Rolls Royce’s Financial Performance and Corporate Social Responsibility

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Introduction

Gross profit margin and net profit margin are ratios that measure a company’s ability to derive profit from sales. Rolls Royce has a lower gross profit margin than Safran and General Electric (GE) who are some of the competitors. The net profit margin shows that Rolls Royce is more profitable than either Safran or GE. The dividend payout ratio shows the proportion of funds that are shared from net earnings. Safran has a better dividend payout ratio than Rolls Royce. The current ratio and quick ratio are used to analyze a company’s ability to clear its short-term debts. Rolls Royce is more stable than Safran but less stable than GE. Rolls Royce’s financial stability has remained almost constant over the five years. The company explains measures that are used to ensure that it only engages in investments that add value to shareholders. The company explains its commitment to reducing risk exposure. Directors’ bonuses are a percentage of their salary which depends mostly on profitability, cash flow, and stock prices. The group has expressed concerns about corruption and bribery by its subsidiaries in Indonesia and China. The company engages more female workers in its non-engineering and non-manufacturing programs following their low numbers in manufacturing and engineering programs. The company invested in a development project that sought to improve the engines for low carbon emission for civil aircraft. The company has better financial performance than the other two companies. The company is a leader in developing engines that reduce fuel consumption and pollution from noise.

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Profits, earnings, and dividends

Profitability

Gross profit margin and net profit margin are ratios that measure a company’s ability to derive profit from sales. Operating profit margin measures the efficiency of operations (Moyer et al. 2012, p. 82). Rolls Royce has a lower gross profit margin than Safran and General Electric (GE) who are some of the competitors. GE Aviation is the operating unit of GE that is a direct competitor of Rolls Royce. However, the data considers GE in general because of the availability of data. The net profit margin shows that Rolls Royce is more profitable than either Safran or GE. The difference between the gross profit margin and net profit margin can be explained by Safran and GE having higher operating costs than Rolls Royce. It is clear that Rolls Royce has more efficient operations by comparing its operating profit margin and gross profit margin to those of GE. The final outcome is that Rolls Royce is more profitable than the other two companies.

Gross profit margin 2012 2011 2010 2009 2008
Gross profit 2,745 2,448 2,200 2,113
Net sales 12,161 11,124 11,085 10,414
Rolls Royce Gross profit margin 22.6% 22.0% 19.8% 20.3%
Safran Gross profit margin 47.3% 46.0% 46.3% 44.2%
GE gross profit margin 47.6% 51.7% 50.0%
Profits millions GBP
Net profit margin 2012 2011 2010 2009 2008
net income 2,295 848 543 2,217 -1,345
net sales 12,161 11,124 11,085 10,414 9,082
net income/ net sales 0.188718 0.076232 0.048985 0.212886 -0.1481
Rolls Royce Net profit margin 18.9% 7.6% 4.9% 21.3% -14.8%
GE net profit margin 9.3% 9.6% 7.8%
Safran net profit margin 9.4% 4.0% 1.8% 6.0%
Operating profit margin 2012 2011 2010 2009 2008
Operating profit 1,132 1,058 1,006 986
Net sales 12,161 11,124 11,085 10,414
Rolls Royce Operating profit margin 9.3% 9.5% 9.1% 9.5%
GE operating profit margin 20.3% 23.6% 19.9%

Sources: General Electric Company (GE) – NYSE: Income statement (2013), Safran SA (SAF.PA) – Paris: Income statement (2013), and Rolls Royce Holdings plc (RR.L): Income statement (2013).

Earnings and dividends

Safran has a better dividend payout ratio than Rolls Royce. Rolls Royce dividend payout ratio is unpredictable compared to Safran which has maintained a payout ratio of 40% throughout the five-year period (Safran: Dividends 2013). The dividend payout ratio shows the proportion of funds that are shared from net earnings (Moyer et al. 2012, p. 85). Rolls Royce retains most of the net earnings compared with Safran. Safran has higher payout ratios which indicate more stable earnings than Rolls Royce. It may not be a good investment for someone who is not interested in long-term investment in a company that exceeds five years. Rolls Royce earnings per share have improved in the last 3 years. The company has regained its past profitability level. The EPS recorded in 2009 compared with EPS in 2012 is proof. It appears that investment made in 2008 is finally giving higher positive returns. EPS may increase unless the company engages in a long-term investment that may result in negative net income. A company that engages in reinvestment is good for an investor in the short-term and long-term periods. Optimism in investments makes stock prices rise in the short-term period. Returns from the investment are received in the long-term period. The investor benefits in both ways.

Dividend payout ratio 2012 2011 2010 2009 2008
Dividends per share 19.50 17.50 16.00 15.00 14.30 GB pence
Earnings per share 123.23 45.95 29.20 120.38 -73.63
RR dividends payout ratio 15.8% 38.1% 54.8% 12.5% -19.4%
Safran payout ratio 40% 40% 40% 40% 40%
Safran dividends 0.96 € 0.62 € 0.50 € 0.38 € 0.25 €

Sources: Safran: Dividends (2013), and Rolls Royce Holdings plc annual report (2012, pg. 130, see appendix A).

Financial stability and liquidity

The current ratio and quick ratio are used to analyze a company’s ability to clear its short-term debts. A company is more stable when it is able to clear its short-term debts when required (Moyer et al 2012, p. 74). It is measured by current assets exceeding current liabilities which results in a ratio that is more than 1.0. The current ratio is almost similar to its competitor. Current ratios above 1.0 indicate that Rolls Royce would have been able to clear its current debts. GE is more financially stable than Rolls Royce when the quick ratio is considered. Rolls Royce’s stability has remained almost constant over the five-year period. The quick ratio showed more stability in 2009 than it was in 2012. Rolls Royce is more stable than Safran but less stable than GE. However, the quick ratio and current have been maintained at acceptable levels except for 2011.

Current ratio 2012 2011 2010 2009
Current assets 9,593 8,315 9,824 9,374 GBP millions
Current liabilities 7,194 6,916 7,178 6,312
Rolls Royce current ratio 1.33 1.20 1.37 1.49
Safran current ratio 1.13 0.97 1.08 1.05
Quick ratio 2012 2011 2010 2009
current assets 9,593 8,315 9,824 9,374 GBP millions
inventory 2,726 2,561 2,429 2,432
current liabilities 7,194 6,916 7,178 6,312
Rolls Royce Quick ratio 0.95 0.83 1.03 1.10
GE quick ratio 1.87 1.73 1.66

Sources: General Electric Company (GE) – NYSE: Balance sheet (2013), Safran SA (SAF.PA) – Paris: Balance sheet (2013), and Rolls Royce Holdings plc (RR.L): Balance sheet (2013).

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Safran and GE have higher debt ratios than Rolls Royce. It shows that shareholders are less exposed to risk at Rolls Royce than in the other two companies. Shareholders’ equity and earnings are considered once the debts have been cleared in case a firm is to be dissolved (Moyer et al. 2012, p. 80). Less debt increases the possibility of recovering equity. Rolls Royce is the best for the investor when the debt ratio is the only factor to be considered. The debt to equity ratio also indicates an investor is safer at Rolls Royce than the other two companies. Rolls Royce also has a good performance in reducing the level of debt in the five-year. It has consistently reduced the debt to equity ratio which reduces risk for investors.

Debt ratio 2012 2011 2010 2009
Total liabilities 12,010 11,904 12,255 11,640 GBP millions
Total assets 18,115 16,423 16,234 15,422
Rolls Royce Debt ratio 66.3% 72.5% 75.5% 75.5%
GE debt ratio 82.0% 83.8% 84.1%
Safran debt ratio 72.8% 75.3% 74.7% 76.0%
Debt to equity ratio 2012 2011 2010 2009 2008
Total liabilities 12,010 11,904 12,255 11,640 13,123
Stockholders’ equity 6,088 4,518 3,975 3,782 2,216
Rolls Royce debt to equity 1.97 2.63 3.08 3.08 5.92
Safran debt to equity ratio 2.70 3.04 2.96 3.05
GE debt to equity ratio 4.57 5.17 5.29

Sources: General Electric Company (GE) – NYSE: Balance sheet (2013), Safran SA (SAF.PA) – Paris: Balance sheet (2013), and Rolls Royce Holdings plc annual report (2012, p. 130).

Returns to equity are above 6% non-risk rate paid for long-term treasury bonds. However, returns to assets show that assets have not been used efficiently to generate earnings (see Appendix B).

Information disclosed to assist stakeholders’ understanding

Additional information also contains a simplified capital structure. Credit rating by renowned companies is also included to simplify a shareholder’s understanding of financial stability. Rolls Royce was rated ‘A3’ by Moody’s Investor Service and ‘A’ by Standard & Poor’s which indicates the company is financially stable (Rolls Royce Holdings plc annual report 2012, p. 38).

The company also provides a simplified analysis of the movement of stock prices from the one that was reported at the beginning of the financial year against the one at the end. The stock price changed by 17% from the one that was reported at the beginning of 2012 and the one at the end of 2012 (Rolls Royce Holdings plc annual report 2012, p. 38).

The company has provided information on the types of shares that it issues. There are ordinary shares that are traded on the LSE. There are preference shares known as C shares that are issued instead of dividends and are redeemable for cash. The preference shares can also be retained. The major shareholders who are other companies have been disclosed. Their interest in the issuance of additional shares has also been disclosed. Issuance of additional shares may dilute the market value of shares. The group was given authority by shareholders to purchase about 10% of its shares within 18 months from 2nd May 2012 (Rolls Royce Holdings plc annual report 2012, p. 69). The shareholders were looking to strengthen the value of their holdings by reducing the number of shares available in the market.

The company provides information that shows that they have adhered to IFRS and UK Accounting standards. The information is provided to auditors and regulators who are interested in the company’s adherence to accounting standards and full disclosure of information that is relevant to investors (Moyer et al. 2012, p. 97). The company has provided information on its adherence to “Going Concern and Liquidity Risk: Guidance for Directors of UK Companies 2009” (Rolls Royce Holdings plc annual report 2012, p. 72). It shows that the company is managing risk and adding value according to conventional standards. The information is necessary for regulators and auditors.

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Director’s remuneration and bonuses are explained. The bonuses rely on profitability, cash flow, and stock market price performances (Rolls Royce Holdings plc annual report 2012, p. 59). Directors’ bonuses are a percentage of their salary which depends mostly on the three indicators. The company highlighted a two-week pay as a bonus to employees who worked with the company in 2012 (Rolls Royce Holdings plc annual report 2012, p. 56). Bonuses have been criticized as a source of increased risk for investors in many companies in the past. Senior executives engage companies in risk to increase their individual earnings. Rolls Royce has set limits to the maximum percentage of salaries that can be received as bonuses.

Corporate social responsibility

Ethics

The group has expressed concerns about corruption and bribery by its subsidiaries in Indonesia and China (Rolls Royce Holdings plc annual report 2012, p. 50). The group has a strong emphasis on its disassociation with corruption and bribery. Other parts discuss measures and approaches that the group has used to reduce and tackle business misconduct.

Social

The company employed 42,800 employees in 2012 in more than 50 countries (Annual report 2012, p. 34). More than half the number of employees were employed in the UK. The company uses a feedback system to identify employees’ concerns. The company upholds human rights in its policies and standards. The company discourages child labor and does not support the employment of children. The company encourages diversity by supporting female students to engage in Science, Technology, Engineering and Mathematics (STEM) subjects. It is a response by the group to correct the low number of females in its manufacturing workforce. The company also engages more female workers in no-engineering and non-manufacturing programs following their low numbers in manufacturing and engineering programs. About 50% of participants in such programs are female (Rolls Royce Holdings plc annual report 2012, p. 34). The company provides training for the disabled with an aim of enhancing workforce diversity.

The company engages employees in mandatory health and safety training with an aim of eliminating accidents at the workplace or elsewhere (Rolls Royce Holdings plc annual report 2012, p. 35).

The company spent an aggregate of GBP 8 million in charitable contributions and community development programs in countries where it operated in 2012 (Rolls Royce Holdings plc annual report 2012, p. 36). The company is adding value to its goodwill through corporate social responsibility.

Environment

The company invested in a development project that sought to improve the engines for low carbon emission in civil aircraft. The Strategic Investment in Low-carbon Engine Technology (SILOET II program) was launched at a cost of GBP 40 million. The company partners with other stakeholders to develop a system for monitoring maritime emissions, noise levels in aviation, and alternative fuel policies (Rolls Royce Holdings plc annual report 2012, p. 35).

The company has helped in achieving goals set by the Advisory Council for Aviation Research (ACARE) for increasing efficiency in fuel combustion and reducing the noise produced by planes. Rolls Royce has developed the Trent XWB for civil aerospace that has reduced fuel consumption by 16% of the first Trent engine that was produced in 1995 (Rolls Royce Holdings plc annual report 2012, p. 33). The company has invested in producing energy-efficient engines such as the Trent 60 gas turbine engine, and RFA36 pipeline compressor (Rolls Royce Holdings plc annual report 2012, p. 33). The company exceeded its target to reduce Greenhouse gas emissions in 2012.

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GHG emissions breakdown
Source: Rolls Royce Holdings plc annual report (2012, p. 33).

Conclusion

Rolls Royce provides less risk for an investor than the other two companies. It is more profitable than the other two companies. However, the company retains most of the earnings because of unstable net incomes and reinvestment. The company has helped in achieving goals set by the Advisory Council for Aviation Research (ACARE) for reducing noise, fuel consumption, and GHG emissions by a certain percentage by 2050. The company effectively uses bonus packages for its senior executives to encourage good financial performance. The company expresses discretion in using bonuses by setting an upper limit. Bonuses are also linked to salaries and part of it is converted into shares.

Reference List

General Electric Company (GE) – NYSE: Balance sheet 2013, Web.

General Electric Company (GE) – NYSE: Income statement 2013, Web.

Moyer, C, McGuigan, J, Rao, R & Kretlow, W 2012, Contemporary financial management, South-Western Cengage Learning, Mason.

Rolls Royce Holdings plc annual report 2012, Web.

Rolls Royce Holdings plc (RR.L): Balance sheet 2013, Web.

Rolls Royce Holdings plc (RR.L): Income statement 2013, Web.

Safran: Dividends 2013, Web.

Safran SA (SAF.PA) – Paris: Balance sheet 2013, Web.

Safran SA (SAF.PA) – Paris: Income statement 2013, Web.

Appendices

Appendix A

Group five-year review
Source: Rolls Royce Holdings plc annual report (2012, pg. 130).

Appendix B

Return on assets (ROA) 2012 2011 2010 2009 2008
Net earnings 2,295 848 543 2,217 -1,345
Total assets 18,115 16,423 16,234 15,422 15,348
ROA 12.7% 5.2% 3.3% 14.4% -8.8%
Return on equity (ROE) 2012 2011 2010 2009 2008
Net earnings 2,295 848 543 2,217 -1,345
Stockholder’s equity 6,088 4,518 3,975 3,782 2,216
ROE 37.7% 18.8% 13.7% 58.6% -60.7%

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