Assignment 2 - BU383 T Winter 2010 Assignment #2 Suncor...

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BU383 T Assignment #2 Tiezhu (Steven) Li Winter 2010 Suncor (TSX: SU) 080910830 Part A: Ratio Analysis Before comparing and analysing the ratios for Suncor (SU) and Imperial Oil (IMO), one key piece of information to keep in mind is the merger between Suncor and Petro-Canada in an all stock transaction involving the exchange of 1.28 SU share per Petro-Can share. The deal was completed in August 2009; this is the key explanation in the sudden changes of SU ratios from 2008 to 2009, therefore some analysis may omit the ratios from SU-2009. At first glance it is obvious that both companies have seen their margins diminish over the years, the cause is of course due to the drop in oil prices from 2007 to 2009. Although SU has been able to achieve relatively higher gross margins in 2007 and 2008, the merger has caused their gross margins to drop drastically in 2009, to a level similar to those of IMO. It is clear that IMO is better at controlling costs, SU have seen their net margins drop from 20% in 2007 to just 12% in 2008, where IMO managed to maintain a steady 12%-13% margin throughout. The cause of this drop may be poor management, but a more likely cause is probably due to expansion; the drop in ROA and ROE for SU clearly indicates an increase in exploration, development and/or acquisitions of new oil fields. This is clearly seen in the 2009 numbers, where the drop in ROA was caused by the larger increase in assets and the drop in ROE was due to the all stock nature of the deal, while margins dropped further due to redundancies in the operation. The same can also be said about IMO-2009 ratios; it seems that IMO also acquired new properties, as indicated by a similar decrease in ROA and ROE. For most industries, a low asset turnover rate is welcomed since it indicates effective management and a less leverage operation, but for companies in the oil, gas and mining sector the exact opposite is true. Since the company’s ability to continue generating revenue is positively correlated to the amount of resources producing properties it operates, therefore a larger amount of fixed assets is required. So seeing a sudden plunge in the asset turnover often indicates an increase in deposits through new acquisitions or exploration, this happens to be the case for both SU and IMO in 2009. On the liquidity front, both companies have done a good job maintaining their current ratio around one
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Assignment 2 - BU383 T Winter 2010 Assignment #2 Suncor...

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