Financial Statement Analysis and Business Valuation Assignment

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While flexibility are clear in accounting in Conocophillips, it is essential for managers to pay more attention for disclosure information. Guideline of consistency and coordination must be take care when judging the accounts. Strict guideline is helpful for manager to manipulate the accounts and release the possibility of errors.

1.3 Quality of disclosure

Conocophillips conduct a detailed disclosure of accounting information both qualitatively and quantitatively. Conocophillps’s disclosure provide detailed financial statement relating to the company’s business strategy as well as forecast the future. It is clear to know the company’s current performance. And information are disclosed differently due to different segments. Notes are specific and accounting policy are explained in detail in the notes. As a result, the accounting information is informative. However, in terms of defects, highlights of business are easily to find, but bad news or emergency may hardly to know in the information.

1.4 Red flags identification and accounting analysis implementation

In order to search for red flags of Conocophillips, it needs to analysis related ratio of the company. Below are some important ratio of Conocophillips with briefly illustration.

Net sales to Cash from sales ratio

[pic 1]

This ratio reflects the ability that a company turns its sales into cash. It is clear that the lower the ratio, the better ability for the company. From the chart, though it shows a substantially rise from 2009 to 2010, the following four years generate a steady drop trends ( the date of 2014 is missing because cash from sales in 2014 is not available). As a result, the trend indicates there is no red flag in this section

Net sales to Accounts receivable ratio

[pic 2]

This ratio is used to quantify the effectiveness of using it assets and extending its credit. The higher the ratio, the more efficient of its assets. As it can be seen from the chart above, the rate falls sharply from 2009 to 2010 possibly because of the economic crisis, it is rising steadily after 2010 until recent year. This shows a good trend and certainly remove the chance of red flag.

Net sales to Assets

[pic 3]

This ratio judge the efficiency the a company using its assets. It shows how many revenues are generate per dollar of assets. The higher the ratio, the more efficiency of the assets. From the chart, it can be seen that the trend is very steady in recent years. As a result, red flag could not be seen in this area.

Cash flow from Operation Activities to Operating Income ratio

[pic 4]

This ratio could measure the concern of core expense in operating activities if noticeable changes happened. However, the steady increasing trend reflects the operating income is rising faster than costs. Thus, there predicts no red flags.

Net sales to Inventories ratio

[pic 5]

The Net sale/Inventories ratio refers to inventory turnover ratio, it measures how many times the inventories has been moved during a financial year. Higher ratio reflects a favorable sales level and relatively lower storage cost, thus, a healthy business circulation. From the chart, though the ratio was rapidly increased from the year 2011 to 2012, it decline by 24% from the year 2012 to 2013 and 17% from the year 2013 to 2014. This trend may continue by 2014-2015. This is not a good signal. In this case, a red flag has been found. This may be due to the bad economic situation in the end of 2014 and the first several month of 2015. Price of oil has been cut during this period. As stated in accounting policy in Conocophillips, oil and gas are core business of Conocophillips. As a result, the company should make efforts to finding new reserves and expanding it sales and potential market.

From this ratios, just one red flag, i.e, the inventory turnover ratio, is found . In search for other potential red flags, this report will depend on the annual report of Conocophillips. Firstly, derivatives market could be a potential market of Conocophillips. Due to rapidly growth of its business, Conocophillips has large volume of derivatives holding and trading in market such as options, futures. The company record the return and costs of derivative as operation revenue or sales, but it actually do not increase it profit. This situation could lead to a wrong picture or misunderstanding. Secondly, As said in accounting policy, Conocophillips has flexible policy which it measure the possibility of failure to find reserves to adjust cost. However, this judgment is mostly by managers or directors own views. It is quite subjective, as the judgment may be distorted if managers wrongly forecast the future. As a result, the final adjustment of cost could be unreasonable.

In conclusion, due to the analysis of red flag above, the company must take measures to adjust accounting policy and marketing plan for significant progression in future.

- Financial Analysis

2.1 Profitability analysis

In order to do profitability analysis, some important ratios should be analyzed including:

- Net Profit Margin

- Return on Assets

- Return on Equity

- EBITDA Margin

This report will take Devon Energy Corp, Noble Energy Corp and Hess Corporation as Conocophillips’s competitors and the whole industry average for comparison.

2.1.1 Net Profit Margin

[pic 6]

Net profit margin helps to measure the profitability of a company that how much percentage that the sales revenue are turned into profit. High profit margin reflects a higher profitability. The chart above shows the net profit margin of Conocophillips and its peers and the whole industry. From the chart it can be seen that Conocophillips’s profit margin is not the largest one but the most stable one. Unlike the other three peer companies which fluctuates to a relative large extent, Conocophillips’s profit margin stay steady along the time with industry average. Even