Introduction
Rolls Royce is the one of the world known leading company in the manufacture of the prestigious vehicles, the rolls Royce, it’s also accredited for being the leading manufacturer of aircrafts engines and part of the combustion and driving components components of ships manufacture of aircrafts engine as well as driving parts of ships. Over its existence the company has been leading in this industry with prospects of even rejuvenated domination due to its ever growing reputation due its innovation and production of high quality products that far much surpass the international standards,. The parent country for the company in England, strategically located in Buckingham Gate but it has diversified its operation and investments in the larger European Union, the oil rich Middle East as well Australia and Asia.
This paper will utilize the financial statements of the company for the financial period 2011, from which the performance information through the calculation of the wanted ratios will be performed and therefore an explanation on the figures in order to unveil what they mean in reference to the performance of the company.
The ratios which will be computed include the solvency ratios, liquidity ratios without ignoring the profitability ratios.
The paper will also analyze the future prospects of the company both in the short run and in the long run period as this is part of getting for insight on the performance of the company and particularly the management which is charged with the responsibility of moving the company along the path of growth.
Reasons why the company should compare its cash flow information with its operating profits:
Operating profit is the income net of expenses incurred in relation to realization of the profits, it may be actually have been received in cash or might be still be part of revenues not yet recovered from the customers while the cash flow is the total amount of cash inflow less the amount of cash flow from the business entity, if the outflow exceed the inflow then the company will have a deficit I the cash flows and vice versa. Reasons for this is because some items are used in the commutating of operating income as expenses but don’t really involve any form of cash outflow such as depreciation cost, provision of bad debts and other expenses in which there is no physical cash flow. The cash flow statements write off such expenses which don’t involve flow of the cash with in the business entity because the cash flow statements only records events which only took place with actual flow of cash of significant and verifiable amount.
Reasons as to why a fine understanding of the cash flow is because in every business cash is regarded as the king and its keeps the company going
Starting with the liquidity ratios
Quick ratio/acid test ratio
This ratio measures the ability of the company to service its obligation using the most liquid asset with exclusion of the its inventories because the inventories are regarded as less liquid ,that is, it would take an expansive duration to convert such inventories into cash and meet the due obligations. The ratio is computed as follows;
(Current assets-inventories)/current liabilities
Thus the acid test for Rolls Royce for the 2011 financial year will be;
(8,315-2561)/ 6,916= 0.831984
Current ratio
This measure the ability of the company to honor its financial obligations on time when they fall due, it’s computed as follows a ratios of above one is regarded safe for the company and vice versa.
Current assets/ current liabilities, for Royce the value is as computed as shown below
8315/6,916 =1.202
Accounts Receivable Turnover ratio
This is the ratio of averages debtors to sales of the company. It’s computed as follows
(Average debtors or accounts receivable/annual sales) the annual sales are inclusive of both cash and credit sales. While the average debtor or accounts receivable is equal to opening accounts +receivable closing value of accounts receivables divided by two.
For our company under analysis it’s computed as follows
11,124/ 2495 =4.5
This shows the average number of days the debtors take to pay their due debts or the duration after which the company may issue a notice of due debts to its customers.
Inventory turn over
This ratio show the time it takes a company to convert its inventories into sales either on cash basis or credit basis or a mixture of both. Its computed as follows
Cost of goods sold divided by average inventory value of the company.
The ratio will be as follows:
Average inventories=(2561+2421)/2= 2,495
Inventory turnover = 8,676/2495= 3.477 times
Days of sales in inventory
This ratios show how long it take to cover available stock and uncompleted inventorie into sales, its computed using this formulae;
= (2,561/8676)365 days
= 107.74 days.
This is the average number of days it takes Royce to convert its stocks into sales, and revisiting our introduction the company is involved in the manufacture of heavy auto mobiles and thus this a duration is quite commendable for the company and because its quite well efficient in turning its inventories into sales.
computation of:
Debt to Equity ratio and the Interest Coverage ratio.
Debt to equity ratio
This is the amount of borrowed funds that the company utilizes in its operations and its ameasure of how the company is leveraged. It’s calculated as
(Total debt/total equity)
For rolls Royce the value is; (4988/4519)
=1.1030
Thus the company is financing much of its assets using non owners funds;
Interest coverage ratios
This ratio indicates the ability of the company to pay its interest and principle for its obligations. It’s calculated by dividing the company’s earnings before interest and tax by the interest expenses
= (earnings before interest and tax/ Interest expense)
= 1,189/84
14.15 times
There for the company is in a good position to pay its debts with ease.
Calculate and interpret the following profitability ratios: Gross Profit Margin, Operating Profit Margin, Return on Common Stockholders' Equity, and Return on Investment.
Gross Profit Margin
This show the amount of revenues net cost of productionthsat goes in to the production of commodities it’s computed as follows, usually calculated as shown
(Gross Profit /sales)100%
= (2,448/11,124)100%
= 22%
Operating profit margin
Also called the net profit margin, this measure to the returns to the owners of the company relative to the sales revenues. This ratio is calculated as follows;
(Operating profit/sales)*100%
(1,186/11,124)
= 10.7%
Return on equity
This ratio measures the net return or profit on the money that the share holders have invested in the business of the company.;
Net Income/ equity for the shareholders
= 848/4519
= 18.77%
This is the earnings to the shareholders of Rolls Royce.
Return on investments.
This ratio is a measures of returns to the investor’s money in a company.
It’s computed as
Net profit/ total assets, for roll Royce its given as
848/16,423
= 5ws
Thus the money invested in the company for the year under study is earned 5% .
How are segments identified under U.S. GAAP and International Financial Reporting Standards?
Under GAAP, the management has the powers to decide what makes the segment, because segments are mostly for internal use and since the management responsibility is to control the internal affairs of the company then such decision is integrated in their responsibilities. There however exists a set of guidelines on how GAAPs should be identified. Segments usually identified using some set criteria such as criteria such as geographical regions,
Under IFRS 8, Segments are recognized where; the internal management is involved in and regularly reviews the performance of the segment (http:// www.iasplus.com)
Calculate Rolls-Royce's Return on Investment by breaking it down into the margin and turnover components. What steps can Rolls-Royce take to increase its Return on Investment?Calculate the Residual Income of Rolls-Royce. What assumptions did you make to obtain your answer?
The return on investment can be subdivided into its components by employing the DuPont system as follows;
NET Return on assets= (Net income/sales)*(sales/ total assets)
= (848/11,124)*(11,124/16,423)100%
= 5.15%
Operating return on assets
= operating income * sales/Total assets
Sales
= (1186/11,124) *(11,124/16,423)
= (1186/ 16,423)*100%
= 7.2% her investment,
The following formulae is used to compute the residual income
RI = Operating Income - (Operating Assets x Minimum Required Rate of Return) for case of Royce the value of Riis computed as; 1186-(16,423*5.15%)
= 1186- 845.78
= 340.2155
Based on the ratios that you calculated above, what is your overall assessment of the company?"
Ina nut shell the company can be said to have performed pretty well as identified from the profitability ratios and liquidity ratios except for the return on invest which or only went up to a tune of 5%which is not commendable for such a blue chip company but this can be due to the global economic shocks that occurred during the company’s financial period. In conclusion the company performance is expected to improve in the foreseeable future given that the economic downturn has ended and the management of the company remains committed to scaling higher heights in making the company one of the best in the automobiles and energy sectors
References:
IFRS 8. Adopted from http:// www.iasplus.com
Rolls Royce annual report (2011). Adopted from .
Accessed 28th Nov 2011<>
Troy, l. (2001).Almanac of Business and Industrial Ratios. John Wiley and sons, Inc, Ontario
