Category: Rolls-Royce

Introduction

Rolls-Royce deals in aircraft, military engines, propulsion systems used by navies, and gas turbine power. Its main competitors include GE Aviation, SAFRAN, and Pratt & Whitney Engine Services, Inc. (Rolls-Royce Holdings PLC Competition, n.d.). Salmon reports that Rolls-Royce relies on over 8,000 suppliers (2012).

Cowan enlists stakeholders as the suppliers, creditors, customers, employees at all levels, and communities that are all concerned about the performance of a company (2005, p. 16). Competitors and business partners may also want to know the strength of an organization. Rolls-Royce financial statements have been extracted from the LSE website (RR. Rolls Royce Holdings PLC ORD SHS 20P, n.d.)

Financial ratios

Board of directors

The board can make decisions to invest in bonds or stocks to increase profitability. Davidson (2010, p. 65) claims that companies may consider issuing bonds instead of equity when interest rates are low.

Reliance on revenue source

Reliance on revenue source = revenue source total/ total revenue

In 2012, it can be seen that civil aerospace had a revenue ratio of 0.5272, and engine holding had 0.0235. From these calculations, it can be seen that 52.72% of the revenue generated in 2012 came from the civil aerospace section. 2.35% was generated from the engine holding section (see appendix 6, no. 1).

The company mainly relies on civil aerospace section for its revenues. The ratio is used to determine areas where the firm is more reliant (Demonstrating value, n.d.). It can be used to influence diversification strategies, and reducing reliance on volatile sources. It can be used to find means of ensuring sustainability.

Operating expense ratio

The board may also be interested in the operating expense ratio. The operating expense ratio measures the efficiency of a company’s operation. It compares one period to another. A declining ratio indicates improvement in managing efficiency.

Operating expense ratio = operating expense/ total revenue

The calculations show that operating expense ratio has declined from 0.8981 in 2010 to 0.8871 in 2012. It indicates that the company operated more efficiently in 2012 than in 2011. 2011 was also better than 2010 (see appendix 6, no. 2).

Creditors

Current ratio

It is used to analyze the liquidity and stability of an organization in the short-term period. It shows that a firm can finance its operations within the short-term period. Current assets consist of cash and holdings that can easily be exchanged for cash. Pendlebury & Groves explain that the ratio should be higher than 1 because of the time needed to convert some of the assets into cash (2004, p. 148).

Creditors are interested in the current ratio because it indicates ability to honor debts in the current period. Creditors may want to avoid companies that may default. A high current ratio may indicate that resources are not applied to full capacity. Pendlebury & Groves explain that different companies need to keep different levels of current ratio depending on a company’s needs (2004, p. 148).

Current ratio = current assets/ current liabilities

The company has maintained a current ratio valued between 1.4 and 1.2 in the 5-year period (see appendix 6, no. 3). The current ratio indicates that the company is able to cover its short-term liabilities in the current period.

Quick ratio

Quick ratio is used in industries where the stock is considered less liquid such as manufacturing industry where Rolls-Royce is found (Pendlebury & Groves 2004, p. 149). It reduces the current assets by deducting the value of stocks.

Quick ratio = (current assets – stocks) / current liabilities

Values should be closer to 1 or more than 1. The amount of assets that the company has been maintaining to meet its current needs has declined in the 5-year period (see appendix 6, no. 4). In 2012, it has a quick ratio of 0.95. It shows that the company is unlikely to default.

Shareholders/ investors

Shareholders look at the proportion of a company’s capital that is financed by debts. Pendlebury & Groves discuss that shareholders are concerned about the capital structure of a company (2004, p. 155). Gearing refers to raising capital from debts. Debt repayment and interest on debts are prioritized before paying dividends. A high proportion of debts may reduce the amount received as dividends.

Debt to equity ratio

Debt to equity ratio = (short-term debt + long-term debt) / total equity

Low levels of debt may indicate a firm that is operating below its full potential. High debt levels indicate that shareholder earnings may decrease. It can also indicate a higher risk. In the case for debt to equity ratio, shareholders may feel comfortable because the company has been reducing reliance on debts over the 5-year period. In 2008, the debt to equity ratio was 5.9 compared to 1.97 in 2012 (see appendix 6, no. 5). The company is becoming less risky for shareholders.

Return on equity

Shareholders also consider return on equity. It compares the value they have obtained by investing in the company rather than in other assets. It shows whether the amount earned is worth the risk they have taken.

Return on equity = net profit/ average shareholder equity

Average shareholders’ equity is obtained by calculating the average of shareholders’ equity at the start and at the end of the period (Fridson & Alvarez 2011, p. 284). Returns on equity calculations indicate that there has been an improvement in the amount generated from shareholders’ funds apart from 2008 and 2009 fiscal years (see appendix 6, no. 6).

In 2008, it had a negative value (-0.6) which may indicate servicing big debts or the company took more investment opportunities. Investors are interested in the company’s growth prospects. Long-term investors would like to see the value of their investment multiply.

Competitors

Return on assets

A lower return on assets ratio than competitors may mean the company should look for more efficient methods of doing business (Demonstrating value n.d.). Competitors may want to know the return on assets to compare Rolls-Royce’s efficiency to theirs.

Return on assets = net profit/ average total assets

The average total asset is obtained by dividing the sum of asset values at the beginning and the one recorded at the end of the period. It should be used by comparing an industry’s return rate. Rolls-Royce return on assets shows a trend that is similar to returns on equity.

Returns on assets are 0.13, 0.05, and 0.03 in 2012, 2011, and 2010 respectively. The company is on an improvement path except in 2009 when it recorded a higher value (see appendix 6, no. 7). Competitors can use these values to compare it with their efficiency in utilizing capacity.

Sales growth

The competitors may look at the sales growth. It is calculated by subtracting previous period sales from current period sales, and then dividing the difference by previous period sales.

Sales growth = (current period sales – previous period sales) / previous period sales

Competitors can use it to analyze whether their market share is likely to increase or decline. It can be used to measure the performance of marketing and sales strategies. It can also be used to examine if sales growth matches inflation. It can justify changes in price to account for inflation (Demonstrating value, n.d.). As a result of changing price, the company can avoid a slow growth rate.

Rolls-Royce’s sales growth indicates periodic fluctuations. It was high in 2009 at 14%. It was low in 2010 (6%), and lower in 2011 (0.3%). There were signs of recovery in 2012 at 9% (see appendix 6, no. 8). Competitors can compare these trends with theirs to find out if the conditions are caused by external factors such as the global economic condition or if there is a consumer preference for another brand.

Conclusion

Company results affect the price movement in the stock listing. Davidson (2010, p. 51) explains that “a company may cut expenditure to increase profits now, at the expense of the long term”. Another company may invest for future growth which reduces current profits such as Rolls Royce in 2008 shown by a net gearing of -50.68% (see appendix 3).

Investors need to examine the cause of a company’s good or poor performance reports. A company’s growth depends on how much it borrows for investment purposes. There is a need to balance debt and equity depending on which lowers the cost of raising capital. Some ratios may be converted into percentages for easy interpretation.

Reference List

Cowan, N. 2005, Risk analysis and evaluation, 2^nd edn, Institute of Financial Services, Canterbury.

Davidson, A. 2010, How the city really works: the definitive guide to money and investing in London’s square mile, 3^rd edn, Kogan Page, London. Demonstrating value. Web.

Fridson, M., & Alvarez, F. 2011, Financial statement analysis: a practitioner’s guide, 4^th edn, John Wiley & Sons, Hoboken.

Pendlebury, M., & Groves, R. 2004, Company accounts: analysis, interpretation and understanding, 6^th edn, Thomson Learning, London.

Rolls-Royce Holdings plc Competition. Web.

RR. Rolls Royce Holdings PLC ORD SHS 20P. Web.

Salmon, J. 2012, Rolls-Royce reveals it has been forced to lend to its own suppliers to keep them afloat, media release. Web.

Appendices

Appendix 1

RR. ROLLS-ROYCE HOLDINGS PLC ORD SHS 20P. Web.

Appendix 2

Balance sheet

RR. ROLLS-ROYCE HOLDINGS PLC ORD SHS 20P. Web.

Appendix 3

RR. ROLLS-ROYCE HOLDINGS PLC ORD SHS 20P. Web.

Appendix 4

RR. ROLLS-ROYCE HOLDINGS PLC ORD SHS 20P. Web.

Appendix 5

Appendix 6

Calculations

Reliance on revenue source = revenue source total/ total revenue

Reliance on civil aerospace = 6,437m/ 12,209m = 0.5272

Reliance on engine holding = 287m/ 12,209m = 0.0235

Operating expense ratio = operating expense/ total revenue

2012 Operating expense = revenues – operating profit = 12,161 – 1,373 = 10,788

2011 Operating expense = revenues – operating profit = 11,124 – 1,186 = 9,938

2010 Operating expense = revenues – operating profit = 11,085 – 1,130 = 9,955

2012 operating expense ratio = 10,788/12,161 = 0.8871

2011 operating expense ratio = 9,938/11,124 = 0.8934

2010 operating expense ratio = 9,955/ 11,085 = 0.8981

Current ratio = current assets/ current liabilities

2012 current ratio = 9,593m/ 7,194m = 1.333

2011 current ratio = 8,315m/ 6,916m = 1.202

2010 current ratio = 9,824m/ 7,178m = 1.369

2009 current ratio = 9,374m/ 6,312m = 1.485

2008 current ratio = 9,046m/ 6,439m = 1.405

Quick ratio = (current assets – stocks)/ current liabilities

Stocks value is obtained from the inventories entry.

2012 quick ratio = (9593 – 2726)/ 7194 = 0.9545

2011 quick ratio = (8315 – 2561)/ 6916 = 0.8319

2010 quick ratio = (9824 – 2429)/ 7178 = 1.0302

2009 quick ratio = (9374 – 2432)/ 6312 = 1.0998

2008 quick ratio = (9046 – 2600)/ 6439 = 1.0011

Debt to equity ratio = (short-term debt + long-term debt)/ total equity

Values are in millions of pounds

2012 debt to equity ratio = 12010/ 6105 = 1.9672

2011 debt to equity ratio = 11904/ 4519 = 2.6342

2010 debt to equity ratio = 12255/ 3979 = 3.0799

2009 debt to equity ratio = 11640/ 3782 = 3.0777

2008 debt to equity ratio = 13123/ 2225 = 5.8979

Returns on equity = net profit/ average shareholder equity

For average shareholder equity, the average shareholders’ funds have been used

Values are in millions of pounds

2012 returns on equity = 2295/ ((6088+4518)/2) = 2295/ 5303 = 0.4328

2011 returns on equity = 848/ ((3975+4518)/2) = 848/ 4246.5 = 0.1997

2010 returns on equity = 543/ ((3782+3975)/2) = 543/3878.5 = 0.1400

2009 returns on equity = 2217/ ((2216+3782)/2) = 2217/ 2999 = 0.7392

2008 returns on equity = -1345/ 2216 = -0.6069

Return on assets = net profit/ average total assets

2012 return on assets = 2295/ ((18115+16423)/2) = 2295/ 17269 = 0.1329

2011 return on assets = 848/ ((16423+16423)/2) = 848/ 16423 = 0.0516

2010 return on assets = 543/ ((16423+15422)/2) = 543/ 15922.5 = 0.0341

2009 return on assets = 2217/ ((15422+15348)/2) = 2217/ 15385 = 0.1441

2008 return on assets = -1345 (15348) = -0.0876

Sales growth = (current period sales – previous period sales)/ previous period sales

2012 sales growth = (12161 – 11124)/ 11124 = 0.0932

2011 sales growth = (11124 – 11085)/ 11085 = 0.0035

2010 sales growth = (11085 – 10414)/ 10414 = 0.0644

2009 sales growth = (10414 – 9082)/ 9082 = 0.1467

Introduction

Today, we could observe a significant increase in the power of business. The world belongs to global corporations that acquire multi-billion incomes and introduce new conditions for the development of different sectors of the market. In such a way, competition becomes the most important distinctive feature of the modern world. To preserve their leading positions and remain influential, companies have to apply different approaches and tools to create a competitive advantage and overcome their closest rivals. For this reason, financial strategic management acquires the top priority nowadays as one of the most potent tools to analyze the current state of the market and create the most efficient financial strategy that will guarantee the further rise of the business. At the same time, a particular instability of the market introduces the necessity of its in-depth analysis to remain informed and act appropriately.

Background

Nevertheless, the importance of the sphere of business and its significant impact on the society resulted in the appearance of specific agencies that investigate the functioning of particular corporations and create forecasts related to their further growth or financial analysis. For instance, the FTSE100 list is one of the most potent tools that provides agents with an opportunity to acquire data about the most successful companies and peculiarities of their rise. Thus, Rolls-Royce HLG is one of the companies that could be found in the list which means that it preserves a significant competitive advantage and adheres to efficient development and financial strategies. For this reason, the in-depth investigation of the company regarding the financial management approach could help to understand the peculiarities of the market and the way companies organize their functioning.

Company

At the moment, Rolls-Royce HLG (holdings) is a multinational public limited non-financial company that was incorporated in 2011 and that owns the Rolls-Royce trading mark (it was founded in 1904). The holding is focused on designing, manufacturing, and distribution of power systems mainly for aviation but also for some industries where these products could be used. The company is the worlds second-largest manufacturer of aircraft engines which proves the brands success and opportunities for the further rise. Moreover, the company is a large defense contractor and provides the military sector with power systems and engines. In such a way, the emergence of Rolls-Royce Hlg in 2011 could be considered an efficient solution to guarantee the further evolution of the brand and it’s becoming a leader in the particular sphere.

Current Vision

The firm also has its unique vision which is the constant and stable development of all aspects of its functioning which will result in significant changes in management and processes. Rolls-Royce proclaims the further rise in its products sales and increases large aero-engine production output the prior tasks. Additionally, the company is interested in the attraction of new shareholders which is reflected in its vision. At the moment, it guarantees an appropriate payment to all individuals who own shares and subjects to the short-term cash needs. This shows the companys confidence in its future success and stable evolution. In other words, its statement reflects the financial strategy and top priorities that should be given attention to manage the funds efficiently and guarantee their positive balance.

Main Indicators

The companys main financial indicators also prove its stable position in the market. In 2016, its total revenue comprised £14,955 million. Moreover, its gross profit is £3,248 million. By the companys annual report, the corporations underlying revenue is £13,783 million. The bigger part of the income (60%) comes from the engines sales, and the remaining part comes from services and other power systems. The firm reports its assets to be £1,864 million and its gross profit is £2,626 million. In general, these financial indicators prove the companys outstanding functioning and the enhanced efficiency regarding strategic financial management and performance. Moreover, the annual report states that the company expects a further increase in its main financial showings and income. By the end of 2020, Rolls-Royce plans to become a leader in the sphere and guarantee its further stable evolution.

Another significant part of the companys strategic financial management is its approach to shareholders and shares. Therefore, as it has already been stated, the company is focused on a specific value creation which implies long-term cash-flow returns for shareholders generation. For this reason, businessmen and other potential investors become interested in cooperating with the company to acquire a stable source of income. An average price per share is about £840,20, and considering the successful development of the company and numerous tendencies for its further rise, specialists predict the further increase in the price of shares. In such a way, investing in Rolls-Royce Hlg should be considered an efficient placement of funds with a perspective for their rise

If to speak about Rolls-Royces capital structure as part of its financial strategy, it is critical to admit the positive correlation between debt and equity. The constantly stable demand for its products has a positive impact on the companys capital structure. Moreover, the factor is impacted by the companys ability to enhance its equity and attain even bigger financial success in a new financial year. Therefore, the majority of the companys financial operations are funded through various shareholders funds, banks borrowings, and notes. In such a way, the capital structure of the holding reflects the current financial balance and the companys health. At the same time, the Board of Directors has an opportunity to manage the capital to sponsor particular projects or create the basis for the brands further expansion.

The company also possesses advanced financial long-term liabilities. Being the corporation focused on the creation of value and enhanced cooperation with shareowners, Rolls-Royce can significantly improve its financial state and guarantee payments to all shareholders. The long-term debt of the organization also demonstrates positive dynamics as it becomes dependant on its constant rise in incomes. In such a way, the firms long-term liabilities prove the efficiency of the current approach to strategic financial management and could serve as the guarantee that competitive advantage will be preserved and the company will be able to evolve. Additionally, using Great Britain pounds as the central currency for the bigger part of its financial operations, Rolls-Royce can avoid problems connected with the instability of the U.S. dollar and the tendency towards oscillations in its rate. In such a way, the companys stability is also stipulated by an appropriate choice of currency and its use.

Financial Risk Management

Advantages

Altogether, the above-mentioned elements are fundamental aspects of any companys strategic financial management as they create the basis for the companys evolution or collapse. Thus, analyzing these aspects, one could also understand the central peculiarities of Rolls-Royce and its strategic financial management. Therefore, regarding this perspective, several strengths and weaknesses of its financial risk management could be outlined. First of all, the companys ability to create long-term relations with its shareholders and guarantee timely payments should be considered the first advantage of its financial risk management strategy. Promoting long-term money relations, the company introduces a pattern that helps to minimize the negative impact of alterations in the market, its trends, or some other crises that might pose a threat to the brands functioning. In other words, the corporations financial stability is preconditioned by its emphasis on the attraction of new investors and their participation in the most significant projects that will bring stable incomes.

Another advantage of the companys financial risk management is the use of Great Britain pounds as the central currency for their operations. As it has already been stated, its stability contributes to the improved brands functioning at the international level. It becomes less dependent on the U.S. dollar and acquires an opportunity to plan the majority of its operations regardless of the oscillations in its rate. The given factor could be considered another important advantage of the current financial risk policy accepted by Rolls-Royce.

Finally, another strength of the companys financial risk management is its use of transparent schemes to finance all its projects and distribute funds between departments. As it has already been mentioned, the Board of Directors has the authority to manage funds and money acquired from shareholders and financial agents or organizations with the primary aim to guarantee the further development of the company and its stable position at the market. However, the transparency of their actions should be preserved. In such a way, all movements of the capital are noted and demonstrated in detailed reports. The given approach helps to avoid some unfair practices and enhance the efficiency of the existing financial risk management.

Disadvantages

At the same time, there are also several weaknesses in the approach used by the company to guarantee its financial stability. First, Rolls Royce becomes vulnerable to the emergence of new potential rivals who use similar methods to the creation of competitive advantage and distribution of funds. Additionally, the brand might suffer from the poor position of Great Britain pound at the international level. Traditionally, it is considered one of the powerful currencies that save their leading roles and could be used in deals. However, the slightest alterations in its exchange rates could become a significant challenge to the company. Finally, it also depends on the Boards decisions as they introduce the course and establish priorities. If a wrong decision is accepted, the company might demonstrate the significant deterioration of its functioning.

Altogether, the analysis of Rolls-Royces financial indicators regarding the financial risk management shows that the company explores an efficient strategy that helps to minimize risks of negative outcomes and create a particular competitive advantage. Its financial risk management also demonstrates the high efficiency and several strengths like the ability to guarantee the companys stable functioning in terms of unstable market or currency oscillations. Some drawbacks come with the accepted approach; however, they are not critical today.

Selected Market

Nevertheless, applying the idea of strategic financial management and using the fundamental financial data provided above, we could now identify Rolls-Royce’s performance in terms of a selected market and its closest rivals which are Pratt & Whitney, GE Aviation, and Safran. First, all companies have a similar approach to business. They manufacture aircraft engines and power systems for the aviation industry. In such a way, the firms should be considered the closes rivals. However, at the moment, due to the efficient approach to management, Rolls-Royce manages to preserve the leading position. At the moment, it is the world’s second-largest manufacturer of engines which means that GE Aviation, Pratt & Whitney, and Safran are behind.

Comparing their incomes, Rolls Royce is also the leader. As stated above, in 2016, its total revenue comprised £14,955 million ($21,094 million) while Safran earned $19,778 million. If to compare with other companies, their revenues and other financial showings are also lower. At the same time, continuing comparison of Rolls-Royce and other rivals, it is critical to admit the companys high speed of development and growth. Other corporations are not so stable in their rise. It could be considered a result of successful financial management and risk assessment. Finally, identifying the company’s performance in terms of the selected market, its focus on quality and long-term cooperation should be admitted. If to compare with its closest rivals, Rolls Royce is more attractive for potential partners because of its positive image and transparency in financial operations. In such a way, the strategic financial management proves an outstanding position of the brand in the particular market segment and numerous perspectives for its further rise.

Three Main Indicators

Finally, using the central data about the company provided in previous sections, we can make predictions regarding the three key performance indicators that will remain important during the following several years. First, it is the annual revenue. It is one of the most important aspects of the functioning of any company as it describes perspectives for the further growths and creation of new projects. In such a way, if Rolls-Royce has high incomes, it can preserve its leading status and manufacture high-quality products. Another important indicator is the price per share. Being focused on the cultivation of long-term relations with its shareholders and investor and using their money as the main funds to finance their projects, the company is interested in the further rise in the price of its shares as it will attract new agents and make the position of the company more stable. The last important indicator is the exchange rate of the British pound which is the main currency used by the company in all its operations. At the moment, it provides the brand with appropriate stability and ground for the further rise. In such a way, these are the main three factors that will affect the functioning of the company during the next several years and stipulate its results.

Conclusion

In conclusion, Rolls-Royce is one of the most powerful manufacturers of aircraft engines and power systems in the world. It benefits from efficient financial and risk management and demonstrates the high speed of its growth. There are also numerous rivals in the sphere that could pose a particular threat to the existence of the company and its leading positions; however, it still manages to introduce efficient strategic decisions and create the basis for the further rise.

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