Executive summary
The company; Rolls Royce is a well renowned business organization with global brand presence and reliance for quality. The company was initially set up to manufacture luxury cars but later on that function was assigned to BMW and the trademarks are utilized by the parent company, Rolls Royce. The group marks the history by establishing a strong presence in the engineering sector with emphasize on aerospace and marine sector. It provides integrated power solution to its strong clientele with a worldwide network of sales and service facilities. It is present in over 50 countries of the work and major marine and defense companies along with aircraft manufacturers etc. The headquarters for the company are stationed in London, United Kingdom (Rolls Royce, 2013).
The company has various peers including General Electric, BAE Systems PLC, Boeing Co. and various other strong companies. These are all globally present with strong brand image and renowned for their quality and commitment. Due to the increased space for innovation and technological advancements, the competition is fierce where there is strive to stay ahead of the other.
Introduction
Profitability analysis
(Financial Morningstar, 2013)
This is the measure of the company’s efficiency in terms of controlling costs and the efficiency of earning a return with regards to the capital invested (Peavler, 2012). The profit margin for the company has increased substantially as a result of a 9% increase in revenue amounting to 1.04 million while costs of sales showed a corresponding increase of just over 8% showing improved efficiency. The one off figure for profit on disposal ad result in large increase in the net profit figures for the year, taking the profit margin to over twice. There was a corresponding increase in the figures for ROCE (Return on capital employed) which had improved to more than double as a result of increased earnings showing more efficient earnings level. Similarly, return on equity has also enhanced by a good 23% following the increased profitability and corresponding increase in equity due to earnings and reserves by. Net assets turnover demonstrates how much company is earning in ratio to the assets utilized (Peavler, 2012) and there has been an increased in the same by almost 3%.
Liquidity
(Financial Morningstar, 2013)
The liquidity ratios present a fair view of the company in terms of its ability to meet its short term obligations as they may fall due (Riley J., 2012). The current ratio takes account of all current assets in contrast to current liabilities to presume the liquid health. For the company, this ratio has improved by 11% as a result of relatively stronger increase in the current assets as compared to the current liabilities. The quick ratio on the other hand takes account of the most liquid current assets and compares that with the current liabilities and this had increased by 20% showing a improving prospects however as long as this is below 1, can be considered critical and risky and needs further improvement (Riley J., 2012).
Capital structure and solvency
(Financial Morningstar, 2013)
Capital structure takes account of the company’s financial structuring and how it’s being managed in terms of financial sourcing. Gearing ratio takes account of the financial leverage situation and compares the degree of owners’ fund to borrowings that are utilized to source the company finance (Accounting tools, nd). This ratio has come down by 23% to 0.2 which shows company is paying back the external borrowings and less reliant on that which is better for the company. Interest cover takes account of the company’s ability to meet its finance costs, the greater the ratio the better it is for the company (Accounting tools, nd). For the year, this ratio has increased by 138% showing a large improvement and higher cushion for the company to meet its finance cost liability mainly as a result of improved margin and decreased finance cost.
Operating efficiency
(Financial Morningstar, 2013)
The operating efficiency for the company presumes how well the company is managing its operations and working capital (Spaulding W., 2011). Inventory days show how much on average inventory is held in stock and a reduction by over 2% shows company is improving its efficiency in terms of conversion of inventory into revenue. Receivable days have gone down by 4 days on average that shows improved receivable management and company’s enhanced collection policy. The payable days showing the company’s paying off the creditors have improved slightly by over a day on average which explains a positive sign in terms of cash flow for the company (Spaulding W., 2011).
Cash flow statement
(Financial Morningstar, 2013)
The percentage of cash flow to sales has improved slightly to 4.69% as a result of improved sales as well as the overall cash flow available to the company, thus explaining healthy prospects in terms of cash flow situation.
Industry analysis
General electric is a strong global peer for Rolls Royce and operates in the same industry. Both companies own a strong reputation in their industry and a strong brand image and presence. Although they are operating from different geographical locations, they assume a more logical comparison with respect to their level of activities and presence in their industry. The following table lists down comparison of some key financial ratios for both the companies:
(Stock analysis, nd)
General Electric has a stronger profit earnings ratio as compared to Rolls Royce that differs by over 7% showing stronger profit prospects for the peer company. ROCE for Rolls Royce is stronger than its peer as a result of a higher profit earning potential in comparison to the capital invested. In terms of liquidity, Rolls Royce is better than its peer as it has a stronger current as well as quick ratio giving it the edge over the competition. In terms of financial leverage position, the company has a stronger reliance over external borrowings as compared to its peer company as its debt ratio is over 40% higher. Interest cover for the company is over 4 times stronger than that of its competitor; General Electric, showing stronger fanatical health and position for the company.
References
Rolls Royce (2013), Company Overview [Online] Source: http://www.rolls-royce.com/about/index.jsp (Accessed on: 05.12.2013)
Growth champions (2013), Rolls Royce [Online] Source: http://growthchampions.org/growth-champions/rollsroyce/ (Accessed on: 05.12.2013)
Peavler (2012), Profitability Ratio Analysis [Online] Source: http://bizfinance.about.com/od/financialratios/a/Profitability_Ratios.htm (Accessed on: 05.12.2013)
Riley J. (2012), Accounting Ratios-Liquidity [Online] Source: http://www.tutor2u.net/business/accounts/liquidity_ratios.html (Accessed on: 05.12.2013)
Accounting tools (nd), Gearing Ratio [Online] Source: http://www.accountingtools.com/gearing-ratio (Accessed on: 05.12.2013)
Spaulding W. (2011), Accounting ratios-Accounts receivable turnover, Inventory turnover [Online] Source: http://thismatter.com/money/stocks/valuation/activity-ratios.htm (Accessed on: 06.12.2013)
Stock analysis (nd), General Electric Co. [Online] Source: http://www.stock-analysis-on.net/NYSE/Company/General-Electric-Co (Accessed on: 06.12.2013)
Financials Morningstar (2013), General Electric Co. [Online] Source: http://financials.morningstar.com/ratios/r.html?t=GE (Accessed on: 05.12.2013)
