I.

Financial Ratios: Commonly used

The company that I have chosen to profile for the final project is Exxon-Mobil. Exxon-Mobil

is the world’s largest publicly owned “integrated oil & gas company.”

Commonly used financial ratios for the “integrated oil and gas industry” include, but are not

limited to: (1) Price-to-Cash flow ratio, (2) Reserve-Replacement ratio, and (3) Current Ratio.

Price-to-Cash flow is an important tool because it evaluates the price of a company’s stock

relative to how much cash flow it is generating on a per share basis. The higher this multiple the

riskier the stock is. Due to the complexity of the oil and gas industry, this ratio removes the effects of

non-cash metrics such as depreciation (Investopedia, 2017).

The Reserve-Replacement ratio measures the amount of proved reserves added to a company’s

reserve base during the year relative to the amount of oil and gas produced. During stable demand

condition, a company's reserve replacement ratio must be at least 100% for the company to stay in

business long-term; otherwise, it will eventually run out of oil (Investopedia, 2017).

The current ratio is a liquidity ratio. It shows the company’s ability to pay off immediate

financial obligations. The higher the ratio, the more easily the company can pay those obligations.

II. Financial Ratios: ROA and ROE for Chevron

Chevron is an industry peer of Exxon-Mobile. Please see APPENDIX I for Chevron’s ROE

and ROA calculation and summary.

III. Profitability

Profitability is a measure of company’s ability to generate sales and to control their expenses

(Berman, K., Knight, J., Case, J.,2006).

Chevron’s ROE for 2013, 2014, 2015, 2016, and 2017 were 14.2%, 12.3%, 2.98%, -0.34%,

and 1.97% respectively (Appendix, Table 1). ROE’s for the Integrated Oil and Gas industry for 2013,
2014, 2015, 2016, and 2017, were 11.6%, 6.6%, -0.5%, 2.6%, and 4.5% respectively (NetAdvantage,

2017). Chevron’s current ROE of 1.97% is currently below the industry average of 4.5%. With

respect to the industry, over the last five years, Chevron experienced the same downward trend in its

ROE.

A declining ROE in the oil and gas industry could possibly be due to a worldwide decline in

commodity prices, especially in crude oil.

Chevron’s ROA for 2013, 2014, 2015, and 2017 were 8.8%, 7.4%, 1.73%, -0.19%, and 1.12%

respectively (Appendix, Table 2). ROA’s for the Industry for 2013, 2014, 2015, 2016, and 2017 were

5.2%, 3.8%, 1.3%, 1.5%, and 2.2% respectively (NetAdvantage, 2017). Chevron’s current ROA of

1.12% is slightly below the industry average of 2.2%. Like ROE, Chevron’s ROA with respect to the

industry experienced a downward trend.

ROA captures how well a company used its assets to create value. The decline in ROA can be

a sign that Chevron is encountering possible declines in their fundamental business performance.

IV. Limitations of Financial Ratios: In General

Financial ratios are also limited by the scope of various external factors which impact the ratio

inputs.

Inflation has an impact on financial data. If the rate of inflation has changed in any of the

periods under review, this can mean that the numbers are not comparable across periods (Bragg, S.,

2011). In addition to inflation, a company’s accounting policies have a limiting effect on ratio

analysis. Different companies may have different policies for recording the same accounting

transaction. This means that comparing the ratio results of different companies may be like comparing

apples and oranges (Bragg, S., 2011).

 Seasonality can also distort financial analysis. Seasonality is defined as a characteristic of a

time series where the data will be subjected to regular and often-predictable changes that occur every

year, these patterns repeat themselves year after year. Seasonality can affect the comparative analysis

of ratios meaning where the ratios of one period are compared to the ratios of another period

(Universal Class, 2017).

V. Limitations of Financial Ratios: Specific to Industry

Limitations involving the industry’s accounting policies have been known to considerably

impact financial ratio analysis.

The most controversial accounting alternatives within the industry are the "full cost" and

"successful efforts" methods of accounting for property costs. Conceptually, full cost accounting

requires that companies capitalize all discovery and development costs, even those associated with dry

holes, the theory being that a certain percentage of failure is characteristic of operations in the

industry. In contrast, companies using successful efforts accounting generally capitalize only those

costs associated with successful wells, charging unsuccessful operations against current earning

(Reed, J.L., 1978). These accounting anomalies have an impact on financial earnings figures, which in

turn impact the ratios that use earnings as an input.

As mentioned earlier the Reserve-replacement ratio is commonly used in this industry.

However, the ratio cannot factor in future advances in technology, new discoveries of significant

reserves, or the state of economic and political conditions. A company's measure of reserves can be

inaccurate as well (Investopedia, 2017).

 REFERENCES

Berman, Karen & Knight, Joe & Case, John. (2006). Financial intelligence: a manager's guide to
knowing what the numbers really mean. [Books24x7 version]
Retrieved on June 30, 2017 from
http://common.books24x7.com.ezproxy.snhu.edu/toc.aspx?bookid=12896

Bragg, Steven (2011), The limitations of ratio analysis

Retrieved on June 30, 2017 from https://www.accountingtools.com/articles/what-are-the-
limitations-of-ratio-analysis.html

Investopedia, (2017), Key Financial Ratios to Analyze Oil Companies

Retrieved on July 1, 2017 from http://www.investopedia.com/articles/active-
trading/082015/key-financial-ratios-analyze-oil-companies.asp#ixzz4lffZMUp4

Investopedia, (2017), Key Ratios For Analyzing Oil And Gas Stocks: Measuring Performance
Retrieved on June 30, 2017 from http://www.investopedia.com/university/important-ratios-
for-analyzing-oil-and-gas-stocks/measuring-performance.asp#ixzz4lbb8UzhD

Investopedia, (2017), Reserve-Replacement Ratio

Retrieved on June 30, 2017 from http://www.investopedia.com/terms/r/reserve-replacement-
ratio.asp#ixzz4lbeIE3tY

NetAdvantage, (2017), Integrated Oil and Gas-Key Stats and Ratios.

Retrieved on June 30, 2017 from
https://www-capitaliq
com.ezproxy.snhu.edu/CIQDotNet/Lists/KeyStats.aspx?listObjectId=100884513

Reed, Joel L., (1978) Exploring for Information on Oil and Gas Companies.
Retrieved on June 30, 2017 from
http://www.jstor.org.ezproxy.snhu.edu/stable/pdf/4478191.pdf?refreqid=search%3Af8449b5429c58b
258d10a205609d78e6

Universal Class, (2017), Objectives and Limitations of Performing a Financial Ratio Analysis.
Retrieved on June 30, 2017 from https://www.universalclass.com/articles/business/objectives-
and-limitations-of-financial-ratio-analysis.htm
 APPENDIX I

Table 1- Chevron - Return on Equity Calculations

Mar. 31,2017 Dec. 31, 2016 Dec. 31, 2015 Dec. 31, 2014 Dec. 31, 2013
Net Income (in millions) $2,910 -$497 $4,587 $19,241 $21,423

Total Equity (in millions) $147,790 $146,772 $153,886 $156,191 $150,427

Return on Equity (ROE)

ROE=Net Income/Total Equity 1.97% -0.34% 2.98% 12.32% 14.24%
Source: All Financials used here are derived from Chevron's 10-K Form
for Fiscal Years ended 2013, 2014, 2015, 2016, and 2017
All equations used here are from : Hampton, John J. (2011),The AMA Handbook of Financial Risk Management,
AMA, New York, NY

Table 2- Chevron - Return on Assets Calculations

Dec.31,
Mar. 31,2017 Dec. 31, 2016 Dec. 31, 2015 Dec. 31, 2014 Dec. 31, 2013 2012
Net Income (in millions) $2,910 -$497 $4,587 $19,241 $21,423

Total Assets (in millions) $259,111 $260,078 $264,540 $266,026 $253,753 $232,982

Return on Assets (ROA)

ROA=Net Income/Average Total Assets 1.12% -0.19% 1.73% 7.40% 8.80%
Source: All Financials used here are derived from Chevron's 10-K Form
for Fiscal Years ended 2012, 2013, 2014, 2015, 2016, and 2017
All equations used here are from : Hampton, John J. (2011),The AMA Handbook of Financial Risk Management,
AMA, New York, NY