We Said Buy At $96, Now 52 Week High Of $118, What Now? $CVX
We told you to hold off when $CVX was trading $103 in April and it dipped to $96 then we told you it was a buy before oil rallied again as it started to break out again. Now it a new 52 week high of over $118 today. For the long term oil & gas investor it is important to evaluate the future potential using different methods. Here are some important tips to consider.
Determining a company’s financial health is a very important step in making a decision on whether or not to invest or to stay invested. There are many different ways to compute a company’s financial health.
In this test, I will be considering Chevron Corporation’s (CVX) profitability, debt and capital, and operating efficiency. Based on these criteria, we get to see sales, returns, margins, liabilities, assets, returns, and turnovers.
Note: All numbers sourced from Morningstar.
Profitability
Profitability is a class of financial metrics that are used to assess a business’ ability to generate earnings, compared with expenses and other relevant costs incurred during a specific period of time.
In this section, we will look at four tests of profitability. They are: Net Income, Operating Cash Flow, Return on Assets, and Quality of Earnings. From these four metrics, we will establish if the company is making money, and gauge the quality of the reported profits.
- Net Income 2011 = $26.895 billion
To pass, the company needs to have a positive net income. Chevron passes.
- Operating Cash Flow 2011 = $47.634 billion
Operating Cash Flow is the cash generated from the operations of a company, generally defined as revenue less all operating expenses, but calculated through a series of adjustments to net income.
To pass, the company needs to have a positive operating cash flow. Chevron passes.
- ROA – Return On Assets
ROA is an indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company’s net income by its total assets, ROA is displayed as a percentage. Sometimes this is referred to as “return on investment.”
- ROA in 2010 = 10.29%
- ROA in 2011 = 12.83%
- Net income growth, 2010 = $19.024 billion to 2011 = $26.895 billion, a increase of 41.37%
- Total Asset growth, 2010 = $184.769 billion to 2011 = $209.474 billion, an increase of 13.37%
In 2010-11, Chevron’s ROA increased from 10.29% to 12.83%. As the ROA increased Chevron passes.
- Quality of Earnings
Quality of Earnings is the amount of earnings attributable to higher sales or lower costs rather than artificial profits created by accounting anomalies such as inflation of inventory.
- Operating Cash Flow 2011 = $47.634 billion
- Net Income 2011 = $26.895 billion
To pass, the operating cash flow must exceed the net income. Chevron passes, Operating Cash Flow exceeds net income.
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