Ethics: Changes in Estimate Mike Crane is an audit senior of a large public accounting firm who has just been assigned to the Frost Corporation’s annual audit engagement. Frost has….
Investor Ratios; Dividend per share
Gearing/ Financial Risk ratios
Gearing ratios look at debt and equity proportions in the company. Financial leverage or capital structure looks at the mix and utilization of equity and debt capital. Royal Dutch Shell adapt the traditional capital structure approach. This particular approach lends faith to an optimal capital structure. ‘This approach very clearly implies that the cost of capital decreases within the reasonable limit of debt and then increases with average’ (Chand, 2015).
Shell keeps their gearing ratio under 50% which helps them to reduce capital costs. Their highest gearing appeared in 2010 with 29.5%. In 2010 the Shell may have needed to use more debt financing due to high investments in explorations, plants etc. Industry average highest gearing usage was in 2014 with 27.13%.
The company main objective should be shareholder wealth maximisation. They then should keep the costs down to increase the revenues, which all 5 companies are doing by keeping gearing under the 50% mark.
Shell have a very high coverage for cash interest cover compared to industries average. This could mean that they have a high number of cash unused sitting in the bank, which could be reinvested back into the company or payed out as a dividends. Royal Dutch Shell and Exxon Mobil should consider their opportunity costs related to this cash. The rest of industries taken into account for this average have a reasonable amount of interest cover, using the available money for better use.
Current Ratio measures the ability to pay its debt over the 12 month period. This ratio shows how much protection they have over each $1 borrowed.
The Current Ratio shows that the debt level of Royal Dutch Shell is balanced and desirable for investors. The above graph shows that Shell PLC has between1.1:1 and 1.2:1 ratios for debt cover. This protection stays steady over the 5 year period, even though the company’s revenue changes over these years, the debt is protected. However, as these ratios are based on the balance sheet in the financial statement this data can be manipulated for the company’s personal gain.
Operating Cash Flow to Current Liabilities
‘Current liabilities are paid with cash so this ratio allows us to tell if a business is generating enough cash from operations to meet these liabilities’ (accofina.com, 2013). If the operating cash flow to current liabilities ratio is under 1 it means that they do not have generated cash to pay off short term liabilities. It is interesting that both Shell and the industry average do not have enough cash over this 5 year period, especially as all these 5 oil and gas companies are considered as leaders in their field of business. This cash could have been re-invested back into the company or have been tied up somewhere else. The above graph shows that industries and Royal Dutch Shells cash flows are improving gradually over the years and becoming healthier.
Dividend per share is the total dividend paid for the share over the year, it can be made as one or two payments. The above graph shows that dividends for Royal Dutch Shells shareholders have been growing slowly but with a steady pace. Royal Dutch Shells dividend policy is to; ‘grow the US dollar dividend in line with our view of the underlying earnings and cash flow of Shell’ (Shell.com, 2016).
Even though Shells revenue has decreased in 2012, 2013 and 2014 their dividend per share has had a steady increase to keep their shareholders pleased. Stable dividend policy is favourable in the shareholder view as they know their dividend is going to increase every year.
Industry average also has a steady increase in dividend payments over these 5 years. Steady growth in dividend payments send a positive signal to their existing and potential shareholders.
In 2011 Shell had a massive increase in revenue but they decided not to increase dividends and kept them the same as in 2011. ‘In 2010, the company spent some 1.02 billion U.S. dollars on R&D’ (statista.com, 2016).
Dividend Cover shows how many times the company can cover dividend payments. Dividend cover of less than 1.5 is viewed as a threat to shareholders as this may impact their dividend payments significantly. More than 2 times is viewed as strong.
Industry average is steadily above 2 in all 5 years consecutively, which is a good signal for potential investors. Royal Dutch Shell have had ups and downs on their dividend coverage but still they kept a steady increase on their dividend payments each year. Industry average
also has a steady and very strong dividend cover, even though with each year the coverage declines. ‘Investors use dividend cover ratio to gauge the level of risk associated with the receipt of dividends on their investment’ (accounting-simplified.com, 2013). As the Royal Dutch Shell’s dividend cover is under 1.50 for 2013 and 2014 this may suggest that the company will not be able to cover dividend payment in the case of profitability falling in the future and this may affect share valuation.