Rolls Royce Case

We will consider two non-financial companies and their capital structure. These two companies are Rolls Royce Holdings and InterContinental Group which are operating in manufacturing and hotels segments respectively.

We should begin with calculating debt-to-equity ratios for these companies. Figures are 0,5 for the last year for Rolls Royce Holdings and 3 for InterContinental Group.

This ratio remained rather stable for Rolls Royce Holdings for last 5 years. It experienced insignificant increase and reached its maximum in December 2008 (0,6), probably, because of financial crisis. After that enhance, the situation began to normalize slowly by declining to the level of 0,226 in December 2012. The latest figure is almost 2 times bigger than the previous mark (0.5). The average value of the ratio over the past 5 years is around 0.39, which means that the company uses about 28% of debt and 72% of equity.

Rolls Royce is very old company from premium segment which has a huge history and uses conservative approach to everything including finance. It is very stable firm with many years of successful performance and a lot of retained earnings due to it. Conservative style managers prefers to use less debt in capital structure. According to its sector (airplane engines) company requires huge investments for their ongoing projects but it seems that they use retained earnings to finance it not debt. Company acts in according to Pecking Order Theory and uses internal money to finance projects with positive NPV’s.

The situation with InterContinental Group is the opposite. During last 5 years figures changed constantly and the biggest value of the ratio was achieved in December 2009 when it was around 10 (90% of debt in capital structure). Company has aggressive management style and have three quarters of debt in its capital structure. Due to the properties of sector they open branches (hotels) all around the world and probably it