FINANCIAL ANALYSIS OF

ROLLS ROYCE HOLDINGS PLC.

Analyzing the Financial performances, Business
and Growth Strategy from 2013-2016

Pratik Shrestha (21240206)

Accounting for Decision Makers
Word Count: 1650
TABLE OF CONTENTS

Intoduction and company profile 1

Limitations of Financial ratios 1

Horizontal analysis (Trend Analysis) 1

Profit Margins Analysis 1
Efficiency Ratio analysis 3
Gearing ratios analysis 4
Dividend policy Analysis 5

Vertical Analysis 1

Business and Growth Strategy Analysis (Chairman and chief Executives Strategic
Report) 1

References 2

APPENDIX 1: Rolls-Royce Holdings plc annual report 2013 4

APPENDIX 2: Rolls-Royce Holdings plc annual report 2014 6

APPENDIX 3: Rolls-Royce Holdings plc annual report 2015 8

APPENDIX 4: Rolls-Royce Holdings plc annual report 2016 10

APPENDIX 5: WORKINGS AND CALCULATIONS 12

INTODUCTION AND COMPANY PROFILE

Rolls Royce are leaders in providing solutions for propulsion and integrated power. The business
operates in two divisions; Aerospace Engineering (civil and defense businesses) and Land and Sea
(power systems, marine and nuclear businesses). RRH plc operates from its headquarters in London,
England and is currently listed in the FTSE 100 in Londons stock exchange (Rolls-Royce Holdings plc,
2014). The key executives of the company are Mr. D. Warren A. East CBE (Chief Executive Officer)
and Mr. David Miles Smith (Chief Financial Officer), They currently operate with 36,100 employees
across the world. This report will be critically analyzing the trends and strategic alignment of RRH plcs
financial performances from year 2013-2016. Various ratios will be calculated and utilized for trend and
vertical analysis. A conclusion will be extrapolated after comparing their performance with their
strategic alignment.
LIMITATIONS OF FINANCIAL RATIOS

On a stand-alone basis, financial ratios have limited applicability. They need to be benchmarked against
industry norm or another company (CooperMathews, 1998). Because Rolls Royces operations operate
in a vast industry, a benchmark is difficult to portray. Another important factor limiting ratio analysis
the seasonal factor. in RRHs case, Sales Revenue are based on High values and A long-term
phenomenon that funds the company for decades. Hence, to assume that Credit transactions doesnt exist
in sales is impossible (CooperMathews, 1998). In a growing technical environment and focus on
ecological sustainability, these factors compared to historical figures needs to be addressed. These
factors cause changes in pricing as well as business cycle (Rolls-Royce Holdings plc, 2014).

HORIZONTAL ANALYSIS (TREND ANALYSIS)

1. Income Statement
2. Balance Sheet

In close inspection, major downward bends can be seen during period ending 2014 and 2016. 2014 saw
decrease in revenue whilst increasing Financial and Interest Expenses.2016 recorded a plummeting loss
with a -4957.83% change in Net Income while gross profit shows a -1.3% decrease. The major
contributor can be reasoned towards their Expense in Provisions for Income tax that costed 6 million
and Financial expenses of 4.78 Billion in 2016 (Investopedia, 2003). Due to the EU referendum in
2016, the value of the sterling pound fell significantly in relative to the US dollar. Hence, they
recognized a 4.4bn in-year non-cash mark-to-market valuation adjustment for their currency hedge
book, as part of their reported financing cost. They increased their investment in Long term investments
and deferred long-term assets in 2016 by two-fold. Also, an increment in their Account Payables can be
noticed with an increment of 176%, along with 863 million in Reserves (Rolls-Royce Holdings plc,
2017).
Profit Margins Analysis

1 Gross Profit Margin

An unstable trend is seen in

Fig.1 with a slight increment from 2013-2015 and a drop in (Fig.1) 2016. This trend cannot
fully determine the companys financial stability as their Income are based on
long-term transactions. Further, gearing ratios will provide more information on the situation.

3. Percentage Change in Revenue

-
1,37 4,03
9 58 84 2
 Percentage Change in Revenue Profit/Loss of Year

(Fig.2) (Fig. 3)
The Net profit of the company struck a body blow in 2012 allowing a plunging -40% decrease. The
trend continued in 2015 with -95%( Fig. 2 and Fig. 3). While recovery was made in 2015 slightly they
hit a lowest recorded loss of 4.03 Billion in 2016. Further discussion and elaboration is made in The
companys Vertical analysis (See Page 2).

4. Major Expenses to Revenue

The companys
(Fig.4)
efficiency in managing their Major expenses (Commercial and
Administrative Costs, R&D Costs) in relation with their
Revenue arent promising. A steady trend is noticed till 2015, however 2016 sees increment in R&D
costs, plus a 100% increase in Administrative costs (Fig.4). This shows the companys inefficiency in
operations and its Cost strategy that hampers profitability.
5. Return on Capital Employed(ROCE)

ROCE calculates the companys efficient utilization of Shareholders Equity and long term loans (Total
Assets Current Liabilities) (Staff, 2003). The steady ROCE of RRH plc. was broken in 2016 with a
major plunge in their Earnings before interest and tax and an increased debt. Hence, the company has
been inefficient in its use of capital for the period of 2016 not being able to generate shareholders value.

Efficiency Ratio analysis

(Fig.5)
Efficiency Ratio analyzes the companys internal use of its assets and liabilities, i.e. its
ability to generate income from its assets, and convert inventories and liabilities into cash flow
(CooperMathews, 1998).
6. Quick Ratio/Acid Test

Fig. 6 depicts the company has been able to keep their Quick Ratio steady at an average of 1.3.
Which means, they have 1.5 of liquid asset to pay off 1 of current liability. Due to a slight
decrease in its Current Liabilities and assets in 2014 a slight boom can be observed.

(Fig.6)
7. Inventory Turnover

The company has steadily increased their Inventory turnover in past 4 years, meaning inventory turns
every 93 days in average. This implies strong sales and efficient operations, which is backed up by their
steady Sales revenue until 2015.

(Fig.7)

Gearing ratios analysis

8. Debt to Equity Ratio & Gearing Ratio

 Gearing Ratios

Debt to Equity Ratio Gearing Ratios

The ratio (Fig.8)

analyzes the companys Debt leverage to finance its assets and
growth. In Fig. 8, a steady and low ratio is seen in an average of 2.6, meaning the company was not
highly dependent in their liabilities. However, in 2016 there is a massive increment in Total Debt, with
near 4 Billion decrease in its Equity. Also, the companys Gearing ratio is clearly above the 70% mark,
meaning they are highly dependent and funded by external sources instead owners equity. This causes
volatility in the companys earnings due to rise in Interest expenses and downturns in the business cycle
and economy

Dividend policy Analysis

9. Earnings per Share, Payout Ratio, Dividend Yeild and Dividend Cover
(Fig.9) (Fig.10)

Dividend Yeild Dividend Cover Earnings per Share

All these ratios help in determining their Share prices and the profitability of investing in the company.
Rolls Royce has seen stormy days in the past 4 years as seen in Fig.9 and Fig. 10. A downhill in their
E.P.S caused their Share prices to plunge significantly. A decrease in their profit and Dividend per share
are responsible for these figures (Staff, 2003). However, surprisingly their dividend cover still is still in
the margin averaging 3. This shows they have barely sufficient earnings to pay off its preferred
dividends amounting at times the corresponding ratio at that period. Their Dividend yield (Fig.9) has
been struggling as well in corresponsive to the above ratios, at below 3% yield. This gives the
presumptions to investors that the company is only able to earn below 3% of their invested value, i.e.
little to none, which automatically becomes a high risk for the investors and creating an obstacle for the
company to receive funding in the future (Staff, 2003).

VERTICAL ANALYSIS

1 Income Statement

Comparing percentage of Total Operating Expenses (COR + Other Exp.) an inefficiency in operations
and cost of revenue can be noticed with the trend being well over 70% of total revenue. Other
fundamentals have stayed steady in the 4 periods apart from Financing expenses in 2016 that contributed
a 4% jump in costs than the previous year resulting in a -26% LOSS for the year (Rolls-Royce Holdings
plc, 2017).
10. Balance Sheet

A decreasing trend in Cash flow and short term investments is seen at an average rate of 4% and 0.2%
respectively. Whereas, there is a 25% increase in Accounts payable in contribution to total assets in
2016. Also in contrast to the gearing ratios mentioned above, in 2016 92.7% of Total Liabilities
(Excluding Equity) contributed to it with 18% decrease in retained earnings (Rolls-Royce Holdings plc,
2017).
BUSINESS AND GROWTH STRATEGY ANALYSIS (CHAIRMAN AND
CHIEF EXECUTIVES STRATEGIC REPORT)

In 2013, They built a business model around 3 core pillars; Customer, Innovation and Profitable Growth.
Emphasis was on cost reduction and attain funds for long-term investment. An efficient implication of
their strategy awarded them with sales growth and disciplined capital allocation (Rolls-Royce Holdings
plc, 2014). This pattern of allocating Capital towards R&D was seen in all strategic reports (2013-2016).
In 2014, the company planned to allocate 1.4 billion in R&D, however it was unfulfilled because of
their short-term performance, affecting their growth and profit margin. Other factors such as sharp
decline in oil prices, reduced government spending in Defense in their main markets caused a massive
stir in the business financial performance in 2014 (Rolls-Royce Holdings plc, 2015).

For 2015, weakness was seen in the marine market with good compensating growth in Civil Aerospace.
An underlying profit of 812 million was achieved due to difficulty in sustainable investment and high
fixed costs for the year. Prior to Nov 2015, restructuring and transformation programs for their
aerospace and marine division (Rolls-Royce Holdings plc, 2016). In Oct 2015, a decision was made to
invest $600 million in modernizing their manufacturing base plus other initial restructuring in their
Supply chain and governance to reduce cost and target cost savings. These programs would significantly
reduce the companys unwanted operational footprints. For 2016, the company has predicted significant
headwinds holding back the performance of the company and cash inflow (Rolls-Royce Holdings plc,
2016).

The marine market was still suffering in 2016, with other markets remaining robust. The massive loss
occurred in the period due to currency valuations and Financial penalties, had taken a massive toll in the
companys finances. Hence, the Chief executives have prioritized to strengthen long-term profitable
growth, Operational excellence to reduce cost and Capturing after market value (Rolls-Royce Holdings
plc, 2017).

The company is highly investing in R&D and revenue generation depends upon Its order book and
delivery. Due to their long-term strategy of cost reduction and customer commitment, Dependent in
Liabilities is considerable. However, Their Net Income plummeted in 2016 from a profit of 83 million
to a loss of 4.03 billion, investing 1.36 billion on investing activities and financing 739 million in
cash flow (Rolls-Royce Holdings plc, 2017).

REFERENCES

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Blackstone, W. and Morrison, W. (2001). Commentaries on the laws of England. London:

Cavendish Pub.

Cooper, B. and Mathews, M. (1998). Accounting & finance for managers. Milton, Qld.:
Jacaranda Wiley.

Rolls-Royce Holdings plc,. (2014). Rolls-Royce Holdings plc annual report 2013. Lodnon.
[Online]. Available at: https://www.rolls-royce.com/~/media/Files/R/Rolls-
Royce/documents/investors/annual-reports/rr-full%20annual%20report--tcm92-
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Rolls-Royce Holdings plc,. (2015). Rolls-Royce Holdings plc Annual Report 2014. London.
[Online]. Available at: https://www.rolls-royce.com/~/media/Files/R/Rolls-
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APPENDIX 1: ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2013
APPENDIX 2: ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2014
APPENDIX 3: ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2015
APPENDIX 4: ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2016
APPENDIX 5: WORKINGS AND CALCULATIONS
Gross Profit Percentage
Percentage Change in Revenue
Major Expenses to Revenue
Return on capital employed
Acid Test/ Quick Ratio
Inventory Turnover
Inventory Days
Gearing Ratio
Debt to Equity Ratio
Earnings per Share
Dividend Yield
Dividend Cover
WR1 = (Sales Revenue - Cost of
Sales)/Cost of Sales X 100%
WR2 = (Profit/Loss of precious Year -
Profit/Loss of current Year) /
Profit/Loss of previous Year X
100%
WR3 = Operating Expenses (Research
and development Costs +
Commercial and Administrative
Costs) / Sales Revenue X 100%
WR4 = Earnings Before Interest and
Tax (EBIT) / Capital Employed
(Total Assets -
Current Liabilities)
WR5 = (Current Assets Inventories) /
Current Liabilities
WR6 = Cost of Sales / Inventories
= 365 Days / Inventory Turnover
WR7 = Total Liability / (Total Equity +
Total Liability) X 100%
WR8 = Total Liability / Total Equity
WR9 = (Net Income Dividends on
preferred Stock)/ Average
Outstanding Shares
WR10 = Dividend per Share / Share
Price
WR11 = Dividend per Share / Earnings
per Share
Dividend Payout Ratio WR12 = Earnings per Share / Dividend
per Share