There is currently a high demand in energy in the market, so what better way to take advantage of the situation than invest in an energy company? For this study, I chose Sunoco, Inc. Sunoco refines and markets petroleum. The company has a refining capacity of 910,000 barrels per day from five refineries and also has around 4,700 retail sites. Sunoco also manufactures petrochemicals that are used in making fibers, plastics, film and resins. The company also manufactures metallurgical-grade coke that is used by the steel industry.
With headquarters in Philadelphia, Sunoco’s petroleum and petrochemicals operations are done mainly in the eastern part of the country. Its cokemaking facilities are located in Virginia, Indiana, Ohio and Brazil. The company’s shares trade at the New York Stock Exchange under the symbol SUN. The good thing about Sunoco is that it has a very comprehensive company website and it is a public company. Being a public company, its financial statements can be accessed through the website of the U. S. Securities and Exchange Commission. From the data obtained in the company’s financial statements, revenues for the year ended 2007 went up to $44.
73 billion from $38. 72 billion in 2006. Due to an increase in the price of crude oil, costs and expenses also went up $43. 32 billion in 2007 compared to $37. 14 billion in 2006. As result, net income for the year ended 2007 went down to $891 million from $979 million in 2006. The company’s balance sheet showed that as of Dec. 31, 2007, total assets was $12. 4 billion while total liabilities was $9. 9 billion resulting in a shareholders’ equity of $2. 5 billion. In terms of profitability, the company only had a profit margin of 2%. Return on assets for 2007 was 8% while return on equity was 39%.
For the year ended 2007, the company was illiquid with a current ratio of 0. 82 and quick ratio of 0. 62. Working capital to total assets ratio was at negative 0. 08. Doing computations further showed that the company had a shareholders’ equity ratio of 0. 20. The ratio of current assets to total debts was 0. 63 while debt ratio was 0. 59. In relation to asset management, Sunoco had total assets turnover ratio of 3. 58, fixed asset turnover ration of 6. 32 and receivables turnover of 15. 66. The company’s financial statement also showed that it had a free cash flow of $191 million.
Return on investment using the DuPont formula was 7%. Additionally, the company’s stocks are trading at a little more above $50. This is actually a drop considering that the company’s shares traded at around $80 in the middle of 2007. So, should I start investing in this company? Based on the results as well as the financial analysis made, I would say that the best judgment would be to hold buying stocks and see what happens during the first two quarters of 2008. Although initially thought of as a good investment, the findings show that the company had trouble recouping expenses due to the increase in the price of crude oil.
Profit margin was in fact only 2%. The company is also likely to face more problems given that it had a negative net working capital ratio. In regulatory filings, the company said that it intends to focus on upgrading its products instead of undergoing expansions. This is a good sign since it could help cut costs in the long run. If the company does encounter problems, it could always address liquidity issues by putting on hold its share repurchase program. The company had actually done this in 2002. Overall, the attitude with regards to an investment with Sunoco is more of a “wait and see.
” If I decide immediately to say “yes” to buying stocks now, I run the risk of losing big. If I say “no,” then there is also the chance that I might miss a good investment. The company has released good estimates for the year 2008 but with the price of crude oil continuing to go up, it would be best to see how the company deals with this problem before making a final investment decision.
Ross, S. A. , Westerfield, R. W. , & Jordan, B. (2008) Fundamentals of Corporate Finance 8th Edition. McGraw-Hill/Irwin.