Introduction to Business Finance

Shell Pakistan Ltd.

Ratio Analysis (2014-2018)

Group 3
Aliza Rashid
Amena Rizvi
Osama Khan
Mujtaba Sarwar
Rabab Kazmi

1
Contents
Introduction..................................................................................................................................................................................................................3
.......................................................................................................................................................................................................................................3
Liquidity Ratios..............................................................................................................................................................................................................4
Current Ratio............................................................................................................................................................................................................4
Acid Test Ratio..........................................................................................................................................................................................................4
Profitability Ratios........................................................................................................................................................................................................5
Gross Profit Margin Ratio.........................................................................................................................................................................................5
Operating Profit Margin Ratio..................................................................................................................................................................................5
Earnings before Tax Margin Ratio............................................................................................................................................................................6
Net Profit Margin Ratio............................................................................................................................................................................................6
Return on Total Assets Ratio....................................................................................................................................................................................7
Return on Common Equity Ratio.............................................................................................................................................................................7
Asset Management Ratios............................................................................................................................................................................................8
Inventory Turnover Ratio.........................................................................................................................................................................................8
DAY SALES OUTSTANDING RATIO............................................................................................................................................................................8
Fixed Asset Turnover................................................................................................................................................................................................9
Total Asset Turnover................................................................................................................................................................................................9
Debt Management Ratio............................................................................................................................................................................................10
Debt to Asset Ratio................................................................................................................................................................................................10
Debt to Equity Ratio...............................................................................................................................................................................................10
Times Interest Earned Ratio...................................................................................................................................................................................11
Market Value Ratios...................................................................................................................................................................................................12
Earnings per Share Ratio........................................................................................................................................................................................12
Price to Earnings Ratio...........................................................................................................................................................................................12
Book Value Per Share Ratio....................................................................................................................................................................................13
COMPARISON WITH PAKISTAN STATE OIL (PSO):.....................................................................................................................................................13
Current Ratio..........................................................................................................................................................................................................13
ACID TEST RATIO:...................................................................................................................................................................................................13
INVENTORY TURNOVER RATIO:.............................................................................................................................................................................14
DAY SALES OUTSTANDING RATIO:.........................................................................................................................................................................14
NET PROFIT MARGIN:.............................................................................................................................................................................................14
RETURN ON ASSETS:..............................................................................................................................................................................................14
RETURN ON EQUITY:..............................................................................................................................................................................................15
TIMES INTEREST EARNED:......................................................................................................................................................................................15
DEBT TO EQUITY RATIO:.........................................................................................................................................................................................15
FIXED ASSET TURNOVER:.......................................................................................................................................................................................15
DUPONT ANALYSIS:.....................................................................................................................................................................................................16

2
3
Introduction

Shell Pakistan Ltd. serves to be a multinational company and is a public limited company in
Pakistan that sells and manufactures petroleum products such as Oil, CNG gas, aviation fuel
etc. It’s a subsidiary of the Royal Dutch Shell PLC. Haroon Rashid is the CEO of Shell
Pakistan. The main aim and goal of Shell Pakistan is that to position itself as the preferred
oil company in Pakistan, leading the field in its commitment to safety, customer service,
quality and environmental protection. Currently Shell is the second most preferred company
for oil in the petroleum industry after PSO. Having more than 850 retail stations in more
than 330 cities, Shell has a 42% market share in the organized sector for lubricants and is
the largest foreign investor in Pakistan’s oil marketing sector with a total market share of
20%. 
Shell Pakistan’s commercial fuels business has a lot of potential for growth and its aviation
business supplies fuel to 6 major airports across Pakistan.

4
 Current Ratio Trend for the years 2014-2018
Liquidity Ratios
0.9
0.85 Current Ratio
0.8
times

0.75
0.7
0.65 The Current Ratio for Shell Pakistan limited is
2014 2015 2016 2017 2018 below the ideal range and remains so for the

period 2014-2018. It starts at 0.84x in 2014 then

Column2 climbs up to 0.87x by 2016 (the peak point) and
then experiences a sharp dip from there to 0.75x in
2018.
The company is in a dangerous position if its liquidity is taken into account. The reason for Shell’s
improvement in liquidity till 2016 does not come from better management of its current assets, but it
stems from a sharp decline in its sales. This was coupled by the fact that its current assets remained
nearly constant during 2014-2016 and its current liabilities fell drastically due to a fall in net taxation and
short-term borrowing.
The decline in liquidity from 2016-2018 rose from a sharp decline in its most liquid assets-cash and bank
balances. The effect of this was countered by a rise in inventory and other current assets, but liquidity
fell as current liabilities climbed faster than current assets due to short term borrowing and trade
payables.

Acid Test Ratio

ACID TEST RATIO FOR THE YEARS 2014-2018
0.6 The acid test ratio shows shell’s dangerous
0.5 liquidity position over the 5 year period. The ratio
0.4 is at 0.45x in 2014 but worsens to less 0.39x by
TIMES

0.3 2018. There was an improvement in the ratio as it

0.2 rose till 0.54x in 2016, but that was due to the
0.1 same reason as the current ratio improve.
0
2014 2015 2016 2017 2018 We can conclude that inventory forms a
Years significant part of the current assets of Shell as we
can see without including inventory, the company
is facing a serious liquidity crisis which is
worsening as its current liabilities are rising, sales are falling and inventory is piling up in these 5 years.

Profitability Ratios

5
 GP Margin
Gross Profit Margin Ratio
10
Over the period of these 5 years, GP margin has
8
continuously increased until 2017 after which there
6 was a slight decrease in 2018. During 2015, even
4 though net revenues fell by 21% (from Rs.
2 250,784,741,000 to Rs. 197,128,351,000). This was
0 due to decrease in export as well as local sales.
2014 2015 2016 2017 2018
However, the company managed to increase the
Gross profits by reducing their Cost of Goods Sold by a higher proportion of 23.3% (from
243,203,242,000 to 186,533,476,000). There was a significant increase in the Gross Profit Margin from
3.02% to 5.37%. Similarly, in 2016, sales fell further by 14.9% and COGS reduced by 17.6% resulting in an
increase in GP margin by 2.98% to 8.35%. During 2017, the company was successful at changing the
trend of decreasing sales to a trend of increasing sales and reached the maximum GP margin at 8.81%.
However, in 2018, the sales were still increasing, this time, by even a higher rate of 10.3% but weren’t
enough to cover the increase in COGS (11%) due to which there was a slight decrease in the GP Margin
of just 0.5%. This increase in COGS was caused to higher level of finished products purchased and
opening stock of raw and packing materials during the year as mentioned in the notes.

Operating Profit Margin Ratio

The Operating Profit Margin fluctuated over the

OP Margin
4 period of these 5 years. It innitially increased over
3 the first 3 years but then fell over the next two
2 years. It started in 2014 with a very minimal OP
Margin of 0.18%. in 2015, even though Shell
1
Pakistan made a trademarks and manifestation
0
2014 2015 2016 2017 2018 license agreement with Shell Brands International
-1 AG (SBI) which costed 700 billion, it managed to
reduce its Administrative Expenses by 31.6%. They
did so mainly by reducing their Salaries, wages and
benefits, Technical service fee, Communication and
stationery expenses, Amortization expenses and Computer expenses. This deduction in Administrative
expenses was enough to cover the decrease in other incomes and increase in Distribution and marketing
expenses and other expenses.
Over the next 4 years, even when the sales were increasing, Shell failed to manage its operational costs
efficiently. In 2016, even when the op margin was at its maximum, it was still too low. It showed that the
profits were just enough to support the operations and the company would need to find some other
way to generate funds to pay the finance costs and taxes.
In the following years, OP margin continues to decline and went into negative in 2018. OP margin is a
key indicator for investors and creditors and the company would not be considered stable with such
ratios and would face even worse problems in future. 

6
 Return on total assets (ROA)
12
Earnings before Tax Margin Ratio
10
8
6 EBT margin shows earnings of a company before
4
2 it pays tax as a percentage of net sales. 
0
-2 Shell should consider the EBT margin as the
-4 flustuating trends indicate that the company is
not very stable. 
However, there is improvement. In 2014, it
started with a negative value which the company
managed to increase by reducing their overall
costs. The EBT margin peaked in 2016 after which
finance costs increased leading to a lower EBT Margin. 

Net Profit Margin Ratio

NP Margin
The NP Margin measures the amount of net
5 income earned with each dollar of sales
4
generated by comparing the net income and
3
the net sales of a company. 
2
1 Shell’s Net Profit Margin started from a -0.39%
0 (net loss) then rose up to 2.82% in 2016 and
-1
then fell back again to -0.69% (net loss). The
fluctuating trend over the years was caused due
to several reasons. Shell Pakistan failed to
control its Selling, General and Administrative Expenses. Moreover, the exchange loss of the company
was rising at a very high rate, amounting Rs. 5,008,315,000 by 2018. On the other side, whether earning
profits or losses, the company feels obligated to give back to the society and participates in 2 to 3 types
of donations each year.
Shell hasn't been very successful at effectively converting their sales into their net profits. Investors
want to make sure profits are high enough to distribute dividends and Shell hasn't been successful at it.
Shells financial statements show that a high proportion of the sales has been consumed by expenses
thus, management needs to budget and cut down on them.

Return on Total Assets Ratio

This ratio measures how efficiently a company can covert the money spent to purchase assets into net
income or profit. The ratios of 2014 and 2018 show that Shell was not efficient at all in converting their
asset purchases into net income, instead they have a ratio that is -2.55 times and -2.60 times

7
 respectively, meaning that they were perhaps not
Return on common equity managing their assets well enough. However, this
50 same ratio was at its peak in 2016 at a level 11.11
40 times showing that the firm’s overall business and
30
20 use of all assets was well managed and efficient in
10 recovering its purchasing costs. This was due to an
0 increase in sales and the overall growth in
-10
-20
consumption of petroleum in the years 2016-
-30 2017.

Return on Common Equity Ratio

The Return on Common Equity ratio shows the return Shell gets from its total equity (ROE) that is the
ability of the firm to generate profits from its shareholder’s investments. The graph shows how the
return on equity increased from 2014 till 2016 (-16.71 to 42.51 respectively) but then it declined in the
years 2016-2017 and 2017-2018 and came down to a value of -20 times in 2018. This shows that from
2014 to 2018, apart from the fluctuations, the ratio got worse by around 4 times. For the firm this is a
threat to future investors because it indicates that the firm is not that efficient and productive in
converting the equity they invest into net income and generating profits. Although, the competitor,
PSO’s ROE ratio has declined over these years it is still very high compared to Shell being at a value of
20.36 times in 2018. This would cause the investors to lay their trust more into PSO and invest in it
more, some might even sell their shares. PSO is the leader of the Petroleum industry in Pakistan and
Shell follows it.

The two ratios, ROA and ROE, show how efficiently the firm uses its assets and the equity shareholders
invest in it, however, they cannot be used to analyze and comment on the total efficiency of the firm
because it is a result of many things for example sales, gross profit margin etc.

Asset Management Ratios

Inventory Turnover Ratio

Shell Pakistan has a high inventory turnover ratio and

INVENTORY TURNOVER RATIO FOR THE YEARS
2014-2018 is able to maintain it over the 5 years despite the
20
large fall in net sales. It starts at 15.9x in 2014 and is
15 at 14x in 2018. There was a significant fall during the
TIMES

10
5
0
2014 2015 2016 2017 2018 8
YEARS
period from 2014 till 2016. That was due to a fall in sales and even though cost of products sold followed
the sales, the inventory fell significantly in 2016.

In the second period, during 2016 till 2018, the ratio recovered to 14x. This was because of a rise in
inventory levels and despite a fall in sales (in 2017) the cost of products sold remained constant and only
rose back in 2018 when sales rose again. In 2017, the cost remained nearly the same while the inventory
levels further dipped which caused the improvement in ratio. This improvement was eroded in 2018
when sales increased and despite the rise in cost, the rise in inventory levels was enough to bring the
ratio down to 14x.

DAY SALES OUTSTANDING RATIO

The day sales outstanding for Shell Pakistan started at

DAY SALES OUTSTANDING RATIO FOR 2014-2018
3.29 days in 2014 and rose to 5.56 days by 2018.
6 Despite this increase, Shell company has a low day sales
4
outstanding ratio indicating efficiency in collection of
DAYS

receivables and managing credit.

2
The ratio initially fell from 3.29 days to 2.35 days during
0
2014 2015 2016 2017 2018 the period 2014-2016. This was most likely due to the
YEARS large fall in sales. The trade debts fell sharply in 2015
but rose again in 2016 and yet the DSO fell significantly.
In the second period from 2016-2018, the ratio rose significantly ending at 5.56 days in 2018. This was
due to a significant rise in trade debts as they rose from 2.12 billion (2016) to 3.2 billion rupees (2018).
This period also coincided with initially a fall in sales in 2017 and then a recovery in 2018. It is possible
that the company had extended its credit period to its customers in an attempt to increase sales which
served as the reason for decline in DSO.

Fixed Asset Turnover

The Fixed Asset Ratio (FAT) for Shell

Fixed Asset Turnover Pakistan Limited shows a negative trend
45 from 2014 to 2018. It initially dropped from
40 about 41.27% in 2014 to 30.72% in 2015,
35
30
after which the decrease was continuous.
25 This negative trend fell down to 18.2% in
20 2018. The reason for such a trend is two-
15 fold. Firstly, Shell Pakistan has been
10
5 increasing its investment in Property, Plant,
0
2014 2015 2016 2017 2018
9
and Equipment over the course of all these years, rendering a decreasing FAT. Secondly, Shell Pakistan
has not been able to increase its sales as much as the increase in Fixed Asset investment. In fact, Shell
Pakistan has observed a constant decrease in Sales Revenue from 2014 to 2017, after which it increased
by a small amount in 2018.

Total Asset Turnover

The Total Asset Turnover Ratio for Shell Pakistan

Total Asset Turnover shows an overall decrease from 2014 to 2018. It
8 started declining in 2014 up until 2016. From
7 2016 to 2017, the Total Asset Turnover went up
6
5 from about 5.05% to 5.29%, rendering a very
4 nominal increase, nonetheless. On a broader
3 picture, the ratio fell from about 7.53% in 2014
2
1 to 4.36& in 2018. There can be many reasons for
0 this 40%+ fall for instance, Shell Pakistan is not
2014 2015 2016 2017 2018
using its Assets efficiently. It is increasing
investment in Fixed Assets each year but the
consequent increase in Sales is not achieved. In addition to this, it also shows that they might have
excess production capacity for which they are not capitalizing effectively. Moreover, this negative trend
can also be a result of poor inventory management, and collection methods.

Debt Management Ratio

Debt to Asset Ratio

Debt to Asset Ratio

0.9 The Debt to Asset Ratio of Shell Pakistan is
some sort of a good news for investors and
0.85
creditors. It is a basic convention that the
0.8 lesser this ratio is, the less riskier the company
0.75 is. Shell Pakistan’s DtoA ratio shows us
stability from 2014-2015, and from 2016-
0.7
2017. However, it decreased sharply from
0.65
2014 2015 2016 2017 2018
10
0.84 to 0.73 in 2016 due to larger increase in Total Assets available to pay off Liabilities. Nonetheless, it
then increased sharply from 2017-2018, from about 0.73 to 0.87. This increase resulted from a hefty
increase in Trade Payables and Short Term borrowings.

Debt to Equity Ratio

The Debt to Equity Ratio of Shell Pakistan

Debt to Equity Ratio shows stability between 2014 and 2015, after
8 which it fell down to 2.82 in 2016. It again
7 maintained stability from 2016 to 2017, after
6
5 which it shot up to 6.73 in 2018. The reason
4 for the sharp decrease in 2016 was due to
3
the fact that unappropriated profit has
2
1 increased by more than 100%. However, the
0 ratio sharply increased in 2018 due to an
2014 2015 2016 2017 2018
approximate 35% decrease in Total Equity,
Debt to Equity Ratio and significant increase in Total Liabilities.

11
Times Interest Earned Ratio

Times interest ratio refers to the amount of

times Shell can pay off its interest with the
income it is earning in that year. The ratio for
shell shows great fluctuation in the years
2014 till 2018. It was only 1.01 times in 2014
which shot up to 25.2 times in 2016, due to
high growth in petroleum consumption which
lead to a greater net income, and then fell
drastically by 2018 and came to a value of
1.79 times. Analyzing it just from 2014 to
2018, there has been a very little change in
the ratio overall and the company is barely even able to cover its interest 2 times in the whole year
which puts the company in a higher risk than other competitors. For example, Pakistan State Oil (PSO)’s
TIE ratio increased generally increased from 4.4x in 2014 to 6.2x in 2018. This could be merely due to the
reason that the net comprehensive income of Shell also shows a similar trend. They were at a net loss of
Rs. 985,022 Million in 2014 which, by 2016, turned into a net income of Rs. 4,722,986 million; however,
they faced a loss again in 2018 of Rs. 1,276,442 million. There was a great fluctuation in the oil prices in
the following years too which may have led to the inconsistency in sales and the consumption of oil
showed a growth rate of 9.7% in the years 2016-2017 compared to the previous years growth rate of
5.2%. The graph of the time interest ratio depicts clearly how the ratio varied in these years.

12
Market Value Ratios

Earnings per Share Ratio

The earnings per share ratio gives the amount of

money each share of stock would receive if all of
the profits were distributed to the outstanding
shares at the end of the year. The earnings per
share ratio also showa a trend in which it was very
low in 2014 at a value of Rs. -9.97, then increased
and got to a value of Rs. 63.22 in 2016 and then
deteriorated and came to a value of Rs. -10.3 in
2018. The face value of the shares of Shell was
constant at Rs. 10 per share however the number
of shares bought each year and the net income was different. This depicts that the company in 2014 had
income in minus to distribute to its shareholders which then increased to Rs. 63.22 per share in 2016
and then again fell down to a minus value of Rs. 10.3 in 2018 as shown in the graph.

Furthermore, the Dupont analysis gives the return on equity further so analyzing Shell it shows that in
the initial year of 2014, there was an extremely less value of -19.4, which however rose to 19.8 in the
following year perhaps due to increase in sales and a better net profit margin. It again showed an
upward trend and came to a very high value of 54.4 that shows that in 2016, Shell was getting a very
high return on equity due to remarkable sales as well as a high profit margin and financial leverage.
However, after 2016, it shows a downward trend, as the graph below shows, and lands to a very low
value of -23.11 in 2018 as the sales decreased.

Price to Earnings Ratio

A company’s P/E ratio greater than 25 is

considered to be more than excellent and
ideally it should be between 15-25 and
Shell’s P/E ratio increased from a negative
value of -25.53 in 2014 to 28.18 in 2015
and then again went down and down along
these years showing drastic change in the
business operations which may be due to
several exogenous factors that might have
changed the sentiments of the market
which would have ultimately affected the
operations of the firm. This fall in the P/E from 2017 to 2018, means that the company is losing money.

13
This negative trend questions the performance and effectiveness of the company, in maintaining
stockholder interests. This trend will discourage investors and create an adverse brand image.

Book Value Per Share Ratio

Book value reflects the total value of a

company's assets that shareholders of that
company would receive if the company were
to be liquidated. Shells Book value per share
rose up from 55.09 in 2014 to 103.82 2016
but then the book value faces a decline in
the further years dropping down to 95.3 in
2017 and further down to 59.37 in 2018
indicating that the investors may have to
think before investing in the firm. This drop
could be possibly because of the poor
liquidity position of firm over the years. It
might also be because of the plunge in sales during the 2015-2016 period.

COMPARISON WITH PAKISTAN STATE OIL

(PSO):
Current Ratio
The Current ratio for Shell’s main competitor Pakistan State Oil (PSO) has improved over the time period
2014-2018. It started from 1.087 in 2014 and improved significantly to 1.32 by 2018. The ratio falls near
the ideal range of current ratio, which is 1.5-2.
In comparison, Shell’s ratio deteriorated over the 5 year trend. This shows the efficient and effective
management of PSO as compared to shell as it is more secure in terms of liquidity. On the other hand,
the deteriorating current ratio for Shell indicates that it can face a serious liquidity crisis.
One of the reasons for difference can be that despite both firms borrowing heavily in short term, PSO
was able to increase its current assets by lending on short term basis as well as significantly increase its
trade debts. This reduced the negative effect of short term borrowing.

ACID TEST RATIO:

Comparing both firms through the acid test ratio, we can conclude that the overall liquidity of PSO has
improved significantly. The acid test ratio climbed from 0.78 (2014) to 1.03(2018). This also shows that
the reason for the rise in current ratio above is due to a significant rise in non-inventory items of current
assets, which of course reflect a strong liquidity position.
In comparison, following its current ratio, Shell’s acid test ratio went down significantly over the 5 year

14
period stopping at 0.39x in 2018. This reflects the poor liquidity position and shows that the company is
facing a serious liquidity crisis.

It also shows that PSO’s management was able to significantly control its liquidity position during the
falling period of sales (2015-2016) but later when it bounced back up, it did not compromise its liquidity.

INVENTORY TURNOVER RATIO:

For the period 2014-2018, PSO’s inventory turnover ratio initially started from 13..3 in 2014 and climbed
to 15x in 2015 but fell to 12.4 by 2018. In comparison, Shell’s ratio started at nearly 15.9x in 2014 and
fell to 14x in 2018. This was still significantly better than PSO’s trend for the 5 years.
A reason for this can be PSO’s significantly higher inventory levels as compared to Shell for the period. In
comparison, there is a significant difference between PSO’s annual net sales and shell’s annual net sales.
Even though Shell had a better trading performance as compared to PSO, the sheer size of PSO’s trading
towered over Shell. This means that at the level PSO is trading, its inventory turnover ratio is still
impressive.

DAY SALES OUTSTANDING RATIO:

PSO’s day sales outstanding (DSO) started at 6.4 (2014) and ended at 17.7 (2018).
As compared to Shell, which started from 3.29 (2014) and ended at 5.56 (2018).
PSO’s DSO ratio is quite high and climbs over the period. This can be because it has a large sales volume
and that might be driven by a high credit period for its customers.
Whereas, the ratio does show a good control over cash collection by Shell, its low ratio might be
because of its significantly smaller sales volume as compared to PSO.

We see a rising trend in both the firm’s ratio over the 5 year period and this is most likely in an effort to
increase their respective sales after the low sale period of 2015-2016.

NET PROFIT MARGIN:

PSO’s Net profit margin beats that of shell over the 5 year period. Starting at 1.8% in 2014, it
experienced a lot of fluctuations and dipped to around 0.7%in 2015 and rose above 2% in 2017. As
compared to Shell, which experienced fluctuations and could not maintain a positive net income in the 5
years, PSO proved better than its competitor and managed to keep its net profit above 1% for most of
the years. This can be attributed to Shell’s lack of control at its selling expenses and an inability to
control costs as sales fell significantly.

RETURN ON ASSETS:
The ROA for Shell started at a negative 2.55% in 2014. Over the period of 5 years it climbed as high as
11.11 (2016) but fell back to a negative 2.6% in 2018. In comparison, PSO was able to maintain a more
steady return on total assets, even though it fluctuated. Overall, PSO’s performance in selling and

15
utilizing its assets effectively is shown clearly that despite the decline in ROA from 5.58% to 3.84%, there
was not a single year where it reported a negative return on total assets.

RETURN ON EQUITY:

The Return on Equity for PSO started with a high figure of 53.3% in 2014 but saw a gradual decline to
20.3% in 2018. In comparison, Shell’s ROE started at negative 16% in 2014, climbed to more than 40% in
2016 but fell by a huge margin to a negative 20%.
This fluctuation in ROE occurs because of the fluctuation in sales level during the years 2015-2016.
However, this ratio again proves PSO’s effective utilization of its total equity as compared to Shell which
not only experienced far more fluctuations but also did not deliver as high a return as PSO.
Another reason for this is possibly because of a lack of control in operations and trade by Shell as its cost
of goods sold remained proportionately high. ROE of shell was further eroded by its failure to control its
fixed costs.

TIMES INTEREST EARNED:

If we observe the times interest earned ratio for both the firms, we see that PSO’s TIE ratio has
significantly improved from 4.39 to 6.2 by the end of the period. In comparison, Shell’s TIE ratio
generally was far more than PSO’s TIE ratio on average for the period of 5 years. However, it was also far
more volatile whereas PSO’s ratio consistently and gradually rose, Shell’s ratio surged and dipped during
the period.
A possible reason for PSO having a low ratio can be due to high financing costs whereas Shell has a
comparatively lower financing cost.

DEBT TO EQUITY RATIO:

Comparing both firms Debt to Equity ratio, we can safely say that PSO has improved its debt to equity
ratio. With a slow and gradual decline in the ratio, it has resulted in lowering of financing cost which has
contributed to a rise in its net income. On the other hand, Shell started with a huge debt to Equity ratio
(above 5) and despite a fall in 2017, the ratio surged back up in 2018 to above 6 times. This shows the
dangerous position of financing Shell has taken for itself. As a consequence for debt, it has to pay a
higher financing cost yearly which leads to a decline in its NP margin.

FIXED ASSET TURNOVER:

FAT for PSO started at 246 (2014) but declined to 182 (2018). In comparison, Shell’s FAT ratio started
from 41 (2014) and declined to 18 (2018).
For both the companies this show deteriorating performance as the ratio has impaired. However, on
comparison we can clearly see that PSO is using its Fixed assets much better than Shell. Moreover, PSO’s

16
 FAT ratio declined by approximately 25% over the 5
DuPont Analysis - Shell years, whereas Shell’s ratio lost more than 50% of its
60 value.
50
40
30 DUPONT ANALYSIS:
20
10
0
2014 2015 2016 2017 2018 The Dupont Analysis shows the return on equity for a
-10
-20 firm. It combines net profit margin, financial leverage
-30 and return on assets to determine how profitable a
firm is and why.
The dupont analysis for Shell started at a low ratio of -19.4 (2014) but climbed to 54.4 (2016) and fell to
-23.1 (2018). This indicates that the return on equity is unstable and fluctuates greatly every year.
Overall, there has been a trend of Return on assets falling during this time period and it adversely affects
the Return on equity. Moreover, the improvement in ratio came due to a rise in NP margin over the
years and as it deteriorated, so did the return on equity.
Lastly, the company’s financial leverage remained largely stable in 2014 and 2015 at above 6 but falls
during 2016 and 2017 to approximately 3.8. This fall comes in despite the betterment of ratio of return
on equity. The financial leverage climbs back up above 7 and still the return on equity falls as net profit
margin fell.

PSO’s Dupont analysis shows that in the initial year

of 2014, there was an extremely less value of
-19.4, which however rose to 19.8 in the following
year perhaps due to increase in sales and a better
net profit margin. It again showed an upward
trend and came to a very high value of 54.4 that
shows that in 2016, Shell was getting a very high return on equity due to remarkable sales as well as a
high profit margin and financial leverage. However, after 2016, it shows a downward trend, as the graph
below shows, and lands to a very low value of -23.11 in 2018 as the sales decreased.

On the other hand, PSO shows that their return on equity in 2014 was very high with a value of 37.37,
however it fell even more than 50% by 2016 and came to a value of 16.12 probably because of the fall in
sales due to which the net profit and return on total assets also fell. However, there was an upward
trend till it reached 25.6 in 2017 and then fell again in 2018 to 17.9. This could have because of high
financial leverage and the stabilizing net profit margin as the sales rose in 2017, however they fell again.
Overall the DuPont analysis shows that the return on equity of PSO is a lot better than that of Shell and
it is an overall more stable company that uses it equity more efficiently.

17