By analyzing Exxon Mobil’s financial statements we obtained financial ratios which led me to the conclusion that Exxon Mobil is mildly profitable, however they have some areas that might require attention. We can support this conclusion by analyzing what the implications of certain ratios are, and how they apply to Exxon Mobil.
To make things brief will pick out a prominent ratio from four different categories (liquidity/short term debt ratios, turnover ratios, long-term debt ratios, and profitability ratios). The first ratio of importance is the current ratio (current assets/current liabilities) and it is a liquidity /short-term debt ratio that measures a company's ability to pay short-term obligations. Generally speaking a company should be above 1.0, as a number below this indicates that the company would not be able to pay off its current liabilities if it had to sell of its current assets.
A strong company however will have a current ratio of about 2.0 or higher (www.answers.com/topic/financial-ratio). For Exxon Mobil the current ratio were 1.47, 1.47, and 1.55 for 2008, 2007, and 2006 respectively. Being that Exxon Mobil is in the middle ground between 1.0 and 2.0, one can come to conclusion that Exxon Mobil is mildly profitable, however there is definitely room to grow by either increasing assets, or decreasing current liabilities.
Another short term debt/liquidity ratio to analyze is the cash ratio (cash and cash equivalents/current liabilities). The cash ratio measures the extent to which a corporation or other entity can quickly liquidate assets and cover short-term liabilities (http://www.investopedia.com/terms/c/cash-ratio.asp?&viewed=1). For the most recent year, 2008, Exxon Mobil has a cash ratio of 0.64. A profitable company would more than likely have enough cash to pay off its short turn debt, so a ratio of 1 or greater could be expected. Exxon Mobil however is less than 1 and hence is not terribly profitable and healthy from this standpoint.
Another ratio of importance is the turnover ratio, inventory turnover (Cost of Goods Sold/Average Inventories). This particular statistic measures how frequently a company’s inventory comes in (purchased or manufactured) and goes out (sold). According to http://www.effectiveinventory.com/article2.html, an efficient inventory turnover amount is around 12. For Exxon Mobil the inventory turnover ratio were 28.95, 24.98, and 25.08, for 2008, 2007, and 2006 respectively. Using this ratio we can see that Exxon Mobile has roughly double the inventory turnover of your typical healthy company, which supports the conclusion that Exxon Mobil is a mildly profitable company.
Another we should take a look at is the Profitability Ratio, ROA a.k.a. Return on Assets (Net Income/Sales * Sales/Average Assets or Net Income/Average Assets). Return on Assets measures indicates how effectively a company is deploying its assets. In addition to this the more “asset-intensive a business, the more money must be reinvested into it to continue generating earnings. This is a bad thing. If a company has a ROA of 20%, it means that the company earned $0.20 for each $1 in assets. As a general rule, anything below 5% is very asset-heavy (manufacturing, railroads), anything above 20% is asset-light (advertising firms, software companies)” (http://beginnersinvest.about.com/od/incomestatementanalysis/a/return-on-assets-roa-income-statement.htm).
For Exxon Mobil ROA (return on total assets) was 19.83, 16.78, and 18.04, for 2008, 2007, and 2006 respectively. As noted earlier this means that Exxon mobile doesn’t need to reinvest that much money when compared to most companies to continue generating earnings; this again is good for Exxon Mobil, as it shows high profitability. Exxon Mobil’s ROE (Net Income/Average Shareholder’s Equity) for the most recent year, 2008, was 40.03. This is a striking statistic as the average is between 15-20%; this also shows the profitability of Exxon-Mobil. One final ratio to take a look at is the long-term debt ratio, debt/equity ratio (short-term debt + long-term debt/stockholders equity).
For Exxon Mobil the value of the ratio for the most recent year ended 2008, was 0.08. This value here again attests to the profitability of Exxon Mobil as evidenced by its small amount of debt in comparison to its stockholder’s equity. of A conclusion that can be drawn from analyzing ratios is that overall Exxon Mobil is in fact mildly profitable, however the areas that warrant improvement lead me to believe that Exxon Mobil should be Given a Hold rating until there circumstances merit otherwise.
According to http://finance.yahoo.com/q/ao?s=XOM, an average of 12 different analysts yields a 2.7 rating for Exxon Mobil, with 1.0 representing a strong buy/outperform/overweight, a 5.0 representing a strong sell/underperform/underweight, and a 2.5 representing a hold/equal weight/perform. More recently Exxon Mobil has experienced a string of downgrades.
For example, on April 14th 2009, Oppenheimer downgraded Exxon Mobil from outperform to perform. In addition to this, on March 27th 2009, Benchmark downgraded Exxon Mobil from hold to sell. If that wasn’t bad enough, on February 19th 2009, Barclays Capital downgraded Exxon Mobil from overweight to equal weight.
The news hasn’t been all bad however, due to the fact that on February 23rd 2009; Deutsche Securities upgraded Exxon Mobil from hold to buy. When compared to the other large cap companies in the energy, oil, and gas industry such as Chevron Corp, ConocoPhillips etc. the mean recommendation of 2.7 for Exxon Mobil is the lowest. Unfortunately a stock’s price and hence valuation is moderately influenced by analysts’ opinions (http://biz.yahoo.com/research/indgrp/0530_mc_group.html).
With this in mind the according to http://finance.yahoo.com/q/ao?s=XOM, an average of 12 brokers gives a year-end price target of 76.58, which as of September 29, 2009 is higher than the current closing price of 69.07. This in turn, if holds true, represents a potential for ten percent growth by the year’s end.
Overall what the analysts are saying almost completely parallel what I concluded about Exxon Mobil for a few different reasons. Given the mixed results for profitability and general health that I obtained for Exxon Mobil, I came to the conclusion that right now Exxon Mobil was in a state where it didn’t merit a sell, however by the same token they weren’t doing anything that would lead me to believe that they were a company that has a lot of short term growth and warranted a buy rating. That being said I said there was room for improvement on the part of Exxon Mobil which would increases its value.
The analysts too indicated this as evidenced by setting a mean year end price target that was roughly ten percent above the current price. This means that analysts believe that Exxon Mobil has the capacity to change its current situation either by decreasing their debt, or by increasing their profit margins and sales volume. Overall, Exxon Mobil is and will continue to be, a powerhouse in the oil, gas, and energy industry. Any obstacles present can more than likely be attributed to the present economic downturn, as well as the decrease in the price of crude oil. In fact, Exxon Mobil is #1 on the Fortune 500 list, and is the largest energy company in the world.