Essay: BG Group’s financial performance using ratio analysis

About Coursework

In this Assignment we are going to explain about BG Group’s Financial Performance using Ratio Analysis for potential investor who want to invest in this company.

1.0 Introduction.

BG Group plc is engaged in the exploration, development, production, transmission, distribution and supply of natural gas and oil. The Company operates in four segments: Exploration and Production (E&P), Liquefied Natural Gas (LNG), Transmission and Distribution (T&D), and Power Generation (Power). A leading player in the global energy market, BG Group is a dynamic growing business with operations in some 27 countries over five continents. The main business of BG group is Natural Gas. The headquarters are in United Kingdom (UK), over 60% of the talented professionals who make up the BG team are located outside the UK. BG Group is a publicly listed company on the London Stock Exchange and is also listed on the US over-the-counter market known as “International OTCQX”.

BG Group possess core skills in every aspect of the gas chain from the reservoir to the burner tip. Business of BG Group is the discovery, extraction, transmission, distribution and supply of natural gas to existing and developing markets around the world. The core skills of BG Group include exploration and production, transmission, through pipeline systems or LNG liquefaction and transport, as well as the creation and distribution of energy through gas fired power generation. The goal of BG Group is to deliver a top quartile performance in terms of total shareholder returns when measured against our peers in the energy industry. To reach this goal, the twin planks of BG Group’s investment programme are to deliver strong growth coupled with good returns from an international integrated energy business having relatively high resilience to oil price volatility.

2.0 Analysis and Discussion.

Nowadays, it is important for organizations to know how to survive in the competitive market in which they are involved, markets that require managers who understand and are aware of the internal and external factors that concerns to the company. Therefore, it is vital to know the existence of different techniques of measurement such as financial tools, which can give an idea on how the company’s financial situation is going to affect its performance in the marketplace.

One of these tools can be the used of financial ratios, which gives to managers the information to set up strategies in order to make decisions in the future. However, it is important to highlight that this ratios provide an overview of the business’s financial condition, but an analysis in depth is needed to know the reasons why certain changes have occurred (Maclaney and Atrill, 2002). Nevertheless, there are some limitations in the used of financial ratios, for instance, the information is out of date so it does not reflect the real situation of the company, hence it can lead to wrong decisions, also, the analysis made from the financial statements gives symptoms of such situations but not the causes of it (Berry and Jarvis, 1997).

The purpose of this report is to analyze BG Group’s financial performance using the analysis of ratios as a financial tool. This information will be taken from the annual reports of 2005, 2006, 2007 and 2008. Finally, this report will give conclusions and recommendations to those investors who want to make an investment in a BG Group plc.

2.1 Profitability Ratio Analysis.

According to Maclaney and Atrill (2002, p. 197), Profitability ratios provide an insight to the degree of success in achieving this purpose. For instance, the profitability ratios of BG Group plc are:

Profitability Ratios	2005	2006	2007	2008
Return on Shareholders Fund	40.59%	51.63%	42.06%	42.86%
Return on Capital Employed(ROCE)	26.54%	31.62%	24.75%	28.31%
Gross Profit Ratio	67.28%	71.34%	67.21%	68.20%
Net Profit Ratio	28.91%	77%	22.06%	24.69%

          Table 2.1 :- Profitability Ratios.

Figure 2.1 :- Graphical Analysis of Profitability Ratios.

2.1.1 Return on Shareholders Fund.

This ratio is one of the most important ratios used for measuring the overall efficiency of a firm. As the ratio reveals how well the resources of the firm are being used, higher the ratio, better are the results. In 2005 ROSF is 40.59% . This means that the return on shareholders funds is 40.59 pence per pound. So as per figure average return on shareholders fund of last four year is 44.28%. It means that company gives return to shareholders is 44.28 pence per pound. As per the analysis it is good to invest in BG Group plc.

2.1.2 Return on Capital Employed.

ROCE ratio is considered to be the best measure of profitability in order to assess the overall performance of the business. ROCE gives us an indication of how the company is utilizing its capital and whether the company is making enough earnings to cover its cost of capital. In 2008 ROCE is 28.31% . This is a good result as it shows that the business is effectively earning around 28.31% on the (investment) funds that the shareholders have invested in it. But it is decrease 5% compare to 2006. So it didn’t necessarily go wrong, was that the capital employed increased but the profits did not increased compare to capital employed.

2.1.3 Gross Profit Ratio.

The gross profit margin ratio tells us the profit a business makes on its cost of sales, or cost of goods sold. It is a very simple idea and it tells us how much gross profit per �1 of turnover our business is earning. Here in 2006 Gross profit ratio is highest about 71.34% means 71.34 pence profit per �1 of turnover BG Group’s business is earnings. While in 2008 it is decrease about 3 % due to Decrease in the selling price of goods, without corresponding decrease in the cost of goods sold but still it is good.

2.1.4 Net Profit Ratio.

NP ratio is used to measure the overall profitability and hence it is very useful to proprietors. The ratio is very useful as if the net profit is not sufficient, the firm shall not be able to achieve a satisfactory return on its investment. obviously higher the ratio is good for investor. In 2005 net profit ratio is 28.91 % means net profit of BG Group’s is 28.91 pence per one pound. It is decrease in 2008 about 4%. Some time turnover or sales increase but due to other expense like tax, administrative expense etc, due to this net profit is decrease here is the same case turnover increase in 2008 but compare to other year other expense also increase.

2.1.5 Conclusion on Profitability Ratios.

So finally , As per the graphical analysis of profitability ratios there is no sudden increase of decrease in any of profitability ratios . So we can say that BG Group is doing their business very well. And from the last four your BG Group give their excellent financial performance. Sometimes there was a drop in profit, but as it is a long-term investment it is estimated to be an income generation in the future.

2.2 Investment Ratio Analysis.

Certain ratios are concerned with assessing the returns and performance of shares held in a particular business (McLaney et al., 2002, p. 197). In this case, the investor ratios for BG Group plc are the followings:

Investment Ratios	2005	2006	2007	2008
Earnings per Share	£0.43	£0.51	£0.52	£0.93
Dividend Payout	9.24%	13.81%	18.15%	12.03%
Price Earnings Ratio	67.28%	71.34%	67.21%	68.20%
Net Profit Ratio	11.58 times	13.63 times	19.39 times	9.64 times

Table 2.2 :- Investment Ratios.

2.2.1 Earnings per Share.

Figure 2.2.1 :- Graphical Analysis of Earning per Share.

The good news for investors here is that the average earnings per issued ordinary share has almost doubled over the two years. So this really is a good result as profits available for shareholders must have increased significantly. In 2008, EPS grew by 74% compared with 2007.

2.2.2 Dividend Payout.

Growing companies will typically retain more profits to fund growth and pay lower or no dividends(Ken little,2004).BG Group gave dividend 11.23 pence per ordinary share and it is 20% more compare to 2007 but in 2008 earning per share is more compare to 2007 but BG Group keep profit for further development in Australia and Brazil in 2009 so dividend payout ratio is decrease compare to 2007.

Figure 2.2.2 :- Graphical Analysis of Dividend Payout Ratio

2.2.3 Price Earnings Ratio

The ratio is useful in financial forecasting. It also helps in knowing whether the share of a company are under or overvalued. The market value of every one pound of earning is 9.64 times more or 9.64 pound in 2008. The average market value of every one pound of earning is 13.31 times more or 13.31 pound. It is very good for any investor.

Figure 2.2.3 :- Graphical Analysis of Price Earnings Ratio.

2.2.4 Conclusion on Investment Ratios.

From the last four year, Every year earnings per share is increase. In 2008 it is almost double compare to 2005. While dividend per share is given by company is varied but it is depends on company sometime company use profit for more further development but still it is good. In contrast market prize of share is almost double in 2007 and 2008 compare to 2005. So as per the investment ratios figure we can say that the performance of the company is excellent.

2.3 Liquidity Ratio Analysis.

As Maclaney and Atrill (2002, p. 197) said, Certain ratios may be calculated that examine the relationship between liquid resources held and creditors due for payment in the near future. These ratios in BG Group plc are as follow.

Liquidity Ratios	2005	2006	2007	2008
Current Ratio	1.35	1.47	1.30	1.05
Quick Ratio	1.28	1.38	1.21	0.97

Table 2.2 :- Investment Ratios.

Table 2.3 : – Liquidity Ratios.

2.3.1 Current Ratio.

This ratio is a general and quick measure of liquidity of a firm. In 2008, BG Group plc has 1.48 pound of Current Assets to meet 1.00 pond of its Current Liability. A relatively high current ratio is an indication that the firm is liquid and has the ability to pay its current obligations in time and when they become due. On the other hand, a relatively low current ratio represents that the liquidity position of the firm is not good and the firm shall not be able to pay its current liabilities in time without facing difficulties. A ratio equal to or near 2 : 1 is considered as a standard or normal or satisfactory.

Figure 2.3 :- Graphical Analysis of Liquidity Ratios.

2.3.2 Quick Ratio.

This quick ratio/acid test ratio is very useful in measuring the liquidity position of a firm. BG Group plc has 0.97 pound of Quick Assets to meet 1.00 pound of its Current Liability. Usually a high liquid ratios an indication that the firm is liquid and has the ability to meet its current or liquid liabilities in time and on the other hand a low liquidity ratio represents that the firm’s liquidity position is not good. As a convention, generally, a quick ratio of “one to one” (1:1) is considered to be satisfactory.

2.3.3 Conclusion on Liquidity Ratios.

The current ratio has a slightly fall, due to the current liabilities rising faster than the current assets. Looking at the current liabilities it can be seen that the company is using bank loans to finance for the further development in other country in 2008 compare to 2007. The current assets have also been affected the acid test ratio with a slight fall in the rate in 2008 compare to 2007.

2.4 Efficiency Ratio Analysis.

These ratios are used to try and identify the strengths and weaknesses of a business using a variety of different ratios (Giles et al., 1994, p. 371). The following table illustrates the efficiency ratios used in BG Group plc case.

Efficiency Ratios	2005	2006	2007	2008
Average Stock Turnover Period(Age of Inventory)	38.04 days	41.00 days	52.12 days	50.56 days
Average Age of Debtors(Average collection Period)	116.15 days	90.51 days	104.29 days	106.16 days
Average Age of Creditors(Average Payment Period)	282.95 days	272.05 days	311.24 days	330.18 days

Table 2.4 :- Efficiency Ratios.

Figure 2.4:- Graphical Analysis of Efficiency Ratio.

2.4.1 Average Stock Turnover Period (Age of Inventory).

Modern stock control theory tells us to minimise our investment in stocks. With a result of 2008 is 50.56 days, it means stocks of raw materials or whatever they were on 31st December 2009 is ran out of those raw materials on 51 days just into 21st February. It is very good result for BG Group because they can use their money in other place. in 2007 it is 52 days and it is same as 2008 while in 2005 it is 38 days and it is also a best result for BG Group.

2.4.2 Average Age of Debtors (Average collection Period).

Average collection period indicate how much time company taken to clear their account receivable. Here Average 105 days to clear company’s receivable account. Higher collection period time means less liquid the debtors are and lower average collection period means lower more liquid the debtors are.

2.4.3 Average Age of Creditors (Average Payment Period).

Average collection period indicate how much time company taken to clear their account payable. Here Average 300 days to clear company’s payable account. It indicates company’s creditors gives plenty of time to pay money.

2.4.4 Conclusion on Efficiency Ratios.

Stock holding period is comparatively law. As per the BG Group’s business nature, Average collection period and Average payment period is comparatively good.

2.5 Gearing Ratio Analysis.

This is the relationship between the amount financed by the owners of the business and the amount contributed by outsiders (Maclaney and Atrill 2002, p. 197). For instance, Sainsbury’s capital gearing ratios are:

Gearing Ratios	2005	2006	2007	2008
Gearing Ratio/Debt Equity	28.86%	34.27%	36.06%	30.39%
Debt Ratio	44.57%	49.05%	52.20%	48.46%
Interest Cover/Time Interest Earned	37.48 times	73.00 times	56.28 times	237.74 times

Table 2.5 :- Gearing Ratios.

Figure 2.5.1 :- Graphical analysis of Debt Equity and Debt Ratio.

2.5.1 Gearing Ratio/Debt Equity.

If the ratio is more than 1 means majority of assets are financed through debt and if it is less than one than majority of assets are financed through equity. Here in 2008 ratio is 0.28 means assets are financed through shareholder’s equity and it is not riskier. While in any other year from 2005 to 2008 it is less than one so it indicates totally assets are financed through shareholder’s equity in last four year.

2.5.2 Debt Ratio.

Another ratio, the debt to equity ratio, is often used instead of the debt to total assets ratio. The debt to equity ratio uses the sameinputs butprovides a different view. In 2008 ratio is 0.48 means assets are financed through owners. A higher percentage indicate higher risk and more leverage.

2.5.3 Interest Cover/Time Interest Earned.

The interest cover ratio tells us the safety margin that the business has in terms of being able to meet its interest obligations. That is, a high interest cover ratio means that the business is easily able to meet its interest obligations from profits. Similarly, a low value for the interest cover ratio means that the business is potentially in danger of not being able to meet its interest obligations. In 2008 it is 237.34 times more it is very best result of company because its generate 237 times more revenue compare to their interest.

Figure 2.5.2 :- Graphical analysis of Interest Ratio.

2.5.4 Conclusion on Gearing Ratios.

As per the gearing ratio of BG Group from 2005 to 2008, company’s assets is financed by their owners of shareholders. And also company have average 102 times more revenue to cover interest.

3.0 Analysis of Sources of Finance.

Sources of Finance	2005	2006	2007	2008
Shareholders Fund	£6,182	£6,363	£7,225	£12,758
Retained Profit	£3,794	£4,394	£5,203	£8,016
Bank loan, Overdraft and bond	£1,295	£1,662	£1,943	£1,897

Table 3.0 :- Detail of Source of Finance.

Figure 3.0:- Graphical Analysis of Source of Finance.

There are two types of source of finance external and internal source of finance. Retained profit, Working capital, Sales of assets etc. are the internal sources of finance. Shares, Loans, Bonds, Overdraft etc. are the external sources of finance. In 2005 the shareholders equity is �6182 million. In 2008 it is �12758 million and it is totally double in four years. While other borrowings like bank loan overdrafts and bond in previous four year, it is average �1,699 million. While retained profit almost double in 2008 compare to 2005.

As per the figure we can say that BG Group’s shareholders equity double in last four year. And it indicates BG Group is well financed by shareholders. And Average �5352 million use as a retained profit as a source of finance. Also take some loan and bond as per shown in figure.

4.0 Analysis of Share Price Movement.

As per the following graph, We can see the share price movement of last 6 weeks from 1st sep to 16th Nov 2009. As per the data in last 6 week lowest prize of stock is �10.56 and highest price of stock is �11.55 and current prize of stock is �11.20. As per the 52 week range, highest price is �11.80 and lowest price is �9.89. while average volume of last 6 month is 75,63,080.

Figure 4.0 :- Graphical Analysis of Share price movements

News about BG Group.

BG Group plc is engaged in the exploration, development, production, transmission, distribution and supply of natural gas and oil. The Company operates in four segments: Exploration and Production (E&P), Liquefied Natural Gas (LNG), Transmission and Distribution (T&D), and Power Generation (Power). On November 14, 2008, BG Group’s wholly owned subsidiary, BG International (AUS) Investments Pty Limited, acquired a 90% interest in Queensland Gas Company Limited. In March 2009, BG International (AUS) Investments Pty Ltd completed compulsory acquisition of all outstanding shares in Queensland Gas Company Limited. As of March 31, 2009, BG International (AUS) Investments Pty Limited held a 96.68% interest in Pure Energy Resources Limited. In April 2009, the Company acquired a relevant interest in 99.74% of Pure Energy Resources Limited.

5.0 Competitive Analysis.

As per the market, Eni, GDF SUEZ, Royal Dutch Shell are mainly top competitors of BG Group. Here Analysis by different parameter of each competitor with BG Group is given in table and also given Graphical analysis. Analysis is given as per the financial performance and position also share price movement is given.

6.0 Conclusion and Recommendations.

As per the ratio analysis, Overall performance of BG Group is good. In 2008, EPS grew by 74% compared with 2007. The Group reported a 65% increase in total operating profit to �5 355 million and a 74% increase in earnings per share to 91.6 pence. The full year dividend payment has been increased by 20% to 11.23 pence per share. And also the future development of company is good and they are developed there business in so many country. So as per the investor point of view everything is best to invest in this company as per the above data analysis.

7.0 References and Bibliography.

[1]. MCLANEY, E. and ATRILL, P. (2002) Accounting An Introduction. Second edition. London, Prentice Hall.

[2]. BERRY, A. and JARVIS, R., 1997. Accounting in a Business Context. 3rd Edition. London: International Thomson Business Press.

[3]. Ken, L. (2004) Understanding dividend payout rato. [online] Available From: http://stocks.about.com/od/evaluatingstocks/a/dpr.htm [Accessed 14th Nov 2009].

[4]. Graeme, P. (2006) Interest Cover. [online] Available From: http://moneyterms.co.uk/interest_cover/ [Accessed 16th Nov 2009].

[5]. Harold, A. (2003) Financial Ratios. [online] Available From: http://www.accountingcoach.com/online-accounting-course/03Xpg01.html

[Accessed 16th Nov 2009].

[6]. Web finance Inc. (2009) Debt/Asset Ratio. [online] Available From : http://www.investorwords.com/5497/debt_asset_ratio.html [Accessed 16th Nov 2009].

[7]. Biz/eZ. (2009) Financial ratio Analysis. [Online] Available From : http://www.bized.co.uk/compfact/ratios/index.htm [Accessed 19th Nov 2009] .

[8]. CreditGuru Inc. (2009) Financial Statement Analysis. [Online] Available from: http://www.creditguru.com/ratios/ratiopg2.htm [Accessed 20th Nov 2009].

[9]. ACCOUNTINGFORMANANGEMENT.COM. (2009) Financial Statement Analysis. [Online] Available From : http://www.accountingformanagement.com/accounting_ratios.htm [Accessed 20th Nov 2009].

[10]. Debbi, H. & Joyce, H. & David, H. (2000) Historical Analysis. [Online] Available From: http://www.docstoc.com/docs/10238136/Ratio-Analysis [Accessed 20th Nov 2009] .

[11]. BG Group. (2009), News Release [Online] Available From: http://www.bg-group.com/MediaCentre/Press/Pages/Releases.aspx [Accessed 10th OCT 2009]

[12]. BG Group. (2009), About BG Group [Online] Available From http://www.bg-group.com/AboutBG/Pages/AboutBG.aspx [Accessed 10th OCT 2009]

[13]. BG Group. (2009), Investor Relations [Online] Available From: http://www.bg-group.com/InvestorRelations/Pages/IRhome.aspx [Accessed 10th Oct 2009].

[14]. BG Group. (2009), Share Price Movements [Online] Available From: http://www.bggroup.com/InvestorRelations/SharePrice/Pages/ColourOptimisedSharePriceChart.aspx [Accessed 10th Oct 2009].

8.0 Reflective Statement

Yogesh Patel(INSEP09MBA7254)

Financial Strength looks at business risk. The stronger a company is from a financial standpoint, the less risky it is. Total operating profit increase 65% in 2008 compare to 2007. And earning per share increase 74% compare to 2007.Dividend per share increase 20%. Financial Strength looks at business risk. The stronger a company is from a financial standpoint, the less risky it is.BG Group company have total equity are �12,884, total liabilities are �12112, total assets are �24996.

My views regarding this assignments is that working in group have given me a lot experienced of team work, allocation of work is a good idea of getting work done soon in a proper manner. After making this assignment in group, I got experienced to work with different person. I had kept four years data of the company together and then calculated all the ratios after that these data had been checked individually by rest of two members. Every member had spent enough time as much as we needed behind making this assignment well.

Moreover, with help of this assignment I got knowledge about business financial areas that means what are the basic points should be kept in our mind before invested in any business

Finally, I think assignment which is based on practical, give knowledge about the reality so I am thankful to Dr. Ali malik who had given this assignment and opportunity to work in group. According to my analysis on this company the companies financial position is very good but somehow in past it was not that much stable.

Rohan Patel (INSEP09MBA7215)

Teaching is the key factor of the education. With the help of this project I am getting so much knowledge about the finance and accounting.

Our project is based on the analysis of the B G Group plc. From the analysis of this company’s data I learn how the financial data are affecting to the business and how can we run our business properly. Moreover, I am very thankful to Dr.Ali Malik who had given me a great opportunity to do this project for my benefit.

At the end of this research analysis I can say that the company’s financial position is healthy. This business is running very good.