Financial Information for Business Decision: Rolls-Royce Group Plc - Case Study Example

FINANCIAL INFORMATION FOR BUSINESS DECISION: ROLLS-ROYCE GROUP PLC by Date of submission Executive Summary In this study, Rolls-Royce Group plc’s financial statements were selected for analysis for a period of five years starting from the year 2007-2011. In the year 2007, Rolls-Royce Group plc generated 7,435 million pounds revenues. The revenues increased steadily over the following four years by 22.2 percent, 14.7 percent, 6.4 percent, and 0.4 percent respectively. Profits after tax reached a pick of 2,2171 million pounds in the year 2009 and the lowest loss of (1,3452) million pounds in the year 2008. The loss may be attributed to the rise in financing cost by 541 percent from the previous year. Financing costs fluctuated with a pick of 3,186 million pounds in the year 2008 and the lows of 491 million pounds in the year 2009. In the year 2007, Rolls-Royce Group plc had a net cash inflows decreased by 34.2 percent. The inflows rose by 44 percent in response to the 22.2 percent revenue growth, and latter decreases as the percentage revenues go down. When comparing the Rolls-Royce Group plc’s revenues with that of GE Aviation, the group’s revenues grew with a higher percentage. In 2008, GE Aviation’s revenues grew by 5.8 percent while that of Rolls-Royce group plc grew by 22.2 percent in the same period. In the year 2009, GE Aviation’s revenue declined by 14.1 percent, as the revenue of Rolls-Royce Holdings plc grew by the same amount. The Director and Chairman’s Statements, and the Business Model The Rolls-Royce Chairman, Simon Robertson stated that the company had performed strongly in the year 2007. This growth was greatly attributed to the rise of demand in Asian and Middle East markets, which has resulted to a 76 percent increase in the order book3. The business model for Rolls-Royce at this time was to develop the business for the longer term, a strategy the company has practiced for over 20 years. The group has ensured its customers trust the company to deliver excellence through the following ways: By developing close customer relations. Ensuring manufacture efficiency and developing excellent products. Providing value added services. Investing in leading technologies and human resources This model was evident from Rolls Royce’s involvement in reducing the environmental impact of their engines by producing more efficient and fuel economical engines. Revenues collected in the year 2007 were 7,435,000 pounds, a 3.9 percent growth from the previous year4. In the year 2008, Simon Robertson announced that Rolls-Royce performed well in the midst of difficult market conditions5. Rolls-Royce experienced a 22.2 percent revenue growth when there was a global economic crisis. The chairperson attributed the growth to diversification and a strong balance sheet that lacks a net debt. Sir John Rose, the Chief executive officer of Rolls Royce attributed the growth to the group’s business model. By developing the business with the long-term in perspective, Rolls-Royce has created a stable organization that is unaffected in the face of short-term challenges. Simon Robertson declares that the group’s balance sheet remains strong and the long-term nature of Rolls-Royce continues to give exceptional visibility of revenues for years to come in 20096. Sir John Rose also shared the same opinion by stating that the inherent strength of the business model will enable the group to manage short-term uncertainties and ensure future growth. The chief executive officer announced further growth in 20107. However, there was a decline in profits for the year by 75.5 percent from the previous year. In 2011, the Rolls-Royce chairperson announces further growth in revenues, with the order book growing to a record 62.2 billion pounds8. The after tax profits also grew by 56.2 percent from the previous year. Summary of Income Statements9 The income statements of Rolls-Royce can be summarized for the annual period from 2007-2011 as follows: (In million Pounds) 2007 2008 2009 2010 2011 Revenue 7,435 9,082 10,414 11,085 11,124 Cost of sales (6,003) (7,311) (2,111) (2,200) (8,676) Gross Profit 1,432 1,771 2,111 2,200 2,448 Other operating income 50 79 89 95 69 Commercial and administrative costs (653) (699) (740) (836) (984) Research and development costs (381) (403) (379) (422) (463) Share of results to joint ventures and associates 66 74 93 93 116 Operating profit 514 855 1,174 1,130 1,186 Profit on disposal of businesses (2) 7 (2) 4 3 Profit before financing and taxation 512 862 1,172 1,134 1,189 Financing income 718 432 2,276 453 456 Financing costs (497) (3,186) (491) (885) (540) Net financing 221 (2,754) 1,785 (432) (84) Profit/Loss before taxation 733 (1,892) 2,957 702 1,105 Taxation (133) 547 (740) (159) (257) Profit/Loss for the year 600 (1,345) 2,217 543 848 Revenue The revenue generated by Rolls-Royce over the period under review is set out below: (In million Pounds) 2007 2008 2009 2010 2011 Revenue10 7,435 9,082 10,414 11,085 11,124 The table below shows the year on year revenue growth. 2007 2008 2009 2010 2011 Percentage revenue growth 3.9% 22.2% 14.7% 6.4% 0.4% In the year 2007, Rolls-Royce had a 3.9 percent revenue growth from the previous year, but had a decrease in the annual after tax profits. The revenue growth pattern is in line with the industry average of 6.511 percent when compared to other global companies offering similar power solutions. Between the year 2007 and 2008, Rolls-Royce experienced a very strong growth of 22.2% as compared to the previous year. The group’s product diversification and emerging markets in Asia and Middle East may have contributed to the growth in the midst of the global financial crisis. Middle East and some parts of Asia ware not adversely affected by the global financial crisis, thus their purchasing power remained unchanged in the year 200812 (Eisen, 2007). Percentage revenue growth declined in the year 2009 to 14.7 percent. This may be because of the prolonged global recession that may have slightly affected the emerging markets. Although there was a 14.7 percent revenue growth, Rolls- Royce made after tax losses of 1,34513 million pounds. The loss may be attributed to the rise in financing cost by 541 percent from the previous year. In the following two years, 2010 and 2011, Rolls-Royce experienced a further decline in the rate of revenue growth. Revenue grew by 6.4 percent and 0.4 percent in the year 2010 and 2011 respectively. This was expected since the industry average had declined to 4.5 percent and 3.5 percent in the year 2010 and 2011 respectively. Revenues and the Business Model Rolls-Royce business model is to develop the business for the long term, designed to generate returns for several years to come. The main objective of the board is to ensure that the group’s business model creates value for the long-term investors within an acceptable risk profile14. In order to avoid the losses brought by short-term changes, such as economical fluctuations, Rolls-Royce ensures that its balance sheets have no debt, thus ensuring business stability. Over the past five years, Rolls-Royce has experienced revenue growth, even in the midst of tough economic times. The reason for the strong growth can be traced to the business model, which has brought into being of a well-diversified business enterprise in terms of products, customer, and geography. In 2008, the global recession affected the revenues all companies to varying degrees without sparing Rolls-Royce. However, the effects of the recession were not visible in the group’s revenues since it experienced 22.2 percent increase, which was unexpected due to the recession. The effects of the extended recession were however experienced in the years 2009-2011. The post-recession effects were characterized by decrease in the rate of revenue growth. Income Statement Comparison with Competitors There is high competition in the environment in which Rolls-Royce operates. The business model has enabled the group to avoid short-term adverse effects resulting from competition. These factors alone do not completely protect the group from completion. The business has developed an impartial selection and maintained a steady improvement in operational routine. The income statement has remained adversely unaffected by competition due to its long-term nature projection of the future. Income statements have also not been adversely affected by completion because of the group’s increased focus on cost performance and cash conversion. General Electric Aviation is the greatest competitor for Rolls-Royce plc. GE Aviation annual revenues are slightly lower than Rolls-Royce since the group under analysis has a number of products. In the year 2007, GE aviation’s revenue was 277,758 pounds. The company experienced some growth in revenue, and later a rapid decline from the year 2009. In 2008, GE Aviation’s revenues grew by 5.8 percent. This is a small percentage growth of revenue as compared to that of Rolls-Royce group plc, which grew by 22.2 percent in the same period. In the year 2009, GE Aviation’s revenue declined by 14.1 percent. This was almost equal to that of Rolls-Royce Holdings plc’s 14.7 percent, but in this case was a revenue growth. The decline in the market could be attributed to the weak economic growth and the post-recession effects of the global financial crisis. GE Aviation’s revenues further declined in the year 2010 by 3.3 percent. In this same period, Rolls-Royce had a revenue growth of 6.4 percent. In the next year, the revenues of the two companies continued to progress in the opposite directions, with GE Aviation’s revenues declining by 1.5 percent. Summary of Cash Flow Statements In the year 2007, Rolls-Royce Group plc had a net cash inflow generated from operating activities of 70515 million pounds, which was a 34.2 percent decrease from the previous year. Net cash outflows for the year were 473 million pounds. As at 31 December of 2007, the cash and cash equivalents was 1,87216. This was a 13.8 percent decrease from the previous year. In the year 2008, net cash inflows increased by 44 percent from that of the previous year. The net cash outflows from investing activities and financing activities increased and reduced by 13.3 percent and 53.3 percent respectively. This lead to a 31.5 percent increase in the cash and cash equivalents. Decrease in the rate of revenue growth is also reflected in the group’s net cash inflows for the year 2009. This year was characterized by a 15.4 percent decrease in cash inflows. Net cash outflows from investing activities and financing activities for the year reduced by 6 percent and 273.8 percent respectively. Over the following two years, net cash inflows increased and reduced by 60 percent and 2.5 percent in the year 2010 and 2011 respectively. The reduction of inflows in the year 2011 may be attributed to the reduced revenue growth rate of that year. Conclusion In this research paper, there was an analysis of the Rolls-Royce financial audited reports from the year 2007-2011. The director and Chairman’s Statements of each of the year has been analyzed, and the groups Business Model explained. At the start of each year, the director and chairperson indicated growth in revenues and the order book. The business model for Rolls-Royce has also facilitated the revenue growth. The strategy is to develop the business for the longer term, a business model the company has practiced for over 20 years. A summary of the income statement for the five years has also been outlined and the annual percentage growth of revenue computed. It has been established that Rolls-Royce has experienced steady growth over the five years under analysis despite the economical challenges. The reason for the strong growth can be traced to the business model. The business strategy used by Rolls-Royce has facilitated growth of a well-diversified business enterprise in terms of products, customer, and geography. The business model has also aided the group to avoid the losses brought about by short-term changes, such as economical fluctuations, Rolls-Royce ensures that its balance sheets have no debt, thus ensuring business stability. References Eisen, P. 2007. Accounting. New York: Barron’s Educational Series, Inc. Rolls-Royce Group plc, 2010. Annual Report: Teamwork and Technology. London: Rolls-Royce Group plc. Rolls-Royce Group plc, 2009. Annual Report: Delivering today, Investing for the future. London: Rolls-Royce Group plc. Rolls-Royce Group plc, 2008. Annual Report: Technology Creates Global Opportunities. London: Rolls-Royce Group plc. Rolls-Royce Holdings plc, 2011. Annual Report. London: Rolls-Royce Group plc. Rolls-Royce Group plc, 2007. Annual Report: A Global Business. London: Rolls-Royce Group plc. Hoovers, 2012. Rolls-Royce Holdings plc Competition, viewed 3 December 2012, . Read More