Understanding the key ratios of a company is very important for investors. Each ratio uncovers the inner workings of the company, and may lead an investor to make a decision on whether to invest in the company, or to continue looking elsewhere. Exxon Mobil and Chevron are both in the same industry, and are virtually household names. In this study, key ratios of these two companies will be analyzed, and a comparison of results will be provided. Exxon Mobil and Chevron – Financial Data
Exxon Mobil and Chevron are two of the most prominent companies in the energy sector, ranking 2nd and 4th, respectively, on Fortune 500’s list of America’s largest corporations (Fortune Magazine, 2007). The companies are traded on the New York Stock Exchange (NYSE), and have over $500 billion USD in combined revenue from the year 2006; making them interesting corporations to financially analyze. When analyzing a company’s financials, it is important to conduct ratio and trend analysis.
Ratio analysis allows for certain important performance factors to be translated into useful statistics for a given reporting period. Trend analysis, on the other hand, provides insight into a company’s long-term situation since a comparison of certain key ratios spans multiple years; hopefully providing analysts with a clue as to how the company will perform in the future. The follow key ratios were derived from Exxon Mobil’s and Chevron’s SEC filings for the years 2005/6, and will be used to determine possible trends for the companies.
Understanding the key ratios of a company is very important for investors. Each ratio uncovers the inner workings of the company, and may lead an investor to make a decision on whether to invest in the company, or to continue looking elsewhere. Exxon Mobil and Chevron are both in the same industry, and are virtually household names. In this study, key ratios of these two companies will be analyzed, and a comparison of results will be provided.
Current Ratio Analysis: The current Ratio tells us how well a company is able to pay off its short term debts using its most liquid assets. To illustrate using the current ratio for comparisons of Exxon Mobil current position relative to Chevron as shown. Current Ratio = Current Assets/Current Liabilities.
| EXXON MOBIL| | CHEVRON| | Dec-06| Dec-05| | Dec-06| Dec-05| Total Current Assets| 75,777.00| 73,342.00| Total Current Assets| 36,304.00| 34,336.00| Total Current Liabilities| 48,817.00| 46,307.00| Total Current Liabilities| 28,409.00| 25,011.00| Current Ratio| 1.550| 1.580| Current Ratio| 1.270| 1.370|
The current ratio measures that Exxon Mobil has better ability of pay in short term its debits than Chevron. The current ratio is computed as shown. A declining ratio of Chevron is a sign of deteriorating financial condition in comparison with Exxon, or it might result from eliminating obsolete inventories or other stagnant current assets. This ratio is definitely not good for any company, but principal for Chevron as it decreasing. Which demonstrate that financial solvency of the company is weakling.
Quick (Acid-Test) Ratio: This ratio is much like current ratio but as inventory subtracted, this ratio become better test of liquidity. The quick or acid-test ratio is computed as shown. Quick ratio= Quick Assets / Current Liabilities.
In other word Quick Ratio = Current Assets – Inventory)/Current Liabilities | EXXON MOBIL| | CHEVRON| | Dec-06| Dec-05| | Dec-06| Dec-05| Current Assets| 75,777.00| 73,342.00| Current Assets| 36,304.00| 34,336.00| Inventory| 10,714.00| 9,321.00| Inventory| 4,656.00| 4,121.00| Quick Assets| 65,063.00| 64,021.00| Quick Assets| 31,648.00| 30,215.00| Total Current Liabilities| 48,817.00| 46,307.00| Total Current Liabilities| 28,409.00| 25,011.00| Quick Ratio| 1.333| 1.383| Quick Ratio| 1.114| 1.208| This is a conservative analysis of the variation of the current ratio because it only includes cash, receivables, and current marketable securities. Like current ratio also decreasing due to same reason stated above in current ratio section here, another reason can be found and that is inventory. Chevron has the mayor decreasing amount, the amount of inventory of chevron are not reaching up to the company own expectation and that is why the inventory pilling up.
Inventory Turn Over: The inventory Turn Over tells us how fast a company can sell its products usually in a year. The inventory turnover is computed as shown. Inventory Turn Over = Cost of Goods Sold / Average Inventory.
It measures how many times a company's inventory has been sold and replaced during the year. Here is the inventory turnover for Exxon and Chevron. Generally, the higher turnover indicates that merchandise is being handled more efficiently. In this case, Chevron has more efficiency in sell its product of 32.8% in comparison on Exxon with 28.1%. Chevron has 4.7% of affectivity more than Exxon. | EXXON MOBIL| | CHEVRON|
| Dec-06| | | Dec-06| | Cost of Goods | 281,692| | Cost of Goods | 144,139| | Beginning Inventory| 9,321| | Beginning Inventory| 4,121| | Ending Inventory.| 10,714| | Ending Inventory.| 4,656| | Average Inventory| 10,017| | Average Inventory| 4,388| | Inventory Turn Over| 28.121| | Inventory Turn Over| 32.848| |
As a result, Chevron has less number of days’ sales in inventory of11 days; Chevron is major improvement in managing inventory. Exxon has 12 days in takes its inventory to purchase, sell and replace it. Average sales period = 365 days / Inventory Turnover.
Average Collection Period: This ratio measure on average how many days it takes to collect an account receivable. Average Collect Period = 365 / Accounts Receivables Turnover Account Receivable Turnover = Net Credit sales/ Average Account Receivable Average receivable = (beg. Inventory- end Inventory)/2
| EXXON MOBIL| | CHEVRON| | Dec-06| Dec-05| | Dec-06| Dec-05| Average Collection Period| 25| 24| Average Collection Period| 20| 21| *Information according to templates. This ratio shows that Chevron has less and decreasing days to collect its sales credit (21-20) than Exxon that has and increasing in collect the account receivable (24-25).
Total Asset Turnover: The Total Asset Turnover Ratio shows how much of revenue is generated from every unit of assets. This ratio measure Chevron is increasing its assets percentage in revenue from 157.7% to 158.4%. Exxon for contrary is decreasing from 177.9% to 172%. But in comparison with Chevron the percentage on revenue of Exxon is biggest | EXXON MOBIL| | CHEVRON|
| Dec-06| Dec-05| | Dec-06| Dec-05| Revenue| 377,635| 370,680.00| Revenue| 210,118| 198,200.00| Total Assets| 219,015| 208,335.00| Total Assets| 132,628| 125,833.00| Total Assets Turnover| 1.724| 1.779| Total Assets Turnover| 1.584| 1.575|
Debt to Equity Ratio: Debt to Equity Ratio determines the financial leverage of a company. This ratio show the amount of financing activity done by investors and the amount of loan taken by the company. The lower the ratio the better is the company. In this case the both company have the same financing activity, but the better results is of Chevron because it is decreasing and Exxon in the last year increase 3 percentage points. | EXXON MOBIL| | CHEVRON|
| Dec-06| Dec-05| | Dec-06| Dec-05| Total Liabilities| 105,171| 97,149.00| Total Liabilities| 63,693| 63,157.00| Total Equity| 113,844| 111,186.00| Total Equity| 68,935| 62,676.00| Debt to Equity Ratio| 0.92| 0.87| Debt to Equity Ratio| 0.92| 1.01|
Net Profit Margin: Net Profit Margin tells us about how much of the revenue generated by a company can kept as profit for the company. | EXXON MOBIL| | CHEVRON| | Dec-06| Dec-05| | Dec-06| Dec-05| Net Income| 39,500.00| 36,130.00| Net Income| 17,138.00| 14,099.00| Total Revenue| 377,635.00| 370,680.00| Total Revenue| 210,118.00| 198,200.00| Net Profit Margin| 0.105| 0.097| Quick Ratio| 0.082| 0.071|
From the data above it can be seen that net profit margin of the both companies is increasing since their net income has increase over the years. Although the revenue also increase but the margin of increase in revenue of Chevron was comparatively low of 94.32% (198,200/210,118). The increase in Exxon was 98.15% (370,680/377,635).
Price to Earnings Ratio: The price earnings ratio (PE) on common stock measures a company’s future earnings prospects. It is often quoted in the financial press and is computed as follow: Price Earnings Ratio (PE) = Market Price per share of Common Stock/ Earning per Share on Common Stock. | EXXON MOBIL| | CHEVRON|
| Dec-06| Dec-05| | Dec-06| Dec-05| Price Earnings Ratio (P/E)| 13.360| 10.960| Price Earnings Ratio (P/E)| 8.100| 8.800| *Information according to templates. The price earnings ratio of Exxon improved from 10.9 to 13.36 during 2006. In other words, a share of common stock of Exxon was selling for 10.9 times earnings per share at the end of 2005. At the end of 2006, the common stock was selling for 13.36 times earnings per share. This indicates that the market expects Exxon to experience favorable earnings in the future. For contrary Chevron has decrease from 8.8 to 8.1 times earnings per share)
Comparison Balance Sheet The follow illustrate analysis between Exxon Mobil and Chevron of December 31, 2006 and 2005 balance sheet indicates that inventory of the two companies have increased of total assets: Exxon Mobil from 4.47% to 4.89% and Chevron from 3.27% to 3.51%. Chevron has stockholders’ equity increase from 49.81% to 51.98% with a comparable decrease of Exxon Mobil 53.37% to 51%. Exxon Mobil has an unfavorable effect in its liabilities from 45.63% to 48.02%, at difference of Chevron that its liabilities decrease from 50.19% to 48.02%, In 2006 the both companies have the same percentage in Stockholders’ equity and liabilities, so Chevron has been doing effective progress in its operation. In 2006, the both companies increased the assets Chevron by 5.4% (132,628/125,833) and Exxon Mobil by 5.1% (219,015/208,335).
Comparison of Income Statement In the follow illustrates comparative income statement for Exxon Mobil and Chevron are showing the percentage analysis of the relationship of each component in the income statement and sales. These Incomes Statements are show as for single step.
The comparative indicates that Exxon Mobil has a higher rate of operating and total gross profit in the past two years than Chevron Corporation. In the gross operating profit the companies had increase profit over 2005 to 2006, Exxon Mobil from25.69% to 27.93% and Chevron from 18.49% to 21.67%). In Net Income, Chevron has increase net income from 8% to 9%t than Exxon Mobil that has the same percentage in its net income of 13%.
These are the two biggest and most stable companies in its industry; Exxon Mobil would certainly have higher sales, profit and economic result than Chevron, but according to our previous analysis Chevron has great growth, maximizing their resources for effective use of their inventory and control of their liabilities. Whether the conduct of its operations continues to like these in a short time would appreciate more similarity between the two companies.
References Warren, Reeve, Duchac (2009). Principles of Accounting. Edition 23, Cengage Learning. Edmond (2006), Managerial Accounting. 7 edition, McGraw-Hill high education. From http://highered.mcgrawhill.com/sites/0072991054/student_view0/chapter13.html MSN Money (2007). Exxon Mobil Corporation Financial Statements. Retrieved 19 July, 2007 from http://moneycentral.msn.com/investor/invsub/results/statemnt.aspx?Symbol=XOM Fortune Magazine (April 30, 2007). Fortune 500. Retrieved July 15, 2007 from http://money.cnn.com/magazines/fortune/fortune500/2007/full_list/index.html MSN Money (2007).
Chevron Financial Statements. Retrieved July 22, 2007 from http://moneycentral.msn.com/investor/invsub/results/statemnt.aspx?
Symbol=US:CVX&lstStatement=CashFlow&stmtView=Ann CNN Money. Exxon Mobil Corporation Financial Statements
from http://money.cnn.com/quote/quote.html?symb=XOM CNN Money. Chevron Financial Statements. From http://money.cnn.com/quote/quote.html?symb=CVX