8251 - Financial Analysis Assignment Sample

Introduction - Financial Analysis

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At present, the United Kingdom's Airline Industry is one of the biggest networks in the world. The turnover of the airline industry in the UK is in billion and its contribution to the gross domestic product is also remarkable. (Doži?, S. (2019) a Million jobs in the UK are directly or indirectly supported by this industry.

The above facts highlighted the importance of the Airline Industry in the growth and prosperity of the country. It is a very important segment for any country, and if the industry is flourishing, it provides a lot of value to the country, since it means financial prosperity of the country, and also highlights the fact that the people living in the country have a good standard of living.

Financial analysis is done to compare the monetary performance of the company by analyzing various measures of the company. It is important to analyze various aspects for commenting on the financial performance of the company. The factors to be considered are sales, profit, current assets, etc.

In this report, we will be focusing on the financial performance of Ryanairs and will be comparing its data from another company – Easy Jet. For assessing the true picture of any company, there must be both – internal as well as external comparisons made. Internal comparison is done when performance is measured against own past performance, and external comparison is made when the said comparison is made with other companies of the industry.

Analysis of Financial Information

Financial information can be assessed by measuring the performance of a company using various parameters. Following ratios are calculated in the report to compare the data:

1. Profitability Ratios
2. Liquidity Ratios
3. Efficiency Ratios
4. Gearing Ratios
5. Investor Ratios
6. ASM and RPM

For analysis of these ratios, it is important to identify the key figures needed for these ratios (Kim, J., & Im, C. (2017)). These figures can be taken from the annual statement of the company. The main figures are mentioned herewith:

Financial Information of Easy Jet PLC

Particular	2020	2019
			Sales Revenue From Operations	3,009.00	6,385.00
Operating Profit/ (Loss)	(899.00)	466.00
Current Assets	2,563.00	2,119.00
Quick Assets	2,563.00	2,119.00
Current Liability	3,826.00	2,668.00
Equity Shareholder fund	1,899.00	2,985.00
Debts Fund	2,748.00	2,510.00
Average Debtors	247.50	389
Average Creditor	1,146.00	1,036.50
Operating Cost	2,561.00	3,999.00
EBIT	(358.00)	970.00
Interest Expenses	491.00	60.00
Earnings Available for Shareholders	(1,079.00)	349.00
Total Assets	8,473.00	8,163.00
Number of Shares	407.00	393.00
Fixed Assets	5,053.00	5,163.00
Total Liability	6,574.00	5,178.00

Financial Information of Ryanairs for 2020

Particular	2020	2019
			Sales Revenue From Operations	8,495.00	7,697.00
Operating Profit/ (Loss)	1,127.40	1,016.80
Current Assets	4,493.90	3,804.00
Quick Assets	4,490.60	3,801.10
Current Liability	5,508.20	4,096.60
Equity Shareholder fund	4,914.50	5,214.90
Debts Fund	4,324.50	3,939.20
Average Debtors	63.50	58.55
Average Creditor	971.00	411.40
Operating Cost	7,367.00	6,681.00
EBIT	1,128.00	1,016.00
Interest Expenses	480.10	59.10
Earnings Available for Shareholders	648.70	885.00
Total Assets	14,747.20	13,250.70
Number of Shares	1,120.00	1,155.00
Fixed Assets	9,438.00	9,029.60
Total Liability	9,832.70	8,035.80

Results and Interpretation

Financial Information of Easy Jet PLC

Particular	Formula	Result	Result
Profitability Ratio
Margin Profit on sales	Operating Profit / Sales	-29.88%	7.30%
Return on capital employed	EBIT / Capital Employed	-18.85%	32.50%
Liquidity Ratio
Quick ratio	Quick Assets / Current Liability	1.49	1.26
Current Ratio	Current Ratio / Current Liability	1.49	1.26
Efficiency Ratio
Debtor Turnover Period	(Average debtors ÷ Sales) *365	35	36
Gearing Ratio
Gearing Ratio	(Total liability - current liability)/ Capital Employed	1.45	0.84
Interest cover ratio	EBIT / Interest Charges	(0.73)	16.17
Investor Ratio
Earnings Per Share	Earning / Number of share	-265.11%	88.80%

Financial Information of Ryanairs for 2020

Particular	Formula	2020	2019
Profitability Ratio
Margin Profit on sales	Operating Profit / Sales	13.27%	13.21%
Return on capital employed	EBIT / Capital Employed	22.95%	19.48%
Liquidity Ratio
Quick ratio	Quick Assets / Current Liability	1.23	1.08
Current Ratio	Current Ratio / Current Liability	1.23	1.08
Efficiency Ratio
Debtor Turnover Period	(Average debtors ÷ Sales) *365	3	3
Gearing Ratio
Gearing Ratio	(Total liability - current liability)/ Capital Employed	0.88	0.76
Interest cover ratio	EBIT / Interest Charges	2.35	17.19
Investor Ratio
Earnings Per Share	Earnings Available for Shareholders / Number of share	0.58	0.77

Profitability Ratios

These ratios are calculated to assess the profit position of the firm.

The margin of profit on sales is used to identify what portion of sales for the company has turned out to be its operating profit. The higher the ratio, the better for the company, since it means that the company is earning more profits on its sales.

The ratio for the EASY JET PLC system in 2020 was -29.88 % as against 7.30 % in 2019. This means the operating profit ratio for the company has fallen, which is bad for the company. Also, when compared to RYANAIRS, the ratio is almost 13% under profit which is more than 40% higher as compared to Easy Jet Plc. The company should try to reduce its expenses, to earn more profit in future.

1. Return on capital employed = EBIT / Capital Employed

Return on capital employed is used to calculate the return that is given by the company on the capital introduced by the owner. This is a very crucial ratio, since every investor is concerned with the return they get on their capital, and if the return is not appropriate, they tend to withdraw their funds. The higher the ratio, the better it is, since this means that the investors are getting a higher return on their investment. The ratio for the EASY JET PLC system is -18.85 % which is considerably good. This ratio was 32.50 % in 2019 which means that the company's performance has been demonized and it can be dangerous for the investor as a company providing losses to their invested money. Also, the return for the competitive company is only 22.95 % which is very Favorable as compare to Easy Jet Plc.

Liquidity Ratios

For every business to survive and grow, it needs to have some liquidity available with it, to meet its day-to-day requirements.1.

Current Ratio

The current ratio is used to measure how many assets are available with the company to meet its liability balance. In short, if all the liabilities of the company were to monetary in a single day, would there be funds available to pay them off? The ideal current ratio is 2:1. Having a ratio lower than this means that the company may have a cash crisis anytime in the future. However, having a ratio higher than this means that the company is not optimally utilizing its assets and have kept more funds than required (Öztürk, H., & Karabulut, T. A. (2018)). The current ratio for EASY JET PLC Systems for 2020 is 1:1.49 and that for 2019 is 1:1.26. In both years, the company has not maintained enough cash to meet out its current liability requirement which is not a bad practice. RYANAIR has a current ratio of 1.23:1 which is still not adequate as this is below standard. EASY JET PLC Systems should keep more current assets to be able to payout in the future.

Quick ratio = Quick Assets / Current Liability

Quick Ratio is used to measure how many quick assets are available to meet current liabilities. A quick asset is nothing but current assets less inventory. The ideal ratio is 1:1. A higher quick ratio means the company has idle cash funds available which the company must invest to earn income. On the other hand, a ratio lower than idle means that the company does not have enough funds and might face a cash crunch later. The quick ratio for the company for 2020 is 1.49:1 against a ratio of 1.26: 1 in 2019. The ratio of the company can be said to be adequate. The competitor in the industry has a ratio of 1.23: 1 which is very low. In this respect, we can say the company has fared well.

Efficiency Ratios

Efficiency Ratio is used to measure the efficiency with which resources of the company are utilized to generate optimal results.

1. 1. Debtor Turnover Period = (Average debtors ÷ Sales) *365

This ratio is used to calculate how quickly and effectively a company can collect its outstanding amount from debtors. The higher the ratio, the better it is, since it means that the company is quick in the collection of outstanding funds and a little amount is blocked towards debtor balance.

The ratio for the EASY JET PLC system in 2020 is 35 times as compared to 36 times in 2019. There is not much variance in the performance of the company internally. However, when compared to RYANAIRS, the company's ratio is very good. The turnover ratio for RYANAIRS is 3 times.

Gearing Ratio

1. 1. Gearing Ratio = (Total liability - current liability)/ Capital Employed

The gearing ratio is used to measure the financial leverage which shows the quantum to which a firm's business is funded by the owner's capital and the amount that is invested by outsiders.

The company must maintain a proper balance for both the funds to get the benefits of equity trading. Equity trading is a concept where equity investors are benefited due to the investment of others in debt. This is based on the concept of borrowing at a lower rate of interest and earning a higher rate. EASY JET PLC system's ratio for 2020 is 1.45 times. This means the company's operations are financed 1.45 times from debt than from equity. This ratio was 0.84 times in 2019. The ratio for 2020 for RYANAIR'S was 0.88 which is more than required.

1. 2. Interest cover ratio = Earnings before interest at tax (EBIT) / Interest Charges

Interest Coverage Ratio can be used to evaluate whether the company can pay interest on its debt easily or not. The higher the ratio, the better it is, since it means that the company can easily pay its interest obligation on time. Also, it means that higher after-tax profit is available for shareholders. The ratio is -0.73 times for 2020. This means that the company is not able to meet its interest obligation 6.07 times. This ratio was 16.17 times in 2019 which means that company performance has reduced from the previous year.

Investor Ratio

Earnings per share is a very important ratio from the point of view of investors. It means the amount that is available to equity shareholders. Every investor considers the earnings that will be available to him before investment and therefore, the higher the ratio better it is. The ratio is -265.11 % for 2020, which means for every 100 Euros invested in the company, the investor will earn a Loss of 265.11 Euros. The ratio was 88.80 % in 2019 which means that the returns have fallen from the previous year. This may be due to the impact of Covid-19 induced traveling restrictions. However, the ratio of RYANAIR'S is -57.92. As per external comparison, Company is not having favorable conditions for an investor in the market.

ASM and RPM Analysis

ASM defines the capacity of airlines from which they can generate revenue with full occupancy of the customer. As per the ASM analysis Easy Jet Plc hold the capacity of 62,580 Million in 2020 which is almost 53% capacity of 2019 due to the impact of Covid-19 as major countries are restricted their flights and also additional guidelines are imposed for running 50% capacities for airline industries.

RPM defines the number of passengers who are paying for airlines for travelings. Simply it indicates the number of customers who are engaged with airline services for travel. Revenue generation had directly linked with RPM for Airlines Company. Easy jet holds 58,914 Million in 2020 which is approx. 54.68% of last year.

RPM and ASM required to calculate the load factor for airline industries which helps management in recognized the level of occupancy for revenue general from available seats to their customer. Financial information of Easy Jet indicates a Load factor of 94.44 % in 2020 which is 2% more from 2019 as in 2019 company had a load factor of 92.84 %. These stats indicate positive growth and also reflect the efficiency of airlines in the market. When it compares to Ryanairs Company had a lower load factor as Ryanairs had 95.27% Load factor in 2020 which means there is the scope of improvement from which management needs to work to be in the market.

Analysis of Cost factor

The overall cost of a passenger seat includes various cost factors which influence per price of seed for airline industries. Many of the companies are strict monitors their cost factor and cost Centre so that they can maintain their seacoast for their customers. Here ASM is analyzed against cost factors that can impact profitability and per-unit cost for the airline industry. Both the companies are compared for their cost factor which can be the trigger factor for their operational activities.

• Fuel and Oil - Fuel and Oil considers a highly impactful cost center which includes most of the running cost for the airline industry. In a financial statement, your fuel cost is highly impactful on the financial performance of the company or airlines. Further, due to the impact of Covid-19 companies are more careful for their fuel construction as these limitations in fuel in the market and the price of fuel is also get increased dramatically in the global market. As per the analysis Easyjet had $0.0150 cost per ASM which is decreased by $0.0009 from last year where the competitor of the company holds fuel cost per ASM of $3.6297 which is very costly as compared to Easyjet PLC.
• Airport and Handling Charges - Airport and handling charges are the specific charges are cost which needed to be borne by airline industries. Airport and handling charges are very crucial for the financial performance of airline industries as these charges are highly not noticeable by investors because this kind of fixed cost is management need to wear when there is no airlines are you in the air. In current conditions due to covid most of the companies or airlines industries first this kind of cost which can influence highly on their profitability. As per the financial performance of EasyJet PLC Company $938 million costs in 2020 and cost of $1,845 in 2019 which is just doubled. As per the financial data, the company has highly demonetized their cost which impacts on positive financial growth and profitability of the company as compared to the competitor the business had a very minimum cost of $0.0101 per ASM as compared to RyanAir which head $1.4983 in 2020. States indicates company head positive approach toward this cost Centre and also have a competitive edge in the market.

• Staff Cost – Staff cost can be a semi-variable cost in which fixed wages due to being paid by the company and also some of the staff are needed for the Planes when they flew in the airs. Staff cost can be identified as a crucial cost Centre as this kind of post are semi-variable because of the nature of salaries and wages paid to the employees of the company who are worked in airline industries. The financial statement of EasyJet company had staff cost of 206 million in 2020 and 409 million in 2019 which indicates the efficiency of management to reduce cost for their staff as many of the staff are needed to not work due to covid-19. The company faced the cost of $0.0033 per available seat for Miles and on the other hand competitors of the company, Ryanairs face the cost of 1.4 545 per available seat for miles. This indicates that the company had the competitive edge over the competitor in the measurement of per ASM and also the company decrease that cost as compared to last year which is a good sign for an airline company.
• Route Charges - Route charges can be identified as the charges which airline industry needs to pay for their predefined routes for traveling of their airlines. This kind of charge is fixed and had an impact on financial performance in between lock down also where no flights are operated by the airline industries due to covid-19. Yes the financial statement of a rigid PLC indicates that the company spends $278 million for their route charges in 2020 and $302 in 2019 for the route charges. Further, as per the comparison between the company and the other airline competitor it is clearly indicated company had very low charges of the routing which is approx. $278 as compared to $736 of Ryan airs in 2020.

Assessing the impact of COVID-19 on the Airline industry

COVID – 19 induced restrictions have majorly affected all industries. The worst affected industries are transportation, Hotel industry, Airline industry, etc. It is visible from the above analysis that the EASY JET PLC system's financial conditions have also deteriorated during the past year. This reduction cannot be blamed on poor management on behalf of a company but due to the pandemic...There were various restrictions on movements, due to the widespread of the virus. Also, international travels were completely halted. Due to this, the whole Airline industry suffered huge losses.

However, it is expected that next year will bear positive results since the pandemic is almost over. Also, people have started traveling again and both domestic and international travels have resumed once again. This will cause more revenue in the coming years since people will now start traveling more often. Also, all the people who left the country during the pandemic will be returning, which will lead to a boom in the Airline industry.

The future of the Airline industry depends majorly on a digital shift. EASY JET PLC Systems is suggested to heavily use the internet for promotions, bookings, etc to facilitate travelers to travel without any issues through the airport. Also, until COVID-19 is fully contained, the industry must spend extra to make the experience risk-free. Proper precautions need to be taken for the safety of customers, crew, and pilots.

The industry will properly prosper only once the restrictions are completely resolved since only then will people be carefree enough to travel for leisure purposes. However, once the pandemic is over, the future of the Airline industry will be very bright.

Also, until COVID-19 is completely over, the company must convert sits passenger planes into freighters. This means that the plans that are used to transport people can be used to travel goods. This is because due to pandemics, people are reluctant to travel. However, the goods need transport. This way, the company can cover its fixed expenses without suffering any real losses. Few planets must be continued to use for passenger transport, to transport passengers who are willing to travel.

Conclusion

To conclude, we can say that the company's performance has fallen in all aspects in 2020 when compared to the previous year. However, this reduction is not due to mismanagement but due to the worldwide pandemic induced by COVID-19. The Airline industry is specifically more affected by the pandemic than others since people stopped traveling altogether due to the spread of disease. However, if we ignore the losses incurred due to COVID – 19, the company did perform very well.

As compared to its competitor Ryanairs, the company did farewell. There were various aspects where RYANAIR outdid EASY JET PLC Systems, but the overall result of EASY JET PLC systems was far better.

Also, if the impact of COVID-19 is considered for the whole of the industry, then we can say that the EASY JET PLC industry performed well. The company's profitability ratios are very good when compared to the industry average. The company should focus on improving its efficiency and liquidity ratios to obtain full-fledged efficiency.

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