A Ratio Analysis Report on Chevron Corporation

Q1. When did the company begin operating and where are its major locations? Chevron Corporation is based in San Ramon, California, but has offices and does business in over a 100 countries. Their roots are traced back to an oil discovery at Pico Canyon, Ca in 1879 that led to the formation of Pacific Coast Oil Co. The company later became Standard Oil Co. of California and adopted the name Chevron in 1984 when it merged with Gulf Oil, the largest merge in U.S. history at the time. Since then Chevron has acquired Texaco, Unocal, and Philips on the chemical side of operations. Q2. What is the size of the company?

Chevron has 65,000 employees working worldwide. They are the “second-largest integrated energy company in the United States and among the largest corporations in the world, based on market capitalization as of December 31, 2007” (Company Fact Sheet). They are ranked 5th in the world with a market capitalization of 196.2 billion. In 2007 Chevron did $214.1 billion in sales revenue making $18.7 billion in net income or $8.77 earnings per share diluted. Their cash dividends equaled $2.26 per share making a total stockholder return of 30.5%. Q3. What are its major products or services?

Chevron’s petroleum operations include the exploration, development, and production of crude oil and natural gas. Their refineries turn crude oil into finished petroleum products. In 2007, Chevron produced 2.62 million barrels a day and had a refinery capacity equivalent to 2 million barrels of oil per day. Chevron transports the crude oil/ natural gas by pipeline, ship, truck and rail car. On the chemical side of operations they manufacture and market petro chemical industrial plastics, fuel, and lubricant oil additives. Q4. What is the company’s industry ranking?

According to the S&P 500, Chevron is ranked second in the energy industry. They are also the #3 company in Fortune 500’s top U.S. company list. They moved up a spot due to its highest annual profit ever of $18.7 billion. This was despite a loss it took on the refinery side of business due to a rise in crude oil prices. On the Fortune 500 Most Profitable list they moved up four spots from last year to #3 due to a 9% increase in earnings along with a 5% increase in sales. Q5. What are the company’s major competitors?

Chevron is one of the six “supermajors” non-state owned oil companies. The other five are Exxon Mobile, British Petroleum, Royal Dutch Shell, Total S.A., and Conoco Philips. They rank 5th among these worldwide companies.

Q6. What are the company’s goals, philosophies and objectives for the future? Chevron’s current marketing motto is the Power of Human Energy. This is based upon their search to create a better balance between providing energy to meet the industrial needs of human progress, while simultaneously respecting nature and finding smarter, cleaner ways of going about this venture. Chevron has created a way of doing business that sets standards for what they believe in and how they go about accomplishing these goals.

These set of standards are called The Chevron Way and “At the heart of The Chevron Way is our vision… to be the global energy company most admired for its people, partnership, and performance” (www.chevron.com). For the future, the company has “invested in energy alternatives, including geothermal and biodiesels fuels, and signed contracts to develop oil fields in China.” They use the profitability of their base business, oil and gas production, to fund long term growth projects.

They also maximize their ability to compete by investing in people, technology, and efficient organizational capabilities. This investment in technology will help them become a leader in exploration as the more accessible wells dry up and companies are forced to go into harsher environments, such as the arctic and deep off shore drilling.

CVX Ratios20072006Industry Avg.Current Ratio1.171.281.3Profit Margin8.7%8.3%9.6%Asset Turnover1.521.59Return on Assets13.3%13.2%12.8%Return on S.H. Equity25.6%26.0%25.5%Times Interest Earned69.253.5Payout Ratio25.7%25.7%Debt: Tot Assets Ratio48.2%48.0%Earnings per Share8.827.8316.0

Current ratio is a good measure of liquidity. It is found by dividing current assets by current liabilities. In 2007, Chevron (CVX) had a current ratio of 1.17. That means for every dollar of current liability, it has a $1.17 of current assets. Profit Margin measures the percentage of each dollar of sales resulting from net income. It is found by dividing net income by net sales. Chevron’s profit margin of 8.7% was below the industry average of 9.6%. Asset turnover measures how effectively a company’s assets are utilized to generate sales.

It is found by dividing net sales by average assets. This means that Chevron generated a $1.52 of sales for each dollar of assets invested. Return on Assets is a good measure of overall profitability. It is found by dividing net income by average assets. This ratio is slightly above the industry average of 12.8% in 2007. Return on common stockholder’s equity measures profitability from the stockholder’s perspective.

It is found by dividing net income by avg. common stockholder’s equity. This ratio shows how much net income the company earns for every dollar invested by the owner. Chevron’s ratio of 25.6% is right on par with the industry average making it very competitive. The earnings per share of $8.82 are found by dividing the net income (18,688) by the weighted average shares (2,117). This is a measurement of the net income earned on each share of common stock. Payout Ratio measures the percentage of earnings distributed in the form of cash dividends. It is found by dividing cash dividends by net income.

A low payout ratio is common among companies experiencing high growth rates. Chevron’s 25.7% payout ratio in both 2007 and 2006 means according to this ratio it experienced no growth. Solvency Ratios show the ability of a company to exist over a long period of time. One such solvency ratio is debt to total assets ratio. It measures the percentage of total assets that creditors provide. It is found by dividing total debt by total assets. Chevrons 48% ratio is stable from 2006 to 2007. A high debt to total assets ratio is also a sign of stable earnings. Times interest earned indicates a company’s ability to make interest payments on time.

It is found by dividing income before interest expense and income taxes by interest expense. Chevron’s times interest earned ratio increased from 2006 to 2007 by 16 points, which is good since they have more available to cover interest.

Chevron’s ability to compete with the other “supermajors” has been proven over the last three decades. It has built itself up by merging and acquiring companies. Its ability to create profits has secured a financial base for it to build upon. The organizational skills and future planning, along with its investment in future technologies and renewable sources of energy, are second to none. All these components have guaranteed the existence and competiveness of this company for many decades to come. Innovation and success truly are The Chevron Way.