financial analysis of an energy company
TRANSCRIPT
UNIVERSITY OF STRATHCLYDE
DEPARTMENT OF ACCOUNTING & FINANCE
MSC FINANCE
(6TH INTAKE PT)
PROJECT TITLE: “COMPANY FINANCIAL ANALYSIS
AND VALUATION: THE CASE OF FORTUNE OIL PLC”
RESEARCH PROJECT NO: TWO
NAME: MARTIN NASUZWA KITUNDU
REGISTRATION NUMBER: 200652717
Submitted in partial fulfilment of the requirement for the degree of MSc Finance
LECTURER IN CHARGE: PROFESSOR A. MARSHALL
0
DECLARATION
This is to declare that this project is submitted in partial fulfilment of the requirements for the
degree in Masters of Science in Finance offered by the University of Strathclyde, and accord
with the university regulations for the programme as narrated in the university calendar. I declare
that this document embodies the results of my own work. For the purposes of avoiding the
plagiarism, I have made due acknowledgement of the work of others.
Signed----------------------Martin Nasuzwa Kitundu---------------------------------------------
Date------------------------18TH July, 2010 -----------------------------------------------
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ACKNOWLEDGEMENT
This project would not have been possible without the help and support of a number of
individuals who have been involved in one way or the other.
First, I would like to acknowledge the contributions of those individuals who reviewed my work
at various stages. Many thanks should go to Dr. S. R. Mohamed , Dr. J. Miranda, Dr. Cairo, Dr.
Mnzava (from IFM), Prof. A. Marshal, Prof. J. R. Davies and Barry Koch (from Strathclyde) to
mention just few for their moral and material support. I would also like to pay special thanks to
Barbara for maintaining my continuous communication with Strathclyde.
Since it is not possible to thank all people for their assistance received, those whose names do
not appear in this list should count themselves included in this appreciation. All productive
assistance in this dissertation is the results of their contribution but all errors and mistakes are
solely mine.
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TABLE OF CONTENTS
DECLARATION.............................................................................................................................ii
ACKNOWLEDGEMENT..............................................................................................................iii
LIST OF TABLES..........................................................................................................................vi
LIST OF FIGURES.......................................................................................................................vii
ABBREVIATIONS......................................................................................................................viii
ABSTRACT...................................................................................................................................ix
CHAPTER ONE: INTRODUCTION..............................................................................................1
1.1 OVERVIEW..............................................................................................................................1
1.2 FORTUNE OIL PLC: A BRIEF BACKGROUND..................................................................2
1.2.1 Historical Background............................................................................................................2
1.2.2 Fortune Oil’s Strategy.............................................................................................................2
1.2.3 Structure of the Company.......................................................................................................3
1.2.4 Recent Trading Development.................................................................................................4
1.2.5 Financial Accounts and Reporting Standards.........................................................................4
1.2.6 The Company’s Treasury Risk Management.........................................................................5
1.3 FINANCIAL ANALYSIS AND VALUATION APPROACH................................................6
CHAPTER TWO: FINANCIAL PERFORMANCE AND POSITION OF THE COMPANY......8
2.1 INTRODUCTION.....................................................................................................................8
2.2 FINANCIAL PERFORMANCE ANALYSIS..........................................................................8
2.2.1 Overview.................................................................................................................................8
2.2.2 Financial Performance Analysis of Fortune Oil Plc...............................................................9
2.2.3 Limitations on Using Ratios in Financial Analysis..............................................................26
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2.3 CAPITAL STRUCTURE ANALYSIS...................................................................................27
2.3.1 Overview...............................................................................................................................27
2.3.2 The Miller and Modigliani Irrelevance Theory....................................................................28
2.3.3 Capital Structure: The Trade-off Theory..............................................................................28
2.3.4 The Pecking Order Theory...................................................................................................28
2.3.5 Fortune Oil Plc’s Capital Structure.......................................................................................29
CHAPTER THREE: VALUATION OF THE COMPANY..........................................................31
3.1 OVERVIEW............................................................................................................................31
3.2 VALUATION MODELS........................................................................................................31
3.2.1 Dividend Valuation Models..................................................................................................31
3.2.2 Gordon’s Growth Model.......................................................................................................34
3.2.3 Earnings Valuation Model....................................................................................................35
3.2.4 Net Assets Valuation............................................................................................................37
3.2.5 Price-Earnings Model...........................................................................................................38
3.2.6 Market Valuation Method.....................................................................................................39
CHAPTER FOUR: CONCLUSION..............................................................................................42
REFERENCES..............................................................................................................................44
APPENDIX 1: BALANCE SHEETS (2005 – 2009) – FORTUNE OIL PLC..............................45
APPENDIX 2: INCOME STATEMENTS (2005 – 2009) – FORTUNE OIL PLC......................46
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LIST OF TABLES
Table 2.1 Fortune Oil Plc’s Balance Sheet Structure (2005 – 2009)
Table 2.2 Ratio Analysis for Fortune Oil Plc
Table 2.4 Value of the Fortune Oil Plc using Dividend Valuation Models
Table 2.5 Fortune Oil’s Book Value
Table 2.6 Fortune Oil’s Price Earnings Valuation Model
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LIST OF FIGURES
Figure 2.1 Logical Scheme of the Discussion of Financial Results and Analysis
Figure 2.2 Structure of Data Presentation
Figure 2.3 Financial Analysis Ratios
Figure 2.4 Changes of Main Income Statement Accounts (2005 – 2009)
Figure 2.5 Fortune Oil Plc’s Inventory Turnover
Figure 2.6 Fortune Oil Plc’s Inventory Days Comparison with Green Dragon Gas
Figure 2.7 Fortune Oil Plc’s Receivable Collection Period
Figure 2.8 Fortune Oil Plc’s Receivable Turnover Comparison with Green Dragon Gas
Figure 2.9 Fortune Oil’s Asset Turnover Comparison with Green Dragon Gas
Figure 2.10 Fortune Oil’s Debt to Equity Comparison with Green Dragon Gas
Figure 2.11 Fortune Oil Book Value Trend
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ABBREVIATIONS
HSE: Health, Safety and Environment
CBM: Coal Bed Methane
CNG: Compressed Natural Gas
LNG: Liquefied Natural Gas
FLG: Fortune Lilian Gas Company
IASB: International Accounting Standards Board
IFRS: International Financial Reporting Standards
NWC: Net Working Capital
NWC/S: Net Working Capital to Sales
GPM: Gross Profit Margin
OPM: Operating Profit Margin
NPM: Net Profit Margin
ROA: Return on Assets
ROFA: Return on Fixed Assets
ROCA: Return on Current Assets
EBIT: Earnings before Interest and Taxes
ROE: Return on Equity
ROCE: Return on Capital Employed Ratio
IT: Inventory Turnover
DI: Days in Inventory
ACP: Average Collection Period
ART: Accounts Receivable Turnover
APT: Accounts Payable Turnover
TAT: Total Assets Turnover
FAT: Fixed Assets Turnover
FL: Financial Leverage
GR: Gearing Ratio
PE: Price Earnings ratio
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ABSTRACT
The project study focuses on undertaking the financial analysis of Fortune Oil performance from
year 2005 to 2009. The trend analysis has been adopted as a bench mark for analysis and
interpretation. The Introduction Chapter shows a summary of company activities and its current
position. Chapter Two conducts a financial performance and capital structure analysis of Fortune
Oil Plc.
The study also involves looking at the prediction ratios and seeing whether the dividend policy
and company structure as well as what should be done to influence shareowner’s returns on
capital employed and investment prospects of the company. In addition, the project looks on the
strength, weakness, opportunities and threats analysis of the company and tries to recommend
what actions should be taken to resolve the problems.
The analysis evaluation is done on the view of potential investors and to provide the evaluation
of the company shares. The report issued annually by a corporation to its stockholders is
important as it provides basic financial statements, as well as management’s opinion of the past
year’s operations and the company’s future projection. It should be noted that if the management
is to sustain the company’s value; it must take benefit or the company’s strengths and correct its
weaknesses.
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CHAPTER ONE
INTRODUCTION
1.1 OVERVIEW
Business activities of a company always attract certain attention from various market participants
such as associates, investors, competitors or authorities, who are expressly or by implication
interested in its business and financial results. The third parties are able to estimate business and
financial performance by analyzing accounting statements available for public use.
Measuring business and financial performance is complex because of the many objectives of
business. Profit maximisation remains one of the key objectives of business, although the debate
around this issue has not reached any final conclusions. Balance sheets and profit/loss accounts
are the traditional and most popular means of measuring business performance. Financial
analysis serves as a primary tool for this purpose. The inherent weakness of these measures,
however, is that they fail to capture non-financial parameters such as goodwill and customer
loyalty. These parameters become more meaningful when so-called “financially sound”
companies are liquidated overnight or go out of business in due course. Proponents of accounting
based performance measures give due cognizance to non-financial parameters, but they do not
offer a measurement technique.
The main idea of financial analysis is to obtain enough of key values (the most informative
ones), that represent objective and exact financial situation within a company: its profits and
losses, structural changes in assets and liabilities, level of competitiveness, relations with debtors
and creditors. This analysis can be used both for estimation of current financial condition and for
its prediction in the nearest or more remote future.
With a historical view of assessing a company’s results, business and financial performance
engagement is an analysis of a company’s past and current business and financial performance
and compares such performance to similar sized companies within its industry providing insight
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into a company’s historical growth, profitability, debt capacity and overall liquidity. All such
factors can be important indicators of a company’s ultimate value. Using Fortune Oil Plc, this
project report analyzes the past five-year history of financial statements as well as financial
information relative to industry and geographical market in which the company operates. We use
various business performance analysis measures and calculate financial ratios (liquidity,
coverage, leverage and operating) for the company.
The basis of the comparative analysis may be affected by the nature of the business, its size,
geographic location, business practices, and other factors that affect the company’s operations. In
this study, we analyse the valuation and financial performance of Fortune Oil Plc, which is
incorporated in the UK but has an operational headquarters in Hong Kong.
1.2 FORTUNE OIL PLC: A BRIEF BACKGROUND
1.2.1 Historical Background
Fortune Oil PLC is registered in England and Wales (number 2173279, main board symbol FTO)
and is subject to UK Listing Rules and compliance regulations. The Company has its operational
headquarters in Hong Kong. Fortune Oil Plc focuses on oil and gas supply and infrastructure
projects in China. The largest shareholders in Fortune Oil are First Level Holdings Limited
(36.4%), Vitol (7.44%) the public (45.63), Kerry Holdings Limited (4.62%) and major Chinese
state-owned corporations (5.91%), plus Willmar International Limited has a 15 per cent interest
in the Company's gas business.
1.2.2 Fortune Oil’s Strategy
China is the world’s second largest energy market. Fortune Oil seeks to exploit opportunities in
the oil and gas industry as the China market develops, with a particular emphasis on the supply
of gas as a premium clean fuel. Our strategy in developing our businesses and seeking new
opportunities is:
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To become a leading integrated gas supplier in north and central China, with annual gas
sales of 1 billion cubic metres by 2012 (equivalent to 1 per cent of the projected total
domestic market); and
To develop opportunities for the supply of fuels to China, in particular exploiting our
unique position in oil products supply and terminals.
1.2.3 Structure of the Company
In 2008 the Company established Fortune Gas Investment Holdings Limited (“Fortune Gas”) as
the holding company for all of the Group’s gas operations, including both gas distribution and
coal bed methane (CBM). In November 2008 Wilmar International Limited (“Wilmar”), one of
the largest companies listed on the Singapore Stock Exchange, invested US$36 million (£22.3
million) to acquire new shares in Fortune Gas representing 15 per cent of the enlarged capital.
Fortune Gas is a Hong Kong registered company and is owned 85 per cent and controlled by
Fortune Oil. Wilmar has representation on the board of Fortune Gas.
The operations extend to production and wholesaling of Liquefied Natural Gas (LNG) and
Compressed Natural Gas (CNG), gas pipelines, retail CNG stations and city gas supply, as well
as CBM development. The vision for Fortune Gas is to be a leading integrated gas supplier in
north and central China with gas sale to exceed 1 billion cubic metres per year by 2012 (1 per
cent of the projected market).In 2007 the Company acquired a 51 per cent controlling interest in
Henan Fortune Green Energy Development Company (“Green Energy”), which operates a LNG
and CNG production and distribution business based in Puyang, Henan Province. The remaining
49 per cent interest in Green Energy is held by the 500 employees, who have significant
expertise in LNG and CNG technology. Following the Company’s investment in Green Energy
new compressors was installed to raise the throughput of the first Puyang LNG plant and a
second parallel LNG train was commissioned in early 2009. Both trains have the capacity to
liquefy 150,000 m3/d of natural gas, and this LNG is then transported by road to over 50 cities.
In 2008 the Company established Fortune Gas Investment Holdings Limited (“Fortune Gas”) as
the holding company for all of the Group’s gas operations, including both gas distribution and
coal bed methane (CBM). Fortune Gas has a controlling interest in Fortune Liulin Gas Company
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(FLG), which is the foreign contractor in the PSC with CUCBM for the Liulin CBM block in
Shanxi Province. The PSC has recently been extended for a further two years to 29 March 2012.
The Liulin block achieved a major recognition and advancement in February 2009 when the
block was designated a State Science and Technology Significant Project under a scheme
administered by the State Council, the nation’s chief administrative authority.
In November 2009 the Company acquired the 26.1 per cent interest in FLG held by Molopo
Energy Ltd. (“Molopo”) in exchange for US$4 million cash and US$2 million in new Fortune
Oil shares. The following month the Company agreed an alliance with Arrow Energy
International Pte Ltd of Australia (“Arrow International”), wherein as a first step Arrow
International acquired a 35 per cent interest in FLG in a series of transactions which completed
after year-end following the renewal of the PSC.
1.2.4 Recent Trading Development
Fortune Oil plc announced that a conditional subscription agreement has been signed for an
investment in Fortune Gas Investments Holdings Limited (Fortune Gas), a newly created holding
company for Fortune Oil's gas business, for $72 million (GBP39 million). Wilmar International
Limited and Star Medal, a wholly owned subsidiary of Kerry Holdings Limited, have each
agreed to invest $36 million to acquire new shares in Fortune Gas representing 15% each of the
enlarged share capital of Fortune Gas.
1.2.5 Financial Accounts and Reporting Standards
The Company prepares its financial accounts and reports in compliance with the International
Financial Reporting Standards (IFRS) adopted by the European Union. In this regard, the
independent auditor’s (Deloitte LLP) opinions for the accounts and reports for the year 2009 are
as follows:
“Opinion on financial statements
In our opinion the group financial statements:
give a true and fair view of the state of the group’s affairs as at 31
December 2009 and of its profit for the year then ended;
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have been properly prepared in accordance with IFRSs as adopted by the
European Union; and
Have been prepared in accordance with the requirements of the
Companies Act 2006 and Article 4 of the IAS Regulation.”
Separate opinion in relation to IFRSs as issued by the IASB
As explained in Note 1 to the group financial statements, the group in addition to complying with
its legal obligation to apply IFRSs as adopted by the European Union, has also applied IFRSs as
issued by the International Accounting Standards Board (IASB).
In our opinion the group financial statements comply with IFRSs as issued by the IASB.
Opinion on other matter prescribed by the Companies Act 2006
In our opinion the information given in the Directors’ Report for the financial year for which the
financial statements are prepared is consistent with the group financial statements.
1.2.6 The Company’s Treasury Risk Management
General Business Risks
The business of the Fortune Oil Group is focused on the distribution in mainland China of
hydrocarbon fuels with recent expansion into coal bed methane, and it is subject to a variety of
business risks. These risks have not changed since the date of the Annual Report 2008, where the
principal risks and uncertainties are detailed on pages 21 and 22.
The general business risks facing Fortune Oil's operations in China include: country risk; the
regulatory regime; relationship risks; attraction and retention of employees; speed of
development; current and future financing; uninsured risks; foreign exchange risks; liquidity
risk; commodity price risk; and health, safety and environment (HSE) risks. Specific risks
pertaining to the Group's fuel distribution business include: the level of energy demand; technical
risk; physical security; and gas availability. Specific risks and uncertainties for the Group's
upstream gas business include: general exploration, development and production risks;
5
estimation of gas resources; and the work programme under the Group's Production Sharing
Contract.
Currency Risk
The functional and presentation currency of Fortune Oil Plc is pounds sterling. The functional
currencies of overseas operations are the Hong Kong dollar and Chinese renminbi. In the
accounts of individual Group companies, the Group translates foreign currency transactions into
the functional currency at the rate of exchange prevailing at the transaction date. Monetary assets
and liabilities denominated in foreign currency are translated into the functional currency at the
rate of exchange prevailing at the balance sheet date. Exchange differences arising are taken to
profit and loss.
Exchange gains or losses on monetary items receivable from or payable to a foreign operation
for which settlement is neither planned nor likely to occur, which form part of the net investment
in a foreign operation, are recognised in the translation reserve.
As at the reporting date, the assets and liabilities of overseas operations are retranslated into the
presentation currency of Fortune Oil Plc at the rate of exchange ruling at the balance sheet date
and their income statements are translated at the average exchange rate for the year. The
exchange differences arising on the retranslation are taken directly to a separate component of
equity. On disposal of a foreign operation, the cumulative amount recognised in equity relating
to that particular foreign operation shall be recognised in the income statement.
The Group has elected not to record cumulative translation differences arising prior to the
transition date as permitted by IFRS 1. In utilising this exemption, all cumulative translation
differences are deemed to be zero as at 1 January 2004 and all subsequent disposals shall exclude
any transaction differences arising prior to the date of transition.
1.3 FINANCIAL ANALYSIS AND VALUATION APPROACH
For a complete analysis and valuation of Fortune Oil Plc, available financial and operational data
and metrics were gathered. These were then used to derive measures and compared to
6
benchmarks from similar businesses. Interpretation of the analysis accounted for differences in
markets and business models. Methodology of financial analysis includes variety of specific
instruments like ratios, indicators and coefficients suitable for their own purposes. The analysis
also implies researching of changes over time. It is true that business and financial analysis
means thorough explanation of each received result. All financial ratios in this project report
were calculated using Microsoft Excel environment, based on formulas presented herein under.
All results were gathered in summary tables as shown in the following sections and appendices.
There are many advantages of this approach such as convenience, stability and popularity of the
software and relative accessibility (or easiness of use). Additionally, special analysis templates
have been created especially for this research project. With the help of these templates, the
calculation routine has been literally reduced. Nevertheless, regardless of the amount of
calculations, all results have been grouped in the most compact resulting tables as possible and
included in the Appendices.
We mostly used secondary data in conducting the analysis on valuation and financial
performance of Fortune Oil Plc. These data were obtained through various sources including
Annual Reports and Accounts, Fortune Oil Plc’s website, London Stock Exchange website and
other financial markets trading analysis news and research websites.
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CHAPTER TWO
FINANCIAL PERFORMANCE AND POSITION OF THE COMPANY
2.1 INTRODUCTION
Company financial performance assessment is mainly conducted through the use of financial
statements. However, financial statements by themselves do not provide adequate of information
about how well a company performs year to year or in comparison to other businesses in its
industry. One of the reasons why it is difficult to make comparisons is that companies rarely
have exactly the same revenue.
Another reason is that companies have varying financing structures. Ratios and other
performance measures and techniques have been developed to make financial information
comparable from company to company. These tools form three broad categories: estimation of
operating performance, evaluation of financial performance and defining level of financial risk.
Operating performance deals with efficiency of management. In other words, it is important to
know if a company uses its assets in an efficient and profitable manner. Financial performance
deals with issues related to a company’s financial structure and ability to meet its financial
obligations. Analysis of financial risk is important to banks, suppliers, and investors. The general
objective of financial analysis is to evaluate the effectiveness in each of these areas.
2.2 FINANCIAL PERFORMANCE ANALYSIS
2.2.1 Overview
The information contained in the main financial statements has major significance to various
interested parties who regularly need to have relative measures of the company’s business
efficiency. Financial analysis conducted for the need of third parties is external by its nature and
often called “analysis of financial statements”. The analysis of financial statements is based on
the use of ratios also known as relative values. Ratio analysis involves methods of calculating
and interpreting financial ratios to analyze and monitor the firm’s performance.
8
There are as many different financial ratios as there are possible combinations of items appearing
on the balance sheet, income statement and cash flow statement, and their application is defined
from an analyst point of view. Financial management practitioners use various approaches
depending on the goal of analysis or business issue. Despite of the number of ratios, they all
cohere through their classification.
Furthermore, it is worth noting that ratio analysis is not just the calculation of a given ratio.
Ratios, alone, are not sufficient to understand a company’s past performance or to forecast future
perspectives in business. Most important is the interpretation of the ratio value. However it is not
an easy work to do and there is no single correct value for a ratio. Correct conclusion, that the
value of a particular ratio is too high, too low, or just right depends on perspective of the analyst
and on company's strategy. A financial ratio is meaningful only when it is compared with some
standard, a norm, such as an industry trend, ratio trend, or a planned management objective. This
is called benchmarking and it can be used as a measure. According to Vance (2003),
benchmarking “involves analyzing the financial statements of the best companies in an industry
and using their financial ratios as a basis for evaluation of a company’s performance.”
As a result, to make correct conclusions on ratio analysis, two types of ratio comparisons should
be made: cross-sectional approach and trend-analysing method. Cross-sectional analysis involves
comparison of different firms’ financial ratios over the same period in time. It usually concerns
two or more companies in similar lines of business. One of the most popular forms of cross-
sectional analysis compares a company's ratios to industry averages published by statistical
agencies. In trend analysis, ratios are compared over a periods, typically years. Year-to-year
comparisons can highlight trends and point up possible need for action. Trend analysis works
best with three to five years of ratios. Certainly, the most informative approach to ratio analysis
combines both cross-sectional and trend analyses. A combined view makes it possible to assess
the trend in the behaviour of the ratio in relation to the trend for the industry.
9
2.2.2 Financial Performance Analysis of Fortune Oil Plc
As for financial analysis, the set of tools shown in Figure 2.1 corresponds to a sequence of
operations (or applied methods so to say) of the report. Whenever required, readers can refer to
this scheme.
Figure 2.1 Logical Scheme of the Discussion of Financial Results and Analysis
The first logical step in the analysis sequence includes studying of structure and changes in
financial reports. This allows evaluating the structure of assets and liabilities of a company
according to its balance sheet. It gives the possibility not only to estimate the capital owned or
controlled by organization, but also to allocate current and fixed assets in its structure of capital.
In addition, this method defines sources of formation of the company’s capital. Studying of
changes of profit allows answering such questions as: 1) changes of net profit for a period (both
in absolute and in relative values); 2) sources of its formation; 3) alterations in operational profit;
4) changes in tax burden. The complementary Fig.2.2 shows data presentation of the paragraph
“structure and changes in financial reports”.
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Figure 2.2 Structure of Data Presentation
Liquidity of balance sheet is a first step in measuring company’s liquidity. According to this
method, ability of assets to cover balance sheets obligations defines liquidity of a company,
which in terms of transformation into the money also corresponds to a degree of maturity of the
company’s obligations. Studying of changes and structure of balance sheets and income
statements is important, because it gives an idea about the company’s business development.
Yet, this method is very basic, as it does not go deep into details and answer only to questions
“what” and not to questions “why”. It is impossible to evaluate a company’s financial
11
performance by analysing its balance sheet changes and assets structure only, as well as there is
no way of doing it by just looking at a balance sheet. Only ratio analysis is suitable.
Ratios are capable of revealing many patterns of relationship in financial reports. Four groups of
ratios have been calculated and analyzed for Fortune Oil Plc in this report: liquidity ratios,
profitability ratios, activity ratios and debt ratios (or financial leverage ratios) as shown in Fig.
2.3.
Figure 2.3 Financial Analysis Ratios
The term “analyzed period” means an interval in five years (from 2005 until 2009) that
corresponds with obtained financial reports (see Appendix 2).
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Structure and Changes in Fortune Oil Plc’s Financial Reports
Table 2.1 presents the balance sheet for Fortune Oil Plc covering the analyzed period. It provides
useful information about assets and liabilities of the company and the balance sheets structure.
Table 2.1 Fortune Oil Plc’s Balance Sheet Structure (2005 – 2009)
No. VALUE
Million GBP (£)
2005 2006 2007 2008 2009
1 Total Assets 70,198 64,756 114,297 228,996 219,242
1.1a Non-current Assets 50,062 49,182 77,211 137,564 143,399
1.1b In % to balance 71.32% 76% 68% 60% 65%
1.2a Current Assets 20,136 15,574 37,086 91,432 75,843
1.2b In % to balance 28.68% 24% 32% 40% 35%
2 Shareholders’ Equity and
Liabilities
2.1a Shareholders’ Equity 39,012 38,678 45,150 86,666 90,086
2.1b In % to balance 56% 60% 40% 38% 41%
2.2a Long-term Liabilities 19,188 17,119 47,976 87,133 65,480
2.2b In % to balance 27% 26% 42% 38% 30%
2.3c Current Liabilities 11,998 8,959 21,171 55,197 63,676
2.4d In % to balance 17% 14% 19% 24% 29%
In addition, it is necessary to create additional analytical table showing changes of all figures
listed in the previous table. Table 3.2 helps to visualise changes occurred with balance sheet
values during the analyzed period. This table contains such information as the following: 1)
“Δ2006”, “Δ2007”, “Δ2008”, “Δ2009”, – absolute changes for the periods; 2) “%2006 to 2005”
“%2007 to 2006” “%2008 to 2007” “%2009 to 2008” – relative changes for last period; 3)
VALUE – main balance sheet accounts.
The information gained from analysis Tables 2.1 and 2.2 allows estimating capital structure of
the balance sheets horizontally and vertically.
13
Distribution of total assets (to current assets and non-current assets) can also be studied from
Table 2.1. A good proportion between fixed and current assets is required for successful business
operations. While it depends on type of activities of a company, percentage of current and non-
current assets should be equal approximately to 60-70 % of non-current assets and 30-40 % of
current assets in the total balance. Excesses of current assets may be result of wrong financial
policy.
Formation of a company’s capital can be fulfilled both at expense of its own and at borrowed
funds. For definition of financial stability and degree of dependence on loan proceeds, it is
necessary to analyze structure of liabilities of the balance sheets. In general, the less a company
owes to others, the more stable financial position it has. Table 3.1 provides useful insights on this
matter.
There is no “universal” rule regarding proportion between owned and borrowed funds a
company operates as shown in its balance sheet. However, a company whose assets are formed
from its own capital is usually considered more financially stable than a firm relying on external
finances is. With Fortune Oil Plc, we see that during the analysed period, the company’s capital
structure (a combination of shareholders equity and liabilities) was maintained at shareholders’
equity of between 40% and 60% (see Table 3.1 above), which indicate that it is financially
stable.
Analysis of Profit Changes
Analyzing of changes in the accounting reports includes studying not only balance sheets, but
also other important sources of financial information - income statements. For this paragraph,
Fortune Oil Plc income statements were transformed into reports similar to the IFRS statements.
You can compare income statements in Appendix 3.
Another important issue to mention here is the possibility of correct interpretation of financial
statements analysis results. Unfortunately, it is not easy to analyze Fortune Oil Plc income
statements. Due to their “tax nature”, these financial reports give just rough picture of what
14
really happened with a company’s incomes and losses during a period. They do not answer why
these changes occurred. Only studying of internal financial accounts, records and business
documents may clarify alterations of such factors as prices, sold quantities, tax specifications,
and interest rates etc. – all that can explain changes of main income statement articles.
Financial Results of Fortune Oil Plc for the Period from 2005 to 2009
According to Table 2.3, net sales for the analyzed period increased from £9.8 billion to £ 11
billion (+11.8 %). At the same time, costs of sales changed from £ 7.6 billion to £ 8.2 billion (+7
%). Specific weight of costs in net sales reduced from 77.7% to 74.3%. Total amount of gross
profit increased in 2009 by 29.2 %.
Comparison of sales and costs change rates in 2009 indicates efficiency growth of main
operations. The base for this statement is significant increase in operating profit from £ 748
million to £ 1.6 billion or by 109 %. Sums of tax expense increased at the end of the period by
45.7 % that may be connected with growth of profit before tax on £722.2 million or by 131 %.
At the end of the analyzed period, Fortune Oil Plc gained net profit at the level of £ 905 million
(increase by 203.7 % in comparison with previous year). This means that own capital of the
company was formed from financial and economic activities. In the structure of incomes, the
greatest share was provided by profit from main operational activity that signifies normal
commercial strategy of the company. Fig.3.4 represents trends of all main income statement
accounts of Fortune Oil Plc in the analyzed period. This diagram shows certain level of
expansion in main activities of the company due to the positive tendency of net sales and costs of
sales.
15
Figure 2.3 Changes of Main Income Statement Accounts (2005 – 2009)
2005 2006 2007 2008 20090.00%
20.00%40.00%60.00%80.00%
32.50%22.87% 25.10%
65.87%
10.70%
Growth in Net Sales
Growth in Net Sales
Periods
% C
han
ge
2005 2006 2007 2008 2009-50.00%
0.00%
50.00%
100.00%
29.00%-7.98%
82.33%64.42% 54.45%
Cost of Goods Sold
Cost of Goods Sold
Periods
% C
han
ge
2005 2006 2007 2008 2009
-20.00%
-10.00%
0.00%
10.00%
20.00%
2.90%8.71%
-10.94%
0.34%
-15.27%
Growth in Gross Profits
Growth in Gross Profits
Periods
% C
han
ge
2005 2006 2007 2008 2009-50.00%
0.00%
50.00%
100.00%
33.50%
78.07%
-5.22%
72.82%
7.75%
Growth in Net Income
Growth in Net Income
Periods
% C
han
ge
Source: Developed from Financial Statements Data using Microsoft Excel
Fortune Oil Plc Ratio Analysis
This part of the report contains ratios calculated and presented. All ratios were arranged in tables
to make them easier to understand. All ratios were patterned to make easier evaluation of critical,
16
negative, satisfactory and good values. It is now possible to explain methodology of this
approach. Without a doubt, the method of results visualization is intended first for the readers to
keep their attention on important findings.
Table 2.2 Ratio Analysis for Fortune Oil Plc
Annual Annual Annual Annual AnnualPeriod Period Period Period Period
Title of Ratio 2005 2006 2007 2008 2009Acid Test Ratio 1.50 1.62 1.70 1.57 1.11Current Ratio 1.68 1.74 1.75 1.66 1.19 Operating Cash Flow to Net Income 1.00 1.18 (0.13) (0.43) 2.58 Liquidity Index:Receivables - Days Removed 34 146 137 218 232 Inventory - Days Removed 79 17 6 10 12 Other - Days Removed 16 22 26 21 19 Liquidity Index (Days) 19 60 33 46 46 Z Score:1.2 x (working capital / total assets) 0.14 0.12 0.17 0.19 0.07 1.4 x (retained earn / total assets) (0.36) 0.51 0.35 0.23 0.30 3.3 x (EBIT / total assets) 0.28 0.50 0.29 0.27 0.31 .6 x (market value equity / debt) 0.00 0.00 0.00 0.00 0.00 .999 x (sales / total assets) 2.04 2.71 1.92 1.59 1.84 Z Score 2.09 3.85 2.73 2.28 2.52 Receivable Turnover:Receivable Turnover 10.9 2.5 2.7 1.7 1.6 Days Required to Collect A/R 34 146 137 218 232 Inventory Turnover: Inventory Turnover 4.6 21.1 57.9 35.4 31.6 Days in Inventory 79 17 6 10 12Total Asset Turnover 2.0 2.7 1.9 1.6 1.8 Operating Assets Ratio 0.67 0.62 0.70 0.79 0.78 Gross Profit Margin 74% 81% 72% 72% 61%Operating Margin 2% 3% 3% 3% 3%Net Profit Margin 11% 20% 11% 11% 8%Direct Cost to Operating Revenues 82% 78% 85% 85% 88%Capitalization Rate / Asset Return:Capitalization Rate / Return 6.18% 10.55% 6.09% 4.84% 5.92%Return on Shareholder Equity 15% 14% 18% 8% 19%Debt to Total Assets 0.28 0.23 0.44 0.40 0.39 Debt to Common Equity 0.52 0.35 1.09 1.40 1.10 Times Interest Earned 13 21 8 7 8
Source: Developed from Financial Statements Data using A Financial Model developed in Microsoft Excel
The above just give an overview of the ratios. As it was mentioned earlier, ratios themselves do
not provide enough information without correct explanation. Therefore, ratio evaluation is the
17
subject of next section. It is also a good idea to specify in which year the company had better
results.
Financial Liquidity
Calculated liquidity ratios confirm results obtained with balance sheet liquidity method discussed
above. Absolute liquidity value is associated with monetary assets available for covering
immediate liabilities. Many experts agree that the quick ratio is the most informative measure of
financial liquidity of companies. The normal value that is internationally accepted for quick ratio
is “1”. This ratio is similar to the absolute liquidity ratio and includes financial instruments
besides cash and cash equivalents. Throughout the analysed period, Fortune Oil Plc had good or
satisfactory values of this ratio. The good quick ratio values during the analyzed period most
probably have been creating a “financial cushion” for settlement of the company’s future
liabilities.
Current ratio characterizes solvency of a company in backing of immediate obligations and is
used in this thesis as main criterion for defining financial stability. During the analysed period,
Fortune Oil Plc has current ratios in the range of 1.8 – 2.5. This means that in case of a force-
majeure, the company’s current assets were able to cover all obligations immediately and even
leave 50 percent of the current assets. This is an excellent state of stable financial position.
Net working capital (NWC) characterizes amount of capital in a company’s turnover. This
indicator is free from current obligations. In other words, it consists of current assets financed
from long-term sources, which will not be used for debt settlement but only for financing of
current operations. If amount of the company’s NWC is positive, it means basic possibility of
settlement of any debts by means of current assets. Another important criterion for the NWC is
steadiness of its changes. As it can be seen from Table 3.3, net working capital of Fortune Oil
Plc, was higher than zero and sometimes had positive trend. Hence it is evaluated positively too
from point of view of increased liquidity and solvency of the company. Any potential creditor
that observes similar trends will increase its confidence in Fortune Oil Plc as a credible borrower.
18
The net working capital to sales (NWC/S) ratio represents share of the most financially stable
capital in total amount of net sales. The higher it is - the better for financial stability.
Profitability
Profitability indicators allow giving performance evaluation of a company’s management by
study of how well they use corporate assets. An overall managerial performance is defined by
parity of profit, identified in various ways, with assets used for earning this profit.
Gross profit margin (GPM) shows how much money is left in revenues after accounting for the
cost of goods sold. During the analyzed period, Fortune Oil Plc had gross profit margin in the
range of 60–64%. It is high value, especially for a company operating in the tobacco sector,
which is mostly governed by legal trade restrictions. Still, there is an opinion among top-
managers that 20-30% of gross profit margin is acceptable in current economic conditions. It is
also obvious, that negative GPM means absence of any profit for company.
Operating profit margin (OPM) is associated with proportion of the company's revenues that is
left after paying for variable production costs such as wages, raw materials and so on. This value
is closely connected with capability of the company’s management to work efficiently while
keeping production costs low. The reduction of the OPM in the other years can most likely be
connected with high variable production costs.
The net profit margin (NPM) ratio tells how much profit Fortune Oil Plc made for every £.1
generated in revenue. This is comparative indicator. The year 2006 has the best performance in
terms of NPM at 20%. The year 2009 was the worst with NPM dropping down to8%.
Return on assets (ROA) and complimentary ratios Return on fixed assets (ROFA) and Return on
current assets (ROCA) are the most important profitability indicators in the thesis. They show
how effectively has been used each monetary unit involved in the business cycle i.e. how a
company’s assets were allocated for earning its profit. Fortune Oil Plc ROA ranged from 28% to
40%, which indicates good performance. The ROA ratio is logically connected with net profit
margin and assets turnover.
19
Earnings before interest and taxes (EBIT) include all profits from operations, before interest and
income taxes are deducted. Normally, non-operating profits and non-operating expenses are not
included in the EBIT.
Return on equity (ROE) defines effectiveness of using a company’s own capital. It shows how
much money per £1 of shareholder’s equity was earned during the analyzed period. Being the
comparative indicator, there is no normal value for this ratio. Fig.3.4 provides visual
representation of these ratios.
Another important measure of profitability is the Return on capital employed ratio (ROCE). This
indicator shows how much money in the EBIT has been generated by the Net working capital
(i.e. by the most stable and financially independent sources of financing). In two years of the
analysed period, Fortune Oil Plc achieved good figures of this ratio.
Activity Ratios
Activity ratios measure a firm's ability to convert different accounts (current assets and current
liabilities) found in their balance sheets (or in internal accounting books) into cash or sales.
Companies will normally try to turn their production into cash or sales as fast as possible because
this leads to higher revenues.
Inventory turnover (IT) is used for estimation of how fast a company's stock is sold and replaced
over the period. There is no generally accepted figure for this ratio, but the main idea is to turn
inventories as fast as possible. During the analysed period, Fortune Oil Plc demonstrated good
integrity of this indicator with an average of 34 times.
20
Figure 2.4 Fortune Oil Plc’s Inventory Turnover
2005 2006 2007 2008 20090.00
10.00 20.00 30.00 40.00 50.00 60.00 70.00
Inventory Turnover
Inventory Turnover - Company
Periods
Tu
rno
ve
r R
ate
Source: Ms Excel Financial Model Output
The Days in Inventory (DI) ratio is the opposite indicator for the inventory turnover. It is
measured in days. It shows how many days were needed for companies to convert their stocks
into products. Fewer days in inventories are better and conclusions are the same as with the
previous ratio.
Figure 2.5 Fortune Oil Plc’s Inventory Days Comparison with Green Dragon Gas
2005 2006 2007 2008 20090
20
40
60
80
100
Inventory Days Comparison
Days in Inventory - Green Dragon Gas
Days in Inventory - Fortune Oil
Periods
Da
ys
He
ld in
Inv
en
tory
21
Source: Ms Excel Financial Model Output
The Average Collection Period (ACP) ratio measures average number of days that company’s
customers took to pay their bills, indicating effectiveness of credit and collection policies of the
businesses. As it was mentioned earlier, the average collection period should not be exceeding 30
days. Acceptable value of this ratio for the industry is equal to one quarter (120 days) even if it is
substantially longer than thirty days. Figure 3.5 shows the analysis.
Figure 2.6 Fortune Oil Plc’s Receivable Collection Period
2005 2006 2007 2008 20090
50
100
150
200
250
Receivable Collection Comparison
Days to Collect A/R - Green Dragon Gas
Days to Collect A/R - Fortune Oil
Periods
Da
ys
to
Co
llec
t A
/R
Source: Ms Excel Financial Model Output
As Figure 2.6 indicates, Fortune Oil Plc takes relatively long time to collect its receivables and
this may not be a good sign. The reason for that includes many factors starting from poor
performance of the industry and finishing by geographical specificity such as distances between
business partners and their facilities. More than 120 days for this indicator may cause delays in
receiving payments and considerably increases risk of financial failure.
Accounts receivable turnover (ART) is connected with the average collection period ratio within
one-year business cycle. It shows how many times the studied companies collected their
22
receivables during financial period. High average collection period means slow receivables
turnover. As shown in Figure 2.7 below, Fortune Oil Plc ART averaged at 4.9 during the
analysed period.
Figure 2.7 Fortune Oil Plc’s Receivable Turnover Comparison with Green Dragon Gas
2005 2006 2007 2008 20090.00
2.00
4.00
6.00
8.00
10.00
12.00
Receivable Turnover Comparison
Receivable Turnover - Green Dragon Gas
Receivable Turnover - Fortune Oil
Periods
Tu
rno
ve
r R
ate
Source: Ms Excel Financial Model Output
The accounts payable turnover (APT) is short-term liquidity measure used to quantify rate at
which the companies paid off their suppliers. Generally, the faster company pays to its partners,
the higher financial liquidity it has. High turnover rate also indicates production development
and possible business expansion.
That is critically low for any businesses. It is required to mention here that external analysis of
assets and liabilities turnovers has approximate nature and can be substituted by studying of
accounts and books. For figures that are more precise it is necessary using of managerial
accounting data if possible.
23
The Total assets turnover (TAT) measures a company’s operating efficiency by estimation of its
assets use in generating sales or revenues - the higher it is the better. It also indicates pricing
strategy: companies with low profit margins tend to have high asset turnover, while those with
high profit margins have low asset turnover. This ratio differs from industry to industry. During
the analysed period, the TAT for Fortune Oil Plc was stably above 1.5 and at an average of 2.0,
which is good for the company (see Figure 2.8).
Figure 2.8 Fortune Oil’s Asset Turnover Comparison with Green Dragon Gas
2005 2006 2007 2008 20090.00
0.50
1.00
1.50
2.00
2.50
3.00
Asset Turnover Comparison
Asset Turnover - Green Dragon GasAsset Turnover - Fortune Oil
Periods
Tu
rno
ve
r R
ate
The fixed assets turnover (FAT) ratio is similar to the previous indicator. It is narrower measure
and determines effectiveness of sales generated by investments in fixed assets. It does not
include current assets. This ratio is most likely to be useful in such capital-intensive industry as
oil and gas exploration and distribution.
Financial Leverage Ratios
Leverage indicators have mission to show degree of possible risk of business collapse in
connection with use of borrowed financial resources. Indeed, if a company does not use loan
proceeds the risk of bankruptcy is insignificant. This group of financial ratios is interesting for
existing and potential creditors of Fortune Oil Plc.
24
The financial leverage (FL) ratio characterizes company’s dependencies from loans and
borrowings. The lower this ratio, the higher is risk of potential insolvency for the company.
Fortune Oil Plc can be defined to be financially stable for the analyzed period according to the
financial leverage ratios.
The debt ratio (D/A) shows share of company’s assets that is financed at the expense of loan
proceeds, irrespective of their sources. Some financial experts commend keeping this indicator at
stably at good levels. During the analyzed period, Fortune Oil Plc had good values of this ratio
although it was steadily increasing from 52% in 2005 (see Figure 2.9). And Fortune Oil had
highest debt-to-equity ratio indicates that the company is mostly financed by debt than internal
sources of finance (retained earnings).
Figure 2.9 Fortune Oil’s Debt to Equity Comparison with Green Dragon Gas
2005 2006 2007 2008 20090%
20%40%60%80%
100%120%140%160%
Debt to Equity Comparison
Debt to Equity - Industry
Debt to Equity - Fortune Oil
Periods
De
bt
to E
qu
ity
Ra
tio
The last calculated indicator in this group of leverage ratios is the gearing ratio (GR). Gearing is
a measure of financial leverage, demonstrating degree to which a firm’s activities are funded by
owner’s funds versus creditor's funds. The higher degree of leverage, the more the company is
considered risky. Fortune Oil Plc’s leverage was mostly above 50% during the analysed period,
keeping its financial risk at high levels and this is not good for the company.
25
2.2.3 Limitations on Using Ratios in Financial Analysis
Financial ratios have certain limitations in their use and are not meant to be applied as definitive
answers. They are usually used to provide additional details in the determination of the results of
financial and managerial decisions. They can provide clues to the company’s performance or
financial situation. However, on their own, they cannot explain whether performance is good or
bad. As for the external financial analysis, ratios also play a role of basic indicators, showing just
an overview of studying business entity.
Ratios have to be interpreted carefully. Gitman (2004) points out some cautions about using
ratios in financial analysis. He defines six of them:
Ratios with large deviations from the norm only indicate symptoms of a problem. It is
essential always to carry out additional analysis based on internal data to isolate the
causes of the problem. Ratio analysis just directs attention to potential weak spots. It does
not provide conclusive evidence and only shows the existence of a problem;
A single ratio does not provide enough information sufficient to judge the overall
performance of a firm. Only a group of ratios can practically play key role in it;
The ratio comparison should be made using ratios calculated with financial statements
dated at the same point in time. Otherwise, the effects of seasonality may produce
incorrect conclusions. (For example, it is especially important while comparing
agricultural companies where seasonality is crucial);
The use of audited financial statements for ratio analysis is preferable. Using an audited
financial statement guarantees a certain level of trust both for analyst and for the end-
user. If the statements have not been audited, the data contained in them may not reflect
true financial situation;
The financial data being compared should have been developed in the same way. The use
of differing accounting practices is especially relative to inventory and depreciation and
can distort the results of ratio analysis. This limitation is very important for the thesis. It
narrows the possibility for comparison of results of Russian forest product companies
26
with European analogues since the analysis is performed on the different data basis. It is
true, that the differences of accounting policies may distort inter-company comparisons;
Results can be distorted by inflation, which can cause the book values of inventory and
depreciable assets to differ greatly from their true (replacement) values. Additionally,
inventory costs and depreciation write-offs can differ from their true values, thereby
distorting profits. Without adjustment, inflation tends to cause older firms (older assets)
to appear more efficient and profitable than newer firms (newer assets).
Ratio analysis is a useful tool, but a person who deals with it has to be always aware of these
limitations and make adjustments as necessary and whenever possible. First, the ratio analysis is
not just a mechanical process, as it seems to be. It involves an accurate results interpretation. For
instance, a correct conclusion about financial ratio value is impossible without analysis of
economical situation both in the industry and in the country. Knowing of environment where
studied companies operate helps to make better conclusions for an analyst.
Analysis of financial ratios can provide useful insights about company’s operations, but
preferably, it should be used together with other methods such as potential bankruptcy
prediction, liquidity of a balance sheet, evaluation of profit changes and its composition and
studying of structure of assets and liabilities.
2.3 CAPITAL STRUCTURE ANALYSIS
2.3.1 Overview
The capital structure of companies has been a focus by financial researchers for some decades
since the proposition by Miller and Modigliani (1958). As we analyse the capital structure of
Fortune Oil Plc, it is imperative that we review and apply the key methods of analysis for
company capital structure. In this regard, we review Miller and Modigliani’s irrelevance theory,
the trade-off theory and the pecking order theory. This provides a guide for analysing Fortune
Oil Plc’s capital structure.
27
2.3.2 The Miller and Modigliani Irrelevance Theory
The Modigliani–Miller capital structure irrelevance theory states that, in the absence of taxes,
bankruptcy costs, and asymmetric information, and in an efficient market, a company’s value is
unaffected by how it is financed, regardless of whether the company’s capital consists of equities
or debt, or a combination of these, or what the dividend policy is. The theory is interchangeably
also known as the capital structure irrelevance principle.
A number of principles underlie the theorem, which holds under the assumption of both taxation
and no taxation. The two most important principles are that, first, if there are no taxes, increasing
leverage brings no benefits in terms of value creation, and second, that where there are taxes,
such benefits, by way of an interest tax shield, accrue when leverage is introduced and/or
increased. The theory compares two companies: one un-levered (i.e. financed purely by equity)
and the other levered (i.e. financed partly by equity and partly by debt)—and states that if they
are identical in every other way the value of the two companies is the same.
2.3.3 Capital Structure: The Trade-off Theory
This theory of capital structure suggests that a firm’s a firm’s target leverage is driven by three
components: corporate taxes, bankruptcy costs and agency conflicts. Capital structure trade off
involves balancing the corporate tax advantage of debt against the present value of bankruptcy
costs (Kraus and Litzenberger, 1973) and agency costs (Jensen and Meckling, 1976). Trade-off
Theory also states that debt-equity ratio varies from one firm to another depending on its risks,
number of assets held (collateral) and number of assets which are source of taxable income from
their shield. The theory explains that, industry differences lead to differences in capital structure
of companies. High technology industries tend to use very little debt because of its risks on
assets, since their assets are intangible, unlike retailers who borrow heavily because of the
presence of tangible assets they hold.
2.3.4 The Pecking Order Theory
The Pecking Order Theory depicts the hierarchy or mix of firm’s sources of finance. It explains
how firms choose to finance their operations and investments between internal and external
28
financing, basing on companies’ policies, priorities and prospective. The hierarchy implies that
there is preference in financing firm’s operations. Retained earnings are preferred followed by
debt if there is a short fall and equity being the last option. Under this theory, the optimal capital
structure is not well defined.
Meyers (1984) and Meyers and Majluf (1984) contended that there are three sources of funding
available to firms, which are retained earnings, debt and equity. Retained earnings have no
adverse selection problem; equity is subject to serious adverse selection problem while debt has
only a minor adverse selection problem. Due to adverse selection problems, firms prefer internal
to external finance. But when outside funds are necessary, firms prefer debt to equity because of
the lower information costs associated with debt issue.
From the point of view of the outside investors, equity is strictly riskier than debt. However, both
have an adverse selection risk premium, but the premium is larger on equity, which influences
the outside investors to demand a high rate of return on equity than on debt. Whereas from the
perspective of those inside the firm, retained earnings are a better source of funds than debt and
debt is better than equity.
2.3.5 Fortune Oil Plc’s Capital Structure
During 2009, Fortune Oil market capitalization remained largely unchanged at approximately
£11.4 billion. The impact of a 4 pence decrease in the share price during the year to 546 pence at
31 December 2009 (550 pence at 1 January 2009) was offset by the issuance of 10.7 million
shares to satisfy employee share awards. Net debt decreased during the year from £3,900 million
at the end of 2008 to £2,909 million at the end of 2009.
The company continues to proactively manage the capital structure to maximize shareowner
value, whilst maintaining flexibility to take advantage of opportunities which arise, to grow the
business. One element of the strategy is to make targeted, value enhancing acquisitions. It is
intended that these will, where possible, be funded from cash flow and increased borrowings.
29
The availability of suitable acquisitions, at acceptable prices is, however, unpredictable.
Accordingly, in order to maintain flexibility to manage the capital structure, the company has
sought, and been given, shareholders approval to buy back shares as and if appropriate. This
authority has only been used once, in 1999, when 24 million shares (representing approximately
1% of the Company's equity) were purchased. Additionally, many of the obligations under share
plans will be satisfied by existing shares purchased in the market by the Fortune Oil Employee
Trust (Employee Trust) rather than by newly issued shares. The Employee Trust purchased £50
million shares during 2009 (none in 2008) and held 19 million shares at the end of 2009,
representing approximately 0.9% of the company's issued share capital.
Fortune Oil authorized ordinary share capital is 3,200,000,000 ordinary shares of 12.5 pence
each (2005-2009). The allotted, Called-up and fully paid up ordinary share capital as at 31 st,
December, 2002, 2003,2004, 2005 and 2006 shows £ million 257, £ million 258, £ million 259, £
million 260, and £ million 262(2,095,000 at 12.5p shares in 2009) respectively. The Company
has one class of ordinary shares which carry no right to fixed income.
During 2009, 10,682,192 ordinary shares of 12.5p were allotted and issued upon the exercise of
share options. The nominal value of ordinary shares issued during the year was £1.3 million.
There were no other changes in the issued ordinary share capital of the Company during 2009.
During 2008, 11,528,687 ordinary shares of 12.5p were allotted and issued upon the exercise of
share options .The nominal value of ordinary shares issued during the year was £1.4 million.
There were no other changes in the issued ordinary share capital of the Company during 2008.
During 2007, 8,446,409 ordinary shares of 12.5p were allotted and issued upon the exercise of
share options. The nominal value of ordinary shares issued during the year was £1.1 million.
The company committed both long and short term debt / borrowings at fixed and floating rate
just to maintain its debt capital program for the period under review. The Gross debt as at 31 st,
December, 2002, 2003, 2004, 2005 and 2006 shows £2,318 million, £4,644 million£4,216
million, £4,279 million and £3,304 million respectively. Generally the company is highly
financed through borrowings and these borrowings were secured by the company group
properties.
30
CHAPTER THREE
VALUATION OF THE COMPANY
3.1 OVERVIEW
This chapter presents the valuation of Fortune Oil Plc by applying different valuation methods.
There are several valuation methods. However, this project uses the methods in the following
sections. To fully understand the application of the valuation models to Fortune Oil plc, we start
with a review of the literature on the selected valuation models.
3.2 VALUATION MODELS
3.2.1 Dividend Valuation Models
Is the discounted cash flow model used to value stock, or equity i.e. the cash flow the shareowner
in a company really stands to receive is dividends plus the proceeds from the sale of the shares at
some future time. The dividend is the cash payment made by the company to the investors. In
most cases, companies pay out part of their earnings in the form of dividends and retain a part for
reinvestment. Dividends are paid from earnings, and consequently it is the potential earning
power of a company which is the most important determinant of its market value. This had been
most convincingly argued by Miller and Modigliani (1961) who contended, assuming perfectly
competitive capital market, that ‘values are determined by real considerations the earning power
of the company’s assets and its investment policy and not by how the fruits of the earning power
are packaged for distribution”. A company can use either or all of the following factors to
influence dividend policy; Profitability, Company Size, Leverage, Agency Costs, Business Risk,
Ownership Structure, Maturity, Tangibility, and Growth Opportunities.
The Gordon Dividend Valuation Model (1959)
Gordon (1959) established the model and the calculation bases on dividends growth and required
rate of return. Always the value of the company is the same with earnings based valuation model
to that of the dividend model. This model states that, the share price given by discounted value
for the dividend per share is what expected to be received by the shareholders. The shares will be
31
held for a given time period and then sold at the expected price (based on the payoff expected
from holding stocks in present value terms).
The cash flow consists of the dividends expected by shareholders and the process predictable
from the sale of the share at the end of holding period. Increase in dividend payout increases the
value of company. Current dividends are preferable to future dividends as the future ones that are
associated with uncertainties.
Graham and Dodd (1934) commended that, the typical investor would most certainly prefer to
have his dividend today and that let tomorrow take care of it. There seems to be a natural
clientele for high payout shares because dividends are regarded as payout income where capital
gains are additions to capital. Gordon (1961) and Lintner (1962) cited that investors view current
dividends as less risky than future dividends or capital gains.
The expected rate of return on a share bought in the market comprises ‘dividends paid until share
sold and the price on sale’. In order to make a purchase decision, the shareholder must believe
that the current price is below the value of the receipts, i.e. Current price, Po < Dividends to sale
+ Sale price ⁄ Discount rate i. Algebraically, if the share is held for n years then sold at a price Pn
and annual dividends to year n are D1, D2, D3,…….Dn.
Then:
Po < D1/(1+i)¹ + D2/(1+i)² + D3/(1+i)³ + (Dn + Pn)/(1+i)ⁿ
The model tells us that the price of a share of stock should equal the present value of all future
dividends paid by the share.
By similar logic, the seller of the share must believe that;
Po > D1/(1+i)¹ + D2/(1+i)² + D3/(1+i)³ + (Dn + Pn)/(1+i)ⁿ
These different views will occur for two reasons.
Different projects for D1, D2, etc and for Pn by the different investors.
32
Different discount rates being used by different investors.
However, the price of share is usually in equilibrium, for the majority of investors who are not
actively trading in that asset. Dividend policy of the company is therefore depending on what
type of the investors the company has and the tax rate in force at the time. If investors demand
their dividend currently, then the company will fund its business by using the external funding or
otherwise. The Company can try to decrease the problem of providing high dividend payout ratio
by convincing its investors to make out their own dividends by selling some of their shares if the
dividends provided by the company are contrary to their expectation.
Table 2.4 Value of the Fortune Oil Plc using Dividend Valuation Models
Dividend Valuation
Model 2007 2008 2009
Po=D/r D= dividend(million) 247 260 272
‘r % 23 23 23
Po 10.739 11.3043 11.826
No(million) 2,027 2,051 2,072
Vo = Po*No
(million)
21,767.95
3
23,185.119
3 24,503.472
Note: “r” assumed to be constant from 2005 to 2009
This study focussed on the following key assumptions governing the Gordon Valuation Model:
Dividends continue to grow at a constant rate for an extended period of time.
The growth rate is assumed to be less than the required return on equity, ke.
Gordon demonstrated that if this were not so, in the long run the firm would grow impossibly
large. Theoretically, the best method of stock valuation is the dividend valuation approach. But,
if a firm is not paying dividends or has an erratic growth rate, the approach will not work.
Consequently, other methods are required.
33
3.2.2 Gordon’s Growth Model
Gordon Growth Model is a variant of the discounted cash flow model, a method for valuing
shares or business. Often used to provide difficult-to-resolve valuation issues for litigation, tax
planning, and business transactions that are currently off market.
Assumptions of the Model
It assumes that the company issues a dividend that has a current value of D that grows at a
constant rate g. It also assumes that the required rate of return for the stock remains constant at k
which is equal to the cost of equity for that company. It involves summing the infinite series
which gives the value of price current P.
The model also assumes that the earnings growth is constant for perpetuity. In practice a very
high growth rate cannot be sustained for a long time. Often it is assumed that the high growth
rate can be sustained for only a limited number of years. After that only a sustainable growth rate
will be experienced. This corresponds to the terminal case of the Discounted Cash Flow model.
Gordon's model is thus applicable to the terminal case. Gordon established that if this was not so,
in the long run the company would impossibly grow large.
The problem with the model is that it requires one perpetual growth rate greater than negative 1
and less than the cost of capital.
P0 = (D0 (1+g) 1 ⁄ (1+r) 1) + (D0 (1+g) 2 ⁄ (1+r) 2) +…..+ (D0 (1+g) ∞ ⁄ (1+r) ∞)
Where:
D0 = the most recently paid dividend.
g = the expected growth rate in dividends
r = the required return on equity investments∞ = infinite time.
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Predicting future dividends for two or three periods is hard enough; the equation above needs an
estimate of dividends perpetually. A pragmatic approach of providing such estimates is to
presume that the dividend will grow steadily evenly hence high dividend policy is the best.
Algebraically model = P0 = D0 (1 + g) ⁄ (r - g) = D1⁄ (r – g)
3.2.3 Earnings Valuation Model
Modigliani and Miller (1961), developed M & M model and argued that, dividend is paid from
earnings. Earnings power of the company is the most significant feature in the whole course of
determining the market value of the company. All investments in respect of this model are
funded from retention. Earnings based valuation model uses Net Present Value (NPV), earnings
required rate of return and growth rate.
They argued that dividend policy is irrelevant given the perfect capital market and frictionless
world. The value of the company depends only on the profitable investment strategies to be
undertaken by a company and working decisions that produce cash flows. M&M study based on
the assumptions that there are perfect capital markets, no transaction costs, no taxes/tariffs, no
brokerage/commission fees, information is costless and the market has homogeneous beliefs.
Modigliani and Miller relaxed some of their assumptions such that transaction costs and tax.
Dividends are more certain than retentions as they increase payout ratio. Expected dividends are
generally perceived to be critical determinants of the value on the share price but dividend policy
is somehow controversial.
In developing a dividend policy, there must be a proper approach to deal with, because, when a
company decides to increase investment by using retained earnings, investor’ current income in
the form of dividends will decreases. On the other hand, when dividends are increased,
shareholders’ current income will increase, but the company may have to give up some
investment opportunities for want of funds and as a result, the future earnings may decrease.
Management should therefore develop a dividend policy that apportion the net earnings into
dividends and retained earnings in the best possible way to achieve the objective of maximizing
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the wealth of investors. The objective of a dividends policy is to maximize the inventor’s return
so that the value of his investment is maximized. Investor’ return comprises dividends and
capital gain and dividend policy has a direct impact on these components of return.
A high pay out dividend policy means more dividends and less retained earnings, which may
accordingly leads to slower growth and perhaps lower share price. Low pay out policy means
less dividends, more retained earnings, higher capital gains, and perhaps higher share price.
Capital gains are future earnings while dividends are current earnings. Dividends in most cases
are taxed more than capital gains. Therefore, it is somewhat reasonable that some investors
would prefer high-payout companies while others may prefer low-payout companies.
Earnings valuation model, assumes value is based upon the sum of Net present value from
contribution obtained on the expected earnings and the expected returns of the company.
VO=E/r+PVGO,
Where:
PVGO = ∑ NPVt+NPV/(r-g) (1+r)t
,
G =retention times rate of return from investment, and
NPV = Eb (k/r-1) = Eb (k/r-1),
V0 = stands for the value of the company
E = expected earnings,
R = for required rate of return,
g = for growth rate,
b = for retention,
k = for investment rate of return and
PVGO = Present Value of Growth Opportunity
Earnings Valuation of Fortune Oil Plc (2009 to 2014)
36
Let g = growth of the Fortune Oil of the revenue generated, assumed to be 23% evenly from
2009 to 2014.
Let b= Retention = the earnings after interest and tax for six years subtracts dividend paid, hence
average retentions rate obtained and get 77% and (1-b)=dividend payout =23%.
According to the theory g = bk assumed that earnings is anticipated to grow at constant rate.
From assumed b is 77% and g is 23% hence k = g/b =0.23/0.77 = 0.2987=29.87%=k=30%
The company-required rate of return also assumed to be constant = the average rate of
shareholders funds = r = 23%.
Year 2005 2006 2007 2008 2009 Average(2005-2009)
ROSF=r
= 19.26% 13.16% 25.5% 25.43% 31.7% ‘r=23%
Earning model:
V0 = E/r + PVGO, but PVGO = NPV1/ (1+r) 1 + NPV2/ (1 + r) 2 + ………………NPVn/ (1+r) n
Amount in £ million
V0 = 1,169 + 273.95 + 337.23 + 415.25 + 511.17 + 629.25 + 774.60
0.23 1.23 (1.23)2
(1.23)3
(1.23)4
(1.23)5
(1.23)6
=£6,421.91 million
3.2.4 Net Assets Valuation
Book-value = Assets - Liabilities i.e. the book value of the company is the cost of assets less
accumulated depreciation, i.e. it is the sum value net asset of the company. Book value can be
defined as total value of the company’s assets that investors would notionally receive in case of
company’s liquidation. The book value can show whether the inventory is over or under priced
when compared to market value. It is the same as net assets value taking the cost of tangible
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assets less accumulated depreciation add working capital less long-term liability. The book value
may be affected by the management decisions on the provisions made on depreciation and
debtors hence some companies may decide to have large amount of provision on bad debts.
Table 2.5 Fortune Oil’s Book Value
Year 2005(£million)
2006(£million)
2007(£million)
2008(£million)
2009(£million)
Book value 70,198 64,756 114,297 219,242 228,996
% change in book value
13% -9% 76.5% 91.8% 4.4%
The Fortune Oil’s book value grew to 13% in 2005 before falling by 9% in 2006 and the growth
shoot up to 76.5% and 91.8% in 2007 and 2008 respectively with a marginal growth of 4.4% in
2009(see Table 40 above).
Figure 2.11 Fortune Oil Book Value Trend
20052006
2007 2008 2009
70,198 64,756
114,297
219,242228,996
Book Value Trend (in £million) - Fortune Oil
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3.2.5 Price-Earnings Model
The price earnings ratio (PE) is a widely method used to measure how much the market is
willing to pay for a unit of earnings from a company. It shows how much shareowners are
willing to pay per a unit of currency of the reported profits. P/E ratios are higher for companies
with high growth prospects, all else being equal, but they are lower for riskier companies.
A high PE has two interpretations:
A higher than average PE may mean that the market expects earnings to rise in the future.
A high PE may indicate that the market thinks the company’s earnings are very low risk
and is therefore willing to pay a premium for them.
Assumptions of the P/E model:
The price earnings ratios are expected to remain constant over time.
A number of inferences are drawn based on results of the analysis.
The expected rate of return (k) is constant over time.
Market Value (Vo) = Earnings *P/E ratio
Table 2.6 Fortune Oil’s Price Earnings Valuation Model
2005 2006 2007 2008 2009
Earnings Per Share 0.16 0.24 0.25 0.49 0.47
Market Share price (GBP) 6.5p 5.7p 6.4p 8.7p 6.8p
P/E 40.625 23.75 25.6 17.7551 14.4681
Earnings (£million) 2,792 4,307 4,487 8,897 8,842
Vo(£million) 113,425 102,291 114,867 157,967 127,927
From Table 2.6, Fortune Oil’s earnings for 2009 were £8,842 million and P/E ratio of 14.468, the
lowest compared to the company’s performance in the preceding four years and this gives the
value for the company to be £127,927 million in 2009.
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3.2.6 Market Valuation Method
The market capitalization refers to the value of the outstanding shares of company. The market
value is equal to the total number of shares multiplying by the market share price. The market
capitalization depends on the share price and on occasion may misinform users as they believe
that the higher the market share price the larger the value of the company.
Market value
The method assumes that shareowners will buy investments of equal value interchangeably and
the company value is determined in the following way:
Market value per share = dividend per share divided by dividend yield
Assumptions of market value method:
A constant ratio of earnings is reserved in each time.
All investment is funded by retentions
The rate of return on investment is constant over time (The earlier a shareholder receives
his or her funds the more value it has).
The cash flow generated from investment are constant in infinity
The rate of return on existing assets remains constant over time
A constant ratio of dividends is paid out.
Market Prospects
Market measures are valuable for analyzing companies registered in stock exchange. The market
measures use share prices, which reflect the market’s prospects of both company return and risk
as the market perceives it.
Fair Market Value
“Fair market value” is defined as the price, expressed in terms of cash equivalents, at which
assets would change hands between a theoretical willing and able purchaser and a theoretical
40
willing and able broker, acting at arm’s length in an open and unrestricted market, when neither
is under force to acquire or sell and when both have rational knowledge of the relevant facts. The
fair market value standard incorporates definite assumptions, including the assumptions that;
the theoretical buyer is rationally prudent and logical but is not stimulated by any
synergistic or planned influences;
the business operates as a going concern the theoretical transaction will be conducted in
cash or equivalents;
The parties are willing and able to consummate the transaction.
These assumptions might not, and probably do not, reflect the actual situation of the market in
which the business might be sold. However, these conditions are assumed because they yield the
same standards of value, after applying generally-accepted valuation methods, which allows
meaningful comparison between businesses which are similarly situated.
The market approach to business valuation is rooted in the economic principle of competition:
that in a free market the market forces will drive the price of business assets to certain
equilibrium. Buyers would not pay more for the business, and the sellers will not accept less,
than the price of a comparable business enterprise. It is alike in many respects to the
“comparable sales” technique that is regularly used in real estate evaluation. The market price of
the shares of publicly traded companies engaged in the same or a similar line of business, whose
shares are actively traded in a free and open market, can be a valid indicator of value when the
transactions in which shares are traded are adequately similar to allow meaningful comparison.
The problem lies in identifying public companies that are adequately comparable to the company
for this purpose. Also, as for a private company, the equity is less liquid (in other words its
shares are less easy to buy or sell) than for a public company, its value is taken to be somewhat
lower than such a market-based valuation would give.
3.3 SUMMARY OF VALUATION OF FORTUNE PLC
41
Based on the calculations and discussion of the valuation models presented above, the valuation
of the Fortune Plc can be summarized as shown in Table 3.7 below. The summary focuses on
Fortune Plc’s valuation for years 2007, 2008 and 2009.
Table 3.7 Summary Valuation of Fortune Plc
Valuation Model 2009(£Millions)
Gordon Dividend Valuation Model
24,503
Earnings Valuation 6,421Net Assets Valuation 228,996Price Earnings Model 127,927Market Value
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CHAPTER FOUR
CONCLUSION
Financial analysis through various techniques including balance sheet structure and income
statement structure analysis and the use of ratios has been found to be very helpful in evaluating
the company performance, compared to previous years and to competitors and the industry,
setting benchmarks or standards for performance, highlighting areas that need to be improved, or
areas that offer the most hopeful future potential and enable external parties, such as investors or
lenders, to measure the creditworthiness and profitability of the company.
The financial statements of Fortune Oil show that it was doing some how good in terms of
revenue, gross profit, operating profits as well as profit after tax and interest, especially for the
years under review. However, the financing structure is set to be against the shareholders of the
company as its financial leverage hangs above 50%. This puts the company at higher financial
risk.
The analysis also evaluated the company’s capital structure and this involved a review of the
irrelevancy theory propounded by Modigliani and Miller (1958). The irrelevancy theory of
capital structure by Modigliani and Miller (1958) argued that the value of the company is
independent with its capital structure. Friend and Puckett (1964) and Black and Scholes (1974)
were incapable to find any considerable relationship between dividend policy and total returns on
a risk-adjusted basis. Barnes, Haugen and Senbet (1981) concluded that as the level of gearing
increases, the agency costs increase as well. The conflicting interest between shareowners and
debt owners arise due to this agency costs. There are two assumptions presented by researchers
“the principle and the agent motivated by self-interest and they are capable of forming rational
anticipation concerning the likely outcomes and the actions of the decision takers.
Modigliani and Miller (1995) explained that the dividend policy is irrelevant in company
valuation. Gordon and Lintner model explained that high dividend policy is the best one. The
results show that there are some general factors that determine dividend policy for both financial
43
and non-financial companies and there are other factors that affect only non-financial companies.
Specifically, there are six determinants of dividend policy for non-financial companies, while
there are only three factors that influence the dividend policy of financial companies. The
general factors are profitability, company size, and business risk, government influence, gearing
level, and the company age have a strong influence on the dividend policy of non-financial
companies but no effect on financial companies. Agency costs, tangibility, and growth do not
appear to have any effect on the dividend policy of either financial or non-financial companies.
The fact that agency costs is not an important determinant of dividend policy is not surprising
given that Arab companies are highly geared on bank debt where the role of dividends in
alleviating the agency problems is less important.
With respect to the stability of dividend policy, we find that the speed of adjustment differs
substantially between financial and non-financial companies. While we find that non-financial
companies adopt a policy of smoothing dividends, this is not the case for financial companies. In
fact, financial companies do not have stable dividend policies. It was found that shareholders
have a strong favourite to receive dividends. If the company cannot pay cash dividends, they
prefer to receive stock dividends compared to not receiving dividends at all. This clearly shows
that they are certainly not neutral towards the dividend policy. We do not find much support for
the “irrational” explanations of the existence of dividends, i.e. the uncertainty solution theory of
Gordon (1961, 1962) and the behavioural explanation of Shefrin and Statman (1984). We only
find support for the latter in case of stock dividends. Furthermore, it was found that shareholders
partly want dividends because of transaction costs. The results strongly reject the agency theories
of Easterbrook (1984) and Jensen (1986). On the other hand a strong support is found for the
signalling theories of Bhattacharya (1979) and Miller and Rock (1985).
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REFERENCES
Brealey, Richard A., Stewart C. Myers, and Franklin Allen (2008) Principles of Corporate
Finance. 9th ed., McGraw-Hill/Irwin, Boston
Gitman, L. J. (2004) Principles of Managerial Finance, 10th Edition, Pearson Education, London
Vance, D. I. (2003) Financial Analysis and Decision Making: Tools and Techniques to Solve
Financial Problems and Make Effective Business Decisions, McGraw Hill, Chicago
Modigliani and Miller (1958) “The Capital Corporate Finance and the Theory of Investment,”
American Economic Review, Vol. 48, 261-297
Gordon (1959) “Dividends, Earnings and Stock prices,” Review of Economics and Statistics,
Vol. 99-105
Lintner (1956) “Distribution of Incomes of Corporations among Dividends, Retained earnings
and Taxes,” The American Economic Review Journal, Vol.46, No 2, 97-113
Myers S, (1984) “The Determinants of Corporate Borrowing,” Journal of Finance, Vol.32, 147-
175
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APPENDIX 1: BALANCE SHEETS (2005 – 2009) – FORTUNE OIL PLC
Millions of GBPAnnual Annual Annual Annual AnnualPeriod Period Period Period Period
Description 2005 2006 2007 2008 2009
Cash and Cash Equivalents 11,713 8,202 27,263 67,823 55,766 Short Term Marketable Securities 0 0 0 0 0 Accounts Receivable 6,272 6,302 8,759 18,937 14,817 Inventory 2,151 1,070 1,064 4,672 5,260 Other Current Assets 0 0 0 0 0 Total Current Assets 20,136 15,574 37,086 91,432 75,843
Property, Plant and Equipment 26,747 24,539 43,283 90,086 94,126 Accumulated Depreciation 0 0 0 0 0 Net Fixed Assets 26,747 24,539 43,283 90,086 94,126 Long-term Investments 1,917 2,394 5,425 8,136 5,593 Investments in Other Companies 19,410 21,083 22,593 27,405 31,326 Intangibles and Other Assets 1,988 1,166 5,910 11,937 12,354 Total Non Current Assets 50,062 49,182 77,211 137,564 143,399 Total Assets 70,198 64,756 114,297 228,996 219,242
Trade and Other Payables 9,813 5,362 15,410 26,572 32,458 Borrowings 1,944 3,427 5,212 27,593 30,192 Short Term Portion of LT Debt 0 0 0 0 0 Other Current Liabilities 241 170 549 1,032 1,026 Total Current Liabilities 11,998 8,959 21,171 55,197 63,676
Long-term Debt / Borrowings 7,126 5,567 27,976 34,633 18,346 Other Long-term Liabilities 336 264 1,527 2,556 3,024 Total Non Current Liabilities 7,462 5,831 29,503 37,189 21,370 Total Liabilities 19,460 14,790 50,674 92,386 85,046
Non-controlling Interests 11,726 11,288 18,473 49,944 44,110 Ordinary Shares 18,351 18,363 18,363 19,282 19,875 Share Premium 37,344 22 22 8,932 10,129 Retained Earnings (17,985) 23,805 28,291 37,618 47,157 Translation Reserves 2,062 (2,717) (932) 21,428 13,854 Treasury Shares (760) (795) (594) (594) (929)Total Shareholder Equity 50,738 49,966 63,623 136,610 134,196
Total Liabilities & Equity 70,198 64,756 114,297 228,996 219,242
46
47
APPENDIX 2: INCOME STATEMENTS (2005 – 2009) – FORTUNE OIL PLC
Millions of GBPAnnual Annual Annual Annual AnnualPeriod Period Period Period Period
Description 2005 2006 2007 2008 2009
Net Sales 143,057 175,771 219,887 364,722 403,745Other Operating Revenues -98,068 -132,500 -147,199 -232,586 -211,714Total Revenues 44,989 43,271 72,688 132,136 192,031Cost of Goods Sold (36,851) (33,912) (61,831) (101,660) (157,013)Other Operating Expenses 0 0 0 (11,192) (12,000)Total Direct Expenses (36,851) (33,912) (61,831) (112,852) (169,013)Selling, General & Administrative (4,617) (4,444) (5,169) (8,483) (9,522)Operating Income 3,521 4,915 5,688 10,801 13,496
Interest Expenses (454) (471) (1,243) (2,722) (2,532)Foreign Exchange (Loss) Gain 0 0 0 0 0 Associated Company (Loss) Gain 2,966 3,110 4,376 (1,051) 6,228 Other Non-Operating (Loss) Gain 0 0 0 0 0 Income Tax Expense (544) (617) (619) (1,501) (2,784)Reserve Charges 0 (834) 0 0 0 Income Before Extra Ord. Items 5,489 6,103 8,202 5,527 14,408
Extra Ordinary Items (Loss) Gain (629) 2,551 0 8,648 865 Tax Effects of Extraordinary Items 0 0 0 0 0 Minority Interests 0 0 0 0 Net Income 4,860 8,654 8,202 14,175 15,273
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