Analysis of Rolls Royce Plc's Financial Position

The assignment requires students to analyze the financial position of Rolls Royce Plc using various ratio analysis techniques. It also involves a SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis and a PEST (Political, Economic, Social, Technological) analysis to identify the internal and external factors affecting the company's performance. The report provides recommendations for improving the company's financial position and maintaining its brand image.

STRATEGIC FINANCIAL
MANAGEMENT

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
Background.............................................................................................................................1
SWOT.....................................................................................................................................1
PEST.......................................................................................................................................2
Trend in performance.............................................................................................................3
Ratio analysis..........................................................................................................................3
Issues that need to be solved with the help of corporate finance...........................................5
CONCLUSION................................................................................................................................6
BIBLIOGRAPHY............................................................................................................................7

INTRODUCTION
In accordance with having favourable financial stability as well as profitability in the firm
there is need to implement various techniques or strategies which will evaluate the functioning of
the organisation. In the present scenario there will be discussion based on Rolls Royce Motor
Car's financial position with the help of various models and techniques. There will be financial
analysis of entity such as ratio analysis which will help them in retaining the attention of
maximum stakeholders.
Background
Rolls Royce plc is the most successful MNC throughout world. It has gathered the good
will from working in the favourable estate as well as maintain the brand image or standard in the
Automotive industries. However, the origin of this company is from UK which is established in
1998. Hence, the corporation has satisfied its clients through its quality products with the
luxurious touch makes it more reliable and popular worldwide.
SWOT
In accordance with being the world's most successful and respected automotive industry
there will be several challenges or strength to Rolls Royce plc. Hence, it can be seen in the
following table:
Strength
 Have the strong brand image in world.
 Luxurious quality of vehicle with the
use of good quality material
 It has developed the status symbol that
only a rich person could be able to
afford such car.
 This industry operates in more than 50
nations and has clients of more than
150 countries
 It has the strongest Research and
development team as well as has better
technologies in manufacturing the cars.
Weaknesses
 Due to strong brand image the cots of
the cars are higher than one person
could not be able to afford such
products.
 There is similarity in each products thus
every model of car seems same which
indicates poor innovations.
 Due to high range of the prices as well
as maintenance charges many clients
moved to other brands.
 Organisation has the high debts which
are reducing the brand image as well as
1

stakeholders.
Opportunities
 The entity can adopt the changes in the
models of cars such as bringing better
research and development.
 They must build up the environment
friendly cars with maintaining the
luxurious fame.
 Must build up the favourable price
premium that would help consumers to
acquire such cars.
Threats
 Large numbers of rivalry firms such as
BMW, GM, Audi etc. can switch their
consumers
 Limited product line would be obstacle
for the business.
 High rate of cars can shift clients to
other firms.
PEST
In order have operations in various countries there will be several challenges that need to
be adopted by Rolls Royce plc. Thus, in order to make the favourable functioning in such
countries the organisation need to understand variations in each locality which will influence the
operational work such as:
Political factors:
Due to great brand image the organisation has various political threats which are
damaging the passenger confidence. For instance, Gulf war and terrorism which have shaken the
brand goodwill. The support from EU aircraft to this MNC has reduced pressure of the taxation
rates to consumers. Thus, in order to have better environmental sustainability the firm is planning
to lower down the carbon emission and necessary steps which will be fruitful for the
environment.
Economical:
There will be thousands of consumers throughout the world but the main economic
factors which influence the high debts in the organisation is the prices of such products. Hence,
Rolls Royce plc deals in various nations as well as there will be variations in the economic
conditions of such citizens so it can be said that, it would not be able earn from all nations a
2

same amount revenue. Thus, it influences the high debts over the brand because due to strong
goodwill power the firm cannot scarifies to lower down the costs suspended over manufacturing
the cars. Thus, they need to maintain status symbol which will lead them to the high
indebtedness.
Social:
In accordance with the dealing made by Rolls Royce in various countries there are
variations in the living standard or people as well as cultural changes which will influence the
operational activities. Thus, as per the current scenario there has been raise in the urbanisation of
the demand of Air craft travelling will also be increasing. Hence, in order to manage the air
traffic there is requirement of manufacturing the large Air crafts.
Technological:
Due to increase in competition there has been raise in the demand of innovative research
and development which will help Rolls Royce in gathering the large attention form consumers as
well as from investors. Thus, it will result in generating the adequate amount of income as well
as it helps in lowering down the short and long term debts of the organisation.
Trend in performance
Innovative changes as well as introduction of new strategies will help the organisation in
having the better growth in the long run as well as they could be able the gather the large
numbers of stakeholders. Thus, in this context Rolls Royce plc need to introduce new ranges or
models of the cars. They need to manufacture suitable designs of vehicles which are highly
efficient as well as has low carbon emission. In these regards, firm need to appoint talented team
of engineers, designers as well as implementation of technologies which will help them in
analysing the level of pollution made by them.
Ratio analysis
RATIO ANALYSIS OF ROLLS
ROYCE
PARTICULARS FORMULAS 2015 2016
Profitability Ratios
Return On Eq Profit Available To Owners *100 1.46 -117.28
3

Equity
Return On Assets Profit *100 0.37 -16.85
Net Assets
GP Margin GP *100 23.88 20.38
Sales Revenue
Asset Efficiency Ratio
Asset Turnover Net Sales 0.62 0.62
Net Assets
Liquidity Ratios
C R CA 1.48 1.35
CL
Q R CA-Inventory 1.13 0.93
CL
Capital Structure Ratios
Debt To Equity Net Liabilities *100 0.57 1.71
Net Equity
Eq Ratio Net Equity *100 22.46 7.29
Net Assets
Interest Coverage EBIT 3.25 -59.21
4

Ratio Total Finance Costs
Interpretation: The Financial ratios of Rolls Royce were measured in the above listed
table. It describes that, organisation is facing the down fall in the operational activities which
results in such disclosure of the accounts. Hence, on the basis of profitability the return on equity
in 2015 is 1.46 and in 2016 is -117.28 which says that this entity is suffering from high losses in
2016. Due to exceeding expenses over manufacturing cars and aircraft projects the organisation
has high level of operating expenses which are result in the losses faced by business in such
financial year. Which may lead them to he down fall as well as shareholders will stop investing
in the company due to such looses. On the other side, the return on assets for both the financial
years has changes such as 0.37 and -16.85 respectively. Thus, such ratios denotes that Rolls
Royce has faced losses in 2016 which results in the negative ratios.
However, the gross profit ratios of both the years are 23.88 and 20.38. Thus, it describes
that, in 2015 the ratio of GP is 23.88 and reduced in 2016 at 20.38 it is due to reduction in the
sales made by organisation as well as increase in the cost of production such as purchase or
material, salaries to workforce etc. during such period. On the other side, the assets' efficiency of
Rolls Royce can be analysed as constant in both the years for 0.62 which indicates that there are
no changes in the assets acquired by the firm in this year and sales by them. Hence, liquidity of
the firm in both the years has the positive outcomes such as Current ratio in 2015 and 2016 is
1.48 and 1.35 respectively, which denotes that there may be reduction in the current liabilities of
entity but not too much thus it can be said the liquidity of the firm is capable of meeting the
financial requirements.
The quick ratios of both the years is 1.13 and 0.93 thus, the in the current year the quick
ratio is lower than as compare to previous year. Hence, The capital structure ratios of the firm on
the basis of debt equity ratios, equity ratios and interest coverage ratio has huge difference. The
debt equity ratio of both the years are 0.57 and 1.71 which is increased in the current year. Thus,
it can be said that Rolls Royce is capable of meeting its debts in the current even though they
have faced losses in the operating activities. Hence, the current year the company is better in
covering the debts of the firm as well as able to make payments of dividends to stakeholders.
5

On the other side the equity ratio of firm in both years is said to be 22.46 and 7.29 which
can be said that, due to various loses and increase in the operational expenses such as Aircraft
manufacturing has reduced the numbers of investors in the firm. In current year the Equity ratio
is less than the 50% of the previous years' ratio. Thus, on the basis of Interest coverage ratio
company has hug reduction in current year as compared to previous year such as 3.25 in 2015
and -59.21 in 2016. Thus, it is due to the losses incurred in the 2016 which tends to reflect the
negative balance in financial accounts as well as negative EBIT.
Issues that need to be solved with the help of corporate finance
There can be several issues which are need to be solved by the organisational
professionals. Thus, managers at Rolls Royce need to over come such loopholes which are
leading them toward the down fall of the financial position in the company. Hence, there will be
many issues or obstacles in the gathering the funds of operational activities such as:
Fund rising through Equity Capital: These will be beneficial for the organisation in
context with rising gathering the capital revenue from shareholder's investments. Thus, it can
reflect the various changes in the financial position of the firm as well as entity will be able to
make investment in the new projects such as designing innovative models of cars, manufacturing
big volume of aircraft as to maintain the traffic control.
Funds through Government: The procedure of acquiring the loans from government is
quite long and complicated. Thus, it cannot meet the initial requirement of Rolls Royce on
specific time as well as there are lot many obstacles included in it such as taxation, various laws
and regulations which distract the firm in taking loans and grants from governmental bodies.
Poor Budgeting: The main reason behind reduction in the shareholders are mainly
inappropriate forecasting of the requirement of costs. Thus, it reflects in the poor management of
the planned budgets if the increase in the costs of manufacturing products as well as operational
expense are higher.
Disclosure of accounts: Stakeholders in the firm are the main users of the financial
statements as well as disclosure of such accounts. Hence, such disclosure will help theme in
planning the investments decisions. Thus, Rolls Royce plc need to adopt various new techniques
of making the fruitful disclosure of such accounts such as Integrated reporting, CSR and
6

sustainability reporting. Hence, these are the modern reporting techniques which are helpful for
users of such statements that they could be able to build up good brand image.
Allocation of resources: the quality of material used by the entity is the main reason
behind the brand image. Hence, Rolls Royce is tended to maintain the luxurious experience of
the passenger by manufacturing the vehicle of such standards.
CONCLUSION
In accordance with the above study, Rolls Royce and the financial position of the
company can be measured in the form of various ratio analysis. Thus, it can be said that in the
2016 the operational functioning g of the firm is quite poor but it has been able to meet the debts
of the business. Hence, on the basis of SWOT and PEST analysis the internal or external ability
of the firm is to be acknowledged as well as the professionals in entity were suggested to make
the beneficial changes to enhancing the efficiency of the business as well as maintain the brand
image.
7