Profitability and Impact on Investor Performance Indicators

Institution Affiliation:

Tableof Contents

Profitability and Impact on Investor Performance Indicators 3

Executive summary 3

Introduction 4

Analysis 4

Profitability analysis 4

Income statement analysis 4

Comparison 6

Gross profit margin 6

Operating profit margin ratio 7

Net profit margin ratio 7

Ratio analysis efficiency of asset utilization 9

Notes: 10

Return on assets 10

Return on equity 11

Cash return on assets 11

Investor financial indicators 11

Conclusion and recommendations 12

Appendix: 14

Bibliography 16

Profitabilityand impact on investor performance indicatorsExecutivesummary

The theme of the project is to compare profitability and its impacton investor financial indicators. The selected companies in thisproject are Chariot Oil &amp Gas and Canadian Overseas Petroleumlimited both trading at London Stock Exchange. Chariot Oil &amp Gaspetroleum is from the Great Britain while Canadian Overseas PetroleumLimited is from Canada. Both companies are from the Oil and Gassector, and exploration and Production subsectors. While conductingthe profitability analysis, profitability ratio analysis took intoconsideration net profit margin, return on assets and return onequity as some of the profitability indicators. Both companiesmonitor their investor performance indicators by measuring andtracking key performance indicators. The market ratios for ChariotOil &amp Gas are better than those of Canadian Overseas PetroleumLimited, a clear suggestion that the former is in a better positionto satisfy the investors in terms of higher returns on shares. Theefficiency ratios for Chariot Oil &amp Gas are better than CanadianOil, a suggestion that the former is using its assets and equity moreefficiently. The horizontal analysis of both companies suggests thatChariot Oil &amp Gas has higher profitability, and the samepositively affects its investor performance indicators.

Introduction

Mella (2012) says that in the contemporary business world, companiesnot only need to manage their financial measures, but also keep trackof other elements such as the market response and stakeholdersatisfaction. Key Performance Indicators (KPI) are a company’smeasurable goals, which are related to the company’s organizationalstrategy. At the same time, financial statements are used to providea picture of a company’s health and performance (Mella, 2012). Theyinclude income or profit and loss statement, balance sheet and cashflow statement. all these are important in measuring a company’sprofitability. This paper looks at profitability and its impact oninvestor performance indicators in Chariot Oil &amp Gas and CanadianOverseas Petroleum Limited.

Analysis

The assignment for performing ratio analysis and income statementanalysis for the purposes of the project is based on financialstatements of Chariot Oil &amp Gas and Canadian Overseas PetroleumLimited for the year ending 2014. An analysis and evaluation of thesaid period was conducted for the purposes of the project. The incomestatement used were obtained from reliable online financial sources.The 10-k performance form for the investor performance evaluation ofChariot Oil &amp Gas and Canadian Overseas Petroleum Limited was notused.

ProfitabilityanalysisIncomestatement analysis

Chariot Oil &amp Gas

2010

2011

2012

2013

2014

Revenue

&nbsp4

6.9

8.9

10.5&nbsp

11

Gross Margin

3

4

4.99

&nbsp5.2

5.3

Operating Margin

2.5

2.8

2.7

3.2&nbsp

3.4

Net Profit Margin

1.9

2.2

2.6

&nbsp3.4

3.5

The purpose of the income statement analysis is to evaluate theperformance of a company’s key heads in the income statement(Fridsom and Alvarez, 2011). For any company, the income statementcan be evaluated and be used to measure performance and growth. Thisis by using horizontal analysis and vertical analysis (Graham et al2012). For the purpose of this project, horizontal analysis was usedto measure the performance of Chariot Oil &amp Gas and CanadianOverseas Petroleum Limited. Their publicly issued income statementswere used. The calculations were done by use of horizontal analysison the key heads, up to the year ending 2013 (data for 2014 waseither inconsistent or missing). The calculation above usedhorizontal analysis on the company’s income statement. The changesin revenue, gross margin, operating margin and net profit margin wereevaluated. The revenue for Chariot Oil &amp Gas increased steadilythrough the years. Accordingly, the gross margin for the period2013/2014 increased at a steady rate. In addition, the same periodsaw an increase recorded in the company’s operating margin.

Canadian Overseas Petroleum Limited

2010

2011

2012

2013

2014

Revenue

4.3

6.8

8.9

10.5

11

Gross Margin

2.8

3.9

4.8

&nbsp4.11

4.2

Operating Margin

2.14

2.7

2.4

3.1&nbsp

3.3

Net Profit Margin

1.7

1.9

2.3

3.2

3.4

The revenue for Canadian Overseas Petroleum Limited increased by asmall percentage throughout the years. As well the operating marginsincreased from ₤2.14 million to ₤ 3.1 million from the year 2010to the year 2014. Also, the net profit margin increased from ₤1.7million to ₤3.4 million from the year 2010 to 2014. The overallhorizontal analysis of Chariot Oil &amp Gas was found to be betterthan Canadian Overseas Petroleum Limited. The performance of thelatter has been significantly lower than the industry leverages, andthe company needs to significantly improve its performance in theselected items so as to have a competitive edge in the industry.

ComparisonGrossprofit margin

Chapman (2012) says that the gross profit margin looks at the cost ofgoods merchandized to consumers and other enterprises as a fractionor proportion of the aggregate sales. This ratio is used to tell howwell a company is controlling the cost of its inventory, as well asthe manufacturing of its products. Additionally, the way in which thecompany passes on the costs to the customers is taken intoconsideration. If the gross profit margin is big, the company isdoing well, and vice versa. Gross profit and net sales are used tocalculate the gross profit margin. The Gross profit margin forChariot Oil &amp Gas was ₤3 million in 2010, and it increased to₤5.3 million in 2014. As for Canadian Overseas Petroleum Limited,the gross profit margin was ₤2.8 million in 2010, increasing to₤4.2 million in 2014.These figures show that Chariot Oil &amp Gasis doing better in terms of gross profit margin than CanadianOverseas Petroleum Limited. As such, the former is controlling itsinventory and manufacturing in a more efficient way than the latter.

Operatingprofit margin ratio

This ratio is also known as EBIT (De Jong 2014). These are thecompany’s earnings before the interest and taxes are calculated.Therefore, the operating profit margin looks at EBIT as a part of thetotal percentage of the sales. This ration is a measure of theoverall operating efficiency, taking into consideration all theexpenses of ordinary daily business activities. When calculating acompany’s operating profit margin ratio, both terms of the equationcome from the company’s income statement, as they have beenincluded in the two companies’ income statements. Chariot Oil &ampGas’ operating profit margin ratio went up from ₤2.5 million inthe financial year 2010 to ₤3.4 million in the financial year 2014.This was a 73% increase. On the other hand, Canadian OverseasPetroleum Limited’s operating profit margin ratio went up from ₤1.7million in the financial year 2010 to ₤3.4 million in the financialyear 2013. This was a 50% increase. This shows that Chariot Oil &ampGas’ operating profit margin ratio is way better than that ofCanadian Overseas Petroleum Limited. As such, the former is makingmore money before interest and taxes are calculated than the latter.

Netprofit margin ratio

Bragg (2012) says that whenever a simple profitability ratio is beingdone, the net profit margin is the most often margin ratio that isused. The function of the net profit margin is to show how muchpounds come up as net income after the company has paid all theexpenses, such as utilities and other liabilities. The net profitmargin measures profitability after all expenses have been consideredsuch as tax, depreciation and interest (Bragg, 2012). For instance,the net profit margin for Chariot Oil &amp Gas went up from ₤1.9million in 2010, increasing steadily, to ₤3.5 million in 2014. Thiswas a 54% increase. This means that the company made 55 cents fromevery dollar as its profit. On the other hand, Canadian OverseasPetroleum Limited’s net profit margin went up from ₤1.7 millionin 2010, increasing at a steady rate to ₤3.4 million in 2014. Thiswas a 50% increase. This means Canadian Overseas Petroleum Limitedmade 53 cents from every dollar as its profit. In comparison, ChariotOil &amp Gas performed a little better than Canadian OverseasPetroleum Limited for the period investigated.

Ratioanalysis efficiency of asset utilization

Chariot Oil &amp Gas

Canadian Overseas Petroleum Limited

Industry leverage

Efficiency and usage ratios

2010

2011

2012

2013

2014

2010

2011

2012

2013

2014

2013

Return on assets

5.01%

4.59%

4.55%

4.31%

5.22%

2.14%

2.01%

1.9%

1.7%

12.8%

Return on equity

12.65%

11.87%

11.61%

11.64%

10.69%

1.98%

1.78%

1.6%

1.4%

21.87%

Asset turnover

0.66

0.54

0.55

0.47

0.48

0.61

0.59

0.42

0.36

1.98

A/R Turnover

11.22

11.58

8.64

8.69

8.45

8.35

7.25

6.24

5.25

15.24

A/P Turnover

6.34

4.38

2.96

2.39

2.58

4.12

3.97

3.65

2.98

6.78

Accordingto Haber (2004), Efficiency ratios are calculated to measure theearning efficiency of the company. They are also calculated in theratio analysis and financial analysis so as to assess how the companyutilizes its assets and equity in order to gain profit. Efficiencylevels justify the use of level of assets and equity by the companyto realize a profit. The return on assets ratio for Chariot Oil &ampGas is higher than those of Canadian Overseas Petroleum Limited. Thismeans that Chariot Oil &amp Gas is using its assets in a moreefficient way than Canadian Overseas Petroleum Limited. As the sametime, the return on equity for Chariot Oil &amp Gas is way higherthan that of Canadian Overseas Petroleum Limited for the period oftime measured. This means that the Former used their equity to earnprofit in a more efficient way as compared to Canadian Petroleum.

From the results above, the asset turnover for Chariot Oil &amp Gasis higher than that of its competitor, which means that the companyuses its assets to generate more turnover for the company than thecompetitor. The account receivables for Chariot Oil &amp Gas arehigher than Canadian Petroleum. The indication of this is thatChariot Oil &amp Gas is more efficient in recovering receivables ascompared to Canadian Petroleum. Additionally, this means that ChariotOil &amp Gas achieves account receivable efficiency much faster thanits competitor. The accounts payable turnover for the two companiesis not much different. However, from the results, it is indicatedthat Canadian Petroleum delays their accounts payable to meet thecash for some business operations. For the years that have beencalculated, the efficiency and usage levels for favor Chariot Oil &ampGas Petroleum more.

Notes:Returnon assets

Return on assets is also known as return on investment (Jewell andMankin, 2011). This is an important profitability ratio because it isused to assess the efficiency with which a company is handling itsinvestment in assets, and how it is using them to generate the profitthey wish. This ratio measures the amount of profit, which is grossedby the business comparative to the firm’s level of investment intotal assets. While calculating return on asset ratio, one uses totalassets and net earnings. The net income is obtained from the incomestatement, while the total assets are obtained from the balancesheet. When the percentage is high, it means good for the business(Bernacke et al 2011). This is because the high figures imply thatthe company is using its assets to generate more sales.

Returnon equity

The return on equity ratio is crucial to the investors in thecompany. It is used to measure the return on the money that theinvestors have put into the business (Heikal et al 2014). Investorsare mainly concerned with this ratio when they are consideringwhether to put in the business or ignore any sort if investment inthe business. The ratio is calculated by dividing the net income byinvestor’s equity (Cilloni et al 2013). The net income is obtainedfrom the income statement, while the stockholder’s equity isobtained from the balance sheet. Generally, if the percentage ishigh, chances for the company to make profits are higher.

Cashreturn on assets

Palazzo (2012) says that this ratio is used generally in moreadvanced profitability ratio analysis. This ratio is used as acomparison to return on assets, because it is a cash comparison. Thecash is kept for the company’s future investments. To calculate thecash return on assets, cash flow from operating activities is dividedby the total assets.

Investorfinancial indicators

Chariot Oil &amp Gas

Canadian Overseas Petroleum Limited

2010

2011

2012

2013

2014

2010

2011

2012

2013

2014

Earnings per share

-0.02

0.12

0.01

-0.04

-0.03

0.6

-0.12

-0.13

-0.4

-0.01

Dividends per share

0.11

0.09

0.01

0.09

0.01

0.01

0.01

0.02

0.1

0.02

The earning per share (EPS) is the amount of money for eachoutstanding share of the company’s stock. While calculating theearnings per share, all the dividends of preferred stock aresubtracted from the total net income.

Chariot Oil &amp Gas’ diluted earnings per share for the yearending 2014 was ₤-0.03. This was the lowest for the years that wereconsidered for the study. Canadian overseas petroleum company’searnings per share for the year ending 2014 were ₤-0.02. Thisimplies that the company’s investors received higher than what wasreceived by the competitor companies’.

ChariotOil &amp Gas’ dividends per share for the period ending 2014 were₤0.01. The company’s dividend yield as per the present day is0.01%. Least square regression is used to calculate the growth rate.On the other hand, Canadian Petroleum’s dividend yield as of theperiod ending 2014 was 0.02%. This was higher than that of thecompetitor.

Conclusionand recommendations

Different ratios were analyzed for the two selected companies, andthe results were interpreted. At the same time, the results werecompared and contrasted. A horizontal analysis of the incomestatement of both companies was also done for the years 2010-2014.The analysis concluded that Chariot Oil &amp Gas had a strongercompetitive edge over Canadian Overseas Petroleum Limited. Theresults suggested that Chariot Oil &amp Gas’ investors couldexpect more returns on shares as compared to Canadian OverseasPetroleum Limited. According to the analysis of the two companies’investor financial gauges, “Canadian Overseas Petroleum Limited”is in an enhanced position to attract more investors than Chariot Oil&amp Gas’. This is despite the fact that the former performed muchbetter in other ratios than the latter. According to results from theratios that were calculated, Chariot Oil &amp Gas was is a positionto reduce its future debt liabilities than Canadian OverseasPetroleum Limited., which means that some investors may consider thisto invest with the former. Chariot Oil &amp Gas also utilized itsassets and equity in a way that is most likely to attract theinvestors. Overall, the performance of Chariot Oil &amp Gas was muchbetter than that of Canadian Overseas Petroleum Limited.

In order to improve financial performance, it is recommended that acompany ensure that its cash flow performs well. This can be done byextending Accounts Payable terms and reducing the Accounts receivableterms. Additionally a company needs to outline its strategies for thepurposes of identifying and disposing of obsolete inventories. As forthe Canadian Overseas Petroleum Limited, it needs to ensure that itconducts a permanent review of gross margins and reducing itsborrowing costs. Results from this research show that it is crucialfor a company to increase its profitability by performing well in theratios that were considered, as this greatly impacts the investorperformance indicators.

Appendix:

Calculations:

Grossmargin = gross margin/ net sales

Operatingmargin = operating income/ Sales

Netprofit margin = Net income/ Sales

Returnon assets = Operating income/ Total assets

Returnon equity= Net income/ Shareholder’s equity

Assetturnover= Sales/ Assets

Earningsper share= market share per share/ price-earnings ratio

Dividendsper share= Dividends paid to shareholders/ Number of sharesoutstanding

Canadian Overseas Petroleum Limited

2010

2011

2012

2013

2014

Revenue

4.3

6.8

8.9

10.5

11

Gross Margin

2.8

3.9

4.8

&nbsp4.11

4.2

Operating Margin

2.14

2.7

2.4

3.1&nbsp

3.3

Net Profit Margin

1.7

1.9

2.3

3.2

3.4

Chariot Oil &amp Gas

Canadian Overseas Petroleum Limited

Industry leverage

Efficiency and usage ratios

2010

2011

2012

2013

2014

2010

2011

2012

2013

2014

2013

Return on assets

5.01%

4.59%

4.55%

4.31%

5.22%

2.14%

2.01%

1.9%

1.7%

12.8%

Return on equity

12.65%

11.87%

11.61%

11.64%

10.69%

1.98%

1.78%

1.6%

1.4%

21.87%

Asset turnover

0.66

0.54

0.55

0.47

0.48

0.61

0.59

0.42

0.36

1.98

A/R Turnover

11.22

11.58

8.64

8.69

8.45

8.35

7.25

6.24

5.25

15.24

A/P Turnover

6.34

4.38

2.96

2.39

2.58

4.12

3.97

3.65

2.98

6.78

Investorindicators

Chariot Oil &amp Gas

Canadian Overseas Petroleum Limited

2010

2011

2012

2013

2014

2010

2011

2012

2013

2014

Earnings per share

-0.02

0.12

0.01

-0.04

-0.03

0.6

-0.12

-0.13

-0.4

-0.01

Dividends per share

0.11

0.09

0.01

0.09

0.01

0.01

0.01

0.02

0.1

0.02

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