Santos Financial Analysis and Capital Budgeting Essay

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Santos Capital Budgeting and Financial Analysis

2a) Company Perspective

Working capital measures a company short-term financial health as well as a company's efficiency. To calculate a working capital ratio, the paper uses the following formula:

"Working Capital Ratio= Current Assets / Current Liabilities"

In other words, the working capital ratio measures a liquidity capability of a company that measures whether a company has enough working capital to settle its short-term liability. A working capital below one indicates a negative working capital revealing that a company will face challenges in settling its short-term liability. On the other a working capital of 1.2 and 2.0 reveals that a company has enough liquidity to settle its short liability. However, working capital above 2 shows that a company is not embarking on an investing policy.

The paper uses the following financial tools to measure the working capital efficiency of Santos Company:

Working Capital Ratio

Inventory Turnover Ratio

Santos Working Capital Efficiency ($Millions)

Working Capital Ratio

2014

2013

Total Current Assets

2065

2078

Total Current Liabilities

1946

Working Capital Ratio

2065/1946

2078/1726

Working Capital Ratio

1.06

1.20

The results of the Santos working capital efficiency reveals that the company has ability to settle its short-term liability in both 2013 and 2014 fiscal year. However, the results of the working capital ratio for 2013 fiscal year is more satisfactory than 2014 working capital ratio. The working capital ratio of 2013 fiscal year is 1.20, which is satisfactory compared to 2014 working capital ratio of 1.06 that is less satisfactory.

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Inventory Turnover Ratio

Similarly, Santos inventory turnover ratio for the 2013 fiscal year is better than the inventory turnover ratio for the 2014 fiscal year.

Santos Working Capital Efficiency ($Millions)

Working Capital Ratio

2014

2013

Inventory Turnover Ratio

Sales

Cost of Sales

Inventory

Inventory Ratio

2889/443

2505/419

Inventory Ratio

6.52

5.97

The inventory turnover ratio reveals the number of Santos replaces and sells its inventory in a given period. The company inventory ratio is 6.52 in 2014 and 5.97 in 2013. As being revealed in the calculation below, Santos sells its entire inventory within 52.36 days in 2013 fiscal year compared to 55.98 days for 2014 fiscal year.

2014= (1 + 6.52) x 365 = 55.98 days.

2013 =(1 + 6.97) x 365 = 52.36 days.

The overall results reveals that Santos performs better in term of working capital efficiency in 2013 fiscal year than 2014 fiscal year.

2b)

In 2014, the Santos financing technique is through long-term debt. In the 2014 fiscal year, Santos issued a long-term debt of $1.57 Billion, and Santos issued its debt directly into the financial market to source for fund to finance its long-term investment. The company relies on direct borrowing to finance its large-scale project. In essence, Santos uses direct debt financing technique to predominantly finance its debt. Moreover, the company used $122 Million to finance its debts during 2014 fiscal year. The Australian dollar is the predominant currency.....

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