Financial ratios and cash management practices at Royal Dutch Shell

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Company chosen: Royal Dutch Shell.

How are Financial Ratios Used?

Many analytical tools, techniques and concepts have been developed by both analysts and investors to compare companies' strengths and weaknesses over the years. Fundamental analysis is based on these tools, techniques and concepts (Lan, n.d.).

Ratio analysis was developed as a tool for the performance of quantitative analysis on the numerical figures that occurred in financial statements. Ratios assist in the connection of the three financial statements and provide numbers that can be used to compare different organizations, industries and even sectors. One of the most broadly applied techniques of fundamental analysis is ratio analysis (Lan, n.d.).

The following ratios are used by companies to display several important performance indicators to investors and also provide data from past years for the purpose of comparison. They are also used internally to see the company's performance against competitors (Lan, n.d.).

1. The company's efficient utilization of assets is measured using activity ratios. They give investors an idea of the firm's general operational performance.

2. The efficient usage of the firm with the aim of generating revenue is measured using asset turnover.

3. Next to profitability ratios, liquidity ratios are probably some of the ratios that are very widely used. They are particularly very significant to creditors. They are used to gauge the capability of firms to fulfill those obligations that are short-term. In this regard, the quick ratio and the current ratio are the most important.

4. For measuring the ability of the company to fulfill those obligations that are long-term, solvency ratios are used. They are analyzed to show the capital structure of the company as well as the firm's financial leverage (Lan, n.d.).

What capital budgeting techniques are used for investment analyses?

The process of determination and evaluation of large potential investments or expenses by a business is known as capital budgeting. These investments and expenses include projects like pursuing a long-term investment venture or the construction of a new plant (Investopedia, 2016).

The company also uses the Internal rate of return, Profitability index, Net present value and Payback period but it does not rely on them alone. If all of them are properly used, decisions of capital budgeting will be more accurate.

Does the corporation target specific levels of debt and equity?

For a company that wants to utilize its value to the maximum, the best debt-to-equity ratio is a capital structure that is optimal. This is a structure that lowers the company's cost of capital to a minimum and regulates the range of debt-to-equity to the ideal. Theoretically, as a result of tax deductibility, debt financing provides the minimum cost of capital. However, the firm's risk increases with increase in debt and therefore it is not the optimal structure at most times (Investopedia, 2016).

The company's debt-to-equity mix was as follows for the year 2015:

51.75% debt

48.25% equity