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Introduction

Rolls- Royce Holdings PLC a leading aircraft engine manufacturer was brought into existence as Rolls-
Royce Limited in 1906, producing its first aircraft engine in 1914. Rolls-Royce manufactured a large
number of engines during World War 1 as well as World War 2. Rolls-Royce was among the greatest
contributors to several inventions and innovations which improved the flying capability of the airline
industry, manufacturing gas turbine engines reducing the time of flight between distances greatly. In
1973 Rolls-Royce motors was separated from the company and sold to Vickers. Privatized as Rolls-Royce
PLC in 1987 the company entered into the civil aircraft industry currently the companys engines power
17 different airlines. In 1988 Rolls-Royce acquired Northern Engineering Industries (NGI), through the
acquisition of which the company name was changed to Rolls-Royce Industrial Power Group. In1990
BMW and Rolls-Royce established BMW Rolls-Royce a joint venture producing engines for regional and
corporate jets. In 2000 BMW withdrew from the company and the company was renamed as Rolls-
Royce Deutschland. In 1994 it acquired Allison Engine Company currently named as Rolls-Royce
Corporation as a part of Rolls-Royce North America. Converted as a holding company in 2003 forming
Rolls-Royce Holdings PLC, currently the company stands as the third-largest manufacturer of aircraft
engines, and was the 16
th
largest defense contractor in 2011 and 2012.
The vision of Rolls-Royce Holdings PLC is delivering better power for a changing world betterment
being a key focus in the company acknowledges the need for continuous improvement. The mission of
the company is sound and relevant for the industry and is a necessity being met. Rolls-Royce Holdings
PLC is a good company, the acquisition of whose shares can prove to be an asset to the company.










Analysis of Rolls-Royce Holding PLC on the basis of its financial performance and its financial position
with the help of financial instruments:-
A) Profitability Ratios
(Rolls-Royce PLC)
(Rolls-Royce PLC)

The profitability ratio metrics are used to evaluate the ability of a business to generate profits with
regards to its expenses and other costs during a specified period of time. If the ratios show a higher
value with regards to a previous period or with relation to a competitor it suggests that the company is
doing well. (Investopedia)
Ratios 2013 2012
Gross Margin% = Net Sales-Cost
Nets Sales
Or
Gross Profit
Revenue
3,316
15,513 = 21.37%
2,729
12,161 = 22.44%
Operating Profit %=
Operating profit
Net Sales
Or
Operating profit
Revenue
1,535
15,513 = 9.89%
1378
12161 =11.33%
PBIT =
profit before interest and tax
Net Sales
1,870
15,513 = 12.05%
2,077
12,161 = 17.07%
PBT= Net profit before tax
Net Sales
1,759
15,513 = 11.33%
2,766
12,161 = 22.74%
PAT= Net profit after tax
Net Sales
1,379
15,513 = 8.88%
2,335
12,161 = 19.20%
ROCE= Operating profit
Debt + Equity
1,535
13,283 = 11.55%
1,378
9,516 = 14.48%
ROE= Profit after tax
Equity
1,379
6,303 = 21.87%
2,335
4,402 = 53.04%
Capital turnover =
. Sales .
Capital employed in a year
(Debt + Equity)
15,513
13,283 = 1.16
12,161
9,516 = 1.27
The profitability ratios calculated for Rolls Royce PLC, of 2013 with comparison of the ratios of 2012
suggest that there is a high change towards the negative. The analysis has been done using several
financial metrics such as gross margin %, Operating profit %, PBIT ratio, PAT ratio, ROCE, ROE and capital
turnover, with the values derived from each of these metrics it is evaluated that the profit generation of
the company has reduced from 2012 to 2013 to a large extent.
(About.com)
B) Solvency Ratios
Ratios 2013 2012
Current ratio = Current assets
Current liabilities
12,818
9,780 =1.31
9,593
7,208 = 1.33
Acid test ratio =
Current assets Inventories
Current liabilities
9,499
9,780 = 0.97
6,847
7,208 = 0.95

The Solvency ratios are used to determine the ability of a business to meet its debt and other obligations
such as its creditors etc. The solvency ratios indicates a short term capability, it is useful in the analysis
of the day to day running of the business and the ability to meet its short-term liabilities with the
available current assets. A higher solvency ratio is indicative of a greater capability of meeting its debt
obligations.
The current ratio analyses the ratio of the current assets with relation to the current liabilities, the
current ratio of the company in 2013 with comparison with 2012 suggests the slightest decline in the
companys capability to meet its liabilities.
The acid test ratio is similar to the current ratio, but the inventory is not included to calculate the acid
test ratio. The values derived for the company suggests an increased ability to meet its liabilities in 2013
with relation to 2012.
(Investopedia)






C) Activity Ratios
Ratios 2013 2012
Debtor days =
Trade receivables x 365
Net sales
1,601 x 365
15,513 = 37.67
1,182 x 365
12,161 = 35.48
Creditor days =
Trade payables x 365
Cost of sales
1,370 x 365
12,197 = 40.99
1,109 x 365
9,432 = 42.92
Stock days = Stock x 365
Cost of sales
3,319 x 365
12,197 = 99.32
2,726 x 365
9,432 = 105.49
Operating cycle % =
Stock + Debtors Creditors
Sales
3,550
15,513 = 22.84%
2,799
12,161 = 23.02%
Asset turnover = Net assets
Total assets
15,513
23,063 = 0.67
12,161
16,459 = 0.74

Activity ratios evaluate the ability of the business to convert its available assets into liquid assets such as
cash or sales. The activity ratio measures the efficiency of the business, taking into consideration its
revenue generation from its resources.
Debtor days also known as average collection period helps determine the number of days the sales cash
remains with its customers. If the business is able to retrieve its sales cash in a shorter period of time
this amount can be used in further investment. The calculations show a higher number of debtor days
in 2013 than 2012, suggesting that the cash is unavailable for a longer period suggesting that the
business providing a longer period to its debtors.
Creditor days determine the time in which the business is able to pay its suppliers or creditors with the
revenue generated with regards to its cost of sales. The number of days in 2013 is lesser than 2012,
suggesting the business has an improved capability to pay off its creditors.
Stock days otherwise known as days of inventory, determines the number of days in which the business
can make a sale of its inventory. It also estimates the number of days for which the available inventory is
sufficient or the time period in which the inventory needs to be restocked showing the efficiency of the
business in maintaining its inventory. The lower number of stock days suggests a positive effect as there
is a lower investment needed in maintaining the inventory. There is a lower need in 2013 with
comparison to the number of days in 2012, suggesting effective maintaining of the inventory by the
business.
Operating cycle % analyses the managements capability in maintaining its inventory, debtor and
creditors with regard to its cash or sales. A lower % would suggest a more favorable result and as per the
financial information the operating cycle % has reduced in 2013 from 2012.
Asset turnover ratio indicates the efficiency in which the assets of the business are being utilized. A
higher asset turnover ratio is a favorable result whereas the results show that in 2013 it is lower than
the asset turnover in 2012.
(Investopedia)

D) Financial Structure
Ratios 2013 2012
Debt Ratio =
Debt (non-current liabilities)
Debt + Equity
6,980
13,283 = 52.55%
5,114
9,516 = 53.74%
Debt / Equity = Debt
Equity
6,980
6,303 = 1.11
5,114
4,402 = 1.17
Interest cover = PBIT
Interest payable
1,870
438 = 4.26
2,077
108 = 19.23

The financial structure ratios analyses the mixture of long-term debt with relation to the equity
employed by the business to finance its various operations. The financial structure of a business defers
for every business, and it is the duty of the financial management to determine the right mix to be
employed, considering the risk and requirement and also the least expensive sources of financing its
long term operations.
Debt ratio determines the demands of the companys creditors on its capital. The more favorable result
is to have a lower demand by the creditors but it is dependent on several other factors on the basis of
which the right amount of debt is determined. As per the financial information provided, there is a
lower demand on the capital by the creditor in 2013 with regards to 2012. The business has employed
lesser debt and more of equity by 2013.
Debt Equity ratio evaluates the mixture of debt and equity in the companys capital structure and a
ratio of more than 1 suggests the reliance on more debt than equity by the organization. The debt
equity ratio is lesser in 2013 than 2012 suggesting that the company is relying more on equity than debt
in 2013.
Interest cover measures the interest payable to the earning of the business, and a higher interest cover
suggests a higher capability of the business to make the payments towards the same efficiently. The
interest cover in 2013 is much lower than 2012, there is a need for scrutiny as there is a huge difference
in the ratio and caution is to be taken.
(Halcolm Bard) (Investopedia)

E) Stock Market Ratios
Ratios 2013 2012
Basic EPS=
Profit after tax
No. of ordinary shares in issue
Given =0.7326 Given = 1.2538
Diluted EPS Given = 0.7244 Given = 1.2373
Dividend / shares=
total dividends paid
number of ordinary shares in
issue
41,411.41
1,882.34 = 22.00
36,315.60
1,862.34 = 19.50
Dividend cover =
Earnings per share
Dividends per share
0.7326
22.00 = 0.0333
1.2538
19.50 = 0.0643
Dividend yield
Dividend per share
Share price
22.00
1,275 = 1.73%
19.50
873.50 = 2.23%
P/E = Share price
Basic EPS
1,275
0.7326 = 1,740.38
873.50
1.2538 = 696.68
(London Stock Exchange PLC)

Stock market ratios indicate the perception of the investors of the company based on its history or past
performance and its future prospects. The stock market ratios are crucial in determining the companys
standing from the investors point of view as well as the managements point of view. The stock prices
of the business also suggest the stability of the business.
EPS (Earnings per share) refers to the amount of profit from the business allocated to the share holders
per share. The EPS is one of the main evaluators of the business in the stock market, and a higher EPS
means more income for the shareholders. The EPS in 2013 is much lesser than the EPS given in 2012,
suggesting a lower profit margin made available for the shareholders.
Dividend per share (DPS) refers to the payment made towards the shares from the company over the
period of a year. The dividend also forms as a source of income for the shareholders, and a growing DPS
suggests that the company believes that the growth can be sustained. The DPS in 2013 is higher than
2012 suggesting a growth in the company.
Dividend cover shows the number of times the capability of the company to pay dividends in a specified
accounting period from its profits to its shareholders. A dividend cover of less than 1.5 states that the
company may not be able to maintain the same level of dividend payments in the future. In 2013 Rolls-
Royce Holdings PLC had a dividend cover of 0.0333 decreasing from 0.0643 in 2012 suggesting that the
company may not be able to maintain its current dividend payments.
The dividend yield ratio measures the amount of dividends paid by the company with relation to its
share price. The dividend yield in 2013 of 1.73% from 2.23% in 2012 shows a decline in the dividend
payment with regards to the share price.
Price / Earnings ratio evaluates the earnings per share with relation to the price of the share in the
market. A high P/E ratio suggests that there will be an increase in the EPS in the future, in 2013 the P/E
ratio stands at 1,740.38 with the P/E ratio in 2012 only being 696.68. Suggesting a higher EPS can be
expected from the company in the future.
(Investopedia)

Conclusion

Rolls-Royce Holdings PLC is one with a great history and has shown great growth and progress, the
various analysis of the company shows the current financial standing of the company, taking into
consideration the short-term and the long-term implications and the current standing in the stock
market showing the perception by the investors of the companys capabilities and efficiency. The
profitability ratio shows a decline and suggests that the same level of profit is not being able to be
maintained in the company. In the solvency ratios, the current ratio shows a decline, but the acid test
ratio shows an increase in ratio from 2012 to 2013. This shows that the inventory maintained in the
company is lesser showing a reduced need for investment in inventories, and an increased ability of the
business to meet its short-term liabilities. The activity ratios show the ability of the business to produce
profits or earnings from its available resources, there is a positive shift in the activity ratios except for
the debtor days and the asset turnover ratio. The financial structure ratios show the businesses
dependence on debt with relation to equity employed. There is a positive move in 2013 in comparison
with 2012 showing a lesser dependence on debt but the interest cover ratio has reduced greatly, this
may be an area which must be analyzed carefully, but the lesser dependence on debt reduces the
demand by the creditors on the company assets. The stock market ratios are used to evaluate the
companys standing in the stock market, in the eyes of the investors based on past performance and
future prospects. The evaluation is made on the basis of the dividends paid and the earnings per share,
also the share price of the stock in the market at a particular period in time is taken for evaluation of the
same. The EPS shows a decline in 2013 from 2012 whereas there is an increase in DPS but the dividend
cover shows a decline in value in 2013 also the dividend yield in 2013 is lesser, suggesting the company
may not be able to maintain the dividend payout. The P/E ratio shows more a doubling in amount,
suggests that there may be an increase in the future, but the other ratios suggest that this may not be
true. Based on an overall review of the company it is advisable to purchase now as it shows a great
possibility of growth.


Works Cited
About.com. (n.d.). Retrieved March 15, 2014, from
http://bizfinance.about.com/od/financialratios/a/Profitability_Ratios.htm
Halcolm Bard. (n.d.). Halcolm Bard. Retrieved march 15, 2014, from http://www.halcolm.com/rat-
capi.html
Investopedia. (n.d.). Invetopedia. Retrieved march 15, 2014, from Investopedia :
http://www.investopedia.com/terms/p/profitabilityratios.asp
London Stock Exchange PLC. (n.d.). London Stock Exchange. Retrieved march 15, 2014, from
http://www.londonstockexchange.com/exchange/prices-and-markets/stocks/summary/company-
summary.html?fourWayKey=GB00B63H8491GBGBXSET1
Rolls-Royce PLC. (n.d.). Rolls-Royce PLC. Retrieved march 13, 2014, from http://www.rolls-
royce.com/Images/RR_Full%20Annual%20Report__tcm92-55530.pdf
Rolls-Royce PLC. (n.d.). Rolls-Royce PLC. Retrieved March 14, 2014, from http://www.rolls-
royce.com/Images/rolls_royce_annual_report_2012_tcm92-44211.pdf