Executive summary

The importance of financial ratio for a company cannot be down played as it helps the company
to know how liquid it is, how profitable it has been and finally the debts that it may have accrued.
With these information, the company is able to take sound financial decision. This assignment
looks at how the liquidity ratios, the profitability ratios and the capital structure of Total
Petroleum Ghana Limited was calculated from the financial statements. It also compares the
results with one of its competitors Ghana Oil Company Limited. It also looks at the decision taken
with regards to a loan request for the company based the ratios and the computation of bonds
for the company.
Table of contents
Pages
1.0 Introduction 2
2.0 Overview of Total Petroleum Ghana Limited 2
3.0 Computing the Ratio analysis of Total Petroleum 3-6
Ghana Limited
4.0 Bond’s computation for both companies 7
5.0 Conclusion 8
6.0 Reference 9
Appendices 10-12

List of figures
Figure 1: products of Total Petroleum Ghana Limited 2
Figure 2: vision of Total Petroleum Ghana Limited 3

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1.0 Introduction
By law, it is a requirement for companies to present financial statements at the end of every
accounting period which may be printed in the newspapers, journals or website of the company.
The financial statements are made up the income statement, statement of financial position,
statement of cash flow, statement of changes in equity and notes to the financial statements.
Investors, stakeholders, shareholders, the board of directors as well as the general public have a
broad picture of the performance of the company from them. But when one rely exclusively on
the financial statements, one may misjudge the performance of organisations. That is the basis
for further performance analysis normally done by analysts by the use of performance indicators.
One tool normally used for financial analysis is financial ratio. According to Moscalu and Vintila
(2012), financial ratios are good predictors of failure/success in business and have been proven
to accurately discriminate between failed and non-failed companies several years prior to failure.

The focus of this assignment is to analyze the financial performance (liquidity ratios, capital
structure ratios and profitability ratios). Total Petroleum Ghana using ratios and compare the
performance of Total Petroleum Ghana with its industry competitor Ghana Oil Company.

2.0 Overview of Total Petroleum Ghana Limited

Total Petroleum Ghana Limited is part of the global Total Group whose operations in the country
have spanned over 60 years. It has a strong brand image in the market and well represented in
all the ten regions of the country. Figure 1 gives an overview of some of the products of Total.

total excellium diesel

total excellium super

total excellium super 95

total Quartz 4X4

total INEO lubricants

.

Figure 1: products of Total Petroleum Company limited

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It also has more than 234 service stations, some of which have additional state of the art lube
bays, food Corners and car wash centers. Its mission is to market quality petroleum products and
serve its customers responsibly and profitably in an innovative way to ensure that the public
continues to turn to Total. Its vision is illustrated in figure 2 below.

To be the number 1 with customer service

To develop talent through diversity

to be a good corporate citizen

To have a sustainable shareholder value

Figure 2: vision of Total Petroleum Ghana Limited

Ghana Oil Company Limited is one of the main competitors of Total Petroleum Ghana Limited
(GOIL) which have all been listed on Ghana Stock Exchange.

3.0 Computing ratio analysis for Total Petroleum Ghana Limited and Ghana Oil Company
Limited
According to Nuhu (2014), ratio analysis is used to determine the short-term and long-term
liquidity of a firm or its ability to meet its current and long-term financial obligations. Moscalu
and Vintila (2012) added that ratios are able to measure profitability, liquidity, self-financing
capacity, indebtedness as well as the capacity of a company to pay interest and repay loans. The
focus of this ratio analysis will be on some selected ratios under liquidity, profitability, and capital
structure for Total and Goil.

Halici and Erhan (2013) opined that it was mandatory that some references be used in
interpreting the ratios which could be the ratios from the previous years of the organization. They
could also be the ratios that have been developed for the sector in which the business operates.

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3.1 Liquidity ratios

Breuer (2012) asserted that a liquidity ratio is the ability of the assets to convert into money. It
looks at how fast an organization could generate money to pay its short-term liabilities. Moscalu
and Vintila (2012) added that it is calculated as the current ratio and quick ratio.

3.1.1 Current ratio

Current ratio looks at the ability of the company to cover its current liabilities with its current
assets. A current ratio is classified to be favourable when the ratio is greater than 1. When the
current ratio is 1 or greater than 1, it indicates the ability of the company to cover its current
liabilities with the current assets. According to Dansby et al., (2000:827), the yardstick is the
standard of 2 to 1 (2:1) meaning that for every N1 current liability there should be a minimum of
N2 current assets to cover it. Often, it is used by lending institutions and credit bureau and has
generally been considered as satisfactory.

Total Petroleum has a current ratio of 0.73 for 2016 as against 0.87 for 2015 which signifies that
in 2016, the company had a decline. In the two years, they are all leaser than 1 which implies that
the liabilities of the company are more than the assets. Liquidity of Total is not satisfactory. In
the case of GOIL, the current ratio for 2016 is 0.83 and that for 2015 is 1.02. In both years, GOIL
performed satisfactory as compared to Total (see Appendix 1).

3.1.2 Quick ratio

Quick ratio measures the extent to which the firm can readily raise cash to settle its current
liabilities. The quick ratio is measured by total current assets less stock divided by current
liabilities. A quick ratio of 1 or more is considered to be satisfactory or advantageous.

In 2016, Total Petroleum has a quick ratio of 0.54 for 2015 as against 0.58 in 2016 which is a slight
increase. Nonetheless, the quick ratios for the last two years are all lesser than one which is not
satisfactory since it has a negative implication on the ability of Total to readily raise cash to settle
its current liabilities. For GOIL, the quick ratio for 2016 is 0.7 and that for 2015 is 0.95 which is a
decrease. The performance of GOIL is satisfactory as compared to Total (see Appendix 1).

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3.2 Profitability ratios

Nuhu (2014) opined that profitability ratios are used to measure the profit made or earning
success of company and these are of primary impotent to stockholders, creditors and investors
since the profits produce cash flows out of with which the debts and dividends are paid.

3.2.1 Net profit margin

Net profit margin is calculated as the percentage of net profit after tax on total revenue (net
income)/ sales.

The direct implication is that the higher the net profit margin the better the performance of the
company.

In 2015, Total had 3.69% while in 2016 it reduced by more than 1% to 2.49%. In the case of GOIL,
the year 2015 had 1.13% while in 2016, it increased to 1.89%. In both years, Total performed
better than GOIL. For investors, these figures could help them to take a proper decision (see
Appendix 1).

3.2.2 Return on assets

Return on assets ratio gives an indication on the amount of cedis that has been made on each
asset of the company. Normally it is expressed as the percentage of the net income over total
assets. In this case, what may be of interest to creditors and investors is a higher return on assets
since it means that the company is performing higher or more profitable and vice versa.

In 2015, the ROA of Total was 9.33% and in 2016 it reduced drastically to 4.15%. One could see
that the profits of Total had reduced by 50% and this had an impact on all the profitability ratios.
In this regard, Total had a loss. In the case of GOIL, there was no difference between the ROA for
2015(7.27%) and for 2016(7.21%) as shown in Appendix 1.

3.2.3 Return on equity ratio

The ROE ratio is calculated as the net income over the equity of the shareholders. It measures
the ability of the company to earn a return on the capital which has been invested. This ratio is
of importance to shareholders because it directly involves their investments. Total recorded

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0.312 in 2015 but in 2016, it decreased to 0.16 however for GOIL, it was 0.51 in 2015 and also
decreased to 0.26 for 2016. Investors in Total will not be pleased with the decrease as this affects
them (see Appendix 1).

The DuPont Analysis for the ROE of Total Petroleum Company limited

In 2015, Total had 44.68 while in 2016, it was 27.88 with the calculation shown in the
Appendix. The ROE for 2015 was superior as compared to 2016. In the case of GOIL, for 2015 it
was 36.94 but in 2016, it reduced to 20.35 as calculated in Appendix 2

3.3 Capital structure ratio

Karanja (2014) asserted that the capital structure is made up of long-term liabilities, specific
short-term liabilities for example the bank notes. Velnampy and Niresh (2012) stated that it is
combination of equity shares, preference shares and debts which are in long-term. Debt ratio
and debt to equity ratio are the analysis that are calculated to find the capital structure.

3.3.1 Debt ratio

Debt ratios for Total Petroleum in 2015 was 0.7 while in 2016, it was 0.74 which is a slight
increment. In comparison with its competitor, 0.78 in 2015 and decreased to 0.62 in 2016. In this
case, the lesser the figure, the more satisfactory it is for the company. The implication of the
figures above is that 70% of the total assets were financed by debts. From the statements, a
greater part of the assets are in while for Goil, it was 78%. However in 2016, the figure rose to
76% while for its competitor, it decreased to 62% (see Appendix 1).

3.3.2 Debt to equity ratio

Total had a debt to equity ratio of 2.38 for 2015 and in 2016 it increased to 2.80. For GOIL it was
4.8 which was high but in 2016, there was a sharp reduction to 1.19 (see Appendix 1).

Sources of finances: In the last two years, the short-term sources and the long term sources of
Total Petroleum Company Limited finance have been loans, borrowings and shares.

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3.3.3 Recommendations for loan request

After the capital structure has been calculated for Total Petroleum Ghana Limited, the figure
obtained were not encouraging. Over 60% of its assets have been financed by debts as of 2016,
therefore it is not advisable to go for a loan. Already the company is financing some loans and
borrowing that it has contacted. Every loan for a company comes with an additional interest. It
is therefore recommended for the company to raise funds through the issue of stocks as that will
be relatively cheaper compared to taking a loan.

4.0 Computation of bonds for both companies

The bonds should not be sold at the same value. This is because one is an annual coupon while
the second is a semi-annual coupon. Secondly the given to each company has its unique
percentage of interest at maturity.

Face Value = $100 Coupon Rate= 8% number of Years = 5 years Maturity=3.5

Total Petroleum (Rated A): Compounded annually
= [(8% *100)*(1-(1+3.5%) x-5+100
(3.5%)] ((1+3.5%) x5)
= $120.32 (an equivalent of 532.15 cedis)

The implication of this is that if someone buys this bond, he/she will make a profit of $20.32
(532.15 cedis) for every dollar which has been used to buy it.

For its competitor, GOIL (semi-annual)

Face Value = $100 Coupon Rate= 8% Years = 5 years Maturity= 4
Goil (Rated B): Compounded annually
= [(4% *100)*(1-(1+4%) x-5+100
(4%)] ((1+4%) x5 )
=$157.82

In this case, $157.82 will be the profit that would be made on every dollar invested.

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Total Petroleum Company limited is an A rated company which would sell its bonds at $ 120.32
whilst Ghana Oil Company Limited which is a B rated company would sell the bonds at $157.82.

This is an indication that companies must improve to get good ratings by the rating agencies. The
decision to buy bonds will now depend on the

4.1 Rating Agencies and why companies should maintain a given target rating

Three principal international ratings which are Moody credit rating agency, the Standard and
Poor credit rating agency and Fitch credit rating agency .

Businesses and firms should try to maintain good Credit Ratings because having a good rating is
able to lower the cost of borrowing for an issuer. Secondly the company can borrow larger sums
of money with a high rating as it becomes credit worthy. Finally it is able to give the company an
advantage which is competitive since its brand image is improved when it has a high rating.

Conclusion

The ratio analysis for Total Petroleum Company Limited has given an overview of the capital
structure ratio, the profitability ratio and the liquidity ratio which will help the company to take
good decisions that will help the company not to be bankrupt, always have a steady flow of
finances and finally reduce its debts. This will give the company an advantage which is
competitive enough in the industry.

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References
Breuer, A., Frumusanu, M.L., Breuer, B.L. and Manciu, A., 2012. Cash and Liquidity/Liquidity and
Liquidity Ratio. Annals-Economy Series, 4, pp.78-82
Dansby, R. l., Burton. S.K., and Michael D. L. 2000. Paracligin college Accounting. 4thed. st
paul,mN: paradigm publishing Inc.
Halici A. and Erhan D. U. 2013. Structuring strategic management with ratio analysis method:
a case study in the transition to SME TFRS process. Social and Behavioral Sciences 99, pp
947 – 955. doi: 10.1016/j.sbspro.2013.10
Karanja, M.G., 2014. The Effect of Capital Structure on Financial Performance of Small and

Medium Enterprise in Dairy sector in Kiambu County. University of Nairobi.

Moscalu M., and Vintila G. 2012. Business failure risk analysis using financial ratios. Social and
Behavioral Sciences 62:728 – 732. doi: 10.1016/j.sbspro.2012.09.123

Nuhu M. 2014. Role of Ratio Analysis in Business Decisions: A Case Study NBC Maiduguri Plant
Journal of Educational and Social Research. Vol. 4 No.5, pp 105-119.
Doi:10.5901/jesr.2014.v4n5p105.568
Velnampy T. and Niresh J. A. 2012.The Relationship between Capital Structure & Profitability
Global Journal of Management and Business Research. Volume 12 Issue 13, pp1-9

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 APPENDICES
Appendix 1: ratio Analysis
Total petroleum company Ghana oil company limited INDUST
limited RY
AVERA
GE
Item 2015 2016 2015 2016
Current assets 256,536 259,391 544,495 384,589
Current liabilities 294,153 354,289 536,186 461,944
Stocks /inventory 84, 683 69,588 35, 491 64,094
Total liabilities 352,396 415,183 460,529 536,186
Total assets 500,704 563,925 585,372 866,660
Profit after tax 46,718 23,402 39,573 62,464
Sales 1,635,731 1,499,083 3, 491, 696 3,313.501
Total shareholders 148,308 148,742 111,019 324,310
equity
Calculations
Current Current assets 254,536 259,391 544,495 384,589
ratio
current liabilities 294,153 354,289 536,186 461,944
0.87 0.73 1.02 0.83
Quick Current assets- 254,536 -84,683 259,391-69,588 544,495-35,491 384,589-64,094
ratio inventory 461,944
294,153 354,391 536,186
Current liabilities
0.58 0.54 0.95 0.7
Net net profit after tax 46,718 X 100 23,402 X 100 39,573 X 100 62,464X100
profit X100 1,635,731 1,499,083 3,491,696 3,313,501
margin sales
3.69% 2.49% 1.13% 1.89%
Return Net income (profit after 46,718 X100 23,402 X100 39,573 X 100 62464
on assets tax)X 100 500,704 563,925 544, 495 866,660
ratio total assets
9.33% 4.15% 7.27% 7.21%
Return net income(profit 46,718 23,402 39,573 62,464
on after tax) 148, 308 148,742 111,019 324,310
equity Total equity
0.312 0.16 0.51 0.26
Debit Total liabilities 352,396 415,183 460, 529 536,186
ratio 866,660
total assets 500, 794 563,925 585,372

0.70 0.74 0.78 0.62

Debt to Total liabilities 352,396 415,183 461,944 536,186
equity total shareholders 148,308 148,742 111,019 324,310
ratio equity
2.38 2.80 4.8 1.19
Equity Total assets 500,704 563,925 585,372 866,660
multiplie Shareholder equity 148,308 148,308 111,019 324,310
r
3.38 3.80 5.27 2.67

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Appendix 2: Computing ROE with the use of Dupont analysis.
Formula = Net profit margin X Total asset turnover X Equity multiplier

Total Petroleum Company limited:

2015:

(Net profit/sales) x (Revenue/Total assets) x (total assets/shareholder equity)

= 3.69X (1,793,752/500,704) X 3.38

=3.69X3.58X3.38
=44.68
2016
=2.49 X (1,661,615/563,925) X 3.8
=2.49X2.95X3.8
=27.88

For Goil,
2015
=1.13 X (3,630,998/585,372) X5.27
= 1.13 X 6.20 X 5.27
= 36.94
For 2016
= 1.89 X (3,494,644/866,660) X 2.67
=1.89 X 4.03 X 2.67

= 20.35

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