Financial Analysis Project

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University of Nairobi *

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2022

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Finance

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Nov 24, 2024

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1 Financial Analysis Project Student’s Name Institutional Affiliation Course Name and Number Instructor’s Name Assignment Due Date

2 Financial Analysis Project Trend Analysis Price to Earnings The price-to-earnings ratio is an investor's tool used to compare the current stock price of a company to its earnings per share (Nickolas & Mansa, 2022). Using the figures provided for Total Energies, the trend of the ratio over the past four years is increasing and overall, generally positive. From 2019 to 2020 the ratio decreases from 13.17 to -14.45, however, it then reversed the trend in 2021 at 8.74 and 2022 at 7.85, displaying an upward trend in the ratio. Generally, a low price-to-earnings ratio is considered positive, as it indicates the company's stock is undervalued relative to the earnings generated; therefore, the current price-to-earnings ratio trend of Total Energies is considered positive. Dividend Yield The dividend yield ratio is a metric used to measure the return on an investor's investment in the form of dividend distributions. A higher ratio indicates higher returns from dividend distributions (Bloomenthal et al., 2023). From 2019 to 2020, the dividend yield ratio decreased from 55.30 to 41.91. This drop was followed by a mild recovery from 2021 to 2022 when the dividend yield ratio yielded 52.02 and 62.08 respectively. The return was positive overall, which indicates a growing dividend distribution strategy. This can potentially be a good indicator of the profitability and dividend reinvestment potential of the company. Net Profit Net Profit Ratio is a measure of financial performance and is calculated by dividing net profit after tax by total revenue (Nickolas & Mansa, 2022). From 2019 to 2020, the net profit ratio decreased from 0.065 to - 0.061, indicating a loss for Total Energies in that year. In 2021

3 and 2022, the net profit ratio rose to 0.089 and 0.080 respectively, showing an overall upward trend that can be considered positive. This increase is likely due to cost-cutting initiatives and efficiency improvements made by Total Energies which resulted in increased profits and a healthier bottom line. Return on Assets (ROA) Return on assets (ROA) is a financial ratio that measures the profitability of a company to its total assets. This ratio is calculated by dividing Net Income by Total Assets (Bloomenthal et al., 2023). The trend analysis of total energy from 2019 to 2022 shows a gradual increase in the ROA ratio. In 2019, the ROA Ratio was 0.08, in 2020 the ROA ratio dropped to -0.06, in 2021 it increased to 0.11, and in 2022 the ROA ratio was 0.14. This upward trend in the ROA ratio is considered positive since it shows that the company is using its assets more effectively to generate higher profits. Return on Equity (ROE) Return on Equity (ROE) Ratio is a measure of profitability that tells us how much shareholders are benefiting from the company's activities (Nickolas & Mansa, 2022). In 2019, the ROE ratio for Total Energies was 0.10, indicating that the company generated 10 cents in earnings for every dollar of investment. In 2020, the ROE ratio of -0.07 shows that the company lost 7 cents for every dollar of investment. In 2021, ROE improved to 0.14. Finally, the ROE ratio in 2022 showed a positive increase of 0.08 to reach 0.18. This indicates a trend of increasing returns to shareholders, suggesting that the company is becoming more profitable over time. This performance is considered positive given the fact that the ratio is positive and higher over the four years. Current Ratio

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4 The current ratio is a measure of a company's liquidity or short-term debt-paying ability. It is calculated by dividing current assets, such as cash, marketable securities, and accounts receivable, by current liabilities, such as accounts payable and short-term debt (Nickolas & Mansa, 2022). From 2019 to 2020, the current ratio of Total Energies increased from 1.21 to 1.23, indicating an improvement in the company's short-term debt-paying ability. From 2020 to 2021, however, the ratio decreased to 1.17, indicating that Total Energies had more difficulty in paying its short-term debt. In 2021, the current ratio further decreased to 1.15. This could be interpreted as a sign of weakening liquidity that may need to be addressed. Generally, a higher current ratio is seen as being more positive since it indicates that the company can pay its short- term debt. Asset Turnover Asset turnover ratio is a financial ratio that measures the efficiency of a company’s asset’s use in producing sales (Nickolas & Mansa, 2022). The Total Energies asset turnover ratio from 2019 to 2022 showed an overall positive trend of increasing efficiency in asset utilization. From 2019 to 2020, the ratio fell from 0.64 to 0.45 indicating poor asset utilization. However, the asset utilization trend has reversed from 2021 and improved, reaching 0.63 and 0.87 respectively. This indicates that the company has managed the assets more efficiently and generated more sales, which is considered positive. Working Capital The working capital ratio measures the liquidity of a company. The ratio is calculated by dividing current assets by current liabilities (Nickolas & Mansa, 2022). The working capital ratio for Total Energies from 2019 to 2022 was $15.021 billion, $15.003 billion, $16.034 billion, and $15.946 billion, respectively. This shows an overall increase from 2019 to 2021, with a decrease

5 in 2022. This implies that the company is showing improvement in its ability to pay its short- term liabilities. An increase in working capital is generally considered positive since it indicates the company has good liquidity and can easily pay its short-term debts. Debt to Equity The debt-to-equity ratio is one of the main financial metrics used to measure a company's financial health. It is calculated by dividing total liabilities by total equity. A higher ratio indicates a company is taking on more debt, while a lower ratio indicates the company is taking on less debt. From 2019 to 2022, the debt-to-equity ratio of Total Energies has steadily grown. The increase in the ratio from 1.29 in 2019 to 1.65 in 2022 is an indication that Total Energies is taking on more debt. This can be considered a positive trend as it suggests Total Energies is further investing in its operations and taking on more risk to grow its business. Debt Ratio The debt ratio is a measure of a company's financial leverage, calculated by dividing its total liabilities by its total assets (Nickolas & Mansa, 2022). From 2019 to 2022, the debt ratio for Total Energies slowly increased from 0.56 to 0.62. This indicates that Total Energies has taken on more debt relative to the size of its assets, which could potentially signal increased risk. On the other hand, this could be considered positive if Total Energies can turn their increased liabilities into returns, such as investments, to increase value for shareholders. Generally, the trend is neutral as it shows the company has managed its debt portfolio carefully, avoiding taking on too much debt too quickly. Current Events and Management’s Discussion and Analysis Commodity prices have been increasing, with crude oil prices rising in particular, which is beneficial for Total Energies. Higher commodity prices mean increased adjustments to Total

6 Energies' profit margins, thus resulting in higher profitability. This means Total Energies will be able to generate higher Debt to Equity Ratios, Debt Ratios, Return on Assets (ROA), Return on Equity (ROE), Asset Turnover Ratios, Working Capital Ratios, Current Ratios, Dividend Yield Ratios, Net Profits, and Price to Earnings Ratios. Consequently, an increasing number of companies are entering the renewable energy sector, leading to more competition. This could negatively affect Total Energies’ profitability in the long run, as it would have to compete with other firms to maintain market share in the energy industry. This could lead to lower Debt to Equity Ratios, Debt Ratios, Return on Assets (ROA), Return on Equity (ROE), Asset Turnover Ratios, Working Capital Ratios, Current Ratios, Dividend Yield Ratios, Net Profits, and Price Earnings Ratios (Nickolas & Mansa, 2022). The rise of climate change awareness and governments imposing stricter environmental regulations will affect Total Energies’ production costs, as they will incur higher costs in meeting regulatory requirements. This could affect Total Energies’ profitability, by leading to lower Debt to Equity Ratios, Debt Ratios, Return on Assets (ROA), Return on Equity (ROE), Asset Turnover Ratios, Working Capital Ratios, Current Ratios, Dividend Yield Ratios, Net Profits, and Price to Earnings Ratios (Nickolas & Mansa, 2022). There is a shift in the demand for energy sources towards renewable energy sources (such as solar, wind, and hydropower), thus affecting the demand for traditional energy sources (such as oil, natural gas, and coal). This could affect Total Energies’ overall profitability, as demand for its traditional energy sources falls. This could lead to lower Debt to Equity Ratios, Debt Ratios, Return on Assets (ROA), Return on Equity (ROE), Asset Turnover Ratios, Working Capital Ratios, Current Ratios, Dividend Yield Ratios, Net Profits, and Price Earnings Ratios. Furthermore, Total Energies has to make huge upfront capital investments to maintain and grow

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7 its business. This could lead to higher debt levels, which could affect Total Energies’ profitability by impacting its debt-to-Equity Ratios, Debt Ratios, Return on Assets (ROA), Return on Equity (ROE), Asset Turnover Ratios, Working Capital Ratios, Current Ratios, Dividend Yield Ratios, Net Profits, and Price to Earnings Ratios (Nickolas & Mansa, 2022). Overall, the issues identified above could affect Total Energies’ future performance. With higher commodity prices and an expansion of the renewable energy sector, Total Energies could see improved profitability in the short term. However, these opportunities could be partially offset by higher environmental regulations, a shift in demand for energy sources, and high capital investment requirements. These could lead to a lower debt-to-equity ratio, debt ratio, return on assets, return on equity, asset turnover ratio, working capital ratio, current ratio, dividend yield ratio, net profit, and price-to-earnings ratio for Total Energies, negatively impacting its future performance.

8 References Bloomenthal, A., Drury, A., & Logan, M. (2023, March 17). Financial ratio analysis: Definition, types, examples, and how to use . Investopedia. https://www.investopedia.com/terms/r/ratioanalysis.asp Nickolas, S., & Mansa, J. (2022, April 6). How to use ratio analysis to compare companies . Investopedia. https://www.investopedia.com/ask/answers/032315/how-does-ratio- analysis-make-it-easier-compare-different-companies.asp

9 Appendices Appendix A Performance Analysis Table Performan ce 2022 2021 2020 2019 Trend (positive/negative/neut ral) Market Price to Earnings 7.85 8.74 -14.45 13.17 Positive Dividend Yield Positive Profitabilit y Net Profit Margin 0.080 0.089 -0.061 0.065 Positive Return on Assets 0.14 0.11 -0.06 0.08 Positive Return on Equity 0.18 0.14 -0.07 0.10 Positive Liquidity

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10 Current Ratio 1.15 1.17 1.23 1.21 Positive Asset Turnover 0.87 0.63 0.45 0.64 Positive Working Capital $159460000 00 160340000 00 150030000 00 150210000 00 Positive Solvency Debt to Equity 1.65 1.55 1.51 1.29 Positive Debt Ratio 0.62 0.61 0.60 0.56 Positive