Royal Dutch Shell Ratios - Example

Rоyаl Dutсh Shеll Your name: Institution name: Table of Content 1.0 Introduction……………….. 3 2.0 Finance Analysis…………………. 3 2.1 Profitability Ratios……………………… 3 2.1.1 Return on Capital Employed (ROCE)…………….4 2.1.2 Net Profit Margin ………………5 2.2.0 Efficiency Ratios………………6 2.2.1 Receivable Turnover …………………6 2.2.2 Payable Turnover………………………7 2.3.0 Gearing Ratios………………………….8 2.3.1 Cash Interest Cover…………………………..10 2.4.0 Liquidity ratios…………………….11 2.4. 1 Current Ratio……………11 2.4.2 Quick Ratio…………………12 2.4.3 Operating Cash Flow to Current Liabilities ……………………….13 2.6 Investor Ratio………..14 2.6.1 Dividend per share………………………………..14 2.6.2 Dividend Cover ……………………16 2.7 Conclusion……………………………….17 2.8 References………………………..18 1.0 Introduction The financial analysis is a technique or method used to interpret and analyze financial statement of companies over a definite period of time i.e. 2 to 5 years. Ratios are the one used to assist an investor to analyze financial statement of companies (Buckley, 2004). In this report I will use various ratios to analysis the performance of Royal Dutch Shell and compare the same with Exxon Mobile and industry average. This will provide us with a broader picture of Shell’s financial risk earnings, profitability, efficiency, cash flow, liquidity and so forth. The balance sheet and financial statements for the last five years will be used to do this (Kendall, 2015). Benchmarking is done using industry peer, Exxon Mobile, as comparison will give better perspective for financial analyzing (Bryant, 2016). 2.0 Finance Analysis 2.1 Profitability Ratios This tool measures the company’s financial structure concerning company’s management’s ability to control their expenses and to earn returns on their investments (Bryant, 2016). Ratios that are used to measure profitability of a company are usually consists of a profit elements and one that represents the amount of funds that have been invested in aspect of the company in the view of investor/stakeholder’s interest ( Buckley, 2004). In this section, we will use Return on Capital Employed (ROCE) and Net Profit Margin ratio over past 5 years to analyze the profitability of Shell Company. 2.1.1 Return on Capital Employed (ROCE) Shell Exxon Mobil Industry Average ROCE (%) 2012 19.2 12.7 16.5 2013 12.7 14.5 11.3 2014 10.6 10 10 2015 1.9 2 1.8 2016 3.6 4 3 Figure 1: ROCE Graph Return of Capital Employed (ROCE) is a key measure of efficiency in capital intensive sectors, especially in the oil and energy sector. Shell Company’s ROCE has been downward in the last 4 years from 19.2 per cent in 2012 to 1.9 per cent in 2015 but increased to 3.6 per cent in 2016, as shown in the figure 1. This decline has been contributed by the falling prices of oil and gas which are still ding damage (Haushalter, 2015). Each 10 dollar a barrel change in the oil price has an impact of about 3.3 billion dollars on annual company earnings (Kendall, 2015). But Exxon Mobil has delivered higher returns on capital than its closes competitor over the last 2 years (i.e. 2015 and 2016 respectively). Exxon Mobil being a non-GAAP metric, return on capital can be calculated using different methods. The oil and gas industries average decrease is more as compared to both Shell Company and Exxon Mobil Company. From the figure 1, Shell’s Return of Capital Employed is above that of the industry average throughout the past five years. 2.1.2 Net Profit Margin Shell Exxon Mobil Industry Average Net Profit Margin (%) 2012 10.8 10.7 10.5 2013 7.4 8.3 9.2 2014 6.7 8.9 7..8 2015 1 6.8 4.6 2016 2.4 3.96 2.5 Figure 2 Profit Margin Net profit margin is a ratio that is being used to show how much money in a company has been left after expenses (both direct and overhead expenses) have been subtracted from the gross income (Haushalter, 2015). While net profit ratio is used to describe how much a company profit was used for every dollar of total sales (Gismatullin and Lacqua, 2012). If a company net profit is found to be low as compared to gross profit, this simply means the company managed to sell, but its distribution and administration department in that company is not efficient in relation to their expenses (Buckley, 2004). Shell profit margin has been much lower than the industry over the past five years (Royal Dutch Shell, 2015). This is because the company has been struggling to maintain their crude oil and gas production, let alone increase it, despite their heavy capital expenditures. 2.2.0 Efficiency Ratios Efficiency ratios are tools that are used to measure how efficient a company’s assets are managed. 2.2.1 Receivable Turnover This ratio is used to measure the number of times trade receivables turn over during the year. This ratio is calculated by diving net sales by accounts receivable (Myaccountingcourse.com, 2015). Shell Exxon Mobil Industry Average Receivable Turnover 2012 11 28 29 2013 13 28 27 2014 18 25 26 2015 13 27 27 2016 3 35 34 Figure 3: Receivable Turnover Receivable turnover tool tell us more about different competitors in the same sector. In competitive industries, companies will try to gain advantage by offering better credit terms, causing increase in sales and receivables (Myaccountingcourse.com, 2015). No Average, Shell Company has the lowest receivable turnover as compared to Industry average (Bryant, 2016). But, the higher the Receivable turnover the better. This shows that Exxon Mobil is able to collect debts from its clients quickly than Shell Company and have low bad debt figures (Gismatullin and Lacqua, 2012). 2.2.2 Payable Turnover Shell Exxon Mobil Industry Average Payable Turnover (%) 2012 1 57 60 2013 2 57 59 2014 4 50 54 2015 11 63 63 2016 72 68 Figure 4 Payable Turnover This ratio is used to indicate how many times a company is able to pay its suppliers during the financial year. This ratio also measures how a company is able to pay its debts. Shell company has a lower payable ratio which is favorable as payables are being paid less to what they receive in a financial year (Buckley, 2004). In 2015, Shell paid their payables eleven times in a year, while they received their payable 13 times in a year (Haushalter, 2015). Where the oil and gas industry averages pays their payables as many as 55 times in a year. 2.3.0 Gearing Ratios This ratio is used to compare company’s equity to borrowed more funds. Investors or stakeholders sometimes use gearing ratio to assess how well a company is able to survive in the time of economic downturn. Shell Exxon Mobil Industry Average Payable Turnover (% 2012 19.2 4.4 4.4 2013 12.7 3.6 4.1 2014 10.6 6.02 5.9 2015 2.75 10.12 9.8 2016 3.7 14.26 13.9 Figure 5 Gearing Ratio The higher level of gearing ratio (level of borrowing) the higher are risks to the company’s operations, since payment of interest and repayment of the company’s debts are not in tandem in the same way as dividends (Haushalter, 2015). Shell Company has managed to reduce its gearing from 19.2 per cent in 2012 to 3.7 per cent in 2016. This has helped the company to reduce their capital costs. Moreover, Industry average has also managed to keep their cost down thus their gearing ratio have been under the 20 per cent mark in the past 5 financial year. 2.3.1 Cash Interest Cover Shell Exxon Mobil Industry Average Cash Interest cover 2012 330 1.8 100.03 2013 18.2 2.01 743.48 2014 2.4 1.9 513.56 2015 2.6 1.8 612.86 2016 1.3 1.2 715.2 From the table above, Shell Company has been found to have higher cash interest as compared to the industry average. This simply mean that that company has a lot of cash that is unused which can in turn be reinvested back into other projects or the company can decide to pay out the money as dividends. 2.4.0 Liquidity ratios These ratios are used to measure the company’s ability to meet its short-term obligations. 2.4. 1 Current Ratio Shell Exxon Mobil Industry Average Current Ratio 2012 1.2 1 0.89 2013 1.1 0.83 0.73 2014 1.2 0.82 0.72 2015 1.3 0.79 0.69 2016 1.7 0.87 0.85 The current ratio is sued to measure if a company has enough resource to payback its debts (Haushalter, 2015). Shell Company has maintained a stable current ratio. For Shell Company, this ratio has increased by 0.5 per cent over the five years period (Tiffany, 2015). Furthermore, Shell’s current ratio in the same period has exceeded one; this proved that the company is able to pay out its short term liabilities by its existing current assets without borrowing from external resources such as using new debts or issuing shares (Buckley, 2004). As compared to Exxon Mobil, Shell liquidity situation has been found to be in good health and can be able to sustain itself. 2.4.2 Quick Ratio Shell Exxon Mobil Industry Average Quick Ratio 2012 0.6 0.78 0.78 2013 0.69 0.6 0.6 2014 0.74 0.56 0.56 2015 0.64 0.55 0.55 2016 0.72 0.65 0.65 Figure 6 Quick Ratio This has been seen to represent the ability of a company to utilize its assets or cash to cover its liabilities (Falola and Genova, 2005). The quick ratio of Exxon Mobile has also decreased from 2012 to 2016; it began with 0.78 in 2012 and decrease to reach 0.65 in 2016. One main reason for this reduction could be the company’s liquidity that has affected the industry in recent years (Chand, 2015). For example, the oil spill accident in Mexico, and the massive impact on Shell Company. In addition, the cost of oil and gas exploration and drilling has rapidly risen making such ventures to be expensive. 2.4.3 Operating Cash Flow to Current Liabilities Shell Exxon Mobil Industry Average Operating Cash Flow to Current Liabilities 2012 0.48 0.57 0.49 2013 0.43 0.23 0.42 2014 0.52 0.35 0.51 2015 0.42 0.32 0.41 2016 0.27 0.18 0.52 This tool is used to tell if a company has enough cash from its operations to meet its liabilities since company’s current liabilities are being paid using cash (Chand, 2015). If the operating cash flow to current liabilities is less than 1, this means that the company doesn’t have enough cash to pay its short term liabilities (Falola and Genova, 2005). From the table above both Shell Company and Exxon Mobil don’t have enough cash reserver to payout their current expenses or liabilities. It is the same in the industry average that most companies suffer the same effect, and this has been largely contributed to the failing oil prices that have affected all companies in the oil and gas industry. 2.6 Investor Ratio 2.6.1 Dividend per share Shell Exxon Mobil Industry Average Dividend per share 2012 1.72 1.81 1.7 2013 1.8 1.65 1.8 2014 1.88 1.54 1.9 2015 1.88 1.44 1.7 2016 1.88 1.54 1.8 Figure 7 dividend per share Dividend per share payment is the total amount of dividend given to shareholders over the financial year; dividend usually being paid once or twice per financial year (Tiffany, 2015). The above graph dividend payout for Shell Company has been growing over the five years. Even though the company revenue has been impacted negatively, the company has been able to increase its dividend payout to its shareholders (Falola and Genova, 2005). Stable dividend payout is important to the company’s shareholders since it will give them an impression that the company is stable. In the oil and gas industry have had a steady increase in dividend payments over the last five years. An increased dividend payment gives confidence to the existing and potential shareholders. 2.6.2 Dividend Cover Shell Exxon Mobil Industry Average Dividend per cover 2012 2.48 1.45 2.5 2013 1.44 0.5 1.49 2014 1.26 0.87 1.57 2015 0.15 0.12 1.45 2016 0.3 0.2 1.39 Dividend Cover is a measure that is used to show if a company is able to cover its dividend payments (Accofina.com, 2013). Dividend cover that has been found to be less than 1.5 can be said to be a threat to the shareholders as this will have a negative impact on their dividend payment significantly (Accofina.com, 2013. While dividend covers that has been found to be more than 2 times can be said to be strong financially. The industry average has been found to be below 1.5 which shows a bad sign for shareholders or potential investors. Both Shell and Exxon Mobil have had a rough on their dividend coverage which have seen their dividend coverage to decline. Conclusion Benchmarking with the best company in the industry will make shell knows what to do next. Meanwhile some ratios, its competitor gets better value than the leader (Royal Dutch Shell, 2014). Anyway, Shell Company is going in the right business track for building stronger financial position. Therefore, I would give recommendation to potential investor who planning to acquire the Shell shares because the company is the largest in the oil and gas industry, in addition, it has healthy revenue and dividend payment to its shareholders has increased in the last 5 years. References Accofina.com (2013) Operating Cash Flow to Current Liabilities, [Online]. Available at: http://accofina.com/calculators/liquidity-ratios/operating-cash-flow-to-current-liabilities.html [accessed 12 May 2016] Bryant, L. (2016). 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