You extend the research on financial analysis of the performance of your company to include financial and non-financial performance indicators by designing a balanced scorecard covering four (4) perspectives – analyse the four balance score cards and evaluate of the technique used, and come up with a strategy map.Namely:you should write another paragraph about what should the company doaccording toa balanced scorecard sheet and say what you get from the sheet before the conclusion. Also, please rewrite the conclusion with some recommendations.Running head: financial report of Royal Mail PLC
The financial report of Royal Mail PLC
Name:
Institution affiliation:
Date:
Word count (2500 words)
1
Financial report of Royal Mail PLC
2
Executive summary
Royal Mail Group plc is a courier and postal service company whose financial
performances over the past three years have been declining year after year. Firstly, the
company’s profitability declined year after year over the past three years, as indicated
by the decreasing profit margin. Also, its performances over the past three years were
quite poor in comparison to the performances of its closest competitors since the
company’s profitability ratios were less than industry averages. Also, management’s
efficiency in using the company’s assets to generate earnings kept on declining year
after year, as portrayed by the company’s efficiency ratios. Lastly, even though the
company’s debt load decreased year after year over the past three years, the
company’s ability to service its debts and to meet its financial obligations kept on
decreasing year after year over the past three years. However, despite the decline in
the company’s ability to service its debts, it still managed to comfortably meet the
covenant tests stipulated by the bank loan agreement.
Financial report of Royal Mail PLC
3
Introduction
Royal Mail Group plc is a courier and postal service company that was founded in the
United Kingdom, in the year 1516. The subsidiary of the company that operates the
parcel force and Royal mail brands is referred to as the Royal Mail Group Limited. Royal
Mail Group plc is also a global business because of its operations across 44 countries
worldwide. The majority of the countries in which the company has its operations are in
Europe. In particular, Royal Mail Group plc operates in 41 European countries, and
through recent acquisitions, the company has ended up operating in eight states in the
United States and Canada. Through its digitally innovative brand, Royal Mail Group plc
manages to provide its customers with their mail collections as well as delivery services.
Its business operations encompass letters being deposited in a post box before they are
transported to the post office. In other instances, the company usually collects in bulk
letters from businesses. Notable assets, which facilitate day to day operations in the
U.S. that the company owns include the distinctive red pillar boxes that were first
introduced in the year 1852. In the U.K., Letters are usually delivered at least once
every day, with the exception of Sundays as well as during bank holidays (Daunton,
2012).
It is from the above-mentioned operations that the company manages to generate
revenue and incur costs. In this paper, the financial performances of Royal Mail Group
plc will be analyzed to determine whether the company’s financial performances have
been improving in recent years or not. Firstly, the Royal Mail Group plc.’s profitability will
be analyzed. Afterward, the company’s ability to service its debts as well as be able to
meet its financial obligations over the past three years will be analyzed by looking at its
coverage and leverage ratios. Lastly, the efficiency of Royal Mail Group plc.’s
management in using the company’s resources to generate income will be discussed.
Royal Mail PLC.’s profitability
A company’s ability to generate earnings relative to its revenue is of the essence in
enabling a company to not only create value for its shareholders but for the company to
end up achieving its growth objectives as well. Royal Mail PLC.’s profitability, as
indicated by the company’s net profit margin over the past three years, has been
decreasing year after year. The company’s profitability decreased year after year
Financial report of Royal Mail PLC
4
despite the fact that it managed to generate net sales that were increasing every year
as shown in table 1. For this reason, the decrease in the company’s profitability year
after year over the past three years can be attributed to the increase in costs the
company incurred that ended up affecting its bottom line. Some of the costs that
increased significantly over the past three years to the extent that they ended up
affecting the company’s bottom line included infrastructure costs that increased from
868 million euros to 995 million euros between 2017 and 2018 and the distribution and
conveyance costs that increased from 2106 million euros to 2606 million euros over the
same period (Royalmailgroup, 2020).
Also, in comparison to its closest competitors in the postal services and courier industry,
Royal Mail PLC’s profitability was quite low since over the three year period, the
company’s net profit margin was less than the industry average. The low profitability of
the company is an indication of the fact that strategies the company has implemented in
recent years to gain a competitive advantage in the market were not effective in
enabling Royal Mail PLC to become profitable (Finch, 2008).
Table 1: net profit magin
2019
2018
2017
Net Income/Sales or net profit margin
1.65%
2.54%
2.79%
net profit margin industry average
3%
6.05%
5.60%
Secondly, even the EBITDA margin of the company varied year after year over the past
three years, it was still less than the industry average over the three year period as
shown in table 2. The higher industry average for the EBITDA margin as compared with
Royal Mail PLC’s EBITDA margin over the same period is indicative of the fact that
Royal Mail PLC’s operating profit as a percentage of revenue was less than that of its
competitors in the same industry.
Table 2: EBITDA Margins
2019
2018
2017
EBITDA Margins (Royal Mail PLC)
8.18%
5.67%
8.11%
EBITDA Margins (Industry average)
9.26%
11.54% 12.60%
Financial report of Royal Mail PLC
5
Royal Mail PLC’s ability to service its debts as well as be able to meet its financial
obligations
The ability of Royal Mail PLC to service its debt improved over the past two years, as
indicated by the company’s coverage ratios. Firstly, the company’s EBITDA to Interest
Coverage Ratio increased from 6.34 to 10.9 between 2018 and 2019 as shown in table
3. The company’s EBITDA to Interest Coverage Ratio, which was above one over the
past three years, is indicative of the fact that the company was generating enough
earnings to cover its interest payments every year. Additionally, the increase in EBITDA
to Interest Coverage Ratio over the past two years points to the conclusion that the
company was able to increase its EBITDA over the past two years as its interest
payments decreased over the same period. In summary, the high EBITDA to Interest
Coverage Ratio is indicative of the fact that the company has strong cash flows to cover
its debt expenses.
Table 3: EBITDA/ Interest
2019
2018
2017
EBITDA (millions)
865
577
793
Interest(millions)
79
91
120
EBITDA/ Interest
10.94937 6.340659 6.608333
Secondly, over the past three years, Royal Mail PLC’s cash flow to capital expenditures
was greater than 1 (Schonfeld & Associates., 2015). The high cash flow to capital
expenditures indicates that the company has sufficient cash flows to fund its operations.
In other words, Royal Mail PLC has enough free cash flow to fund its operations without
having to take on debt. However, despite its favorable cash flow to capital expenditures
over the past three years, this ratio fluctuated year after year as the company went
through cycles of small and large capital expenditures.
The Bank covenant
The bank covenant or simply the formal debt agreement that Royal Mail PLC stipulates
that the company should maintain a ratio of adjusted net debt to EBITDA below 3:1,
while the EBITDA to interest should be above 3.5:1. The covenant was adhered to by
Financial report of Royal Mail PLC
6
the company over the past three years since its EBITDA to interest was above the
stipulated ratio of 3.5:1. Therefore, the company comfortably met the covenant tests
that had been stipulated by the bank loan agreement over the past three years
(Royalmailgroup, 2020).
Leverage ratios
The relative level of the debt load that Royal Mail PLC has had over the past three
years has been decreasing year after year. Royal Mail PLC’s ability to pay off its debt
improved significantly over the past three years, as indicated by the Debt/EBITDA ratio
as shown in table 4(Finch, 2008). The ratio decreased year after year because of the
decrease in the company’s debt load of the past three years. However, since the ratio
was above one over the past three years, it implies that Royal Mail PLC did not
generate enough earnings to pay its outstanding debt before covering taxes, interest,
depreciation, and amortization expenses over the past three years.
Table 4: Debt/EBITDA ratio
2019
2018
2017
EBITDA(millions)
865
577
793
Debt(millions)
2,782
2,821
3,336
Debt/EBITDA
3.216185 4.889081 4.20681
Royal Mail PLC did not manage to meet the bank covenant for this ratio over the past
three years that had been stipulated to be below 3:1. Failure by the company to
maintain the agreed-upon level of Debt/EBITDA ratio may result in the entire loan the
company owes the bank becoming due without any further notices to clear the loan.
Therefore, Royal Mail PLC is at a very high risk of defaulting on its loans because the
company wouldn’t be able to pay its entire loans if they were to become due
immediately. Also, since the Royal Mail PLC’s debt/ EBITDA ratio is quite high in
comparison to the debt/ EBITDA ratio that is stipulated in the bank covenant, it implies
that Royal Mail PLC is not in a position to take on additional debt because of its high
likelihood to default on loan. Therefore, the company will have to depend on its cash
flows to finance any future operations that require significant capital expenditures.
Financial report of Royal Mail PLC
7
Another indicator of the company’s financial stability to its investors and lenders is the
company’s free cash flow to debt ratio over the past three years. Over the past three
years, Royal Mail PLC has had the free cash flow to debt ratio that has fluctuated year
after year. A notable aspect of the company’s financial health as portrayed by the free
cash flow to debt ratio is the fact that the fraction of the company’s total debt that would
be repaid by its free cash flow generated within one year was quite low over the past
three years. For this reason, there is a need for Royal Mail PLC’s management to come
up with strategies that will enable it to increase its free cash flows for the company’s
credit score to improve. Additionally, the company’s free cash flow to debt ratio points to
the conclusion that it would take Royal Mail PLC a very long time to repay its debt if it
devoted all of its free cash flow to debt repayment (Wiehle, 2006).
Table 5: free cash flow to debt ratio
2019
2018
2017
FCF(millions)
318
756
584
debt(millions)
2,782
2,821
3,336
FCF/Debt
11%
27%
18%
Other than the debt/ EBITDA ratio and the free cash flow to debt ratio, another indicator
of Royal Mail PLC’s ability to meet its financial obligations is the company’s debt to
equity ratio. Over the past three years, Royal Mail PLC had a debt to equity ratio that
was less than one. The low debt to equity ratio is indicative of the fact that over the past
three years, the company has been aggressively financing its debt using debt rather
than shareholders’ equity. Also, the low debt to equity ratio points to the conclusion that
Royal Mail PLC is not able to repay its debt obligations using shareholder’s equity.
Additionally, the company’s debt to equity ratio has been decreasing year after year of
the past three years, even though the company’s debt has been decreasing as well.
Therefore, the low debt to equity ratio that the company has had over the past three
years can be attributed to the significant decrease in the company’s shareholder’s
equity. However, the decrease occurred only between the years 2017 and 2018. In
2019, Royal Mail PLC’s shareholders’ equity increased as compared to the company’s
shareholders’ equity in 2018 (Royalmailgroup, 2018). The increase in the company’s
Financial report of Royal Mail PLC
8
shareholder’s equity can be attributed to the failure by the company to repurchase
ordinary shares from its shareholders.
Royal Mail PLC’s management’s efficiency in using the company’s assets to
create value for its investors
Firstly, the company’s return on invested capital was used to get a sense of how Royal
Mail PLC is using money to generate returns. Over the past three years, the company’s
return on invested capital fluctuated years after year as shown in table 6. The company
managed to generate significant earnings from its capital expenditures in 2017 as
compared to earnings it generated in 2018 and 2019 because its return on invested
capital in 2017 was equal to 1. However, in 2018 and 2019, the company’s return on
invested capital was only slightly greater than half of the capital expenditures the
company incurred during the respective years. The decrease in the company’s return on
invested capital is indicative of the decrease in the effectiveness in which the company’s
management was using its invested capital to generate earnings (Balogh, 2017). Also,
taking into consideration the fact that Royal Mail PLC’s weighted average cost of capital
over the past three years has been above 7%, it implies that over the past two years the
company’s management did not effectively use its invested capital to generate earnings
before interest and taxes because the company’s return on invested capital was less
than the weighted average cost of capital.
Table 6: return on invested capital
2019
2018
2017
EBIT(millions)
175
137
231
CAPEX(millions)
264
219
230
Return on Invested Capital =
0.662879 0.625571 1.004348
EBIT/CAPEX
Secondly, to gain insights into how effective the company’s management is at
converting inventory into cash, the company’s inventory turnover was calculated. A
notable aspect of Royal Mail PLC’s inventory turnover ratio was that it decreased year
after year over the past three years. The decrease of the company’s inventory turnover
ratio points to the conclusion that the number of times the company ended up selling
Financial report of Royal Mail PLC
9
and replacing its inventory over the past three years decreased year after year between
2017 and 2019 (Balogh, 2017). The declining inventory turnover ratio also indicates that
the number of days it takes the company to deliver parcels and letters to its customers
increased year after year between 2017 and 2019. Therefore, it can be concluded that
the company’s operational efficiency has been decreasing year after year over the past
three years. Additionally, Royal Mail PLC’s inventory turnover ratio over the past three
years was less than the industry average inventory turnover ratio. The low inventory
turnover ratio is indicative of the fact that Royal Mail PLC was able to deliver less
number of parcels and letters in comparison to the total number of letters and parcels
that were delivered by its competitors over the same period (Goel, n.d.).
Table 7: inventory turnover
2019
2018
2017
COG(millions)
10,107
9,936
9,286
Inventory(millions)
27
25
23
Inventory turnover =
374.3333
397.44
403.7391
COGS/Inventory
Thirdly, Royal Mail PLC’s effectiveness in collecting money its customers owed the
company decreased significantly in 2019, as indicated by the company’s receivables
turnover ratio. However, overall, Royal Mail PLC effectively used and managed the
credit it extended to its customers, as evidenced by how quickly the company managed
to collect its short-term debts over the three year period. The high receivable turnover
ratios indicate not only that Royal Mail PLC was efficient in collecting what its customers
owed the company but also that the company a high proportion of quality customers
who clear the debt they owe the company in a timely manner. Additionally, the high
receivable turnover ratio is indicative of the fact that Royal Mail PLC operates on a cash
basis.
Lastly, as indicated by Royal Mail PLC’s cash ratio, it is quite evident that the company
does not have enough cash and cash equivalents to cover its current liabilities,
because, over the past three years, the company’s cash ratio was less than one. The
low cash ratio points to the conclusion that Royal Mail PLC is not able to repay its short-
Financial report of Royal Mail PLC
10
term debt obligations with the company’s cash and cash equivalents. For this reason,
lenders will not be willing to loan Royal Mail PLC significant amounts of money because
there is a high likelihood that the company may end up defaulting on the loan. Also,
even though the company’s cash ratio fluctuated year after year of the past three years,
it decreased significantly between 2018 and 2019. The decrease is an indication of the
decline in the company’s capability to generate enough cash and cash equivalents to
cover its current liabilities (Goel, n.d.).
Table 8:AR turnover and Cash ratio
2019
2018
2017
sales (millions)
10,581
10,172
9,776
AR(millions)
1,310
1,160
1,117
AR Turnover = Sales/ AR
8.077099 8.768966
8.752014
Cash(millions)
236
600
299
CL(millions)
1,989
2,082
2,016
Cash ratio = Cash/ CL
0.118653 0.288184
0.148313
Conclusion
In summary, Royal Mail PLC had poor financial performances over the past three years.
The company’s profitability declined year after year over the past three years. Also, the
company’s performances over the past three years were quite poor in comparison to the
performances of its closest competitors. Also, management’s efficiency in using the
company’s assets to generate earnings kept on declining year after year. Lastly, even
though the company’s debt load decreased year after year over the past three years,
the company’s ability to service its debts and to meet its financial obligations kept on
decreasing year after year over the past three years. However, despite the decline in
the company’s ability to service its debts, it still managed to comfortably meet the
covenant tests stipulated by the bank loan agreement.
Financial report of Royal Mail PLC
11
References
Balogh, A. (2017). Financial Ratios for Accounting Research. SSRN Electronic Journal.
doi: 10.2139/ssrn.3053402
Daunton, M. (2012). Royal mail.
Finch, N. (2008). Summary of Financial Ratios. SSRN Electronic Journal. doi:
10.2139/ssrn.1099869
Goel, S. Financial ratios.
Royalmailgroup. (2018). Retrieved 22 February 2020, from
https://www.royalmailgroup.com/media/10169/royal-mail-group-annual-reportand-accounts-2017-18.pdf
Royalmailgroup. (2020). ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19.
Retrieved 22 February 2020, from
https://www.royalmailgroup.com/media/10924/royal_mail_ar19_190918.pdf
Schonfeld & Associates. (2015). Irs corporate financial ratios. [Place of publication not
identified]: Schonfeld & Associates.
Wiehle, U. (2006). 100 IFRS financial ratios. Wiesbaden: Cometis.
Financial report of Royal Mail PLC
12
Appendix
Profitability ratio
2019
2018
2017
Net income (millions)
175
258
273
sales (millions)
10,581
10,172
9,776
Net Income/Sales or net profit margin
1.65%
2.54%
2.79%
EBITDA (millions)
865
577
793
sales (millions)
10,581
10,172
9,776
EBITDA Margins
8.18%
5.67%
8.11%
net profit margin
3%
6.05%
5.60%
EBITDA Margins
9.26%
11.54%
12.60%
EBITDA
865
577
793
Interest
79
91
120
EBITDA/ Interest
10.94937
6.340659
6.608333
CFFO
582
975
814
CAPEX
264
219
230
CFFO/CAPEX
2.204545
4.452055
3.53913
EBITDA
865
577
793
CAPEX
264
219
230
Tax/ Interest
66
46
-62
Principal
0
0
0
Fixed Charge Coverage ratio
535
312
625
EBITDA
865
577
793
Debt
2,782
2,821
3,336
Debt/EBITDA
3.216185
4.889081
4.20681
cash from operations
582
975
814
CAPEX
264
219
230
FCF
318
756
584
Industry averages
Coverage ratio
Leverage Ratios
Financial report of Royal Mail PLC
13
debt
2,782
2,821
3,336
FCF/Debt
11%
27%
18%
equity
4,619
4,436
4,998
debt
2,782
2,821
3,336
Debt/equity
0.602295
0.635933
0.667467
EBIT
175
137
231
CAPEX
264
219
230
Return on Invested Capital =
0.662879
0.625571
1.004348
COG
10,107
9,936
9,286
Inventory
27
25
23
Inventory turnover = COGS/Inventory
374.3333
397.44
403.7391
sales
10,581
10,172
9,776
AR
1,310
1,160
1,117
AR Turnover = Sales/ AR
8.077099
8.768966
8.752014
Cash
236
600
299
CL
1,989
2,082
2,016
Cash ratio = Cash/ CL
0.118653
0.288184
0.148313
Efficiency Ratios
EBIT/CAPEX
Running head: financial report of Royal Mail PLC
The financial report of Royal Mail PLC
Name:
Institution affiliation:
Date:
Word count (2500 words)
1
Financial report of Royal Mail PLC
2
Executive summary
Royal Mail Group plc is a courier and postal service company whose financial
performances over the past three years have been declining year after year. Firstly, the
company’s profitability declined year after year over the past three years, as indicated
by the decreasing profit margin. Also, its performances over the past three years were
quite poor in comparison to the performances of its closest competitors since the
company’s profitability ratios were less than industry averages. Also, management’s
efficiency in using the company’s assets to generate earnings kept on declining year
after year, as portrayed by the company’s efficiency ratios. Lastly, even though the
company’s debt load decreased year after year over the past three years, the
company’s ability to service its debts and to meet its financial obligations kept on
decreasing year after year over the past three years. However, despite the decline in
the company’s ability to service its debts, it still managed to comfortably meet the
covenant tests stipulated by the bank loan agreement.
Financial report of Royal Mail PLC
3
Introduction
Royal Mail Group plc is a courier and postal service company that was founded in the
United Kingdom, in the year 1516. The subsidiary of the company that operates the
parcel force and Royal mail brands is referred to as the Royal Mail Group Limited. Royal
Mail Group plc is also a global business because of its operations across 44 countries
worldwide. The majority of the countries in which the company has its operations are in
Europe. In particular, Royal Mail Group plc operates in 41 European countries, and
through recent acquisitions, the company has ended up operating in eight states in the
United States and Canada. Through its digitally innovative brand, Royal Mail Group plc
manages to provide its customers with their mail collections as well as delivery services.
Its business operations encompass letters being deposited in a post box before they are
transported to the post office. In other instances, the company usually collects in bulk
letters from businesses. Notable assets, which facilitate day to day operations in the
U.S. that the company owns include the distinctive red pillar boxes that were first
introduced in the year 1852. In the U.K., Letters are usually delivered at least once
every day, with the exception of Sundays as well as during bank holidays (Daunton,
2012).
It is from the above-mentioned operations that the company manages to generate
revenue and incur costs. In this paper, the financial performances of Royal Mail Group
plc will be analyzed to determine whether the company’s financial performances have
been improving in recent years or not. Firstly, the Royal Mail Group plc.’s profitability will
be analyzed. Afterward, the company’s ability to service its debts as well as be able to
meet its financial obligations over the past three years will be analyzed by looking at its
coverage and leverage ratios. Lastly, the efficiency of Royal Mail Group plc.’s
management in using the company’s resources to generate income will be discussed.
Royal Mail PLC.’s profitability
A company’s ability to generate earnings relative to its revenue is of the essence in
enabling a company to not only create value for its shareholders but for the company to
end up achieving its growth objectives as well. Royal Mail PLC.’s profitability, as
indicated by the company’s net profit margin over the past three years, has been
decreasing year after year. The company’s profitability decreased year after year
Financial report of Royal Mail PLC
4
despite the fact that it managed to generate net sales that were increasing every year
as shown in table 1. For this reason, the decrease in the company’s profitability year
after year over the past three years can be attributed to the increase in costs the
company incurred that ended up affecting its bottom line. Some of the costs that
increased significantly over the past three years to the extent that they ended up
affecting the company’s bottom line included infrastructure costs that increased from
868 million euros to 995 million euros between 2017 and 2018 and the distribution and
conveyance costs that increased from 2106 million euros to 2606 million euros over the
same period (Royalmailgroup, 2020).
Also, in comparison to its closest competitors in the postal services and courier industry,
Royal Mail PLC’s profitability was quite low since over the three year period, the
company’s net profit margin was less than the industry average. The low profitability of
the company is an indication of the fact that strategies the company has implemented in
recent years to gain a competitive advantage in the market were not effective in
enabling Royal Mail PLC to become profitable (Finch, 2008).
Table 1: net profit magin
2019
2018
2017
Net Income/Sales or net profit margin
1.65%
2.54%
2.79%
net profit margin industry average
3%
6.05%
5.60%
Secondly, even the EBITDA margin of the company varied year after year over the past
three years, it was still less than the industry average over the three year period as
shown in table 2. The higher industry average for the EBITDA margin as compared with
Royal Mail PLC’s EBITDA margin over the same period is indicative of the fact that
Royal Mail PLC’s operating profit as a percentage of revenue was less than that of its
competitors in the same industry.
Table 2: EBITDA Margins
2019
2018
2017
EBITDA Margins (Royal Mail PLC)
8.18%
5.67%
8.11%
EBITDA Margins (Industry average)
9.26%
11.54% 12.60%
Financial report of Royal Mail PLC
5
Royal Mail PLC’s ability to service its debts as well as be able to meet its financial
obligations
The ability of Royal Mail PLC to service its debt improved over the past two years, as
indicated by the company’s coverage ratios. Firstly, the company’s EBITDA to Interest
Coverage Ratio increased from 6.34 to 10.9 between 2018 and 2019 as shown in table
3. The company’s EBITDA to Interest Coverage Ratio, which was above one over the
past three years, is indicative of the fact that the company was generating enough
earnings to cover its interest payments every year. Additionally, the increase in EBITDA
to Interest Coverage Ratio over the past two years points to the conclusion that the
company was able to increase its EBITDA over the past two years as its interest
payments decreased over the same period. In summary, the high EBITDA to Interest
Coverage Ratio is indicative of the fact that the company has strong cash flows to cover
its debt expenses.
Table 3: EBITDA/ Interest
2019
2018
2017
EBITDA (millions)
865
577
793
Interest(millions)
79
91
120
EBITDA/ Interest
10.94937 6.340659 6.608333
Secondly, over the past three years, Royal Mail PLC’s cash flow to capital expenditures
was greater than 1 (Schonfeld & Associates., 2015). The high cash flow to capital
expenditures indicates that the company has sufficient cash flows to fund its operations.
In other words, Royal Mail PLC has enough free cash flow to fund its operations without
having to take on debt. However, despite its favorable cash flow to capital expenditures
over the past three years, this ratio fluctuated year after year as the company went
through cycles of small and large capital expenditures.
The Bank covenant
The bank covenant or simply the formal debt agreement that Royal Mail PLC stipulates
that the company should maintain a ratio of adjusted net debt to EBITDA below 3:1,
while the EBITDA to interest should be above 3.5:1. The covenant was adhered to by
Financial report of Royal Mail PLC
6
the company over the past three years since its EBITDA to interest was above the
stipulated ratio of 3.5:1. Therefore, the company comfortably met the covenant tests
that had been stipulated by the bank loan agreement over the past three years
(Royalmailgroup, 2020).
Leverage ratios
The relative level of the debt load that Royal Mail PLC has had over the past three
years has been decreasing year after year. Royal Mail PLC’s ability to pay off its debt
improved significantly over the past three years, as indicated by the Debt/EBITDA ratio
as shown in table 4(Finch, 2008). The ratio decreased year after year because of the
decrease in the company’s debt load of the past three years. However, since the ratio
was above one over the past three years, it implies that Royal Mail PLC did not
generate enough earnings to pay its outstanding debt before covering taxes, interest,
depreciation, and amortization expenses over the past three years.
Table 4: Debt/EBITDA ratio
2019
2018
2017
EBITDA(millions)
865
577
793
Debt(millions)
2,782
2,821
3,336
Debt/EBITDA
3.216185 4.889081 4.20681
Royal Mail PLC did not manage to meet the bank covenant for this ratio over the past
three years that had been stipulated to be below 3:1. Failure by the company to
maintain the agreed-upon level of Debt/EBITDA ratio may result in the entire loan the
company owes the bank becoming due without any further notices to clear the loan.
Therefore, Royal Mail PLC is at a very high risk of defaulting on its loans because the
company wouldn’t be able to pay its entire loans if they were to become due
immediately. Also, since the Royal Mail PLC’s debt/ EBITDA ratio is quite high in
comparison to the debt/ EBITDA ratio that is stipulated in the bank covenant, it implies
that Royal Mail PLC is not in a position to take on additional debt because of its high
likelihood to default on loan. Therefore, the company will have to depend on its cash
flows to finance any future operations that require significant capital expenditures.
Financial report of Royal Mail PLC
7
Another indicator of the company’s financial stability to its investors and lenders is the
company’s free cash flow to debt ratio over the past three years. Over the past three
years, Royal Mail PLC has had the free cash flow to debt ratio that has fluctuated year
after year. A notable aspect of the company’s financial health as portrayed by the free
cash flow to debt ratio is the fact that the fraction of the company’s total debt that would
be repaid by its free cash flow generated within one year was quite low over the past
three years. For this reason, there is a need for Royal Mail PLC’s management to come
up with strategies that will enable it to increase its free cash flows for the company’s
credit score to improve. Additionally, the company’s free cash flow to debt ratio points to
the conclusion that it would take Royal Mail PLC a very long time to repay its debt if it
devoted all of its free cash flow to debt repayment (Wiehle, 2006).
Table 5: free cash flow to debt ratio
2019
2018
2017
FCF(millions)
318
756
584
debt(millions)
2,782
2,821
3,336
FCF/Debt
11%
27%
18%
Other than the debt/ EBITDA ratio and the free cash flow to debt ratio, another indicator
of Royal Mail PLC’s ability to meet its financial obligations is the company’s debt to
equity ratio. Over the past three years, Royal Mail PLC had a debt to equity ratio that
was less than one. The low debt to equity ratio is indicative of the fact that over the past
three years, the company has been aggressively financing its debt using debt rather
than shareholders’ equity. Also, the low debt to equity ratio points to the conclusion that
Royal Mail PLC is not able to repay its debt obligations using shareholder’s equity.
Additionally, the company’s debt to equity ratio has been decreasing year after year of
the past three years, even though the company’s debt has been decreasing as well.
Therefore, the low debt to equity ratio that the company has had over the past three
years can be attributed to the significant decrease in the company’s shareholder’s
equity. However, the decrease occurred only between the years 2017 and 2018. In
2019, Royal Mail PLC’s shareholders’ equity increased as compared to the company’s
shareholders’ equity in 2018 (Royalmailgroup, 2018). The increase in the company’s
Financial report of Royal Mail PLC
8
shareholder’s equity can be attributed to the failure by the company to repurchase
ordinary shares from its shareholders.
Royal Mail PLC’s management’s efficiency in using the company’s assets to
create value for its investors
Firstly, the company’s return on invested capital was used to get a sense of how Royal
Mail PLC is using money to generate returns. Over the past three years, the company’s
return on invested capital fluctuated years after year as shown in table 6. The company
managed to generate significant earnings from its capital expenditures in 2017 as
compared to earnings it generated in 2018 and 2019 because its return on invested
capital in 2017 was equal to 1. However, in 2018 and 2019, the company’s return on
invested capital was only slightly greater than half of the capital expenditures the
company incurred during the respective years. The decrease in the company’s return on
invested capital is indicative of the decrease in the effectiveness in which the company’s
management was using its invested capital to generate earnings (Balogh, 2017). Also,
taking into consideration the fact that Royal Mail PLC’s weighted average cost of capital
over the past three years has been above 7%, it implies that over the past two years the
company’s management did not effectively use its invested capital to generate earnings
before interest and taxes because the company’s return on invested capital was less
than the weighted average cost of capital.
Table 6: return on invested capital
2019
2018
2017
EBIT(millions)
175
137
231
CAPEX(millions)
264
219
230
Return on Invested Capital =
0.662879 0.625571 1.004348
EBIT/CAPEX
Secondly, to gain insights into how effective the company’s management is at
converting inventory into cash, the company’s inventory turnover was calculated. A
notable aspect of Royal Mail PLC’s inventory turnover ratio was that it decreased year
after year over the past three years. The decrease of the company’s inventory turnover
ratio points to the conclusion that the number of times the company ended up selling
Financial report of Royal Mail PLC
9
and replacing its inventory over the past three years decreased year after year between
2017 and 2019 (Balogh, 2017). The declining inventory turnover ratio also indicates that
the number of days it takes the company to deliver parcels and letters to its customers
increased year after year between 2017 and 2019. Therefore, it can be concluded that
the company’s operational efficiency has been decreasing year after year over the past
three years. Additionally, Royal Mail PLC’s inventory turnover ratio over the past three
years was less than the industry average inventory turnover ratio. The low inventory
turnover ratio is indicative of the fact that Royal Mail PLC was able to deliver less
number of parcels and letters in comparison to the total number of letters and parcels
that were delivered by its competitors over the same period (Goel, n.d.).
Table 7: inventory turnover
2019
2018
2017
COG(millions)
10,107
9,936
9,286
Inventory(millions)
27
25
23
Inventory turnover =
374.3333
397.44
403.7391
COGS/Inventory
Thirdly, Royal Mail PLC’s effectiveness in collecting money its customers owed the
company decreased significantly in 2019, as indicated by the company’s receivables
turnover ratio. However, overall, Royal Mail PLC effectively used and managed the
credit it extended to its customers, as evidenced by how quickly the company managed
to collect its short-term debts over the three year period. The high receivable turnover
ratios indicate not only that Royal Mail PLC was efficient in collecting what its customers
owed the company but also that the company a high proportion of quality customers
who clear the debt they owe the company in a timely manner. Additionally, the high
receivable turnover ratio is indicative of the fact that Royal Mail PLC operates on a cash
basis.
Lastly, as indicated by Royal Mail PLC’s cash ratio, it is quite evident that the company
does not have enough cash and cash equivalents to cover its current liabilities,
because, over the past three years, the company’s cash ratio was less than one. The
low cash ratio points to the conclusion that Royal Mail PLC is not able to repay its short-
Financial report of Royal Mail PLC
10
term debt obligations with the company’s cash and cash equivalents. For this reason,
lenders will not be willing to loan Royal Mail PLC significant amounts of money because
there is a high likelihood that the company may end up defaulting on the loan. Also,
even though the company’s cash ratio fluctuated year after year of the past three years,
it decreased significantly between 2018 and 2019. The decrease is an indication of the
decline in the company’s capability to generate enough cash and cash equivalents to
cover its current liabilities (Goel, n.d.).
Table 8:AR turnover and Cash ratio
2019
2018
2017
sales (millions)
10,581
10,172
9,776
AR(millions)
1,310
1,160
1,117
AR Turnover = Sales/ AR
8.077099 8.768966
8.752014
Cash(millions)
236
600
299
CL(millions)
1,989
2,082
2,016
Cash ratio = Cash/ CL
0.118653 0.288184
0.148313
Conclusion
In summary, Royal Mail PLC had poor financial performances over the past three years.
The company’s profitability declined year after year over the past three years. Also, the
company’s performances over the past three years were quite poor in comparison to the
performances of its closest competitors. Also, management’s efficiency in using the
company’s assets to generate earnings kept on declining year after year. Lastly, even
though the company’s debt load decreased year after year over the past three years,
the company’s ability to service its debts and to meet its financial obligations kept on
decreasing year after year over the past three years. However, despite the decline in
the company’s ability to service its debts, it still managed to comfortably meet the
covenant tests stipulated by the bank loan agreement.
Financial report of Royal Mail PLC
11
References
Balogh, A. (2017). Financial Ratios for Accounting Research. SSRN Electronic Journal.
doi: 10.2139/ssrn.3053402
Daunton, M. (2012). Royal mail.
Finch, N. (2008). Summary of Financial Ratios. SSRN Electronic Journal. doi:
10.2139/ssrn.1099869
Goel, S. Financial ratios.
Royalmailgroup. (2018). Retrieved 22 February 2020, from
https://www.royalmailgroup.com/media/10169/royal-mail-group-annual-reportand-accounts-2017-18.pdf
Royalmailgroup. (2020). ANNUAL REPORT AND FINANCIAL STATEMENTS 2018-19.
Retrieved 22 February 2020, from
https://www.royalmailgroup.com/media/10924/royal_mail_ar19_190918.pdf
Schonfeld & Associates. (2015). Irs corporate financial ratios. [Place of publication not
identified]: Schonfeld & Associates.
Wiehle, U. (2006). 100 IFRS financial ratios. Wiesbaden: Cometis.
Financial report of Royal Mail PLC
12
Appendix
Profitability ratio
2019
2018
2017
Net income (millions)
175
258
273
sales (millions)
10,581
10,172
9,776
Net Income/Sales or net profit margin
1.65%
2.54%
2.79%
EBITDA (millions)
865
577
793
sales (millions)
10,581
10,172
9,776
EBITDA Margins
8.18%
5.67%
8.11%
net profit margin
3%
6.05%
5.60%
EBITDA Margins
9.26%
11.54%
12.60%
EBITDA
865
577
793
Interest
79
91
120
EBITDA/ Interest
10.94937
6.340659
6.608333
CFFO
582
975
814
CAPEX
264
219
230
CFFO/CAPEX
2.204545
4.452055
3.53913
EBITDA
865
577
793
CAPEX
264
219
230
Tax/ Interest
66
46
-62
Principal
0
0
0
Fixed Charge Coverage ratio
535
312
625
EBITDA
865
577
793
Debt
2,782
2,821
3,336
Debt/EBITDA
3.216185
4.889081
4.20681
cash from operations
582
975
814
CAPEX
264
219
230
FCF
318
756
584
Industry averages
Coverage ratio
Leverage Ratios
Financial report of Royal Mail PLC
13
debt
2,782
2,821
3,336
FCF/Debt
11%
27%
18%
equity
4,619
4,436
4,998
debt
2,782
2,821
3,336
Debt/equity
0.602295
0.635933
0.667467
EBIT
175
137
231
CAPEX
264
219
230
Return on Invested Capital =
0.662879
0.625571
1.004348
COG
10,107
9,936
9,286
Inventory
27
25
23
Inventory turnover = COGS/Inventory
374.3333
397.44
403.7391
sales
10,581
10,172
9,776
AR
1,310
1,160
1,117
AR Turnover = Sales/ AR
8.077099
8.768966
8.752014
Cash
236
600
299
CL
1,989
2,082
2,016
Cash ratio = Cash/ CL
0.118653
0.288184
0.148313
Efficiency Ratios
EBIT/CAPEX
Balance sheet score
Balanced Scorecard
Long-Term Short-Term
Vision
Financial
Growth
Targets
Increase
Customers
# of
Customers
% increase
Increase
Average
Sale
% increase
% increase
Frequency
Frequency of
Sale
New
New
Revenue
Product
Order Size
Increase
Balanced
Scorecard
Measures
% increase
Revenue
Increase
Customer
Measures
Quality
Customer
Customer
Satisfaction
% increase
Satisfaction
Increase
Referrals
Referral Rate
% increase
Increase
Frequency
Frequency
% increase
Reduce
Cycle Time
Cycle Time
% reduction
From the above measures, it indicates the business is working towards
Reduce
Parts per
% reduction
Million
a sustainable business operation, and this
shows that there
is a high level of
Defects
utilization.
Reduce
Cost of
% reduction
Waste &
Costs
From the financial measures, it requires that the business should
Rework
manage its operations
towards&meeting its sustainability and increased level of
Learning
Increase
Training
% increase
Core
Skills
Growth
growth as a business.
Increase
Systems
Availability
System
Un-availabilit
y
% reduction
From the customer relation, it requires that the business should work towards
having a viable customer relation to have better utilization of its assets and
manage the customers. Customer relation is key to meeting business
operations (Ardalan, 2017).
Quality is also an important aspect of the balance score towards
meeting the objectives of the business. To integrate the vision and the mission
of the company, there is a need that, as a business, working towards quality is
an important aspect (Banker, Chang, Janakiraman, & Konstans, 2004). To
increase the volume of sales and its viability in adding to the business
revenue, it is a need that as business management, revenue should be the key
to meeting its business sustainability. The quality affects the sales as well as
the prices for the goods and services. It affects the financial position and the
ranking of the business in its industry. Quality should also reduce the level of
wastage, and the business should work towards operating at a point where it
will always breakeven as it meets its operational needs.
From the learning and growth perspective, the rationality of the
business is to ensure that all its human resources have the right skills and
techniques which are deemed important for the business operations. In this
case, as a business, training is an important aspect of growth. Therefore,
growing the skills of an employee is one of the important and rational factors
towards investment in human capital.
Conclusion
As the management of Sainsbury business, considering financial and
non-financial aspects is important in diction making and, therefore, good for
the business. It should work towards increasing the management philosophy,
and in making decisions, this aspect needs to be considered for a viable
investment decision. The long term prospect for the business should be
viewed for the rationale of the investors.

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