Annual Reports and Financial Information Analysis of Afren Plc

Introduction or “What is Financial Information?”

Financial statements are annual reports prepared by companies for both internal and external users. Such reports are aimed at allowing the users of financial statements to go through all the information about the company. The reports comprise not only financial information about the company but also other details about the business of the company and various details about its functioning. With the help of such information, the users of the financial information are able to draw the conclusion about whether it is beneficial for them to continue their cooperation with the company or not.

Users of Financial Information

There are a lot of users of financial information. The users can be classified into the following groups: internal users and external users. Internal users are managers, owners and employees of the company whereas external users comprise investors, financial institutions, government, vendors, media etc. Each of the users analyses the financial statements according to their requirements; for example, investors will be keen on getting to know the return on capital employed, return on equity, net profit margin, etc. The employees are interested in learning about the current ratio, quick ratio and solvency ratio of the company because this information enables them to make collective bargaining agreements.

Afren Plc (AFR)

Being a vigorous entrepreneurial organisation, Afren Plc has numerous world class asserts situated in the hydrocarbon basins of the Middle East and Africa which are considered to be the most prolific and rapidly growing areas of such kind in the world. The activities of the organisation include the full cycle E&P value chain up to the stage of production through exploration, appraisal and subsequent development. Distinct and consistent strategies of Afren, its ability to provide all the stakeholders with long-term value and responsibilities that go beyond the operations determine the success of the company.

In order to turn the effective portfolio, track record of operational delivery and financial management of the company to good advantage, its business was located in three major business units, in particular the Kurdistan region of Iraq, Afren, East Africa Exploration, and West Africa including Nigeria. The company did very well in 2012 for all intents and purposes. Production was at the record level; the Kurdistan region of Iraq and Nigeria experienced outstanding exploration success and the financial results were impressive. The company traditionally issued its annual report for the year 2012. This financial report will be utilized by the users for different purposes. Different users of financial information will use the report in the following manner.

1. Investors

Since investors always seek new ventures which could provide them with high return, they will analyse the financial statements of Afren from their peculiar point of view, they will need to know the following ratio for the company over the period of the last five years:

Profitability 2008-12 2009-12 2010-12 2011-12 2012-12
Net Margin % -132.05 -5 14.17 20.4 13.57
Return on Assets % -9.18 -1.66 3.55 5.56 6.24
Financial Leverage (Average) 2.63 1.67 1.68 2.43 2.51
Return on Equity % -24.36 -3.33 5.97 11.78 15.44
Return on Invested Capital % -21.9 -4.77 2.93 2.06 7.67

From the above ratios we can see that the net margin of the company as an investor was very poor in 2008 and 2009 but it soon recovered in 2010, 2011 and 2012. The company in 2012 registered a net profit margin of 13.57% which means the company did fairly well as far as net profit margin is concerned. The return on assets has also improved since 2010 and reached to a decent level of 6.24%. The company did amazingly well in 2012 as to the return on equity; it reached 15.44% in 2012. The return on invested capital also went up to the level of 7.67% in 2012.

We can say that the company has done a good job in 2012 from the investor’s point of view as judged by all the ratios that improved a lot in 2012. It can be said that the company has demonstrated profitable past and can assure investors in the glorious future on the basis of its performance.

2. Managers

Managers are the most important people who ensure functioning of the organization; they use the financial statement information to assess the company performance. The managers make use of the income statement information to compare the sales done within a certain period to those of another period and use it to identify the possible problem areas.

This is of major importance because managers are those people who are responsible for making influential decisions. Managers are supposed to base their decisions on the balance sheet to decide what change should take place in assets and liabilities over a certain period. Moreover, they have to guarantee that those decisions which are made by them do not result in failures or create any problems for the entire organization. Since managers are insiders, they care about the operational information in the company. For example, the days sales outstanding (DSO) in 2008 was 111 days which is extremely high. Seeing that, the manager must have arrived at a serious decision and it can be seen that the same index decreased to only 19 days in the following year. Notwithstanding its subsequent gradual increase, it seemed normal from the business point of view.

Efficiency 2008-12 2009-12 2010-12 2011-12 2012-12
Days Sales Outstanding 111.63 19.12 25.23 48.88 42.98
Days Inventory 42.34 37.95 70.55 65.84 39.69
Payables Period 211.09 71 40.89 21.93 5.18
Cash Conversion Cycle -57.11 -13.93 54.88 92.79 77.5
Receivables Turnover 3.27 19.09 14.47 7.47 8.49
Inventory Turnover 8.62 9.62 5.17 5.54 9.2
Fixed Assets Turnover 0.14 0.7 0.51 0.49 0.89
Asset Turnover 0.07 0.33 0.25 0.27 0.46

3. Creditors

Creditors unlike managers are external users of information; they lend time to the company for the goods supplied to the company. Thus, they need the information from the financial statements to make lending decisions about the company. They require details of the income statements, the cash flow statements and the balance sheet. Creditors get to know the amount of income generated in the course of a certain period from the income statements. The correlation of the equity of the company with its liabilities is shown in the balance sheet. The creditors know that those companies that are known for high liabilities already have loans and base their decision on this information. The ability of the company to manage the available cash and meet the financial obligations can be seen in the statement of cash flows.

Creditors are also influential people since lack of their faith in the company will result in no loans. Thus, the company will not be able to do any business because credit is the backbone of doing all kinds of business. From a creditor’s point of view, the days inventory held by the company is essential because if the company holds too much of inventory, then the creditors will have to think twice. It can cause an unnecessary delay in getting their money from the company.

They will also be keen on knowing the payable period of the company, i.e. the time taken by the company for making payment to its creditors. In 2008, the ratio was very high which signifies a poor cash conversion cycle. However, it has improved a lot since then. We can say that the company’s results for the year 2012 will not leave its creditors dissatisfied and they will be happy to lend to Afren Plc.

Creditors 2008-12 2009-12 2010-12 2011-12 2012-12
Days Inventory 42.34 37.95 70.55 65.84 39.69
Payables Period 211.09 71 40.89 21.93 5.18
Interest Cover -0.31 1.02 4.12 2.81 13.46

4. Customer

Customers are also an integral part of the cash conversion cycle chain. The company is not always able to get money for the sales at once; it is a business practice to grant credit to the customers for payment of money. The company has improved its day’s sales outstanding ratio and receivable turnover ratio.

Customer 2008-12 2009-12 2010-12 2011-12 2012-12
Days Sales Outstanding 111.63 19.12 25.23 48.88 42.98
Receivables Turnover 3.27 19.09 14.47 7.47 8.49


Having analysed all the key figures and data, we can say that the company is doing well. Its cash conversion cycle in 2008 was negative but it has improved a lot since 2010. The company operates at a satisfactory level and it is expected that its profitability will increase in the future. The company will be able to satisfy the users of the financial statements and their expectations from the company. All four types of financial statement users and their peculiar features are discussed above. They use the financial data to assess the financial health of the company and make conclusions. The perspective of each of the user is different as well as their solutions to each of the problems.

Owing to the improvements seen in the performance of Afren Plc in 2012, it is expected that the company’s users will keep their confidence instated in the company and go on giving chances to the company depending on the global economic environment.

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