FINANCIAL STATEMENT ANALYSIS

GROUP ASSIGNMENT

Lecturer: Do Van Anh

Students name: Dang Vuong Duy
Hoang Lan
Do Phuong Nguyen
Do Hai Dang
Nguyen Thanh Dat
Word count: 4536
Peer evaluation form

No. Student ID Student name Contribution details Signature

1 20937654 Đặng Vương Duy 20% VDuy

2 20930178 Hoàng Lan 20% Lan

3 20785440 Đỗ Phương Nguyên 20% Nguyen

4 20936293 Đỗ Hải Đăng 20% Dang

5 20930209 Nguyễn Thành Đạt 20% Dat

I.Introduction:
Ampol Limited, formerly known as Caltex Australia, is an Australian petrol company
originally founded in 1936 as an Australian Motorist Petrol Company. However, by
1995, the company merged with its competitor Caltex Oil and later rebranded it into
Caltex Australia. Ownership of the company was a 50-50 split between Chevron
Corporation – the parent company of Caltex – and shareholders of the Australian
Stock Exchange until 2015 when Chevron sold all its stake in Caltex Australia and
terminated the Caltex trademark in 2019. This eventually led the company to revert to
its original brand name of Ampol in 2020 but it is worth noting that any data prior to
this still refers to the company as Caltex (Australia).

This report will attempt to analyze Ampol’s financial statements from 2016 to 2020 to
provide an overview on the financial health of the company and provide predictions
on the growth of Ampol in the next decade and the probability that the company will
fall into financial distress in the future.
II.Risk and profit potential of Ampol

2.1. Industry analysis:

a. Competitive force 1: Rivalry among existing firms

According to (Porter 2018), the profitability of a company is likely to be affected by
the basis and intensity of existing competitors. (Datamonitor 2009 and Datamontor
2010) have proposed that because competitors in the oil industry are quite similar in
size, capabilities, and power as well, this may increase the rivalry intensity among
firms resulting in a trade war if a firm attempts to manipulate the prices.

(Porter 2018) has claimed that rivalry can also be intensified by the slowing down in
output and the decline in the reservation of net liquid as well (Datamonitor 2010)

In every sector, the rivalry is severe if competitors have objectives that extend further
economic efficiency (Porter 2008). (Bernstein et al. 1991) state that one of the
objectives of joint ventures in the gas and oil industry is to handle competition by
converting potential rivals into allies. Especially, it is important in the gas and oil
sectors, where little distinguishes competitors (Hennart et al. cited in Kent 1991).

b. Competitive force 2: Threat of new entrants

Porter (2008) asserts that new entrants have a willingness and new capabilities to
increase market share. Porter indicates that this demand puts a lower pressure on
prices, costs as well as competition needed to compete .As he states, the danger of
entry is impacted by two variables: the strength of barriers to entry and the
incumbents in response to new competitors.

Patents for technology and invention serve as differentiation and cost-cutting forces
(Santos et al. 1999). Exxon Mobile, for example, implemented advanced technologies
in early 2010 to minimize costs while expanding production volume, allowing the
company to increase manufacturing capacity by 5.8 million tons of oil equivalent and
lengthen the longevity of its own gas and oil reserves. (2010 Datamonitor) However,
technological patent barriers are reduced in refining because the technology involved
in refinery construction is recognized well. Barriers to entry resulting from high capital
requirements and economies of scale are often reduced and, in some cases, do not
exist in competitive petroleum & energy industries such as the US market.

Barriers to entry imposed by government regulation have affected the strategic

strategies of oil and gas companies in the marketing field. For instance, the United
States fossil fuel companies are always successful at product differentiation, owing to
decades of advertising and growth. This achievement, however, did not preclude
independent markets from offering comparable goods at a lower price. Nonetheless,
government controls have effectively eliminated such autonomous markets. (1978,
Jones et al.). In short, the threats of new entrants to the oil industry are likely to be
low because it has a lot of requirements such as patents, a huge capital, and
economies of scale to enter the market.
 c. Competitive force 3: Threat of substitute products
Porter makes a distinction between competition (the third force) substitution and
(the fifth force). Rivalry is when a particular commodity is served by a number of
firms, while direct replacement occurs when two businesses don't have a similar
product. It limits profits by introducing a cap on price (Porter 1980), (Strategy,
Business Information and Analysis 2009).

Major oil and gas firms are evaluating renewable energy sources as potential
alternatives through the use of advanced technologies. For instance, TOTAL formed a
partnership with Gevo in April 2009, a US company focused on the development of
transportation biofuels and industrial chemicals. (Datamonitor 2010) Porter (2008)
asserts that a substitute poses a significant threat when it provides an enticing price
differential to the industry's goods or when the buyer's cost of moving to the
substitute is minimal. In general, threats of green energy such as biofuel and
electricity seem to be very high because, in recent years, people are not only
concerned about money but also care about the environment to assure a sustainable
environment (Datamonitor 2010). If biofuels deliver an appealing price-performance
ratio, they can serve as effective substitutes, posing a challenge to crude petroleum
(Porter 2008).

d. Competitive force 4: Bargaining power of buyers: low

Customers have the potential to lower prices, demand higher quality or more service
(leading to growing costs), and pit market players against one another, all at the
detriment of industry profitability (Porter 2008). As buyers, oil businesses like Caltex
are in a strong position to negotiate lower costs, higher quality, or extra services. On
the other hand, the oil industry has high product differentiation which means each
particular product has unique characteristics, therefore, customers find it hard to find
other substitute products. However, Ampol’s quality is important in their market and
attracts the majority of Australians because they are famous for high and differentiated
products, lower bargaining power of buyers. The buyers of Ampol are less sensitive
when the price changes. Ampol is called the largest fuel retailer in Australia and
credited with a whopping 25% market share. (Who are the biggest servos in Australia,
2021). Another key point is that Ampol can leverage its size advantage to develop a cost
advantage and sell several suitable product lines to low-income buyers. In this way,
Caltex will possibly attract a large number of buyers.

e. Competitive force 5: Bargaining power of suppliers: high

There is a fact that the supplier of the oil industry has more power, which means
companies like Ampol have less control in price and bargaining power. Another point
is to make the bargaining power of suppliers a weaker force within the industry as
Ampolis under pressure from suppliers. These suppliers will provide reasonable
pricing and Caltex will be a weaker force within the industry. Ampol is in the energy
sector obtaining their raw materials from a variety of sources. The company imports
roughly 83% of the crude oil they process from more than 17 nations, the majority of
which are in Asia (40 percent), also Africa (18%), and the Middle East (17%). Suppliers
in leading positions reduce the profit margins that Caltex Australia Limited can gain.
Powerful producers like Asia area use their bargaining power to secure higher
premiums from Ampol. Higher retailer bargaining power has the net effect of
lowering Ampol's overall profitability. (Australia imports almost all of its oil, and there
are pitfalls all over the globe, 2021).
2.2. Competitive strategy analysis: analyze two competitive
strategies: differentiation and cost leadership
To become successful in the oil market, Ampolhas to position itself with clear
competitive strategies. There are two main competitive strategies that Caltex is using,
cost leadership and differentiation.

a. Cost leadership
The cost leadership strategy allows Ampolto to gain competitive advantages by
cutting down the cost and boosting its savings. This is a generic strategy, which Ampol
uses for some consumer markets, used to maintain the market leadership position
(Tan 2015). Ampol uses this cost leadership strategy to target the middle class - the
largest proportion in almost all consumer markets, who can be easily affected by
pricing factors. Caltex Australia Limited also increases its brand awareness and high
sales growth globally by providing affordable and easy-to-access products. Besides,
Caltex wants to give consumers the most competitive prices by lowering the cost and
maximizing the efficiency of the supply chain. It also offers vouchers and discounts to
achieve both the sales targets and the brand popularity (Caltex 2019).

In general, the cost leadership strategy of Ampol has benefited this company in
various opportunities such as gaining brand recognition, meeting the sales target by
focusing on product prices, and encouraging consumption from the middle class.

b. Differentiation
Differentiation is another competitive advantage strategy that Caltex uses to achieve
sustainable competition in the oil industry.

Caltex Australia Limited aims to enlarge the customer base and build brand loyalty by
showing the unique features of products and services and also making essential
changes to meet the customers’ desires. For example, this company has researched
 and developed other product lines due to the consumers’ changing interests, which
makes Caltex outstanding with other competitors and raises the contentment of
customers. Another highlight of differentiation of Caltex’s competitive strategy is that
it always catches up with the most technology trends, such as launching the Caltex
app to help customers have a better experience (Caltex 2019). Caltex also uses
marketing wisely when showing the experienced, strong image to the world,
differentiating it from other alternatives.

III. Examination of financial health for Caltex (5 years)

3.1. Profitability analysis

The return on equity ratio ( ROE): From 2015 - 2019, this data demonstrated the
gradual decline of Caltex ROE, from 37.4934% in 2015 to 11.5268% in 2019. This
decreasing trend of ROE shows that Caltex has become less efficient at earning profits
and raising the shareholder value, which can be resulted from making bad decisions in
generating income for Ampol’s shareholders. In 2020, the ROE of Ampol decreased
significantly, from 11.5268% to -14.77%. It indicates that Caltex’s managers
inefficiently utilized investment financing to make the company worse, therefore, the
investors received fewer returns. On the other hand, ROE in 2020 is lowest compared
to the average ROE through 5 years (21.82%). Generally, in 2020, Caltex has low ROE
(less than 10%), which means that the business is not very efficient in generating
profit or it also tells the investors that the business is not worth investing in.

The return on assets ratio ( ROA): The data illustrate that Caltex company's
management is in generating earnings from their economy. ROA of Caltex had
significantly fallen from 20% to -6.13% between 2015 and 2020. The worst ROA
proves that the Caltex profit trend is decreasing. ROA shows that Caltex is becoming
less and less confident about management's ability to generate returns on the assets
and projects it chooses to invest in. The bad ROA signals put Caltex at a disadvantage
when investors are comparing to make a choice between Caltex and another
company.

3.2. Operating management evaluation:

Gross profit margin: The better the gross profit margin, the more profit that the
company can generate. The gross profit margin was at its peak in 2016 with 11.11%
and reduced gradually to 2020, which is only 7.83%. In 2020, the COGS increased
significantly (up to $6,000,000 million), negatively affecting Caltex’s gross profit
margin, which may be caused by suppliers. Another reason why Caltex's gross profit
margin will be reduced in 2020 is it uses a cost leadership strategy, reducing the
revenue this year.

Though using cost leadership strategy, the average gross profit margin in 2020 of
Caltex is still higher than the average net profit margin for the oil and gas drilling
industry in the same year (6.8%) (Stern Business School 2021). It can happen when
Caltex charges not the lowest prices in the industry, but among competitive firms
within the target market, then Caltex can still make high profit compared to the whole
oil industry.

Earnings before interest and taxes (EBIT): Earnings before interest and taxes show
the profit of the company from its operations without taxes and interest expense,
EBIT warrants a company's ability to generate earnings from operations. The average
EBIT Margin of Caltex is 3.2% which illustrates that it can make a profit but in a small
volume.

The size between gross profit margin and EBIT from 2015 to 2019 is approximately
6%. But in 2020, EBIT became negative, which increased this gap up to 8%. This
significant drop is resulted by the low revenue in 2020, along with high COGS and high
operating expenses. The main reason that led to this scenario could be the Covid-19
pandemic, when people are told to stay at home, therefore, reduce the amount of oil
and petrol.

3.3. Investment management evaluation:

Networking capital to sales: Even if a firm is profitable, it is still able to become

bankrupt. Net Working capital shows the ability to be paid in cash and there are no
inventories or current liabilities in the company. According to the data, Caltex's
networking capital is always at a low level (from 1.72% to 4.08).

Inventory turnover: It is clear that there was a fall of the Inventory turnover from
2016 to 2019 (15.02-8.27) and a slight raise to 8.95 in 2020. Its downtrend shows that
the overall efficiency of a business is more inefficient. Like the previous point, this
problem is caused by Caltex wasting resources on inventory costs or coming up with
inefficient or inappropriate products for sale. This leads to more excess inventory and
it affects the value of the company. Accordingly in 2020 Caltex's inventory turnover is
much lower than the average of the companies in the sector (CSIMarket, 2020).

Accounts receivable turnover: Caltex collected its receivables 29.38 times on average
in five years. As an illustration, it takes 13 days for Caltex’s client to pay for their order,
this data shows that the collection accounts receivable is effective. However, there is a
sharp decrease in the accounts receivable turnover ratio from 2015 to 2020 (from
58.77 to 13.17). This is because the Caltex collection process becomes inconsistent
gradually.

3.4. Financial management evaluation:

Current ratio: Current ratio of Caltex Australia Limited through 5 years is always more
than 1.0, and it has been volatile from years to years. The current ratio decreased
from 1.43 in 2016 to 1.16 in 2017, then back to 1.31 in 2018. In 2019, this ratio once
again fell to 1.14 and increased to 1.32 in 2020. This fluctuation in the current ratio of
Caltex indicates that the operation risk is increasing and the company value can be
dragged.

Net debt to capital ratio: Besides, the net debt to capital ratio of Caltex has increased
over 5 years, with the lowest in 2016 (0.199) and becoming higher in 2019 and 2020
(0.353 and 0.347 respectively). It indicates that about 20% to 35% of Caltex’s
operations are funded with debt rather than capital. This makes it a relatively risky
proposition, as the business is aggressively financing growth activities with debt.

3.5. Common size balance sheet and income statement:

For Gross profit margin, we can see that it has reduced from the period 2015 to 2020
from 9.93% to 7.83% that is, it has reduced by 2.1%. To know the reason behind this
we have to see direct expenses fluctuation and revenue. During the years cost of
goods sold percentage has increased which led to the decrement of the Gross profit.
Maybe because of high cost raw material or maybe some new machinery is being
used which has more waste than the previous one. From the common size sheet we
can see that it has decreased from positive 4.05% to negative 4.07% from 2015 to
2020. This drastic change in the EBITDA is maybe because of reduction of Gross profit
difference of 2.1%, also there was a increase in expenses also, like selling and
distribution expenses from 5.19% to 7.31% and administration charges also increased
from 0.68% to 2.2%.These all led to the decrement of EBITDA.

Now for net profit margin, we can see from the statement that the Net profit margin
has decreased from positive 2.61% to negative 3.11%. We can see that it has changed
by 5.72% over 5 years from 2015 to 2020. This change is because of a reduction in
EBITDA which we saw earlier. And also there is a slight increment in finance costs
which may have led to the decline of Net Profit Margin. Overall profitability has
reduced over the years as the profit percent is declining yearly.
IV. Prospective analysis-forecasting

2020 was an unforgiving year for the oil and gas industry, marked by Covid-19 and the
crashing in price of West Texas Intermediate to below zero and Brent crude. The
situation for the future is dependent on widespread vaccination as this will enable
society to return from its lockdown state and allow economies to recover. The sales
growth forecast for Ampol, therefore, is based on the prediction by The Economist
that most rich countries will achieve full-scale vaccination by the beginning of 2023.

4.1. Sales growth forecast

The sales growth for Ampol will be an upward trend as it recovers from the effects of
Covid-19 on the industry and global economy, down from -30% in 2020 to only -5% in
2023. Future growth rate from 2024 onwards is predicted to range from between
1.7% to 2.3% based on industry forecasts provided by the International Energy Agency
(2020) and the Australian Government Department of Industry, Science, Energy and
Resource (2021). We decide to be as conservative as possible in our forecast as the
period after 2023 is marked with uncertainty based on the effectiveness and
widespread scale of Covid-19 vaccination. Additionally, in their 2020 director’s report,
Ampol’s management team has mentioned plans for overseas expansion of their
trading and shipping into America and their existing South East Asian branches, which
will not yield immediate sales growth. Hence the higher growth rate is predicted to be
from 2027 onward – when the projected overseas expansion is settled.

4.2. NOPAT margin forecast

Ampol’s strategy also focuses on differentiation which includes not only oil and gas
but also in convenience retail, with its retail EBIT up by 43% in 2020. However,
considering the lockdown surrounding Covid-19 and halted transportation, a positive
change in NOPAT will be marginal as total revenue decreased by 31%. Ampol’s
pre-Covid NOPAT so far appears to hover around 3% of sales.
 Similar to sales growth, NOPAT is predicted to recover steadily by 2023. After 2023,
we decided to take the 5-year average as the benchmark for NOPAT change and keep
it consistent with sales growth. Therefore, the NOPAT margin from 2024 to 2026 is set
at 1.5%, in line with the 1.7% sales growth rate recovery. To reflect the potential
outcome of its overseas expansion and eventual recovery, Ampol’s NOPAT margin
between 2027 and 2029 is set at 3% of sales, back to pre-Covid-19 levels.

4.3. Working capital to sales forecast

Ampol’s working capital to sales fluctuated around 3% based on 5-year averages.

However, considering the reduction in sales due to Covid-19 and the company issuing
bonds in order to fund its overseas expansion in 2020, its working capital to sales can
be expected to be on the rise for the upcoming years. We decided to keep it
consistent at 6%, which is double the 5-year average rate, to reflect the increase in
liability.

4.4. Net long-term assets to sales forecast

The long-term assets to sales for Ampol appears to be upward trending. This is due to
both a decline in overall revenue and increase in long-term debt for overseas
expansion, as previously mentioned. However, as the company's non-current asset is
always around 60% of its total assets; with an average asset turnover ratio of 3, the
company's long-term assets to sales is calculated to be around 20% of its sales. This is
also reflected in historical long-term assets to sales with the 5-year average at 20.83%.

Future long-term assets, therefore, are expected to be around 20-30% of sales. The
period from 2021 to 2023 marks a temporal increase in net long-term asset. This is
also supported by the fact that the company has a weighted average debt maturity
profile of 3.6 years, according to its 2020 annual report. After this period has passed,
net long-term asset to sales is expected to return to the pre-Covid rate of 21 to 22%.
4.5. Liability to asset ratio forecast

As mentioned before, the company is planning to issue bonds to expand its overseas
drilling sites and office networks. This signals an increase in overall liability for the
upcoming year. However, at the same time, the company states its intention in
maintaining a consistent level of net debt. It is worth noting that while the company’s
ROA and ROE are both steadily decreasing, they still maintain the same debt ratio of
around 50%, and the reduction can be attributed to low sales instead. Therefore, this
increase in liability will be reflected by an increase to 60% for the first 3 years as the
highest estimate. After adjustments and according to the company’s policy, we can
expect this ratio to gradually decline for the next periods afterward. This is predicted
to return to the normal 5-year average by the 2027-2029 period of around 52%.

4.6. After tax cost of debt

Due to Covid-19, it is reasonable to assume that the company will take up more debt
both long-term and short-term to fund its new trading and shipping route to America
and its acquisition of new drilling sites in South East Asia. According to a report by
CreditBenchmark in 2017, drilling and exploration activities represent a higher risk
compared to other activities within the global oil industry. This report illustrated that
average oil and gas companies in America are only rated around bb+ to bbb-, which
falls between the line of investment grade and high-yield non investment grade. Even
many subsidiaries of Royal Dutch Shell are around bbb- to a+.

However, the company’s management also mentioned in their framework that they
want to maintain an investment-grade credit rate, as illustrated by their capital
allocation to achieve a low gearing ratio of 21% in 2019 and 12% in 2020. Looking at
the historical cost of debt, the average cost of debt for Ampol is around 15.3%. This
will result in an after tax cost of debt of around 11%, taking the higher risk rating into
account. Additionally, as the corporate tax rate in Australia remained unchanged in
2021 compared to 2020, according to the Australian Tax Office, we can assume a
relatively constant after tax cost of debt throughout the entire 10-year period.

4.7. Dividend rate

The dividend rate of the company has been gradually decreasing for the past 5 years,
with a 21% reduction in payout in 2021 and 23% reduction in 2020 compared to their
previous respective years. As the company is still recovering, dividend rate for this
period is expected to be at its lowest as the company reinvests. Therefore, as the
company expands its operations overseas, dividend for this period (2021 throughout
to 2026) is forecasted to be around 2.3 to 2.5%. Dividend is expected to recover to its
overall average by 2027 onward and will reach around 3.5%.

4.8. Share value assessment

From our calculation, as demonstrated in the financial health excel sheet, it appears
that Ampol’s stock is consistently overvalued. Its book value of equity per share is
around $11 to $13, averaging at $12 per share for the 5-year period. It’s market price
per share, however, is valued at more than $30 per share on average. This can
indicate that the company is either overvalued or that the company is believed by the
market to have more potential for growth in the future.

V. Credit analysis and distress prediction

Altman Z-score is used to assess corporate credit risk. A score of less than 1.8
indicates that the company is expected to go bankrupt, while a score of 3 indicates
that the company is unlikely to go bankrupt.

Overall, Ampol’ Z-scores witnessed a downward trend during the period of 2016-2020
but they were in safe zones and impossible to go bankrupt. For the first 2 years
(2016-2017), the scores were the highest with above 6.0, meanwhile, the next 3 years
gradually decreased to above 3.5.

(Z1) Specifically, although Ampol’s working capital to total assets saw ups & downs
between above 5% and 12% during this period, they all stayed positive. This positive
working capital indicated that Ampol could satisfy its short-term financial
commitment, and had available funds to spend and expand.

(Z2) Likely, The retained earnings to total assets of Ampol underwent fluctuations
between approximately 33% and 43%. Despite significantly declining in the last 2
years (2019 & 2020) due to Covid-19 pandemic, the figures were still high and
occupied above 32%. It showed that Ampol attained profitability over years and did
not depend on borrowings.

(Z3) By comparison, Ampol’s EBIT experienced a decrease during this time, and
declined to the lowest point of -2.28% in 2020, which means the company had
inability to generate profit to keep profitable from its operation. The reason this
happened was because Covid-19 had caused the whole of Australia to be socially
isolated, so all vehicles had to stop working.

(Z4) Similarly, the market value of equity to total liabilities proportion also went down
from 318.73% to 173.37% during 2016-2020, which indicated that investor confidence
in Ampol’s financial strength became poorer but overall they were still high.

(Z5) In terms of The sales to total assets percentage, Ampol's figures were all above
210%, indicating that the management required a modest investment to make
revenue, which improved profitability of the business. Despite high ratios, the sales to
total assets of Ampol underwent a downward trend over the years.
VI. Conclusion
As can be observed from the above analysis, by using both cost leadership and
differentiation strategy, Caltex becomes outstanding with other competitors and
raises the contentment of customers.

In terms of Financial health, Ampol’s profitability has reduced over the years as the
profit percent is declining yearly. The company does not offer the lowest rates in the
industry, it may nevertheless generate a large profit within the target market when
compared to the whole oil sector which indicates that the firm has strong financial
health.

For potential forecasting, the company has retained a consistent average current ratio
of 1.2 and debt ratio of 0.53. Moreover, it is predicted that in the next decade, the
sales growth rate of Caltex will keep increasing and NOPAT will recover steadily after
2023, as economies recover from the impact of Covid-19.

Ampol' Z-scores showed a downward tendency from 2016 to 2020, although they
remained in safe zones, making it impossible to go bankrupt. Its share value is
overvalued compared to its book value, which can be an indication that the company
still has potential for future growth. Caltex, therefore, is not a risky investment.
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