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Running head: SABIC- ACCOUNTING AND FINANCIAL REPORTING SABIC- Accounting and Financial Reporting Name of the Student Name of the University Author Note
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1SABIC- ACCOUNTING AND FINANCIAL REPORTING Table of Contents Answer to Question 1.................................................................................................................2 Company’s Overview.............................................................................................................2 Answer to Question 2.................................................................................................................2 Porter’s Five Forces Model....................................................................................................4 VRIO Analysis.......................................................................................................................7 Environmental, Social and Governance.................................................................................8 Answer to Question 3.................................................................................................................9 SABIC’s Financial Performance............................................................................................9 Answer to Question 4...............................................................................................................14 Sustainable Competitive Advantage....................................................................................14 Answer to Question 5...............................................................................................................14 Saudi ARAMCO-SABIC acquisition..................................................................................14 Appendix..................................................................................................................................17 References................................................................................................................................20
2SABIC- ACCOUNTING AND FINANCIAL REPORTING Answer to Question 1 Company’s Overview Saudi Arabian Basic Industries Company (SABIC) is a public company situated in Riyadh, Saudi Arabia. It is amongst the world's largest petrochemicals manufacturers. The company has begun in the year 1976 (Sabic.com 2019). Currently, its operation is in more than50countrieswithabove35,000employeesworkingwithinthiscompany.The company's 70% shares are with the government of Saudi Arabia, and the rest 30% is being publicly traded on the Saudi stock exchange (Gashgari 2017). SABIC is a diversified manufacturing company that is composed of four different strategic business units that are Agri-Nutrients, Specialties, Metals and Petrochemicals. They support the customers through packaging, construction, agri-nutrients, medical devices, transportation, electronics and clean energy. SABIC used to develop a deep understanding of the customer's requirement and engineer products at the right time. The SABIC, with their expertise, adapts the business needs of the customers that allow them to prepare a product solution. This strategy helps them to maximize the customer's advantage over the long-term (Alotaibi 2015). The products and services of the company are extensive. SABIC's product portfolio involved within the five primary industries that is Polymers, Agri-Nutrients, Chemicals, Specialists and Metals. SABIC keep a good knowledge about such sectors in which the customers compete. This allows them to find a way to increase the customer's market success. Answer to Question 2 SABIC’s Business Model Key PartnersKey ActivitiesValue Propositions Customer Relationships Customer Segments The government of Saudi Arabia Petrochemicals,Providequality productsand CreateandIndustries different
3SABIC- ACCOUNTING AND FINANCIAL REPORTING has owned 70% shares, Remaining 30% sharesis publiclytraded ontheSaudi stock exchange, Agriculture industry, Petrochemicals, Affiliatesand Subsidiaries, Oil, Joint Ventures. Metals, Agri-nutrients, Specialists, Technology acquiredby joint ventures, Manufacturing, Quality control, Engineering plasticsandits compounding, Oil extraction, Supplychain management, Researchand development, serviceswith their continuous innovation, Sustain maximum value totheir shareholders, Value-added commodities, Introducemore than150new productsevery year. Deliver, Long-term contacts, Patent-attached agreements, Inspiringand engaging, Leadership, Government- backed agreements. vertical markets: Construction Healthcare, Agriculture, Automotive. Key ResourcesChannels Highly qualified staff, Manufactures on a global scale, Support from the Saudi government, Intellectual property, Natural resources, 21 technology and innovation centres, 12191 global patents. Hundreds of dedicated scientists News and media, Global website, Reports, Videos, Social Networks, The dedicated team of Sales, Account management
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4SABIC- ACCOUNTING AND FINANCIAL REPORTING Cost StructureRevenue Streams Manufacturing facilities, Raw material, Factories, Research and Development, Technology and innovation centres, Distribution, Economies of scale, Legal, Royalties, Staff compensation. Agri-nutrients and metals, Chemicals, Licensing in technology, Service fees, Commodity and high-performance plastics, Sale of several products. Porter’s Five Forces Model Threat of New Entrants Bargaining Power of Buyers Bargaining Power of Suppliers Threat of Substiututes Industry Rivalry
5SABIC- ACCOUNTING AND FINANCIAL REPORTING (Source: Author) Threat of New Entrants (Petrochemicals- Low and Polymers- Moderate to Low) The threat of the new entrants for the petrochemicals industry is low. The company’s initial capital, expenditure, its patented technology, economies of scale to sell their products at a reasonable price, complex supply chain, favourable support of the environmental and government regulations are highly managed. To enter the segment of such an industry, a company will need to make a high investment (Leker and Bauer 2017). Therefore, the new entrants find it not easy to enter the market. Further, the government of Saudi also discourages the new entrants by regulating the oil supply. The Polymers industry is having moderate to the low threat of new entrants, as the company is still evolving. It requires a considerable capital investment, and the major limitation is exposure to technology. Threat of Substitute Products (Petrochemicals- Low and Polymers- Moderate to Low) SABIC’s petrochemical companies used the produces materials into several sectors such as food or beverages, construction, electrical, industrial and agricultural sectors. The industries used to make indispensable products every day that required by people too frequentlyintheirlife.Polytheneisfamousinitsproductionbecauseoflow-cost manufacturing and its use. Farmers mostly prefer the artificial fertilizers to manure due to its reliability and readily availability. SABIC is a significant player in analyzing the trend and positioned to cater at a speed that is not possible by other industry to meet such strategy soon. Accordingly, the threat of its substitutes is too low. Bargaining Power of Customers (Petrochemicals- Moderate to High and Polymers- Moderate)
6SABIC- ACCOUNTING AND FINANCIAL REPORTING The buyer of the Petrochemicals segment has high bargaining power because of its availability of substitutes and low switching costs (Rehman and Al-Hadhrami 2014). The prices of the petrochemical industry depend on the domestic and international market demand. During the economic prosperity and expansion period, the buyer has limited bargaining power due to its necessity. The polymer segment has moderate bargaining power of the customer. The substitute’s availability is moderate to lower, which depends on the ratings and variety of the polymers. Bargaining Power of Suppliers (Petrochemicals- High and Polymers- Low) The bargaining power of suppliers in the Petrochemicals industry is high. The reason that increases the suppliers bargaining power is the forward integration. SABIC is the sole supplier in the industry, and only a few petroleum companies can supply raw materials. The price of the oil is used to be driven and set according to the government policies. The price of the oil is a major threat that has the potential to influence the overall production cost and ultimately, the company’s profit (Bardshaw, Van de Graaf and Connolly 2019). The main source of input for the polymer companies is available to be provided by different chemical producers. Addition to this, the switching cost is moderate.Therefore, this is limiting the bargaining power of the suppliers. Competitive Rivalry (Both Petrochemicals and Polymers- Moderate to High) In the last two decades, there has been rapid economic growth in the Middle East and Asia. This has led to the emergence of different petrochemical companies. The industry is having a high competition. Some of the Asian countries are small, and thus the consumption of the petrochemicals products is less (Volgy and Gordell 2019). This increased competition in the international market. However, the market share is determined by a few major players like SABIC that accounts to almost 95% of domestic chemical production. The high
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7SABIC- ACCOUNTING AND FINANCIAL REPORTING sensitivity of the customers for lower switching costs and to the price increase the intensity of intense competitive rivalry.The companies with advance technology make them able to capture the market share of the polymers (Jaconiset al.2018). As technology enables them to produce better products and thus, increase the competitive rivalry. VRIO Analysis Value:ThejointventuresofSABICsupportinincreasingthecapacityand effectivenessinmeetingthedemands.Thereisacontinuousemergenceofintense competition in the petrochemical industry that can affect profitability. However, the company leverage is its strong origination and capability in the advanced technology that improves the portfolio of the product. Rarity:The share of SABIC of about 70% is with the Saudi government. The company have the support of the government. But some decision in the interest of the government can lead the company to a considerable expense. The royal family members hold the key positions of the company as Chairperson is the prince of Saudi Arabia's Kingdom. The company may lead to poor governance due to the conflict of interest. Imitability:The environmental liabilities may lead to increase in substantial costs and limits the production in the market of the USA and Europe (Olimat 2016). The low economic growth rate affects the company’s performance by reducing demand for the petrochemicals product. However, a well-formulated and implemented strategy of SABIC results in improving its competitive advantage by meeting the customers' requirements. Organizations:SABICishighlyfocusedonanalyzingalong-termtrendand fulfilling society's expectations. It has remained profitable from the last five years, which attracts local and international investors. It has additional capital to expand its operations.
8SABIC- ACCOUNTING AND FINANCIAL REPORTING Further, it has made a high investment in technology (Milne 2017). The firm is able to meet the customer’s demand through its good brand image, high quality and reliability. Environmental, Social and Governance SABIC's environmental pressure has a threat to the industry's future. The industry is highly dependent on oil for its production. The company uses oil as its raw material, and a sourceofenergycausesairpollution(Sabic2015).Thisisultimatelyaffectingthe environment as well as society. However, the government of several countries discouraged the company's practices. The products manufactured by the company, such as polythene and chemicals, misbalance the ecology. Thus, it is being criticized by the government and society aswell.Accordingly,thegovernmentdiscourageditsproductionthroughhightaxes (Abdallah and Aljelly 2014). The US and Europe imposed quantitative restrictions on their output. Tax policies and trade barriers are the most influential factors that affect the industry. SABIC has analyzed such pressure that can influence its company’s profit. Therefore, the company has prepared a circular economy solution by mapping the material priorities with appropriate strategic planning within the sustainability issues. The sustainable goal developed by the SABIC is concerned with the efficiency of the resource, circular economy, climate change, innovation and sustainability, governance and integrity, environment, health, safety and security. ‘SABIC’s Circular Economy Solutions’
9SABIC- ACCOUNTING AND FINANCIAL REPORTING (Source: Sabic.com 2019) Answer to Question 3 SABIC’s Financial Performance SABIC has made impressive progress over the years. SABIC has recent figures for its annual revenue of SR 169billion with Net Income of SR 21.5billion. The growthof SABIC revelled in the year 2018 with an increase of 20.058% in their Gross profit as compare to the previous year. Their operation profit has also shown an increase of 32.604% in the first three quarters of 2018 as compared to the corresponding period of the previous year. However, the company has faced a decrease of 6% in total revenue in the year 2019 as compared to the
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10SABIC- ACCOUNTING AND FINANCIAL REPORTING corresponding period of the previous year. Income from the operation has also decreased by 4%. A gap in the Net income decreased in the current year that has been sustained in the year 2018 by an increase of 14% (Source:Sabic.com 2019) The company believed that their long-term strategy with sustainability and innovation would help them in developing the products that leverage SABIC (Barakat 2014). The Growthof SABIC in the past few years comes with a mixed version of their profit and expense. The last several years have shown tremendous profitability of the company. Nevertheless, SABIC the reported revenues for the financial year 2018-19 of $45.1 billion revenues and profits of $5.7 billion, which awarded it to the fourth position amongst the chemical companies by Fortune Global 500, list of the year 2019. ReturnonEquity=NetIncome÷Sharholder'equity×100 201820172016 Net income21,520,67818,430,23617,838,843
11SABIC- ACCOUNTING AND FINANCIAL REPORTING Shareholder’s Equity173,084,380163,921,633163,047,895 ROE12.43%11.24%10.94% Return on Equityis a profitability ratio and considered as one of the measures of the company's financial performance. This reveals the ability of the company in generating profits through the investment of the shareholders. Return on Equity (ROE) is a sign or an indicator of how effective the management is using equity financing so that to grow the company and fund its operation. The return on equity of the last three years is generally showing an increasing trend (Thibaultet al2017). The increasing rate of return on equity of SABIC is reflecting the level of return that the company can generate. However, a good return on the equity of a company is considered 15%-18%, which is less of SABIC. The company is maintaining its return on equity year over year. NetProfitMargin=NetIncome÷TotalRevenues×100 201820172016 Net Income21,520,67818,430,23617,838,843 Total Revenues169,128,339149,765,968132,826,605 Net Profit Margin12.72%12.30%13.43% Net profit marginis one of the key indicators of the financial health of the company. It helps the investors in assessing the company is generating enough profit from its expense or not or whether the company is utilizing the operating and overhead costs. In simple words, the Net profit margin reveals the revenue percentage left after deducting all the operating expenses, taxes and preferred stock dividends (Almadi 2016). The company SABIC is having an average net profit margin that means to be not so good and not too low. As a general rule of thumb 20% margin is considered as good, and a 5% margin is too low. However, it varies
12SABIC- ACCOUNTING AND FINANCIAL REPORTING from industry and its size. In the case of SABIC, the company has maintained its average ratio and never resulted too low. It needs to increase its net profit margin. ReturnonAssets=NetProfit÷AverageTotalAssets AverageTotalassets=¿ Assetsatthebeginningoftheyear+Assetsattheendoftheyear÷2 201820172016 Net Profit21,520,67818,430,23617,838,843 Average Total Assets321,083,148319,674,140322,556,006 Return on Assets6.70%5.76%5.53% Return on Assetsratio or return on total assets refers to profitability ratio that is used to measure the net income generated by the company’s total assets during a financial year or a certain period. The ratio indicates the company’ efficiency in the proper use of the assets to generate profit (Khan and Khokhar 2014). A good ratio of return on asset is considered to be above 5% that shows the efficiency of the company is using the fund in buying assets and ultimately converting it into profit. SABIC has maintained the ratio of return on asset more stable (Al-Tally 2014). In the last three years, it has shown an increasing percentage every year and thus, a stable position. The investors of the company will be relieved by having stability in the company’s return. As the increasing percentage of return on assets for three years reflects that the SABIC has managed their assets efficiently so that to generate profit during a period. Gearingratio=TotalDebt÷TotalAssets 201820172016 Total Debt98,274,399112,316,930106,566,235 Total Assets319,710,874322,455,422316,892,858
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13SABIC- ACCOUNTING AND FINANCIAL REPORTING Gearing30.73%34.83%33.62% Gearing ratiois a type of financial ratio that helps in comparing the debt of the company with respect to the company's different financial metrics such as equity and assets. This is a measurement of the financial leverage of the company. SABIC gearing ratio of the last three years is within 25%-50% that is reflecting its position in a normal or optimal for a well-established company. However, the gearing ratio below 25% reflects low risk and above 50% considered as a highly leveraged company. SABIC has maintained stability in its leverage position and secured its investors with a fear of high risk. However, SABIC can make changes in its financial structure. The company can increase its gearing while focusing on its growth strategy, the convergence of short-term loan into the long-term loan, issuing preference shares or debentures and through paying dividends out of the retained earnings (Oxford Analytica 2019). In the case of cost minimization by the company by focusing on profit improvement, it can lead to a decrease in gearing. Further, a reduction in gearing of the company can also be made through repaying long-term loans, the convergence of loans into equity and first retain profits than pay dividends. LyondellBasellandBASFarethetwomaincompetitorsofSABICinthemarket. LyondellBasell manufactures plastics, chemicals, gasoline blending constituents, diesel and petrochemical product. It has generated revenue of about $35.4 billion and has more than 19,450 employees in their company. Their main competitors are Dow and SABIC. BASF is involved in manufacturing and marketing chemicals, plastics, agricultural products used for protection of crops, energy as well as automotive sectors. BASF has revenue of $4.2 billion and the involvement of 113,830 employees. The LyondellBasell Company gives direct
14SABIC- ACCOUNTING AND FINANCIAL REPORTING competition with its capacity of revenue generation. However, a large number of skilled working employees gives competition to SABIC's sustainability and strategies. Answer to Question 4 Sustainable Competitive Advantage All the companies are required to have a sustainable competitive advantage so that to sustain in today's global environment and to generate profit in the long-term. SABIC's leverage position is normal and maintained an average profit margin for their company. The company has initiated to develop its sustainability in the market through continuous product developmentandwithcontinuousinnovation.SABICistosustaintheircompetitive advantage through developing strategies to set up capabilities, investment in the technology and by focused on the cost efficiencies. The company is able to generate a minimum an average profit with advanced knowledge with respect to their assets capability. The company expense is high with respect to the development of advanced technology to produce ethylene. However,inthelong-term,itisbuildinganedgeoverthemarketplayersforits competitiveness.Theadvancedtechnology,skilledknowledgeandthebenefitofthe acquisition have a maximum probability of extractingmore value from their resent resources and long-term sustainability in the competitive advantage.The stability in the financial situation and with strategic investment, SABIC is able to have a sustainable competitive advantage over its competitors and market that create value for its investors. Answer to Question 5 Saudi ARAMCO-SABIC acquisition SABIC is a petrochemicals company, while Aramco is an Oil company. Saudi Aramco has announced in the year 2018 that it would merge with SABIC by purchasing its 70% shares from the PIF (Public Investment Fund). On March 27, 2019, Aramco has signed a
15SABIC- ACCOUNTING AND FINANCIAL REPORTING formal agreement to purchase a share of SABIC at price of $69.1 billion. The company Aramco has maintained transparency in its announcement by releasing a prospectus in April 2019 for the investors. The acquisition of Aramco with SABIC has many advantages to both companies. The company Aramco highly needed homegrown technical knowledge as well as infrastructure in the advanced chemical industry. The financing of SABIC has been regulated to reduce the impact on Aramco (Landryet al. 2017). However, the sum of $69 billion is not a small amount and especially on that period when the Saudi energy policy was seeking for ExxonMobil. On the other hand, it is also a fact that the PIF would give up its ownership of SABIC in actual that is without any doubt, a best-known investment and an effective decision of the company. Aramco has further invested $20 billion in Sadara Chemical Company that is a joint venture with DowDuPont. The chemicals that are produced by the Sadara like urethanes is highly advanced and different production as compare to the SABIC. The advanced chemicals produced by the SABIC add a great deal to the Aramco. SABIC has its feedstock from Aramco in Saudi Arabia. The production of methanol, ammonia and urea from SABIC tends to highly competitive due to its advantage of methane. Aramco sold methane at $1.25/ million British Thermal units that are considered as the cheapest methane gas over the world. Both the companies Aramco and SABIC have the capacity of petrochemicals production of about 17 and 62 million tons every year. The purchase of stack will give a boost of millions of dollar to the Public Investment Fund. This ultimately gives the power to implement their plans of creating jobs and to diversifying the major Arab economy other than the export of oil (Preseley and Westaway 2017). The price of natural gas, as well as production cost in Saudi, are very low. The price of the natural gas allows users to get the cost of production low too. The SABIC achieves the feedstock that is methane, ethane, and so on at low cost. At the time when Aramco takeover
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16SABIC- ACCOUNTING AND FINANCIAL REPORTING SABIC, there is not any decrease in overall cost of oil company. This in turn contradicting one of the main synergies of the deal. The commodity chemicals of SABIC maybe have some value the same as European ethylene and its businesses in polymer-like HDPE, LDPE that have low-profit margins. Such assets of SABIC can be sold to international companies or in the private sector of Saudi Arabia. The sale would increase billion dollars as well as save much effort and time of the management.
17SABIC- ACCOUNTING AND FINANCIAL REPORTING Appendix 1.BALANCE SHEET
18SABIC- ACCOUNTING AND FINANCIAL REPORTING (Source:Finance.yahoo.com 2019)
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19SABIC- ACCOUNTING AND FINANCIAL REPORTING 2.INCOME STATEMENT (Source:Finance.yahoo.com 2019)
20SABIC- ACCOUNTING AND FINANCIAL REPORTING References Abdallah,A.E.K.andEljelly,A.M.,2014.SustainabilityandCorporateSocial Responsibility: Framework Development and Application.Khartoum University Journal of Management Studies,8(1). Almadi, M.M., 2016. The impact of contextualizing board structure on firm financial performance in an emerging market.Contemporary Management Research,12(4). Alotaibi, H.J., 2015. An assessment of the connection of elements in a strategic plan: a case study of SABIC company.International Journal of Advanced Research in Management and Social Sciences,4(10), pp.19-36. Al-Tally, H.A., 2014.An investigation of the effect of financial leverage on firm financial performanceinSaudiArabia'spubliclistedcompanies(Doctoraldissertation,Victoria University). Barakat, A., 2014. The impact of financial structure, financial leverage and profitability on industrialcompaniessharesvalue(appliedstudyonasampleofSaudiindustrial companies).Research Journal of Finance and Accounting,5(1), pp.55-66. Bradshaw, M., Van de Graaf, T. and Connolly, R., 2019. Preparing for the new oil order? Saudi Arabia and Russia.Energy Strategy Reviews,26, p.100374. Finance.yahoo.com 2019.Yahoo is now part of Verizon Media. online Finance.yahoo.com. Available at: https://finance.yahoo.com/quote/2010.SR/financials?p=2010.SR Accessed 27 Dec. 2019. Gashgari, R., 2017.Exploring the implicationsof corporate governance practices and frameworks for large-scale business organisations: a case study on the Kingdom of Saudi Arabia(Doctoral dissertation, Brunel University London).
21SABIC- ACCOUNTING AND FINANCIAL REPORTING Leker, J. and Bauer, M., 2017. Strategic Analysis: Understanding the Strategic Environment of the Firm.Business Chemistry: How to Build and Sustain Thriving Businesses in the Chemical Industry, pp.59-107. Jaconis,S.B.,Morita,A.T.,Coutinho,P.L.andBorschiver,S.,2018.Systematically Monitoring, Relational Database and Technology Roadmapping for Trends and Innovation Opportunities in Biopolymers. Khan, M.Z.R.M.N. and Khokhar, I., 2014. Select financial ratios as a determinant of profitability evidence from petrochemical industry in Saudi Arabia. Landry, A.T., Gagne, M., Forest, J., Guerrero, S., Seguin, M. and Papachristopoulos, K., 2017. The relation between financial incentives, motivation, and performance.Journal of personnel Psychology. FMilne, C.L., SABIC Global Technologies BV, 2017.Induction heated mold apparatus with multimaterial core and method of using the same. U.S. Patent Application 15/306,112. Olimat,M.S.,2016.ChinaandtheGulfCooperationCouncilCountries:Strategic partnership in a changing world. Lexington Books. Oxford Analytica, 2019. Saudi Aramco-SABIC merger will raise strategy concerns.Emerald Expert Briefings, (oxan-db). Presley, J.R. and Westaway, T., 2017.A guide to the Saudi Arabian economy. Springer. Rehman, S. and Al-Hadhrami, L.M., 2014. Web-based national corrosion cost inventory system for Saudi Arabia.Anti-Corrosion Methods and Materials. Sabic, N., 2015. Governance through Transparency Tools. InDiversity and Excellence in Higher Education(pp. 217-230). SensePublishers, Rotterdam.
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