Financial Reporting and Analysis

-Session 6 NCL-

Professor Raluca Ratiu, PhD

  THE OIL SECTOR: THE IMPORTANCE OF
INVENTORY RATIOS 

SYNNOPSIS:
Theresa has been hired for her first job as a junior equity research analyst in an investment
bank. The first assignment that her boss gives her is to help with the coverage of the oil sector.
She uses a Top-down approach in the sector analysis looking at macro, sector and then
company specific issues. Theresa has to decide which will be the best company to include in
the model portfolio from a selection of European and American companies. To make this
decision, Theresa needs to compare the financial ratios of the different companies, paying
special attention to inventory ratios, which are key to the sector. Furthermore, the oil sector
recently experienced an unexpected and sharp fall in the Brent price that is impacting the
financial reports of the companies and their stock prices. During a coffee break, she saw a
senior analyst named Bruno. They talked about her report and he warned her to check that the
ratios are comparable. The case ends with Theresa recalculating her numbers and being
surprised by the results.
 Inventory Ratios Applied to the Case

Adjusting the balance sheet of Chevron:

Balance Sheet 2014 2015

LIFO Inventory 6,505.00 6,334.00

LIFO Reserve 8,135.00 3,745.00

FIFO Inventory 14,640.00 10,079.00

 Inventory Ratios Applied to the Case

Adjusting the income statement of Chevron:

Income Statement 2014 2015

LIFO COGS 119,671 69,751

LIFO Reserve 8,135.00 3,745.00

LIFO Change =3745-8135= - 4390

FIFO COGS = 69,751 - ( -4390)=74,141

 Inventory Ratios Applied to the Case

Calculate Inventory Turnover and DIO for Chevron and Total for 2015
    2014 2015
Chevron
(Adjusted to FIFO) Inventory 14,640.00 10,079.00

  COGS   74,141

  Inventory Turnover   6.00

  DIO   60.85

Total Inventory 15,196.00 13,116.00

  COGS   96,671.00

  Inventory Turnover   6.83

  DIO   53.45
 Inventory Ratios Applied to the Case
Calculate Inventory Turnover and DIO for Chevron Unadjusted and Total for
2015 (NOT correct for comparison)
    2014 2015
Chevron
(Unadjusted to Inventory 6,505.00 6,334.00
FIFO)
  COGS   69,751

  Inventory Turnover   10.87

  DIO   33.59

Total Inventory 15,196.00 13,116.00

  COGS   96,671.00

  Inventory Turnover   6.83

  DIO   53.45
 Inventory Ratios Applied to the Case

Calculate Gross Profit Margin for Chevron and Total for 2015:

    2015
Chevron
Revenue 138,477.00
(Adjusted to FIFO)
  COGS 74,141.00

  Gross Profit 64,336.00

  Gross Profit Margin 46.45%

Total Revenue 143,421.00

  COGS 96,671.00

  Gross Profit 46,750.00

  Gross Profit Margin 32.6%

 Inventory Ratios Applied to the Case

PER, EPS and Share Price for Chevron and Total for 2015:

   PER EPS Share Price

Chevron 530.45 0.17 89.96

Total 20.36 2.21 44.95

- FIN -