International Finance: A Case Study of Royal Dutch Shell

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INTERNATIONAL FINANCE
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Table of Contents
Introduction......................................................................................................................................3
Main Findings..................................................................................................................................4
Conclusion.....................................................................................................................................13
Reference List................................................................................................................................14
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Introduction
The trade of services and goods, capital and technologies at a transitional or global level across
the national borders are known as international business. Many significant changes have been
witnessed in the international financial market in the years 1990s and 1980s (Ocampo, 2018).
The world we live in getting smaller in every aspect with the advent of rapid integration and
globalisation. Banking is being discussed at global level was the banking sector has went into
rapid globalisation in the international business environment (Maggiori, 2017). In this research, a
detailed analysis of an international company is conducted to study their financial position.
Moreover, to track the recent developments in the international market and their reaction towards
increasing globalisation this research has concentrated on the studying the business environment
of this British company named The Royal Dutch Shell Plc.
The Royal Dutch Shell plc having its headquarters in Netherlands, UK is a British – Dutch oil
and gas company. Samuel Samuel and Marcus founded it in 1907. The main items of Shell are
natural gas, Petroleum, and LNG (Shell.com, 2019). This study would enumerate the ways Shell
is adopting with the recent changes in the international business environment. Moreover, it
details out the financial performance of the company in the changing environment. The
effectiveness of the policy the company has adopted to adapt to the changes. The effect of key
elements of the Royal Dutch Shell Plc on its performance would also be highlighted in this
study.
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Main Findings
A) Two recent developments in the international financial environment appear to have
affected Royal Dutch Shell’s recent performance and development and analysis of how
these two developments are likely to impact on the company in the near future.
In the words of Hamilton and Webster (2018), it can be noticed that there have been large
number of developments occurring within the global financial environment during the recent
past, mostly in terms of the money markets. These changes have occurred because of differing
factors such as the rapid advancements and progress in technology, the rapid developments of
telecommunications, increasing number of investments with opportunities for financing and
market liberalisations (Bekaert and Hodrick, 2016). These developments have had considerable
effects over both the development and the recent performance of Royal Dutch Shell and are
likely to have an influence over the enterprise in the future as well. The points below involve a
discussion of two such significant developments and the possibilities of their impacts over Royal
Dutch Shell’s near future -
 Continual integration and globalisation - According to Rosenau (2017), the continual
integration and globalisation has resulted in the integration of varying financial markets,
along with improving economies and trade, enhancing factor mobility along with
ensuring extravagant changes IT in addition to posing threats and risks for non-globalised
enterprises. However, globalisation results to increased competitive rivalry for Royal
Dutch Shell in addition to enlarging a number of risks, which are uncontrollable, for
example, the unexpected changes occurring in external environments or external shocks.
The analysis of the operations within Royal Dutch Shell provide an indication that Royal
Dutch Shell’s competitive rivalry within the global marketplace have increased largely,
the major competitors being Chevron Corporation, ConocoPhillips, Total, BP (British
Petroleum and Amoco) and Exxon Mobil. This has had an influence over the financial
performance of Royal Dutch Shell along with posing threats over further enhancement.
Observations also provide an indication that the competition in the global oil and gas
marketplace is likely to enhance further because of globalisation and integration and in
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order to deal with it, the organisation needs on focusing over acquisitions through buying
out competition.
Enlarging securitisation - According to Lumby and Jones (2015), the enlargement of
securitisation has taken place because of the spurge occurring in mergers and acquisitions, in
addition to the leveraged buy-outs occurring in European marketplace. An enlargement can also
occur in the issue of corporate bonds because of securitisation (Betz and Betz, 2018). For
example, during the FY2019, securitisation increased by 54% in the European market (Imf.org,
2019). As enlarging securitisation enhances transfer to loans and assets including home loans,
recent developments have influenced Royal Dutch Shell’s financial performance. Financing has
become for Royal Dutch Shell due to enlarging securitisation through pooling varying kinds of
contractual debts and the pooling of securitised assets can be leading to the mitigation of credit
risks for the business while it borrows. Thus, this is another way in which recent developments
within the global financial environment is likely to be leading to the enhancement of the
performance of Royal Dutch Shell during the future years.
B) International financial management strategy
The financial management strategy of an enterprise is not only concerned or related to only the
management of the finances of the enterprise but also related to the management of finances for
its survival while attainment of its objectives and goals, while maximising shareholder worth
with time. Below are the two key elements of the international financial management strategy of
Royal Dutch Shell and the manner in which they have an influence over its financial
performance -
Sources of finance
According to Schwienbacher et al. (2015), sources of financing or funding act as a considerable
factor affecting a company’s financial performance. With the means of evaluation of Royal
Dutch Shell, one can find out that there are differing sources with the help of which the
enterprise acquires funds. The evaluation of the balance sheet of Royal Dutch Shell indicates that
the company has 685 million equity shares held in it with total shareholders’ funds amounting to
202534 million at the end of 2018 (Reports.shell.com, 2019).
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On the other hand, the total liabilities and borrowings of the company amounted to 196660
million during the last year (Reports.shell.com, 2019). This is an indication that the company
uses both debt financing and equity financing in order to acquire finances externally and it can be
seen that it uses more of equity financing than debt financing, which is one of its most effectual
international financial management strategies to ensure the maintenance of proper solvency. The
retained profit of Royal Dutch Shell during the year 2018 amounted to 182606 million, which is
an internal source that the enterprise uses as source of finance (Reports.shell.com, 2019). All
these sources of financing have led to the enhancement of the financial performance of Royal
Dutch Shell and their availability would be improving its performance in the future periods as
well.
Dividend policy
Dividend policies are of three kinds - residual policy, constant policy and lastly, stable policy
(Benavides et al., 2016). The evaluation of the annual reports of Royal Dutch Shell, it can be
seen that the total dividend payout of the company varies during the past three years, as shown in
the figure below -
Figure 1: Dividends paid out by Royal Dutch Shell in the last three years
(Source: Reports.shell.com, 2019)
This means that as the net earnings or profit of the company changes, the dividend payout of the
enterprises keeps varying and the residual amount remaining in the company from its net profit
after capital expenditure is made are distributed as dividend. The consideration of the dividend
policy of the company also shows that both cash dividends and scrip dividends are distributed
among shareholders. The use of scrip dividends is an indication of a strong financial
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management strategy of the company, as this form of dividend distribution policy helps in the
ascertainment of maintenance of optimum level of liquidity within the enterprise. The cash flows
statement of Royal Dutch Shell shows that in 2017, the company had net cash balance of 2
million, which increased to 3 million in 2018, thereby indicating optimum cash availability and
liquidity within the company (Reports.shell.com, 2019). Therefore, it can be stated that the
dividend policy of Royal Dutch Shell has resulted into a positive impact over its financial
performance.
C) Analyse the financial performance of Royal Dutch Shell Plc in the financial year 2016-
2017 & 2017-2018 (in terms of profitability, liquidity, efficiency and investment) of the
company
The purpose of shell is to provide increased number of clean energy solutions. The company is
strategising to be the leading energy sector in the field of power generation. They are
maximising sustainable free cash flow by emphasising on asset performance, health, safety and
security to improve their operating performance. They seek and build highly motivated
employees to proceed successfully with their outlook. The research done below shows a
comparative financial analysis of the company for the years 2016 and 2017 (Reports.shell.com,
2017).
Particulars Formulas 2016 2017
Operating profit margin Earnings before income & taxes/sales
3.670374
5
7.1087
3
Net profit margin Net income/sales
1.908094
8
4.1619
9
Inventory Turnover Cost of goods sold/Average Inventory
8.689642
1
9.9922
3
Total Asset turnover
ratio Sales/average total assets
0.769087
8
0.5774
3
Current Ratio Current Assets/Current liabilities
1.252772
7
1.1960
3
Quick Ratio Current assets - inventory/Current liabilities 0.804820 0.8798
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5 2
EPS Earning price per share 3.12 1.16
Price earnings Ratio Net income/no of shares 41.2
24.469
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Table 1: Showing different ratios that analyses the financial performances of a company
Year 2016 2017
EBIT 881 2217
Sales 240.03 311.87
Net Income 458 1298
Cost of goods sold 193.117 252.044
Average Inventory 22.2237 25.224
Average total assets 312.097 540.097
Current assets 97482 95404
Current Liabilities 77813 79767
EPS 3.12 1.16
Table 2: Ratio Analysis
Year 2016 2017
Profitability ratios -
Operating profit ratio 3.670374537 7.1087312
Net profit ratio 1.908094821 4.1619906
Table 3: Operating profit and net profit ratio analysing the profitability of the company
2016 2017
0
1
2
3
4
5
6
7
8
Operating profit ratio
Net profit ratio
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Figure 2: Figure showing the contrast between the operating profit and net profit ratio for
the year 2016 & 2017
The figure shows the operating profit of the company for the year 2016 and 2017. The true
profitability of the business is reflected through operating profit margin. It is evaluated before
subtracting the cost of interest. The firm’s margin of profit after subtracting the cost of sales but
before taxes and expenses of interest has increased drastically from 3.67 in 2016 to 7.10 in 2017.
This shows that the company is performing fairly well and is able to curb the extra expenditure
on the production cost. The graph also predicts the net profit margin of the company. The margin
of profit after all expenses and cost is the net profit margin of the company. On analysing the net
profit margin a considerable increment can be noticed. From 1.908094821 in 2016 the net profit
ratio has increased to 4.1619906 in 2017 (Reports.shell.com, 2017). Therefore, it can be
concluded that the company has been performing fairly since last two years.
Year 2016 2017
Efficiency ratios
Inventory turnover 8.689642139 9.9922296
Total asset turnover ratio 0.769087816 0.5774333
Table 4: Inventory turnover and total asset turnover showing the efficiency of the company
2016 2017
0
1
2
3
4
5
6
7
8
9
10
Inventory turnover
Total asset turnover ratio
Figure 3: Figure showing analysing the efficiency of the company for the year 2016 & 2017
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The figure above analyses the inventory turnover ratio of the company. The graph shows that in
relation to the cost of goods sold the inventory turnover is considerably reasonable. It can be
drawn out from the graph that the company has a very recognisably high inventory turnover ratio
in 2016 of about 8.689642139. Although, the company has not recorded any considerable
increase in 2017 but it seems that they have continued following the policies and strategies the
company adopted in 2016. This also proves that the company has successfully determined their
market environment hence the flow of inventory is exceptionally good. Moreover, the supply is
as per the research strategy, this proves the efficiency of the control strategy of the company. On
the contrary, the total asset turnover ratio is disappointing to a great deal. The total asset turnover
ratio in 2016 was 0.769087816, which further declined to 0.5774333 in 2017 (Reports.shell.com,
2017). Therefore, it can be concluded that the company fails to efficiently use the current assets
and fixed assets of the company. They need to implement policies urgently that helps them to
make effective use of the fixed and current assets of the company.
Year 2016 2017
Liquidity ratios
Current ratio 1.252772673 1.1960334
Quick ratio 0.804820462 0.879825
Table 5: Current ratio and quick ratio showing the liquidity of the company
2016 2017
0
0.2
0.4
0.6
0.8
1
1.2
1.4
Current ratio
Quick ratio
Figure 4: Figure showing analysing the liquidity of the company for the year 2016 & 2017
The firm’s ability to meet the day-to-day obligation of the company by using their short-term
assets is known as the liquidity ratio. Higher the liquidity ratio higher is the firm’s ability to meet
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its daily obligations easily and freely, where as lower liquidity ratio states that the company is
short on liquid cash and is unable to meet its short-term obligations. The graph above analyses
current ratio and the quick ratio of the company. Current ratio is the obtained by dividing the
current assets and current liabilities of the firm. On close examination, it is observed that the
current ratio of the company in 2016 was 1.252772673, which is considerably low. Further, in
year 2017 a negligible improvement is noticed (Reports.shell.com, 2017). The company’s
performance is maintaining its current ratio is poor. Quick ratio also analyses the sum total of
current liabilities and assets but they list out the inventories from the assets. On further analysis
of the quick ratio it is drawn that in 2016 quick ratio was recorded as 0.804820462 and in 2017
the no improvement is noted and the it is recorded at 0.879825. Therefore, it can be concluded
that the company needs to implement its policies to increase the liquidity of the company so that
they do not face any issues in meeting their daily expenses (Gullifer and Payne, 2015).
Year 2016 2017
Investment Ratio
EPS 3.12 1.16
Price Earnings ratio 41.2 24.469388
Table 6: EPS and price-earnings ratio showing the investments of the company
2016 2017
0
5
10
15
20
25
30
35
40
45
EPS
Price Earnings ratio
Figure 5: Figure showing analysing the investments of the company for the year 2016 &
2017
The market price of the stock in regards to certain measures of the company such as book value,
cash flows, dividend and earnings is indicated by the valuation or investment ratios. These ratios
help the investors to decide if they want to invest in the company. With change in the prices of
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the stock, these ratios tend to change. The research below shows some light upon the price
earnings ratio and earnings per share of the company. The most widely used valuation share of
the company is the investment ratio or the valuation ratio. These ratios give a detailed analysis to
the investors of the condition of the business and subject to these ratios, they decide whether to
invest in the company or not.
Price earnings ratio of the company is the share’s market price in regards to the earnings. The
money paid by an investor for the ordinary shareholders for each rupee earned by the company is
known as price earnings ratio of the company. The price-earning ratio of the Royal Dutch Shell
Plc in 2016 was 41.2 (Reports.shell.com, 2017). The amount is decreased to a great extent in
2017 and was recorded at 24.46. Furthermore, the earning per share of the company is quite low
and has showing a decreasing trend. From 3.12 in 2016 it has decreased to 1.16 in 2017.
Therefore, it can be concluded that the shares of the company are overvalued.
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