The Financial Performance of Royal Dutch Shell PLC - Case Study Example

Introduction This report examines the financial performance of Royal Dutch Shell PLC which is a global leader in the production and sale of oil and gas. In this regard, financial ratios have been used as the main analysis tool in a bid to get informed understanding of the company’s profitability, liquidity risk, leverage risk and suitability for acquisition by potential investors over the last five years (2012- 2016). In so doing, the company has been compared against its close competitors who include B.P, Total SA, and CNOOC. The company’s performance has also been compared against industry average in a bid to enable one to make an informed decision on the suitability of the company for investment. Financial Ratio Analysis Profitability Ratios In gauging the company’s financial performance, we need to establish how successful the company has been in generating profit from its operations. In this regard, the company’s return on capital employed as well as net profit margin for the past five years have been analyzed. Net Profit Margin This is the percentage returns that the company makes from its revenue generating activities (Morningstar.com, 2017). The company’s profitability has generally been lower than that of the industry over the last five years with the only excepition being the year 2016 when the company’s profit margin was 2.4% compared to the industry’s average of 0.59%. The company and the industry have a similar trend of the five years period as far as net profit margin is concerned with a great decline noted in their profitability. The company’s highest profitability was recorded in 2012 when its profit margin was 10.8% with the lowest performance being recorded in 2015 which was 1%. On the other hand, the industry’s highest performance in 2012 was 15.98% with the lowest being 0.59% in 2016. This kind of performance is attributed to the declining prices of gas and oil during the five years period. Royal Dutch Shell has become the latest oil major to reveal the hefty toll the sharp slump in crude prices has taken on its earnings as it posted an 80 per cent decline in full year profit to $3.8bn (Thomas, 2016). Return on capital employed On the other hand, return on capital employed is concerned with the overall profitability that the company generates from the capital it employs. From the graph above, it can be concluded that the company performs better than the industry as far as ROCE is concerned as it outperformed the industry in 2012, 2014 and 2016. However, both the industry and the company has a similar trend of ROCE performance over the five years period with the highest performance being recorded in 2012 when the company’s ROCE was 19.2% while the lowest performance was 1.9% in 2015 with the company’s performance improving in 2016 to 3.6%. On the other hand, the industry’s best performance was in 2012 being 17.81% with the lowest performance being 0.52% in 2016. Just like profit margin, the declining performance is also blamed on the decline in the prices of oil and gas. It is however worth noting that the company’s performance for 2016 slightly improved owing to increased demand and lowering costs. Shell posted a massive turnaround in its bottom line last quarter on the back of an improved production profile, lower costs, and higher price realizations. Shell’s financial improvement is set to continue going forward as upstream oil price realizations will continue to improve on the back of a positive demand-supply environment in the oil industry. Oil demand has exceeded supply by 500,000 bpd this year and the trend will continue as the likes of Russia, Saudi Arabia, and the U.S. continue to reduce output. Shell’s focus on lowering both operating and capital costs will allow it to attain break-even point even if oil prices remain at $50/barrel, which will also improve cash flow (Alpha investor, 2016). Efficiency Ratios Accounts Receivables turnover Accounts receivables turnover gives an indication of how much efficient the company is in collecting the money it is owed from its sales. Companies would prefer to have less money being owed as this would release cash to be used in operations as well as in paying debts (Financeformulas.net, 2012). Thus, companies would want to take the least time in collecting receivables. From the graph above, it is clear that the company greatly outperforms the industry as far as faster collection of receivables is concerned. While the industry seems to be taking longer to collect its receivables, the company is taking less and less time. The company’s took the shortest time to collect its debts in 2016 when it only took 3 days while it took the longest time in 2014 when it took 18 days to collect its debts. On the other hand, the industry average was lowest in 2014 when it took 24.5 days to collect receivables with the longest time being 34 days taken to collect debts in 2016. The observed trend by the company could indicate that the company has an extremely restrictive credit policy with only the most credit worthy customers being allowed to purchase on credit. However, this may not necessarily be desirable as the company could be losing some sales to its competitors who might have slightly flexible credit policy. Accounts payables turnover Accounts payables turnover give an indication of the company’s efficiency in paying those creditors it owes during the accounting period in question (thestrategiccfo.com, 2015). The graph above indicates that the company has been very efficient in paying it suppliers greatly outperforming its competitors and the industry. Its best performance was in 2012 when it only took 1 day to pay its suppliers while its worst performance was in 2015 when it took 11 days to pay its suppliers. On the other hand, the company’s best performance was in 2014 which was 37.5 days with the worst performance being 64.75 days in 2016. Gearing ratios Gearing Gearing ratio shows us how the company mixes debt and equity in its capital structure. As such, it is calculated by dividing the company’s debt with its equity. The company seems to have employed the traditional capital structure with an optimal capital structure that is aimed at keeping the cost of capital at its minimum (Chand, 2015). The company has maintained its gearing ratio below 50% during the five years period which helps in keeping interest obligations at its minimum. The company had its highest gearing ratio being 19.2% in 2012 while the lowest level of 2.75% was achieved in 2015 (Chand, 2015). Thus, the company performs excellently compared with the industry that had its highest gearing ratio being 95.75% in 2014 with the lowest gearing ratio being 88.29% in 2012. The performance is in line with the company’s shareholders wealth maximization goal and this is achieved by keeping the cost of capital to its minimum. Interest Cover The company’s cash interest cover is the number of times the cash available from operations is able to pay the company’s interest expenses. Initially, the company’s interest cover is far much high than the industry average at 330 times compared to the industry’s 118.97 times. These performances are the highest both the company and the industry. However, the company’s performance deteriorates to be lower than that of the industry from 2013 onwards. The lowest performance by the company is 1.3 times in 2016 while the industry’s lowest performance was 8.57 times in 2016. However, this kind of performance is not desirable since it is very low and shows the company may be unable to pay its interest obligations in future if the trend continues. Liquidity Ratios Current Ratio Current ratio which is given by dividing the company’s current assets with its current liabilities gives an indication of the company’s ability to meet its short term obligations and hence the protection on the short term liabilities. The graph above shows that the company has been outperformed by the industry as far as current ratio is concerned with exception of 2016 which was the company’s and the industry,s best performance. During the year, the company’s current ratio was 1.7 while the industry’s average was 1.5. On the other hand, the company’s worst performance was 1.1 in 2013 when the industry’s average was 1.18. However, there is little course for concern as the company’s shortterm debts are well covered by the assets over the entire five years period. Operating Cash Flows to Current Liabilities This ratio shows the company’s preparedness to meet its short term obligations from the cash it generates from operations (Accofina.com, 2013). Ideally, the ratio should be above 1 if the company is to fully pay its current obligations from the cash it generates from operations. The above graph shows that neither the company nor the industry has generated enough cash from its operations to meet its short term obligations over the five years period. This could be explained from the capital intensive nature of the industry and hence cash once generated is reinvested back into the company’s operations and development. Investor Ratios Dividend per Share Dividend per share is the total cash payments that shareholders receive from the company every year divided by the number of shares they hold. From the graph above, both the company and the industry have had stable dividend policy. However, the company has consistently paid a higher dividend than the industry average. The lowest dividend by the company was $1.72 in 2012 with the highest payment being $1.88 between 2014 and 2016. On the other hand, the industry average was lowest in 2012 at $1.23 per share while the highest payment was $1.29 per share in 2014 and 2015. The stable dividend policy has probably been adopted to give a bright picture of the industry and the company to the shareholders and potential investors especially given the decreased income across the industry over the period. Dividend Cover The company’s dividend cover shows the number of times the company is able to cover dividend payments with a lower dividend cover being viewed as a threat to the shareholders as it has the potential of impacting on the company’s future dividend payments. From the graph, both the company and the industry show a sharp decline in the dividend cover between 2012 and 2015 before slightly rising in 2016. The company’s highest dividend cover was in 2012 at 2.48 times compared to the industry’s 2.16 times while the lowest performance was in 2015 at 0.15 times compared to the industry’s -0.83 times. The improvement in 2016 is attributed to improving profitability. Conclusion This report has analyzed the various aspects of the Royal Dutch Shell financial performance over the last five years between 2012 and 2016. Based on the analysis, various conclusions have been made with regard to the company’s profitability, liquidity, leverage, efficiency and returns to investors. The company’s financial performance has also been compared against that of its competitors and the industry thus allowing a more informed decision making. Therefore, arising from the analysis, it has been observed that the company performs very well relative to the competitors and the industry in which case it has outperformed the industry in a number of areas. As such, the company’s financial performance can be considered impressive given the environmental conditions that the company has operated in over the last five years. As such, this report recommends that the company would be a suitable investment option for a potential acquirer although steps need to be taken to improve its profitability thus making it an even better investment option in future. References: Royal Dutch Shell, 2015,Annual Report 2014, Retrieved on 11th May 2017, from; reports.shell.com/annual-report/2014/consolidated-financial-statements.php Royal Dutch financial statements 2014 Royal Dutch Shell, 2014, Annual Report 2013, Retrieved on 11th May 2016, from; reports.shell.com/annual-report/2013/servicepages/welcome.php shell annual report 2013 Royal Dutch Shell, 2013, Annual Report 2012, Retrieved on 11th May 2017, from; reports.shell.com/annual-report/2012/servicepages/about_disclaimer.php shell annual report 2012 Royal Dutch Shell (2012) Annual Report 2011, Retrieved on 11th May 2017, from; reports.shell.com/annual-report/2011/servicepages/downloads/files/entire_shell_20f_11.pdf shell annual report 2011 Shell.com, 2017, Annual report 2016, Retrieved on 11th May 2016, from; http://www.shell.com/investors/financial-reporting/annual publications.html#iframe=L2ludmVzdG9ycy9maW5hbmNpYWwtcmVwb3J0aW5nL2Fubn VhbC1wdWJsaWNhdGlvbnMvamNyOmNvbnRlbnQvcGFyL2lmcmFtZWRhcHBfZTE1Zi5 zdGF0aWMvaW5kZXguaHRtbA== Morningstar.com, 2017, Profitability ratios, Retrieved on 11th May 2017, from; http://news.morningstar.com/classroom2/course.asp?docId=14509 3&page=6 Nathalie, T2016, Royal Dutch Shell full year profit slumps 80%, Retrieved on 11th May 2017, from; https://www.ft.com/content/c9efecec-e213-3d50-a0a9- 224f80ed6a77 Alpha investor, 2016, Royal Dutch Shell: The comeback is here, Retrieved on 11th May 2017, from; http://royaldutchshellplc.com/2016/11/06/royal-dutch-shell-the- comeback-is-here/ Chand, S2015, Theories of Capital Structure | Financial Management, Retrieved on 11th May 2017, from; http://www.yourarticlelibrary.com/financial-management/theories-of-capital-structure- explained-with-examples-financial-management/29398/ Financeformulas.net, 2012, Receivables Turnover Ratio, Retrieved on 11th May 2017, from; http://www.financeformulas.net/Receivables-Turnover-Ratio.html The Strategic CFO, 2015, Accounts Payable Turnover Analysis, Retrieved on 11th May 2017, from; http://strategiccfo.com/accounts-payable-turnover-analysis/ Accofina.com, 2013, Operating Cash Flow to Current Liabilities, Retrieved on 11th May 2017, from; http://accofina.com/calculators/liquidity Appendix: Financial statements Financial Ratio analysis Profitability Ratios: Net Profit Margin (Operating Profit Margin) = Net Profit BIT (Operating Profit)/ Sales x 100 2012 = 50,512 / 467,153 x 100 = 10.8% 7.4 6.7 1 2.4 2013 = 33,592 / 451,235 x 100 = 7.4% 2014 = 28,314 / 421,105 x 100 = 6.7% 2015= 2047/26490 x 100 = 1% 2016= 5606/233591 x 100 = 2.4% Return on Capital Employed (ROCE) = Net Profit BIT (Operating Profit) / (Shareholders funds+ Non-Current Liabilities (Capital Employed)) x 100 2012 = 50,512 / (189,927 + 73,419) x100 = 19.2% 2013 = 33,592 / (181,148 + 83,106) x 100 = 12.7% 2014 = 28,314 / (172,786 + 94,118) x 100 = 10.6% 2015= 2047/(1939+105088) x100 = 1.9% 2016=5606/(4575+148939) x100 = 3.6% Efficiency Ratios: Receivable Turnover = Account Receivables/Sales x 365 (Days) 
2012 = 12,902 / 467,153 x 365 = 10.08 = 11 days 13 18 13 3 2013 = 15,032 / 451,235 x 365 = 12.2 = 13 days 2014 = 20,652 / 421,105 x 365 = 17.9 = 18 days 2015= 9852/264960 x 365 = 13 days 2016= 2038/233591 x 365 = 3 days Payable Turnover = Account Payables/Cost of Sales (Purchases + production and manufacturing costs) x 365 (Days) 2012 = 1,015 / 396005 x 365 = 0.94 = 1 day 2013 = 1,647 / 381,585 x 365 = 1.58 = 2 days 2014 = 3,116 / 357,316 x 365 = 3.18 = 4 days 2015= 7156/222739 x 365 = 11 days 2016= 2669/191008 x 365 = 5 days Gearing Ratios: Gearing Ratio = Total debt/Equity x 100 2012 = 50,512 / (189,927 + 73,419) x 100 = 19.2% 2013 = 33,592 / (181,148 + 83,106) x 100 = 12.7% 2014 = 28,314 / (172,786 + 94,118) x 100 = 10.6% 2015 = 4528/164121 x 100 = 2.75% 2016= 2669/191008 x 100 = 3.7% Cash Interest Cover = (Cash flow generated from operations + dividends received + interest received)/Interest 2012 = (4,086 + 3,807 + 26) / 24 = 330
 2013 = (16,526 + 7,117 +175) / 1,307 = 18.2 2014 = (16,079 +18,031 + 7) / 14 = 2,4 2015= 29.8+ +4627+288/1888 = 2.6 2016= 20.6+3820+470/3203 = 1.3 Liquidity Ratios: Current Ratio = Current Assets/Current Liabilities 2012 = 114,734 / 96,979 = 1.2 1.1 1.2 1.3 1.7 2013 = 103,343 / 93,258 = 1.1 2014 = 99,778 / 86,212 = 1.2 2015= 93358/70948 = 1.3 2016=86569/73825= 1.7 Operating Cash Flow to Current Liabilities = Net cash flow from operating activities/Current Liabilities 2012 = 46,140 / 96,979 = 0.48 2013 = 40,440 / 93,258 = 0.43 2014 = 45,044 / 86,212 = 0.52 2015=29810/70948 = 0.42 2016=20615/73825= 0.27 Investor Ratios: Dividend per share= Total dividends paid/No. of ordinary shares 2012 = 1.72 2013 = 1.80
 2014 = 1.88
 2015 = 1.88 2016 = 1.88 Dividend cover = EPS/Dividends per share 2012 = 4.27 / 1.72 = 2.48
 2013 =2.60 / 1.80 = 1.44
 2014 = 2.36 / 1.88 = 1.26 2015 = 0.30/1.88= 0.15 2016= 0.58/1.88 = 0.30 Competitors and Industry Performance B.P Royal Dutch Shell Total SA CNOOC Industry Net profit Margin 2012 4.8 10.8 11.89 36.41 15.98 2013 7.8 7.4 10.43 17.18 10.70 2014 1.4 6.7 5.45 17.20 7.69 2015 -4.29 1 3.89 9.99 2.65 2016 -1.25 2.4 4.79 -3.60 0.59 Return on Capital Employed 2012 8.42 19.2 19.47 24.13 17.81 2013 12.98 12.7 15.36 12.65 13.42 2014 2.24 10.6 7.30 11.44 7.90 2015 2.39 1.9 3.72 2.95 2.74 2016 -4.67 3.6 4.07 -0.92 0.52 Gearing Ratio 2012 150.96 19.2 136 47 88.29 2013 134.41 12.7 132 81 90.03 2014 152.40 10.6 146 74 95.75 2015 166.12 2.75 135 72 93.97 2016 171.90 3.7 127 67 92.4 Interest cover 2012 19.10 330
 34.48 92.39 118.97 2013 19.76 18.2 32.05 42.35 28.09 2014 28.53 2.4 34.24 26.80 22.99 2015 14.20 2.6 20.63 13.09 12.63 2016 6.38 1.3 14.91 11.67 8.57 Current Ratio 2012 1.19 1.2 1.38 2.07 1.46 2013 1.33 1.1 1.37 0.93 1.18 2014 1.37 1.2 1.45 1.09 1.28 2015 1.28 1.3 1.38 1.66 1.41 2016 1.16 1.7 1.33 1.82 1.50 Operating cash flow to current liabilities 2012 0.26 0.48 0.46 1.12 0.58 2013 0.29 0.43 0.48 0.49 0.42 2014 0.51 0.52 0.48 0.51 0.51 2015 0.35 0.42 0.39 0.95 0.53 2016 0.18 0.27 0.30 1.09 0.46 Account Receivables Turnover 2012 34 11 35 45 31.25 2013 45 13 33 25 29 2014 32 18 25 23 24.5 2015 41 13 24 47 31.25 2016 45 3 30 58 34 Account payables turnover 2012 49 1 63 55 42 2013 53 2 43 64 40.5 2014 48 4 40 58 37.5 2015 63 11 63 78 53.75 2016 117 5 74 63 64.75 Dividend per share 2012 0.33 1.72 2.34 0.53 1.23 2013 0.365 1.80 2.38 0.57 1.28 2014 0.39 1.88 2.44 0.45 1.29 2015 0.40 1.88 2.44 0.43 1.29 2016 0.40 1.88 2.45 0.33 1.27 Dividend Cover 2012 1.75 2.48
 2.01 2.38 2.16 2013 3.39 1.44 1.57 2.21 2.15 2014 3.15 1.26 0.77 3.00 2.05 2015 -5.3 0.15 0.89 0.96 -0.83 2016 0.1 0.30 1.03 0.03 0.37 Read More