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Esso SA Company’s Performance Evaluation Case Study

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Updated: Oct 28th, 2020

Introduction

Located in France, the Esso SA Company operates within the petroleum industry. The objective of the company is to operate a global brand that is efficient in the production and other aspects of running the business. Moreover, the company intends to balance its equity and costs to meet the demands of shareholders, clients, and market dynamics. The primary activities of the company are the refining and distribution of different oil products within the domestic market in France under the Mobil and Esso brands.

The product portfolio is subdivided into motor/other fuels and lubricants/specialties. Under the motor and another fuel portfolio, the company produces and distributes different fuels such as gasoline, diesel, gas, kerosene, and other petroleum-based products. The lubricants and specialties portfolio consists of the production and sale of bitumen, paraffin, and lubricants. The Esso SA has subsidiaries such as Esso Raffinage SAS and Worex SNC. The ESSO Raffinage operates the company’s refineries located in Fos-sur-Mer and Port-Jerome-Gravenchon.

The Worex SNC is involved in the distribution of different fuels on behalf of the Esso SA within the domestic market. Between the years 2010 and 2014, the company implemented a series of development activities targeting expansion of the product line, restructuring the management, and cost management.

Following the global financial meltdown of the year 2008-2009, the Esso SA’s 2010-2011 financial year was characterized by production efficiency involving the formation of subsidiaries such as Raffinage SAS to manage the major refineries. In the 2011-2012 financial years, the company invested more than 1 billion Euros in facilitating the expansion. During the preceding year, the management was restructured, and a new CEO called Antoine du Guernsey joined the company, followed by a partnership deal with the three major airports to supply all fuels.

Formulation of Financial Statements between 2010 and 2014

Consolidated Statement of Comprehensive Income

Table 1. Income statement.

Year 2010 2011 2012 2013 2014
Operating Revenue/Turnover 12,620,400 15,970,900 17,754,700 16,360,300 15,761,600
Sales 12,581,900 15,924,000 17,703,400 16,286,900 15,673,800
Costs of Goods Sold -10,456,600 -15,371,000 -16,844,800 -15,971,200 -15,130,600
Gross Profit 2,163,800 599,900 909,900 389,100 631,000
Other Operating Items -2,022,100 -445,500 -469,500 -405,000 -412,300
Depreciation/Amortization -116,000 -121,300 -126,900 -123,000 -119,600
Operating P/L 25,700 33,100 313,500 -138,900 99,100
Financial Revenue 14,600 500 200 n.a. 100
Financial Expenses -3,100 -5,100 -5,000 -4,700 -9,500
Financial P/L 11,500 -4,600 -4,800 -4,700 -9,400
Other non-operating /Financial Items 178,200 35,300 -177,100 -24,800 -671,500
P/L before Tax 215,400 63,800 131,600 -168,400 -581,800
Taxation -67,800 -17,400 -51,300 58,900 135,200
P/L after Tax 147,600 46,400 80,300 -109,500 -446,600
Extra ord. & Other Items 0 0 0 0 0
P/L for Period 147,600 46,400 80,300 -109,500 -446,600

Consolidated Statement of Financial Position

Table 2. Balance sheet.

2010 2011 2012 2013 2014
Assets
Current Assets 2,145,100 2,584,100 2,554,500 2,459,000 1,718,900
Stock 1,220,200 1,508,900 1,632,100 1,623,900 1,026,700
Debtors 673,700 893,800 764,600 621,200 499,500
Others 251,200 181,400 157,800 213,900 192,700
Cash & Cash Equivalent 132,700 40,500 51,000 31,800 25,900
Fixed Assets 1,559,100 1,338,000 1,488,400 1,493,800 1,670,800
Tangible Fixed Assets 1,110,500 1,109,900 1,128,000 1,099,700 918,500
Intangible Fixed Assets 80,600 73,400 60,800 53,800 35,400
Other Fixed Assets 368,000 154,700 299,600 340,300 716,900
Total Assets 3,704,200 3,922,100 4,042,900 3,952,800 3,389,700
Liabilities & Equity
Current Liabilities 1,225,800 1,665,500 1,461,400 1,543,500 1,287,900
Loans 37,400 98,900 62,200 321,400 295,100
Creditors 809,600 1,189,800 1,046,900 884,600 639,800
Other 378,800 376,800 352,300 337,500 353,000
Non Current Liabilities 866,000 660,900 1,344,300 1,252,300 1,605,300
Long Term Debt 32,700 29,400 133,100 128,500 127,600
Other Non Current Liabilities 833,300 631,500 1,211,200 1,123,800 1,477,700
Provisions 24,600 26,600 28,300 20,800 24,200
Shareholders’ Funds 1,612,400 1,595,700 1,237,200 1,157,000 496,500
Capital 98,400 98,400 98,400 98,400 98,400
Other 1,514,000 1,497,300 1,138,800 1,058,600 398,100
Total Shareholders’ Funds & Liabilities 3,704,200 3,922,100 4,042,900 3,952,800 3,389,700

Consolidated Statement of Changes in Equity

Table 3. Summary of statement of changes in equity.

Year 2010 2011 2012 2013 2014
P/L for Period 147,600 46,400 80,300 -109,500 -446,600
Shareholders’ Funds 1,612,400 1,595,700 1,237,200 1,157,000 496,500

Consolidated Statement of Cash Flows

Table 4. Summary of cash flow statement.

Year 2010 2011 2012 2013 2014
Cash flow 263,600 167,700 207,200 13,500 -327,000
Cash flow / operating revenue 2.09 1.05 1.17 0.08 n.s
Market capitalization/cash flow from operations 5.21 31.44 6.87 n.s 5.08

Company Performance over the Five-Year Period: Financial Ratios

Liquidity Ratios

This category of ratios gives information on the ability of the Esso SA to settle its immediate obligations using current and liquid assets. If the ratios are low, then it can be an indication that the company is facing financial difficulties. On the other hand, extremely high ratios can signify that a large amount of cash is invested in assets that do not generate revenue (Nobes 281).

Table 5. Liquidity ratios.

2010 2011 2012 2013 2014
Current ratio 1.75 1.55 1.75 1.59 1.33
Quick ratio 0.75 0.65 0.63 0.54 0.54
Shareholders liquidity ratio 1.86 2.41 0.92 0.92 0.31

The current ratios fluctuated. The ratios ranged between 1.33 and 1.75 (as captured in table 5). The ratios are above one, which implies that Esso SA can pay current obligations using short term assets. On the other hand, quick ratios were less than 1, and they had a declining trend. It indicates that the ability of the company to use quick assets to settle short term obligations deteriorated. A review of the ratios shows that the company does not have sound liquidity and is facing difficulties in managing short-term liquidity and working capital (Nobes 281).

Solvency Ratios

These ratios measure the ability of a company to meet both short and long-term obligations. Higher ratios are preferred to lower ratios because they show that the company is solvent.

Table 6. Solvency ratios.

2010 2011 2012 2013 2014
Solvency ratio (Asset-based) (%) 43.53 40.68 30.60 29.27 14.65
Solvency ratio (Liability based) (%) 77.08 68.59 44.10 41.38 17.16

The asset and liability based solvency ratios had a declining trend. The asset-based ratio dropped from 43.53% in 2010 to 14.65% in 2014, while the liability based ratio declined from 77.08% in 2010 to 17.16% in 2014 (table 6). This implies that the ability of the company to meet its obligations deteriorated. It is a bad indication of the going concern of the company.

Efficiency Ratios

These activity ratios give information on how well an entity makes use of available resources to generate sales and income. Therefore, they analyze the efficiency of a company in making sales, collecting cash, paying creditors, and replenishing inventory, among others.

Table 7. Efficiency ratios.

2010 2011 2012 2013 2014
Net asset turnover 5.09 7.08 6.88 6.79 7.50
Stock turnover 10.34 10.58 10.88 10.07 15.35
Collection period (days) 19 20 16 14 11
Credit period (days) 23 27 21 19 15

The net asset turnover ranged between 5.09 and 7.50 (as captured in table 7). There was a general rise in the value of the ratio. This can be attributed to a decline in net assets. The stock turnover ratio was fairly constant between 2010 and 2013. The value rose sharply in 2014. The increase can be attributed to a decline in the inventory balance. The ratio gives information on the number of times a company replenishes stock in a year.

Therefore, there was no significant change in the speed of replenishing stock. There was a general decline in the collection period. This implies that there was an improvement in the speed of collecting accounts receivables. The credit period also decreased during the period. It implies that there was an improvement in the efficiency of paying creditors. In general, there was an improvement inefficiency of the company (Nobes 315).

Profitability Ratios

This set of ratios measures the earning capability of a company. They focus on how revenues are converted into profits. They also give information on pricing strategies and how costs are managed by the company. Higher profitability ratios are often preferred to lower ratios.

Table 8. Profitability ratios.

2010 2011 2012 2013 2014
ROE using P/L before tax (%) 13.36 4.00 10.64 -14.55 -117.18
ROCE using P/L before tax (%) 8.82 3.05 5.29 -6.79 -27.23
ROA using P/L before tax (%) 5.82 1.63 3.26 -4.26 -17.16
ROE using Net income (%) 9.15 2.91 6.49 -9.46 -89.95
ROCE using Net income (%) 6.08 2.28 3.30 -4.35 -20.80
ROA using Net income (%) 3.98 1.18 1.99 -2.77 -13.18
Profit margin (%) 1.71 0.40 0.74 -1.03 -3.69
Gross margin (%) 17.15 3.76 5.12 2.38 4.00
EBITDA margin (%) 1.12 0.97 2.48 -0.10 1.39
EBIT margin (%) 1.89 0.35 0.44 -1.24 -3.52
Cash flow / Operating revenue (%) 2.09 1.05 1.17 0.08 n.s.
Enterprise value / EBITDA 8.67 6.21 1.91 n.s. 3.71
Return on Shareholders’ Funds (%) 13.36 4.00 10.64 -14.55 -117.18
Profit Margin (%) 1.71 0.40 0.74 -1.03 -3.69
Return on Total Assets (%) 5.82 1.63 3.26 -4.26 -17.16

All the profitability ratios displayed a similar trend. The values declined in 2011 and later increased in 2012. The ratios dropped further in 2013 and 2014 (as captured in table 8). Further, it can be observed that Esso SA had negative profits in 2013 and 2014, except for the gross profit margin. The trend of the ratios is quite erratic. A major cause of the negative profits is that the costs of sales are growing at a higher rate than sales (table 1).

This creates a declining value of gross profit margin. Thus, the gross profit cannot adequately cover the operating expenses. The values of return on shareholders’ funds and assets were quite low. This can be an indication that the management of the company is not effective in using available resources to generate profits. It can also be a sign that the assets that are held by the company are obsolete or underutilized. Generally, the profitability ratios are quite low. The company performed dismally. Therefore, there is a need to come up with strategies that can help reverse the trend (Horner, 145).

Market Prospect Ratios.

These ratios are often used by investors and other stakeholders to evaluate the trend of share prices. They also assist in the current and future market value of shares. These ratios make use of current earnings of a company and dividend payments to predict how much an investor will earn from their investment. Therefore, they are used for stock valuation.

Table 9. Price-earnings ratio.

2010 2011 2012 2013 2014
Price Earnings Ratio 8.75 18.77 8.64 n.s. n.s.

The price-earnings ratio grew from 8.75 in 2010 to 18.77 in 2011. It later dropped to 8.64 in 2012 (as captured in table 9). The company had negative earnings in 2013 and 2014. This explains the missing values of the price earnings ratio during those two years. This ratio basically gives information on what the market is willing to pay relative to earnings. The price earnings ratios were low. This indicates a dismal current and future performance. Therefore, the market is willing to pay low prices for the company’s shares due. Thus, it is not advisable to invest in the company at the moment.

Financial Leverage Ratios

These ratios focus on the capital structure of a firm, that is, the amount of debt and equity that is used by a company. It is important for a venture to maintain an optimal level of debt and equity.

Table 10. Financial leverage ratios.

2010 2011 2012 2013 2014
Gearing (%) 56.03 47.62 113.68 136.02 382.76

The gearing ratio grew from 56.03% in 2010 to 382.76% in 2014. However, there was a slight decline in 2011 (as captured in table 10). The growth indicates that the amount of debt used by the company grew over the period. The decline in shareholders’ fund also contributed to the growth in gearing level (as captured in table 3). The high values signify that it is risky to invest in the Esso SA due to high credit risk.

Coverage Ratios

Basically, these ratios measure the ability of a company to service its debt and to meet other financial obligations. Thus, high ratios are often preferred because they signify that a company can meet its obligations.

Table 11. Coverage ratios.

2010 2011 2012 2013 2014
Interest cover 8.29 6.49 62.70 -29.55 10.43

The interest coverage ratio fluctuated during the period. The highest value was reported in 2012 (62.70 times), while the lowest value was reported in 2013 (-29.55 times) (as captured in table 11). This ratio measures the ability of the company to pay interest expense from operating income. During the five-year period, the company was able to pay interest expense apart from 2013 when operating income was negative. The fluctuating values are an indication that the company is struggling to meet its obligation. This is supported by the declining value of cash flows (as captured in table 4).

Compound Annual Growth Rate (CAGR)

This measure is simple and it gives information on the average growth rate of an investment over a specific duration. If total assets are used as a measure of investment, then the initial and ending investments are €3,704,200 and €3,389,700, respectively (as captured in table 2). The period of analysis is 5 years, between 2010 and 2014. Thus, the resulting value of CAGR is -1.76%. If shareholders’ fund is used, then the initial investment is €1,612,400 and the ending investment is €496,500. This yields a CAGR of -20.98%. In both cases, it can be observed that the smoothed growth rate is negative. This indicates that the company experienced negative growth rates. This ratio can be used to compare performance of various companies.

Operating Margin Ratio

The ratio gives information on the proportion of net sales that is converted to operating income. Thus, it shows how much revenue is left after deducting operating expenses and variable costs. The operating income focuses on the core operating activities of a business. Therefore, it measures pricing and operating efficiency of a business. It also shows how a business is supporting its operating activities. This ratio eliminates the non-operating activities such as interest income and expenses. The operating margin ratio is quite significant to investors and creditors because it shows how much income a business can generate for non-operating activities. A high value of the ratio is often preferred to a low ratio (Horner 143).

Table 12. Operating margin ratios.

2010 2011 2012 2013 2014
Values 0.2043% 0.2079% 1.7708% -0.8528% 0.6323%

The operating margin for Esso SA grew from 0.20% in 2010 to 1.77% in 2012 (as captured in table 12). The ratio later dropped to -0.85% in 2013. The value later increased to 0.63% in 2014 (as captured in table 12). Thus, it can be observed that there is no clear trend that is followed by the ratios. They are neither increasing nor decreasing. Further, it can be observed that the values were quite dismal. For instance, in 2013, the company did not generate income from the operating activities. Therefore, it is evident that the company is not profitable. In addition, it is not efficient in managing operating expenses, variable costs, and prices.

Accounts Payable Turnover Ratio

The ratio measures the efficiency of a company in paying its creditors, that is, the number of times a business services accounts payable in a financial year. Generally, a high ratio is often preferred because it signifies that the business borrows and pays the debts quickly. This ratio is often used by creditors to assess the credit worthiness of a business. Accounts payable turnover ratio is quite important because it gives information on both the efficiency and liquidity of a business. If a business does not properly manage this ratio, then it can affect the working capital.

Table 13. Accounts payable turnover ratios.

2010 2011 2012 2013 2014
Values 15.40 15.38 15.06 16.54 19.85

The values of the ratio dropped from 15.40 times in 2010 to 15.06 times in 2014 (as captured in table 13). This signifies a decline in efficiency. The values later improved from 16.54 times in 2013 to 19.85 times in 2014 (as captured in table 13). An increase in the ratios signifies improvement in efficiency because it implies that the Esso SA is paying its creditor at a faster rate. Accounts receivable turnover ratio highly depends on the credit policies of a company and the industry in which a business operates.

Retention Ratio (Plowback Ratio)

This ratio gives information on the percentage of net income that is retained in the business for expansion and other uses. This ratio highly depends on the stage of growth of an entity. High growth companies tend to retain a higher proportion of net income.

Table 14. Retention ratio.

2010 2011 2012 2013 2014
Values (%) 100 100 100 100 100

The values were constant at 100% (as captured in table 14). The company was unable to pay dividends due to low and negative profits. This has a negative effect on the market price of shares and how investors gauge the company.

Equity Multiplier

The ratio measures the financial leverage. Thus, it gives information on the proportion of debt and equity that is used by a company. The ratio is important to creditors and investors because it shows how much risk a business is exposed to. For instance, companies that use a large amount of debt are considered risky because the company will have to raise a high amount of cash flow that can finance the debt service costs. On the other hand, extremely low ratios can imply that a company is conservative and may not exploit its full growth potential. Therefore, a company needs to maintain an optimal level of leverage (Horner 191).

Table 15. Equity multiplier.

2010 2011 2012 2013 2014
Values 2.30 2.46 3.27 3.42 6.83

The equity multiplier for Esso SA grew from 2.30 times in 2010 to 6.83 times in 2014 (as captured in table 15). There is a clear upward trend, which implies that the ratio is growing. The values are also high and it can be attributed to decline in the value of shareholders’ fund and an increase in the amount of debt. This indicates that the company is highly levered. In addition, it shows that the creditors own more of the company’s assets than the shareholders (Horner 191).

Conclusion

The discussion above reveals that the performance of Esso SA lacked trend and consistency. A review of the income statement and statement of financial position shows that there was growth in performance between 2010 and 2012. This was followed a decline in 2013 and 2014. Further, the total liabilities grew while shareholders’ fund decline during the five-year period. The liquidity ratios indicate that the company is facing difficulties in paying immediate obligations.

This implies that the company is not effective in managing working capital. The solvency of the company also deteriorated. This raises doubts over the future of the company. The efficiency ratios indicate that there was an improvement in the use of resources to generate sales and income. The profit level was quite low. The ratios were negative in 2013 and 2014. This shows that the company is facing difficulties in generating profits.

Further, the improvement in efficiency levels does not translate to improved profits. Efficiency and profitability are related. Therefore, it can be noted that there is a variance because improvement in efficiency does not lead to growth in profit. This can be a sign that the low profits are caused by numerous external factors. For instance, it can be noted that the costs of sales are growing faster than revenue. This can be an indication that the prices of materials and other inputs are growing at a faster rate.

The price earnings ratio shows that the market is willing to pay low prices for the shares of the company. This can be attributed to the low earnings. Further, the ratio signals that the company is expected to perform dismally in the future. Particularly, the market prices of the shares have dropped drastically between 2010 and 2014. Therefore, the company is a not a viable investment opportunity. The gearing and equity multiplier ratio grew over the period.

It is an indication of growth in the leverage level. Thus, the amount of debt that is used by the company grew over the period. Therefore, the company has a high credit risk. Times interest earned ratio fluctuated during the five-year period. It implies that Esso SA is facing difficulties in paying interest expense. The entity had a negative compound annual growth rate. It shows that Esso SA experienced a negative growth rate during the period of analysis.

The operating margin was quite low and they followed a similar trend as the profitability ratios. It signifies that the company is generating low income from the core operating activities of the company. Thus, it is not efficient in managing operating expenses, variable costs, and prices. The accounts receivable turnover indicates that there was improvement in the speed at which the company paid its creditors.

The ratio analysis highlights that the company did not perform well during the period of analysis. This can be partly attributed to declining sales and other industry external factors that cannot be controlled by the company. For instance, the sudden drop in oil prices in 2013 and 2014 affected the sales level. In addition, the rise in prices of raw materials affected the bottom line of the company. Esso SA operates in a capital intensive industry.

This explains why the use of debt grew by a large proportion. The shareholders’ capital was constant. However, the company used the reserves for expansion. The retained earnings were also significantly reduced by losses made. This led to decline in the shareholders’ equity. Therefore, the management needs to come up with strategies that can turn around the company.

Recommendations

The management of Esso SA should come up with ways of improving the performance of the company since the profits are dwindling at an alarming rate. Therefore, there is a need to come up with effective cost management strategies. This should be done with an aim of ensuring that the sales grow at a higher rate than the costs. This strategy will ensure that there are positive and stable profits. In addition, it will have a positive impact on the shareholders’ fund.

Moreover, there is a need to reduce the current liabilities and grow assets. This will ensure that the company has adequate working capital. It will also ensure that immediate obligations are met on time. Further, there is a need to manage the liabilities that are currently growing at an alarming rate. This will help reduce the credit risk that the company is currently exposed to.

Works Cited

Horner, David. Accounting for Non-Accountants. Kogan Page Limited, 2013.

Nobes, Christopher. Accounting: A Very Short Introduction. Oxford University Press, 2014.

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