This report reflects on the financial statements of two companies that fall in the broad petroleum and allied industry. One the companies, Halliburton which offers technical services to the petroleum industries has its headquarters in Dubai, United Arabs Emirates [hhtp://www.halliburton.com] whereas the other one, Anadarko explores and develops oil and natural gas and has its headquarters in Huston, Texas, United States of America. [hhtp://www.anadarko.com/]
The main goal of this paper is to save the potential reader time. It is also designed to assist consultants, financial managers, strategic planners, and corporate officers I gauging the financial worthiness of the two companies. However, it will not seek to answer the question of whether the companies have performed well or poorly in the past or will do so in the future, but it will leave those questions for the readers to answer.
Financial Ratios for the two firms Halliburton 2007 balance sheet indicated a total of $35,135 millions USD in assets, and an equal figure in liabilities and stock equity, while the 2006 financial year showed totals of $16,820 millions USD. [hhtp://www.halliburton.com]
Anadarko’s balance sheet indicated totals of $49,229 millions USD on both columns for 2008 while for 2007 indicated a totals of $48,451 millions USD on both columns. [hhtp://www.anadarko.com/] These balance sheets and other financial statements of the two companies can be used to calculate the companies’ liquidity, profitability, leverage, and market performance. NB: figures are given in million USD
In calculating liquidity, the current ratio formula will be used to give out the liquidity ratio for the two companies for at least two years duration. Current ratio = Current assets Current liabilities; Therefore the liquidity ratio for the two companies will be: - Halliburton
= 3.14 (2007)
4,727 = 2.37 (2006)
6232 = 1.61 (2008)
5,234 = 1.84 (2007)
From the financial reports the profitability ratios of the two companies can also be calculated, this will involve the deducting of costs from the turnover.
Profitability = turnover (sales) – costs
Therefore the company’s profitability ratio will be: - Halliburton 15264 – 11, 765 = 3,477 (2007) Anadarko
= 6,149 – 2592 = 3,557 (2008)
= 2,995 – 1,934 = 1,061 (2007)
From the financial data collected reflecting the two companies financial statements, the leverage ratios can also be calculated. Leveraging which is the use of borrowed funds or debt so as to boost the returns to equity is normally calculated by dividing the total liabilities with the shareholders equity.
The following terms are used to give out the leverage ratio: -
D = liabilities, E = equity,
Debt-to-equity ratio = D
6866 = 0.91 (2007)
7376 = 1.28 (2006)
18,211 = 1.70 (2008)
16,364 = 1.96 (2007)
The market performance of the company the two is relatively good with the UAE, Halliburton recording total revenue of $15,264 million USD in the just concluded last quarter of 2008 and a market cap of, [hhtp://www.halliburton.com]while Anadarko recorded a commanding figure of $4,149 in the year 2007 and $ 2,995 in the year 2006. [hhtp://www.anadarko.com/] These figures indicate a solid grip in the market for the two firms. Although many factors are put into consideration in order to come up with a precise figure as the approximate position of a particular in the market.
The companies multinational presence also I another factor which adds up to this argument, Halliburton has an international presence to more than seventy countries while Anadarko has interests in Algeria, china, Ghana and other countries.
The above calculated ratios portrayed a distinct variant between the two firms; though they fall in the same industry and are both multinationals offering almost similar products but operating in various countries of the globe. The financial ratios calculated were meant to differentiate the two firms in terms of their assets base and shareholders equity. The ratios also seek to give out a glimpse of the way each company is faring relative to.
The calculated ratios helps to give a potential reader a quick snap check on the overall performance of the companies, many people are known to shy away from going through the full financial documents on the companies. The ratios are described using simple and appealing language in order to make the indented impact among the target group.
The ratios also help users of financial information to develop a sense of comparison for countries whose areas of operations are different. Again, the ratios were calculated from available financial data posted by the companies which mostly differs from company to company a phenomenon that also gives users of financial information a chance to experience this variation which definitely leads them to understand the financial standing of the companies better.
However, the calculations of ratios for the two companies were not an obvious task; it required the collection, analysis and interpretation of the companies’ financial statements which as explained above exhibited very distinct traits. The variations took the form of sketchy and mean balance sheets and other important financial documents; this made the computations of the ratios and the determination of the financial worthiness of a given company to be nightmarish.
Whereas the US based Anadarko website posted a very detailing and lengthy financial data, the UAE based Halliburton website offered a sketchy and short financial data and thereby compromising the computation of accurate and elaborate financial ratios from the data set.
Some times the data sets from the two companies varied in the use of certain terms to describe processes, ratios or even various stages in the financial statements. Financial information extracted from a company’s website may not be fully relied on because a company can make some exaggerations as to who its competitors, suppliers, or customers are, and therefore external sources are highly recommended for authentic financial ratios.
The credibility of financial information is also subject to deviations from year to year across companies and therefore predictions of market trends may be a bit hard a task to partake, again, comparing two firms in the same industry may be not realistic since they are not directly linked or do not directly compete.
In UAE for instance, financial information was noted to be not only sketchy but also too unrevealing and therefore a lot needs to be done in order to make them more revealing and lengthy. It’s good to note that even most Middle East countries continue to use the US dollar as the benchmark for the pricing of oil products; however, this alone is not enough. The UAE financial information needs to adopt some of the universal terms that will make the information easy to interpret and use.
The analysis and computation of ratios in regards to the financial information provided by firms or even external audits is sometimes not one hundred percent reliable due to some or all of the following reasons. According to shim and Siegel (p. 60) asserts that “while ratio analysis is an effective tool for assessing a company’s financial condition, its limitations must be recognized.” Further, on page 59 they again assert that “no single ratio or group of ratios is adequate for assessing all aspects of a company’s financial condition.” They therefore point out to the following limitations as being the most likely to arise; [Skim and Siegel, (2000)]
ratios are static and do not reveal future trends; accounting standards or policies may limit useful comparisons across companies; ratios do not indicate the quality of the components used to calculate the ratios i.e. they are sometimes ambiguous to interpret; management accounting practices across companies and countries may not be performed in the same style; reported ratios may not reflect real values; companies may be highly diversified, limiting the comparability of their ratios to others; Financial statements and resulting ratios mean different things to different things to different people depending on their points of view or motivations; Industry averages or norms are approximate and therefore finer industry definitions may be required for certain interpretations or companies.
This is to say that all the above figures are mere estimates and forward-looking therefore they should be cautiously used as again they are subject to countless intervening factors such as company’s management style, exchange rate volatility, changes in accounting standards, changes in economic trends, changes brought about by competition, changes in source data quality among many other factors. [Skim and Siegel, chap. 6, (2000)]
Within the context of financial market, the efficient-market hypothesis (EMH) is a proposition that asserts, financial markets that involves the pricing of assets such as bonds, stocks, and other properties reflect all known information. This proposition is guided by the reasoning that a market can not be consistently outwitted by information that the market already knows, except through great luck. The term information as used in this context refers to anything that may affect prices and that is not known in the present and hence it is bound to materialize haphazardly in the future. [Paul, Samuelson, (1965)]
The main role played by EMH is to give potential investors on the prospect of the future performance of a given company; it requires that agents exhibit rational expectations especially when the market is faced with new information. This important in stabilizing the markets since investors are known to overreact while others under react, and thereby ending up in making irrational decisions. EMH demands that investors’ reactions be random but follow a normal distribution pattern in order to achieve a net effect on the market price that can not be manipulated into realizing abnormal profit in regards to transaction costs.
This renders the notions of indispensability irrelevant, whereby any person can be wrong about the market, while the market is always right. Hence EMH is equivalent to a meteorological report which may deliver a wrong weather report on a particular geographical area but the weather goes ahead and proofs the forecasting wrong, giving credit to the term , “the market is always right” just like the “Ws always right.” EMH is categorized into three main groups that depends on the dynamics of particular market, these groups are, weak-form efficiency, semi-strong-form efficiency and strong-form efficiency. [Paul, Samuelson, (1965)]
In UAE for Instance, a country that enjoys a stable economy due to huge deposits of oil and natural gas, during the year 1999 it recorded a per capita income of $16, 892, again, UAE has exhibited the ability to absorb external economic shocks emanating from East Asia or Russian fiscal woes or even the fluctuating oil prices. [Moin A Siddiqi, 1999] UAE firms therefore operates under a semi-strong-form of EMH, the share market prices adjust to publicly available new information very rapidly and in an unbiased fashion, a phenomenon that leads to fair trading with no cases of excess returns realized in the event of trading based on that new information.
However, the success of semi-strong-form of efficiency is wholly depended on reasonable and instantaneous adjustments to previously unknown news.
Skim and Siegel (2000), financial management published by Barron’s Educational Series, Inc. (BARRON’S BUSSINESS LIBRARY series), ISBN: 0-7641-1402-6. Paul, Samuelson (1965). “Proof That Properly Anticipated Prices Fluctuate Randomly”. Industrial Management Review 6: 41-49. Moin A Siddiqi (1999). United Arab Emirates: Financial Report Middle East, the, Dec, 1999. hhtp://www.anadarko.com/ hhtp://www.halliburton.com/