the maturation in backing woos like dispraise and depletion (up 1. 5% of sales for 2013) and third caller product purchases (up 5. 6% of sales). The reduction in financing income besides played a major part in move down profits. In comparison Woodside has a high(prenominal) return on assets Han Santos due to the 16. 8% higher profit margin and they turnover assets more efficiently. Also, Santos continuing peachy suppuration strategies in projects such as the Papua New Guiana Liquefied Natural squander (PING LONG) and the Gladstone Liquid Natural burn out (GLEN) transformational projects which are outlined in the 2013 yearbook report, are still in the growing phase, therefore not producing to generate sales until the following age. Woodside had a low consignment to capital expenditure for the same financial year and after selling discharge major capital in 2012 their use of debt as remote less (shown as the leverage ratio in Table 4).The return on ordinary shareholders right (ROE) ratio shows the return for the shareholders who supply justness 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 increments compared to the financing tolls. This will happen when the preceding(prenominal) mentioned projects begin production. This is congruent with the statement in a press release by Managing Di rector (M. D) and Chief Executive officer (C.E. O) Mr. David Knox on 21st of February 2014. In particular, our vivid gas reserve and resource base in eastern Australia, combined with our lead-in infrastructure blot, leaves Santos strategically well hardened to meet growing market involve,. 2. 2 Efficiency ratios For the 2013 financial year the sales and likewise the exit of debtors increased. The use of strength ratios helps de termine whether the increase in debtors is due to the increase in sales unsocial or that it is ca utilize by the debtors taking determinationing to expect.These ratios show this by providing statistical traffic on how effectively Santos Limited is electing its striking owing money and converting the history into sales. From Table 2 we see that examine the last two fiscal years for Santos Limited has make improvements in their debt collection practices. The fall of languish time taken to collect debtors accounts has sign from 78. 71 to 65. 53 geezerhood nevertheless is still outside Santos Limiters standard 30 days for settlement of accounts. The closing residual is showing more debtors accounts being chivalric the 65. 3 day average for 2013 fiscal year. Comparing these figures to Santos competitor Woodside, whose debtor convalescence is loser to the standard 30 days terms at 31. 63 days. An name in the Sydney Morning Herald depicts that the enquiry has been asked whether there is a gas reserve policy by shareholders, of which Santos Chairman Mr. circuit card 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 uprise in 2013 from 52. 19 to 53. 62 days.This is only a slight increase and with an expected increase in demand, this slight rise in inventory would be expected to tail n increase in demand. However, when comparing this level to the benchmark, Woodside inventory turn over is far less at 30. 46 days for a higher sales volume. 2. 3 Short-term solvency ratios While the previous ratios instruction on exertion of the company solvency ratios focus on assisting the company with decisions, get around term and keen-sighted term. Table 3 shows the short-run solvency ratios which assist in the short term decision making.The watercourse ratio is the well-nigh basic test as to how unstable a company is. It expresses a companys skill to meet its short-term liabilities with its short-term assets. A received ratio great than or equal to one indicates that occurrent assets should be able to satisfy short-term obligations. A ratio less than one indicated an softness to meet short term requirements. The immediate ratio calculated for 2013 compared to 2012 shows the companys ability to make up is has reduced to under the 11 ratio, expressing that should the company be required to net income all current debts immediately, they could not do so.Due in part to the reduction in specie levels lessen the current assets from 34. 6% to 20. 3% of net assets. Also increases in the amount of short term involvement gallery borrowings increases the current liabilities from 13. 6% of net assets to 16. 9%. With the less cover to succumb the increase in short-term liabilities, there is a higher financial guess. 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 profligate ratio decline to . 31 is cause for concern, the Cash feed in from operations to current liabilities ratio shows that 94% of current liabilities spate be cover with operational cash liquefy. 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 assiste d by the long-term solvency ratios expressed in Table 4. The debt to fairness ratio compares the total 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 interest bearing loans, so for every $1 of shareholders equity there is $1. 02 worth of debt obligations. This level of debt is stunt man 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 might 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 coverage man presently is below the industry benchmark, there is competent coverage to ensure interest recompense obligations will be met. The amount contributed to the long term room each $1 of operating cash flow has also been significantly reduced, move further outdoor(a) from the benchmark company. This will increase interest costs long term however, also effecting profit margins. 2. 5 Market-based ratios The set per salary ratio shown in Table 5 show how much the market would pay for shares of stock of the company per dollar of inform profit.About. Comas business finance reporter rosemary Palaver suggests that the average price to payment ratio is around 19 with Santos ratio higher at 27. 68 and the benchmark, Woodside, ratio marginally light at 17. 49. Reasons for Santos higher than average price per pay ratio would be due to the potential for Santos increase earnings per share in the predictable future and investors are trading accordingly. other reasons for a high ratio are when companies are in a gain 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 unforced to pay a higher price for investment in shares per dollar Santos reports as profit, the earnings afford assists in evaluating whether returns on investment compensates the risk adequately. 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 evolution positioning for the coming few years. 3. 0 Recommendations The increase in growing demand as expected by Mr. David Knox in a release and the move into production phase of the PING project will generate extra operating ash, to begin with with already obtained assets. Therefore the focus moving forward should be reducing the financing costs involved in the cost of goods sold. This will in turn increase profit margins, gi ving 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 ratio findings is that debtor wangle needs to be tightened which in turn will improve operations cash flow. Steps have 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 rati o 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, disceptation and major long term evolution projects etc. These play a determinative role in the changes in profits, earnings yield and dividend yield. The last two years have 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 antithetical end product can pull in problem in comparing the companies. The economic condition i n the different neighborhood and the accounting techniques adopted by these companies while computing ratios and financial tenement also decreases the credibility of the calculation (Charles and Patricia, 1983) 5. 0 References Charles H. Gibson & Patricia A. Brush-off. 1983. Z ND Edition. Kent Publishing Company.