An analysis of the financial situation of British Airways - Case Study Example

An Analysis of the Financial Situation of British Airways By Mustaque Ahmed BSc (Hons) in Applied Accounting Oxford Brookes Word Count A) Introduction & Information Gathering 925 words B) Analysis 3,069 words C) Conclusions 1,316 words Table of Contents Table of Contents 3 ABSTRACT: 5 INTRODUCTION 6 BACKGROUND TO THE STUDY 6 AIMS AND OBJECTIVES 7 RESEARCH QUESTION 8 REASONS FOR STUDY 8 INFORMATION GATHERING 9 TYPE OF DATA USED 9 INFORMATION GATHERING METHODOLOGY 9 ANALYSIS 10 ANALYSIS OF INFORMATION 10 Trend Analysis 10 Financial Analysis 11 Table 1. Computation of Profitability Ratios 13 Table 2. Computation of Financial Leverage Ratios 15 Table 3. Computation of Liquidity Ratios 15 Table 4. Computation of Investor Ratios 17 Benchmarking 18 PRESENTATION OF FINDINGS 19 Trend Analysis 19 Table 5. Growth Rates of Major Financial Accounts (in %, 2002-2005) 20 Figure 1. Graphical Illustration of Major Financial Accounts (in million, 2001-2006) 21 Financial Analysis 21 Table 6. Computed Profitability Ratios (2005-2006) 22 Table 7. Computed Financial Leverage Ratios (2005-2006) 22 Table 8. Computed Liquidity Ratios (2005-2006) 23 Table 9. Computed Working Capital/Efficiency Ratios 23 Table 10. Computed Investor Ratios 24 Benchmarking Analysis 25 Table 11. Financial Data and Ratios of the BA, its Key Competitors, and Industry 25 CONCLUSION 27 British Airway's Financial Strengths 28 Financial Weaknesses 30 Appendix 1. Selected Financial Accounts of British Airways Plc 34 Appendix 2. Financial Data Used in the Computation of Ratios 34 Appendix 3. Competitor Analysis 35 REFERENCES 36 ABSTRACT: This report is a Financial Analysis of British Airways. The latest balance sheets and other financial statement have been observed and the calculation with regard to the company's profitability position, liquidity position and asset management position has been calculated. Comments are accompanies for each and every calculation that has been performed. In the introduction part of the report, an overview about the business of the company, its evolution, organization structure etc, have been described. All the calculations performed are supported by graphical representations apart from the comments in order to give a clearer picture about the company's financial performance and management efficiency. The capital structure of the company is also discussed as part of the report. INTRODUCTION This report looks at the financial situation of British Airways Plc amidst the threats and challenges in its external environment. In doing so, this paper will utilize three different financial analysis techniques. First, the current performance of the company will be compared with its historical financial data in a trend analysis. In order to simplify the analyses, the six year period of 2001-2006 will be considered. Second, a financial ratio analysis will also be conducted in order to ascertain the profitability, working capital or efficiency, liquidity, and financial leverage of the company. Recognizing that the financial analysis will be maximized by more data, it uses 2005 as a comparative year for 2006. Lastly, this paper will also compare the financial data and ratios of British Airways Plc, its key competitors, and industry through a benchmarking analysis. The report concludes with the identification of the airline's financial strengths and weakness. BACKGROUND TO THE STUDY The British airline is rapidly evolving due to external environmental forces. The industry has been faced with a dismal outlook with the onset of economic downturn in the world led by the business cycle in the United States (Sorensen 2006). Furthermore, the emergence of low cost carriers in the European airline industry is a living example of how the strategic directions of business organizations are strongly affected by the changes, trends, and developments and their external environment. It is apparent that the European airline industry has progressed from being dominated by large, business class air carriers to one which is increasingly controlled by the proliferation of low cost airlines (Sorensen 2006). The wide popularity and acceptance of budget air travel puts pressure on large carriers like British Airways (BA) Plc. to implement more aggressive market strategies in order to compete in the marketplace. With this backdrop, it has been expected that the performance of business class air carriers like BA have declined while budget airlines take center stage. This, in turn, is expected to be reflected in the financial performance of the business organization. Financial analysis has become one of the most popular techniques utilized in order to ascertain the health and well being of a business organization. Financial analysis enables decision makers to uncover trends in business performance and compare different business organizations (Keown, et. al 2005). In line with this, it becomes important to analyze the financial situation of the BA in order to understand how it copes with its weaknesses and faces various threats. AIMS AND OBJECTIVES Based on its annual reports, its key competitors, and the whole airline industry, this report generally intends to examine the financial situation of British Airways Plc. This report aims to accomplish the following objectives: 1. Determine the trend of growth of BA's key income statement and balance sheet accounts; 2. Evaluate the performance of BA in terms of profitability, liquidity, solvency, and financial leverage through the use of financial ratio analysis; 3. Compare the performance of BA with its main competitor by benchmarking; and 4. Reveal the business organization's areas of financial strengths and weakness. RESEARCH QUESTION Based on the aforementioned research aims and objectives, the research question in consideration can be adequately stated as follows: What is the general assessment on British Airways Plc's financial situation based on its revenue and asset growth, financial ratios, and relative performance compared to its key competitors REASONS FOR STUDY Recognizing the intense competition and the public's increasing preference for low cost travel, it is interesting to uncover how BA performs. Industry experts have forecasted the rapid growth of low cost carriers and its adverse consequences for business class airlines like BA (Sorensen 2006). Taking the point of view of the current and potential investor of business organizations, it becomes important to evaluate and understand the financial situation of BA amidst these numerous challenges. This study is facilitated by the accessibility and availability of BA's annual reports. INFORMATION GATHERING This report recognizes that the final output is only as good as the data used in the analysis and to arrive at a conclusion. Thus, it has ensured the accuracy of the data gathered and the efficiency of the data gathering technique employed. TYPE OF DATA USED The nature and background of the study implies the sufficiency of secondary data in completing this report. Therefore, no primary sources are used. Instead, this research makes use of the following data: 1. Annual Reports of BA from the six-year-period 2001-2006; 2. Annual Reports of BA's main competitors during 2006 including UAL Corporation, and Air-France KLM; and 3. Financial data and ratios of the airline industry. It should be noted that these financial statements have become the basis for the ratio, trend, and benchmarking analyses. For the theoretical frameworks which are used in the analyses, this paper draws important insight from textbooks, journals, business articles, and financial databases like FAME and Yahoo Finance. INFORMATION GATHERING METHODOLOGY Technological advancements have facilitated the efficient gathering of the aforementioned secondary data. The annual reports of BA and the other business organizations in consideration are downloaded directly from their respective websites. Since the annual reports contain much more than the needed information, the author has focused only on the company's financial statements like the balance sheet, income statement, and statement of retained earnings. The required information is transcribed in Microsoft Excel spreadsheets to allow easier and more convenient processing. On the other hand, the other secondary sources like textbooks, journals, and business articles are obtained from libraries while some are retrieved electronically. This report also makes use of the FAME financial database. ANALYSIS ANALYSIS OF INFORMATION As previously stated, the analysis of the financial situation of British Airways will be accomplished through the employment of three methods: trend analysis, financial ratio analysis, and benchmarking. This section will briefly outline the methodology applied to the gathered data and the important theoretical frameworks where they are based. Trend Analysis Trend analysis is defined as the "a comparative analysis of a company's financial ratios over time" (Trend analysis Definition" (2005), Web Finance). Thus, trend analysis is the process of evaluating the changes in the company's financial accounts over time. This analysis does not just indicate the growth of company's sales, resources, and other accounts but also reveals important patterns. Looking at a business organization's performance over a period of time instead of focusing on only one financial period will give a better look of its financial performance. In this report, trend analysis will be administered to important financial accounts like current assets, fixed assets, revenue, net income, debt, and equity. Trends will be identified through a graphical presentation of yearly values drawn using Microsoft Excel. Another method which will be utilized is the computation of annual growth rates in these major financial accounts (Fraser and Ormiston 2004). For example, growth in total turnover in time t will be computed as: Turnover (t-1) - Turnover (t) x 100% Turnover (t-1) In order to ensure the accuracy of the graphical illustration and growth rate computations, the trend analysis is accomplished through the use of Microsoft Excel spreadsheet formulas. Financial Analysis Ratios are well known and the most widely used tools of financial analysis. A ratio gives the mathematical relationship between one variable and another. The analysis of a ration can disclose relationships as well as bases of comparison that reveal conditions and trends that cannot be detected by going through the individual components of the ratio. This tool is currently utilized by business managers, investors, creditors, suppliers, and other decision makers in order to determine the financial performance and well being of a business organization (Horngren's 2000). Financial ratios are grouped into five categories, each showing a different aspect of a company's financial operations. These are profitability ratios, financial leverage ratios, liquidity/solvency ratios, efficiency ratios, and investor ratios. (1) DEBT MANAGEMENT: This is one of the leverage ratios. When the analysis of a firm is extended to the long-term solvency, we come into the category of leverage ratios. The leverage ratios are structural ratios and coverage ratios. Structural ratios are based on the proportions are derived from the relationships between debt servicing commitments and sources of funds for meeting these obligations. Total Debt to Total Assets: This ratio measures the extent to which borrowed funds support the firm's assets. The denominator in the ratio is total of all assets as indicated in the balance sheet. The type of assets an organization employs in its operations should determine to some extent the sources of funds used to finance them. FY 2005 FY 2006 Company 1.62 1.94 Industry Average 0.80 1.121 COMMENTS ON THE COMPANY'S DEBT MANAGEMNET: The Company's net debt was 1.4 billion, up 457 million since the year end. Cash and net debt were affected by payments into the New Airways Pension Scheme (NAPS) and to the US Department of Justice (DoJ) for anti-competitive activity. (2) PROFITABILITY: Profitability ratios are also called as the Efficiency ratios. As described above they measure the firm's activities and its ability to generate profits. Net profit Margin: This ratio shows the earnings left for shareholders (both equity and preference) as a percentage of net sales. It measures the overall efficiency of production, administration, selling, financing, pricing, and tax management. Return on common equity (ROCE) is a variant of return on investment. The return on common equity assesses the rate of return on the investments of common stockholders in the company (Analyzing Company Reports 2005). Another ratio is the turnover ratio which shows to what the extent the company uses its assets to produce revenue. Logically, higher profitability ratios indicate a healthier financial condition. Table 1. Computation of Profitability Ratios Net Profit Margin FY 2005 FY 2006 Company 6.82 5.48 Industry Average 5.90 NA Return on Assets: Company 4.22 6.54 Industry Average 4.42 5.43 COMMENTS ON THE COMPANY'S PROFITABILITY: Over the long haul, this company has posted results that are about average for its industry. It is also important to note that the company's net profit margins--another key profitability measure--have been average compared with other companies in its industry. Generally, this capital structure indicates the business class airline's preference for riskier financing. Liability is generally considered as a more costly source of financing since it ties up the firm with immediate and regular interest obligations. British Airways has made a series of changes in its attempts to return to profitability, including reducing its overall number of passengers and instead increasing its focus on having more premium - business class - passengers per flight. Financial leverage ratios provide an indication of the long-term solvency of the firm. They indicate the extent of non-owner claims on the firm's profits as well as the firm's operating capability to meet its obligation. Gearing is the long-term debt to equity ratio which assesses the balance between liabilities and equity in the firm's long term resource structure. Another is the interest coverage ratio which measures the extent to which earnings cover the interest obligation of the company (Thomson 2002, p. C-6). Table 2 shows the different formula used in the computation of the aforementioned financial leverage ratios. Table 2. Computation of Financial Leverage Ratios (3) LIQUIDITY: Liquidity or solvency ratios are used as measures of the company's ability to finance its short-term obligations by its cash and near cash items. Included in these ratios are current, acid test or otherwise known as the "quick ratio", and cash ratios. Current ratio expresses the "working capital' relationship of current assets available to meet the company's current obligations. Cash ratio is an indicator of the extent to which a company can pay current liabilities without relying on the sale of inventory and without relying on the receipts of the accounts receivables (Horngren's 2000, p.153). Higher ratios indicate more liquidity. Table 3 shows the different formula used in the computation of the aforementioned liquidity ratios. Table 3. Computation of Liquidity Ratios Liquidity implies a firm's ability to pay debts in the short run. This ability can be measured by the use of liquidity rations. Short - term liquidity involves the relationship between current assets and current liabilities. If a firm has sufficient net working capital it is assumed to have enough liquidity (ICFAI Center for Management Research ICMR, 2004). Current Ratio FY 2005 FY 2006 Company 0.95 1.07 Industry Average 1.07 1.272 Source: http://stocks.us.reuters.com/stocks/ratios.aspsymbol=BAIRY.PK Quick Ratio FY 2005 FY 2006 Company 0.39 0.46 Industry Average 0.79 NA COMMENTS ON THE COMPANY'S LIQUIDITY: In the operating cycle of the firm current assets are converted into cash to provide funds for the payment of current liabilities. Hence, if the current ratio is higher it means that the short-term liquidity of the firm is also higher. With respect to British Airways, though the figures for both current and quick ratios are less in the year 2005, they look better in the following year which states that the position of the company is pretty good and stable. MARKET VALUE RATIOS/INVESTOR RATIOS: Investor ratios are financial ratios especially designed to covey to investors the asses the profitability of the company's stock as an investment. Earnings per share shows the return to common stock shareholder for each share owned. Shows the rate earned by shareholders from dividend relative to the stock price, while price to earnings ratio expresses the multiple that the market attributes to a common stock relative to its price (Fraser and Ormiston 2004). Table 5 shows the different formula used in the computation of the aforementioned investor ratios. Table 4. Computation of Investor Ratios From the Market Value Ratios, we can get information on earnings of the firm and their effect on price of common stock. PE Ratio: The price-earnings ratio gives the relationship between the market price of the stock and its earnings by revealing how earnings affect the market price of the firm's stock (MorningStar). FY 2005 FY 2006 Company 14.5 13.3 Industry Average 16.8 16.5 Market to Book Ratio: Company 1.4 3.2 Industry Average 2.8 2.9 COMMENTS ON THE COMPANY'S MARKET VALUE RATIOS: British Airways has generated market-like returns over the past 5- and 10-year periods. The company has been one of the strongest performers in its industry over the five-year period. The company has got relatively large number of competitors, and looking at its sales, it is one of the largest players. Benchmarking Benchmarking is a direct comparison of financial data and financial ratios of business organizations in the same industry (Fraser and Ormiston 2004). It has become a potent way of ascertaining the performance of a company in comparison to the other players who are also exposed to same challenges, opportunities, and threats. Since business organizations in the same industry serve the same market and faces almost the same problems, it becomes rational to compare their financial performance. Furthermore, it is also important to look at how individual companies perform relative to the whole industry. This report will conduct a benchmarking analysis based on the financial accounts and ratios of the other industry players in the global airline industry such as UAL Corporation, Air-France KLM, and industry averages. In order to aid in the process of computing the financial data and ratios, the competitor analysis of FAME and Yahoo Finance database is used. The benchmarking will be conducted through a direct comparison of the financial ratios under consideration. PRESENTATION OF FINDINGS Trend Analysis Figure 1 shows the graphical illustration of the major financial accounts of British Airways Plc from 2001-2005 while Table 6 shows the computed growth rates. It becomes apparent that 2002 has not been a good year for the company due to negative operating profit and net income. The company has managed to recover during the following financial years. Table 5. Growth Rates of Major Financial Accounts (in %, 2002-2005) Most stocks in the air transport industry have seen steadily growing revenue and earnings over the past three years. The stock of British Airways Plc. has also seen steady revenue growth over the past three years. Another interesting point that is to be noted is that British Airways stock's sustainable growth rate is quite a bit higher than the rate at which its earnings per share have grown. That means that the company is generating enough capital internally to finance future growth assuming that the pace of growth doesn't pick up markedly without raising additional capital from outside sources. British Airway's current assets have increased albeit at an inconsistent rate. The rise in current asset is highest at 6.49% yet this growth has slowed down during the following two years. Turnover, on the other hand has slid down during the four year period of 2001-2004. It managed to catch up in 2005 at a small growth of 3.35% and peaked in 2006 by 33.21%. The next two years have recorded an impressive double digit increase of 80.56%. It more than tripled in 2005 and slowed down by 19.13% last year. The company has also been showing indications of changing its capital structure. Figure 1. Graphical Illustration of Major Financial Accounts (in million, 2001-2006) Financial Analysis Table 8 shows the computed profitability ratios of British Airways in 2006. In order to fully asses the profitability of British Airways in 2006, the company's profitability ratios for 2005 are also included. Based on the computed net profit margin and operating profit margin, the company's profitability has improved. During 2006, the airline is able to turn 8.3% of its revenue in operating profit and 5.5% into net income from the 7.20% and 5.0% recorded in the previous year, respectively. It should be noted that operation in the airline industry requires incurring huge operating costs which could justify the relatively low percentages. In terms of asset turnover and return on equity, British Airways is in a downslide. This can be explained by the capital intensive nature of the business organization. Table 6. Computed Profitability Ratios (2005-2006) Table 9 shows the financial leverage ratios which reveal the capital structure of British Airways Plc. The interest coverage ratio computed shows the company's ability to service its interest obligations. In 2006, the company's interest obligations are 3.8 times British Airway's profit before interest and taxes indicating its huge operating profit relative to operating profit. The business organization seems to have no problem in meeting its interest obligations. Table 7. Computed Financial Leverage Ratios (2005-2006) Table 10 shows the company's liquidity has improved from 2005 to 2006. During 2005, the company's liquid assets are not enough to pay off the company's current liabilities. In 2006, however, the current assets are more than enough to settle British Airway's immediate obligations. It should also be noted that the company's current assets are tied up into less liquid resources as cash only accounts for 2.6% of its current resources. Table 8. Computed Liquidity Ratios (2005-2006) Table 11 shows the working capital efficiency ratios of British Airways. Compared to 2005, the airline's ability to maximize the use of resources in order to generate revenue has improved. From the two ratios examined, it can be seen that the company was able to lessen the collection days for each significant transactions. The company's accounts receivables are collected within 29 days in 2006, a three day improvement from what has been recorded in the previous year. On the other hand, British Airway's short term creditors benefit from the huge improvement in its paying period. The company is able to service its trade credits within 25 days in 2006, 20 days shorter relative to the 2005 level. Table 9. Computed Working Capital/Efficiency Ratios Table 12 shows the computed investor ratios of British Airways Plc. The company has not been paying dividends for six year making the air carrier's generate a dividend yield of 0%. Earnings per share are in an uptrend, from 34.8p in 2005 to 39.8p in 2006. The ratio of price to earnings is very high which indicates overvaluation of the air line's common stock. A stock's earnings yield is the annual return it would generate if its profits remained fixed and it paid out all of its earnings as dividends. Hence, a high yield is normally very desirable. The yield of British Airways Plc. is extremely high, and that often (though not always) occurs when a company is in distress. In order to fully comprehend the implication of these ratios from the point of view of investors, it should be noted that stockholders gain from their investment in shares through dividends and capital gains. Dividends are declared by the discretion of the company. Analysts' expectations have been stable regarding the earnings per share rations of the company. Declaration of dividends is often dependent of the amount of profit the business gains from the fiscal year and the size of the company's cash account. Market forces determine the capital gains to be gained from a stock investment. In the case of British Airways Plc, it can be seen that investors gain from huge capital gains alone and hardly from dividend. It is notable that the company's common stock price is in an uptrend. Though market price is rising, the company's financial performance does not seem to justify this uptrend. Table 10. Computed Investor Ratios Benchmarking Analysis Table 13 shows the financial data and ratios of the British Airways Plc, its key competitors Air France KLM and UAL Corporation, and the whole airline industry during 2006. As stated above, these ratios are retrieved from the financial databases of FAME and Yahoo Finance. In terms of revenue, Air France KLM leads the airline industry with total of $29.29 billion in the fiscal year 2006. UAL Corporation follows with $19.34 billion. BA lags behind its two competitors however, it should be noted that compared with the whole industry, the company still posts higher turnover. Looking at the players' gross margin, British Airways Plc shows superior performance in managing its costs of operations. It should be noted that the business organization, aside from surpassing the industry average of 38.91%, also manages to outclass its competitors who perform below the industry's rate. UAL Corporation's gross profit accounts for 36.11% of its turnover while Air France records a very low gross margin of 15.24%. Table 11. Financial Data and Ratios of the BA, its Key Competitors, and Industry Consistent with total turnover, Air France KLM also comes up with the highest EBITDA (Earnings before Interest, Taxes, and Depreciation Allowance). BA once again shows efficiency in managing its costs as it is able to surpass UAL Corporation which can be recalled to have a far higher turnover. All of the three key players surpassed the industry EBITDA of $945.33 million. In terms of operating margin, British Airways Plc continues to show superlative performance. It records an operating profit margin of 8.59% which is almost twice the industry average of 4.40%. Air France KLM manages to report 4.90% operating margin which is a little above the industry rate. UAL Corporation's operational inefficiency is indicated by the company's 2.13% operating margin. UAL Corporation generates the highest net income of $22.88 billion during the fiscal year 2006. Ironically, Air France KLM which reports the highest revenue is left with the lowest net income ($911.10 million). BA manages to translate $1.01 billion of its revenue into net income. All of the players under consideration exceed the average industry net income of $304 million. Since it generates the highest net income, UAL Corporation logically reports the highest earnings per share (EPS) among the three players. The company's EPS in 2006 is $206.71, far and above the industry's ratio of $3.08. BA's EPS of $8.81 is better than Air France KLM's meager $3.2. After examining the players' and the industry's price/earnings ratio, it becomes apparent that the stocks of the air carriers are generally overvalued. The average price/earnings ratio is 14.44 which are higher than what is recorded by each individual player. Air France KLM's and BA's stocks are highly overvalued at 13.32 and 11.63, respectively. On the other hand, UAL Corporation's stocks are valued less than the earnings that they generate. CONCLUSION The financial situation of an organization which is reflected in its various financial statements like the balance sheet, income statement, cash flow, and statement of retained earnings becomes an important indicator of the well being of a firm. Through the use of techniques like trend, financial ratio, and benchmarking analyses, the financial performance of a business organization can be adequately assessed. The trend analysis becomes essential in revealing how the company's current performance compared with the past years. It generally identifies whether the company's financial performance is an uptrend or in a decline. Financial ratio analysis, on the other hand, provides a closer look at a company's operation because it classifies ratios according to the factors measured which includes profitability, efficiency or activity, financial leverage and liquidity. Lastly, benchmarking enables the comparison of a company's performance with the other players in the sector together with the performance of the whole industry. This paper employs the aforementioned techniques in order to gain an insight of British Airway's current financial situation. It should be noted that there is an overall dismal outlook for the whole airline industry because of the various threats in the industry. However, amidst these challenges, the analyses presented in this paper reveal that the financial health of BA is generally stable. British Airway's Financial Strengths Revenue was up by 0.9 per cent. Excluding exchange, revenue was up 3.2 per cent. Passenger revenue at 5.7 billion was up 1.7 per cent on capacity up 0.8 per cent. Seat factor was down 0.6 points to 77 per cent. Yields were up 1.5 per cent mainly due to more premium passengers travelling, although the gains were partially neutralised by exchange rates, mainly the US dollar. The cost performance of the company remains to be strong (Reuters.com, 2006). Engineering costs were up 11 per cent because of higher freighter costs, price rises in maintenance and higher volumes. Handling charges and other operating costs have risen by 3.4 per cent because of the cost of dealing with baggage issues. These figures clearly indicate that the financial position of British Airways is pretty strong and continues to remain the some despite certain drawbacks. The stocks of British Airways is in the air transport industry has generated market-like returns over the past 5- and 10-year periods. When compared to other stocks in the airline industry, the company's five-year returns have been about average. It is always important that when looking at a stock or industry's record, historic returns are not necessarily a predictor of future performance. Even though the company has been highly affected by the issue and controversy of terrorism in 2002 and 2003, BA manages to pull itself from the slump in revenue and losses. The company's current assets are slowly growing while there has also been announcement of plans to upgrade the fixed equipment of the air carrier. What is also apparent is BA's pursuit of aggressively changing its capital structure. This is signaled by the company's declining use of debt in financing its operations and debt. The company continues to boost its shareholder's fund. With this development in the capital structure, BA is continuously lowering its exposure to financial risk. British Airways Plc's cost management is apparently remarkable. The improvement in its operating profit margin and net profit margin indicates its efficiency in managing the costs that it incurs from its operation. When compared to other players in the industry like UAL Corporation and Air France KLM, this ability becomes even more distinct. Also, ratio analysis of the firm has been done from different perspectives like liquidity, profitability, asset turnover, efficiency and market valuation etc, for two consecutive years i.e. 2005 and 2006. An important and yet notable figure with respect to the market valuation of the company is its price-earnings ration which actually exceeded the industry average in the year 2006 which clearly shows the efficiency of the firm in productive utilization of its resources. Thus, the entire financial analysis of British Airways clearly shows that the company's performance in comparison to the industry is pretty good. The company also shows significant improvement in its management of working capital. Through its employment of technological breakthroughs like a computerized information system and online reservation, British Airways becomes more efficient in paying its short term creditors and collecting its receivables. Paying its creditors at a shorter time facilitates the creation of a better relationship between the company and its creditors. On the other hand, shorter collection period gives the business organization more available funds to finance its short term needs. British Airways Plc also experiences a rapid increase in its liquidity. This can be tied to the company's shorter collection period which generates cash more rapidly. Currently, the company can pay more than pay off all its immediate obligations with its huge current assets. The mounting earnings per share of the company amidst the growth in its shareholder's fund signals the maximization of shareholder value which is the primary goal of a business organization. When compared to its competitors in the air transportation industry, British Airways Plc can be considered to have excelled significantly in this aspect. The company's EPS is almost four times that of the industry average. Financial Weaknesses The aviation industry is entering a downturn due to global economic weakness, with high fuel prices piling further pressure on airline profits. British Airways is not exclusion for this fact. The company has experienced the downturn especially in the United States. The rapid hike in the oil prices will also have an impact on the company's performance. The airline industry is a capital intensive business where huge investment is needed to invest in expensive airlines. Furthermore, the industry's operation also requires the acquisition of fuel and incurrence of large fixed costs for manpower. Because of this, British Airways Plc finds it difficult to recoup its investment. Even though British Airways Plc seems to attain higher efficiency in managing its working capital, the company still suffers from the disparity of its collection and payment period. In 2006, the company reports that it pays it short term creditors within 29 days however, it is only able to collect from its customers within 25 days. This discrepancy in credit payment and receivables collection needs to be remedied as it can harm the company in the long run. British Airways Plc's investors primarily profits from their investment in the company's stocks through capital gains. It should be noted that the business organization's shares are highly overvalued as indicated by the company's high price/earnings ratio. Also, BA fails to declare any dividend within the last five years. This policy can discourage investors from financing the activities and resources of the company. If this happens, BA will be faced with the challenge of lowering its financial risk as it may resort to its creditors again. British Airways is a company with healthy number of competitors in the industry and the company is a medium-sized player in the industry. A stock's earnings yield is the annual return it would generate if its profits remained fixed and it paid out all of its earnings as dividends. Hence, a high yield is normally very desirable. This is not the case with British Airways, however. Its yield is extremely high, and that occurs when a company is in distress. Based on the above analyses conducted, British Airways Plc is financially stable amidst the external challenges and threats that it faces. Like any other business organization, it has its fair share of financial weaknesses which can be remedied for further improvement. This paper has strongly emphasized the importance of financial analyses in order to ascertain the health and well-being of a company. However, this report also recognizes the inadequacy of this technique in evaluating a business organization's overall performance. Quantitative analysis often does not tell the whole the story, it should always be supplemented with qualitative analysis. APPENDICES Appendix 1. Selected Financial Accounts of British Airways Plc (2001-2006, in million) Appendix 2. Financial Data Used in the Computation of Ratios (2005-2006, in million) Appendix 3. Competitor Analysis (In $, 2006) REFERENCES 1. MorningStar. (n.d.). British Airways PLC. Retrieved March 20, 2008, from Morning Star: http://quicktake.morningstar.com/StockNet/Valuation10.aspxCountry=USA&Symbol=BAIRY 2. Reuters.com. (2006, November 1). British Airways Plc - Interim Management Statement. Retrieved March 20, 2008, from Reuters.com: http://www.reuters.com/article/pressRelease/idUS66733+01-Feb-2006+RNS20080201 3. Air France KLM 2007, Retrieved 02 March 2007, from http://www.airfrance.com 4. Brealey and Myers 2005, Principles of corporate finance, McGraw-Hill, 8th Edition. 5. British Airways, Retrieved 02 March 2007, from http://www.britishairways.com/travel/home/public/en_gb 6. Trend analysis Definition" (2005), Web Finance, from http://en.wikipedia.org/wiki/Trend_analysis#_note-0 7. Fraser, L. & Ormiston A 2004, Understanding Financial Statements, Pearson-Prentice Hall: Upper Saddle New Jersey 8. Horngren's, C. et. al...2000,Accounting.4th ed. New Jersey: Prentice Hall 9. Keown, A.J., Martin, J.D., Petty, J.W., and Scott Jr., D.F, 2005, Financial Management principles and applications, Pearson/Prentice Hall International Edition, 10th Edition. 10. Sorensen, C. 2006, Low cost airline flying high, Financial Post, 06 December 2006 11. Thompson, A. & Strickland, J 2002,Strategic Management.3rd ed. New York McGraw- Hill 12. UAL Corporation 2007, Retrieved 04 March 2007, from http://united.com 13. Yahoo Finance 2007, Retrieved 02 March 2007, from http://finance.yahoo.com Read More