Picture supply: The Motley Idiot
On the 2025 Berkshire Hathaway annual shareholders’ assembly, Warren Buffett defined that he spends extra time taking a look at an organization’s steadiness sheet than he does at its earnings assertion.
The American billionaire investor stated that earlier than analyzing a possible goal’s earnings and expenditure he likes to “look at balance sheets over an eight- or 10-year period”. His rationale is that it’s harder to “play games” with this facet of a bunch’s monetary statements.
Buffett reckons adopting this method to an organization’s accounts is the easiest way to “understand what the figures are saying, and what they don’t say, and what they can’t say, and what the management would like them to say that the auditors wouldn’t like them to say”.
Over the Christmas interval, I’ve been reviewing a few of my investments. Particularly, I’ve taken a more in-depth have a look at BP (LSE:BP.). And with Buffett’s phrases ringing in my ears, I made a decision to have a look at the power large’s steadiness sheets since 2017.
That is what I discovered.
Getting smaller
The very first thing I famous is that the group’s shrinking. At 31 December 2017, it had a e book worth of $100.4bn. At 30 September 2025, it was $77.6bn. Over the interval, the group’s property have elevated by round $4bn. Nonetheless, extra considerably, its liabilities are almost $27bn greater.
Evaluating the 2 steadiness sheets, it may be seen that the group’s web debt (together with leases) has elevated from $37.8bn to $39.6bn. Admittedly, that is decrease than the $55bn reported on the finish of 2019. But it surely’s been steadily growing since 31 December 2022.
This doesn’t sound too promising. No marvel a number of the firm’s largest shareholders are making use of strain on the group’s administrators to get this down. Simply earlier than Christmas, BP introduced it had entered into an settlement to promote a few of its stake in Castrol, its lubricants enterprise. All the $6bn of proceeds will probably be used to cut back the group’s borrowings.
However taking a look at BP’s 2017-2024 accounts is a reminder of how money generative the enterprise will be. Throughout this era, it reported mixed working money flows of $216bn. That’s why the group’s former boss described it as “a cash machine” when power costs are in its favour.
It additionally illustrates how risky the group’s earnings will be. Its most well-liked measure is substitute price (RC) revenue. In 2022, this was $27.7bn. Two years earlier, throughout the pandemic, it disclosed a RC lack of $5.7bn.
Of concern, my evaluation’s additionally revealed that BP’s grow to be extra bloated. It now employs 26,500 extra individuals than it did in 2017. Rising administrative bills is one other concern worrying some bigger shareholders.
Remaining ideas
So the place does this go away us? Nicely, I nonetheless assume BP’s price contemplating for its potential.
If it will possibly grow to be extra environment friendly then it will likely be in a position to enhance its revenue margin. Sure, its earnings will nonetheless be on the mercy of — most importantly — the worth of oil, however for each $1 of income, its backside line will probably be greater than beforehand.
And decreasing its debt will decrease its borrowing prices. This might unencumber more money for shareholder distributions.
For these uneasy at investing within the oil and fuel sector, I feel there are many different alternatives to think about however, personally, I reckon BP’s one to have a look at.
