TEAM 6 - ACCOUNTING

ACCT5602 Accounting
Team based exercise number
Team name!!!!!TEAM 06!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
You have been given summary data for Woodside and Santos from the Morning Star
data base. Using primarily this data and other information you can access compare
the two companies and answer the six questions listed below. Be sure to clearly
explain your assessment and indicate which company you believe has performed
better or is in a preferred position.
" In terms o# $ro#itabi%it& '(ic( com$an& (as $er#ormed better in recent
&ears) *(&)
a+ ,es$onse
!he following ratios have been considered in arriving at our decision regarding
which company is performing better in recent years
-INANCIA. ,ATIO/
20 202 201
*2. /ANTO/ *2. /ANTO/ *2. /ANTO/
"et #rofit Margin $%& '(.() *+.', '-.(+ *'.*( -..+- *'..(
/eturn on 0quity $/10& % *'.,+ 2.,2 *'.)* (.)* **.*. (.3'
/eturn of 4ssets $/14& % +.23 '.', ..3) -.+. +.3) -.))
4sset !urnover ,.-* ,.*+ ,.-) ,.*3 ,.-2 ,.*.
1!50/
0arnings per share $0#S&
after 4bnormals *.+.(' .(.2, '2-.2. 2(.*, -'+.2 2'.*
b+ Net 2ro#it Margin3
6rom the figures presented above7 it is clear that the "et #rofit Margin $"#M& for W#8
is higher than Santos for the following reasons
!he net profit for W#8 is higher with respect to sales over three years
compared to Santos7 in which means W#8 has better performance.
!he high ratio for W#8 shows that its management of expenses7 including
taxes7 depreciation and interest are controlled better comparing with Santos9
0ven though W#8 has higher profit margins compared to Santos7 the trend
of its profit margin is declining9
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TEAM 6 - ACCOUNTING
!he margins indicate that for W#87 the company:s sales revenue is
increasing as indicating from the financial statement.
c+ ,eturn On E4uit&
6rom the figures7 it is also clear that this benchmar; for assessing
profitability ratios between the two companies is higher for W#8 compared to
Santos. !he high ratio for W#8 indicates that the company uses its assets
well to generate income. !his means that W#8 has a higher level of
management performance in this case compared to Santos9
!he high net income is driving the high ratio that we have observed in W#8.
<n this case7 the average total shareholders: equity remains stable7 and the
net income drives the ratio margin.
d+ ,eturn On Assets
4verage total assets are similar for both companies7 therefore the /14 is
being driven by a higher net income generated by W#8 compared to Santos.
1ver the last three years7 the average total assets for W#8 was =-(7-.-.) m
compared to Santos average of =*+7.*3.', m. 5owever7 the average net
income for the last three years in W#8 is =-7*(..* m and for Santos is
=232m. 6rom this7 it is clear that the net income is driving the high ratio in
W#89
e+ Asset Turno5er
!he average net sales for W#8 for the last three years is =)*2(.(m and
='7'.+.)m for Santos. !he net sales for W#8 are almost twice the net sales
for Santos7 yet the asset values for both are almost similar. >onsequently7
W#8 will have a better 4sset !urnover compared to Santos9
#+ E$s A#ter Abnorma%s
Since the 0#S measures earnings in relation to every share7 the 0#S values
are more valuable compared to the Santos7 which may well be a good
indication of the profitability of W#8 relative to Santos.
2" *(ic( com$an& (as better managed in5entories and debtors) *(&)
a+ In5entor& Turno5er
6rom the table below7 it is clear that W#8 has a better management of
inventories since the turnover is considerably higher compared to Santos.
!his may means that Santos has on average a more unsold inventory
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TEAM 6 - ACCOUNTING
compared to W#8.
b+ Assets Turno5er
Since asset turnover is an indicator of the efficiency of using assets7 W#8
has a slight edge over Santos7 although the ratios are not significantly
different.
c+ NET 6E7T 0 C-
6rom the figures in the table below7 the "et ?ebt of Santos is better than
W#8. !his may well be due to the si@e of the W#8 compared to Santos7 or it
may well be due to Santos managing its better. <n the last of our analysis
$-,*-A*'&7 we see that Santos had more debt and reduced cash flow
compared to W#8
-INANCIA. ,ATIO/
20 202 201
*2. /ANTO/ *2. /ANTO/ *2. /ANTO/
<nventory !urnover -(.)' 3.-2 -).'( *,.-( ',..) ..)3
4sset !urnover ,.-* ,.*+ ,.-) ,.*3 ,.-2 ,.*.
"et ?ebt A >ash 6low -.*3 B,.,) ,.), *.-, ,.2* '.(2
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TEAM 6 - ACCOUNTING
1"
Comment on and com$are t(e s(ort term %i4uidit& $ositions o# bot( com$anies+
!he table below shows the ratios that we have used to explain short term liquidity
positions for the two companies.
a+ Current ,atio
4s the current ratio indicates the firm:s ability to pay debt7 the table shows
Santos: current ratio is better than W#8 in -,**A*-7 however lower in -,*'7
although the trend is moving downwards. <n contrast7 W#8:s current ratio is
trending upwards7 with the highest ratio being achieved in -,*-.
b+ 8uic9 ,atio
4s the quic; ratio is an indication of the firm:s ability to use quic; assets to
pay its current liabilities7 Santos appears to have a better quic; ratio for the
first - years $-,**A*-& compared to W#87 although in the last year $-,*'&7
W#8:s quic; ratio was better than Santos.
6or both ratios7 figures provided $not shown in the table&7 indicate that the total current
assets for Santos have shown a downward while its current liabilities have gone up. 1n
the other hand7 W#8:s current assets have gone up while the liabilities have relatively
stable.
<n addition7 W#8:s ?ays /eceivables and <nventories and ta;es less time compared to
Santos.
-INANCIA. ,ATIO/
20 202 201
*2. /ANTO/ *2. /ANTO/ *2. /ANTO/
>urrent /atio ,.(- '.*- *.'3 -.(3 *.-- *.-,
Cuic; /atio ,.'( -.3' *.-3 -.-( *.*( ,.3)
:" Comment on and com$are t(e %ong term %i4uidit& $ositions o# bot( com$anies+
!he table below provides ratios that have been used to explain the long term
liquidity positions.
-INANCIA. ,ATIO/
20 202 201
*2. /ANTO/ *2. /ANTO/ *2. /ANTO/
6inancial 8everage *.+* *.+) *.2+ *..- *.(3 -.,-
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TEAM 6 - ACCOUNTING
"et <nterest >over 3,.++ B..(3 -,.+3 B3.'+ *'.3- 2,.-3
a+ -inancia% .e5erage
4s the financial leverage is an indicator of the company:s ability to hold
assets relative to its equity7 the figures below indicate that W#8 is marginally
better compared to Santos. !his indicates that Santos is reliant on debt
compared to W#8.
b+ Net Interest Co5er
4s the "et <nterest >over is the ratio of net profit before tax plus interest over
interest expenses7 the figures above indicate that W#8 is far better than
Santos to meet interest expenses on debt using profits. Santos7 on the other
hand7 had an initial low interest coverage7 although the -,*' financial year
shows some mar;ed improvement.
5" Ex$%ain '(& t(e ,OE #or bot( com$anies dec%ined s(ar$%& in 200;)
a+ Ex$%anations3
!he /10 figures for -,,. was '*.(-% while it was *'.3% in -,,3 for W#89
similarly7 the /10 for Santos in -,,. was *'.)% which dropped to '.22% in
-,,3. We see that the -,,3 figures dropped significantly for both
companies.
1ne possible explanation for these drops could be due to external factors
outside both companies: control. 4s we recall7 this is the period when the
Dlobal 6inancial >risis $D6>& was in full swing7 which may have impacted on
the net incomes for both companies7 resulting in low generated revenues.
4s the /10 is a ratio between the "et <ncome and the average
shareholder:s equity7 a decrease in the net income will have a spiralling
effect on the /10 ratio7 resulting in its reduced value7 which is clearly shown
by these values.
6" *(& do &ou t(in9 t(e 2rice Earnings ratios are so muc( (ig(er #or /antos in recent
&ears)
4s the price earnings ratio is calculated based on the share price divided by
the earnings per share7 it is clear from the table below that the increase in
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TEAM 6 - ACCOUNTING
the ratio is due to better sales price earnings by Santos from -,** onwards.
!his could be due to better company performance and financial positions.
-,** -,*- -,*'
Sales per share $=& -.3( '.(' '.+2
#0/ /atio -(.,. -(.)2 -..-*
<" *(ic( com$an& 'ou%d &ou recommend to $otentia% in5estors) *(&)
a+ ,ecommendations3
!he company that we recommend is Woodside based on the following reasons
o !he net profit margin for W#8 is better than Santos by a factor of almost -9
o !he /10 ratio of W#8 is almost ' times that of Santos9
o !he /14 ratio of W#8 is almost -.2 times that of Santos9
o !he 4sset !urnover for W#8 is slightly better than Santos9
<n addition the following factors have been considered
*2. /antos
7enc(mar9 20 202 201 20 202 201
Mar;et >ap $=m& -(7))3.)) -+73*(.,3 '-7,2,.*- **72),.'* *,7))3.*( *(7--*.)2
Share #rice $=& ',.)- ''... '..3 *-.-( **.* *(.)'
1perating /evenues $=m& (+-..-( )**'.-2 ))--.+* -)*3 '-.+ ')(*
#0/ /atio *(... *'.3* *)..' -(.,. -(.)2 -..-*
<t is clear from the table above that all benchmar;s for enticing investments are in W#8:s
favour7 thus ma;ing it a potential target for investment.
1ther factors considered are the ?ebt to 0quity ratio for both W#8 and Santos shown in the
table below
*2. /antos
7enc(mar9 20 202 201 20 202 201
Dross Dearing $?A0 /atio& '..(2 -+.(- -'.23 ').'. '3.22 2).2*
4s the table above shows7 with the exception of -,**7 W#8:s ?A0 /atio is lower7 indicating
that W#8 has a better capital structure and may be less reliant on borrowings or
shareholder:s capital to fund its assets and activities.
CONC.U/ION
<n conclusion7 we can confidently say that W#8 is a better company for potential investment7
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TEAM 6 - ACCOUNTING
and !eam ) feels that it is one company that is worthy recommending to prospective
investors.
MA,=ING /C>E6U.E
Cuestions #oor 4verage Dood 0xcellent Mar;
* A-,
- A*,
' A*,
( A*,
2 A2
) A2
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TEAM 6 - ACCOUNTING
+
A*2
!otal A+2
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