How British Airways Has Been Able to Grow - Case Study Example

Executive Summary British Airways has transformed as a leader in the airline industry. The airline has focussed on travellers and cargos to improve its business. This report examines how British Airways has been able to grow. The financial analysis highlights that British Airways needs to improve its current ratio because although the company is in the service industry the current ratio is low. The most important consideration for British Airways is to ensure profits since doing that will ensure that everything else in the company falls into place. The overall result shows that some immediate steps need to be taken in order to ensure profits for the business. Contents Introduction 3 SWOT Analysis 3 Financial Analysis 4 Liquidity Ratio 4 Capital Structure Ratio 5 Profitability Ratios 6 Asset Efficiency Ratio 7 Market Performance Ratio 8 Findings 9 Conclusion 9 Recommendations 9 Limitations 10 References 11 Appendix 13 Introduction British Airways has worked continuously to improve its services which have made it one of the most popular airlines. This is evident from the growth in business the airlines has been able to produce. British Airways looked for opportunities to improve financial by ensuring customer satisfaction, entering into new sectors like cargo shipping, having a presence in growing cities, building a strong network in London, and improving its ability to meet customer needs. (Company website, 2010) SWOT Analysis This tool highlights the factors which act as an advantage to British Airways. It also helps to identify areas where the company can work on. This is shown below Strengths It has a large fleet of flights with efficient technology It is an innovator in in-flight service by making improvements It ensures effective communication along all levels thereby ensuring smooth transformation Weakness Changing its business model by having seats in flights for business class along with leisure Continuous loss incurred by the company each year Opportunities Opportunity to expand in new markets Opportunity to develop new technology and integrate it with the existing one Develop new strategy to attract different group of customers Threats Threat from rising fuel prices Threat from new entrants Financial Analysis Analyzing the financial statements helps in “planning, budgeting, monitoring, forecasting and improving the financial performance by taking vital decisions”. (Micro Strategy, 2010) Following are the financial ratios for British Airways. Liquidity Ratios This ratio helps “to identify the firms’ ability to meet its short-term obligations”. (Financial Modelling Guide, 2010) The liquidity ratios are as follows Current Ratio: The current ratio “measures the ability to pay the short term liabilities out of short term assets”. (Financial Modelling Guide, 2010) The ratio is as The ratio shows the liquidity position of British Airways improved in 2010 compared to 2009. British Airways needs to improve the ratio further as its short term obligations are raising otherwise the investors and suppliers may stay away. They ratio needs to be around 2. Quick Ratio: The quick ratio “measures the ability of the firm to meet its short term obligation when inventories are removed”. (Financial Modelling Guide, 2010) The ratios is as follows The quick ratio also indicates that British Airways’ performance has improved in 2010 compared to 2009. British Airways needs to improve this ratio as it presents a bleak picture of the company to pay its short term debt. British Airways needs to take this ratio to more than 1. Capital Structure Ratio The capital structure ratio “identifies how much of the firm’s assets are financed through debt and includes long term debt”. (Transtutor, 2010) The ratios are as follows Debt to Equity Ratio: This ratio “determines the proportion of long term debt in relation to the shareholders fund and long term debt” (Transtutor, 2010). The ratio is as follows The debt to equity ratio indicates a huge debt on the part of British Airways and shows that the company little scope for more investment through debt. This is a bad sign and shows little space for future projects. Debt Coverage Ratio: It is defined as “the ability to pay the monthly debt on the loan taken”. (Financial Modelling Guide, 2010) The ratio is as The ratio for British Airways shows decrease in performance in 2010. It indicates that the company is having lower non-current liabilities. British Airways need to continuously work and ensure that the debt coverage ratio improves further so that growth is better. Profitability Ratios Profitability ratios are a vital part of financial analysis. The profitability ratios are as follows. Net Profit Margin: Net Profit margin “is defined as the profit directly attributed to per dollar of sales” (Kennon, 2010). The ratios is as follows The net profit ratio indicates a negative margin for British Airways in both 2010 and 2009. The loss for the British Airways increased in 2010 as compared to 2009 and net profit has decreased. This is a worrying factor and reflects inefficiency in maintaining indirect expense. Return on Equity: Return on equity “is the profit earned as compared to the equity shareholders” (Joseph, 2010). The ratios is as follows British Airways has a negative return on equity because of the loss the business is incurring. This is a worrying factor and shows that the strategies and policies of the company implemented have not been successful. This might lead to shareholders moving out to other companies. Return on Assets: “It is defined as the amount of profit generated for per dollar of asset”. (Joseph, 2010) The ratios is as Here we see that the return on assets for British Airways is negative in both 2010 and 2009. This has resulted in poor utilization having of the assets. The other important part to note is that airlines have huge assets which results in the ratio being lower. Still, on an overall basis British Airways needs to make profits to ensure that it stays positive. Asset Efficiency Ratios Operating ratios helps to “show the efficiency of the management and also indicates the company’s efficiency to manage its capital”. (Joseph, 2010) They are as Asset Turnover Ratio: It is defined as “the total sales generated per revenue of assets”. (Joseph, 2010) The ratios is as follows The ratio indicates that it has decreased in 2010 as compared to 2009. The company needs to use its fleet in a better way and ensure that the turnover rises as the company has scope of using the same fleet of flights to improve the efficiency in their usage. Market Performance Ratio These ratios help to determine the shareholders confidence in the company. This ratio also helps to determine the shareholders prediction about the company along with the company’s performance. Earnings per Share: Earnings per share “is defined as the profit attributed to the equity shareholders” (Joseph, 2010). The ratios is as follows The earnings per share ratio indicate that the earnings are negative in 2010 and 2009 because of the loss incurred by the company. The return for British Airways decreased in 2010 compared to 2009, which shows that the profit has dipped. British Airways needs to ensure that they have profits to improve the earnings per share. Findings The liquidity position especially the current ratio, is a concern for British Airways Because of the nature of its business, British Airways should have few inventories that are reflected in the quick ratio. The long term debt ratio is high for British Airways, so the company has limited scope to take loan for further development. The operating ratio especially the receivable and payable turnover ratio, for British Airways has shown tremendous improvement British Airways need to improve its strategies and management so it can perform on a consistent basis. Conclusion British Airways needs to improve its performance with a better strategy. Its financial ratios shows that the company needs to start making profits to improve its financial position and remain not only financially viable but also attractive to investors. British Airways has considerable room for improvement but with the growth this sector is showing, which will improve the ratios and overall financial health. Recommendations British Airways has been incurring losses for the last couple of years which has resulted in the price of the share to be low. The financial analysis soundness shows strengths on other fronts apart from the profits. The airline has a lot of flights and with the world economy reviving presents a good future for investor. An investor who wants to invest in the company for a long period of time can look at investing in the company but short term investors should stay away due to the risk associated with the company as it is incurring losses. Limitations Inflation and changes in price has not been accounted for which might be misleading Historical cost has been considered which might not be true in the present scenario as value changes with time No comparison has been made either with the industry or with the competitors to reflect a better picture Only information from the accounting statement has been used and no recent issues surrounding the company have been included in the findings. References Company Website, 2010, “British Airways”, retrieved on November 29, 2010 from http://www.britishairways.com Financial Modelling Guide, 2010, “Liquidity ratios”, retrieved on November 29, 2010 from http://www.financialmodelingguide.com/financial-ratios/liquidity-ratios/ Joseph K, 2010, “Analyzing an income statement: Return on assets”, about.com guide, The New York Times Company Joseph K, 2010, “Analyzing an income statement: Inventory turnover”, about.com guide, The New York Times Company Joseph K, 2010, “Analyzing an income statement: Return on equity”, about.com guide, The New York Times Company Joseph K, 2010, “Analyzing an income statement: Return on Assets”, about.com guide, The New York Times Company Kennon J, 2010, “Analyzing an income statement: Gross profit”, about.com guide, The New York Times Company Kennon J, 2010, “Analyzing an income statement: Receivable turnover”, about.com guide, The New York Times Company Micro Strategy, 2010, “Financial analysis”, retrieved on November 29, 2010 from http://www.microstrategy.com/financial-analysis/ Transtutor, 2010, “Capital structure ratios”, retrieved on November 29, 2010 from http://www.transtutors.com/finance-homework-help/dividend-decisions-and-tools-of-financial-planning/Capital-Structure-Ratios.as Appendix 1. Calculation of Current Ratio for British Airways Current Ratio for 2010 = Current Assets / Current Liabilities = 2674 / 3740 = 0.72 Current Ratio for 2009 = Current Assets / Current Liabilities = 2346 / 4142 = 0.57 2. Calculation of Quick Ratio for British Airways Quick ratio for 2010 = (Current Assets – Inventories) / Current Liabilities = (2674 – 98) / 3740 = 0.69 Quick ratio for 2009 = (Current Assets – Inventories) / Current Liabilities = (2346 – 127) / 4142 = 0.54 3. Calculation of Debt to Equity for British Airways Debt to Equity Ratio for 2010 = Long-term Debts / Equity = 3446 / 2113 = 1.63 Debt to Equity Ratio for 2009 = Long-term Debts / Equity = 3074 / 1846 = 1.67 4. Calculation of Net Profit Margin for British Airways Net Profit Margin for 2010 = Net Profit / Sales * 100 = - 425 / 7994 *100 = - 5.32% Net Profit Margin for 2009 = Net Profit / Sales * 100 = - 358 / 8992 * 100 = - 3.98% 5. Calculation of Earnings Per Share for British Airways Earnings per Share for 2010 = Net Income / Outstanding shares = - 38.5 cents (given in financial statement) Earnings per Share for 2009 = Net Income / Outstanding shares = - 32.6 cents (given in financial statement) 6. Calculation of Return on Equity for British Airways Return on Equity for 2010 = Net Income / Equity * 100 = - 425 / 2113 * 100 = - 20.11% Return on Equity for 2009 = Net Income / Equity * 100 = - 358 / 1846 * 100 = - 19.39% 7. Calculation of Debt Coverage ratio for British Airways Debt Coverage ratio for 2010 = Non Current Liabilities / Net Cash Flow from Operating Activities = 4824 / 331 = 14.57 Debt Coverage ratio for 2009 = Non Current Liabilities / Net Cash Flow from Operating Activities = 4500 / 133 = 33.83 8. Calculation of Return on Assets for British Airways Return on assets for 2010 = Earnings before Interest and Taxes (EBIT) / Average assets X 100) = -425 / 10677 * 100 = - 3.98% Return on assets for 2009 = Earnings before Interest and Taxes (EBIT) / Average assets X 100) = - 358 / 10488 *100 = - 3.36% 9. Calculation of Asset Turnover Ratio for British Airways Asset Turnover Ratio for 2010 = Sales Revenue / Average Total Assets = 7994 / 10677 = 0.75 Asset Turnover Ratio for 2009 = Sales Revenue / Average Total Assets = 8992 / 10488 = 0.86 Read More