Financial Management Analysis of Caltex

This report provides a financial management analysis of Caltex, including industry and company description, financial instrument and structure analysis, and financial market analysis. The report includes key ratio calculations and recommendations for financing a new project.

Caltex
Principles of Financial Management
9/24/2019

Table of Contents
Industry Description...................................................................................................................2
Company Description.................................................................................................................3
Financial Instrument Analysis....................................................................................................4
Financial Structure Analysis......................................................................................................5
Financial Market Analysis.........................................................................................................9
Findings, Conclusion and Recommendations..........................................................................12
References................................................................................................................................14
Appendix..................................................................................................................................17

Industry Description
The Australian energy industry is generally very wide due to availability of number of
players who are involved in offering better services in the market to the customer to represent
their superiority of the products and to gain leading position. In fact, the presence of
increased number of players in the market is due to increasing demand and consumption of
1.1% in 2016-17 in order to reach 6,146 petajoules. In addition to this, the competition in the
electricity market is expanding. In Australia, there are around 30 active electricity retailers
(Warren, 2018).
Regulators of Industry
The Australian Energy regulator is the official board that regulates the entire Australian
electricity and gas markets. This regulatory works under the corporation of the Australian
Competition and Consumer Commission and imposes the guidelines recognized by the
Australian Energy Market Commission. The present operations of this body are concentrated
on regulating the distribution segment of the electricity market and natural monopoly
transmission, controlling the electricity market. The regulatory functions of the AER and its
powers are deliberated on it by the country’s law related to electricity and the rules of
electricity (Australian Energy Regulator, 2018).
Industry Groups
The Council of Australia Governments (COAG) Energy Council is focused towards
establishing energy reform, comprising coordination of the setting of the regulatory. The
Energy Market Arrangement of Australia enables two institutions to manage the market that
are:

AER is the economic regulator accountable for monitoring energy legislation.
AEMC undertakes the responsibilities of making rules and development of the energy market
(Australian Energy Regulator, 2019).
Company Description
The company has raised funds from different sources to finance its assets and other business
operations. The multiple financing sources include both internal and external sources. The
internal sources include equity capital, retained earnings, treasury stock and also Caltex
Limited maintains a general reverse whose funds are utilised in the business operations. Apart
from this the external sources from where the company has raised finance are certain bank
loans and borrowings from capital market. Caltex is involved in the purchasing, refining and
distributing the petroleum products across the country. The main products of the company
include petrol, motor oil, jet fuel, diesel fuel and the lubricants (Reuters, 2019). Besides this,
the company also operates certain convenience stores, service stations and some fast food
stores (Bloomberg, 2019).
Ownership structure of the company includes institutional ownership which stands to be
41.9%. Apart from the institutional ownership the company’s structure is comprised of
insider ownership. Insiders are the persons who internally participate in company’s
operations. The management structure of the company is shown below in Figure 1:

In the financial system, the company has no such borrowers as it does not belong to a banking
or finance industry. But, yes it certainly has various providers of finance such as banks,
capital market institutes, equity shareholders etc. The role of Caltex Limited in financial
system of Australia’s economy is that it has borrowed the funds from various investors and in
return to its borrowings it is offering those finance providers certain percentage of interests
and dividend out of its total revenue generation on an annual basis.
Financial Instrument Analysis
Caltex group has managed finance for its operations by way of various financial instruments
and has accounted them all in accordance with AASB -9 Financial Instruments. The different
financial instruments that the company is holding in year 2018 are bank facilities, borrowings
from capital market and also some financial leases. The other financial instruments are also
there in the financial statements of the company such as trade debtors and creditors and these
instruments are originated from the core operations of the company. Further, as the company

is facing risks related to financial market, it the company has also made use of variety of
derivative financial instruments in order to hedge the potential market exposures. Those
financial instruments are forwards, options, swaps and future contracts (Caltex, 2018). All
these derivative financial instruments are accounted for in the financial statements at their fair
values in line with the provisions of relevant accounting standard prescribed by body of
Australian accounting standard setters. The gain and losses that occurs at the time of their
subsequent measurement are accounted for in the consolidated statement of income. With the
help of derivative financial instruments the company has undertaken various accounting
treatment under hedge accounting such as cash flow hedges where the significant portion of
fair value changes of said financial instruments are accounted for in equity (Caltex, 2018).
The other type of hedging that is being undertaken is fair value hedge where changes in fair
value were accounted for in income statements
The off balance sheet business of Caltex Limited are none and hence they are not being
discussed in this report.
Caltex limited in engaged in any Off Balance Sheet business.
Financial Structure Analysis
The overall financial position of a company can be analysed using an important tool of
financial management i.e. Ratio analysis. The said tool is helpful in analysing the financial
performance of the company from different aspects such as profitability, liquidity, solvency
and the efficiency position of a business (Xu, Xiao and Yang, 2014). There are certain
stakeholders of the company who are interested in knowing company’s financial position so
as to make various financial decisions.

The company’s overall financial health is determined by its capital structure which comprises
of two main components i.e. equity and debt. There must be an adequate capital structure in
order to maintain the sound financial position of a business (Al Karim and Alam, 2013).
When Caltex requires AUD 10 to set up a new project, it has two options i.e. either to finance
its new project by way of bank or financial institutions borrowings or through the issue of
shares.
While applying for loan borrowings, the potential lenders will analyse the company’s
financial position before lending such amount. Generally, the creditors select those financial
ratios which are at-least indicative of following points:
 Ability of the customers to repay its debt obligations whenever they fall due and
 The viability of customer’s business in long term
Such ratios could be many but the three key ratios used by creditors are discussed as below:
Debt-equity ratio: This ratio is generally used by the long-term creditors of a firm to
understand the existing capital structure of the company i.e. the proportion of owner’s equity
to the debt as both the components are being used by the firms to finance its assets. This ratio
helps long term creditors to analyse whether the existing assets of the company are financed
by its own investments or through the funds of external parties (Fridson and Alvarez, 2011).
Debt to asset ratio: This ratio helps the potential creditors of the company to determine the
percentage of its total assets that are being financed by the use of external funds. Lower debt
to asset ratio is generally preferred by creditors as it indicates company’s ability to pay off its
existing debt and to take additional debt.
Interest coverage ratio: This ratio helps the creditors to determine the company’s ability to
pay of its interest obligations on its existing debt obligation. Creditors use this ratio to

identify whether the company will be able to meet its additional interest payments if
additional funds are lend to the company (Garrett and James III, 2013).
Alike creditors, shareholders of the company who are the ultimate owners of the company are
also interested in knowing the financial position as they invest their surplus funds in the
company’s operations in consideration of dividend payments. The dividend is paid out of
company’s net operating profits after tax. To analyse the company’s financial position
following ratios will be referred to by the potential shareholders:
Earnings per share: It is the dollar value of the company’s net income that is available for
every share held by the shareholders. Higher EPS is preferred by the potential shareholders as
it reflects the prospects of company’s strong financial position in the market. Further, it
shows company’s ability to generate profits for its equity shareholders (Srinivasan, 2012).
Dividend per share: DPS indicates the profit portion that is distributed among the
shareholders (Belo, Collin‐Dufresne and Goldstein, 2015).
Price Earnings Ratio: This ratio determines the relationship between the market price per
share and the earnings per share. Literally, it reflects the extent company’s earnings are
covered in its market price. PE ratio indicates the opinion of market regarding the company’s
earning capacity and thereby its future prospects. High PE ratio shows that company enjoys
high confidence of its investors in the market (Garrett and James III, 2013).
Key Ratio calculations
Debt Equity Ratio Total Debt $ 3,338,559.00 0.99
Equity $ 3,389,064.00
Debt to Assets
Ratio Total Debt $ 3,338,559.00 0.50
Total Assets $ 6,727,623.00

Interest Coverage
Ratio Earnings before interest and tax $ 819,969.00
16.6
7
Interest $ 49,202.00
Earnings per share Net Operating Profit After Tax $ 561,590.00 2.15
Number of shares outstanding $ 261,000.00
Dividend per share Total Dividend $ 307,757.00 1.18
Number of shares outstanding $ 261,000.00
Price Earnings
Ratio Market Price Per Share $ 25.54
11.8
7
Earnings per Share $ 2.15
(Yahoo Finance, 2019)
The above ratios will be calculated in the further section and on the basis of the same it will
be determined that whether debt financing is a good option or the company has to go with
issue of new shares. The debt equity of the company is below 1 and this shows that the
company has funded its operations through the more use of equity shares and comparatively
lesser through debt funds. The creditors of the company will consider the lower debt equity
ratio of Caltex as a good indicator of its financial position as it shows the company is facing
less solvency risk. Also, this ratio clearly indicates that the company is more prone to lose its
control over the ownership as the proportion of equity is higher in its case. Further, debt to
asset ratio of Caltex Limited shows that less than 50% of the total assets of the company are
being financed through the external sources. Hence, for creditors it will be a favourable ratio
to extend loan to the company as they will find it less risky. Furthermore, the interest
coverage ratio indicates about the company’s ability to repay its interest payments on its debt.
The interest coverage ratio in the present case of Caltex Limited is 16.67 times which shows
that company has sufficient profits to meet its further interest obligations (Caltex, 2018).
On the other hand, a shareholder as an investor will analyse the company’s financial position
by way of Earnings per share which is positive in case of Caltex Limited. However, the EPS

is not so high which might negatively affect the decision making of the investors. Also, the
Dividend per share of Caltex is positive, which is also an indicator of its sound financial
position (Rehman and Takumi, 2012). The price earnings ratio of the company is also high
which reflects the sound future prospects of financial position of the company.
After analysing all the ratios as calculated above, it can be said that in order to set up a new
project, it would be more advantageous to go for financing through external sources i.e. the
borrowings. All the three ratios which are analysed from the point of view of creditors are
showing it positively that the creditors in the market such as banks or financial institutions
will find the company less risky to lend their surplus funds. Also, as the current financial
statements shows that the company is having more proportion of equity capital than the
proportion of debt, it is quite evident that there is a risk for the company to lose interest or
ownership control over the company’s operations. Also, with more debt financing the
company will have an option of obtaining tax savings for the interest payments which is not
available in case of dividend payments that would be made if equity financing is opted as an
option of financing.
Financial Market Analysis
The borrowers, investors, financial intermediaries, regulators within industry interact with
each other in a mutually beneficial relationship as they are somehow inter-related to each

other. As Caltex Limited is not involved in any banking business it is not holding any
significant borrowers except for general trade payables. However, the company has raised
fund from various sources such as shareholders, banks and financial institutions. All these
providers of finance are always keen to know about the financial position and performance of
Caltex as they have invested or lend significant amounts for its operations. Whenever, a
company borrows funds from banks or financial institutions it has to comply with certain
governmental regulations in such context. The said regulations helps in safeguarding the
money lend by the providers of finance by regulating such policies which requires
transparency and regularity of payment of borrowed funds. The reason of mutually beneficial
relation of company with its investors and financial intermediaries is that it is allowing the
company to raise funds for its operations through them and those parties are in return getting
the interests and dividends as the considerations of their investment. Further, the government
is also maintaining a mutual relation with the company as it allow it towards the compliance
of various relevant laws and by adhering to the applicable laws as regulated by the regulatory
bodies.
Yes, there is need of government interventions in the Australian energy industry due to
increasing prices for the customers. Australia is considered to be the biggest gas and coal
exporters in the world, has been hindered with the energy crisis due to which it increased the
prices of the local power and cast doubt on the dependability of its network. However,
presently there is drop in the whole sale charges by around 30% in comparison to last year
and that reflects that there must be drop in the local energy prices for the customers too (The
Business Times, 2018).
The government of Australia is focused towards maintaining ethical behaviour within the
industry by framing different regulations and presenting code of conduct. Some of the codes
of ethics that are abide by the businesses and other members in the industry:

Members and businesses must ensure that their actions, public statements, and activities are
consistent with the objectives and mission of the industry (Energy Efficiency Council, 2015).
Businesses must support the ecologically sustainable development principles, suitable
utilization of the sources of renewable energy, preservation of resources of the non-renewable
energy, maintaining energy efficiency, and contribution towards decreasing the greenhouse
gas emissions.
Businesses and members must work to uphold and improve the pride, honesty, and honour of
the industry by connecting wholly with organizations of indisputable character, by petitioning
work and promoting their products with truth and dignity, evading any possibly deceptive
statements or oversights (Energy Efficiency Council, 2015).
Unethical Behaviour
Caltex has been accused under the regulation of the wage underpayment in its network of
franchise when the Fair Work Ombudsman identified that around three quarters of outlets
that were inspected were involved in exploiting workers. Only 6 out of 25 fuel outlets of the
company were found to be complying with of workplace laws, which reflect the rate of non-
compliance of 76% (Patty and Latimer, 2018). The regulatory body that is FWO is involved
in the detailed investigation of the all the networks of the company and identified the
evidence for the wage underpayment, penalty rates, non-payment of the overtime wages, and
pay slip breaches. The authority has taken legal actions against company’s two franchisees
for allegedly presently false records. During the entire investigation, the authority issued nine
breach notices, 11 obedience notices and around 16 formal cautions for the non-compliant
franchisees. In response, the company has to pay a total of $9329.85 as the back pay for its 26
employees who were identified to be underpaid (Patty and Latimer, 2018).

Findings, Conclusion and Recommendations
The discussion on financial instruments held by the company shows that Caltex Limited is
exposed to various capital market risks which are being hedged by various derivative
financial instruments such as futures, options, forwards and interest rate swaps. The hedging
practices of the company clearly indicate that the company is managing its financial risks
adequately and hence it could be good option of investment for the potential investors.
Further, from the above report it can be concluded that it would be better for Caltex Limited
to go for borrowings as the option of financing as the key financial ratios clearly shows that
the company has satisfactory financial position from all aspects that are considered by
creditors while extending loans. Also, the loan financing will help the company to maintain a
better capital structure which will not let the company lose excessive control over its
ownership. Further, the above report has provided detailed analysis of the industry,
competition, and financial performance of the energy market of Australia with major focus on
Caltex operations. From the analysis, it has been identified that the industry to which Caltex
belongs is very competitive due to increasing demand and consumption. There are around 30
energy retailers who are operating in the market to meet this increasing demand. The
Australian Energy regulator is the regulatory body that monitors and impose laws. Besides
this, from the analysis of the financial market, it has been identified that the wholesale prices
for the energy is reducing which raises the requirement that the retailers involved in the
industry must also reduce the prices for the customers too. Apart from this, the regulatory
bodies as established code of conduct that directs businesses to adopt ethical behaviour

within the industry to maintain the honesty and integrity. Further, the analysis of Caltex has
represented that it has been involved in the unethical behaviour by under paying wages to its
workers, due to which it has to deal with high penalties. Therefore, in order to maintain the
reputation of the business, Caltex is recommended to adhere to the rules and regulations of
workplace and ensure the development of its workforce. In addition to this, the companies
like Caltex that are involved in the energy industry are the one who are involved in the
carbon emission which negatively impacts the environment. Therefore, the government is
recommended to introduce some strict laws that can work to reduce the emission and must
work under the guidance of Kyoto Protocol that motivates businesses to reduce their
greenhouse gas emission.

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Appendix
Source [(Caltex, 2018)]

Source [(Caltex, 2018)]