June 10, 2013 (Chinavestor) Analyzing a firm’s financial statements can give a clear view of how well a company is performing and how their current circumstances can affect their future figures. Shareholders want maximum profit from what they invested and firms will try to seek out the best possible ways of catering to them while not defaulting on their debt repayments. Petrochina (NYSE:PTR) and Sinopec (NYSE:SNP) are two competing Oil & Gas companies based in Asia, both vying for dominance in an industry dependant on profits produced from substantial amount of assets. By analyzing their Return on Equity figures for prior years, making a comparison can highlight how well each firm does with regards to investor funds.
It is immediately apparent from Fig 1 that Sinopec (NYSE:SNP) produces better return on equity over the 4 year period in comparison to Petrochina (NYSE:PTR). ROE increased from 16.7 % to 17.1 % from fiscal years 2009 to 2010. PTR made an increase from 12% to 15%. The increase in ROE can be attributed to the overall profit from operations made by the two O&G companies. PTR made a 35% increase in net profits whilst SNP generated 14% growth. From 2010 onwards, ROE for both companies seemed to decline. In 2012, the ROE for SNP was 12% and PTR 11%. The decline is due to an increase in retained earnings for both firms, brought about by a rise in shareholders’ equity. Weakening ROE figures can also signal a firm is taking on extra debt and liabilities, which is the case for both these firms. Long term borrowings increase by 66% to RMB 256536 million from 2011 to 2012. Whilst ROE can produce a simple way of checking financial health and profitability, the figure can only be measured in line with the firm’s Return on Assets.
Fig 2 illustrates the relationship between ROA and both Petrochina (NYSE:PTR) and Sinopec (NYSE:SNP)
For a firm to indicate good ROE figures, their ROA figures should also be healthy. Both firms appear to show they are generating profits from their assets efficiently. Where PTR had lower ROE compared to SNP over the periods being analysed, their ROA is much better, indicating that SNP may have taken on extra debt, which also increases ROE figures. ROA peaked at 8% in 2010 for PTR, with declines thereafter. The decline in ROA is mainly due to an increase in liabilities, particularly long term debt, and also a decrease in net profits. Net profits declined to RMB 115326 million in 2012 from RMB 132961 million in 2011. Increases in operating expenses are at the forefront of weakened profits. By looking at the two ratios, Petrochina (NYSE:PTR) appears to be more efficient, in contrast to SNP. Good ROE figures are matched by ROA figures which are in line with what is expected. SNP, even though had appeared to be more profitable to investors, is not wisely converting their current assets into profits as efficiently as PTR.
Fig 3 demonstrates PTR’s return on equity and return on assets over prior financial quarters. A better way to assess the true nature of Petrochina’s (NYSE:PTR) return on equity is to break it down using a Three Step Du Pont analysis. This measure can assess how PTR’s ROE is made up and why it may lose momentum over fiscal periods.