Introduction
The financial performance ratios look at how well a company has been able to turn its assets into revenues as well as how efficiently a company converts its sales into cash. (Investopedia) The purpose of calculating and analyzing these ratios is to have an insight into the company’s financial performance during a specific period and the trend of the performance over a definite period of time. This paper analyzes the financial performance of Exxon Mobil on the basis of the published financial results of the company for the years 2005, 2006 and 2007.
Performance Ratios
Based on the financial results for the years 2005, 2006 and 2007 the various performance indicators in the form of financial ratios are presented in the following table:
Gross Profit Index
The gross profit index exhibits the growth in the growth in the gross profit over the periods. The gross profit index for the year 2007 as compared to 2006 shows an increase of 5.3% which is higher compared to the figure for the year 2006 as compared to 2005 which is only 4.6%. This implies that the company has performed well in the year 2007 in terms of gross profit earnings.
Other Ratios
The other ratios have been calculated and tabulated for analysis as below:
Analysis
The analysis of the ratios is appended below:
Gross Profit Percentage
The gross profit percentage is a ratio that can be derived from an income statement and reveals the profit left over from operations after all variable costs have been subtracted from revenues. The gross profit percentage can be used for determining operating performance since the ratio shows the production efficiency in relation to the prices and unit volumes at which the products or services are sold.
The gross profit percentage has increased over the period and it is showing an increasing trend over the years. The gross profit percentage for the year 2006 is at 22.6% whereas the percentage is only 20.5% for the year 2005. The percentage for the year 2007 has improved further as compared to 2006 and is at 23.6%. This implies that the performance of the company has shown better results in 2007 and this may be due to enhanced sales realizations due to price rises of oil products or reduction in the cost of sales.
Net Income Percentage
The net income percentage reveals the return from the operations of the company including the influence of any extraordinary items of revenue. It is calculated by subtracting the sales, general and administrative expenses, interest costs, depreciation and income taxes from the gross profit. The net income reveals how effectively the company has performed in augmenting the ‘return on sales’. (Financial Ratio Analysis) In the case of Exxon Mobil the net income percentage has shown a marginal increase only for the year 2006 at 10.8% as against that of 10.1% for 2005. For the year 2007 also there is only a marginal increase in the net income percentage at 11.3%. This indicates that there is no effective improvement in the ‘return on sales’ of the company during the years under review.
Operating Profit Percentage
The operating percentage reveals the return from the operations of the company excluding the influence of any extraordinary items of revenue. It is calculated by subtracting the sales, general and administrative expenses from the gross profit. The operating income reveals how effectively the company has handled its operations during the period under review. It indicates the amount available for payment of interest costs and depreciation.
In fact the operating income percentage determines the amount that could be available for distribution to the stockholders after deducting interest costs, depreciation and the applicable income taxes. In the case of Exxon Mobil the net income percentage has shown a significant increase for the year 2006 at 18.1% as against that of 16.0% for 2005. However for the year 2007 there is a decline in the operating profit percentage at 17.3%. This implies that the company has not made any effective improvement in the reduction of sales and administrative costs and therefore the operating profit percentage has shown a decline despite the increase in the gross profit percentages.
Sales Margin
This ratio is arrived at by deducting the sales expenses from the gross margin. The sales margin indicates the earnings of the company expressed as a ratio to sales. The price differences and the increase or decrease in sales expenses may affect this ratio. For Exxon Mobil the year 2007 is showing a reduced sales margin as compared to the year 2006 at 21.0% which may be due to the enhanced sales and distribution expenses.
Sales to Operating Income
Operating income is the difference between operating revenue and operating expenses. Here the net sales are only taken into account for calculating the ratio. Other items of revenues like investment income or any other extraordinary revenue items are not included for calculating the ratio. The operating income is the earnings before interest and taxes. This ratio indicates the earning performance of the company expressed as a ratio to net sales. This ratio with figures of 16.7%, 19.1% and 20.0% over 2005, 2006 and 2007 respectively shows an increasing trend only indicating Exxon Mobil is doing well in terms of sales improvements.
Conclusion
Ratio analysis is a better way to understand profitability of companies. The ratios tell how effectively the managers can turn profits from sales.
References
Financial Ratio Analysis. 2008. Web.
Investopedia ‘Operating Performance Ratios: Introduction’. Web.