Mara Birsa
Practice Exam 1
Introduction
According to the case study, Wear Products Ltd is a medium-sized private limited
company that have success on the market. The company makes different parts for
equipment that is used in the extractions of oil and gas.
In order to be able to compete with multinational companies, Wear Products Ltd
wants to develop: to increase its market share, this being the main goal of the
company. In order to do that, the business has two options:
Option 1: internal growth that can be realised through the purchase of new
equipment.
Option 2: external growth through the purchase of another business.
Market trends and financial forecasting for the Oil
Market
According to Figure 1 from the case study, the demand for oil increased by over 5%
from 2013 (91.5 million of barrels a day) to 2016 (almost 97 million of barrels a day).
The forecast supports that it would continue to grow by 1.2% /year until 2021 that is
a great opportunity for Wear Products Ltd. The main reason is that the world
population continues to grow (prediction: 1.1 billion between 2010 and 2025) and
there will be a higher demand for energy, although there are different alternative
fuels
The figure 2 shows that the price of oil is unpredictable, existing different increases
and decreases between 2001 and 2017, being a threat for Wear Products Ltd. From
2001 to 2008, the oil price increased by approx. 74 US dollars per barrel (95-21), but
in the period 2008-2009 the price decreased by approx. 35 US dollars per barrel (95-
60), probably because of the recession. Although, according to the case study, even
in 2009, the oil companies managed to have good profits due to some less viable
fields, so the uneconomic oil fields were developed.
After that, the price began to grow again, the peak being in 2012, approx.110 US
dollars per barrel. From 2012 to 2016, there was again a big decrease by 70 US
dollars per barrel (110-40), and then the price increased slowly. The forecast is that
these fluctuations are expected to continue in the future, because unexpected events
such as wars, conflicts and regional politics affect the price of the oil, these are
threats to the company and to the industry. Additionally, the forecast shows that
because of the increasing demand for energy and the rising of the prices, the oil
companies will need to try to find new sources of oil, that being a huge opportunity
for the manufacturers of oil exploration equipment: the demand for their products will
increase.
1
, Mara Birsa
Wear Products Ltd – Current situation
According to the case study, the company has many strengths. The products sold by
Wear Products Ltd are parts for oil and gas exploration equipment that in used in the
extracting them from underground. A huge advantage is that these products are
meeting the customers’ specific needs and wants, having their own designs.
The business has approx. 100 highly skilled employees and a very good reputation
for the high quality of their products existing in different materials. The business has
over 40 years’ experience in offering an excellent customer service. Additionally,
they have a design consultancy service in order to be able to provide the best advice
to their customers regarding the most suitable material for the products. This service
has the benefit to add value to the company and to be highly appreciated by the
clients, leading to high net profit margins.
Figure 3 shows that the financial performance was quite uneven, because of the
fluctuations of the oil price and competition existing between 2014 and 2017. Per
total, the financial performance of the business decreased in 2015 and 2016 and the
situation started to be repaired in 2017, being lower than in 2014 in certain aspects
(Gross Profit, GP margin, Net profit, NP margin, ROCE) and higher in other aspects
(Revenues and Capital). This fact shows that the business has more sales and
capital, but it has not the same profitability, maybe because of the higher costs of
goods sold and other expenses.
The Revenue is quite stable with small increases and decreases. In average is £3
837 500, with the biggest revenue in 2017. However, the Gross Profit decrease by
£220 000 from 2014 to 2017, but it was even lower in 2015 and 2016. The GP
margin decreased by 6.5% from 2014 to 2017, but is quite good, being over 60%.
The Net profit and NP margin also decreased. A NP margin of 9.4% offers stability,
but it would be better to be increased. Instead, the capital increased by £150 000
from 2014 to 2017. ROCE decreased by 5.5% in the same period.
2017: The gap between Gross Profit and Net Profit is high.
£2 705 000 - £370 000 = £2 335 000 is spent on different costs. The business needs
to revise all their costs and to try to decrease the costs.
The net profit from 2017 will be used as part of funding for their growth plans.
Option 1 – Internal Growth
According to Boston Matrix (stars, problem child, cash cows, dogs positions), the
business will be situated in Stars position, because although they use much money,
they generate much money. They will have a good growth and will increase its
market share.
SWOT
Strengths: According to the case study, Wear Products Ltd identified a new and
piece of production equipment that would make the business more efficient and will
2
Practice Exam 1
Introduction
According to the case study, Wear Products Ltd is a medium-sized private limited
company that have success on the market. The company makes different parts for
equipment that is used in the extractions of oil and gas.
In order to be able to compete with multinational companies, Wear Products Ltd
wants to develop: to increase its market share, this being the main goal of the
company. In order to do that, the business has two options:
Option 1: internal growth that can be realised through the purchase of new
equipment.
Option 2: external growth through the purchase of another business.
Market trends and financial forecasting for the Oil
Market
According to Figure 1 from the case study, the demand for oil increased by over 5%
from 2013 (91.5 million of barrels a day) to 2016 (almost 97 million of barrels a day).
The forecast supports that it would continue to grow by 1.2% /year until 2021 that is
a great opportunity for Wear Products Ltd. The main reason is that the world
population continues to grow (prediction: 1.1 billion between 2010 and 2025) and
there will be a higher demand for energy, although there are different alternative
fuels
The figure 2 shows that the price of oil is unpredictable, existing different increases
and decreases between 2001 and 2017, being a threat for Wear Products Ltd. From
2001 to 2008, the oil price increased by approx. 74 US dollars per barrel (95-21), but
in the period 2008-2009 the price decreased by approx. 35 US dollars per barrel (95-
60), probably because of the recession. Although, according to the case study, even
in 2009, the oil companies managed to have good profits due to some less viable
fields, so the uneconomic oil fields were developed.
After that, the price began to grow again, the peak being in 2012, approx.110 US
dollars per barrel. From 2012 to 2016, there was again a big decrease by 70 US
dollars per barrel (110-40), and then the price increased slowly. The forecast is that
these fluctuations are expected to continue in the future, because unexpected events
such as wars, conflicts and regional politics affect the price of the oil, these are
threats to the company and to the industry. Additionally, the forecast shows that
because of the increasing demand for energy and the rising of the prices, the oil
companies will need to try to find new sources of oil, that being a huge opportunity
for the manufacturers of oil exploration equipment: the demand for their products will
increase.
1
, Mara Birsa
Wear Products Ltd – Current situation
According to the case study, the company has many strengths. The products sold by
Wear Products Ltd are parts for oil and gas exploration equipment that in used in the
extracting them from underground. A huge advantage is that these products are
meeting the customers’ specific needs and wants, having their own designs.
The business has approx. 100 highly skilled employees and a very good reputation
for the high quality of their products existing in different materials. The business has
over 40 years’ experience in offering an excellent customer service. Additionally,
they have a design consultancy service in order to be able to provide the best advice
to their customers regarding the most suitable material for the products. This service
has the benefit to add value to the company and to be highly appreciated by the
clients, leading to high net profit margins.
Figure 3 shows that the financial performance was quite uneven, because of the
fluctuations of the oil price and competition existing between 2014 and 2017. Per
total, the financial performance of the business decreased in 2015 and 2016 and the
situation started to be repaired in 2017, being lower than in 2014 in certain aspects
(Gross Profit, GP margin, Net profit, NP margin, ROCE) and higher in other aspects
(Revenues and Capital). This fact shows that the business has more sales and
capital, but it has not the same profitability, maybe because of the higher costs of
goods sold and other expenses.
The Revenue is quite stable with small increases and decreases. In average is £3
837 500, with the biggest revenue in 2017. However, the Gross Profit decrease by
£220 000 from 2014 to 2017, but it was even lower in 2015 and 2016. The GP
margin decreased by 6.5% from 2014 to 2017, but is quite good, being over 60%.
The Net profit and NP margin also decreased. A NP margin of 9.4% offers stability,
but it would be better to be increased. Instead, the capital increased by £150 000
from 2014 to 2017. ROCE decreased by 5.5% in the same period.
2017: The gap between Gross Profit and Net Profit is high.
£2 705 000 - £370 000 = £2 335 000 is spent on different costs. The business needs
to revise all their costs and to try to decrease the costs.
The net profit from 2017 will be used as part of funding for their growth plans.
Option 1 – Internal Growth
According to Boston Matrix (stars, problem child, cash cows, dogs positions), the
business will be situated in Stars position, because although they use much money,
they generate much money. They will have a good growth and will increase its
market share.
SWOT
Strengths: According to the case study, Wear Products Ltd identified a new and
piece of production equipment that would make the business more efficient and will
2
