Financial Analysis: Considering Current Financial Projections for Rolls Royce

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Due to changes observed presently in the global economy, adjustment strategies and, particularly, the development of a resilience mechanism, is needed. Given the outcomes of the financial analysis performed recently, the company will be seeing certain challenges in the nearest future. Specifically, the fact that Rolls Royce’s ROCE has dropped by 12.98% indicates that the firm has been losing its competitive edge. Due to the increasing propensity toward financial decline, particularly, its potential inability to meet its investment goals and the need to dismiss a significant number of staff members, Rolls Royce’s leaders must face the necessity to sell the company’s shares.

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Remarkably, the overall efficiency of the company has been on the rise, even though the increase in the levels of Rolls Royce’s performance has been quite minimal. Specifically, compared to the previous year, the gross profit margins have grown by 1.83%, which indicates a general trend toward improvements in the company’s well-being. Nevertheless, the further consideration of the financial records that the company has shown over the past year proves the need to take immediate action.

Similarly, the inventory turnover period has increased by 5 days, which shows that the organization may lose a substantial amount of its financial resources on sustaining its inventory and the maintenance of its equipment. Given the overall drop in the levels of roll Royce’s performance, increasing expenses for the machinery that will not contribute to the improvement of the end product and the rise in the company’s competitive advantage or its influence within the industry does not appear to be legitimate. Therefore, the choice of selling the shares s the only solution for terminating the current loss of profit should be deemed as reasonable.

The change in the financial gearing of the organization also indicates that Roll Royce’s performance has been on the decline. Granted that the change could be interpreted as minimal compared to other alterations in Rolls Royce’s performance, the described issue still indicates that the company could use a change in its overall direction and business strategy. The 3% drop in the acid test ratio shows that the current approach used by Rolls Royce to balance out its debt and equity rates to maintain some semblance of equilibrium has been lacking efficacy. As the financial analysis results indicate, the current acid test ratio is 0.93, which is 0.03 lower than the one observed in the previous year. Given the low acid test score, there are sufficient grounds to believe that Rolls Royce will be unable to meet its short-term goals and, thus, lose noticeably within the first quarter of its performance. Since the current rates of risk are already excruciatingly high, Rolls Royce must face the necessity to sell its shares to avoid insolvency or bankruptcy in the nearest future.

However, on further assessment of the situation observed at Rolls Royce, several evident problems will surface. For instance, although the gross profit margin has proven to be positive, the operating profit margin, which includes indirect costs taken in the production process, has been moving downward, with a drop by 1.14% being quite indicative of the general trend. Despite being comparatively small, the outlined decline in the profit margin points to the fact that Rolls Royce will have to reconsider the future value of its shares (Koilo & Grytten, 2019). Therefore, given the current lack of certainty in the firm’s future performance and the presence of external factors, such as the rise in pandemic rates and the increase in the power and influence of competitors, Rolls Royce may need to consider selling its shares.

In addition, the fact that the company’s liquidity rates have dropped slightly points to the need to withhold from the further purchase of shares. Arguably, the presence of illiquidity is not necessarily a bad sign, yet illiquidity is more manageable as a concept for organizations of a smaller size. Given the scope and scale at which Rolls Royce operates, making use of illiquidity does not seem possible, especially with the current circumstances of drops in trade due to the pandemic (Pató & Herczeg, 2020). Therefore, the sharp and unprecedented drop in liquidity rates also indicates that the company should consider selling the shares so that it could survive.

As far as the current interest cover rates are concerned, the situation might not be as dire as one might have thought. Despite a noticeable drop in the specified index, Rolls Royce has been showing a rather decent interest cover rate compared to the previous year, which points to the possibility of the company recovering from the current crisis. However, the present interest cover rates do not seem to reflect the investment goals set initially (“Rolls-Royce Holdings Plc 2020 Half Year Results,” 2020). It is worth addressing that the company has already failed to meet its investment objectives recently, which has resulted in a rather disappointing outcome. Specifically, the 2007 investment plans resulted in closing the newly built Virginia reactor parts plant in 2020 (“Rolls-Royce closes Virginia reactor parts plant where 280 work,” 2020). Therefore, the company will have to be particularly careful to ensure that it will be able to meet its investment goals this time.

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Over the past year, Rolls Royce has faced several scenarios that have affected its performance to a noticeable extent, reducing its liquidity, profit margins, and interest cover rates. Therefore, although the company has not reached its lowest point yet, opportunities for selling its shares still need to be discussed given the situation observed in the global market (Hadi, 2019). With the rise in the economic crisis caused by the pandemic, the issues regarding the investment opportunities, and the related concerns, the company is unlikely to be able to meet the standards set within the industry and use its current competitive advantage to coexist with other organizations that have established a strong presence in the target market.

In turn, a bond sale and the following loan, which it will have once it receives access to a greater range of financial resources, will allow the firm to change its course and survive in the global market. Despite the efforts taken so far, the combined effects of the company underperforming last year and the coronavirus hitting the market, effectively reducing Rolls Royce’s ability to act upon changes to zero, the organization will have to consider selling its shares to another party. The described solution will allow avoiding the scenario that could potentially involve bankruptcy or insolvency. Given the fact that Rolls Royce’s management is presently considering the possibility of laying off a substantial percentage of its staff, the idea of minimizing the damage and changing the direction in which the company is headed by selling its shares to a third party appears to be the most sensible and responsible decision to make.

References

Hadi, W. (2018). Analysis of the effect of net profit margin, return on assets and return on equity on stock price (case study on consumption industrial sector companies listed in Indonesian Sharia stock index at Indonesia stock exchange in 2016). The Management Journal of Binaniaga, 3(02), 81-92. Web.

Koilo, V., & Grytten, O. H. (2019). Maritime financial instability and supply chain management effects. Problems and Perspectives in Management, 17(4), 62-79. Web.

Pató, B. S. G., & Herczeg, M. (2020). The effect of the Covid-19 on the automotive supply chains. Studia Universitatis Babes-Bolyai Oeconomica, 65(2), 1-11. Web.

Rolls-Royce closes Virginia reactor parts plant were 280 work. (2020). World Today News. Web.

Rolls-Royce Holdings Plc 2020 half-year results. (2020). Web.

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BusinessEssay. 2022. "Financial Analysis: Considering Current Financial Projections for Rolls Royce." February 20, 2022. https://business-essay.com/financial-analysis-considering-current-financial-projections-for-rolls-royce/.

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