International accounting and finance

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 Table of Contents
INTRODUCTION ............................................................................................................................................. 3
A) FINANCIAL STATEMENT ANALYSIS OF BP PLC .......................................................................................... 4
Profitability ratios ...................................................................................... Error! Bookmark not defined.
Efficiency ratios ......................................................................................................................................... 5
Performance ratios: .................................................................................................................................. 4
B) REASONS FOR CROSS-LISTINGS OF BP PLC ............................................................................................... 7
C) IMPACT OF FOREIGN EXCHANGE RISKS AND ITS MANAGEMENT IN BP PLC ............................................ 9
CONCLUSION............................................................................................................................................... 11
REFERENCES ................................................................................................................................................ 12
INTRODUCTION
Financial statement analysis of a company may be conducted along with the
financial ratio analysis as this tool is effective for obtaining the real scenario of financial
position of the firm in different periods and in comparable way (Baños-Caballero, García-
Teruel and Martínez-Solano, 2014). In this context, the study has conducted the financial
ratio analysis of BP PLC for 2017 for comparing the profitability, efficiency and
performance of the business. Moreover, this study has discussed about the merits and
demerits of cross-listing of a company in the exchange of different countries and the same
effect on BP PLC. The final section has explained the impact of foreign exchange rate in
the business of BP.
A) FINANCIAL STATEMENT ANALYSIS OF BP PLC
Table 1: Financial ratios of BP PLC

Performance Ratios Unit Formula 2016 2017 Change %

Extracted from annual report
Basic EPS times 2017 0.61 17.20 2720%
Earnings before interest and
tax/(Total assets-Current
ROCE % Liabilities) -0.29% 6.08% 2198.7%

Profitability Ratios Unit 2016 2017 Change %

Net income/Average total
Return on Asset % assets 0.07% 1.25% 1820%
Net income/Shareholder's
Return on Equity % equity 0.18% 3.45% 1845%

Efficiency ratio Unit 2016 2017 Change %

Net sales/Fixed assets-
Fixed Asset Turnover times accumulated depreciation 1.9 1.4 -24%
Net sales/Number of
Revenue per employee times employees 2.5 3.2 26%

Performance ratios
In order to measure the performance of BP plc Basic EPS and ROCE has been
calculated. EPS is the amount of money that each share of stock will receive if all the
profits of the business will be distributed as outstanding share. In the period of 2017 there
has been increase in EPS by 17.20 when compared with 2016 which was 0.61. This
clearly indicates that BP plc was more profitable for that particular year and business has
got the potential of distributing these profits with their shareholders. On the other hand,
return on capital employed indicates that how efficiently business was able to generate
profits using their capital employed. Thus, the analysis shows that there is positive ROCE
for the period of 2017, which shows a higher ratio when compared with 2016. This means
for 2017 this ROCE ratio is favourable and indicates that more dollars of profit has been
generated by BP plc using their capital employed.
Profitability ratios
The profitability ratios of the business are an essential measure for evaluating the
overall financial performance as well as the business performance of the company. The
profitability ratios state the truth about the return on equity as well as return on assets for
a given period to clarify whether the condition favouring to the firm or not (Rani, Yadav
and Jain, 2015). The return on assets indicates that how efficiently business was able to
utilize their assets in order to generate profit for a period. The return on asset ratio has
increased for the year 2017 (1.25%) from (0.07%) in 2016 which indicates that BP plc has
utilized their assets in a significant manner for enhancing their profits. The return on equity
ratio indicates how much profit has been generated by each dollar of common
stockholder’s equity (Seay, 2014). The analysis indicates that there has been increase in
the ratio of return on equity from (0.18%) to (3.45%) which shows BP plc was able to
utilize the money of their shareholders in significant manner for generating profits.

Efficiency ratios
The efficiency ratios of a firm are measured for checking the efficiency of the
financial policies of a company as well as how assets are being utilized to achieve
optimization. Moreover, the efficient usage of resources and working capital flow in the
operation is also tested through the efficiency ratios (Kazan and Ozdemir, 2014). In this
respect two ratio has been calculated that are fixed asset turnover and revenue per
employee. The fixed asset turnover ratio indicates how efficiently business was able to
generate their revenues based on their machines and equipment’s. In this regard it has
been identified that there has been decrease in the fixed asset turnover ratio of BP plc for
the period of 2017 (1.4) from (1.9) in 2016. This indicates that business was not able to
utilize their assets in a significant manner for enhancing their overall sales. On the other
hand, revenue per employee of an organisation is calculated in order to understand how
effectively employees of business is utilized for generating sales (Zietlow et al. 2018). In
this respect it has been identified that BP plc was able to enhance their overall revenue
per employee from (2.5) to (3.2) in the period of 2017. This shows that business has used
their employees in a significant manner for increasing their sales for the period.
B) REASONS FOR CROSS-LISTINGS OF BP PLC
BP PLC is listed in three different stock exchanges – London Stock exchange,
Frankfurt and New York Stock exchange. This type of foreign listing is known as cross
listing of stocks of a company. This is an instrument used by various companies for listing
their companies in abroad for obtaining those benefits in practice. Such benefits are
additional equity raising opportunity, high liquidity in foreign stock market, overcoming the
barriers related to foreign investors, flexibility of ESOP sell, ease of overseas acquisition,
creating foreign brand image, protecting from takeover and others (Peng and Su, 2014).
Most of the companies use cross-listing as a tool for publicity purpose as it provides the
free promotion of their brands in abroad. Moreover, such action helps those companies
to enhance their market share in the foreign soil. The foreign regulators also receive
information related to financial as well as the governance mechanism in details, which
helps in acquiring foreign firms. The benefits like market liquidity and breaking the barriers
of segmentation are the major advantage for the firms to be listed in foreign stock
exchanges (Cheng, Cullinan and Zhang, 2014). The foreign employees of the firm may
sell their stock options in foreign exchanges whereas the management may issue shares
to foreign shareholders for increasing reserve of foreign currency. However, there are
plenty of disadvantages of cross-listing such as high underwriting cost, regulatory
pressure on the operation, addressing different reporting requirements, different audit
process, settlement of shares and activities for consistent relation with the shareholders.

In this context, BP PLC is listed in three stock exchanges where the company
receives the advantage of three different currencies – GBP, EURO and US dollar. The
presence of operation of BP PLC is observed in various countries of the world such as
UK, USA, Trinidad and Tobago, India (through investment and subsidiary), Australia,
Norway, Egypt, Brazil and in other emerging countries (Herrmann, Kang and Yoo, 2015).
Therefore, the company has to break the barrier of segmentation of the investors as well
as the currency reserve for foreign investments and acquisitions. Moreover, the
multinational operation of the firm requires to meet the requirement of the employees in
foreign soil to sell their ESOPS. The market liquidity of the US stock market has helped
the company to provide return of 20% in 2017 whereas the UK stock market has provided
only 7% return over the same period. Hence, the cross-listing of shares of BP PLC has
provided the shareholders to sell their shares in New York at better price during the
period. Further, there were several investments done by the company in USD in past,
which were financed by the stock issues as ADRS in New York Stock exchange by BP
PLC.
C) IMPACT OF FOREIGN EXCHANGE RISKS AND ITS MANAGEMENT
IN BP PLC
The foreign exchanges risks are transaction, translation and economic risks for a
multinational company (ESHETU, 2018). These risks are categorized on basis of the
nature of the operation and as well as the business model of the multinational company.
The transaction risk is observed due to volatility in exchange rate between domestic and
foreign currency. Such fluctuation of the exchange rate may create difficulties for a firm
to gather resources as well as exporting products and services (Hodrick, 2014). Both the
adverse and favourable situations may arise due to exchange rate risk, which are beyond
the internal control of the management. The volatility of exchange rate also influences the
foreign liability repayment amount enhancing the risk of repayment capacity. The
translation risk is observed for the foreign listed companies or the assets held in abroad
for a firm (Jacque, 2014). This type of risk arises due to change in valuation of foreign
assets or the liabilities and the impact is observed on the balance sheet of the firm directly.
The last type of foreign exchange risk is associated with the economic risk for a firm that
is dealing with the investment in foreign country. The foreign investment may be affected
due to unstable political condition, paradigm shift in exchange rate due to devaluation of
foreign or domestic currencies or change in government regulations (Gabaix and
Maggiori, 2015).

BP PLC is affected by all these exchange risks in practice as the firm has both
foreign transactions due to operation and investments. The management has to manage
these risks in tactfully by employing various exchange rate risk strategies. BP PLC has
various investments and foreign subsidiaries in other currencies, which influence the
balance sheet of the company. Further, regular operation of the firm in all over the world
has created the transaction risk regular basis. The transaction risk is managed by the
management by employing hedging option and currency swaps (derivative instrument) of
foreign currencies with the domestic currency. The translation risk is mitigated by buying
swaps or currency futures of long-term as the impact of translation is severe and ever-
lasting for a BP PLC. The economic risk is difficult to manage as the management has no
control over the macro-economic changes or the change in government policies in foreign
countries. However, the management of BP PLC has managed this type of risk by
accompanying or acquiring local companies while investing in the same firm. In this way,
BP PLC has mitigated the risk of investment segmentation policy of a country and enjoyed
strong return on investment of valuable assets.
CONCLUSION
The topic of financial analysis of BP PLC has shown that the profitability, efficiency
and performance of the company have improved in 2017 due to improvement in operating
profit majorly. Moreover, the foreign listing of the company has allowed the shareholders
to improve their assets in the USA through ADRS. The foreign exchange risks of BP PLC
are observed as both transaction and translation exist for the firm. The firm’s management
has managed the same by buying swap and financial futures for long-term.
REFERENCES
Part 1

Baños-Caballero, S., García-Teruel, P.J. and Martínez-Solano, P., 2014. Working capital
management, corporate performance, and financial constraints. Journal of Business
Research, 67(3), pp.332-338.
Kazan, H. and Ozdemir, O., 2014. Financial performance assessment of large scale
conglomerates via TOPSIS and CRITIC methods. International Journal of
Management and Sustainability, 3(4), p.203.
Rani, N., Yadav, S.S. and Jain, P.K., 2015. Financial performance analysis of mergers
and acquisitions: evidence from India. International Journal of Commerce and
Management, 25(4), pp.402-423.
Robinson, T.R., Henry, E., Pirie, W.L. and Broihahn, M.A., 2015. International financial
statement analysis. John Wiley & Sons.
Seay, S.S., 2014. The economic impact of IFRS-a financial analysis perspective.
Academy of Accounting and Financial Studies Journal, 18(2), p.119.
Zietlow, J., Hankin, J.A., Seidner, A. and O'Brien, T., 2018. Financial management for
nonprofit organizations: policies and practices. John Wiley & Sons.

Part 2
Cheng, Z., Cullinan, C.P. and Zhang, J., 2014. Free cash flow, growth opportunities, and
dividends: Does cross-listing of shares matter?. Journal of Applied Business Research,
30(2), p.587.
Herrmann, D., Kang, T. and Yoo, Y.K., 2015. The impact of cross-listing in the United
States on the precision of public and private information. Journal of International
Business Studies, 46(1), pp.87-103.
Peng, M.W. and Su, W., 2014. Cross-listing and the scope of the firm. Journal of World
Business, 49(1), pp.42-50.

Part 3
Hodrick, R., 2014. The empirical evidence on the efficiency of forward and futures foreign
exchange markets. Routledge.
Jacque, L.L., 2014. Management of foreign exchange risk. International Accounting and
Transnational Decisions, p.361.
ESHETU, K., 2018. EFFECT OF EXCHANGE RATE ON THE FINANCIAL
PERFORMANCE OF PRIVATE COMMERCIAL BANKS IN ETHIOPIA (Doctoral
dissertation, St. Mary's University).
Gabaix, X. and Maggiori, M., 2015. International liquidity and exchange rate dynamics.
The Quarterly Journal of Economics, 130(3), pp.1369-1420.