The analysis and interpretation of financial statement as now became so significant in daily life business as it is used to determine the financial position and results of operations of a well established organization. Today in the era of globalization the potential investors as anxious to know the financial viability of the company before investing into it. So the financial statement analysis as become very important for the board and the managers so to make a judgment about the financial health of the organization.
According To Myer's "financial statement analysis is largely a study of relationship among the various financial factors in a business is disclosed by a single set of statements, and the study of the trend of these factors as shown in a series of statements."
REASONS FOR ANALYSING FINACIAL STATEMENTS ACCORDING TO
GEOF BLACK IS:
For investment
For curiosity
Commercial reasons
Lending decisions
Self interest
Business rivalry
Taxation
Environmental factors
Economic analysis
A number of methods or devices are used to study the relationship between different statements. Out of this the most widely accepted method is RATIOANALYSIS. In this corporate world financial ratios has gained its significance. Financial ratios provide a quick and relatively simple means of assessing the financial health of the business (PETER ATRILL & EDDIE MCLANEY, 2008) and also are very helpful when comparing the financial health of different businesses.
In our project, for our financial analysis of a company we will be focusing on ROYAL DUTCH SHELL PLC which is a multinational petroleum company of Dutch and British origin. The project will be aimed to know whether a investor should invest in this company or not. There will also be a section on their share prices for a four week period which will show the saleable stocks throughout April 2010. The share price information will come from analysing share price information on the London Stock Exchange. There will also be a section on relevant financial or other current news which has an affect upon the company. In order to understand whether or not SHELL plc is trading successfully and competitively an analysis of one of its key competitors: British petroleum plc will be made. The report will then conclude as to whether or not royal Dutch shell plc should be invested.
2: INTRODUCTION TO THE COMPANY
Royal Dutch Shell plc, commonly known simply as Shell, is a multinational petroleum company of Dutch and British origins. One of the six "super majors" (vertically integrated private sector oil exploration, natural gas, and petroleum product marketing companies), Shell was listed as the world's largest corporation for 2009 by Fortune and world's second largest corporation by Forbes. The company's headquarters are in The Hague, Netherlands, with its registered office at the Shell Centre in London, United Kingdom. Shell operates in over 140 countries.
Core businesses
One of the original Seven Sisters, Royal Dutch Shell is the world's largest private sector oil company by revenue, Europe's largest energy group and a major player in the petrochemical industry. Shell has five core businesses: exploration and production (the "upstream"), gas and power, refining and marketing, chemicals (the "downstream"), and trading and shipping.
Ref: http://www.shell.com/home/content/aboutshell/who_we_are/shell_worldwide
3: METHODOLOGY
This project mainly uses the secondary data information in order to establish whether an investor should invest in ROYAL DUTCH SHELL PLC and also know the current financial position of this firm. Here the statistical technique used is ratio analysis and the secondary data's are collected from the royal Dutch shells financial accounts which include balance sheet, cash flow statements, income statements of four consecutive years from 2006 to 2009, accounting and finance textbooks, London stock exchange and other journals.
AIMS:
To understand the information contained in the financial statements
To know the strength and weakness of the firm and to forecast the future prospects of the firm
To enable to take different decisions regarding the financial health of the company.
OBJECTIVES:
To analyze the overall profitability of the company by comparing each year
To analyze the liquidity position of the company of each year
To analyze the efficiency of the company with which the current assets are managed.
To analyze the solvency position of the firm of each year
To analyze and study the change in working capital and fund flow.
4: FINANCIAL ANALYSIS OF ROYAL DUTCH SHELL PLC
In this section , the financial position and performance of ROYAL DUTCH SHELL PLC will be calculated for a four year period: 2006- 2009 which is done by RATIO ANALYSIS. The reason for taking financial ratios is because they provide a quick and relatively simple means of assessing financial health of business (Peter Atrill &Eddie Mclaney 2008). The financial information will be taken from shell plc's balance sheets .This report will be using the financial information from the 'Company Balance Sheet' to determine an overall conclusion.
4.1: Profitability Ratio:
Every business generally exist with the primary purpose of creating wealth for there owners. Profit is significantly important for a company to attract and encourage outside investment or capital. This is the ratio that shows the profitability of a company for a defined period of time based on stakeholder's capital and whether owner or creditor should withdrawn their funds or maintain its funds (Gitmann.L., 2000).This is also important as stock market generally reacts positively to high profitability ratios (Chatterji,2009) Overall the ratio will enable an investor to see a businesses ability to generate profit.
The following ratios may be used to evaluate the profitability of the business
Gross profit margin:
Formula: (Gross Profit/ Net Sales) *100
Net Profit margin:
Formula: (PAT or Net Profit/ Net Sales)*100
Return on capital Employed:
Formula: PBT/ (Total Assets - Current Liability)*100
Return on Shareholders fund:
Formula: PAT / (Share holder fund or Total Asset - Liabilities) * 100
Ratio
2006
2007
2008
2009
Gross Profit Ratio
17.5 %
16.6 %
13.6 %
12.7 %
Net Profit Ratio
8.2 %
8.9 %
5.7 %
4.5 %
Return on shareholders' fund
38.8 %
40.1 %
39.4 %
15.2 %
Return on capital employed
28.8 %
29.5 %
29.4 %
10.4 %
THE GROSS PROFIT RATIO relates the gross profit of the business to the sales revenue generated for the same period (Peter Atrill & Eddie Mclaney , 2008 ) .The ratio is therefore a measure of the profitability in buying and selling goods before any expenses are taken into account. A change in this ratio can have a significant effect on the 'bottom line'. It is affected by various factors including changing price level and different products being sold( Geoff black , 2005) .
In the case of royal Dutch shell plc it is clearly evident that till 2007 there was a gradual increase in gross profit but in 2008 there is a slight decrease in gross profit which means that the cost of sales was higher relative to sales revenue in 2008 , than in 2007.the probable explanation for this is due to the oil price value which has undergone a significant decrease since the record peak it reached in July 2008 and the global financial crisis. the oil price during the month of December 2008was US $ 30.28 a barrel which is the lowest after the crisis began. As the price of oil continued to be lower and the demand of natural gas also was decreased due to natural calamities, in the month of 2009 there shows a drastic decline of margin of profit. Any way since the price of oil is viable to changes according to the demand there are again chances that the company can regain there margin of profit.
THE NET PROFIT RATIO relates to the proportion of sales which resulted in profit after all overheads (other than interest) has been deducted ( Geoff black, 2005 ) . This is often regarded as the most appropriate measure of operational performance.
Taking into consideration of royal Dutch shell plc till the year of 2007 for every 100 pound sale there was a net operating profit of 8.2 % and 8.9 % respectively, showing a gradual increase. but from the year 2008 there is a decline in the operating profit which continued to the next year 2009 were the decrease in net profit is significantly evident. This shows that the company has started losing control over the expenses. Since there is only slight variation the company can improve by reducing the overheads and a balance has to be achieved between the cutting expenses and the maintaining business efficiency.
RETURN ON SHAREHOLDER'S FUND ( ROSF) compares the amount of profit for the period available to the owners. This ratio is of practical importance to prospective investors and shareholders. If the ratio is higher, they feel confident and encouraged to invest in their company.
For royal Dutch shell plc the return of shareholders fund has been sustained well till the year of 2008.in the year 2009 there is a significant decline which may be due to the recession and the drastic decline in profit.
RETURN ON CAPITAL EMPLOYED (ROCE) is a fundamental measure of business performance. This ratio expresses the relationship between the operating profit generated during a period and the average long - term capital invested in the business.
For royal dutch shell plc the return on capital employed tells us the same story as ROSF. From 2006 to 2008 it is well sustained and in 2009 it shows a poor performance. The main reason here is that even though return on the assets is higher than the rate that the company has to pay for most of its borrowed funds, the profit is low which may be due to less demand for the natural gases, low oil price and inflation. Since this reasons have effected every business the performance of our company can be measured when we compare with its competitors.
Graph 1: Profitability Ratio Trends:
Ref:- http://uk.finance.yahoo.com/q?s=RDSB.L
4.2: Liquidity Ratio:
Liquidity ratios are concerned with the ability of the business to meet its short- term financial obligation. It is generally seen that the higher the value of the ratio is then the larger its margin of safety is for covering short-term debts. The liquidity ratio as twelve months with liabilities which will become due for payment within the same time a way of analyzing credit risk when supplying goods on credit. it is a way of comparing assets which will become liquid in approximately period.
The following ratios are widely used
Current Ratio / Working Capital Ratio.
Formula: ( Current Assets / Current Liabilities )
Acid Test Ratio/Quick Ratio:
Formula: (Current Assets - Stocks) / Current Liabilities.
Ratio
2006
2007
2008
2009
Current Ratio
1.2:1
1.2:1
1.1:1
1.1:1
Quick Ratio
0.81:1
0.88:1
0.92:1
0.81:1
Current ratio compares the liquid asset of the business with the current liabilities. An ideal current ratio is taken as 2: 1. The higher the ratio the more liquid the business is considered to be. But the current ratio cannot be higher as well as too low. A ratio of less than one is often a cause for concern, particularly if it persists for any length of time
Analyzing the current ratio of royal Dutch shell plc, the company is still in a position to pay back its short term liabilities with its short tern assets such as stock/ inventories, cash surpluses and receivables .The slight variation seen the year 2008 and 2009 may be due to minimum stocks caused due to the fluctuating prices of crude oil, natural gas, oil products and chemicals and financial crisis.
Quick ratio or Acid test ratio is the crucial measure of whether a business seems able to meet its debts as they fall due (GEOFF BLACK 2005). Not all the assets can be turned into cash especially the stock and the work in progress. The Quick Ratio adjusts the Current Ratio to eliminate all assets that are not already in cash (or "near-cash") form. The ideal quick Ratio is 1: 1. A ratio of less than one should be taken into concern.
Analyzing the quick ratio of royal Dutch shell plc the company shows a slight increase in its ability to pay back its debts without relying on the inventory from 2006 to 2008. In 2009 it shows a slight decline which may be due to all the reasons discussed before. Even though we can analyze that the company can pay the debts they still need to plan properly and allocate cash in appropriate proportion.
Graph 1.2: Liquidity Ratio Trends:
Ref:- http://uk.finance.yahoo.com/q?s=RDSB.L
4.3: Efficiency Ratio:
Efficiency ratio examines the way in which the various resources invested in fixed asset and working capital of the business is managed. The following ratios consider some of the more important aspects of resource management
Stock Turnover ratio:
Formula: Average Stocks / Cost of Sales * 365
Average age of Debtors:
Formula: Receivables / Sales *365
Average age of Creditors:
Formula: Payables / Sales *365
Ratio
2006
2007
2008
2009
Age of inventory ratio
32 days
38 days
18 days
49 days
Age of receivables ratio
68 days
76 days
65 days
78days
Age of payables ratio
86 days
93 days
79 days
120 days
Inventories often represent a significant investment of a business. Stock turnover ratio helps to know how much money is tied up in inventory or the average period for which inventories are held. An increasing stock turnover figure or one which is much larger than the "average" for an industry may indicate poor stock management. Looking into royal Dutch shell plc the stock turn over period was going on in an average till 2007 .but in 2008 there was a drastic change, showing that the inventories held are being turned over every 18 days which shows a very good performance. The reason for this may be the increase in oil price and demand for natural gas which started from the end of 2007 and reaching the peak in July 2008. Any way after that when the price started to decline and demand became low in 2009 it clearly shows the turnover period being increased to 49 days which indicate a poor performance. Since inventory depends upon the varying price and demand there are chance that the company could regain back.
Ref:- http://www.shell.com/home/content/media/news_and_library/press_releases/2010
Average age of debtors calculates how long on average, credit customers take to pay the amount they owe to the business. The speed of period so that the fund can be used for more profitable purposes. In case of royal Dutch shell plc since only one by forth of its sales are on credit the changes doesn't make much difference and the credit settlements are paid on an average basis from 2006 to 2009. Even that year was of recession; company made the payments in that year itself and did not make a delay.
Ref:- http://www.shell.com/home/content/media/news_and_library/press_releases/2010
Average age of creditors measures how long, on average, the business takes to pay who have supplied goods and services in credit. Most of the business may attempt to increase their average settlement period of trade of payables. In the case royal Dutch shell plc the company from 2006 to 2007 there has been a slow increase from 86 days to 93 days showing that it has an improved ability in paying the suppliers. But in 2008 there shows a slow decline which may be due to the affect of financial crisis. Anyway the company again regained its position back in 2009 having 120 days to finish the settlements. But there are chances that a longer period of settlement may affect the goodwill of the company and may create adverse effects. So the company must look into this issue.
Graph 1.3: Efficiency Ratio Trends:
Ref:- http://uk.finance.yahoo.com/q?s=RDSB.L
4.4: Gearing Ratio:
Gearing reflects the relationship between a company's equity capital (ordinary shares and reserves) and its other forms of long term funds. (GEOFF BLACK, 2005 ). A business's level of gearing that extend to which it is financed from sources that require a fixed return is an important factor in assessing risk. That is when a business borrows money it is committed to pay the interest and make capital repayment. So when the borrowing is heavy that will increase the financial burden and there by it will increase the risk of solvency. There are several ways to calculate gearing ratio
Gearing Ratio:
Formula: Long Term Debt / (Long term debt + Equity) * 100
Interest Cover Ratio:
Formula: (Profit before interest and tax / Interest).
Debt Ratio:
Formula: (Total Liabilities or Debt / Total Assets)*100
ratios
2006
2007
2008
2009
Gearing ratio
27.4%
28.05%
27.14%
33.3%
Debt ratio
51.1%
53.2%
54.2%
52.7%
Interest cover ratio
39 times
46 times
44 times
39 times
Gearing ratio measures the contribution of long term lenders to the long term capital of a business. The higher a company's degree of leverage, the more the company is considered risky. Considering royal Dutch shell plc the ratio from 2006 to 2008 the borrowing is more especially in 2007 were there is an increase of %. In 2008 there is a slight decrease which may due to the financial crisis. In 2009 the borrowing went up again high. The company does not need to worry since its equity is positive and is steadily increasing from 2006 to 2009. (GEOFF BLACK, 2005).
Debt ratio as its name suggests, it exhibits the proportion of debt a company has relative to its assets. This ratio tells us clearly how the company is financed. Taking the case of royal Dutch shell for every £1 of assets the company has in 2006, the borrowing (both long term and short term) is £0.51. In 2009 the figure is down at just under half at £0.52 for every £1 of assets. From 2006 to 2009 are almost shows the same. This is mainly due to positive equity. There is no risk in investing in this company as long as the equity is positive.
Interest cover ratio evaluates the he amount of operating profit which will be available to cover all the interest. So lower the interest cover ratio greater will be the risk to cover all the interest payables. Considering the royal Dutch shell the interest cover ratio is low in 2006 which is 39 times as compared to 2007 were there was slight increase with 46 times. In 2008 there was again a fall to 44 times and in 2009 the condition became more worse showing a decline to 39 times as before. The only explanation here is the operating profit as gone down due to the financial crisis , decrease in oil price and less demand for natural gases and chemicals due to calamities that occurred that year.
Graph 1.4: Gearing Ratio Trends:
http://uk.finance.yahoo.com/q?s=RDSB.L
4.5: Investment Ratio:
This the ratio which is extremely important for any potential investor and financial manager who are interested in the market prices of the shares of a company on the Stock Exchange. (Wood. F & Hellings , 1970 ). These ratios help investors in decision to opt for buying the shares of the company with reference to the below mentioned ratios.
Dividend Yield Ratio:
Formula: Dividend per Share / Market Price per Share (*100 for percent)
Earnings per Share:
Formula: Profit after tax / Number of shares issued
Price Earnings Ratio:
Formula: Market price per Share / Earning per Share
Ratio
2006
2007
2008
2009
Earnings Per Share (EPS)
3.97p
5.00p
4.27p
2.04p
Dividend Payout (DP)
31.9%
28.8%
37.4%
82.3%
Price-Earnings (PE)
8 times
13 times
9 times
9 times
Earning per share is one of the main indicators of knowing a company's performance. Earning per share is always shown under the foot of a company's profit and loss account.
For royal Dutch shell plc the above table clearly exhibits an increase in earning per share till 2007. In 2008 also it shows a slight decline and in 2009 there is a sizable loss. This is mainly due to the low after - tax profit which is directly due to decreased oil price and financial crisis.
Dividend yield measures the actual rate obtained by investing in an ordinary share at the current market price. Basically its direct comparison between market price of a share and number of dividend issued per share.
In the case of royal Dutch shell there was a slight decrease from 31.9% from 2006 to 28.8% in 2007 but it again increased to 82.3% in the year 2009. This means that a potential investor might be attracted because of the increasing dividend payout in 2009.
The price per earning ratio which is expressed as a multiple of earning per ratio indicates how a stock market rates a particular company. Higher the ratio greater will be the expectation of future profit. It is the investors who push up the market price with much anticipation.
For royal Dutch shell plc the price per earning ratio remained strong till the year 2007. From the year 2008 is started to experience a gradual decline and which remained stable for the year 2009.this may be due to decrease in confidence of the investors.
Graph 1.1: Investment Ratio Trends:
http://uk.finance.yahoo.com/q?s=RDSB.L
5: SHARE PRICE ANALYSIS OF ROYAL DUTCH SHELL PLC:
Share prices in a publicly traded company are determined by market supply and demand, and thus depend upon the expectations of buyers and sellers. Among these are:
The company's future and recent performance, including potential growth
Perceived risk, including risk due to high leverage
Prospects for companies of this type, the market sector.
The share price of royal Dutch shell for the past 6 weeks is shown below:
PR
Date
Open
High
Low
Close
Avg Vol
Adj Close*
19-Apr-10
22.45
22.60
22.32
22.54
7,170,000
22.54
12-Apr-10
22.50
22.89
22.18
22.50
6,257,500
22.50
6-Apr-10
21.95
22.47
21.83
22.43
6,903,200
22.43
29-Mar-10
21.50
21.75
21.20
21.75
5,276,400
21.75
22-Mar-10
21.58
21.76
21.31
21.41
6,322,200
21.41
15-Mar-10
21.21
22.06
21.05
21.58
9,267,200
21.58
8-Mar-10
20.95
21.40
20.81
21.23
5,456,400
21.23
1-Mar-10
20.10
20.92
20.05
20.89
7,991,100
20.89
22-Feb-10
20.56
20.59
19.83
20.01
6,958,800
20.01
15-Feb-10
19.97
20.55
19.92
20.49
5,753,900
20.49
http://uk.finance.yahoo.com/q?s=RDSB.L
http://uk.finance.yahoo.com/q?s=RDSB.L
The above mentioned graph gives us a clear picture of share price movement of royal dutch shell company from the year 2009 to 2010 .it is seen that in the month of may the share price is 17.5 million which then gradually increased and reached upto almost 20 million in the month of june. It was at that period when the oil price reached its peak. Anyway as the price started to reduce the share price also started to reduce which is clearly evident during the month of july when its share price is declined upto 17 million. This decrease may be even due to the financial crisis. But later it is seen that the share price again started to increase slowly. The reason for this may be people may have started to buy new shares when the share price came down with an expectation that its value will increase when the demand of natural gas and oil price will increase. As the company as announced of expanding its business to by starting new projects has also increased the confidence of investors to invest in the company .this is reflected in the graph which shows a gradual increase of share price from September 2009. And in current month it still shows increase in share price almost reaching upto 22 million. This shows that investors have not yet lost confidence in the company.
5.1: Current news :
Today shell has entered into a new period of growth and has outlined plans to sharpen up performance and reduce costs. From 2009 onwards peter voser took the position as CEO after jorma ollila. He did start some new projects like our pearl gas to liquid project started in Qatar and the parquet das conchas off shore project started in brazil with an expectation that it wil increase the operation of cash flow by around 50% from 2009 to 2012 in a $60/bbl oil price world, and by over 80% with $80/bbl oil prices. Shell has revisited its payout policy, in line with major competitors and market trends. Downstream, Shell is adding new chemicals capacity in Singapore and refining capacity in the US, and making selective growth investment in marketing. Due to all this the share price value of this company as increased to a greater extend.
Below here shows the current share price value dated on 21.04.2010
Detailed Shell Share Price Data
Share Price
1,994.50p
Close
1,994.50p
Change Today
-15.50p
Volume
2,820,010
Percent Change
-0.77%
Day High / Low
2,016.98p / 1,988.00p
Update Time
16:35:11
Year High / Low
2,016.98p / 1,437.00p
Bid
1,992.50p
Last Trade Price
1,999.33p
Offer
1,993.50p
Last Trade Amount
70,726
Open
2,013.00p
Last Trade Time
16:52:25
http://uk.finance.yahoo.com/q?s=RDSB.L
6: Analysis of Royal Dutch shell Competitor:
For every company its performance can only be measured when it is compared with a business of its same stream or we can say a competitor. Industries were royal Dutch shell competes are in Oil & Gas Refining, Marketing & Distribution Energy & Utilities Gasoline Retailers Oil & Gas Transportation & Storage Oil & Gas Exploration & Production and Retails. There are many competitors for royal dutch shell plc which include Exxon Mobil Corporation , TOTAL S.A , BP p.l.c. since the primary business is inthe management of a vertically integrated oil company , here we are taking british petroleum company as the main competitor.
The below table shows the comparison between BP and shell plc in the year 2009 :
Ratios
BP (2009)
RDS (2009)
PROFIT AFTER TAX
25,124 Million
12,718 million
CURENT RATIO
1.1:1
1.1:1
QUICK RATIO
0.7: 1
0.8:1
GROSS PROFIT
31.5%
12.7%
NET PROFIT
7 %
4.5%
ROCE
14.9%
10.3%
ROSF
24.6%
15.2%
From the above table it is clear that British petroleum company is financially in a very strong position as compared to shell plc with a gross profit of 31.5 %. Comparing the liquidity ratio of both the companies both are in a stable position to cover its liabilities. Comparing with the dividend paid , in British petroleum plc the dividend paid per ordinary share is $ 56.00 and where as in royal Dutch shell its only $ 0.46. this does make a huge difference between both the companies. Now considering current share price value on 20th of month of April it is 648.00p for British petroleum and 2004.02p for shell plc. Evaluating all these factors excluding only the share price it shows that british petroleum as far ahead of royal dutch shell plc.
7: Conclusion and Recommendation :
Shell is one of the world's largest independent oil and gas companies in terms of market capitalization , operating cash flow and oil and gas production. Even though Shell's operations and earnings are subject to risks from changing conditions in competitive, economic, political, legal, regulatory, social, industry , business and financial fields. Out of this the main thing is that is the financial condition are exposed to fluctuating prices of crude oil, natural gas, oil products and chemicals . The companies future development, performance and position are set out in the Strategic and Operational Review and the financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the Finance Review.
In this report the financial analysis of the company is done by using five different ratios in order to evaluate the weakness and strength of the company, how well it is financed and to know whether an investor can invest in it or not. From the data obtained it is clear that the company has a considerable financial resources and an established number of suppliers and a broad and stable customer base. There is been a gradual increase in growth of the company in various aspects with only a slight decrease in 2009 which is mainly due to financial crisis , varying price of oil and decrease demand for natural gas. Their gross profit has grown in the four year period from £17.5 million in 2006 to £12.6 million in 2009 which shows a % decrease. it indicates that Taking the period of recession when almost all companies are affected , still this company has tried to become stable which is a positive sign for the investors. It is also evident from the data that the company as a positive equity and the trend from 2006 to 2009 shows that it is also slightly increasing. The dividend payout has also increased which all together shows a desirable factor to invest in. now considering the share price we have seen that there is drastic increase in share price from 1442.00 p last year to 1966.50 p of this year showing a positive increase of 586.00p which would be another reason for an investor to invest in this company. In addition to all this factors it is clear from the above data that the company is still in a position to pay back all its debts and as the ability to generate cash for its investment and for the distribution of shareholders. Even though the company has been affected by financial crisis from 2008 to 2008 the company still shows a potential to increase its profitability. So by evaluating all this it is recommended that an investor could defenitly invest in this company.
