Financial Ratio Analysis of Petronas for year 2016 and 2017

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Assessment task 2: Individual report

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Executive Summary
Financial ratio analysis is the most important part of accounting and finance as it is used
to analyse the performance of entity and also allow the comparison between companies present
report has been drafted to perform the ratio analysis of Petronas, a famous company in Malaysia
that deals in oil and gas production and exploration. In this report, profitability, liquidity
position, capital structure, market performance, and efficiency of company has been evaluated
through use of ratios. It has been found that Petronas has very strong financial performance in
year 2017 as compared to year 2016.

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Contents
Executive Summary.........................................................................................................................2
Introduction......................................................................................................................................4
Financial Ratio Analysis of Petronas for year 2016 and 2017........................................................4
Meaning, importance and limitations of ratio analysis....................................................................4
Profitability Analysis of Petronas (All data has been presented in RM million)............................5
Asset Efficiency Analysis (All data has been presented in RM million)........................................8
Liquidity Analysis (Short term solvency analysis) (All data has been presented in RM million) 10
Capital Structure Analysis (All data has been presented in RM million)......................................12
Market Performance (All data has been presented in RM million)...............................................14
Conclusion.....................................................................................................................................15
References......................................................................................................................................17
Appendix........................................................................................................................................18

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Introduction
This report is developed for carrying out financial analysis of a recognized public-listed
company by adopting the use of its recently published annual reports. The financial analysis of
the selected company is undertaken with the use of ratio analysis technique that helps in carrying
out an evaluation of the profitability, asset efficiency, liquidity, and capital structure and market
performance. In this context, the company selected is Petronas, an integrated oil and gas
multinational company of Malaysia that has attained higher position within the Fortune Global
list. The financial ratio analysis of the company has been calculated with the use of financial
reports of the company over the last two financial years.
Financial Ratio Analysis of Petronas for year 2016 and 2017
Meaning, importance and limitations of ratio analysis
Ratio analysis is the important method in accounting and finance used to evaluate the
financial performance of an entity through examining and comparing the financial information
provided in the annual report of such entity. The information gathered through performing the
ratio analysis is used by management and investor to make useful decisions. Management use
ratio analysis to evaluate their efficiency, liquidity performance, leverage position and market
performance during the particular period. On the other had investors use information gathered
from the ratio analysis to make investment decisions. Investors are mainly concerned for
organization profitability, holding period return and market performance as main motive is to
maximize their own wealth. So it can be said that ratio analysis is one of best tool measure the
profitability, operational efficiency, liquidity performance, financial strength, and market
performance of the company and also allow the comparison.
There are numerous uses of ratio analysis in business as it helps in simplifying the
complex accounting statement and other financial data into simple ratio that can be easily
understood by the management and investor to take the required decision. Through the
application or use of ratio analysis management can identify the problems and issues in various
areas. In this way management can take appropriate steps to solve the issues at proper time. Ratio

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analysis allows comparing the financial data with competitors or industry average that helps the
management to rank the company in the respective sector and take steps to improve the
performance (Higgins, 2012).
There are limitations of ratio analysis that comes across while making analysis of
financial statements. Ratio analysis uses historical data to make interpretation of financial
performance. It does not mean that same values of ratio will be carried forward in next year. For
this purpose, forecast financial statement can be used for performing ratio analysis and results
derived can be compared with the historical results for consistency.
Ratio analysis can be divided into five major segments that are underline below:
 Profitability analysis
 Asset efficiency analysis
 Liquidity Analysis
 Capital Structure Analysis
 Market performance
Profitability Analysis of Petronas (All data has been presented in RM million)
Profitability analysis is the most important ratio analysis that measures the entity ability
to earn the profits in relation to sales, assets and equity. The purpose of profitability analysis is to
check the ability of company to earn the revenue in relation to some metric. Purpose is to check
how much resources have used by the company to earn the revenue. Some of important
profitability ratios are net profit ratio, return on assets, return on equity and return on capital
employed. It means profitability analysis helps to analysis how well company is performing in
generating the profits in relation to certain measure like amount of investment.
Ratios Formula 2016 2017
Profitability Ratios
Net profit Ratio Net profit (After tax)
/Revenue or sales 12.18% 20.35%
Return on assets Net profit (After tax) /
Average Total Assets 3.98% 7.57%

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Return on equity
Net profit (After tax) /
Average Shareholder's
Equity
5.66% 10.63%
(Annual Report, 2017 and Annual Report, 2016)
(Note: Financial Data can be located at appendix section of this report)
Net profit ratio: This ratio is also known as return on revenue and net margin ratio. It is very
important ratio of profitability that measures percentage of net profit after tax earned on total
sales (Revenue). So it can be said that this ratio shows amount of each sales dollar left after
meeting all the expenses including tax expense. This ratio is very useful for investors as t helps
them to make useful decision regarding the choice of investment. Usually every company want
higher net profit margin as it shows that company is more efficient in converting sales into actual
profits.
Formula: Net profit (After tax) /Revenue or sales (Higgins, 2012)
2016 2017
Net profit Ratio 12.18% 20.35%
2.50%
7.50%
12.50%
17.50%
22.50%
12.18%
20.35%
Net profit Ratio
The above table shows the net profit percentage earned by Petronas in years 2017 and
2016. It is clearly reflected from above bar graph that net profit ratio has been increased from
12.18% in year 2016 to 20.35 % in year 2017. The increase of almost 8% in net profit ratio