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Exxon Mobil Corporation Financial Analysis
Introduction
This paper seeks to evaluate the performance measurements of Exxon Mobil Corporation using its financial statements for the years 2005, 2006, and 2007. Financial analysis will be conducted to extract relevant ratios from the companys financial statements for purposes of making this paper.
Analysis and Discussion
The extracted ratios of Exxon Mobil Corporation will tell about the companys profitability, liquidity, and solvency. The said ratios will be compared with industry ratios for purposes of determining how the company is performing about its competitors. Table 1 below summarizes financial ratios extracted from the companys financial statements for the years 2005, 2006, and 2007 respectively.
Profitability
Exxons profitability ratios are very high are still obviously within the industry average (MSN, 2008). Based on the net profit margin for the years 2005, 2006, and 2007, Exxon had a uniform rate of 10% for every year, which is the same as the industry average of 10%. The is the despite having lower gross margins of 20%, 22% and 21% for the years 2005, 2006 and 2007 respectively or an average of 21% for the three years compared to the industry average of 25.1%. See Table I above. It must be noted that the difference in net profit margin and gross margin of the company has its roots in estimated operating expenses about revenues which the company needs to spend in running the business.
Delving deeper into other profitability ratios which could also be classified as investment ratios (Meigs and Meigs, 1995), the good performance of the company is further confirmed. Investment ratios are measured in terms of return on assets and return on equity. Exxon exhibited very high ratios on this part. Return of Assets was reflected at 17%, 18% and 17% for the years 2005, 2006 and 2007 respectively or an average of 17%. Not surprisingly, the rate is higher than the industry average of 12.7%. The companys Return on Equity is also very high at 32%, 35% and 33% for the years 2005, 2006 and 2007 respectively or an average of 34%. It is also very much higher than the industry average of 26.3%.
The better ROA and better ROE of Exxon as against industry averages as against gross margin being below industry average would mean still a good thing for the company since ROA measures how efficient the company is in running the business and it could increase profitability by just increasing assets investment. ROE is also reflective of the better interest of stockholders being served simultaneously with good management performance as measured by ROA. This is a good sign of minimizing agency cost as a necessary part of corporate business.
Liquidity
The companys liquidity indicates its capacity to meet currently maturing obligations (Meigs and Meigs, 1995), as measured by the quick ratios and current ratios, Exxons quick ratios are very revealing of its liquid position at 1.31, 1.27, and 1.22 for the years 2007, 2006 and 2005 respectively or an average 1.26. The three-year average is higher than the industry average of 1.1.
The same liquidity behavior of Exxon is observed in terms of current ratios, where Exxon reflected higher at 1.58, 1.55, and 1.47 for the years 2007, 2006, and 2005 respectively, or an average of 1.54. It is also higher than the industry average of 1.3. The slight difference between quick and current ratios which are both above 1.0 is indicative of a liquid oil and gas industry.
Comparing quick ratio from current ratio, it may be noted that quick ratio is a better measure for liquidity since the same excludes inventory, prepaid expenses, and other current assets in the composition of the quick assets. It may be observed that the results of the profitability analysis appear to create some consistency in the resulting liquidity ratios of Exxon since profitability contributes to the companys liquidity.
Solvency
Solvency like liquidity also gauges the ability of an enterprise to pay the entitys debts but this time the issue is long-term debts of the company. Thus, solvency tells more about long-term health where a stable company is deemed stronger than an unstable one. Using debt to equity ratio as an expression of solvency, Exxon reflected better at 0.87, 0.92, and 0.99, or an average of 0.93. This appears not as good as the industry average of 0.08 since the lower the ratio, the better the solvency or financial leverage of a company.
Conclusion
Based on the foregoing analysis, this paper concludes that Exxon Mobil Corporation is earning good returns for purposes of investing and that its profitability has redounded to its better liquidity and strong financial leverage or solvency. Although its solvency is a little inferior compared to the industry average it is still not too risky for purposes of pursuing further capital expenditure for expansion in the future as it is still below 1.0.
References
Market Watch (2008) Exxon Mobil Corporation Financial Statements. Web.
Meigs and Meigs, 1995, Financial Accounting, McGraw-Hill, Inc., New York USA.
MSN (2008) Industry data on profitability, investment and financial condition ratios. Web.
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