In order to effectively analyse the data shown in the appendix, it is essential to identify and understand a few aspects. The characteristics of the industry, in this case the aerospace and defence sector, are important (Masson, 2018). Also, the different strategies that the firm implements to differentiate itself from its competitors (Masson, 2018). Firms in the same sector tend to have similar capital structures and fixed assets investments. So, their ratios should be very much the same (Kenton, 2019). If there are major discrepancies in the ratio results, it could mean that a company is either underperforming compared to its competition, or it is generating greater profit than them (Kenton, 2019).
Profitability analysis for Rolls Royce Group and BAE System plc :
In the year 2017, Rolls Royce group made a profit of 2.4% based on the ROCE ratio, which is a very low profit margin (Corporate Finance Institute, 2019). Especially for an expanding industry (Lineberger, 2019). The following year, the profit margin plummeted to -6.83%. On the other hand, BAE systems seems to be making considerably better. With 9.2% return on capital employed in 2017, reaching 10.4% in 2018. This is a positive sign that the profit margin of the company is improving , with them making average profit (Corporate Finance Institute, 2019).
Moreover, their gross profit margin, has improved slightly. In 2018, it was estimated to be 8.71%. Nevertheless, it is still too low for it to be considered average. Furthermore, the Rolls Royce group gross profit margin decreased from 16.42% in 2017, to 7.62% a year later. Which was to be expected since the cost of sales increased by 2 millions. This could mean that the company is going through financial distress which can be attributed to many reasons. One of which is how efficient a company is with the use of its assets. For the Rolls Royce group their asset turnover ratio is less than 1 for both years. Meaning, that the company is not generating enough profit from its asset. It could be due to depreciation. However, a company of this size and in this particular industry with asset turnover less than 1 is a big concern (Merritt, 2019). Whereas BAE system generated asset turnover above 1 for the last two years. For the year 2017 it was 1.12, and even though it decreased to 1.09, it is still a higher figure than Rolls Royce.
Bibliography:
Kenton, W. (2019). How Ratio Analysis Works. [online] Investopedia. Available at: https://www.investopedia.com/terms/r/ratioanalysis.asp [Accessed 5 Dec. 2019].
Lineberger, R. (2019). 2019 global aerospace and defense industry outlook. [online] Www2.deloitte.com. Available at: https://www2.deloitte.com/content/dam/Deloitte/us/Documents/manufacturing/us-mfg-2019-global-a-and-d-sector-outlook.pdf [Accessed 7 Dec. 2019].
Masson, D. (2018). 6 Steps to an Effective Financial Statement Analysis. [online] Afponline.org. Available at: https://www.afponline.org/ideas-inspiration/topics/articles/Details/6-steps-to-an-effective-financial-statement-analysis [Accessed 5 Dec. 2019].
Merritt, C. (2019). What Does the Company’s Asset Turnover Ratio Mean?. [online] Smallbusiness.chron.com. Available at: https://smallbusiness.chron.com/companys-asset-turnover-ratio-mean-60811.html [Accessed 6 Dec. 2019].
Corporate Finance Institute. (2019). Profit Margin – Guide, Examples, How to Calculate Profit Margins. [online] Available at: https://corporatefinanceinstitute.com/resources/knowledge/accounting/profit-margin/ [Accessed 4 Dec. 2019].
