Industry averages and financial ratio reports determine the financial health of an organization. Solvent, efficiency, and profitability are compared by key financial indicators and ratios that measure several companies within the same industry. The publicly traded company chosen by Team A is ExxonMobil. “The largest publicly traded international oil and gas company in the world. ExxonMobil makes products that drive modern transportation, power cities, lubricate industry, and provide petrochemical building blocks that lead to thousands of consumer goods” (ExxonMobil, 2013-2015).
In this paper, Team A will analyze the industry statics and financial ratios of ExxonMobil. Critically adopt lean principles to create a more efficient system. Discuss what a Just-In-time inventory system would have if adopted. Compare the ratios for ExxonMobil with the appropriate industry ratios shown in the D&B Report.
SIC Code of Classification
The Standard Classification Code (SIC) was created in 1937 as four digit codes the government assigns to all U.S. companies to help identify the primary establishment. “These codes were developed to promote the presentation, collection, and analysis of data.” It also helps “simplify comparability and uniformity of the collection of statistical data, which are done by federal government agencies, private organizations, and state agencies”. Each SIC that is assigned has a meaning. “The SIC system arrays the economy into 11 divisions, that are divided into 83 2-digit major groups, that are further subdivided into 416 3-digit industry groups, and finally disaggregated into 1,005 4-digit industries.” The primary SIC code is determined by the highest revenue department within the company that prior year (Siccode.com, 2015).
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The SIC for ExxonMobil is 2911 Petroleum Refining(U. S. Department of Labor, n. d.).
ExxonMobil Inventory Systems
Exxon Mobile operates on the LIFO inventory system method for their business. LIFO, meaning last in, first out, is an inventory system in which goods that are produced last are used first. LIFO is a very common accounting method that many gas and oil industry owners have used over time. Most companies use the LIFO inventory system for tax purposes when cost are raising, hence gas and oil prices. In the event that Exxon Mobile switched to the just in time inventory, it’s possible that Exxon Mobile could come up short on their inventory. Just in time inventory is used to reduce cost by only purchasing inventory when needed. Since gas and oil is such a huge necessity for consumers, the just time inventory method would not be beneficial to Exxon Mobile (Stock Analysis on Net, 2015).
Key Financial Ratios for ExxonMobil
According to Farlex (2015), “financial ratios are defined as a financial analysis comparison in which certain financial statement items are divided by one another to reveal their logical interrelationships.” Financial ratios can be classified to reveal movements in profitability, solvency, and efficiency ratios. “Solvency ratios measure a company’s ability to pay its debt and other obligations.” Profitability ratios exhibit the manner in which a business has fulfilled its operational point of view. Efficiency ratios are normally utilized to examine how a business internally uses its assets and liabilities (Investopedia, 2015).
The cart below acknowledges some key financial ratio for each of the previous mentioned categories for ExxonMobil. All of these ratios have been computed and derived from annual information for the 2010- 2011 fiscal years.
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Exxon Mobil’s Performance Comparison to Industry Averages
The Dun & Bradstreet Key Business Ratios data set for 2911 Refining Petroleum had a sample of 24 in 2010 and a sample of 31 in 2011 to help compare Exxon’s ratios to its competitors. This data set is divided into three categories, this paper compares only three ratios for each category; Solvency Ratios: Quick Ratio, Current Ratio, and Current Liabilities to Inventory Ratio; Efficiency Ratios: Collection Period Ratio, Assets to Sales Ratio, and Accounts Payable to Sales Ratio; Profitability Ratios: Return on Sales Ratio, Return on Assets, and Return on Net Worth.
Solvency Ratios Analysis
The quick ratio for Exxon in 2010 and 2011 are 0.64 times, which falls between the median and lower range of the industry averages on the D & B chart for both years. This shows that ExxonMobil Corporation to be among the average in its industry, therefore it will be a less risky investment. The current ratio in 2010 and 2011 is 0.94 times, in which 2010 falls in the lower range and 2011 falls between the median and lower range of the industry averages. This explains that in 2010 and 2011 Exxon only had $0.94 in current assets to cover every dollar of current liabilities. The current liabilities to inventory ratio illustrates “how much a company depends on its inventory to help pay its debt”. As the above chart shows, Exxon’s current liabilities to inventory ratio for 2010 is 482.68% and for 2011 is 515.87%, which falls on the lower range of industry averages on the D & B chart. This reveals that Exxon does not have to depend on its inventory to help pay its debts. (Creditmanagementworld.com, 2006-2015).
Efficiency Ratios Analysis
“Collection period ratio is used in analyzing how fast a business can increase its cash supplies.” Exxon’s collection period ratio for 2010 is 28.24 days and 2011 is 26.60 days. When comparing this ratio to the industry averages on the D & B chart, Exxon falls between the median and lower ranges. This informs potential investors that Exxon is able to collect on its receivables within 30 days of its initial receipt. The assets to sales ratio for Exxon in 2010 is 0.82 and 0.71 in 2011. This ratio is very low compared to the industry averages, which in term means that Exxon is” selling more than it can safely fulfill by its assets.” The accounts payable to sales ratio for Exxon is 0.91 in 2010 and 0.79 in 2011. These two ratios fall in the upper range of the D & B chart, this is bad for Exxon because it states that Exxon might be using its suppliers to help fund the operations during this time period (Creditmanagementworld.com, 2006-2015).
Financial Ratios: What They Mean In assessing the significance of various financial data, managers often engage in ratio analysis, the process of determining and evaluating financial ratios. A financial ratio is a relationship that indicates something about a company's activities, such as the ratio between the company's current assets and current liabilities or between its accounts receivable and ...
Profitability Ratio Analysis
The return on sales (Profit Margin) ratio in 2010 is 13.82% and in 2011 is 15.06%, for Exxon. This ratio when compared to its industry averages lies in the upper range on the D & B chart. This determines that Exxon is “better prepared to handle any downtrends brought upon by adverse conditions.” Exxon’s return on assets (ROA) ratio for 2010 is 11.37% and 12.96% in 2011. It falls on the upper range of the D & B chart. This illustrates that Exxon “is ran very well and has a strong return on its assets.” Exxon’s return on net worth for 2010 is 23.67% and for 2011 is 27.26%. This simply means that Exxon has made a profit on its investment for these two years. Through this analysis we find that Exxon stays close to the upper percentage ratios, when compared to the industry averages. This ratio makes ExxonMobil Corporation an ideal investing opportunity (Creditmanagementworld.com, 2006-2015).
During these two years, many companies were still feeling the effects of the economic recession. This can possibly explain why some of Exxon’s ratios are on the lower range of its industry averages. As potential investor, this team feels that the financial health of ExxonMobil Corporation in 2010 and 2011 is within the range of the industry averages. Despite what these ratio determine, Exxon is a viable business entity with great potential for investing.
Business Dictionary. (2015).
Financial Ratios. Retrieved from http://www.businessdictionary.com/definition/financial-ratios.html Creditmanagementworld.com. (2006-2015).
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Business Financial Analysis Using Ratios. Retrieved from http://www.creditmanagementworld.com/analysis/analysis04.html Dun & Bradstreet. (n.d.).
Key Business Ratios. Retrieved from http://www.mergentkbr.com.ezproxy.apollolibrary.com/index.php/reports/industry ExxonMobil. (2013-2015).
About Us. Retrieved from http://corporate.exxonmobil.com/en/company/about- us/history/overview Farlex. (2013-2015).
Solvency Ratios. Retrieved from http://financial-dictionary.thefreedictionary.com/Solvency+Ratio Google Finance. (2015).
ExxonMobil Corporation: Annual Financial Statements. Retrieved from https://www.google.com/finance?q=NYSE:XOM&fstype=ii Investopedia. (2015).
Efficiency Ratios. Retrieved from http://www.investopedia.com/terms/e/efficiencyratio.asp Stock Analysis on Net. (2015).
Retrieved from http://www.stock-analysis-on.net/NYSE/Company/Exxon-Mobil-Corp/Analysis/Inventory U. S. Department of Labor. (n. d.).
2911 Petroleum Refining. Retrieved from https://www.osha.gov/pls/imis/sic_manual.display?id=627&tab=description Worldwide Business Dictionary. (2015).
What is a SIC Code?. Retrieved from http://siccode.com/en/pages/what-is-a-sic-code