ANALYSIS FOR OIL AND PETROEUM SECTOR SHELL PAKISTAN:- In the year 2009 the inventory turnover for shell was 6 days and 11 days respectively for raw materials and finished goods.
As compared to other firms in the same industry this is lower. This tells us that Shell is moving towards the process of just in time inventory and this is good for its future reduction in cost. Moreover we can see that the company enjoys an 11% return on its assets which is a good sign.An important point to note here is that inventory is a significant part of the total assists for the firm. This is understandable if we see the expensive price of fuel today.
ATTOCK PETROLEUM Inventory turnover for Raw materials in Attock petroleum is 50. 36; this shows how fast Raw Material inventory is converted manufactured goods. It takes 7 days for Attock Petroleum to convert its Raw Materials to Finished Goods. This period is shorter as compared to the other companies.
This means Attock Petroleum is efficient in managing and selling its inventory. But the inventory Turnover of Finished Goods is low and it requires 15 days to sell Finished Product. This is inefficient and is moving away from just in time method although with regard to conversion of raw materials into manufactured goods, the company is moving towards JIT. Its total inventory as percentage of total assets is low which means it has lower inventory levels as compared to other firms and this makes it more towards JIT.Although the Gross margin % of Attock is low, its net profit margin is high, showing relatively higher production expenses and lower operating expenses. Its return on assets is average as compared to other companies. NATIONAL REFINERY LIMITED Inventory turnover for Raw materials in National refinery limited is 15 which is very low for the industry.
Also it takes 24 days for National Refinery to convert their raw material into manufactured goods and this is very slow and huge amount of raw material inventories are maintained.On the other hand inventory Turnover of Finished Goods is low and it requires 14 days to sell Finished Product. Both the inventory turnover of raw materials and finished goods show that the company is inefficient in processing its inventory and is moving away from just in time method. National Refinery’s total inventory as percentage of total assets is 29% which means it has higher as compared to other firms and this takes it away from JIT. The Gross and Net margin are 5% and 1% respectively which is average while the return on assets is higher.PAKISTAN REFINERY The return on assets for Pakistan Refinery is -11% as compared to the industry average of 5%, which means that the profits are actually negative compared with the company’s investment. This also indicates that in the long run, it cannot grow faster unless it issues more shares or borrows externally.
Inventory days for raw material and finished goods are 28 and 11, as compared to the industry average of 68 and 11, which means that the finished goods are operating at the precise level of the industry.Just-in-time inventory is applied in this organization, which is useful because the inventory days for raw materials are less and require frequent purchases. Gross margin is -4 compared to the benchmark of 4%; net margin is -6 in contrast to industry 1%. As it is evident, there is negative correlation between all the variables discussed in the analysis. But those that possess strong negative correlation are raw material days to finished good days and finished goods days to inventory as % of assets. ATTOCK REFINERY LIMITED Attock Refinery Ltd. ARL) is an oil refinery which uses crude oil as a raw material and produces refined oil as the finished goods. The inventory days of this company is low compared to the industry average.
(This might be because the average has been upset by the presence of Attock Petroleum in the study, which is an extraction company and has operations different to refineries. ) Comparing ARL to the other refineries shows a low Inventory Days RM measure meaning ARL purchases Raw Materials more frequently than the others. However, it does not sell off its finished goods as soon as the other companies.
The GP Margin of ARL is almost equal to the industry average showing that ARL has product costs that are near to the other firms’. The NP Margin is also similar to the other firms; however, it is quite higher than the industry average due to the huge losses of Pakistan Refinery that have brought down averages. Attock Refinery has a very low stock of inventory compared to the other companies as was seen earlier by the Inventory Days RM measure. This means that ARL is closer to JIT than the other firms on the industry.Using this policy ARL has earned comparable returns on assets to the other players.
These returns are still below the industry average, which might be due to numerous factors, such as lower Sales. OVERALL IN THE OIL AND PETROLEUM SECTOR:- The correlation coefficient for the industry is negative which tells us that the higher inventory days whether finished goods or raw material are negatively related to the profitability of the firm. This tells us that if these companies want added profitability they must move towards JIT.