Analysis of the financial position and performance of Shell Co Ltd

The analysis of the financial position and performance of Shell Co Ltd has been made using information from the condensed balance sheet and income statement of the company as from year 2006 to 2010 and the following three factors have been taken into consideration: 1. Growth and Profitability 2. Short term liquidity 3. Long term solvency

Growth
Revenue/Turnover and Net Income/Profit for the year under the income statement are indicators showing whether the company is investing in growth or generating more cash and generally if it is financially healthy. Charting revenue and net income growth will give an idea of the growth of the company. Year 2006 is being used as the base year for calculating the rate of growth for year 2006 v/s year 2007; year 2006 v/s year 2008; year 2006 v/s year 2009; year 2006 v/s year 2010. Growth from the top line that is growth in turnover is calculated in table 1.1 Table 1.1
Rate of growth in Turnover 2006 v/s 2007 (Rs000) 8659857-8147463 x 100 8147463 = 6.3 % 2006 v/s 2008 (Rs000) 10562749-8147463 x 100 8147463 = 29.6 % 2006 v/s 2009 (Rs000) 8430950-8147463 x 100 8147463 =3.5 % 2006 v/s 2010 (Rs000) 9453712-8147463 x 100 8147463 =16.0 %

The figures in Table 1.1 is being used to chart the rate of growth in turnover of the company in diagram A below
35 30 25 RATE OF 20 GROWTH IN TURNOVER (%) 15 10 5 0 2006 2007 2008 YEAR 2009 2010 2011

Diagram A Comment From 2006 to 2008 the rate of growth has increased from 6.3 % to 29.6 % which was a very good performance for the company. This increase in growth rate has also caused an increase in the dividend declared over profit for the year (Rs108493000 to Rs 316678000), which further imply that profit has

been used to pay out dividends thereby causing an increase in the stock price. This was a positive sign for investors as they would like to invest in a company that has more revenue than the previous year.

In 2009 there was a sudden drop in the growth rate in turnover to 3.5 %. Also in 2009 the company has increased his investment in associates from Rs 33072000 in 2006 to Rs 61341000 in 2009 which may partly explained the sudden drop in the rate of growth in 2009. In 2010 we can notice a rise in the growth rate to 16.0 %. The dotted line in diagram A shows that the trend that the rate of growth has evolved with a very slight increase from 2006 to 2009.

Growth from bottom line that is growth in Net income is calculated in table1.2 Table 1.2
2006 v/s 2007 (Rs000) 2006 v/s 2008 (Rs000) 282838-116911 x 100 116911 = 141.9% 2006 v/s 2009 (Rs000) 264266-116911 x 100 116911 = 126.0% 2006 v/s 2010 (Rs000) 324923-116911 x 100 116911 = 177.9%

Rate of 226263-116911 x 100 116911 growth in Net Income = 93.5%

The figures in Table 1.2 is being used to chart the rate of growth in Net Income of the company in diagram B below
200 180 160 140 RATE OF 120 GROWTH IN 100 NET INCOME 80 (%) 60 40 20 0 2006

2007

2008 YEAR

2009

2010

2011

Diagram B Average rate of growth in Net Income from year 2006 to 2010 is 134.8% Comments The rate of growth in Net Income has increased from 2006 to 2008 from 93.5 % to 141.9 % and there was a fall in 2009 to 126 %. This fall can be explained again by referring to the investment in associates in made in 2009 which was 1.9 times greater compared to 2006. In 2010 the Rate of Growth in Net income has considerably increased to 177.9 % which can be explained by comparing the profit from operations that increased from Rs 13034000 in 2006 to Rs 371695000 in 2010.

Charting earnings per share Earnings per share or EPS, is a company's profit divided by the shares outstanding. Based on the number of shares outstanding, the profit per share gives a better idea if the current price is undervalued or overvalued based on comparing historical trends. Table 1.3 below shows the values of earning per share of the company for the year 2006 to 2010 obtained from the Income Statement. Table 1.3 Earning Per Share (Rs) 2006 3.99 2007 7.72 2008 9.65 2009 9.01 2010 11.08

The figures in Table 1.3 is being used to chart the earning per share of the company in diagram C below
12 10 8 EARNING PER 6 SHARE(RS) 4 2 0 2005

2006

2007

2008 YEAR

2009

2010

2011

Diagram C Comments Earnings per Share have increased from 2006 to 2008 with a slight fall in 2009 and a subsequent increase in 2011. The dotted line shows an up-trending chart of earnings per share indicating that the company is growing favorably.

Profitability
Profitability indicator ratios indicate how well the company utilized its resources in generating profit and shareholder value. The long-term profitability of a company is vital for both the survivability of the company as well as the benefit received by shareholders. For decision making we are concerned only with the present value of expected future profits. Past or current profits are important as they help to indentify likely future profits, by identifying historical and forecasted trends of profits and sales.

In analyzing profitability it is important to know whether profits are generally on the rise; whether sales stable or rising; how the profits compare to the industry average; whether the market share of the company is rising, stable or falling. The Net Profit Margin is the ratio of net income to sales and indicates how much of each dollar of sales is left over after all expenses. Net Profit Margin = Net Income . Net Sales (Revenue)

The values of table 1.4 are obtained under the income statement from year 2006 to 2010. Table 1.4 Net Profit Margin (%) 2006 116911 x 100 8147463 = 1.4 2007 226263 x 100 8659857 = 2.6 2008 282838 x100 10562749 = 2.7 2009 264266 x 100 8430950 = 3.1 2010 324923 x 100 9453712 = 3.4

The figures in Table 1.4 are being used to chart the Net Profit Margin of the company in diagram D below.
4 3.5 3 2.5 NET PROFIT MARGIN 2 1.5 1 0.5 0 2005 2006 2007 2008 YEAR 2009 2010 2011

Diagram D Comments The Net Profit Margin has an increasing trend as shown by the dotted line in diagram D. A rising ratio can be explained by the contribution of share of result associates which in turn has significantly increased from 2006 (Rs8043000) to 2010 (Rs22708000). The increase in Net Profit margin also indicates that the company is more profitable and has better control over its costs compared to the previous years.

Effective TAX RATE This ratio is a measurement of a company's tax rate, which is calculated by comparing its income tax expense to its pretax income. This effective tax rate gives a good understanding of the tax rate the company faces. Effective Tax Rate (%) = Income Tax Expense Pretax Income The values of table 1.5 are obtained under the Income Statement from year 2006 to 2010. Table 1.5 2006 Effective 26794 x 100 143705 Tax = 18.6 Rate (%) 2007 21371 x 100 247634 = 8.6 2008 37294 x100 320132 = 11.7 2009 49961 x 100 314227 = 15.9 2010 65146 x 100 390069 = 16.7

The figures in Table 1.5 are being used to chart the Effective Tax Rate of the company in diagram E below.
20 18 16 14 12 EFFECTIVE TAX 10 RATE 8 6 4 2 0 2005.5 2006 2006.5 2007 2007.5 2008 2008.5 2009 2009.5 2010 2010.5 YEAR

Diagram E Comments The companys effective tax rates have been erratic over the five years from 18.6% in 2006, down to 8.6% in 2007, back up to 11.7 % in 2008 with a gradual increase up to 15.9 % and finally to 16.7 % in 2010. Obviously, this tax provision volatility makes an objective judgment of its true, or operational, net profit performance difficult to determine. Tax management techniques to lessen the tax burden are practiced, to one degree or another, by many companies. Nevertheless, a relatively stable effective tax rate percentage, and resulting net profit margin, would seem to indicate that the company's operational managers are more responsible for a company's profitability than the company's tax accountants.

Return on Assets This ratio indicates how profitable a company is relative to its total assets. The return on assets (ROA) ratio illustrates how well management is employing the company's total assets to make a profit. The higher the return, the more efficient management is in utilizing its asset base. The ROA ratio is calculated by comparing net income to average total assets, and is expressed as a percentage. Return on Assets = Net Income Total Assets The values of table 1.6 are obtained under the balance sheet and income statement from year 2006 to 2010. Table 1.6 Return on Assets (%) 2006 116911 x 100 2100967 = 5.6 2007 226263 x 100 1931462 = 11.7 2008 282838 x100 2279544 = 12.5 2009 264266 x 100 2197203 = 12.0 2010 324923 x 100 2711530 = 12.0

The figures in Table 1.6 are being used to chart the Return on Assets of the company in diagram F below.
16 14 12 10 RETURN ON ASSETS 8 6 4 2 0 2005 2006 2007 2008 YEAR 2009 2010 2011

Diagram F Comments The ratio of Return on Assets range from 5.6 % to 12 % and has an increasing trend as shown by the dotted line in diagram F which is a positive sign for the company. This ratio has almost double as from year 2006 compared to year 2007 up to 2010 which indicates that the companys performance is good. This company is non-capital-intensive business (with a small investment in fixed assets) and is favoured with a relatively high ROA because of a low denominator number.

Operating Performance Ratio: Fixed Asset Turnover This ratio is a measure of the productivity of a companys fixed assets (property, plant and equipment) with respect to generating sales. This annual turnover ratio is designed to reflect a companys efficiency in managing these significant assets. The higher the yearly turnover rates the better. Fixed Asset Turnover Ratio = Revenue . Property, Plant and Equipment

The values of table 1.7 are obtained under the balance sheet and income statement from year 2006 to 2010. Table 1.7 Return on Assets 2006 8147463 573428 = 14.2 2007 8659857 655790 = 13.2 2008 10562749 698842 = 15.1 2009 8430950 670356 = 12.6 2010 9453712 619117 = 15.3

The figures in Table 1.7 are being used to chart the Fixed Asset Turnover ratio of the company in diagram G below.
18 16 14 12 10 FIXED ASSET TURNOVER RATIO 8 6 4 2 0 2005 2006 2007 2008 YEAR 2009 2010 2011

Diagram G Comments The dotted line in diagram G shows a very slight trend in the increase of the Fixed Asset Turnover Ratio which means that there has been a relatively low investment in property, plant and equipment. The company is not capital intensive, thereby allowing to generate a high level of sales on a relatively low base of capital investment.

Return on Equity This ratio indicates how profitable a company is by comparing its net income to its average shareholders' equity. The return on equity ratio (ROE) measures how much the shareholders earned for their investment in the company. Return on Equity = Net Income . Shareholders equity

The values of table 1.8 are obtained under the income statement from year 2006 to 2010. Table 1.8 Return on Equity (%) 2006 116911 x 100 355508 = 32.9 2007 226263 x 100 467414 = 48.4 2008 282838 x100 433574 = 65.2 2009 264266 x 100 441270 = 59.9 2010 324923 x 100 472971 = 68.7

The figures in Table 1.8 are being used to chart the Return on Equity of the company in diagram G below.

80 70 60 50 RETURN ON 40 EQUITY 30 20 10 0 2005 2006 2007 2008 YEAR 2009 2010 2011

Diagram H Comments The Return on Equity ratio has considerably increased from 2006 to 2010 from 32.9 % to 68.7 % and the figures have almost double. The dotted line in diagram H shows an uprising trend in the Return on Equity ratio. The high ratio percentage indicates that the company is efficiently utilizing its equity base and producing a better return to investors. The ROE tells common shareholders how effectively their money is being employed. Financially, a high ratio is favorable and tends to decrease financial leverage. However, a high ratio may also be a symptom of low investment adequacy.

Liquidity Measurement Ratio

Short Term Liquidity Liquidity ratios attempt to measure a company's ability to pay off its short-term debt obligations. This is done by comparing a company's most liquid assets (or, those that can be easily converted to cash), its short-term liabilities. In general, the greater the coverage of liquid assets to short-term liabilities the better as it is a clear signal that a company can pay its debts that are coming due in the near future and still fund its ongoing operations. On the other hand, a company with a low coverage rate should raise a red flag for investors as it may be a sign that the company will have difficulty meeting running its operations, as well as meeting its obligations. Current Ratio The current ratio is used to test a company's liquidity by deriving the proportion of current assets available to cover current liabilities. The concept behind this ratio is to ascertain whether a company's short-term assets (cash, cash equivalents, marketable securities, receivables and inventory) are readily available to pay off its short-term liabilities (notes payable, current portion of term debt, payables, accrued expenses and taxes). Current Ratio = Current Assets Current Liabilities The values of table 1.9 are obtained from the balance sheet from year 2006 to 2010. Table 1.9 Current Ratio 2006 1489034 1694741 = 0.88 2007 1231977 1411903 = 0.87 2008 1547377 1786600 = 0.87 2009 1463082 1688629 = 0.87 2010 2047545 2170823 = 0.94

The figures in Table 1.9 are being used to chart the Current Ratio of the company in diagram H below.
0.95 0.94 0.93 0.92 0.91 CURRENT RATIO 0.9 0.89 0.88 0.87 0.86 0.85 2005 2006 2007 2008 YEAR 2009 2010 2011

Diagram I

Comments The Current Ratio of the company falls slightly from 2006 to 2007 and was relatively constant up to 2009 with a slight increase in 2010. The dotted line in diagram I shows an increasing trend in the current ratio which shows a positive sign that the company is improving its capacity to use its liquid assets to meet its short term liabilities. However this ratio does not consider the degree of liquidity of each component of the current assets. If the current assets of the company were mainly cash, they would be much more liquid than if comprised of mainly inventory. A high ratio indicates a greater liquidity and lower risk for short term lenders and the acceptable value for current ratio is 2:1. This company has a ratio of less than 1 which can be explained by the fact that its operating cycle is short and does not require more liquid assets compared to a long operating cycle which may have money tied up in inventory for a longer length of time.

Long term solvency

Debt Ratios These ratios give a general idea of the company's overall debt load as well as its mix of equity and debt. Debt ratios can be used to determine the overall level of financial risk a company and its shareholders face. In general, the greater the amount of debt held by a company the greater the financial risk of bankruptcy. The Debt Ratio The debt ratio compares a company's total debt to its total assets, which is used to gain a general idea as to the amount of leverage being used by a company. A low percentage means that the company is less dependent on leverage, i.e., money borrowed from and/or owed to others. The lower the percentage, the less leverage a company is using and the stronger its equity position. In general, the higher the ratio, the more risk that company is considered to have taken on. Debt Ratio = Total Liabilities Total Assets

The values of table 1.10 are obtained from the balance sheet from year 2006 to 2010. Table 1.10 Debt Ratio (%) 2006 1745459 x 100 2100967 = 83.1 2007 1464048 x 100 1931462 = 75.8 2008 1845970 x100 2279544 = 81.0 2009 1755933 x 100 2197203 = 79.9 2010 2238559 x 100 2711530 = 82.6

The figures in Table 1.10 are being used to chart the Debt Ratio of the company in diagram J below.

84 83 82 81 DEBT RATIO 80 79 78 77 76 75 2005 2006 2007 2008 YEAR 2009 2010 2011

Diagram J Comments The company has a relatively high percentage debt ratio which ranges from 75.8 % to 83.1% which
means that the company is relying more on debt to finance its investments and operations. The dotted line in diagram J indicates the debt ratio has a slight increase trend. Therefore, the company has to manage the debt ratio by reducing debt, increasing savings, or financing a greater portion of assets with working capital may improve this ratio. However, this company is a large well established one and can afford to push the liability component of its balance sheet structure to higher percentage without getting into trouble.

Debt-Equity Ratio The debt-equity ratio is another leverage ratio that compares a company's total liabilities to its total shareholders' equity. This is a measurement of how much suppliers, lenders, creditors and obligors have committed to the company versus what the shareholders have committed.

Debt-Equity Ratio =

Total Liabilities . Shareholders Equity

The values of table 1.11 are obtained from the balance sheet from year 2006 to 2010. Table 1.11 DebtEquity Ratio (%) 2006 1745459 x 100 355508 = 491.0 2007 1464048 x 100 467414 = 313.2 2008 1845970 x100 433574 =425.8 2009 1755933 x 100 441270 = 397.9 2010 2238559 x 100 472971 = 473.3

The figures in Table 1.11 are being used to chart the Return on Equity of the company in diagram K below.

600 500 400 DEBT-EQUITY 300 RATIO 200 100 0 2005

2006

2007

2008 YEAR

2009

2010

2011

Diagram K Comments The company has a very high percentage of Debt-Equity Ratio ranging from 491% to 473.3 % from year 2006 to 22010 which means that the company is using more leverage and has a weaker equity position. The dotted line in diagram K indicates that the trend for Debt-Equity Ratio has been almost constant. This high ratio is not favorable as the company is more dependent on outside sources of funds
relative to owners equity. A high ratio also tends to increase interest cost. Improvement may be gained by reducing long-term debt by disposing of unproductive assets and using proceeds to liquidate debt, or accelerating payments on long-term loans. Other ways include increasing local equity by generating higher levels of local savings, slowing down equity retirement programs, selling additional capital stock, or retaining a greater portion of allocated savings.