pgdbm-mcafr- rollsroyce

8/6/2019 PGdBM-MCAFR- RollsRoyce

http://slidepdf.com/reader/full/pgdbm-mcafr-rollsroyce 1/18

1

1

2011

Nikhil C.S.

8/4/2011

Rolls-Royce plc. An analysis



2

Table of contents

Executive Summary 3

Objectivity of the study 3

About the company 4

Ratio Analysis 7

Suggestions for a Potential Investor 15

Conclusion 17

Bibliography 18



3

Introduction to the Purpose of the paper

Today we are living in times where each financial decision taken should be carefully thought upon.

The purpose this assignment is to not only apply my knowledge of finance in practical life but alsoto understand and analyze the profitability of a company with regards to its balance-sheet. Eachcompany which has itself Listed on stock exchange have to compulsorily disclose their balancesheet and other important financial data to the investors in the company in order to report how thefunds are utilized, their sources, and it¶s financial position vis-à-vis that of the industry. This notonly helps in understanding how the company is functioning but also helps in evaluating theconsistency of the company to its goals, the future prospects of the company, and the safety &profitability of the funds invested in the company. As a normal person who doesn¶t have anyknowledge about finance, a company which is showing a positive balance, would be a considereda good opportunity, but a person who has the necessary knowledge about finance, can understandhow the company has arrived at the profit. If it has any other financial obligation towards itsinvestors or pending loans etc. This helps a person decide whether he should invest his funds in

the company or not, if it¶s worth the risk depending on how the company has performed over theyears and rewarded its investors. Analyzing the company¶s balance-sheet not only shows thedifferent areas where the company has invested but also the assets and liquidity the companyholds to meet its current and future requirements. This will help me in understanding how thecompany works and functions in from the point of view of a potential investor and also as amanager if I were to handle the finances of the company.



4

About the company

Rolls±Royce plc (Rolls-Royce) is a diversified company engaged in providing power systems andservices for use on land, at sea and in the air. The company operates in four global marketsnamely civil aerospace, defense aerospace, marine and energy. The company has manufacturingsites or service centers located in 50 countries around the world. The company provides fuel cellsfor power generation and also provides automation and control for engines, turbines, compressors,motor-driven compressors, motor control centers, station and process control for application withboth Oil and Gas and Power Generation product ranges.

Global Markets Direct, the leading business information provider, presents an in-depth business,strategic and financial analysis of Rolls-Royce plc. The report provides a comprehensive insightinto the company, including business structure and operations, executive biographies and keycompetitors. The hallmark of the report is the detailed strategic analysis and views on thecompany.

AEROSPACE

The civil aerospace business powers over 30 types of commercial aircraft and has a strong

position in all sectors of the market: wide body, narrow body and corporate and regional aircraft

Underlying revenue 2010 ± 4919m £

Rolls-Royce is the world¶s second largest provider of defense aero-engine products and services,

with 18,000 engines in service for 160 customers in 103 countries.

- Underlying revenue 2010 ± 2123m £



5

MARINE

Rolls Royce has a world-leading range of capabilities in the marine market, encompassing the

design, supply and support of power and propulsion systems.




6

ENERGY

The energy business supplies gas turbines, compressors and diesel power units to customers

around the world. Our developing civil nuclear capability has further strengthened our position in

the power generation market.




7

Ratio analysis

Ratio analysis is an important tool for analyzing the company's financial performance. Thefollowing are the important advantages of the accounting ratios.

1. Analyzing Financial Statements

Ratio analysis is an important technique of financial statement analysis. Accounting ratios are

useful for understanding the financial position of the company. Different users such as

investors, management. Bankers and creditors use the ratio to analyze the financial situation of the

company for their decision making purpose.

2. Judging Efficiency

Accounting ratios are important for judging the company's efficiency in terms of its operations and

management. They help judge how well the company has been able to utilize its assets and earn

profits.

3. Locating Weakness

Accounting ratios can also be used in locating weakness of the company's operations even though

its overall performance may be quite good. Management can then pay attention to the weakness

and take remedial measures to overcome them.

4. Formulating Plans

Although accounting ratios are used to analyze the company's past financial performance, they can

also be used to establish future trends of its financial performance. As a result, they help formulate

the company's future plans.

5. Comparing Performance

It is essential for a company to know how well it is performing over the years and as compared to

the other firms of the similar nature. Besides, it is also important to know how well its different

divisions are performing among themselves in different years. Ratio analysis facilitates such

comparison.



8

Ratios 2010 2009 2008 2007 2006

Liquidity Ratios

Current Ratio 1.36 1.48 1.09 1.52 1.60

Liquidity Ratio 1.03 1.09 0.79 1.06 1.19

Cash Position Ratio 0.44 0.46 0.29 0.41 0.50

Turn Over Ratio

Stock Turn Over Ratio 4.56 4.28 3.49 3.37 3.87

Working Capital Turn Over

Ratio 4.18 3.40 10.82 2.97 2.63

Fixed Assets Turn Over

Ratio

1.72 1.72 1.56 1.76 1.97

Capital Turn Over Ratio 0.99 1.03 0.81 0.89 0.99

Profitability Ratio

Gross Profit Ratio 19.85 20.27 19.50 19.26 22.22

Operating Ratio 91.50 90.47 92.27 94.64 91.78

Operating Profit Ratio 10.19 11.25 9.41 6.91 9.67

Net Profit Ratio 4.89 21.28 -14.80 8.06 13.89

Return on Investment Ratio 13.64 58.61 -53.14 16.90 36.47

Earnings per Share Ratio 38.73 39.67 34.06 29.81 24.48

Dividend Payout ratio 41.31 37.81 41.98 43.60 39.17

Return on Capital

Employed Ratio 3.34 14.37 -8.83 5.23 9.20

Solvency Ratios

Debt-Equity Ratio 3.07 3.07 5.01 2.22 2.96

Proprietary Ratio 0.23 0.24 0.16 0.30 0.25

Capital Gearing Ratio 3.50 2.11 110.04 104.38 6.81



9

Types of ratios

SOLVENCY RATIOS

The term µsolvency¶ refers to the ability of a concern to meet its long term obligations. The long-term liability of a firm is towards debenture holders, financial institutions providing medium and long

term loans and other creditors selling goods on credit. These ratios indicate firm¶s ability to meet

the fixed interest and its costs and repayment schedules associated with its long term borrowings.

The following ratios serve the purpose of

determining the solvency of the business firm.

y Debt equity ratio

y Proprietary ratio

Debt-equity ratio

It is also otherwise known as external to internal equity ratio. It is calculated to know the relative

claims of outsiders and the owners against the firm¶s assets. This ratio establishes the relationship

between the outsider¶s funds and the shareholders fund. Thus, the two basic components of the

ratio are outsiders¶ funds and shareholders¶ funds. The outsiders¶ funds include all debts/liabilities

to outsiders i.e. debentures, long term loans from financial institutions, etc.

The firm ratio has increased from 2.96 in 2006 to 5.01 in 2008 which is the reason for the firm¶s

loss in that year as the firm has faced the losses in foreign exchange contracts. The ratio has

reduced in 2009 to 3.07 and is constant in 2010 which shows that company is reducing its debt but

no changes in 2010 shows a little concern.

Proprietary ratio

It is also known as equity ratio. This ratio establishes the relationship between shareholders¶ funds

to total assets of the firm. The shareholders¶ fund is the sum of equity share capital, preference

share capital, reserves and surpluses. Out of this amount, accumulated losses should be

deducted. On the other hand, the total assets mean total resources of the concern. The ratio can

be calculated as under:

Proprietary ratio = Shareholders' funds/Total assets

The ratio is consistently at about 0.25 in 2006 to 0.23 in 2010 which shows that about 75% of the

company is invested by the creditors and it is very alarming for the firm¶s stability.



10

PROFITABILITY RATIOS

The main aim of an enterprise is to earn profit which is necessary for the survival and growth of the

business enterprise. It is earned with the help of amount invested in business. It is necessary to

know how much profit has been earned with the help of the amount invested in the business. This

is possible through profitability ratio.

profitability ratios are :

(i) Gross profit ratio

(ii) Net profit ratio

(iii) Operating profit ratio

(iv) Return on investment ratio

It expresses the relationship of gross profit to net sales. It is expressed in percentage. It is

computed as

Gross profit ratio = Gross profit/Net sales×100

The firm¶s ability to produce its product is very good and it shows the average of about 20%.

(ii) Net profit ratio

A ratio of net profit to sales is called Net profit ratio. It indicates sales margin on sales. This is

expressed as a percentage. The main objective of calculating this ratio is to determine the overall

profitability. The ratio is calculated as

Net profit ratio =Net profit/Net sales×100



11

The ratio is indicating a reduction from 2006 to 2007 i.e.13.89% to 8.06% due to the reduction in

the financial income from 1,196 to 718. In 2008. In 2009, the Net profit ratio is at its lowest.

(iii) Operating profit ratio

Operating profit is an indicator of operational efficiencies. It reveals only overall efficiency. It

establishes the relationship between operating profit and net sales. This ratio is expressed as a

percentage. It is calculated as:

Operating profit =Operating profit /Net sales×100

Operating Profit = Gross Profit ± (Administration expenses + selling expenses)

The operating profit ratio is indicating the average of 10% profit

(iv) Return on investment ratio (ROI)

ROI is the basic profitability ratio. This ratio establishes relationship between net profit (before

interest, tax and dividend) and capital employed. It is expressed as a percentage on investment.

The term investment here refers to long-term funds invested in business. This investment is called

capital employed.

Capital employed = Equity share capital + preference share capital+ Reserve and surplus + long

term liabilities ± fictitious assets ± Non trading investment

Capital employed = (Fixed asset ± depreciation) + (Current Asset ± Current liabilities)

Capital employed = (Fixed Assets ± Depreciation) + (Working capital)

This ratio is also known as Return on capital employed ratio. It is calculated as under

ROI = Net profit before interest, tax and dividend /Capital employed×100

The ROI is not showing any consistency as In 2006 it was high then reduced in 2007 then again itwas more than 50% in 2009 and then it reduce to 13.64% in 2010. It has happened mainly due to

increase in the profit and it occurred due to financial income received by the company.

LEVERAGE RATIO



13

has been turned over in the business during a particular period. The ratio is continuously

increasing from 2006 to 2010 which shows that company efficiency of turnaround of the stock is

increasing which is showing a good signal.

Working capital Turnover Ratio:

This ratio indicates the effective utilization of working capital with regards to sales. This ratio

represents the firm¶s liquidity position. The ratio is showing a rise from 2.63 in 2006 to 4.18 in 2010

shows that the liquidity position of the company is increasing and the firm is able to satisfy all of its

short term needs.

Fixed Assets Turnover Ratio:

This indicates the efficiency of assets management. It is used to measure the utilization of fixed

assets. The ratio is at its highest in 2006 at 1.97 however it reduces to 1.72 in 2009 & 2010 as the

company purchased more fixed assets and hence showing the reduction. But as the company is at

the growing stage it can happen.

Capital Turnover Ratio:

This ratio measures the efficiency of capital utilization in the business. The ratio is at about the

0.99 in 2010 which is similar to 2006 however it shows the increase in 2009 (1.03) but it is

marginal.

Liquidity Ratios.

Common liquidity ratios include the current ratio, the quick ratio and the operating cash flow ratio.

A company's ability to turn short-term assets into cash to cover debts is of the utmost importance

when creditors are seeking payment. Bankruptcy analysts and mortgage originators frequently use

the liquidity ratios to determine whether a company will be able to continue as a going concern.

Current Ratio:

This is a very commonly used ratio to find liquidity. There is a very low decrease in the current

Ratio in the year 2007 as compared to 2006 from i.e. 1.60 to 1.52 .However there¶s a huge

decrease in 2008 from 1.52 to 1.09. The ratio however increases in 2009 and again showing a little

decrease from 1.48 to 1.36



14

The ratio of the company is not showing satisfactory results as it is lower than the standard ratio.

The borrowings of the company have increased tremendously.

Liquid Ratio:

The liquid ratio is also showing a similar trend as the current ratio which is at its lowest in 2008 and

at its highest in 2006 at 1.19 however there is a considerable difference in the current ratio of 2006

and 2007 which shows that in the year 2006 & 2007 the holding of inventory by the company was

more as compared with the current scenario.

The liquidity position of the company is good as per the quick ratio as the company can liquidize

the assets quickly as all the ratios are more 1 consistently except in 2008.

Cash Position Ratio:

It is a variant of Quick ratio. The cash position ratio states that the company position of actual

holding of liquid cash in terms of cash in hand and short term securities is very good as it is

consistently showing an average of about 0.40 except in 2008. Here the liquidity is not highly

restricted in terms of cash



15

Issues which are relevant to a potential investor.

Today, Rolls-Royce brand means more than engineering excellence. It is a standard of quality across all activities. The brand guides actions and behaviors and the way they

present to the world as a leading-edge, international power-systems business.

Morals of the company

Reliability

Integrity

Innovation

Aircrafts

Aero-engine maker Rolls-Royce powers both military and civil aircraft and is a big supplier

of power generating turbines to the marine and energy markets. The company, once

famous for its prestige motor cars, sold the car business to Vickers in 1980, but retained

the rights to the brand name. These rights were transferred to Germany's Volkswagen in

1998 and then passed on to BMW in 2003.

Petro china

Power systems developer Rolls-Royce has won a $65m contract from Petro china, the

largest oil and gas producer in China. The company is to provide more gas compression

equipment for the West East Pipeline Project (WEPP), the world's longest natural gas

pipeline.

Turkish airlines

Turkish Airlines has signed a $200m order for Rolls-Royce's flagship Trent 700 engines to

power three Airbus A330 freighters. The contract also includes a long-term maintenanceagreement, which Rolls calls Total Care.

Developments in marine sector



16

The doors of engine developer Rolls-Royce's newly expanded and modernized marine

service centre in the port of Rotterdam are now open for business. The facility, originally

opened in 2001, has undergone a major expansion programme, including a doubling of

maintenance workshop space to 1,500 square meters and the modernization of equipment

used in the servicing marine products.

Rolls-Royce and Daimler announce joint venture company and intent to launch a

public tender offer for Tognum AG.

Daimler AG is one of the world¶s most successful automotive companies. This news of forming a

joint venture company with the leading companies it will naturally help the company to grow and in

turn facilitates the investors by getting the higher return. While Tognum, with its two business units,

Engines and Onsite Energy & Components, the Tognum Group is one of the world¶s leading

suppliers of engines and propulsion systems for off-highway applications and of distributed energy

systems.

Interest Rate Risk:

The major funding sources used by Rolls Royce are fixed rate bonds and floating debt rate. There

is a combination of interest rate swaps used to manage these interest risks like the forward rate

agreement and the interest rate swaps.

Commodity Risk:

There is a continuous exposure to price of fuel and metal base. In order to minimize the impact of

price fluctuations the exposure is hedged.

Although ratio analysis is very important tool to judge the company's performance, following

are the limitations of it which the investor must keep in mind.

1. Ratios are tools of quantitative analysis, which ignore qualitative points of view.

2. Ratios are generally distorted by inflation.

3. Ratios give false result, if they are calculated from incorrect accounting data.

4. Ratios are calculated on the basis of past data. Therefore, they do not provide complete



17

information for future forecasting

5. Ratios may be misleading, if they are based on false or window-dressed accounting

information.

6. Ratios must never be taken in isolation for analysis. The group of ratios should be

considered.

Conclusion

The Company is at the growth stage and as per the information about the orders received

by the company, it will make progress much faster and also it will benefit the investor as

they will get adequate returns for the investments made.

The business of the company is such that it is ongoing process and looking at the current

scenario I don¶t think that the demand will decrease as all the countries are looking forward

to make more investments in the defense section and wants the country to be secure.

If we look at the overall status of the Group, its revenue increased to £11,085 million which

was an increase by 6 % in the year 2010

There was an improvement seen in the cash flow in the year 2010 which rose to £ 17

million.

Before making any huge investments the Group ensures proper examination of risks and

future cash flows in order to sustain shareholders value.



18

Bibliography

http://www.rolls-royce.com/investors/f inancial_reporting/key _data/income _statement.jsp

http://www.rolls-royce.com/investors/f inancial_reporting/key _data/balance _sheet.jsp

http://www.rolls-royce.com/investors/f inancial_reporting/key _data/historical_data.jsp

http://www.rolls-royce.com/investors/f inancial_reporting/annual_report/rolls-

royce _plc _accounts_archive.jsp

pgdbm-mcafr- rollsroyce

Documents