Summary measures of the key ratios for the companies operating in the oil and gas industry, 2013
Source: Wharton Research Data Services. North America – Annual updates. Fundamentals annual. Web.
Results of the research are shown in the Table 1. Analysis of this data gives an opportunity to determine the general tendencies across the industry and see whether performance of a company is better or worse than average. It also allows to determine the weaknesses that the company should take care of. It is necessary that the ratios are compared across the industry to obtain relevant result, as there might be specific features of the industry that can lead to deviations from common normal value of a ratio.
Values of mean and median differ significantly for Current ratio, COGS ratio, Profit margin, SGA expense, Cash flow from operations ratio and times interest earned. For the ratios which mean and median differ significantly the value of median is more reliable, as mean is largely influenced if any component having especially small or large value. So usage of mean is inappropriate for skewed distributions like this one.
According to the obtained results, in most companies current ratio is less than 100%, which means that their liquidity is insufficient, although taking into consideration the median value, this situation can be considered typical for the industry. Median value of COGS ratio shows that efficiency of using resources is generally high, while the mean value is greatly influenced by the poor efficiency in some companies.
Negative value of profit margin, which is caused by negative net income, points that the amount of income the companies generated failed to cover expenses for a given period.
The value of debt ratio shows that companies in this industry are highly leveraged. Companies should seek to make this ratio lower and if it is more than 100% a company has to take immediate measures as it is at risk to go bankrupt.
Net PP&E ratio points out that PP&E in this industry is a very important component of assets as return on every dollar is around 85 cents compared to 25 cents of total assets turnover.
SGA expense ratio shows that selling, general and administrative expenses are generally low in the industry, so the value exceeding the median means that a company cannot control its expenses.
Cash flow for operations ratio shows that normally companies in the industry do not have problems in collecting cash, it is also important that increase in this ratio is driven by growing cash flows but not falling sales.
The median of times interest earned ratio shows that it is normal for this ratio to be quite low in this industry, although negative results show that a company should work on increasing income and decreasing its liabilities that require interest.
Research of the distribution allowed to determine the key characteristics of the industry. Median values of the calculated ratios can be considered normal for a given industry. By comparing its results to the median value the Deep South Refiners company can define what are its weaknesses, i.e. what caused the discrepancy from the median to the negative side, as well as set its competitive advantage, which is the drives that caused company’s ratios to exceed the normal results. It is also important for the company to improve its own results over years.
Works cited
Wharton Research Data Services. (2013). North America – Annual updates. Fundamentals annual. Web.
