Essays on Royal Dutch Shell Case Study

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The paper 'Royal Dutch Shell' is a great example of a Finance and Accounting Case Study. This report has been prepared to examine the financial performance of Royal Dutch Shell Company which is considered a top oil and gas producer globally. In this regard, various ratios have been selected to examine the company’ s profitability, liquidity, leverage, efficiency, and suitability for investment over a five years period from 2012 to 2016. The ratios are then compared to the industry performance and that of the company’ s competitors such as Total SA, Exxon Mobil, Chevron Corp. , and British Petroleum.

By so doing, it is hoped that the report does provide a balanced and transparent view of the company’ s financial performance hence giving a good insight as to whether or not to invest in the company. Arising from the analysis, the report does not recommend investing in the company as it is considered to have performed poorly over the five year period in comparison to the company while its performance has consistently declined over the period. Profitability ratios These are ratios that are used in assessing the business’ s ability to generate earnings compared to its expenses and related costs incurred during an accounting period.

Having a higher ratio relative to the industry or competitors will be an indication that the company is performing well. In the case of Royal Dutch Shell, return on capital employed and net profit margin will be compared with industry performance. Return on Capital Employed Return on capital employed is calculated by dividing the company’ s earnings before tax with the capital employed. The ratio measures the company’ s profitability and the efficiency at which it utilizes its capital employed to generate profit.

A higher ratio is preferred as it is an indication of a more efficient use of capital. Royal Dutch Shell’ s ROCE has consistently declined over the five years period from a high of 19.94% in 2012 to a low of 1.66 in 2016 as depicted in the graph below. The decline is not synonymous with the company since a similar trend has been observed for the industry. The industry average was 19.14% in 2012 and this has consistently lowered to 0.7 in 2016.

The sharp decline is attributed to the conditions in the operating environment as commodity prices continued to decline over the same period. Royal Dutch Shell became the latest big energy company to file a damage report on the impact of depressed oil prices, saying on Thursday that its adjusted profit fell 56 percent in the fourth quarter of 2015 compared to a year earlier (Reed, 2016) The decline in the industry is in fact greater than that of the company and the industry only performed better than the company in 2013 and 2015. As such, it could be argued that the company’ s ROCE was better than that of the industry over the five years period. Net profit margin This ratio measures the percentage returns that the company gets out of every dollar of its revenue. Just like ROCE, the company’ s net profit margin has consistently declined over the five years period.

The net profit margin for the company was the highest in 2012 when it was 10.81 percent and the lowest in 2015 when it was 0.77 percent. This compares well with the industry performance which was the highest in 2012 at 13.01 percent and the lowest in 2016 when it was 1.52 percent.

However, overall the company performed worse than the industry over the period only performing better than the industry in 2016.

References

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Royal Dutch Shell, 2015, Annual Report 2014, Retrieved on 9th May 2017, from; reports.shell.com/annual-report/2014/consolidated-financial-statements.php Royal Dutch financial statements 2014.

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Reed, S2016, Royal Dutch Shell’s profit down 56% on slumping oil prices, Retrieved on 9th May 2017, from;

https://www.nytimes.com/2016/02/05/business/energy-environment/oil-prices-shell- company-earnings.html?_r=0

Mohr, A2017, How does Accounts receivable turnover ratio affect a company, Retrieved on 9th May 2017, from;

http://smallbusiness.chron.com/accounts-receivable-turnover-ratio-affect-company- 61827.html

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