Analysis of Royal Mail PLC's Capital Structure and Dividend Policy

This report provides a comprehensive financial analysis of Royal Mail PLC, a prominent transportation company. It delves into the company's capital structure, examining the distribution of debt and equity and its impact on financial performance over three years. The report also explores Royal Mail's dividend policy, evaluating its implications for shareholder value and the company's ability to attract and retain investors. Furthermore, it investigates the application of investment appraisal tools, such as Net Present Value (NPV), payback period, Internal Rate of Return (IRR), and Average Rate of Return (ARR), in managerial decision-making for investment projects. Finally, the report assesses the effectiveness of Royal Mail's corporate governance mechanisms in managing and balancing stakeholder interests. The analysis is supported by financial data and ratio calculations, offering insights into the company's financial health and strategic choices.

Accounting and
Finance

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
1. Background of the company....................................................................................................1
2. Capital structure and dividend policy of company and the way in which it has impacted
company's performance over past three years.............................................................................1
3. The way in which investment appraisal tools could be used by managers to make
investment decisions....................................................................................................................4
4. Effectiveness of corporate governance....................................................................................5
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................8

INTRODUCTION
Accounting and finance are two main elements which are required to be focused by top
level executives of business entities in order to make sure that monetary resources are managed
properly. It is very important for all the companies to focus on both the elements to analyse that
business is performing well or not (Aggarwal and Goodell, 2014). The organisation which is
selected for this report is Royal Mail PLC which is a transportation company established in
London, United Kingdom. It was founded in year 1516 and operating business all around the
world. This report covers various topics such as overview, capital structure, dividend policy of
the company. Apart from this, the way in which investment appraisal tools could be used to
make investment decisions and effectiveness of corporate governance is also discussed under this
assignment.
MAIN BODY
1. Background of the company
Royal Mail is a postal and courier company which is a part of transportation sector of
UK. It as founded in year 1516 and since then, operating its business operations all around
world. Its headquarter is in Victoria Embankment, London, UK. The services which are rendered
by it are fright forwarding, parcel services, third party logistics, letter post, delivery etc. Its
subsidiary is General Logistics Systems.
Corporate objective of the organisation is to deliver best quality services to the customers
in order to establish good relation with them which may result in higher profits and revenues. In
order to execute business operations various issues are faced by it which are productivity failure
and dividend commitment (Problems faced by Royal Mail PLC, 2019). In order to deal with
them, top managers formulate strategic decisions and implement them accordingly.
2. Capital structure and dividend policy of company and the way in which it has impacted
company's performance over past three years
Capital structure: It can be defined as the distribution of debt and equity which makes
up the finances in an organisation. In order to execute business successfully it is very important
for companies to manage its capital structure. With the help of it enterprises can understand the
kind of funding which is used to finance its operational activities and attain growth. Main
purpose of it is to help managers and other members of top management to identify the risk.
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Capital structure of Royal Mail PLC is formed in appropriate manner which helps internal as
well as external stakeholders to measure risk factor which may take place in future. It is a
mixture of debts and equities that are available in the balance sheet of the company (Atanasov
and Black, 2016).
Dividend policy: It is a types of policy which is part financial strategies of the company
which is implemented in order to retain shareholders for a long period. If an organisation is not
able to pay appropriate amount of dividend then it results in decreased interest of them in the
enterprise and they may also withdraw their money. Dividend policy of Royal Mail PLC is
appropriate. It has started to provide dividend from year 2015, before this year it was not paying
any dividend to its shareholders. It is the amount of revenues which is going to be distributed to
the people who are holding shares of company. In future, if Royal Mail PLC will not be able to
offer dividend to the shareholders then it will be difficult to stop them to sale their share to other
in order to get money (Ball, Grubnic and Birchall, 2014).
In order to define both the above described aspects of the company following table is
generated in which different figures are calculated which are required to assess capital structure
and dividend policy:
Particulars Year 1 (2016) Year 2 (2017) Year 3 (2018)
EBIT 327 374 187
Net profit 241 272 259
Equity 4458 4997 4436
Debt 3142 3337 2821
Interest paid 14 15 15
Dividend paid 213 222 231
All the figures which are mentioned in above table are taken from annual report of the
company (Final accounts of Royal Mail PLC, 2019). The way in which all of them are calculated
is as follows:
Calculation of EBIT: Revenues – (Cost of goods sold + direct expenses+ indirect
expenses)
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Calculation of net profit: EBIT – (Interest paid by the company and tax pad for the
year)
Calculation of Equity: Total liabilities – external funds
Calculation of debts: Total liabilities – shareholder's equities
In order to analyse capital structure and dividend policy ratio analysis technique is used
which help to assess that company is financially viable or not. For this purpose following ratios
are calculated:
Ratio Formula 2016 2017 2018
Debt equity ratio Debts/ equities 3124/ 4458 = 0.48 3337/ 4997 = 0.67 2821/ 4436 = 0.64
Interest cover EBIT/ Interest
paid
327/ 14 = 23.36 374 /15 = 24.93 187/ 15 = 12.47
Dividend payout Dividend paid/
net income *100
213/ 241 *100 =
99.5%
222/ 272 *100 =
81.6%
231/ 259 *100 =
89.2%
From the above calculation it has been analysed that debt equity ratio of Royal Mail PLC
is fluctuating continuously since 2016. It leaves impact upon performance of organisation
because it shows ability of top executives to use internal and external funds appropriately. Ratios
for all the three years shows that equities are used more then debts for the purpose of business
operation which means company is not taking advantage of external funds to generate profits for
the company. If profits are low then it affects performance of whole company (Brooks and
Oikonomou, 2018).
Interest cover ratio shows ability of an organisation to meet obligations which are related
to interest. In year 2018 interest cover ratio is decreased massively which shows that in this year
Royal Mail PLC was not able to pay appropriate amount of interest to its investors and creditors,
but this condition also shows that sufficient interest is paid to the stakeholders. It also leaves
impact upon performance of company because when interest is decreased suddenly then it result
in decreased interest of creditors and investors in the company. In this situation they may also
withdraw their money which will create issue of lack of monetary resources. Due to this problem
enterprise will not be able to perform well in the market.
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Dividend payout ratio of Royal Mail PLC is also changing with year in 2016 it was
0.995, for 2017 it was 0.816 and for 2018 it is 0.892. All of them are showing the capability of
the organisation to pay dividend to the shareholders. These are depicting that enterprise is able to
provide appropriate dividend to the shareholders. It leaves positive impact upon organisation's
performance because when higher dividend is paid by company then it attracts large number of
new shareholders which increases monetary resources to execute business operations. Due to this
performance get enhanced and profits gets increased (Cleary and Quinn, 2016).
3. The way in which investment appraisal tools could be used by managers to make investment
decisions
Investment appraisal: It is a technique which is used by organisations to analyse
attractiveness of different investments. With the help it managers can determine that investment
which will provide them higher returns in future. It guides managers to assess viability,
efficiency of the project where investment is going to be made. This technique could also be
used by management of Royal Mail PLC in order to make investment decisions so that it can be
assured that corporate objectives are met. Managers can form plans for future period in which it
is determined that spending money in different resources such as machinery, plant, new project
will be beneficial for enterprise or not. Under this procedure, resources are allocated to
investments, capital etc. and main objective of it is to increase value of company to shareholders.
There are various types of tools of investment appraisal which could be used by managers of
Royal Mail PLC. All of them are described below:
Net present value: It is an investment appraisal technique which is mainly used to
calculate net present value of projects where organisation is willing to invest in future. For this
purpose initial investment is subtracted from total inflow. With the help of it managers of Royal
Mail PLC will be able to determine present value of project and it can also help to assess that it
will be profitable for organisation in future or not. Main purpose of this tool is to form plan for
investment and evaluate profitability of range of options which are available to make investment.
If it shows a positive result then it means profitable for future and if it shows a negative balance
then it depicts that project is risky. With the help of it managers of Royal Mail PLC can make
investment decision to meet corporate objective of company which is increasing profits
(Dyckman and Zeff, 2015).
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Pay back period: This tool is used to evaluate the time period in which a project will
recover the whole cost of investment. In other words, it can be defined as the medium which
leads the company to meet break even point. If pay back period is shorter then it enhances
attractiveness of of a project because desirability of an investment depends upon pay back. It can
help managers of Royal Mail PLC to make decision to invest in a project according to the time in
which initial investment will be recovered and help to attain corporate objective. If there are
several alternatives are presented in front of managers then they can use payback period method
to select one of them. Always that option is selected which has shorter period because after that
enterprise can make profits and attain objective of attaining higher profitability.
Internal rate of return: This tool of investment appraisal helps to determine annualised
effective compounded rate of return projects in which an organisation is willing to make
investment. It is the interest rate where net present value of cash flow for a project is converted
to zero. It can guide managers of Royal Mail PLC to measure attractiveness of different
investments where monetary resources could be invested for the purpose of attaining higher
returns and increase profitability which is a corporate objective. Time value of money is also
taken into account while using this tool in order to compare internal and minimum rate of return
of company (Gippel, Smithand Zhu, 2015).
Average rate of return: This tool is used by most of the organisations to analyse annual
rate of return which could be acquired by making investment in a project. While calculating it
time value of money and cash inflows are not considered but net profit is used to calculate it.
With the help of managers of Royal Mail PLC can make decision to invest in a project in order
to achieve corporate objective which is increasing profitability because when investment is made
in that source which provide higher returns then it can help to enhance profits.
All the above described tools can be used by managers of Royal Mail PLC in order to
make decision regarding investing in a project in order to attain corporate objective which is
increasing profitability.
4. Effectiveness of corporate governance
Corporate governance: It refers to the mechanisms, relations and processes which can
help top level managers to control and direct all the activities of the company. With the help of it
interest of stakeholders can be managed and balanced as it helps to represent a positive image of
company in front of them. It is very important for Royal Mail PLC to follow all the aspects of
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corporate governance so that stakeholders can be satisfied. Managers of the company take
guidance from it to manage processes, practices and policies which can help to make formal
decisions in future for betterment of organisation. It is very effective for the enterprise as it helps
to make sure that business attain corporate success and economic growth (Gitman, Juchau and
Flanagan, 2015).
If companies such as Royal Mail PLC is considering all the relevant elements of
corporate governance which formulating decisions then it can help to establish a trustworthy
relationship with its stakeholders. Good corporate governance results in consistency, fairness,
accountability, effectiveness and transparency. If top level executives of entity are making good
commitment with subordinates than it shows that they are serious about sustainability of
company. Corporate governance helps to enhance accountability which decreases possibility of
risks and frauds which results enhanced performance. It also helps to find best ways which can
help to reach predetermined objectives of organisation by enhancing contribution of internal
stakeholders in operational activities (Kim and Zhang, 2016).
Corporate governance is an effective tool which helps large as well as short business
entities to attain long term sustainability and success. The factors which are contributing in
effectiveness of corporate governance of Royal Mail PLC are behaviour of top executives, skills,
experience and integrity of staff members, culture of organisation, clear understanding of roles
and responsibilities etc. With the help of effective corporate governance organisation protects
and reduces possibility of dishonest employees. Best way to measure effectiveness of it is to
analyse that stakeholders are familiar with organisation or not and they are showing interest in
decisions making process or not (McLaney and Atrill, 2014). When these aspects are analysed
then it helps to determine that the policy which is used by organisation is effective or not. People
who are responsible for the measurement are board of directors who oversee performance of
company and then make judgement for its betterment. Effective corporate governance also help
to make sound decisions such as risk, reward, effective oversight, ethical considerations,
competing interests, motivating management etc.
CONCLUSION
From the above project report it has been concluded that, accounting and financial are
two essential aspects for success of a company. In order to establish appropriate corporate
structure, dividend policy and investment strategy both of them are required to be focused by
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managers so that corporate objectives could be achieved. It is very important for top level
executives of organisations to manage corporate structure and dividend policy so that financial
position can be maintained in the market. There are various investment appraisal tools such as
net present value, pay back period, internal and average rate of return which could be used by
managers of entities in order to form investment related decisions so that corporate objectives
can be achieved. Corporate governance is also required to be focused in order to maintain
interest of shareholders in company.
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REFERENCES
Books and Journals:
Aggarwal, R. and Goodell, J. W., 2014. National cultural dimensions in finance and accounting
scholarship: An important gap in the literatures?. Journal of Behavioral and
Experimental Finance. 1. pp.1-12.
Atanasov, V. A. and Black, B. S., 2016. Shock-based causal inference in corporate finance and
accounting research. Critical Finance Review. 5. pp.207-304.
Ball, A., Grubnic, S. and Birchall, J., 2014. 11 Sustainability accounting and accountability in
the public sector. Sustainability accounting and accountability. p.176.
Brooks, C. and Oikonomou, I., 2018. The effects of environmental, social and governance
disclosures and performance on firm value: A review of the literature in accounting and
finance. The British Accounting Review. 50(1). pp.1-15.
Cleary, P. and Quinn, M., 2016. Intellectual capital and business performance: An exploratory
study of the impact of cloud-based accounting and finance infrastructure. Journal of
Intellectual Capital. 17(2). pp.255-278.
Dyckman, T. R. and Zeff, S. A., 2015. Accounting research: past, present, and future. Abacus.
51(4). pp.511-524.
Gippel, J., Smith, T. and Zhu, Y., 2015. Endogeneity in accounting and finance research: natural
experiments as a state‐of‐the‐art solution. Abacus. 51(2). pp.143-168.
Gitman, L. J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson
Higher Education AU.
Kim, J. B. and Zhang, L., 2016. Accounting conservatism and stock price crash risk: Firm‐level
evidence. Contemporary Accounting Research. 33(1). pp.412-441.\
McLaney, E. J. and Atrill, P., 2014. Accounting and finance: an introduction. New York:
Pearson.
Online
Problems faced by Royal Mail PLC. 2019. [Online]. Available through:
<https://www.proactiveinvestors.co.uk/companies/news/206195/five-reasons-royal-
mail-could-fail-to-deliver-for-investors-206195.html>
Final accounts of Royal Mail PLC. 2019. [Online]. Available through:
<http://financials.morningstar.com/income-statement/is.html?
t=ROYMF&region=usa&culture=en-US>
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