Assignment on PetroChina

Added on - 22 Feb 2021

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Individual Assignment Report to theNon-Financial Directors of PetroChinaName:P Number:Module Code: ACFI3424Word Count: 2997
Table of ContentsPart A......................................................................................................................................................3Ratio Analysis............................................................................................................................31.1 Liquidity................................................................................................................................41.2 Working Capital................................................................................................................41.3 Solvency..............................................................................................................................51.4 Profitability..........................................................................................................................61.5 Performance......................................................................................................................7Part B.....................................................................................................................................................82.1 The definition of Independent Audit........................................................................82.2 The assurance of independent audit.....................................................................92.3 The confidence of independent audit....................................................................92.4 Audit expectations gap...............................................................................................10Part C..................................................................................................................................................123.1 The global effect of 2007/2008 financial crisis...............................................123.2 Lesson learned from the financial crisis by PetroChina............................13Reference..........................................................................................................................................14Part ARatio AnalysisPetroChinaSINOPEC20162015Change Rate20162015Change RateLiquidity RatioCurrent Ratio0.76450.74113.16%0.84910.720917.78%Quick Ratio0.47030.4719-0.34%0.52670.406329.64%2
Inventory Days52511.96%322910.34%Receivable Days11110.01%330.00%Payable Days29273.02%1113-15.38%Cash ConversionCycle3435-2.86%241926.32%Solvency RatioGearing0.22990.2972-22.65%0.11150.1662-32.90%Interest Cover3.36663.3684-0.06%12.93106.818089.66%Profitability RatioGross ProfitMargin0.23580.2463-4.29%0.22720.21107.69%Operating ProfitMargin0.03020.0327-7.58%0.04080.025957.97%ROA0.01630.009276.07%0.04370.030145.03%ROE0.02840.016572.59%0.07870.055242.43%PerformanceRatioBasic EPS0.04000.1900-78.95%0.38300.267043.45%Diluted EPS0.04000.1900-78.95%0.38300.267043.45%P/E Ratio198.750043.9474352.25%13.498717.2659-21.82%ROCE0.04300.0479-10.31%0.09550.072431.99%Share Price @ Y/E7.95008.35005.17004.6100PetroChina, the state-owned energy giant, whose market value has shrunk about$800 billion (around £573 billion), experienced its biggest stock collapse 10 yearsafter listing. Its profits declined by over 30 percent to RMB 29 billion. Among itspeers in the world, PetroChina has plunged the most in terms of stock returns sinceits first peak in 2007. The economic in China when PetroChina listed in ShanghaiStock Exchange, there were bubbles in both oil industry and Chinese stock market.The company was clearly overvalued by the market and hence, bubbles weredeemed to burst, not even mention the global financial crisis was just around thecorner.3
1.1 LiquidityLiquidity ratios provide insight on the ability that a company can meet its short-termobligations. Liquidity on its own meaning how quick a company can convert assetsinto cash and pay out its current liabilities. Liquidity ratios vary from one industry toanother. PetroChina, the largest energy company in China, did a good job in keepingits liquidity ratios stable comparing to its peer SINOPEC.PetroChina had less than one in both current and quick ratios lower than its majorcompetitor SINOPEC. The industrial average of current ratio and quick ratio are 0.87and 0.79 respectively (Moneycontrol.com, 2018). PetroChina’s current ratio in 2016was slightly lower than the average, which indicates that the company did well inmaintaining liquidity level. However, PetroChina’s quick ratio was 0.47 that was 0.3lower than the industrial average. The quick ratio removed the possible effect ofinventory, which may not be easy to sell at its carrying value quickly. Given thatinventories in the energy industry have high liquidity and constant demand,PetroChina’s quick ratio was unsatisfying.PetroChina also had longer cash conversion cycle (CCC) (34 days in 2016) than theindustrial average of 20 days (Moneycontrol.com, 2018). Long inventory turnoverperiod was the main cause of such long CCC of PetroChina. It gives the samepicture as quick ratio, that PetroChina had difficulties in converting inventory intocash. Both receivable days and payable days were longer than other companies inthis industry. One possible reason is that PetroChina as the largest energy companyin China has great bargaining power and reputation. Hence, the company can gainbetter terms on trade receivables and payables.4
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