Financial Statement Analysis and Business Valuation Assignment

ACF5130 assignment

Table of Contents

1. Accounting Analysis        

1.1 Key accounting policies        

1.2 Assessing accounting flexibility        

1.3 Quality of disclosure        

2. Financial Analysis        

2.1 Profitability analysis        

2.1.1 Net Profit Margin        

2.1.2 Return on Asset (using net income)        

2.1.3 Return on Equity(using net income)        

2.1.4 EBITDA Margin        

2.2 Asset management analysis        

2.2.1 Inventory turnover ratio and day’s inventory        

2.2.2 Receivables turnover        

2.2.3 Net working capital turnover        

2.2.4  Asset turnover        

2.3 Debt and safety analysis        

2.3.1 Liquidity analysis        

2.3.2 Solvency analysis        

2.4 Cash flow analysis        

2.4.1 Operation cash flow ratio        

2.4.2 Cash flow margin ratio        

2.5 Credit analysis        

2.5.1 Crediting rating        

2.5.2 Altman Z-score and distress analysis        

3. Forecasting        

3.1 Segment analysis        

3.2 Scenario analysis        

4. Risk analysis and cost of capital        

4.1 Risk Analysis        

4.2 Cost of Capital        

5. Valuation        

5.1 Discounted Free Cash Flows Model        

5.2 Abnormal Residual Model        

5.3 Price Multiple Valuation        

6 Conclusion        

References        

1. Accounting Analysis

The objective in this segment is to assess Conocophillips’s accounting quality and the degree that the organization's accounting catches its hidden financial business.

The accounting analysis includes inspecting the organization's accounting framework through examinations of Conocophillips’s accounting policies and flexibility, and quality of disclosure. At the end of this part, potential red flags will be identified.

1.1 Key accounting policies

• Consolidation Principles and Investments:

Consolidated financial statement incorporate the records of larger part claimed, controlled subsidiaries and variable premium elements where we are the essential recipient. Equity method will be use to investment where the company has significant impact. With area that is lack of influence, investment will be classified as available for sale or be used for cost method. Undivided profit are accounted as proportion while others are carried out as cost

• Foreign currency translation

Foreign currency translation income or cost will be regarded as current earnings. Most of the operations are using functional currency.

• Oil and Gas exploration and development

As oil and gas exploration is the major business of Conocophillips, there are special accounting policies in the segments. Investigation cost of earthquake information relating to its business is explained as incurred. It will be until the reserve of oil and gas are guaranteed that leasehold acquirement costs will be withdraw from the balance sheet. Exploration could be a key factor for Conocophillips because this is the main source for raw oil and gas. The accounting policy of Conocophillips record the exploration spend as costs.

• Depreciation

Conocophillips has many long terms asset which will be antiquated. Conocophillips mostly do not assess these long lived items but just keep an ownership of them, because this could reduce cost. Only if the future cost of the old assets are decreased that they will be assessed. The removal of old items are included as costs of good. There are two methods of depreciation, for assets like pipeline is using unit-of-production method. For all other plants and equipment, using individual-unit-straight-line method

• Acquisitions

In recent year, as it is growing fast, the company has implemented several acquisition. Most of these acquisition are accounted as goodwill.

1.2 Assessing accounting flexibility

There are significant accounting flexibility in Conocophillips. As it is said in accounting policies, oil and gas exploration is the major business for Conocophillips. Most cost of the exploration is base on a possibility of the chance that the exploration project fails to find reserve. The proportion is a percentage ranged from 0% to 100%. And cost has positive correlation with the proportion. The project will be reevaluated time to time and the cost will be adjusted due the constantly changed possibility. This gives a high flexibility for management of cost. Moreover, according to the accounting policy, Conocophillips has gone through several mergers and acquisitions. When the company need to value the fair value of the asset during acquisition, they often call for other company or agencies, which also leaves room for flexibility. The last evidence of flexibility is the depreciation. Conocophillips has different depreciation time due to different assets. Refinery has 25 years life, pipeline has 45 years life and service station has 30 year life. Inventories use the principle of first in, first out (FIFT). And depreciation method are different due to different assets. As a result the different deprecation time and method show the flexibility of accounting.