Rolls-Royce Company’s Financial and Risk Management Coursework

Introduction

Today, we could observe a significant increase in the power of business. The world belongs to global corporations that acquire multi-billion incomes and introduce new conditions for the development of different sectors of the market. In such a way, competition becomes the most important distinctive feature of the modern world. To preserve their leading positions and remain influential, companies have to apply different approaches and tools to create a competitive advantage and overcome their closest rivals. For this reason, financial strategic management acquires the top priority nowadays as one of the most potent tools to analyze the current state of the market and create the most efficient financial strategy that will guarantee the further rise of the business¹. At the same time, a particular instability of the market introduces the necessity of its in-depth analysis to remain informed and act appropriately.

Background

Nevertheless, the importance of the sphere of business and its significant impact on the society resulted in the appearance of specific agencies that investigate the functioning of particular corporations and create forecasts related to their further growth or financial analysis. For instance, the FTSE100 list is one of the most potent tools that provides agents with an opportunity to acquire data about the most successful companies and peculiarities of their rise². Thus, Rolls-Royce HLG is one of the companies that could be found in the list which means that it preserves a significant competitive advantage and adheres to efficient development and financial strategies. For this reason, the in-depth investigation of the company regarding the financial management approach could help to understand the peculiarities of the market and the way companies organize their functioning.

Company

At the moment, Rolls-Royce HLG (holdings) is a multinational public limited non-financial company that was incorporated in 2011 and that owns the Rolls-Royce trading mark (it was founded in 1904). The holding is focused on designing, manufacturing, and distribution of power systems mainly for aviation but also for some industries where these products could be used³. The company is the worlds second-largest manufacturer of aircraft engines which proves the brands success and opportunities for the further rise⁴. Moreover, the company is a large defense contractor and provides the military sector with power systems and engines⁵. In such a way, the emergence of Rolls-Royce Hlg in 2011 could be considered an efficient solution to guarantee the further evolution of the brand and it’s becoming a leader in the particular sphere.

Current Vision

The firm also has its unique vision which is the constant and stable development of all aspects of its functioning which will result in significant changes in management and processes. Rolls-Royce proclaims the further rise in its products sales and increases large aero-engine production output the prior tasks⁶. Additionally, the company is interested in the attraction of new shareholders which is reflected in its vision. At the moment, it guarantees an appropriate payment to all individuals who own shares and subjects to the short-term cash needs⁷. This shows the companys confidence in its future success and stable evolution. In other words, its statement reflects the financial strategy and top priorities that should be given attention to manage the funds efficiently and guarantee their positive balance.

Main Indicators

The companys main financial indicators also prove its stable position in the market. In 2016, its total revenue comprised £14,955 million⁸. Moreover, its gross profit is £3,248 million⁹. By the companys annual report, the corporations underlying revenue is £13,783 million¹⁰. The bigger part of the income (60%) comes from the engines sales, and the remaining part comes from services and other power systems¹¹. The firm reports its assets to be £1,864 million and its gross profit is £2,626 million¹². In general, these financial indicators prove the companys outstanding functioning and the enhanced efficiency regarding strategic financial management and performance. Moreover, the annual report states that the company expects a further increase in its main financial showings and income. By the end of 2020, Rolls-Royce plans to become a leader in the sphere and guarantee its further stable evolution¹³.

Another significant part of the companys strategic financial management is its approach to shareholders and shares. Therefore, as it has already been stated, the company is focused on a specific value creation which implies long-term cash-flow returns for shareholders generation¹⁴. For this reason, businessmen and other potential investors become interested in cooperating with the company to acquire a stable source of income. An average price per share is about £840,20, and considering the successful development of the company and numerous tendencies for its further rise, specialists predict the further increase in the price of shares¹⁵. In such a way, investing in Rolls-Royce Hlg should be considered an efficient placement of funds with a perspective for their rise

If to speak about Rolls-Royces capital structure as part of its financial strategy, it is critical to admit the positive correlation between debt and equity¹⁶. The constantly stable demand for its products has a positive impact on the companys capital structure. Moreover, the factor is impacted by the companys ability to enhance its equity and attain even bigger financial success in a new financial year¹⁷. Therefore, the majority of the companys financial operations are funded through various shareholders funds, banks borrowings, and notes¹⁸. In such a way, the capital structure of the holding reflects the current financial balance and the companys health. At the same time, the Board of Directors has an opportunity to manage the capital to sponsor particular projects or create the basis for the brands further expansion¹⁹.

The company also possesses advanced financial long-term liabilities. Being the corporation focused on the creation of value and enhanced cooperation with shareowners, Rolls-Royce can significantly improve its financial state and guarantee payments to all shareholders. The long-term debt of the organization also demonstrates positive dynamics as it becomes dependant on its constant rise in incomes²⁰. In such a way, the firms long-term liabilities prove the efficiency of the current approach to strategic financial management and could serve as the guarantee that competitive advantage will be preserved and the company will be able to evolve. Additionally, using Great Britain pounds as the central currency for the bigger part of its financial operations, Rolls-Royce can avoid problems connected with the instability of the U.S. dollar and the tendency towards oscillations in its rate²¹. In such a way, the companys stability is also stipulated by an appropriate choice of currency and its use.

Financial Risk Management

Advantages

Altogether, the above-mentioned elements are fundamental aspects of any companys strategic financial management as they create the basis for the companys evolution or collapse. Thus, analyzing these aspects, one could also understand the central peculiarities of Rolls-Royce and its strategic financial management. Therefore, regarding this perspective, several strengths and weaknesses of its financial risk management could be outlined. First of all, the companys ability to create long-term relations with its shareholders and guarantee timely payments should be considered the first advantage of its financial risk management strategy²². Promoting long-term money relations, the company introduces a pattern that helps to minimize the negative impact of alterations in the market, its trends, or some other crises that might pose a threat to the brands functioning. In other words, the corporations financial stability is preconditioned by its emphasis on the attraction of new investors and their participation in the most significant projects that will bring stable incomes.

Another advantage of the companys financial risk management is the use of Great Britain pounds as the central currency for their operations. As it has already been stated, its stability contributes to the improved brands functioning at the international level. It becomes less dependent on the U.S. dollar and acquires an opportunity to plan the majority of its operations regardless of the oscillations in its rate. The given factor could be considered another important advantage of the current financial risk policy accepted by Rolls-Royce.

Finally, another strength of the companys financial risk management is its use of transparent schemes to finance all its projects and distribute funds between departments. As it has already been mentioned, the Board of Directors has the authority to manage funds and money acquired from shareholders and financial agents or organizations with the primary aim to guarantee the further development of the company and its stable position at the market. However, the transparency of their actions should be preserved. In such a way, all movements of the capital are noted and demonstrated in detailed reports. The given approach helps to avoid some unfair practices and enhance the efficiency of the existing financial risk management.

Disadvantages

At the same time, there are also several weaknesses in the approach used by the company to guarantee its financial stability. First, Rolls Royce becomes vulnerable to the emergence of new potential rivals who use similar methods to the creation of competitive advantage and distribution of funds²³. Additionally, the brand might suffer from the poor position of Great Britain pound at the international level. Traditionally, it is considered one of the powerful currencies that save their leading roles and could be used in deals. However, the slightest alterations in its exchange rates could become a significant challenge to the company. Finally, it also depends on the Boards decisions as they introduce the course and establish priorities. If a wrong decision is accepted, the company might demonstrate the significant deterioration of its functioning.

Altogether, the analysis of Rolls-Royces financial indicators regarding the financial risk management shows that the company explores an efficient strategy that helps to minimize risks of negative outcomes and create a particular competitive advantage²⁴. Its financial risk management also demonstrates the high efficiency and several strengths like the ability to guarantee the companys stable functioning in terms of unstable market or currency oscillations. Some drawbacks come with the accepted approach; however, they are not critical today.

Selected Market

Nevertheless, applying the idea of strategic financial management and using the fundamental financial data provided above, we could now identify Rolls-Royce’s performance in terms of a selected market and its closest rivals which are Pratt & Whitney, GE Aviation, and Safran. First, all companies have a similar approach to business. They manufacture aircraft engines and power systems for the aviation industry. In such a way, the firms should be considered the closes rivals. However, at the moment, due to the efficient approach to management, Rolls-Royce manages to preserve the leading position. At the moment, it is the world’s second-largest manufacturer of engines which means that GE Aviation, Pratt & Whitney, and Safran are behind.

Comparing their incomes, Rolls Royce is also the leader. As stated above, in 2016, its total revenue comprised £14,955 million ($21,094 million) while Safran earned $19,778 million²⁵. If to compare with other companies, their revenues and other financial showings are also lower²⁶. At the same time, continuing comparison of Rolls-Royce and other rivals, it is critical to admit the companys high speed of development and growth. Other corporations are not so stable in their rise. It could be considered a result of successful financial management and risk assessment. Finally, identifying the company’s performance in terms of the selected market, its focus on quality and long-term cooperation should be admitted. If to compare with its closest rivals, Rolls Royce is more attractive for potential partners because of its positive image and transparency in financial operations. In such a way, the strategic financial management proves an outstanding position of the brand in the particular market segment and numerous perspectives for its further rise.

Three Main Indicators

Finally, using the central data about the company provided in previous sections, we can make predictions regarding the three key performance indicators that will remain important during the following several years. First, it is the annual revenue. It is one of the most important aspects of the functioning of any company as it describes perspectives for the further growths and creation of new projects. In such a way, if Rolls-Royce has high incomes, it can preserve its leading status and manufacture high-quality products. Another important indicator is the price per share²⁷. Being focused on the cultivation of long-term relations with its shareholders and investor and using their money as the main funds to finance their projects, the company is interested in the further rise in the price of its shares as it will attract new agents and make the position of the company more stable. The last important indicator is the exchange rate of the British pound which is the main currency used by the company in all its operations. At the moment, it provides the brand with appropriate stability and ground for the further rise. In such a way, these are the main three factors that will affect the functioning of the company during the next several years and stipulate its results.

Conclusion

In conclusion, Rolls-Royce is one of the most powerful manufacturers of aircraft engines and power systems in the world. It benefits from efficient financial and risk management and demonstrates the high speed of its growth. There are also numerous rivals in the sphere that could pose a particular threat to the existence of the company and its leading positions; however, it still manages to introduce efficient strategic decisions and create the basis for the further rise.

Reference List

Blocher, E. et al., Cost Management: A Strategic Emphasis, New York, NY, McGraw-Hill Education, 2015.

Bryce, H., Financial and Strategic Management for Nonprofit Organizations, Boston, MA, De|G Press, 2016.

Chandra, P., Strategic Financial Management: Managing for Value Creation, New Delhi, India, McGraw Hill Education, 2014.

Corporate Governance, Rolls-Royce.com, Web.

Directors Report, Rolls-Royce.com, Web.

GE Aviation, Digital Industrial: GE 2016 Annual Report, ge.com, Web.

Payments to Shareholders, Rolls-Royce.com, Web.

Rolls-Royce Holdings plc., Annual Report 2016, Rolls-Royce.com, Web.

Rolls-Royce Holdings PLC ORD SHS 20P, London Stock Exchange, Web.

Rolls-Royce Holdings Plc’s Underlying Revenue in FY 2016, by Segment, Statista, Web.

Share Price, Rolls-Royce.com, Web.

Shil, N., and Das, B., Financial Management: A Strategic Perspective, New York, NY, SAGE Publications Pvt. Ltd, 2017.

Sofat, R., and Hiro, P., Strategic Financial Management, Delhi, India, PHI Learning, 2015.

United Technologies, 2016 Annual Report, utc.com, Web.

Weaver, S., and Weston, F., Strategic Financial Management: Application of Corporate Finance (with Thomson ONE – Business School Edition 6-Month Printed Access Card), New York, NY, Cengage Learning, 2007.

Footnotes

1. P. Chandra, Strategic Financial Management: Managing for Value Creation, New Delhi, India, McGraw Hill Education, 2014, 76.
2. E. Blocher et al., Cost Management: A Strategic Emphasis, New York, NY, McGraw-Hill Education, 2015, p. 23
3. Rolls-Royce Holdings plc., Annual Report 2016, Rolls-Royce.com, Web.
4. Ibid., p. 3
5. Ibid., p. 11
6. Ibid., p.4.
7. Payments to Shareholders, Rolls-Royce.com, Web.
8. Rolls-Royce Holdings PLC ORD SHS 20P, London Stock Exchange, Web.
9. Rolls-Royce Holdings Plc’s Underlying Revenue in FY 2016, by Segment, Statista, Web.
10. Rolls-Royce Holdings plc., Annual Report 2016, Rolls-Royce.com, Web.
11. Ibid., p. 21.
12. Ibid., p. 22
13. Ibid., p. 27
14. Ibid., p. 17
15. Share Price, Rolls-Royce.com, Web.
16. Ibid., p. 22
17. Ibid., p. 23
18. Rolls-Royce Holdings plc., Annual Report 2016, Rolls-Royce.com, Web.
19. Corporate Governance, Rolls-Royce.com, Web.
20. Payments to Shareholders, Rolls-Royce.com, Web.
21. N. Shil and B. Das, Financial Management: A Strategic Perspective, New York, NY, SAGE Publications Pvt. Ltd, 2017, p. 98.
22. R. Sofat and P. Hiro, Strategic Financial Management, Delhi, India, PHI Learning, 2015, p. 43.
23. Directors Report, Rolls-Royce.com, Web.
24. S. Weaver and F. Weston, Strategic Financial Management: Application of Corporate Finance (with Thomson ONE – Business School Edition 6-Month Printed Access Card), New York, NY, Cengage Learning, 2007, p. 87.
25. United Technologies, 2016 Annual Report, utc.com, Web.
26. GE Aviation, Digital Industrial: GE 2016 Annual Report, ge.com, Web.
27. H Bryce, Financial and Strategic Management for Nonprofit Organizations, Boston, MA, De|G Press, 2016, 76.