Business Finance Project: Analysis of Royal Dutch Shell's Financials

This project provides a detailed financial analysis of Royal Dutch Shell, focusing on key aspects of business finance. The analysis begins by examining the company's sources of finance, including equity share capital and debt, and assesses the associated risks, particularly concerning leverage. The project then delves into the effectiveness of Royal Dutch Shell's working capital management, evaluating its cash flow statement and identifying strengths and weaknesses in generating cash from operating, investing, and financing activities. Furthermore, the project explores the company's risk management strategies, particularly concerning derivatives and foreign exchange trading, and evaluates the risks associated with international operations. Finally, the project assesses Royal Dutch Shell's joint ventures and subsidiaries, analyzing their impact on the company's financial prospects and the effectiveness of the company's investment strategies in this area. The analysis utilizes the company's annual reports and other financial data to provide a comprehensive overview of its financial performance.

Running head: BUSINESS FINANCE
BUSINESS FINANCE
Name of the student:
Name of the university:
Author Note:

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Table of Contents
Introduction................................................................................................................................2
Discussion..................................................................................................................................2
In Response to Question 1......................................................................................................2
In Response to Question 2......................................................................................................3
In Response to Question 3......................................................................................................4
In Response to Question 4......................................................................................................5
Conclusion..................................................................................................................................7
References..................................................................................................................................8

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Introduction
The assignment concentrates on the chosen company which is the Royal Dutch Shell,
an FTSE listed company and further the detailed analysis have been conducted by the
company. The information of the company is rather obtained from the financial reports 2018
of Royal Dutch Shell and the financial times of the company. The potential strength and
weakness of the company along with the risks associated with the business has been depicted
in the following study.
Discussion
In Response to Question 1
The key sources of finance of Royal Dutch Shell are the equity share capital, shares
held in trust. The company actually have more debt in comparison to the share capital of the
firm which further indicates that the leverage of the company is certainly higher in
comparison to the current amount of share capital of the firm as per the annual of Royal
Dutch Shell 2018. The leverage which is implemented by the company is actually riskier as
the company is concentrating to enhance the financial position of the company by adopting
this approach (Melvin and Norrbin 2017).
The company actually is not financing the equity share capital and hence the gearing
ratio of the firm is quite high in comparison to the other companies in the same department.
In case of the mix of debt and equity of the company, the concentration of debt is much more
than the investment made in equity.
This kind of approach is quite riskier due to the reason that it is likely the company
made end up in a debt trap resulting to the imminent winding up or dissolution of the

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company. As the investment strategy of the higher-level management of the firm is effective
which further helps the company to earn revenue out of such business. The reason behind
adopting this strategy is that the company actually deals with the procurement of oil and gas
which is best profitable business of all time (Loughran and McDonald 2016). That’s why the
management is quite effective in generating revenue for the firm.
In Response to Question 2
The working capital management of the company must be effective in order to carry
on the business of the firm smoothly and effectively. The effectiveness in the working capital
of the firm can be analyzed by the process of evaluating and understanding the net cash and
cash equivalents of the firm. In case of Royal Dutch Shell it is needed to analyze the cash
flow statement of the company. From the annual report of Royal Dutch Shell, it can be
interpreted that the cash flow statement of Royal Dutch Shell is showing positive flow of
cash by the considering the three key elements of the working capital of the firm which are
the cash from operating, cash from investing and financing activity. By the process of
considering the key elements it is needed to see that the company is capable to generate
positive flow of cash in the business (De Grauwe and Grimaldi 2018).
After performing the critical analysis of the cash flow statement of the firm it can be
interpreted that the strength of the firm or the management system is that cash generated from
the operating activities. The company is effective in order to generate the cash flow from the
operating activities by considering the interest expenses and taxes. The weakness of the
company is regarding the cash flow from the financing activities as the company is
ineffective to generate positive flow of cash from the financing activity. This must be a major
concern for the upper level management which means that the strategy of leverage which the
management has adopted must reconsidered or a change in the decisions must be taken. It is

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needed to concentrate on the significant factors which will automatically generate the cash
flow from the operating activity of the firm.
Above all the working capital of firm is quite effective and certain changes in that
case must be adopted by the upper level management of Royal Dutch Shell (Hirshleifer
2015). The effectiveness in the working capital of the firm will further help the business to
sustain the long run of the business. The other benefit of maintaining a positive flow in the
working capital is that the company will be able to meet the short and the long-term
obligation of the business.
In Response to Question 3
The chosen company which is Royal Dutch Shell is also conducting its business in the
international market and are traded which are further measured by the derivatives and foreign
exchange trading (Cochrane 2017). It is significant to understand the risks which are
associated and for that the concepts of derivatives concept are followed by the company
which actually comprises of the following elements which are the foreign exchange risk,
interest rate risk, commodity price risk and foreign currency cash balances. The gain and
losses in that case are recognized accordingly through the performance the derivates and such
recognition within the internal management system of the company.
The change in the fair value of a particular fair value hedge is referred as the
recognized income of the which further involves the amount of the hedging. In such a
situation, with the help of the hedging instruments the purchase and sell of the non-financial
items of the firm are done accordingly which actually does not meet the exact requirement of
the firm. The hedging transaction of the firm actually hampers the income and expenses
along with the balance sheet of the company which is molded by the core financial objectives
of the firm (Härdle, Chen and Overbeck 2017).

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The risk which is taken by the company in that case is quite observable that the
company is taking enough risk to generate profit for the business based on the long-term
objective of the firm. As per the current trade relationship of the company, it is quite visible
that the company has generated business in the international boundaries. This will also
benefit the economic and political factors of the country (Arcand, Berkes and Panizza 2015).
Maintaining and rather enhancing the trade relationship of the country is significant
at the same time for the business. Due to the economic downfall or rather at the time of
recession, there may be a significant decrease in the trade relation of the company. The price
of the currency and the time of hedging and speculation will continuously fluctuate where at
that the time the risk of trading for the company will definitely increase (Fracassi 2016). The
company at this kind of situation must develop strategies or otherwise the company can suffer
huge loss for the business. Significant strategies along with the current change in the policies
must be adopted by the company to get benefitted in the long run business.
At the time of liquidation by the process of hedging might be a big problem for the
company due to such kind of significant fluctuation in the foreign exchange markets. In
strategies which are involved for the company in managing the risk is quite effective which is
based on the implementations of the tool s and techniques of hedging and swap of the foreign
exchange interest rates (Gitman, Juchau and Flanagan 2015). In terms of trading in the
foreign market the company will be able to further enhance the boundaries of trading and
gather sources and information from the open world to broaden the scope of the business
perspective. This will further help the business of the firm to generate return in the long run.
In Response to Question 4
The Royal Dutch Shell in the last five years of the business the company has undertaken
joint ventures all around the Europe, Asia and Oceania. The future net cash flow in terms of

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the shares of the joint ventures and associates is higher in case of the Asia. As per the
information’s which are obtained from the annual report of the company is that there is
actually a net decrease of 3,653 thousand million scf in revisions and reclassifications was
mainly in Groningen (the Netherlands). Further in that region there is recently a decrease of
3,673 thousand million scf is as a result of the Dutch cabinet’s which was announced in the
year 2018. By the year 2030 the overall production of Groningen and an agreement of shell in
that case was made by the government of Dutch government in the current year. This further
helped the management to update the regulatory framework along with the outlook of
production which is recorded in the economic affair of Dutch ministry.
In terms of the corporate restructuring of Royal Dutch Shell, the firm is not that
much effective in maintaining the subsidiaries and the associated joint ventures of the firm.
The financial prospects of the business are also affected by transaction of the joint ventures
and the subsidiaries of the firm. In recent years the company have not acquired any of the
joint ventures. Apart from that the current strategies which are adopted by the company is
that Shell is progressing towards the more cleaner energy solution (Fisher 2018). The external
stakeholders of the business which are the business partners, government, shareholders and
business partners plays significant role for the company in that case. The company has not
been successful in the joint ventures as the shares of the currently or previously acquired
companies is constantly falling.
The investment on the joint ventures of the company is not effective enough due to
the reason that the shares of the company in terms of the joint ventures for the last five years
of business is contently falling (Ehrhardt and Brigham 2016). This further reflects that in
terms of joint ventures business, the upper label management of the company is quite
ineffective in enhancing the performance in terms of the joint venture business. The upper
level management in that must adopt the significant policies in order to cope up with the

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performance in the joint ventures of the firm. The firm will be exact about the strategies
which the company will be adopting in the coming future at the time conducting the joint
venture business.
Conclusion
From the above discussion it can be concluded that the business of the chosen
company for this assignment which is Royal Dutch Shell is performing well as per the current
strategies which is adopted by the upper level management of the company. The
information’s regarding the current strategy of the firm is obtained from the sustainable
development report and annual report which is published by the company. The company is
concentrating on the debt or leverage where the gearing ratio of the company in the current
year is comparatively higher. The company is actually trying to maintain such gearing
performance and enhancing the overall profitability position of the company accordingly.

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References
Arcand, J.L., Berkes, E. and Panizza, U., 2015. Too much finance?. Journal of Economic
Growth, 20(2), pp.105-148.
Cochrane, J.H., 2017. Macro-finance. Review of Finance, 21(3), pp.945-985.
De Grauwe, P. and Grimaldi, M., 2018. The exchange rate in a behavioral finance
framework. Princeton University Press.
Ehrhardt, M.C. and Brigham, E.F., 2016. Corporate finance: A focused approach. Cengage
learning.
Fisher, R.C., 2018. State and local public finance. Routledge.
Fracassi, C., 2016. Corporate finance policies and social networks. Management Science,
63(8), pp.2420-2438.
Gitman, L.J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson
Higher Education AU.
Härdle, W.K., Chen, C.Y.H. and Overbeck, L. eds., 2017. Applied quantitative finance (Vol.
2). Springer.
Hirshleifer, D., 2015. Behavioral finance. Annual Review of Financial Economics, 7, pp.133-
159.
Loughran, T. and McDonald, B., 2016. Textual analysis in accounting and finance: A survey.
Journal of Accounting Research, 54(4), pp.1187-1230.
Melvin, M. and Norrbin, S., 2017. International money and finance. Academic Press.

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Morrell, P.S., 2018. Airline finance. Routledge.
Pilbeam, K., 2018. Finance & financial markets. Macmillan International Higher Education.
Shoup, C., 2017. Public finance. Routledge.
Soros, G., 2015. The alchemy of finance. John Wiley & Sons.