COMPANY ANALYSIS OF EXXONMOBIL’S 2003-2007 FINANCIAL DATA

LIZ ANDERSON, GILLIAN GUTHRIE, JEN HARGREAVES, EMILY STEYER, SARAH STRUEBYCOMPANY ANALYSIS

BUSA 302: FINANCE FOR MANAGERS

PACIFIC LUTHERAN UNIVERSITY

DR. FREDERICK WOLF

DECEMBER 19, 2008

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TABLE OF CONTENTS

EXECUTIVE SUMMARY …………………………………………………………………………………………………………... 3

INTRODUCTION ………………………………………………………………………………………………………………….... 4

OBJECTIVES ………………………………………………………………………………………………………….…………….. 4

METHODS…………………………………………………………………………………………………………………………... 4

ANALYSIS ……………………………………………………………………………………………………………………………. 5

XOM RATIOS COMPARED TO 2008 INDUSTRY AVERAGE ……………………………………………………. 5

INDUSTRY FINANCIAL RATIOS PLOTTED AS FIVE YEAR TRENDS ……………………………………………… 6

A. LIQUIDITY ……………………………………………………………………………………………... 6

B. PROFITABILITY …………………………………………………………………………………….….. 9

C. ACTIVITY …………………………………………………………………………………………..….. 12

D. DIVIDENDS …………………………………………………………………………………….……… 16

E. MARKET VALUATION …………………………………………………………………….………… 19

F. DEBT ……………………………………………………………………………………....………….. 23

DISCUSSION ……………………………………………………………………………………………………………............. 23

2009 FORECAST OF SALES ………………………………………………………………………………..…….…. 23

ORDINARY LEAST SQUARES ………………………………………………………………..…………... 23

PRO FORMA ……………………………………………………………………………………………………………. 24

2003-2007 BOND RATINGS ………………………………………………………………….………. 26

EFFECTS OF DEFLATION ON U.S. ECONOMY ……….……………………………………….…………………….………. 26

CONCLUSION ………………………………………………………………………………………………………….….………. 28

RECOMMENDATIONS …………………………………………………………………………………………………..……….. 28

ENDNOTES ……………………………………………………………………………………………………………….………… 30

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EXECUTIVE SUMMARY

Our team analyzed ExxonMobil’s financial data from 2003 through 2007. We

implemented several different tools to analyze their data including: JMP software, a forecast of

sales, a regression analysis, a scenario based pro forma including a parametric sensitivity

analysis, as well as a times series based graphs across the industry.

Through analyzing ExxonMobil’s data as compared to the competing petroleum

companies, we calculated several metrics that demonstrate ExxonMobil’s ability to generate

high profit margins, a high return on equity, and a significant return on assets. The latter figure

suggests management has done a sufficient job in managing the appropriate allocation of

resources. For the most part, ExxonMobil outperforms its industry competitors: BP, Shell, Total

and Valero. However, as investors interested in returns, we noticed Exxon’s dividend payout

illustrated a declining trend even though their profits show an ever-increasing trend.

Despite the decreasing trend in dividend ratios, we would recommend investing in

ExxonMobil as there this company demonstrates a high potential for returns.

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INTRODUCTION

Our company analysis encompasses ExxonMobil Corporation; the largest publically

‘integrated Oil and Gas Company in the world’i. In our analysis, we examine ExxonMobil’s 2003

to 2007 sales data, compile a regression and scenario based pro forma, and their liquidity,

profitability, activity, dividend, market valuation, and debt financial ratios. We graph this data

against the industry average to see how ExxonMobil compares to its oil competitors; we also

conduct individual ratio comparisons between ExxonMobil and BP, Shell, Total and Valero oil

companies to grasp the overall productivity of the firm. The purpose of this thorough financial

data analysis is to determine whether advising potential investors to add ExxonMobil equity to

their portfolio will serve as an unprofitable or lucrative decision.

OBJECTIVE

The primary objective of this assignment is to analyze ExxonMobil’s 2003-2007 financial

data and to then determine whether it would be financially prudent or imprudent to advise

potential investors to include ExxonMobil in their investment portfolio.

METHODS

To thoroughly analyze ExxonMobil’s financial data, our team utilized several different

techniques and metrics; we compared the data against the industry average, conducted a

regression and scenario based sales forecast, a pro forma analysis including a parametric

sensitivity analysis, conducted a time series visual analyses by plotting the financial ratios as five

year trends and a comprehensive description of how deflation affects the U.S. economy.

To construct the 2009 sales forecast, we calculated three realistic percentage increases

and decreases for 2007 sales data in addition to analysis of results found using software known

as JMP. The pro forma is a model and as such it should be noted, the numbers are in fact

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estimates. Because sales are a dependent variable, it can be manipulated by one or more

independent variables; specifically, we chose to forecast sales based on the United States’ gross

domestic product. GDP is the metric that indicates national income and input for a country’s

economy and combines consumption, gross investment, government spending, and the

difference between exports and imports; with that said it seems logical to forecast sales based

on GDPii. Furthermore, we looked up Standard & Poor’s bond ratings for ExxonMobil during the

past five years to better evaluate the potential for ExxonMobil to default on their loans.

ANALYSIS

EXXONMOBIL COMPARED TO INDUSTRY AVERAGE VALUE LINE

We averaged each of ExxonMobil’s financial ratios from 2003 to 2007 and compared

these to the 2008 industry average value line. We quickly noticed ExxonMobil’s extremely high

debt to equity ratio of 91.5 as compared to the industry average of 19.2. While this kind of

leverage would typically be disconcerting to an investor, because ExxonMobil has a healthy ROA

of 15.48 and an ROE of 29.86, the company still generates enough profits to cover its short-

term obligations as evidenced by their average acid-test ratio of 1.232. Additionally, while

ExxonMobil’s average gross profit margin sits over 25% above the industry average, their net

and operating margins sit relatively lower than the industry averages. With 2007’s fiscal year

revenue topping out at $404.5 billion, it’s not surprising that ExxonMobil’s squashes it’s

competition with an average price to cash flow of $71.5 as compared to the low industry

average of $8.08.

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Here is the comparative data table:

2008 Value Line XOM AVG

LiquidityQuick Ratio 0.92 1.232

Current 1.19 1.46D/E 19.15 91.48

ProfitabilityGross Margin 26.9 52%

Operating Margin 17.8 14.28%Net Profit Margin 17.6 11.36%

ValuationP/E 11.93 11.88

P/Book 2.86 18.3Price/Cash Flow 8.08 71.53

OtherROA 12.5 15.48%ROE 26.9 29.86%

INDUSTRY RATIOS PLOTTED AS FIVE YEAR TRENDS

LIQUIDITY RATIOS

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The current ratio can give an understanding of how quickly a company can turn product into

cash. Also, it can give a sense of how effective their operating cycle is. ExxonMobil has a decent current

ratio, and has the ability to pay off its short term obligations.

Quick Ratio/Acid Test calculates the ability to pay off its short term obligations with the most

liquid assets. The higher the quick ratio, the better position the company is in.

Although 2003 is under 1, ExxonMobil has increased their quick ratio from 2004 to the present.

The quick ratio can be a better tool to measure the ability to pay short term obligations. This is so

because inventory is excluded from current assets. The quick ratio indicates that ExxonMobil can meet

the short term obligations with their most liquid assets.

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Working capital determines if a company can pay off short-term liabilities. ExxonMobil has a

positive working capital meaning it can pay off short-term liabilities. Working capital also gives investors

a tool to determine if the company if operating effectively.

ExxonMobil’s working capital is positive; therefore it can pay off short-term liabilities. The dollar

amount above does not include money that is tied up in inventory or money that customers still owe to

the company. Therefore the above figures are sufficed to pay their short term obligations.

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PROFITABILITY RATIOS

Because this compares net income with sales, it really helped our group see how this petroleum

company was doing in terms of the net profit margin. This company is so large, that it is nearly

impossible to look at the other profit margins and make a good analysis. With the net profit margin we

are able to look at ExxonMobil’s profit margin after taxes. This is necessary because there are so many

costs, including expenses and taxes that are associated with the petroleum industry. Although we can

draw conclusions from this margin, it will not really be reliable in the next two years. As investors, we

need to remember that taxes and regulations are likely going to change over the next few years when

Obama steps into office. However, if we were to look at ExxonMobil’s net profit margin right now and

make predictions, their situation looks a little shaky. Their NPM from 2003 to 2007 has a low of 9.1% and

a high of 18.4% in 2006. The percentages increased by nearly nine points until 2007, when it dropped

about four points. This sudden decrease might have happened for a number of reasons, one of which

being the decreased production of oil in 2007 by U.S. oil companies. The consumption of oil in 2007

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would explain this decrease in production. The consumption in 2007 increased by only 0.5% after the

2006 decrease of 0.5% in consumption. This would make sense, because oil companies have had to rake

in relatively low profit margins. For the most part, the percentages for ExxonMobil are lower than the

industry average. This lower profit margin might show that they are participating in a pricing strategy. It

could also potentially be an illustration that managers at ExxonMobil might not be running its business

effectively.

The return on assets ratio assisted our group in determining what earnings have come from

invested capital. ExxonMobil’s high return on assets (of 15.48 on average) gives us reason to believe

that the company is doing well. Much like we see in the trend of their net profit margin, the ROA

steadily increases every year until 2007, where it decreases. This is probably affected by the

consumption and demand in the economy. This number is very dependent on the price of oil, which as

we know has been a little volatile in the past few years. The really encouraging thing about its ROA is

that, with the exception of 2003, it has consistently remained above the industry average for each of the

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past five years. This means that ExxonMobil is more successful than its competitors when it comes to

converting the money it has invested into net income. It also indicates that ExxonMobil is effectively

using the money it invests, which investors should definitely look at when deciding to buy stock. As

stated by Investopedia, “Anybody can make a profit by throwing a ton of money at a problem, but very

few managers excel at making large profits with little investment.iii”

This ratio is all about leverage. We noticed that ExxonMobil’s return on equity is a little below

the industry average for 2003 and 2004 and quite a bit above the industry average from 2005 to 2007.

ExxonMobil’s return on equity ranges from 23.9% in 2003 to 33% in 2007, with a peak percentage of

35% in 2006. This means that on average, every dollar invested creates 30 cents of assets. This helped

us figure out that this business is most likely a sound investment. Really though, we could not really say

whether the investments are effective without knowing what they are investing their money in. Overall

however, it seems like we can have faith in their profitability when it comes to return on equity.

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ACTIVITY RATIOS

The interest coverage ratio is used to verify how well ExxonMobil is able to pay its interest on

debt. Low interest coverage ratios suggest that the company has more difficulty paying debt interest.

We actually measure how many times Exxon can pay its interest payments with before tax and interest

dollars. The interest coverage ratio of Exxon is very large compared to the rest of the industry. Its five

year average is around 125. Currently for 2007, the rate is 177. Investors generally look at this ratio

with the idea that anything over 1.5 is good. Based on interest coverage, ExxonMobil would be a great

investment.

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ExxonMobil’s low cash flow to long term debt indicates it has the least amount of cash to pay off

its long term debt. However, given the ROA, ROE and P/E, cash flow to long term debt is not necessarily

something an investor needs to be concerned with regard to ExxonMobil. Apparently, Shell has the most

money floating around to pay off its long term debt.

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The debt to equity ratio illustrates the financial leverage of a company. This shows how much of

the company is being financed by debt rather than equity. ExxonMobil’s five year average is .91. A debt

to equity ratio of 91% signifies that their company is highly leveraged through debt. By comparison, the

industry average is around 1.4. ExxonMobil in general has a significantly higher ratio compared to other

companies. This means that Exxon funds its company with more debt and less equity than other

companies. We should emphasize that even though ExxonMobil is highly leveraged through debt

financing, they are a stable company based on the supporting metrics.

Earnings before interest, taxes, depreciation and amortization measures profitability

and disregards how the company finances or does their books. As far as EBITDA goes,

ExxonMobil is about even with the rest of the inventory as a percentage of sales. Using this

ratio allows investors to evaluate income regardless of the company’s accounting policies—

including whether they use the accrual or cash accounting method.

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INVENTORY TURNOVER

ExxonMobilExxonMobil 20032003 20042004 20052005 20062006 20072007Inventory Turnover 11.9 14.7 19.9 18.5 17.99

We included the next three ratios to provide a more thorough company analysis:

inventory turnover, average collection period, and total asset turnover.

Inventory turnover measures how much the company sells and replaces inventory

within their business cycle. ExxonMobil’s average five year inventory turnover is 16.6 days.

This ratio can mean many things. Comparing Exxon to the industry, ExxonMobil is steady with

its competing companies.

Investors and businesses can use this ratio to determine whether inventory purchasing

is satisfactory. If the ratio is low it may mean that there is too much inventory being purchased.

Vice versa, if the ratio is high; this may mean that the company could be losing business from

lack of available inventory.

Average Collection Period

ExxonMobilExxonMobil 20032003 20042004 20052005 20062006 20072007Average Collection Period 37.4 31.78 27.95 28.9 34.08

Average collection period measures how long it takes for the company to collect from its

accounts receivable. ExxonMobil had a five year average of 32 days which is normal within the

industry.

A good average collection period is to turn its collectibles into cash to therefore increase

cash flow. This cash flow is essential to business activities including paying off debt. They can

also use the ratio to predict incoming cash flows. They may then base payments on projected

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available cash. Businesses can also evaluate how their credit and collection policies are working

and adjust them where they see fit. If collection periods are longer than normal, changes may

need to be made to the department and policies.

TOTAL ASSET TURNOVER

ExxonMobilExxonMobil 20032003 20042004 20052005 20062006 20072007Total Asset Turnover 1.4 1.49 1.72 1.67 1.61

Asset turnover measures how successful the company is in using its assets to generate sales. It

can also show the productivity of the fixed assets.

ExxonMobil has a five year average of 1.6 which is somewhat low. This is at the lower end of the

industry as a whole. This means that other companies within the industry are using their assets more

efficiently to generate sales.

ExxonMobil’s asset turnover began to decline after 2005. This may imply that ExxonMobil may

have overly invested in assets. They may have too much money tied up in assets where they could be of

better use elsewhere.

DIVIDENDS RATIOS

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Dividend yield is calculated by dividing the annual dividend rate by the stock price per

share. This metric shows the relationship between how much the company pays out in

dividends each year and the company’s share price.

This ratio is important from an investor’s standpoint because the investor will prefer to

buy shares of common stock in a company with a higher dividend yield ratio. If two companies

have the same share price, but one company has a higher dividend yield ratio, that company is

more valuable to the investor.

From a company standpoint, the dividend yield ratio is important to pay attention to

because it is an indication of the value of the common stock.

While ExxonMobil’s stock price increased from 2003 to 2007, the annual dividend rate

has not increased at the same rate, causing the dividend yield ratio to decrease fairly gradually

over this five year span. The largest drops were between 2003 and 2004 decreasing by .32%

and 2005 and 2006 decreasing by .36%.

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Dividend Payout is simply the annual dividend Rate divided by earnings per share; or

dividends divided by net Income.

The dividend payout ratio is the percentage of earnings paid to shareholders in

dividends each year. According to Investopedia, the payout ratio gives an idea of how well

earnings support the dividend paymentsiv. For example, companies with higher earnings usually

have higher payout ratios.

For our analysis we used this formula: Dividends Paid on Common Stock/ Net Income.

Through this calculation, we derived our dividend payout ratios for ExxonMobil for the years

2003-2007.

It seems that although ExxonMobil’s Net Income increased from 2003-2007, the

percentage of the net earnings paid to shareholder’s in dividends decreased by 11.5% over the

past five years. As visible in the graph above, the decrease in dividend payout was significant

from 2003 to 2004, and the greatest between 2004 and 2005, and then only slightly decreased

from 2005-2007.

i www.nationmaster.com/encyclopedia/bon-credit-rating

ii Wolf, F. (2008). Forecasting sales for use in pro forma; Chapter 3. PowerPoint Slide 11.

iii www.investopedia.com

iv www.Investopedia.com

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MARKET VALUATION RATIOS

The price to earnings ratio compares the stock price to the earnings per share.

ExxonMobil’s average P/E over the last 5 years is 11.88. Aside from BP’s ratios, ExxonMobil’s

ratios are relatively higher than the rest of the industry. A P/E ratio of 11.88 indicates that it

will take approximately 11.88 years to earn back the total investment amount.

Investors should look for higher P/E ratios. This indicates a higher rate of return per unit

invested. This ratio can be compared to other companies to determine the best return

assuming all other aspects are similar. Shells significantly higher P/E suggests that there may be

overconfidence among its investors as they are willing to pay significantly more per dollar of

earnings than any other company within the industry.

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Price to cash flows ratio measures how well a company will be able to withstand the

future financially. It compares cash flow to market value.

ExxonMobil has a five year average of 71.5. This ratio does not include any depreciation

or other aspects that do not involve cash flow. This ratio also excludes depreciation expense

which can have extreme variance depending on depreciation methods and the amount of

depreciable fixed assets. Aside from BP’s ratios, ExxonMobil has relatively higher price to cash

flow ratios than the rest of its competitors as illustrated by the following graph that excludes

BP’s ratio.

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Cash flow per share also measures the financial power of the company. This number is

also used in calculating price to cash flow ratio. ExxonMobil’s five year average is 1.06. Shell

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appears to be dominating the industry with regard to this ratio. This ratio may replace earnings

per share. Some investors place more emphasis on the price to earnings ratio rather on the

cash flow per share because it is more accurate.

This ratio compares the company’s book stock price to market stock price. ExxonMobil’s

five year average price to book ratio is 18.29. This is average for the industry. Investors can get

a better idea as to whether the price they are paying for stock is inflated. If this ratio is low

however, it could mean that either the stock price is too low or there is something bad

happening to the company. If this is the case, more investigation is needed.

Again, despite not having the other company’s figures, our team is including two extra

ratios for a more thorough analysis of ExxonMobil: debt to assets and debt to equity.

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DEBT RATIOS

DEBT TO ASSETS

ExxonMobilExxonMobil 20032003 20042004 20052005 20062006 20072007Debt to Assets 48.40% 47.90% 46.60% 48% 47.90%

ExxonMobil’s debt to assets ratio suggests that relatively half of their company is leveraged

though debt. Because we did not have this information for the competing companies, we were unable

to determine how ExxonMobil compares to the industry.

Debt to Equity

ExxonMobilExxonMobil 20032003 20042004 20052005 20062006 20072007Debt to Equity 93.80% 91.90% 87.40% 92.40% 91.90%

Exxon’s debt to equity figures demonstrates the fact that this company is leveraged

through a significant amount debt and may potentially contain a similar amount of inherent

risk. Again, because of their healthy ROA and ROE as well as P/E ratios, this high amount of

leverage does not necessarily equate to significant risk.

DISCUSSION

Using the JMP software application, we were able to conduct an ordinary least squares

or, regression analysis; through this analysis, we were able to determine an R2 of .9522; this

means 95.22% of the variation in ExxonMobil’s sales is explained by the changes in the U.S.

GDP. JMP also calculated ExxonMobil’s F ratio to equal .797; this figure is used to determine the

statistical significance that the U.S. GDP has on ExxonMobil’s sales. The fact that his number is

slightly higher than 0.05 indicates that there is a .0797 possibility that the outcome was

random.

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To forecast 2009 sales for ExxonMobil, we took the U.S. GDP and postulated three

separate scenarios for years 2002-2009: a best case assuming a 1.8% increase, a likely case of a

1.3% increase, and a worst case scenario assuming a 0.7% increase. As mentioned earlier, sales

are a dependent variable and can be manipulated by one or more independent variables.

Because we are dealing with an energy company and most all economies require a steady

supply of energy consumption to function (and thus generate profits), we chose to forecast

sales based on the United States’ gross domestic product. First, we calculated the U.S. GDP for

years 2002 through 2009 using the same three scenarios as parameters: best case, likely case

and worst case. Below is a table depicting our resulting calculations.

YEAR U.S. GDP (in Billions $)

BEST U.S. GDP: 1.8% INCREASE

LIKELY U.S. GDP: 1.3% INCREASE

WORST U.S. GDP: 0.7% INCREASE

2002 10,469 10,657.44 10,605.10 10,542.282003 10,991 11,188.84 11,133.88 11,067.942004 11,712 11,922.82 11,864.26 11,793.982005 12,457 12,681.23 12,618.94 12,544.202006 13,253 13,491.55 13,425.29 13,345.772007 13,750 13,997.50 13,928.75 13,846.252008 13,970 14,221.46 14,151.61 14,067.792009 14,152 14,406.34 14,335.58 14,250.67

Next, we calculated the 2008 and 2009 values with the help of JMP software. With this

software we were able to determine the slope in addition to the y-intercept values which we

plugged into the linear equation Y=mX+b replacing X with the U.S. GDP to determine the

forecasted ExxonMobil sales. Then we built upon the 2007 sales data to find the 2008 and 2009

sales data. Below is our scenario based forecasted sales, as determined by U.S. GDP:

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YEAR XOM SALES (in Billions $)

BEST SALES: 1.8% INCREASE

LIKELY SALES: 1.3% INCREASE

WORST SALES: 0.7% INCREASE

2002 204,506.00 208,187.11 207,164.58 205,937.542003 237,054.00 241,320.97 240,135.70 238,713.382004 291,252.00 296,494.54 295,038.28 293,290.762005 358,955.00 365,416.19 363,621.42 361,467.692006 365,467.00 372,045.41 370,218.07 368,025.272007 390,328.00 397,353.90 395,402.26 393,060.302008 348,438.20 354,710.09 352,967.90 350,877.272009 370,289.80 376,955.02 375,103.57 372,881.83

Building upon this scenario based analysis and expanding the pro forma, we conducted

a parametric sensitivity analysis to determine the need for external funding otherwise known as

PLUG. Through a pre-programmed excel spreadsheet, we manipulated the anticipated 2009 net

sales, interest and tax rates. We used a realistic tax rate of 35% for year 2007, then varied this

figure by 15%, and compared the scenarios of ExxonMobil’s 2009 predicted sales. We also

played with the interest rate beginning with 7% in 2007 and increasing it to 10% in 2009 to

determine the effect the difference would have on ExxonMobil’s need for external funding.

Below are our findings; keep in mind, there is a counterintuitive understanding of the signs:

negative numbers indicate that the company has enough capital floating around internally and

will not need external funding, while a positive number signifies the firm will require external

funding to stay afloat. In ExxonMobil’s case, in all three scenarios, they do not require any

external funding.

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2009 Sales (Best) Interest Rate Tax Rate External Funding Needed$376,955 0.7% 40% -$122,602.00

  0.7% 20% -$153,312.00  10% 40% -$124,339.00  10% 20% $156,309.00

2009 Sales (Likely) Interest Rate Tax Rate External Funding Needed$375,104 0.7% 40% -$122,003.00

  0.7% 20% -$152,562.00  10% 40% -$123,731.00  10% 20% -$155,544.00

2009 Sales (Worst) Interest Rate Tax Rate External Funding Needed$372,882 0.7% 40% -$121,285.00

  0.7% 20% -$151,662.00  10% 40% -$123,002.00  10% 20% -$154,625.00

2003-2007 S&P BOND RATINGS FOR EXXONMOBILV

2003 2004 2005 2006 2007AAA AAA AAA AAA AAA

EFFECT OF DEFLATION ON U.S. ECONOMY

A growing fear among economists and financial analysts’ lies in the implicit negative

relationships that arise from ‘stag-deflation.vi’ Deflation refers to a sustained fall in general

prices resulting in increased unemployment, and decreased money supply. It is caused

specifically by the diminishing supply and demand of money in conjunction with the supply of

goods going up. The resulting affects of deflation are pervasive and will adversely affect

business, employment, capital expansion loans, and equity markets. In general, businesses will

v www.nationmaster.com/encyclopedia/bon-credit-rating

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suffer decreased profits as demand plummets and firms ‘cut prices to reduce inventoryvii’; this

consequentially decreases their net income and the profits; this is a situation which may force

them to close some or all of their facilities. Diminished profits will increase a companies’

likelihood to default on their loans. Furthermore, if demand goes down, prices go down and

thus unemployment increases, which can potentially lead to an economic depression. As

mentioned above, the default risk on loans will increase which negatively affects banks and

creditors’ willingness to give out loans for capital expansion; this dramatically diminishes loan

capability. This will also affects one’s ability to get loans for a car, a house, or other major

purchases. Because investor confidence will weaken, fewer investors will be willing to invest

their money in equity markets and stock values will go down. Additionally, with less

contributed capital, people will hoard their money and consumers will not spend; if they don’t

invest, equity markets decrease. Consumer spending drives two-thirds of economic growth and

the current pullback has exacerbated the economic slowdownviii. Overall, prices may go down,

yet no one can afford to buy anything.

Hiring freezes within firms are one primary implication of deflation; this means fewer

opportunities for recent graduates to find a solid job. Furthermore, management will be less

likely to give their employees raises. While prices remain stable, interest rates and discount

rates go up and equity valuation goes down. Companies will sell their stock at much lower rates

vi Nouriel, Roubini. (2008). How to avoid the horrors of ‘stag-deflation.’ Retrieved from www.ft.com/cms/s on December 10, 2008.

vii Nouriel, Roubini. (2008). How to avoid the horrors of ‘stag-deflation.’ Retrieved from www.ft.com/cms/s on December 10, 2008.

viii Twin, Alexandra (2008). “DOW plunges 680 points stocks slump as U.S. recession is officially called and signs point to a prolonged slowdown.” Retrieved from www.CNNMoney.com on December 1, 2008.

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than what they are worth. An investor may see this as a prime opportunity to add significantly

undervalued investments with high expected returns to their portfolio.

Fortunately, there are at least a few actions that can be taken to correct the adverse effects

of deflation: the government can increase the money supply to stimulate economic growth and

thus, consumer spending; they cannot however, raise taxes because it will only lead to an

increase in yet more taxes. The government must also force money back into the banks to

supply them with the necessary confidence to issue loans again. While the government will be

incurring enormous deficits, they should embrace the deficit with the hope of eventual

economic growth.

CONCLUSIONS

The quick and dirty company investment analysis includes three metrics: a high return

on equity, a high return on assets, and a fair price to earnings ratio. By averaging the financial

data from years 2003 through 2007, ExxonMobil’s data revealed a fantastic 30% return on

equity, a decent 15.48% return on assets and a fair $11.88 price to earnings ratio. Furthermore,

ExxonMobil’s net profit margin is ever increasing; in 2003, NPM equaled 9.1% and gradually

grew to 18.1% in 2007. This upward trend in profits is comforting to potential investors. As

compared to the industry competitors, ExxonMobil outperforms in the majority of the financial

ratio analyses. While we did observe a considerably higher debt to equity and debt to asset, we

did not compare these figured to the industry as we were not supplied with that information.

Despite ExxonMobil’s increasing net profit margin, we did observe a decreasing trend in

dividend yield and payout; fortunately, this trend was consistent across the industry and is

indicative of the recently volatile external economic dynamics.

RECOMMENDATIONS

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Based on our analysis and findings, we believe investors who wish to acquire

ExxonMobil’s equity will prosper. We back this recommendation on ExxonMobil’s increasing

trend in their working capital, net profit margin, ROE, EBITDA, price to cash flow, and price to

book ratios. Their relatively high current ratio, acid (or quick-test) ratio, ROA, and interest

coverage also indicate a high potential of returns. The only warnings our team feel compelled

to mention include ExxonMobil’s gradually decreasing trend in dividend yield and payout as

well as cash flow per share. Overall, we recommend an investment in ExxonMobil Corporation

will provide returns.

30

ENDNOTES