Royal Dutch Shell PLC commonly known as the shell is second largest energy company in the world whose registered office is in London. It is oil and Gas Company operating in various parts of the world; to stay relevant to climatic and environmental changes it engages in both renewable and non renewable energy. In addition, it is a vertically integrated oil company which engages in all oil activities from exploration to refining and marketing. Apart from its core activities, it has entered into partnership with various international organizations to preserve the environment. The company shares are listed in London stock exchange and its financial statement are presented in accordance to IFRS. The company main competitor is BP Petroleum Company which is also a multinational company (Investors hand book 2011).
The company exploration costs are termed as expenses and treated just like other expenses however, expense pertaining drilling which are included as part of property plant and equipment utilized in the drilling. Associated companies, which are not under control of the shell, are accounted using the equity method while, jointly controlled entities are accounted using the equity method. Its main competitor BP uses the equity method when accounting for joint ventures. The auditors have given their opinion that the financial statements represent true and fair view of the business conditions in accordance to IFRS. This means that the company has adhered to the international accounting standards.
Horizontal analysis
This analysis compares items of balance sheet and trading profit and loss account for different years so as to establish a trend. The trend shows how an item has been increasing or decreasing in a given period percentage change of the item is calculated. To calculate this change at least two years should be considered.
The importance of establishing this trend is to give a clear view of the performance of the company to users of financial information. In addition, it presents the trend of financial performance of an organization in a simple way understandable by investors without extensive financial and accounting knowledge.
Horizontal analysis of Shell company balance sheet
Positive Trends
The long term debt decreased more during 2010 to 2011 than the increase during 2009 to 2010 financial years. This shows that the company is relying more on internal financing than external financing hence it has a strong solvency level.
Negative trends identified
The company experienced down ward trend in terms of income from other activities. This negatively affects total profit which can be distributed to shareholders in terms of profit.
Ratio analysis Current ratio
This ratio measures the ability of a business organization to pay its current liabilities from its current assets. When the ratio is more than one it shows that the business will be able to pay its current liabilities as they fall due.
Current ratio shell
Cash to current liabilities
This ratio is used to indicate the ability of a company to pay its current liabilities from the available cash in bank or in hand. A very high ratio indicates the company cannot face liquidity problems because it can pay its current liabilities from the available cash. However, a high ratio may show that the management does not fully utilize the company resources.
Quick ratio BP
The above calculation shows that Shell Company can pay almost all its current liabilities without disposing its inventory. This is because the ratio is more than 0.75. The ratio is also above that of BP Company hence, the company is in a better liquidity level than BP Company. The liquidity ratios calculated are accurate and can be relied upon because the company accounts have been prepared according to generally accepted accounting principles and presented as per IFRS.
Recommendations
The analysis provides adequate evidence that the company is professionally managed, it’s profitable, and it is likely that its market share will keep on increasing. Therefore, investors can consider investing in shares of Shell Company. This is because the increasing profitability of the company depicts that shareholders will be enjoying dividends year after year. It is also likely that the market price of shell’s shares will increase in future because of increasing turnover and profitability of the company. It can also be seen from the liquidity ratios that the company is effectively managed because the ratios are depict that the company will never face liquidity problems.
In addition, from the company overview it is clear that the company has invested in renewable energy and has provided a clear way of accounting for research and development costs. This shows that the company is sensitive to external business environment and it has provided frame work to show how finances in research are used. Lastly, investors are provided with financial information which is true and fair because the accounts of the company are prepared according to GAAPs and presented according to IFRS. Therefore, I could recommend investors to invest in Shell Co.
References
BP ,2011. An archive of BP annual reporting publications and presentations, available for you to
download. http://www.bp.com/extendedsectiongenericarticle.do?categoryId=9039692&contentId=7072683 (accessed on 26th feb, 2013)
Digital thematic maps, 2008. Earnings per share of royal Dutch shell PLC. Available at
http://finance.mapsofworld.com/earnings-per-share/company/royal-dutch-shell-plc.html (accessed on 26th feb, 2013)
shell, 2011. Financial Report. Available at:
http://www.shell.com/home/content/src/investor_information/annual_reports/ (accessed on 26th feb, 2013)
Investors hand book ,2012. Shells PLC performance since 2006. Available at
http://www.investorshandbook.shell.com/2010/datatables/consolidated.(accessed on 8th Dec, 2012)
Idustry weekly, 2010. Connecting manufacturing leaders available at
http://www.industryweek.com/research/iw1000/2011/iw1000Company.asp?Input=2 .(accessed on 26th feb, 2013)
Shell Dutch company (2012). Royal Dutch shell annual report and form 20-f for the year ended
