Introduction
In the 21st century, businesses move toward the paradigm of transparency, meaning that open and independent analyses of their financial statements are required. Such analyses focus on the official financial statements of companies and provide stakeholders with objective information in regards to the stability and performance of the organizations. The discussed tendency has become particularly important in the energy sector of Kuwait. In a competitive market, it is vital to possess a full understanding of each company’s ability to fulfill its obligations and execute all operations in a reliable manner. This way, stakeholders will know, for example, if the organization’s debt load is not serious enough to have adverse implications on its functioning in the upcoming period. Furthermore, the ability of the management to utilize their assets and resources efficiently is revealed through the analysis of such statements. This analysis report focuses on two major players of Kuwait’s energy sector: National Petroleum Services Company (NAPESCO) and Independent Petroleum Group (IPG). The purpose of the analysis is to examine each company’s financial performance rates between 2019 and 2020 with the subsequent inter-organizational comparison.
NAPESCO
The National Petroleum Services Company (NAPESCO) launched its operations back in 1993. It represents a private entity, initially providing pumping services for residents of Kuwait. As the business grew, the area of NAPESCO’s responsibilities extended, encompassing an array of energy and construction sectors. Nevertheless, energy remains the key industry for the company. Considering the specificity of its operations, NAPESCO lays considerable emphasis on environmental studies in order to mitigate the potential impact of energy production. This way, the company contributes to the sustainable development of the industry while gaining an additional advantage in the eyes of the stakeholders. In 2003, NAPESCO became a publicly-traded company on the Kuwait Stock Exchange. Following this decision, NAPESCO managed to expand its operations further, becoming one of the key energy market players in the Gulf. As of now, the company’s current mission is to become the undisputed leader in its region, providing maximum returns for shareholders with impeccable value for the stakeholders. The success of this mission will depend heavily on financial performance. The ration analysis is required in order to evaluate whether NAPESCO’s plans correspond with the practice.
Working Capital
The following formula was applied to determine NAPESCO’s working capital: (Current assets) – (Current liabilities) = (Working capital)
2019
- Current assets = 36,667,233 KD
- Current liabilities: 4,689,293 KD
- Working Capital = 36,667,233 – 4,689,293 = 31,977,940 KD
2020
- Current assets = 37,707,099 KD
- Current liabilities: 5,036,715 KD
- Working Capital = 37,707,099 – 5,036,715 = 32,670,384 KD
NAPESCO slow an insignificant increase in working capital between 2019 and 2020, which speaks of its stability.
Current Ratio
The following formula was applied to determine NAPESCO’s current ratio: (Current assets)/(Current liabilities) = (Current ratio)
2019
- Current assets = 36,667,233 KD
- Current liabilities: 4,689,293 KD
- Current Ratio = 7,82 : 1
2020
- Current assets = 37,707,099 KD
- Current liabilities: 5,036,715 KD
- Current Ratio = 7,49 : 1
In 2020, NAPESCO had a slight decrease in the current ratio, implying a growing pressure of debt. However, this change lacks statistical significance, and further conclusions at this point would be premature.
Debt Ratio
The following formula was applied to calculate NAPESCO’s debt ratio: (Total liabilities)/(Total assets) * 100% = Debt Ratio.
2019
- Total assets = 48,207,472 KD
- Total liabilities: 7,454,698 KD
- Debt Ratio = 15,46 %
2020
- Total assets = 48,337,566 KD
- Total liabilities: 8,107,661 KD
- Debt Ratio = 16,77 %
The examination of NAPESCO’s total assets and liabilities makes it possible to observe a slight increase in the company’s debt load. This 1-percent difference may not signify major reasons for shareholders’ concerns, but a further examination of the 2021 statements is required to understand whether this is a trend or statistical fluctuations.
Equity Ratio
The following formula was applied to calculate NAPESCO’s equity ratio: (Total equity)/(Total assets) * 100% = Equity Ratio.
2019
- Total assets = 48,207,472 KD
- Total Equity: 40,752,774 KD
- Equity Ratio = 84,54 %
2020
- Total assets = 48,337,566 KD
- Total Equity: 40,229,905 KD
- Equity Ratio = 83,23 %
The share of equity in NAPESCO’s assets saw a similar decrease, which aligns with the increasing role of debt in the company’s cash flow. Current observations suggest that NAPESCO did not see sufficient growth in the fiscal year 2020, which entailed the increase of the debt load. However, the figures presented should cause any alarms among shareholders, as the changes do appear too significant. Accordingly, NAPESCO’s performance in 2021 will provide a clearer understanding of the direction in which the company is going.
IPG
The Independent Petroleum Group (or IPG) is another prominent entity in Kuwait’s energy market. The company specializes in the trading and marketing of crude oil and related products. In addition, IPG is represented in the petrochemical, fertilizer, terminating, pipeline, and shipping markets. Such a portfolio is highly promising for investors who seek to maximize their profits through cooperation with IPG. The diversification of the company’s area of operations mitigates the effect of crises in specific industries. At the same time, IPG is able to encompass nearly all elements of its supply chain through its involvement in the extraction, transportation, processing, and selling of oil products. The analysis of the company’s ratios in the years 2019 and 2020 will reveal whether IPG’s management is able to utilize this potential to the complete extent.
Working Capital
The following formula was applied to determine IPG’s working capital: (Current assets) – (Current liabilities) = (Working capital)
2019
- Current assets = 200,675,000 KD
- Current liabilities: 185,972,000 KD
- Working Capital = 14,703,000 KD
2020
- Current assets = 228,758,000 KD
- Current liabilities: 215,981,000 KD
- Working Capital = 12,777,000 KD
Current Ratio
The following formula was applied to determine IPG’s current ratio: (Current assets)/(Current liabilities) = (Current ratio)
2019
- Current assets = 200,675,000 KD
- Current liabilities: 185,972,000 KD
- Current Ratio = 1,08 : 1
2020
- Current assets = 228,758,000 KD
- Current liabilities: 215,981,000 KD
- Current Ratio = 1.06 : 1
Debt Ratio
The following formula was applied to calculate IPG’s debt ratio: (Total liabilities)/(Total assets) * 100% = Debt Ratio.
2019
- Total assets = 298,731,000 KD
- Total liabilities: 200,572,000 KD
- Debt Ratio = 67,14 %
2020
- Total assets = 330,705,000 KD
- Total liabilities: 230,614,000 KD
- Debt Ratio = 69,73 %
Equity Ratio
The following formula was applied to calculate IPG’s equity ratio: (Total equity)/(Total assets) * 100% = Equity Ratio.
2019
- Total assets = 298,731,000 KD
- Total Equity = 98,159,000 KD
- Equity Ratio = 32,86 %
2020
- Total assets = 330,705,000 KD
- Total Equity = 100,091,000 KD
- Equity Ratio = 30,26 %
In the period encompassing 2019 and 2020, IPG evidently faced serious challenges that resulted in a decrease of the company’s crucial ratios. First of all, while the total asset numbers grew within this timespan, the debt load saw a disproportional growth. As of now, the difference is expressed by the 2-percent margin that may not be a sign of a serious crisis. However, the presence of liabilities is already considerable, as per IPG’s financial statement. Accordingly, if the debt load continues to grow, it is likely to pass the critical threshold, making the company’s position in the market highly vulnerable.
Discussion
Table 1 summarizes the most recent ratios based on the 2020 financial statements provided by IPG and NAPESCO. The comparison of the two companies provides insight into the direction of Kuwait’s energy sector. First of all, during the years 2019 and 2020, the industry experienced challenges that prevented its key players from maintaining the previous pace of growth. Both IPG and NAPESCO demonstrated a decrease in equity as compared to liability. The change in both cases is not highly significant, but it may become the beginning of a persistent tendency. The 2020 decline may be related to the outbreak of COVID-19 and related safety measures. While the energy sector can be considered essential for the nation’s economy, the pandemic affected all industries to an extent. The purchasing power of the population was seriously compromised by COVID-19, and the aftershocks encompassed most operations within the global economy. As such, the year 2021 will show whether Kuwait’s energy sector will be able to regain sustainable growth.
Table 1. NAPESCO and IPG Ratio Comparison
The comparison of the two companies is highly interesting for the stakeholders and investors of Kuwait’s energy market. As can be inferred from the analysis, IPG is a larger company that operates more considerable cash flows. Nevertheless, most of its assets are indebted, making the working capital of IPG more than two times smaller than that of NAPESCO. Furthermore, the debt and equity ratios of the two companies show opposite results. NAPESCO is a more stable entity, as the debt ratio is insignificant as compared to its counterpart. IPG demonstrates nearly 70% of the liability, making it vulnerable in the face of further crises. Ultimately, the analysis of the two financial statements yields the results that favor NAPESCO as a more stable company with a better chance of sustainable growth in the post-2020 period.