Royal shell

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Royal Dutch Shell
Analysis of Financial position
2010 - 2014
Prepared by:
Mohamed Ibrahim
Table of contents:
1. Executive summary ……………………………………………….………
2. Introduction ………………………………………………………………
3. Financial statements analysis ……………………………………………
3.1 Balance sheet analysis …………………………………………...………...
3.2 Income statements analysis …………………………………..…………...
4. Recommendations ………………………………………………….………….
5. Conclusion ……………………………………………………………………………
6. Appendix ………………………………………………………………………….…….
7. References ……………………………………………………………………………
1
2
3
3
7
12
13
14
15
Executive summary:
The report made to measure Royal Dutch Shell financial
performance in five years starting from 2010 to 2014; most of
the information specially the financial data is collected from
the firm’s annual reports.
Ratio analysis of two financial statements balance sheet and
income statement been conducted to reach results about the
firm’s liquidity, management of its activities, efficiency of its
assets and its profitability.
As well as recommendation are added to the performance to
make adjustment on the future.
Introduction:
Royal Dutch Shell known as Shell is an Anglo-Dutch
multinational oil and gas company headquartered in the
Netherlands and incorporated in the United Kingdom, in 1907
created by the merger of Royal Dutch Petroleum and UKbased Shell Transport & Trading.
Shell is vertically integrated and is active in every area of the
oil and gas industry including;
- Exploration and production
- Refining
- Distribution and marketing
- Petrochemicals
- Power generation
- Renewable energy
- Trading
Shell operates in over 90 countries, produces around 3.1
million barrels of oil per day and has 44,000 service stations
worldwide.
Shell has a primary listing on London Stock Exchange and it
has a market capitalization of £ 129.8 billion at close of trading
on 13 April 2015, the largest of any company listed on London
Stock Exchange. It has secondary listings on Euronext
Amsterdam and the New York Stock Exchange NYSE.
Financial performance analysis:
As far as performance is concerned in the following will
represent the performance of Royal Shell for five years starting
from 2010 to 2014, using the two financial statement balance
sheet and income statement to measure the firm’s
performance
Firstly: Balance sheet analysis:
Out of the balance sheet we will be measuring the liquidity of
the firm and we will be able to understand to which extend the
firm is using debt to finance its assets and operations.
Liquidity:
The liquidity of the firm normally will be measured in two
ways; current and quick, for Royal Shell liquidity performance
during the five years was as follow;
$2,50
$2,00
$1,50
Quick ratio
$1,00
Current ratio
$0,50
$0,00
1
2
3
4
5
Quick ratio
$0,83
$0,88
$0,87
$0,79
$0,93
Current ratio
$1,12
$1,17
$1,18
$1,11
$1,16
According to the above “line chart” the liquidity performance
of Royal Shell was quite optimistic as stated that in 2010 for
each dollar of current liabilities there will be $1.12 of current
assets, however the firm’s liquidity performance improved
through the years and reach the peak in 2012 which stated that
for each dollar of current liabilities there will be $1.18 of
current assets, though in 2013 the firm showed the lowest
level of liquidity which $1.11 to meet each dollar of current
liabilities and in 2014 the liquidity started to increase again to
reach $1.16 for each dollar of current liabilities.
The quick ratio shows illiquidity which makes it impossible for
the company to cover its current liabilities using its quick
assets. However the average standard of the oil industry shows
inabilities for most of the petroleum companies to cover their
current liabilities with quick current assets due to the nature of
the oil industry.
So far the liquidity position of Royal Shell was good enough
which enable the firm to meet its liabilities all through the five
years, but not using the quick assets due to the nature and
operations conducted in the oil and gas industry.
Financial leverage:
In order to understand the concept of leveraging we relate the
debt of the firm (total liabilities) with assets and Owner’s
equity and relate the total assets with Owner’s equity to have
full picture about the usage of debt and the ability of the firm to
cover these debts over the years. Royal Shell financial leverage
was as follow;
$4,50
$4,00
$3,50
$3,00
$2,50
$2,00
$1,50
$1,00
$0,50
$0,00
1
2
3
4
5
Financial leverage
$2,15
$2,11
$1,99
$1,97
$2,04
Debt to equity
$1,15
$1,11
$0,99
$0,97
$1,04
Debt to assets
$0,54
$0,53
$0,50
$0,49
$0,51
The above “line chart” shows to which extent the firm is using
debt, in 2010 Royal Shell showed that for each dollar of assets
there will be $0.54 which represents that 54% of the total
assets are debt (liabilities) and the rest 46% are Owner’s
equity, however the portion of the debt reduced through the
years and reaches the best level in 2013 which was $0.49 in
each dollar of total asset, in 2014 the situation is worsening to
reach $0.51 of debt in each dollar of total asset.
Comparing the debt to equity, in most years the level of equity
was always below the level of debt or liabilities except in 2012
and
2013
which
stated
$0.99
and
$0.97.
The financial leverage represents the relationship between the
assets and the share holders’ equity which is moving
congruently with debt to equity, therefore 2013 considered the
best
year
in
terms
of
financial
leverage.
Royal Shell usage of debt fluctuating form 49% to 54% out of
the total assets, however the years 2012 and 2013 represent
the lowest use of debt even the portion of Owner’s equity was
higher the portion of debt in each dollar of assets.
Secondly; Income statement analysis:
Evaluation of the income statement will be consisting of
coverage ratio, activities ratios and profitability ratios as
follow;
Coverage ratio:
Shows the ability of the firm to cover its financial charges, the
coverage ratio of Royal Shell for the five years as follow;
Coverage ratio:
45,00
40,00
35,00
30,00
25,00
20,00
15,00
10,00
5,00
0,00
Coverage ratio:
2010
2011
2012
2013
2014
36,49
41,45
29,75
21,46
16,70
The coverage ratio shows the firm’s ability to meet its financial
charges, in 2010 the coverage ratio was 36.5 times and
increased further in 2011 to reach 41.45 times and start
declining through the years to reach 16.70 times in 2014 which
is still able to cover its financial charges.
Activities measures:
Activity ratios or measures shows how efficient the firm is
managing its primary activities which are; receivables,
payables and inventories.
Royal Shell during the five years managed to keep its activities
as follow;
2010
Receivables turnover
Receivables turnover
in days
Inventory turnover
Inventory turnover in
days
2011
2012
2013
2014
2.16
2.16
2.16
2.16
2.16
169.16
169.16
169.16
169.16
169.16
10.48
13.51
13.49
13.00
12.18
34.82
27.01
27.05
28.07
29.98
The table summaries some of the activities ratios for the five
years, the receivables turnover in times calculated by using the
assumption of “40% of the firm’s revenues are sold on credit in all five
edyears” the collection of the receivables during the five years
considered to be very good as started in 2010 2.16 times which
is almost 170 days to collect $70,102,000, however the
collection frequency increased during the years to reach 2.95
times and 124 days to receive $58,470,000 in 2014.
The inventory management is one of the most important
activities that an analyst require to understand the overall
activities performance of the company, in 2010 was the lowest
turnover of inventory which was 10.48 times almost each 35
days, the firm improved its inventory management well
through the years and reaches in 2014 the best turnover which
was 18.14 in times and 21 in days to sell out an inventory of
$19,701,000 annually, which is an outstanding performance.
Efficiency of Assets:
The efficiency of assets represent how good the company in
using assets to generate sales over the time, during the five
years Royal Shell was indicating the following;
Total assets turnover
$1,60
$1,40
$1,20
$1,00
$0,80
$0,60
$0,40
$0,20
$0,00
Total assets turnover
1
2
3
4
5
$1,17
$1,50
$1,49
$1,42
$1,34
Total assets turnover represents the efficiency of assets to
generate sales, Royal Shell stated its lowest turnover of assets
in 2010 which for each dollar of total asset generated $1.17 of
revenues, in 2011 was the peak of the asset turnover which
was $1.44 and the efficiency started declining due to many
reasons one of which the reduction of the overall consumption
of oil and gas industry as an impact of the financial crises in
most of the markets specially Europe and Asia. However with
all these reasons the firm managed to sustain reasonable asset
turnover over the last five years.
Profitability measures:
Profitability measures are one of the most important indicators
of the business success NPM, ROI and ROE are the most
valuable profitability ratios, the following chart shows the
profitability of Royal Shell.
0,25
0,2
0,15
0,1
0,05
0
1
2
3
4
5
Net profit margin 0,05414225 0,064176896 0,055968445 0,035957432 0,034149078
ROI
$0,06
$0,10
$0,08
$0,05
$0,05
ROE
$0,14
$0,21
$0,18
$0,11
$0,10
Royal Shell NPM which relates net income to revenues
fluctuated from $0.05 in 2010 to $0.06 in 2011 and 2012 and
declined again to reach $0.4 in 2013 and $0.3 in 2014 that was
due
to
several
market
changes.
Return on investment (ROI) represents how efficient the firm
is using its assets to generate net income; in 2010 the ROI was
$0.06 and increased significantly in 2011 to reach $0.09 for
each dollar of assets, however start declining from 2012 to
$0.08 and reaches its worst record in 2014 to reach $0.04 for
each
dollar
of
assets.
Return on investment (ROE) represents the net income
generated by each dollar of owner’s equity; Royal Shell in 2010
for each dollar of owner’s equity generates $0.14 of net
income.
However the firm reaches the peak of ROE in 2011 by
generating $0.19 for each dollar of equity, due to the economic
changes that impacted on the oil and gas industry which is
effect the industry efficiency and reducing its profitability from
2012 Royal Shell ROE start declining to reach $0.15 and
reduced more in 2013 and 2014 to reach $0.09 for each dollar
of owners’ equity.
Recommendations:
Number of recommendations and comments with regard to the
Royal Dutch Shell performance has to take place in order to
adjust its performance in the future years, these
recommendations
will
be
as
follow;
- Improvement with regard to its quick ratio, some
adjustment has to take place either reducing the inventory
portion or reducing the overall liabilities of the firm by
depending
more
on
Owner’s
equity.
- Assets turnover shows decline in the last two years the
company should develop more distribution channels and find
new
markets
to
boost
the
overall
sales.
- Due to the financial crises and other consumption problems
the firm showed decline in its profitability in the last two years,
developing new alternative products and energy solutions is
the only approach that Shell should adopt to sustain in the
industry.
- However a general trend now moving towards reducing
consumption of fuel and oil and now moving towards Green
energy products Shell as a leading company should spend
more on research and development to produce new
energy solutions rather than oil and gas.
Conclusion:
As conclusion, Royal Dutch Shell showed an outstanding
financial performance during the last five years of the
conducted analysis which started 2010 to 2014, Shell
considered one of the largest firms in the industry in terms of
revenues.
Therefore the firm will be recommended for all kinds of
activities of investments and financing due to its strong ability
to sustain profit over time.
However the firm may realizes a reduction on its financial
performance during the last two years, but was due to the
changes of overall economic worldwide. But Shell in terms
ability and strength considered to be one of the most strongest
firms in terms of assets, revenues, reputation, production,
employees satisfaction as well as profitability.
--- End ---
Appendixes:
References:
1. Royal Dutch Shell annual reports 2011, 2013 and 2014 – financial statements
and related information.
2. www.wikipdia.org
3. www.Shell.com
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