0

Managerial Finance
ACC08102
Coursework 1
Rolls Royce Group Plc
22
nd
February 2011
Rolls Royce Group plc 22
nd
of February 2011
1
Table of c ontents
1. Introduction to the Co!any............................................................................" 2 "
2. Table of key figures..........................................................................................." # "
#. Financial $atios................................................................................................" % "
%. Co!any !erforance for 2011......................................................................." & "
&. 'tock arket (ra!h.........................................................................................." ) "
). $ecoendation of in*estent......................................................................." + "
+. $eferences......................................................................................................" 11 "
8. ,ibliogra!hy...................................................................................................." 11 "
Rolls Royce Group plc 22
nd
of February 2011
2
1. Introduction to the Company
$olls $oyce (rou! !lc is an enter!rise within the aeros!ace and defence sector
with large !roduct !ortfolios containing the ci*il and defence aeros!ace- the
arine- energy and nuclear. For e.a!le the engine !ortfolio co*ers all a/or
sectors including trans!ort- cobat- trainers- helico!ters- tactical and unanned
aircraft- thus ost of their !rofit is gained within the !roducts and ser*ices in ci*il
aeros!ace. As a globally re!resented concern- $olls $oyce (rou! !lc are forward"
thinking in their work and in*estent and therefore eerged strengthened fro
the ain recession !eriod in 2008 into a highly successful financial year 2000.
The (rou!1s re*enue e.!erienced a growth of 1&2 and unlike the results in
2008- when the co!any had to 3uote a loss of 1-# ,illion 4ounds- the year 2000
ended with a !ositi*e !rofit of 2 ,illion 4ounds.
The history of $olls $oyce (rou! !lc dates back to 100)- when it was founded by
5enry $oyce and Charles $olls- who decided to !roduce 3uality otor cars in
100%. 6ater they started to anufacture aero engines and already during 7orld
7ar 1 around half of the aircraft engines used by the Allies were ade by $olls
$oyce. The lu.ury brand of cars naed $olls $oyce does still e.ist in !ri*ate
ownershi! as a subsidiary of ,M7. 5owe*er for ore than #& years it has no
longer had a connection to the $olls $oyce (rou! !lc nor their financial results.
8owadays subsidiaries of the $olls $oyce (rou! !lc are located throughout the
world- whereby the ain arkets with the highest re*enues are the 9nited 'tates-
:uro!e including the 9nited ;ingdo and Asia.
The $olls $oyce (rou! !lc has followed a consistent strategy for 20 years which-
cobined with in*estents in technology and together with a strong order book-
will continuously !osition the concern well for future growth< =>eli*ering today-
in*esting in the future.?
Rolls Royce Group plc 22
nd
of February 2011
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2. Table of key figures
@All figures in AB 000C
2000 2008 2 Mo*eent
$e*enue 10.%1% 0.082 1%-)+ 2
D!erating !rofit 1.1+% 8&& #+-#1 2
Ca!ital e!loyed E 0.110 8.000 2-2) 2
Total assets 1&.%22 1&.#%8 0-%8 2
8et cash generated F used in o!erating
acti*ities
8&0 1.01& "1&-#+ 2
8uber of e!loyees #8.&00 #0.000 "1-28 2
:arnings !er share 120-#8 ! "+#-)# ! 8A
Total di*idend !er ordinary share 1&-0 ! 1%-#0 ! %-00 2
Gear end share !rice %8#-&0 ! ##&-&0 ! %%-11 2
Gear end arket ca!italisation EE 8.0)%-&1 ).10)-10 %)-81 2
E Ca!ital e!loyed H Total assets I current liabilities
2000< 1&.%22 I ).#12 H 0.110
2008< 1&.#%8 I ).%#0 H 8.000
EE Gear end arket ca!italisation H nuber of ordinary shares E share !rice
2000< 1 8&% 08+ 0%0 E %8#-&0! H A 8.0)%-&1
2008< 1 820 000 000 E ##&-&0! H A ).10)-10
Rolls Royce Group plc 22
nd
of February 2011
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3. Financial Ratios
4rofitability<
$eturn on Ca!ital e!loyed H 4rofit before interest and ta. F Ca!ital :!loyed
2000< 11+% F 0110 H 12-80 2
2008< 8&& F 8000 H 0-)0 2
'hort I Ter 'ol*ency<
Current $atio H Current assets F Current liabilities
2000< 0#+% F )#12 H 1-%0 ties
2008< 00%) F )%#0 H 1-%0 ties
:fficiency<
Trade $ecei*ables Collection 4eriod H Trade recei*ables F $e*enue E #)& days
2000< #8++ F 10%1% E#)& H 1#) days
2008< #020 F 0082 E#)& H 1&8 days
6ong I Ter 'ol*ency<
>e!t $atio H Total liabilities F Total assets
2000< 11)%0 F 1&%22 H +&-%8 2
2008< 1#12# F 1&#%8 H 8&-&0 2
Rolls Royce Group plc 22
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of February 2011
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In*estent $atio<
>i*idend Gield H Annual di*ided !er ordinary share F Market !rice !er share
2000< 1& F %8#-&0 H #-10 2
2008< 1%-# F ##&-& H %-2) 2
4. Company performance for 211
Figures on Thursday- February 1+
th
in 2011<
4F: $atio< 22-+ ties
4rice !er 'hare< )%&-&0 !
'ector a*erage 4F: $atio< 1&-02 ties
The :arning !er share on this date is< )%&-&0 F . H 22-+
. H )%&-&0 F 2&2-+ H 28-%% !
If the 'ector a*erage 4F: $atio a!!lies- the 4rice !er share would be as follows<
. F 28-%% H 1&-02
. H 1&-02 E 28-%% H %&2-+) !
The $olls $oyce (rou! !lc share !rice differs by J 102-+% !ence to the sector
a*erage and is therefore continually out!erforing the sector and as well the
FT': 100.
Rolls Royce Group plc 22
nd
of February 2011
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!. "tock market #raph
The 100 largest co!anies in the 9nited ;ingdo are cobined to the FT': 100-
which is the key !araeter of the stock arket !erforance. In this gra!h the
FT': 100 share inde. is co!ared to the $olls $oyce (rou! !lc shares.
The co!arison of the share !rice of $olls $oyce (rou! !lc and the FT': 100
o*er the !ast year does not show any a/or di*ergences- /ust a few inor ones.
The concentration will be on the start of 8o*eber 2010- where the share !rice of
the FT': 100 was still growing- but that of the $olls $oyce (rou! !lc does go
through an iediate fall of alost 102. According to Madslien @2010C this was
due to the failure of a $olls $oyce engine in an aero!lane of the Australian airline
Kantas on 8o*eber %
th
- 2010. As the shareholders could not be sure if the fault
was a sole occurrence or if further engines of the sae ty!e would generate
failures in the future as well. 5ence the share !rice of the $olls $oyce (rou! !lc
shares fell !ro!tly.
Rolls Royce Group plc 22
nd
of February 2011
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$. Recommendation of in%estment
In order to !resent a decent recoendation as to whether or not in*esting in the
$olls $oyce (rou! !lc would be !rofitable- their financial !erforance ust first
be analyLed.
The total re*enue of $olls $oyce (rou! !lc increased in 2000 by 1& 2-
ost of this re*enue is generated outside the 9nited ;ingdo @8)2C.
The Co!any anaged to reduce the D!erating e.!enses to 10-+&2
@+%0J#+0 F 10%1%C co!ared to 12-1#2 @)00J%0# F 0082C in 2008- e*en
though the costs for the adinistration are 3uite low- $olls $oyce (rou!
!lc achie*ed a sa*ing of further 1-#8 4ence for e*ery 4ound of
$e*enue.
Furtherore $olls $oyce (rou! !lc had an increase of D!erating !rofit
of #+2- additionally the o!eration !erfored was cost"sa*ing and
therefore the o!erating !rofit argin rose fro 0-%12 in 2008 to
11-2+ 2 in 2000.
9ne.!ectedly after a !ositi*e o!erating !rofit in 2008- the concern had
to then 3uote a loss for the year of the high aount of 1-# ,illion
4ounds. The year 2000 ended with a !rofit of 2 ,illion 4ounds- but
according to the o!erating !rofit of both years- the 3uestion of why there
was no !ositi*e !rofit generated both in 2000 and 2008 ust be raised.
Conse3uently in*estigations into the further !roceedings within the
financial year 2008 need to be abandoned<
The figures res!onsible for the loss in 2008 are the financing
costs- which were #-2 ,illion in 2008- but not e*en half a ,illion in
2000. 6ooking at 200+- the financing costs were siilar to 2000.
To understand this assi*e boost of financing cost in 2008 the
world econoy in this !articular year needs to be e.ained and
understood. This year was the ost challenging year within the
Rolls Royce Group plc 22
nd
of February 2011
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last decade where the ra!id deterioration of the e.ternal
en*ironent started to influence any industries and co!anies
with significant negati*e !ressure. Therefore the end of year
ark"to"arket of outstanding financial instruents such as
foreign e.change contracts- interest rate- coodity and /et fuel
swa!s had a a/or i!act on the co!anyBs yearend !rofit or
loss. These costs are non"cash onesM they are si!ly accounting
ad/ustents re3uired under IA'#0 Financial Instruents<
Recognition and Measurement and hence included in the
financing cost of a co!anyBs incoe stateent. The reason for
recalculating the !rofit or loss due to changes in the e.change
rates are unrealised gains or losses on deri*ati*es- which ha*e
not been !aid within the !articular financial year but will be settled
soetie in the future to atch trading cash flows and therefore
do affect cash flows.
The co!aring o*eents in 2008 and 2000 @A 1 as
co!arati*e figure for 9'> and :9$C are as follows<
E the current Dil !rice !er ,arrel 1bbl H 1&8-00 l
$e"e.aining the financing cost fro 200% until 2000 the
financing costs had been negati*e in ore than half of the ties-
but ne*er as highly negati*e as in 2008 and therefore was the
only year within this ) year !eriod when the !rofit of the year
actually was negati*e- a loss.
Rolls Royce Group plc 22
nd
of February 2011
2008 o!en 2008 close 2000 o!en 2000 close
(,4 " 9'> N1-001 N1-%#8 N1-%#8 N1-)1&
(,4 " :9$ O1-#)2 O1-0#% O1-0#% O1-12)
Dil"'!ot ,rentE N0#Fbbl N%0Fbbl N%0Fbbl N++Fbbl
9
$olls $oyce (rou! !lc did well in increasing their return on ca!ital
e!loyed u! to 12-802 @11+%F0110C fro 0-)02 @8&&F8000C in 2008-
which indicates a better return on in*estents for the future. The
concern had ade ore in*estents then in the !re*ious year- due to
the stabilised situation in world econoics.
The Acid test ratio is an i!ortant ratio to deonstrate the co!anyBs
li3uidity. $olls $oyce (rou! !lc anaged to increase this figure as well
to 1-1+ ties @0#+%"2000F)#12C fro 1-10 ties @00%)"100&F)%#0C in
2008. Therefore the short ter sol*ency is acce!table and for this kind
of business no large increases can be e.!ected.
As $olls $oyce (rou! !lc does not anufacture ass !roductions- the
high figure of the in*entory turno*er is not sur!rising. 8e*ertheless they
succeeded to lower this ratio to 88 days @2000F8#0# E #)&C fro 100
days @100&F+2+8 E #)&C in 2008- which is due to the better order !osition
in 2000 based on the stabilisation of world econoics.
The cash o!erating cycle is e*en ore e.!ressi*e- as it shows the
a*erage nuber of days it takes to turn the !urchased in*entories into
cash sales. In 2000 this !eriod was 1+% days @88J1#)"&0C in
co!arison to 2008 where it took 102 @100J1&8"))C days to generate
cash. >es!ite the aount of days reducing fro 2008 to 2000- the
!eriod of tie is still *ery long. 5owe*er- looking at the sector $olls
$oyce (rou! !lc is !art of- this long cash o!erating cycle can be
acce!ted- because of the lion1s share of big contracts- where longer
!ayent !eriods ust be granted to the business !artners.
$olls $oyce (rou! !lc is a concern o!erating with a *ery high risk-
which is shown by the gearing ratio< des!ite a decrease in this ratio to
&8-%02 @&#28F0110C fro +&-0#2 @))8%F8000C in 2008 the gearing is
still high. In con/unction with this ratio stands the high share !rice of
%8#-&0! at the end of 2000 which indicates new shareholders to
concentrate on long ter in*estents.
Rolls Royce Group plc 22
nd
of February 2011
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$olls $oyce (rou! !lc is te!orarily at a *ery high debt ratioM although
adittedly it is lower than in 2008- with 8&-&02 @1#12#F1&#%8C- in 2000
/ust +&-%82 @11)%0F1&%22C. This is due to the use of fi.ed and floating
rate debts as a funding source. Get this is not too worrying in the
aeros!ace and defence sector.
>uring the decision !eriod whether to buy shares of a s!ecial co!any
the di*idend yield is an i!ortant in*estent ratio- which need to be
closely obser*ed. For $olls $oyce the di*idend yield in 2008 was %-2)2
@1%-#F##&-&C and slightly lower in 2000 with #-102 @1&F%8#-&0C- which is
due to an increase in the share !rice by %%2 whereas the di*idends
reained at a siilar le*el with an increase of /ust & 2. Today the !rice
of one share increased in costM another boost of 2#2 co!ared to 2000-
which leads to a di*idend yield which ight be e*en lower in this
financial year- if the di*idends continue to rest at a co!arable le*el. At
soe !oint in the future the di*idend yield will rise again- because at the
oent the generated oney is not been !aid out. :*en ore
significant in the long run howe*er- has been rein*ested into the
concern- which will lead to higher !rofits in the future and therefore to
higher di*idends.
As a conse3uence of the yearend loss in 2008- no di*idend !ayout can
be calculated for that !articular year. It is therefore shocking- that $olls
$oyce !lc did !ay out di*idends des!ite the effects of the recession.
Db*iously the 3uestion of where the oney for the !ay out of the
di*idends arose fro needs to be answered. The consolidated balance
sheet offers a solution through the retained earnings- which were 2-%
,illion 4ounds at the start of 2008 but did decrease to a closing aount
of 0-0 ,illion 4ounds at the end of 2008. This is a !ositi*e sign for the
shareholders as it shows their ability to rely on the foregone financial
anageent of $olls $oyce (rou! !lc. In addition to this- the retained
earnings at the end of 2000 were e*en higher than at the beginning of
2008 with 2-) ,illion 4ounds- which increases the de!endability of and
trust in the financial anageent for the future.
Rolls Royce Group plc 22
nd
of February 2011
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After discussing all of the rele*ant financial figures and ratios to outline the
!erforance of the $olls $oyce (rou! !lc- this concern is *ery interesting to
in*est in if you are after a long ter in*estent into a globally o!erating future"
inded co!any. This concern does out!erfor the FT': 100 continuously- with
a relati*ely high share !rice- whereby $olls $oyce (rou! !lc does currently use
their generated oney for future in*estents which generates better and higher
di*idends in the future.
Therefore $olls $oyce (rou! !lc is a great long ter in*estent share.
&. References
$olls $oyce (rou! !lc- Annual $e!ort 2000
$olls $oyce (rou! !lc- Annual $e!ort 2008
htt!<FFwww.bbc.co.ukFnewsF11)02#)2 Madslien- P. @2010C Kantas eergency
!oints s!otlight at Airbus and $olls"$oyce
htt!<FFwww.rolls"royce.coFci*ilFnewsF2010F10110%QstateentQ3antasQ3f#2./s!
'tateent $e< Kantas KF#2
htt!<FFuk.finance.yahoo.coF3FbcRtH1ySsH$$.6SlHonSLHlS3HlScHScHTFT':
$$.6 (ra!h
'. (ibliography
Chadwick- 6. @100)C The Essence of Financial Accounting 2
nd
ed. 6ondonM
4rentice 5all
:lliott- ,. :lliott- P. @2000C Financial accounting and reporting 13
th
ed. 9nited
;ingdoM >awson ,ooks

Rolls Royce Group plc 22
nd
of February 2011