Accounting Theory-Financial Statement Analysis

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Imperial Oil
Introduction:
Imperial Oil is the oldest oil and gas company in Canada with a history that dates back to 130 years. The company deals in petroleum products, oil and gas and has a vast upstream and downstream business. It is involved from exploring oil and gas opportunities across Canada to manufacturing and distribution of these products for various purposes. The company also deals in by-products of the main products e.g. chemicals that are essential to many other industries like automobile, manufacturers of personal care and household products etc. The company is Canada’s second largest company by market capitalization of around CAD 36.79 billion. The company has successfully undertaken various acquisitions in the past and is the largest oil and gas producing company in Canada with corporate offices in Toronto, Montreal and Calgary (About Imperial Oil).
Financial Statements Analysis:
Being the key producer of oil and gas in Canada, the company has a significant importance in the economy. However, like all the oil companies of the world the company’s performance and its decisions are greatly influenced by the economy of the county and its operating environment. Below is the analysis of company’s financial performance and position in previous five years from December 31, 2007 to December 31, 2011.
Despite of a recession in economy and extreme fluctuation in prices of the oil in years, the company has managed to increase its revenues and remain profitable. Since 2007, the company has increased the revenues by 16%. Though the company is profitable, its gross profits have fallen by 20% since 2007. The main reason for the fall can be associated with the inconsistency of cost to sales ratios which weren’t very impressive in the five years period. Further, the company has increased its expenditures in research and development which gradually increased from CAD 83 million in 2007 to 120 million in 2011. Great reductions were seen in the interest expenses of the company which fell to 3 million in 2011. The reason for such reductions in the interest expenses is due to capitalization of the interest. The company’s net incomes have shown varying trends in past five years which was 3.19 billion in 2007, reached lowest at 1.58 billion in 2009 and was recorded as 3.37 billion in year 2011. The company has managed to improve its net income as compared to past years, though a falling trend was noticed in gross profits. This means the company has controlled its operating and other expenses to improve its profitability (Summary Annual Report 16; “Imperial Oil Limited-IMO: Toronto”).
The company has increased its asset base by 56% in five years where the current standing of the total assets of the company is 25.43 billion. The ROCE is recorded as 25.4% in 2011 which is promising individually and as compared to industry ratio. The current ratio of the company is 0.85:1 for the year 2011 which is better as compared to previous years but still isn’t satisfactory. The quick acid ratio of the company is 0.76:1 in 2011 which also signifies the company’s lack of ability of pay-off its current liabilities. However, the company’s cash position has improved in 2011 as compared to previous years which increased from 267 million in 2010 to 1.2 billion in 2011. The reason for better cash position in 2011 can be associated with increased net income along with better working capital management, increased sale of assets, reduction in interest expense and increase in debt etc. The company’s debt to equity ratio in 2011 was 9% which is the highest in past five years. This shows the company is using debt as a preferred source of finance. The company overall has a strong a financial position and no dominant area of concern (Summary annual report 17; “Imperial Oil Limited-IMO: Toronto”).
Annual Report, Management Review and Disclosures:
In the annual report of 2011, the company’s review by the management seems satisfactory. Reportedly, the company is satisfied with the performance of 2011 and has delivered according to the expectations of the shareholders. By developing and strengthening operational and technological excellence and continuous improvement in cost reduction activities, the company is able to provide better returns to its shareholders than other competitors in the industry. The management in its discussion and analysis highlighted the financial position of the company on whole along with a detailed discussion of its upstream, downstream and chemical divisions. It discussed in depth, the long term outlook of the business along with the long term growth and potential in the oil and gas industry. A detailed risk assessment of the operative environment of the company has also been provided in the management’s review in order to provide detailed information to the shareholders (Summary Annual Report 2-5).
In 2011, the company has made its largest investment ever which is the Kearl oil sands project. The company expects that the project will be an important sourc...