This paper is about Rolls Royce and it is a financial analysis. The analysis focuses on such things as a ratio analysis, a trend analysis, a DuPont analysis, an explanation of what the firm does, and some notes from the auditor's report are also included in the analysis of the Rolls Royce company.
Rolls Royce
The principle activities of Rolls Royce are to provide "integrated power solutions for customers in civil and defense aerospace, marine and energy markets." The breakdown is as following:
The auditor's report conveys the following findings.
"The financial statements give a true and fair view of the state of the company's affairs"
The financial statements have been properly prepared in accordance with IFRS and UK GAAP
The director's remuneration report has been properly prepared and is consistent with the financial statements
There is nothing to report under the Companies Act of 2006.
The ratios for Rolls Royce are as follows:
Ratio
Expression
Industry
Average
Eg Trade receivables period
days
days
ROE
1559/6105
736/4519
19%
Gross profit margin
2745/12161
2448/11124
22%
10%
Net profit margin
1559/12161
848/11124
3%
Current ratio
8522/7194
8108/6916
Inventory turnover period
2726/9416 x365
2561/8841 x 365
105 days
105 days
50 days
Payables' turnover period
9581/6387 x 365
8841/6236 x 365
243 days
259 days
20 days
Gearing ratio
4816/11278
4988/9880
42.7%
50.5%
4%
P/E ratio
873/123.23
757/45.95
7.1x
16.5x
9.0 x
4. Rolls Royce has grown in the past year. The company's sales have increased 9.3% from £11,124 to £12,161. The company's operating profit has also increased, from £1186 to £1373, which is a gain of 15.8%. The stock price has increased from 757 to 873, which is a gain of 15.3%.
5.
The company has experienced a fairly normal growth trajectory over the 2011-2012 period. The figures used are exclusive of restructurig that the company undertook, which allows the figure to be more comparable with each other. The gains in the operating profit and share price are almost identical.
On the whole, the company's operating metrics are positive. Rolls Royce has healthy margins and a strong balance sheet. Most of its metrics outperform the industry average. The cash conversion cycle is very long for Rolls Royce -- the fictional industry figures make it look bad but really RR probably performs in line with its peers. The long lead times and high development costs in this industry highlight the need for an extended cash conversion cycle. The payables period is especially interesting -- RR seems to want to receive payment for a good before paying its own bills. Normally, that would be considered a sign of financial distress, but with an otherwise healthy balance sheet it seems this is more the industry norm.
The P/E ratio is interesting. The stock price has increased 15.3%, but the EPS increased 168%, contributing to a significant decline in the P/E ratio. This makes one wonder if the market had run up the share price in 2011 in anticipation of a higher EPS in 2012. Certainly the market did not get too excited about the spike in EPS, as that spike did not correspond with an increase in the share price.
6. The ROE increased significantly in 2012, from 16.3% the previous year to 25.5% in 2012. The DuPont analysis can help to explain how that happened. The profit margin increased over that period from 7.6% to 12.8%. This would contribute to an increase in the ROE. The gearing ratio declined, meaning that the company reduced its leverage. This would normally register as a decrease in the ROE. Not only is leverage not the cause of the increase in ROE, but it would have counterbalanced other factors. Lastly, the DuPont analysis considered the total asset turnover, which we have to calculate.
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