Ratio Analysis – Rolls-Royce Holding PLC and BAE Systems PLC

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Page count 10
Word count 2841
Read time 10 min
Topic Economics
Type Coursework
Language 🇬🇧 UK

Introduction

The success of a business requires proper financial management. This can be achieved by having a correct understanding of the financial performance of an entity. However, the reported financial statements do not give an in-depth analysis of the financial results. Therefore, the financial strengths and weaknesses of the company cannot be known by looking at the statements. This makes it necessary to carry out a comprehensive financial analysis of the statements using various tools such as ratio analysis. Ratio analysis breaks down the values reported into various components for a better understanding of the results. Besides, it allows stakeholders to monitor the trend of performance. Ratio analysis also facilitates the comparison of results of various companies (Atrill & McLaney 2013). Calculation and analysis of ratios for Rolls-Royce Holding PLC (RYCEY) and BAE Systems PLC (BA) are presented in the subsequent sections.

Gross profit margin

The ratio shows the amount of profit that is generated after deducting the direct costs from the revenue. In most cases, the direct costs are classified as the cost of sales. It shows whether the company is able to generate enough profit that can cover all the indirect costs. It also gives information on whether the company is efficient in managing direct costs (Horngren et al. 2012).

Gross profit / revenue.

Rolls-Royce PLC 2009 2010 2011 2012 2013 2014 2015
Gross profit (GBP mil) 2,114 2,195 2,447 2,748 3,320 3,200 3,267
Revenue (GBP mil) 10,414 11,085 11,124 12,161 15,513 13,736 13,725
Gross profit margin (%) 20.3 19.8 22.0 22.6 21.4 23.3 23.8
BAE Systems PLC
Gross profit (GBP mil) 20,374 20,980 17,770 17,834 10,659 9,316 10,757
Revenue (GBP mil) 20,374 20,980 17,770 17,834 16,864 15,430 16,787
Gross profit margin (%) 100.0 100.0 100.0 100.0 63.2 60.4 64.1

Comparison

There was a general improvement in the gross profit margin for RYCEY while the ratios for BA dropped. However, the gross profit margin ratios for BA were greater than those of RYCEY. This can be an indication that BA is more efficient in handling the cost of sales. Further, the high values of gross profit margin for BA can be attributed to the fact that the company renders services. Thus, it has a low cost of sales.

Operating profit margin

The ratio measures the amount of profit that is generated from the main operating activities of the company. Thus, it shows the amount of revenue that is available to cover the non-operating expenses.

Operating profit / Revenue.

Rolls-Royce PLC 2009 2010 2011 2012 2013 2014 2015
Operating profit (GBP mil) 1,174 1,130 1,186 1,373 1,535 1,296 1,499
Revenue (GBP mil) 10,414 11,085 11,124 12,161 15,513 13,736 13,725
Operating profit margin (%) 11.3 10.2 10.7 11.3 9.9 9.4 10.9
BAE Systems PLC
Operating profit (GBP mil) 966 1,601 1,580 1,640 806 1,300 1,502
Revenue (GBP mil) 20,374 20,980 17,770 17,834 16,864 15,430 16,787
Operating profit margin (%) 4.7 7.6 8.9 9.2 4.8 8.4 8.9

Comparison

The operating margin ratios for RYCEY were fairly stable while those of BA improved during the 7-year period. Further, for RYCEY were higher than those of BA. The values of the ratio show that the two companies are stable because that the operating activities of are sustainable. However, RYCEY is more profitable than BA (Horngren et al. 2012).

Operating expenses per revenue

This ratio shows the amount of revenue that goes into the operating expenses. A low value of the ratio indicates that the company is profitable.

Operating expenses / revenue.

Rolls-Royce PLC 2009 2010 2011 2012 2013 2014 2015
Operating expenses (GBP mil) 9,240 9,955 9,938 10,788 13,978 12,440 12,226
Revenue (GBP mil) 10,414 11,085 11,124 12,161 15,513 13,736 13,725
Operating expenses per revenue (%) 88.7 89.8 89.3 88.7 90.1 90.6 89.1
BAE Systems PLC
Operating expenses (GBP mil) 19,408 19,379 16,190 16,194 16,058 14,130 15,285
Revenue (GBP mil) 20,374 20,980 17,770 17,834 16,864 15,430 16,787
Operating expenses per revenue (%) 95.3 92.4 91.1 90.8 95.2 91.6 91.1

Comparison

The value of the ratio for RYCEY grew by a small margin while those of BA fluctuated during the 7-year period. Besides, the ratios for BA were higher than those of RYCEY. This shows that the operating cost for BA is higher than those of RYCEY. It indicates that BA is less profitable.

Net profit before tax margin

The ratio shows the profitability of a company before taking into account the tax expense for the financial year.

Net profit before tax / revenue.

Rolls-Royce PLC 2009 2010 2011 2012 2013 2014 2015
Net profit before tax (GBP mil) 2957 702 1105 2705 1759 67 151
Revenue (GBP mil) 10,414 11,085 11,124 12,161 15,513 13,736 13,725
Net profit before tax margin (%) 28.39 6.33 9.93 22.24 11.34 0.49 1.1
BAE Systems PLC
Net profit before tax (GBP mil) 267 1410 1466 1370 422 883 1089
Revenue (GBP mil) 20,374 20,980 17,770 17,834 16,864 15,430 16,787
Net profit before tax margin (%) 1.31 6.72 8.25 7.68 2.5 5.72 6.49

Comparison

The net profit before tax for the two companies fluctuated. This can be attributed to the non-operating items. The range for RYCEY was between 1.1 and 28.39 while that of BA was between 1.31 and 8.25. This indicates that the ratios for RYCEY were more volatile than those of BA. However, RYCEY was more profitable than BA.

Net profit after tax margin

The ratio shows the amount of net profit that is generated per unit of revenue. It takes into account all the operating and non-operating expenses incurred during an accounting period.

Net profit after tax / revenue.

Rolls-Royce PLC 2009 2010 2011 2012 2013 2014 2015
Net profit after tax (GBP mil) 2221 539 850 2281 1367 69 82
Revenue (GBP mil) 10,414 11,085 11,124 12,161 15,513 13,736 13,725
Net profit after tax margin (%) 21.33 4.86 7.64 18.76 8.81 0.5 0.6
BAE Systems PLC
Net profit after tax (GBP mil) -67 1051 1240 1068 169 741 918
Revenue (GBP mil) 20,374 20,980 17,770 17,834 16,864 15,430 16,787
Net profit after tax margin (%) -0.33 5.01 6.98 5.99 1 4.8 5.47

Comparison

The ratios for RYCEY dropped with a slight improvement in 2012 while those of BA improved with a slight decline in 2013.Further, the net profit after tax for RYCEY dropped significantly in 2014 and 2015. On average, the net profit margin for RYCEY is higher than that of BA. However, the profitability of BA is more stable than that of RYCEY.

Return on capital employed

This ratio gives information on the amount of profit that is generated per unit of capital employed. Capital employed is the sum of fixed assets and working capital (Block & Hirt 2007).

EBIT / capital employed.

2009 2010 2011 2012 2013 2014 2015
Rolls-Royce PLC % 48.67 9.89 15.13 35.11 18.14 1.26 1.51
BAE Systems PLC % 0.55 14.37 17.70 16.74 6.55 15.08 17.30

Comparison

The values of the ratios for RYCEY deteriorated while those of BA improved over the 7-year period. On average, RYCEY had a higher value of return on capital employed than BA. This shows that the company is more efficient in using capital employed to generate revenue and profit than BA (Horngren et al. 2012).

Return on equity

The ratio gives information on the efficiency in the use of equity to generate profit.

Net profit after tax / equity.

Rolls-Royce PLC 2009 2010 2011 2012 2013 2014 2015
Net profit after tax (GBP mil) 2221 539 850 2281 1367 69 82
Shareholder’s equity (GBP mil) 2999 3878 4518 6088 5605 6382 5014
Return on equity (%) 74.1 13.9 18.8 37.5 24.4 1.1 1.6
BAE Systems PLC
Net profit after tax (GBP mil) -67 1051 1240 1068 169 741 918
Shareholder’s equity (GBP mil) 5929 4958 4786 3981 3573 2615 2416
Return on equity (%) -1.13 21.2 25.91 26.83 4.73 28.34 38

Comparison

The ratios for RYCEY dropped by a large margin while those of BA improved. A decline in return on equity shows that the performance of the company deteriorated. This can be an indication that the company is facing serious financial problems. Therefore, an investor will prefer BA to RYCEY.

Current ratio

The ratio gives information on the ability of an entity to settle immediate obligations using current assets.

Current assets / current liabilities.

Rolls-Royce PLC 2009 2010 2011 2012 2013 2014 2015
Current assets as a % of total assets 60.78 60.51 50.63 52.96 55.58 50.34 54.27
Current liabilities % of total assets 40.93 44.22 42.11 39.71 42.41 34.58 36.61
Current ratio 1.48 1.37 1.20 1.33 1.31 1.46 1.48
BAE Systems PLC
Current assets % of total assets 34.54 31.69 27.62 31.33 31.34 30.21 31.53
Current liabilities % of total assets 47.62 48.51 44.48 40.03 42.91 40.66 35.62
Current ratio 0.73 0.65 0.62 0.78 0.73 0.74 0.89

Comparison

RYCEY had higher values of current ratio than BA. This shows that it has a better liquidity position than BA. Further, the ratios for BA were less than one. It indicates that the company is facing working capital problems.

Quick ratio

The ratio gives information on the ability of a company to settle short-term obligations using the most liquid assets.

(Current assets – inventory) / Current liabilities.

Rolls-Royce PLC 2009 2010 2011 2012 2013 2014 2015
Current assets as a % of total assets 60.78 60.51 50.63 52.96 55.58 50.34 54.27
Inventory 15.77 14.96 15.59 15.05 14.39 12.46 11.81
Current liabilities % of total assets 40.93 44.22 42.11 39.71 42.41 34.58 36.61
Quick ratio 1.08 1.00 0.76 0.92 0.95 1.07 1.13
BAE Systems PLC
Current assets % of total assets 34.54 31.69 27.62 31.33 31.34 30.21 31.53
Inventory 3.48 2.68 3.10 2.94 3.46 3.49 3.61
Current liabilities % of total assets 47.62 48.51 44.48 40.03 42.91 40.66 35.62
Quick ratio 0.63 0.57 0.52 0.68 0.61 0.62 0.74

Comparison

The ratios for the two companies fluctuated during the period. However, RYCEY had higher values of quick ratio than BA. This shows that it has a better liquidity position than BA. It is worth mentioning that the liquidity level of a company highly depends on the nature of the business of an entity and the industry in which the company operates. This explains why BA had low values of the ratio (Block & Hirt 2007).

Inventory holding period

The ratio shows how frequently an entity replenishes stock. That is, the duration it takes the company to convert inventory to sales.

(365 * inventory) / net sales.

2009 2010 2011 2012 2013 2014 2015
Rolls-Royce PLC 110.60 99.85 104.96 102.47 90.45 105.47 94.31
BAE Systems PLC 0 0 0 0 39.26 40.89 42.86

Comparison

During the first four years, BA did not engage in sale of inventory. This explains why the values of the ratio were zero. RYCEY has extremely high values of the ratio as compared to those of BA. This shows that the company is less efficient in managing inventory. The high values of the ratios can also be explained by the fact that the company sells slow-moving commodities (Block & Hirt 2007).

Trade receivable collection period

The ratio measures the efficiency of an entity in handling accounts receivables. It shows the duration between when a company makes credit sales and when they collect amounts due from debtors. Low ratios are preferred to high ratios because they show improved efficiency.

(365 * ending accounts receivables) / net sales.

2009 2010 2011 2012 2013 2014 2015
Rolls-Royce PLC 46.84 40.93 38.28 34.59 32.74 41.61 41.79
BAE Systems PLC 53.47 50.14 55.02 35.84 21.86 24.52 24.12

Comparison

The ratios for RYCEY remained fairly stable while those of BA declined. Besides, BA had lower values of the trade receivable collection period than RYCEY. This shows that the company is more efficient in handling accounts receivables because it collects debts within a shorter period than RYCEY (Block & Hirt 2007).

Trade payables payment period

The ratio gives information on the duration between when a company makes credit purchases and payments.

365 * ending accounts payable / cost of sales.

2009 2010 2011 2012 2013 2014 2015
Rolls-Royce PLC 41.87 36.03 40.37 41.42 46.68 58.20 47.90
BAE Systems PLC 0 0 0 0 158.35 268.23 151.39

Comparison

The values of the ratio for the two companies fluctuated during the period. Further, the values of the ratio for BA were higher than those of RYCEY. This shows that RYCEY is more efficient in managing accounts payable than BA.

WCC

The ratio shows the duration it takes an entity to convert net current assets and current liabilities into cash. Thus, it shows the efficiency in managing the balance sheet and generating cash flow.

2009 2010 2011 2012 2013 2014 2015
Rolls-Royce PLC 115.57 104.75 102.87 95.64 76.51 88.88 88.21
BAE Systems PLC 0 0 0 0 -97.23 -202.82 -84.41

Comparison

RYCEY had high values of the ratio while those of BA were negative. The high values for RYCEY show that a lot of cash is tied to assets that do not generate revenue for the company. This indicates low efficiency.

Gearing ratio

This ratio gives information on the proportion of credit and equity that is used to finance the business. Some industries are associated with a high value of gearing ratio due to the high capital requirements.

Total liabilities /total equity.

2009 2010 2011 2012 2013 2014 2015
Rolls-Royce PLC 0.51 0.47 0.27 0.23 0.42 0.35 0.65
BAE Systems PLC 0.72 0.57 0.75 0.80 0.86 1.82 1.34

Comparison

The value of the ratios for RYCEY fluctuated while those of BA increased. Further, BA had high values of the ratio than RYCEY. This shows that BA uses a higher proportion of credit than equity. It implies that the company has a high leverage level than RYCEY. This translates to high risk.

Debt to equity

The ratio shows the proportion of debt and equity that the company uses.

Long term debt / total equity.

Rolls-Royce PLC 2009 2010 2011 2012 2013 2014 2015
Long term debt (as a % of total asset) 11.59 6.99 7.21 6.81 9.38 9.67 12.69
Equity (as a % of total asset) 24.52 24.49 27.51 33.61 24.3 28.72 22.46
Debt to equity 0.47 0.29 0.26 0.20 0.39 0.34 0.57
BAE Systems PLC
Long term debt (as a % of total asset) 11.14 8.88 11.61 13.32 12.82 14.49 18.80
Equity (as a % of total asset) 18.01 22.19 18.35 16.70 17.18 9.31 14.88
Debt to equity 0.62 0.40 0.63 0.80 0.75 1.56 1.26

Comparison

BA has a higher leverage level as indicated by the high values of the debt to equity ratio than RYCEY. The company uses a higher amount of debt than equity. Debt reduces net income due to the interest expense. This partly explains why BA has a low level of profit. An investor will prefer to invest in RYCEY because it has a low leverage risk.

Interest cover

This gives information on the solvency of a company. It measures the ability of a company to pay interest expense using earnings before interest and tax (Collier 2010).

EBIT / interest expense. (Source of data – BAE Systems 2016; Rolls-Royce Holding PLC 2016).

Rolls-Royce PLC 2009 2010 2011 2012 2013 2014 2015
EBIT (GBP mil) 1,174 1,130 1,186 1,373 1,535 1,296 1,499
Interest expense 25 93 52 25 49 629 461
Interest cover 47.2 12.14 22.67 54.04 31.33 2.06 3.25
BAE Systems PLC
EBIT (GBP mil) 966 1,601 1,580 1,640 806 1,300 1,502
Interest expense 445 202 204 197 384 217 208
Interest cover 2.17 7.94 7.76 8.32 2.1 5.98 7.23

Comparison

On average, RYCEY had higher values of interest coverage ratios than BA. This can be attributed to the low amount of interest expense. It shows that the company is more solvent than BA.

Conclusion

The first six ratios calculated above give information on the profitability of the company. The results show that RYCEY had higher levels of profitability than BA. However, the profit level of RYCEY deteriorated over the period while that of BA improved over the period. This category gives information on the earning capacity of the company. Higher values of the ratio indicate higher earning capacity. The second category is liquidity ratios. Current and quick ratios are used to measure the ability of the companies to settle immediate obligations using short-term assets (Abraham et al. 2010). RYCEY had a higher level of liquidity than BA. Besides, the ratios for the companies were fairly stable during the period. The ratios for BA are quite low. It shows that the company may be facing difficulties in settling short-term liabilities. The third category is asset management ratios. They show the efficiency in the internal operation of a company. The ratios show that RYCEY is more efficient in managing accounts receivables and trade creditors than BA. The commodities sold by RYCEY are slow-moving. This explains why the inventory turnover period is quite high (Brigham & Michael 2009). Further, RYCEY uses a lower amount of debt than BA as indicated by the gearing and debt ratios. Also, the company is more solvent than BA as shown by the interest coverage ratio. In summary, RYCEY has a better financial standing than BA.

References

Abraham, A, Glynn, J, Murphy, M & Wilkinson, B 2010, Accounting for managers, South-Western Cengage Learning, Boston.

Atrill, P & McLaney, E 2013, Accounting and finance for non-specialists, Pearson Publishing, England.

BAE Systems 2016, Investors – annual reports, Web.

Block, S & Hirt, G 2007, Foundations of financial management, McGraw-Hill/Irwin, USA.

Brigham, E & Michael, J 2009, Financial management theory and practice, South-Western Cengage Learning, USA.

Collier, P 2010, Accounting for managers, John Wiley & Sons, USA.

Horngren, C, Harrison, W, Oliver, S, Best, P, Fraser, D, Tan, R & Willett, R 2012, Accounting, Pearson, Australia.

Rolls-Royce Holding PLC 2016, Annual report archive, Web.

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Reference

EssaysInCollege. (2022, May 24). Ratio Analysis – Rolls-Royce Holding PLC and BAE Systems PLC. Retrieved from https://essaysincollege.com/ratio-analysis-rolls-royce-holding-plc-and-bae-systems-plc/

Reference

EssaysInCollege. (2022, May 24). Ratio Analysis – Rolls-Royce Holding PLC and BAE Systems PLC. https://essaysincollege.com/ratio-analysis-rolls-royce-holding-plc-and-bae-systems-plc/

Work Cited

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References

EssaysInCollege. 2022. "Ratio Analysis – Rolls-Royce Holding PLC and BAE Systems PLC." May 24, 2022. https://essaysincollege.com/ratio-analysis-rolls-royce-holding-plc-and-bae-systems-plc/.

1. EssaysInCollege. "Ratio Analysis – Rolls-Royce Holding PLC and BAE Systems PLC." May 24, 2022. https://essaysincollege.com/ratio-analysis-rolls-royce-holding-plc-and-bae-systems-plc/.


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EssaysInCollege. "Ratio Analysis – Rolls-Royce Holding PLC and BAE Systems PLC." May 24, 2022. https://essaysincollege.com/ratio-analysis-rolls-royce-holding-plc-and-bae-systems-plc/.