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Oil Company S Financial PositionResearch Paper

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Financial Statement Analysis

This study deals with the analysis and reading of financial statements of companies. Such statements include balance sheets, income statements and cash flow statements among others. The paper also looks into the various methods and techniques of financial reporting and their impact on the ultimate outcome of the analysis of financial statement.

For this study we consider the financial statements or annual reports two companies -- Williams Company Inc. and Devon energy, both operational in the field of oil and natural gas. And both are based in the U.S.

The study looks into the various aspects of the financial statements that the two companies had provided in the last three fiscal years and deductions about the company were drawn based on the analysis of the data that was given in the statements.

For the purpose of analysis, the study utilized various financial ratios like the quick ratio, current ratio, other liquidity ratios, performance ratio and profitability ratios. The outcome of the ratios helped in ascertaining the strengths and weaknesses of the companies and understanding in how the figures help in deciding which company is better to invest in and why.

The study also deals with the preparation of pro-forma financial statements and understanding how such statements vary from the actual financial statements that are given by the companies.

This study found considerable fluctuations in results of analysis of the original financial statements and the pro-forma statements in several aspects which impacted the decision to invest in the companies.

Contents

Company Information & Important Financial Ratios 3

Management Discussion and Analysis 8

Ratio Analysis of the Companies 12

Comments on the Major Findings of Williams Company 24

Accounting Treatments of the Companies 26

Selection of the Better Company to Invest 31

Pro-forma Financial Statement of Williams Company Inc. 34

References 42

Company Information & Important Financial Ratios

For this part of the study we chose Williams Company as the primary company to be analyzed in relation to the 10-K reports of the company for the financial years 2011-2012 through to 2013-2014 (Co.williams.com, 2015).

An energy infrastructure company focused on connecting North America's significant hydrocarbon resource, Williams Company is among the leading companies in the oil and gas sector in the U.S. The company has its interests in natural gas, natural gas liquids (NGLs) and olefins. The company has operations in the deepwater Gulf of Mexico and spans to the Canadian oil sands. The company was established in 1908 (Co.williams.com, 2015).

As a competitor the above stated company for this part of the study we chose U.S. based petro-company Devon Energy which is engaged is an independent oil and natural gas exploration and production company with its operations primarily focused on onshore sites in the United States and Canada. It was founded in 1971 (Devonenergy.com, 2015).

This company was chosen as a competitor to Williams as it is in the same field of business or industry. Both the companies are public listed companies and hence it would be apt to compare the two companies with respect to the investor interests. The financials reported by the company can be assumed to have been well scrutinized and error free given the fact that both are public limited companies.

Interestingly, it would also be a matter of comparison as both the companies differ significantly in terms of the age. While Williams was et up in 1908 Devon was established in 1971. Hence it would an interesting comparison in terms of the management outlook and the strategies that the two companies follow given the legacy that they carry with them (Devonenergy.com, 2015)

In order to understand relationships among various items reported in one or more of the financial statements, experts and investors make use of various ratios the define the operations, efficiency and heath of a company. These ratios help to create and understanding and These rations are needed to understand that no analysis is complete unless it leads to an interpretation that helps financial statement users understand and evaluate a company's financial results

Common Size ratios

Horizontal analysis is a form of trend analysis that is done to help financial statement users identify the important financial changes that unfold over time.

The relationship between items on the same financial statement is made possible through vertical analyses and it focus on importance of the relationships.

Trend analyses are usually calculated in terms of year-to-year dollar and percentage changes.

Year-to-year change % = change this year/prior's year's total *100

= (Current year's total -- Prior Year's Total)/Prior's year total * 100

Important relationship within financial statement is focused on vertical or common size analysis. It is a trend to usually pick a value on the financial statement and express all other values on that statement as a percent of the selected amount.

Liquidity Ratios

The ability of a company to pay off both its current liabilities as they become due as well as their long-term liabilities as they become current is analyzed using the Liquidity ratios. The cash levels of a company and the ability to turn other assets into cash so that the company is able to pay off the liabilities and other current financial obligations are displayed by these ratios.

The ease with which a company is able to raise enough cash or convert assets into cash is measured by liquidity ratios and they are not merely measures of how much cash a business has.

Some of the assets that are relatively easy for a company to convert into cash in the short-term, are accounts receivable, trading securities and inventory. Therefore all of these assets go into the liquidity calculation of a company (Wiehle, 2005).

Quick ratio

The ratio that is used to measure the ability of a company to pay its current liabilities when they come due with only quick assets is known as the quick ratio. The current assets that have the ability to be converted into cash within 90 days or in the short-term are termed as quick assets. For companies assets that are considered to be quick assets include elements like cash, cash equivalents, short-term investments or marketable securities and current accounts receivable.

Formula

Quick ratio = Cash + Cash equivalent + short-term investment + current receivables / current liabilities

The higher the quick ratio the better it is for a company and the industry benchmark in the oil and gas sector is 0.27

Current Ratio

The ratio that measures a firm's ability to pay off its short-term liabilities with its current assets is called the current ratio and it is a form of liquidity and efficiency ratio. Short-term liabilities are due within the next year and hence the current ratio is an important measure of liquidity.

Current Ratio = Current Assets/Current Liabilities

Since this ratio shows the company can more easily make current debt payments, therefore a higher current ratio is always more favorable than a lower current ratio.

Working Capital Ratio

This is a form of liquidity ratio that measures a firm's ability to pay off its current liabilities with current assets. Since it shows the liquidity of the company therefore the working capital ratio is important to creditors (Bull, 2008).

Working Capital Ratio = Current Assets/Current Liabilities

Any ration of this sort that is essentially less than 1 is considered to be bad by investors and creditors since is indicates that the company is not running efficiently and can't cover its current debt properly. Such a ratio also referred to as a negative working capital. In case the ratio value is more than 1, it shows that the company can pay all of its current liabilities ad would still be left with current asses and is referred to as positive working capital.

The benchmark for this ratio in the oil and gas industry in the third quarter of 2015 is 1.13

Profit Ratios

Profit Margin Ratio

The amount of net income earned with each dollar of sales generated by comparing the net income and net sales of a company is measured and indicated by the profit margin ratio. It is therefore also called the return on sales ratio or gross profit ratio. What percentage of sales are left over after all expenses are paid by the business is shown by this ratio and hence is very critical to investors.

Profit margin ratio = Net Income / Net sales

What percentage of sales is made up of net income is indicated by the profit margin ratio directly. In other words, it measures how much profits are produced at a certain level of sales. Like sized companies in the same industry are generally compared to each other through this form of profit ratio. The past performance of a company is also effectively measured by this ratio.

Return on capital employed

The measure of the efficiently a company in terms of generating profits from its capital employed is indicated by the return on capital employed ratio. It is calculated by comparing net operating profit to capital employed. How… [END OF PREVIEW]

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