Andras Fekete
Financial Analysis of Exxon Mobil
May 2nd, 2007
TABLE OF CONTENTS
Introduction……………………………………...............................................................2
What is Financial Statement and Ratio Analysis?.............................................................2
Common Size Financial Statements……………………………………………………...4
The structure of Exxon’s financial statement…….............................................................5
Ratios………………………………………………………………………...6
Analysis (Qualitative and Quantitative)………….............................................................7
Conclusion………………………….…………………………………………………...11
References……………………………………….............................................................12
Appendixes………………………………………...........................................................13
1
Introduction
What is Financial Statement and Ratio Analysis?
Financial analysis refers to an assessment of the viability, stability and profitability of a
business, sub-business or project.
It is performed by professionals who prepare reports using ratios that make use of
information taken from financial statements and other reports. These reports are usually
presented to top management as one of their basis in making business decisions. Based
on these reports, management may:

Continue or discontinue its main operation or part of its business;

Make or purchase certain materials in the manufacture of its product;

Acquire or rent/lease certain machineries and equipments in the production of its
goods;

Issue stocks or negotiate for a bank loan to increase its working capital.

other decisions that allow management to make an informed selection on various
alternatives in the conduct of its business.
Goals
Financial analysts often assess the firm's:
1. Profitability- its ability to earn income and sustain growth in both short-term and
long-term. A company's degree of profitability is usually based on the income statement,
which reports on the company's results of operations;
2. Solvency- its ability to pay its obligation to debtors and other third parties in the long-
2
term;
3. Liquidity- its ability to maintain positive cash flow, while satisfying immediate
obligations;
Both 2 and 3 are based on the company's balance sheet, which indicates the financial
condition of a business as of a given point in time.
4. Stability- the firm's ability to remain in business in the long run, without having to
sustain significant losses in the conduct of its business. Assessing a company's stability
requires the use of both the income statement and the balance sheet, as well as other
financial and non-financial indicators.
Methods
Financial analysts often compare financial ratios (of solvency, profitability, growth...):

Past Performance: Across historical time periods for the same firm (the last 5
years for example),

Future Performance: Using historical figures and certain mathematical and
statistical tehcniques, including present and future values, This extrapolation method is
the main source of errors in financial analysis as past statistics are poor predictors of
future prospects.

Comparative Performance: Comparison between similar firms.
These ratios are calculated by dividing a (group of) account balance(s), taken from the
balance sheet and / or the income statement, by another, for example :
Net profit / equity = return on equity
3
Gross profit / balance sheet total = return on assets
Stock price / earnings per share = P/E-ratio
Comparing financial ratios are merely one way of conducting financial analysis.
Financial ratios face several theoretical challenges:

They say little about the firm's prospects in an absolute sense. Their insights about
relative performance require a reference point from other time periods or similar firms.

One ratio holds little meaning. As indicators, ratios can be logically interpreted in
at least two ways. One can partially overcome this problem by combining several related
ratios to paint a more comprehensive picture of the firm's performance.

Seasonal factors may prevent year-end values from being representative. A ratio's
values may be distorted as account balances change from the beginning to the end of an
accounting period. Use average values for such accounts whenever possible.

Financial ratios are no more objective than the accounting methods employed.
Changes in accounting policies or choices can yield drastically different ratio values.

They fail to account for exogenous factors like investor behavior that are not
based upon economic fundamentals of the firm or the general economy.
(Financial analysis, Wikipedia, 2006)
Common Size Financial Statements
Common size ratios are used to compare financial statements of different-size companies
or of the same company over different periods. By expressing the items in proportion to
some size-related measure, standardized financial statements can be created, revealing
trends and providing insight into how the different companies compare.
4
The common size ratio for each line on the financial statement is calculated by dividing
the income statement items by the total revenues and the balance sheet item by the total
assets. The balance sheet items can also be divided by sales revenues and income
statement items by total assets to get an idea of how assets and sales are related. These
common size statements are useful for identifying trends and for comparisons among
companies that differ in size.
Comparisons between Companies (Cross-Sectional Analysis)
Common size financial statements can be used to compare multiple companies at the
same point in time. A common-size analysis is especially useful when comparing
companies of different sizes. It often is insightful to compare a firm to the best
performing firm in its industry (benchmarking). A firm also can be compared to its
industry as a whole. To compare to the industry, the ratios are calculated for each firm in
the industry and an average for the industry is calculated. Comparative statements then
may be constructed with the company of interest in one column and the industry averages
in another. The result is a quick overview of where the firm stands in the industry with
respect to key items on the financial statements.
The structure of Exxon’s financial statements
To set up a dynamic, flexible model, the least amount of inputs is used. The excel model
uses ExxonMobil’s financial statements obtained from Compustat. All the ratios and
measurement are derived from the corresponding line of the original statement. This way,
any changes in any input will change the whole model accordingly.
5
Ratios:
(The explanation of some item calculated on the spread sheet (obvious calculations are
omitted)
Earnings per Share = Net income / shares outstanding
Dividend Payout Ratio = Dividend per share * Shares outstanding / Net income
Company’s Market Value = number of shares outstanding x common stock market price
Days Sales Outstanding = Account receivable / (Sales revenues / 365)
Interest Coverage Ratio = EBITDA / Interest expense
EBITDA = EBIT + Depreciation
It is imperative to note the importance of the proper context for ratio analysis. Like
computer programming, financial ratio is governed by the GIGO law of "Garbage
In...Garbage Out!" A cross industry comparison of the leverage of stable utility
companies and cyclical mining companies would be worse than useless. Examining a
cyclical company's profitability ratios over less than a full commodity or business cycle
would fail to give an accurate long-term measure of profitability. Using historical data
independent of fundamental changes in a company's situation or prospects would predict
very little about future trends. For example, the historical ratios of a company that has
undergone a merger or had a substantive change in its technology or market position
would tell very little about the prospects for this company. (Financial ratios,
Investopedia, 2006)
Although financial ratio analysis is well-developed and the actual ratios are well-known,
6
practicing financial analysts often develop their own measures for particular industries
and even individual companies. Analysts will often differ drastically in their conclusions
from the same ratio analysis.
Analysis (Qualitative and Quantitative)
Analyzing the Common Size Statements (Appendix B)
Income Statement
The bottom line of the Income statement is the Net Income or Loss. This measure is the
result of all factors (revenues and expenditures). For this reason I would like to compare
and evaluate this measure first then find the reasons.
Exxon’s net income is above the industry average by far. In fact, there was no company
having this much income before ($36 billon) (Appendix A). Looking at the income
statement, we can see that Exxon’s operating costs including cash costs in terms of assets
are lower than those in the industry. It is a very important factor that leads to higher EBIT
and higher profit margin. Of course, high income comes with higher tax liability, so
EM’s tax expense is also higher then its competitors.
Balance Sheet
In analyzing the Balance Sheet I only mention items that value deviates from the industry
averages. We notice that Exxon has a huge cash reserve. It always had a lot of cash on
hand. It means increased liquidity but doesn't contribute to production. It gives great
flexibility to take advantage of unforeseen opportunities, but the opportunity cost of not
having sufficient return on it can be costly.
7
The amount of current assets is higher because of the huge amount of cash on hand.
Which we can’t really say is bad or good because it has advantages and disadvantages as
well. Exxon has somewhat more liabilities in the form of note payable, but it has
sufficient cash flows to meet its obligations.
Looking at the amount of long-term liability we see a huge difference. Exxon carries only
a small amount of long term debt that significantly lowers its interest expense and
increases its creditability. EM virtually has no debt. It greatly increases the cost of equity
and ultimately the weighted cost of capital. As a result of such a low long-term debt
Exxon’s total liabilities are also low.
Common stock is costly way of financing but better liquidity ratio increases stability.
Retained earnings are what really make shareholders happy. Exxon delivers outstanding
performance consistently each year.
Ratio Analysis (APPENDIX C)
I would like to point out Exxon’s strengths and weaknesses as they appear on the ratios
rather than introducing each and every ratios and explaining their role in the business.
In the ratio analysis I use different colors to show if a ratio is:
GREEN = streght
RED = challenge
GRAY = natural (it has advantage and disadvantage)
Liquidity ratios
Current ratio: Because of the relatively large amount of cash and equivalents, the
company has no problem to meet its short term liabilities. Higher ratio ensures better
8
credit terms.
Quick ratio: It indicates if the company is able to meet unexpected immediate liabilities.
Once again, The cash that Exxon carries increases this ratio.
Working capital per share: This indicates the amount of working capital in relation to
the number of shares outstanding. There was a sharp change in the Industry in 2004.
(Marathon issued 1 million shares).
Cash flow per share: This measure sometimes is more important than EPS because it is
more difficult to manipulate.
Inventory Turnover: Exxon sell out its inventory slower than the other companies in the
industry.
Average Collection Period (Days): Longer period to collect receivables can indicate
low efficiency on collection but shows favorable credit terms.
Operating Cycle (Days): This is the result of the lower inventory turnover and longer
collection time.
Performance ratios
Sales/Net Property, Plant & Equip: How much sales can the firm generate with its
fixed assets. Exxon doesn't use the fixed assets as efficiently as the rest of the industry
does.
Sales/Stockholder Equity: This factor is not as good either, but the reason is the higher
ratio of equity in Exxon's capital structure.
Profitability ratios
9
Operating Margin Before Depreciation (%): This is a measure profitability that is
independent of the amount of fixed assets.
Operating Margin After Depreciation (%): Even though Exxon is the larges company
with the larges amount of depreciation, but the depreciation is almost neglegtable
compared to the operating profit.
Net Profit Margin (%): This is the ultimate measure of profitability. Exxon is way
ahead of the others.
Return on Assets (%): In spite of the large assets Exxon can produce a good relative
return.
Return on Equity (%): High ratio of equity and the return is still outstanding
Return on Investment (%): Profitable investments.
Leverage ratios
Interest Coverage before Tax: Interest coverage is great. Here it shows the low amount
of long term debt.
Long-Term Debt/Common Equity (%): Assets mainly financed with equity. This is the
reason why Exxon's stock rated AAA.
Total Debt/Invested Capital (%): Both measures, Exxon's investments were higher;
debt is lower than those of the competitors.
Total Debt/Total Assets (%): Again, low debt, capital is equity dominated. Equity is
more costly than debt.
10
Dividend Yield (%): The dividend paid in terms of the share price is very similar to the
industry average but Exxon also pays money to investors by buying back more and more
shares.
Conclusion
As summary we can say that Exxon Mobil biggest advantage is lies in its capital structure
and efficient operations. The company barely carries any debt therefore the interest
expense is low and the stability is high. But the cost of capital is higher than optimal. As
far as the operations go Exxon generates huge revenue with relatively low costs.
The most important things that I would identify as challenges are the inventory turnover
and operating cycles. It is understandable that such a large company is slower in
delivering the product and collecting revenue, but still they need to try to reduce the
operating cycle as close to the one the competition has as they can.
11
References
“Exxon Mobil financial statements” (2005) Compustat
“Accounting Principles“7th Edition (2006), Weygandt, Kieso, Kimmel
“Financial analysis” Wikipedia, 2006, accessed from
http://en.wikipedia.org/wiki/Financial_analysis
“Financial ratios” Investopedia, 2006, accessed from
http://www.investopedia.com/university/ratios/
12
APPENDIX A
EXXON MOBIL CORP ($MILLIONS)
ANNUAL BALANCE SHEET
ASSETS
Cash & Equivalents
Net Receivables
Inventories
Prepaid Expenses
Other Current Assets
Total Current Assets
Gross Plant, Property & Equipment
Accumulated Depreciation
Net Plant, Property & Equipment
Investments at Equity
Other Investments
Deferred Charges
Other Assets +intangibles
TOTAL ASSETS
LIABILITIES
Long Term Debt Due In One Year
Notes Payable
Accounts Payable
Taxes Payable
Other Current Liabilities
Total Current Liabilities
Long Term Debt
Deferred Taxes
Investment Tax Credit
Minority Interest
Other Liabilities
EQUITY
Preferred Stock - Redeemable
Preferred Stock – Non-redeemable
Total Preferred Stock
Common Stock
Capital Surplus
Retained Earnings
Less: Treasury Stock
Common Equity
TOTAL EQUITY
TOTAL LIABILITIES & EQUITY
COMMON SHARES OUTSTANDING
5-Dec
33,275
27,484
9,321
3,262
0
73,342
240,294
133,284
107,010
17,696
2,896
0
7,391
208,335
4-Dec
23,135
25,359
9,487
2,396
0
60,377
242,422
133,783
108,639
15,541
2,863
0
7,836
195,256
3-Dec
10,626
24,309
8,957
2,068
0
45,960
229,315
124,350
104,965
12,636
2,899
0
7,818
174,278
2-Dec
7,229
21,163
8,068
1,831
0
38,291
204,960
110,020
94,940
9,859
2,252
0
7,302
152,644
1-Dec
6,547
19,549
7,904
1,681
0
35,681
190,503
100,901
89,602
8,395
2,373
0
7,123
143,174
515
1,256
25,239
8,416
10,881
46,307
6,220
20,878
0
3,527
20,217
608
2,672
20,057
7,938
11,706
42,981
5,013
21,092
0
3,952
20,462
1,903
2,886
16,918
5,152
11,527
38,386
4,756
20,118
0
3,382
17,721
884
3,209
14,984
3,896
10,202
33,175
6,655
16,484
0
2,768
18,965
339
3,364
13,328
3,549
9,534
30,114
7,099
16,359
0
2,825
13,616
0
0
0
4,477
0
162,056
55,347
111,186
111,186
208,335
6,133
0
0
0
4,053
0
135,917
38,214
101,756
101,756
195,256
6,401
0
0
0
3,834
0
115,442
29,361
89,915
89,915
174,278
6,568
0
0
0
3,767
0
94,907
24,077
74,597
74,597
152,644
6,700
0
0
0
3,630
0
89,128
19,597
73,161
73,161
143,174
6,809
13
EXXON MOBIL CORP
($ MILLIONS, EXCEPT PER SHARE)
ANNUAL INCOME
STATEMENT
Sales
Cost of Goods Sold
Gross Profit
Selling, General, &
Administrative Expense
Operating Income Before Deprec.
Depreciation, Depletion, &
Amortization
Operating Profit
Interest Expense
Non-Operating Income/Expense
Pretax Income
Total Income Taxes
Minority Interest
Income Before Extraordinary
Items & Discontinued Operations
Preferred Dividends
Available for Common
Savings Due to Common
Stock Equivalents
Adjusted Available for Common
Extraordinary Items
Discontinued Operations
Adjusted Net Income
EPS
Dividends Per Share
Common Shares Outstanding
5-Dec
328,213
253,592
74,621
4-Dec
263,989
203,403
60,586
3-Dec
213,199
166,563
46,636
2-Dec
178,909
142,353
36,556
1-Dec
187,510
143,833
43,677
15,366
59,255
14,947
45,639
14,406
32,230
13,276
23,280
14,075
29,602
10,253
49,002
930
12,159
60,231
23,302
799
9,767
35,872
1,138
7,283
42,017
15,911
776
9,047
23,183
697
10,174
32,660
11,006
694
8,310
14,970
824
3,983
17,719
6,499
209
7,944
21,658
811
4,589
24,688
9,014
569
36,130
0
36,130
25,330
0
25,330
20,960
0
20,960
11,011
0
11,011
15,105
0
15,105
0
36,130
0
0
36,130
5.40
1.14
6,266
0
25,330
0
0
25,330
3.99
1.06
6,482
0
20,960
550
0
21,510
2.57
0.98
6,634
0
11,011
0
449
11,460
1.69
0.92
6,753
0
15,105
215
0
15,320
2.28
0.91
6,868
14
APPENDIX B
Common Size Statements
Income Statements, PNC and Industry ($ in Thousands)
Exxon (2005)
% of
% of
assets
sales
Sales revenues
157.54% 100.00%
Cash op costs
129.10%
81.95%
Depreciation
4.92%
3.12%
Total op costs
134.02%
85.07%
Op Income (EBIT)
23.52%
14.93%
Interest
0.45%
0.28%
Taxable Income
28.91%
18.35%
Taxes
11.18%
7.10%
Net Income
17.34%
11.01%
Industry Average
% of
% of
assets
sales
165.71% 100.00%
143.95%
86.87%
4.13%
2.49%
148.08%
89.36%
17.63%
10.64%
0.73%
0.44%
20.17%
12.17%
8.31%
5.01%
11.64%
7.03%
Balance Sheets, PNC and Industry ($ in Thousands)
Exxon (2005)
% of
% of
assets
sales
Cash & Equivalents
15.97%
27.31%
A/R
13.19%
8.37%
Inv.
4.47%
2.84%
Current assets
35.20%
22.35%
Net fixed assets
51.36%
32.60%
Total assets
100.00%
63.48%
A/P
12.11%
7.69%
Notes payable
0.60%
0.38%
Current liabilities
22.23%
14.11%
Long-term debt
2.99%
1.90%
Total liabilities
46.63%
29.60%
Common stock
2.15%
1.36%
Retained earnings
77.79%
49.38%
Total equity
53.37%
33.88%
Industry Average
% of
% of
assets
sales
5.59%
3.37%
12.32%
7.43%
5.08%
3.06%
24.35%
14.70%
51.43%
31.03%
100.00%
60.35%
13.38%
8.07%
0.07%
0.04%
21.03%
12.69%
10.79%
6.51%
51.66%
31.17%
0.75%
0.46%
33.12%
19.99%
48.34%
5.71%
15
APPENDIX C
Ratios and Other Financial Data
2005
Exxon
2004
2003
2005
Industry
2004
2003
LIQUIDITY
Current Ratio
Quick Ratio
Working Capital Per Share
Cash Flow Per Share
ACTIVITY
Inventory Turnover
Receivables Turnover
Total Asset Turnover
Average Collection Period (Days)
Days to Sell Inventory
Operating Cycle (Days)
1.58
1.31
4.41
7.56
1.40
1.13
2.72
5.48
1.20
0.91
1.15
4.57
1.14
0.77
1.96
10.18
1.33
0.94
4.01
7.17
1.18
0.71
1.74
5.30
26.97
12.42
1.63
29.00
13.00
42.00
22.06
10.63
1.43
34.00
16.00
50.00
19.57
9.38
1.30
38.00
18.00
57.00
30.73
18.90
2.18
21.25
12.75
34.00
27.75
19.96
2.04
20.75
14.00
34.75
22.68
18.54
1.76
21.25
17.25
38.00
PERFORMANCE
Sales/Net Property, Plant & Equip
Sales/Stockholder Equity
3.07
2.95
2.43
2.59
2.03
2.37
3.58
4.11
3.65
4.60
3.12
4.60
PROFITABILITY
Operating Margin Before Depr (%)
Operating Margin After Depr (%)
Pretax Profit Margin (%)
Net Profit Margin (%)
EPS
Return on Assets (%)
Return on Equity (%)
Return on Investment (%)
Return on Average Assets (%)
Return on Average Equity (%)
Return on Average Investment (%)
18.05
14.93
18.35
11.01
5.40
17.34
32.50
29.88
17.90
33.93
31.19
17.29
13.59
15.92
9.60
3.99
12.97
24.89
22.88
13.71
26.43
24.27
15.12
10.87
15.32
9.83
2.57
12.03
23.31
21.38
12.82
25.48
23.02
11.98
9.77
10.88
6.41
8.00
11.40
24.58
19.21
13.00
29.30
21.51
10.91
8.36
9.29
5.52
4.84
9.33
21.73
15.26
10.06
24.51
16.46
10.18
6.92
7.10
4.02
2.94
5.96
15.41
9.76
6.16
16.73
10.13
LEVERAGE
Interest Coverage Before Tax
Interest Coverage After Tax
Long-Term Debt/Com. Equity (%)
Long-Term Debt/Shrhldr Equity(%)
Total Debt/Invested Capital (%)
Total Debt/Total Assets (%)
Total Assets/Common Equity
65.76
39.85
5.59
5.59
6.61
3.84
1.87
37.92
23.26
4.93
4.93
7.49
4.25
1.92
47.86
31.07
5.29
5.29
9.73
5.48
1.94
27.51
16.55
26.44
26.40
22.12
13.11
2.16
20.66
12.94
39.55
39.20
27.56
16.97
2.42
11.13
6.77
55.38
54.71
34.84
21.62
2.67
DIVIDENDS
Dividend Payout (%)
Dividend Yield (%)
19.89
2.03
27.22
2.07
31.08
2.39
14.00
1.87
17.97
2.09
25.32
2.40
16