Analysis of Financial Statement of EasyJet - Case Study Example

Letter to the Investor Pursuant to our conversation yesterday regarding your interest in investing $100,000 in easyJet shares, I should like to inform you that investing all your money in equity shares of a single company will carry considerable risk for you. At this stage in your life, it would be more prudent to consider a specific mix of equity, bonds, and money market, customised according to when you would like to withdraw certain amounts to answer for your cash needs. A mix of 50% equity, 25% bonds, and 25% money market funds would perhaps be practical for you at this time. We can alter this mix in subsequent years when a more conservative investment position would be appropriate. Since you expressed interest in one equity in particular and you requested me to study the Annual Report of easyJet, I should like to inform you that the analysis of a companys Annual Report is only a starting point in your learning journey of how to appraise a company for the purpose of investing in it or, if you already have an equity position, of maintaining, or even increasing your existing portfolio in that company. Later on, you will find it helpful to access other sources of information which will not only add to your stock of knowledge of a particular company but also to do a check on the facts and analysis. The easyJet Annual Report as a whole easyJets’s Annual Report contains essential information about the business as a whole, the financial summaries, the financial statements, and the accompanying Notes to the financial statements. The letter of the Chairman/CEO gives you an introduction or overview but it is not a substitute for a more thorough and detailed study and analysis. The Business Review section of easyJets’s Annual Report presents some - but not all - essential information for users of their financial statements. The information provided in the Business Review consists of those that the management feels are important for the reader to know before giving more detailed and in-depth information. During the year under review, the company, consistent with its strategy of expansion, acquired GB Airways, increasing significantly its number of aircraft. This mean the utilisation of a large portion of its cash reserve from operations for the purpose. It has also expanded and diversified its airport network despite an environment of generally slow demand for travel. Because easyJet was able to attract travellers owing to its reduced fares, plus the sourcing of ancillary revenues from other activities, it was able to increase total revenues for 2008. However, the increasing cost of fuel oil made a considerable impact on its cost structure, thus causing net profit to fall slightly from its level the previous year. The company still managed to obtain a 7.6 return on equity for the year. Additional measures were the cost control measures, more efficient use of aircraft, and hedging strategies for fuel prices, exchange rates, and interest rates. Hedging reduces the risks of sudden and massive fluctuations in these variables which could otherwise cause disruptions in the companys finances. Thus, there would seem to less to worry about whether your initial investment would suddenly drop in value after you start your investment. With a thrusting and proactive approach of management, it may even be safe for you to do dollar cost averaging which would be a good move when share prices are choppy. Segmentation The companys fleet of aircraft only have Europe as its geographic segment. The companys low fares and efficient operations are its distinctive advantage in this airport network. Auditors and conflict of interest easyJet is audited by one of the worlds leading auditors, PricewaterhouseCoopers LLC. Although you might have heard of this companys being mentioned in relation to some accounting irregularities elsewhere in the past, the airline company has established safeguard policies that would protect the company from conflicts of interest, particularly where non-audit work is combined with audit work. For this reason, I believe that you can trust that easyJet will not succumb to the same fate that befell Enron, Worldcom,(thanks to another auditing firm, Arthur Andersen) or Indias Satyam, and that the financial figures we are analyzing are true and fair reflection of the reality of the companys operations. Business risks Like any business, easyJet faces some operational and financial risks. The Annual Report identifies several elements of operational risk faced by the company. These include the economic demand risks for air travel owing to the global financial crisis and other factors and changing consumer attitudes, the moves of competitors, regulatory intervention, industrial action, and others. The financial risks are the increasing or unstable fuel prices and currency fluctuations, adverse movements in financing costs and interest rates, and liquidity risk coupled with the risk that investment may be constrained by lack of cash or accessibility to sources of cash. easyJet has prepared contingency plans and measures to counter adverse developments in the areas of its operations that are vulnerable to these risks. In addition to the above risks, the company ought to consider systematic risks as measured by the beta. Some websites such as msn and reuters often indicate their calculated betas of specific companies. The use of beta tells the investor to what extent a company moves relative to the movement of the market as a whole where the market could be the FTSE index. For example, if easyJets beta is .70, it means it fluctuates with less volatility than the whole market. A tool called the Capital Asset Pricing Model (CAPM) is used to discover a companys beta. For the European airline industry the impact of the global financial crisis on consumer demand for travel is evident in the reduced profitability of many companies in 2008. For the budget-fare airlines such as easyJet, however, such impact was dampened by reduced fares, cost cutting, and the creative moves to diversify and expand ancillary sources of revenue. The profit squeeze was caused mainly by acceleration of fuel oil prices. According to forecast, easyJet is expected to remain profitable in 2009. Brokerage firm Collins Steward believes that easyJet is expected to outperform the market in terms of yields, despite the challenging revenue environment, with the carrier also expected to see increased demand of at least 3.4%. The brokerage added that easyJet has “very strong earnings momentum over the coming years. Returns are set to bounce back into value-creation territory, and there is scope for further upside if costs can be cut further than management’s current plan” (Ryanair expects losses). The airline industry in general is expected to recover only in 2011 Financial Analysis The Annual Report provides very few ratios of interest to investors but one notes that the ratios provided in the Annual Report are the profit margins, return on equity, and gearing ratio (defined as the proportion of loan capital to the total capital employed). The current ratio is important because it tells the investor how adequate are the liquid current assets to pay for current obligations when they fall due within the year. The benchmark is 2:1, but industry norms differ according to stability (utility companies, with stable earnings, can usually operate with lower current ratio.) The excess is called net working capital ( $301 million for easyJet in 2008). The current ratio, the indicator of the ability to pay obligations that mature within one year is 1.55:1. The debt-to-equity (or gearing) ratio (easyJet: .287) shows the proportion of debt relative to the owners equity, and tests a companys ability to pay liabilities out of the net assets. A high gearing ratio that is close to 1 (e.g. .90) would be a danger signal for investors because it means that the company is taking a risk that it will shoulder a large interest expense, at the same time compromising its ability to settle obligations in order to survive. A high gearing ratio is possible for diversified companies and companies with stable cash flows such as General Electric, if the profit expected significantly exceeds interest payments on the debt. The investor will examine the financial statements in order to derive this ratio. In terms of solvency and liquidity, easyJet passes the test. It is not taking undue risks that would compromise its ability to pay it obligations at any time. The return on the equity is 7.8 percent in 2008 compared to 13.3 in 2007. These ratios tell you that the company is efficient in increasing sales and controlling costs, thereby yielding higher values for investors. Additional relevant ratios that can be derived are earnings per share (0.22.1p for easyJet), price-earnings ratio and dividend yield. Problems in making comparisons and in-depth study There is no uniformity in the way companies in general, and even companies in a specific industry, present their Annual Report. Some are complex and couched in heavily technical language (such as that of easyJet) and others are simpler, designed to help the investor understand the information (Ryanair is an example). For the investor with little or no accounting background, wading through the Annual Reports and the financial statements can quite laborious. The financial statements are quantitative information that the management communicates to investors and other persons concerning the performance of the business. The balance sheet shows a snapshot of a companys assets and fund sources as of a specific date. The income statement pertains to revenues, expenses, and profits for a particular accounting period. The cash flow statement shows the sources and uses of cash, also for the same period. All these are passive data, i. e., data rendered as identification and description of the quantitative outcomes of company operations. They do not describe the relationships of the data or what these relationships mean. The diligent investor would have to extract meaning out of the welter of data through the analysis of relationships and through the computation of financial ratios. While financial ratios can help the studious investor understand financial data, they are not sufficient. The reasons are as follows: Firstly, the Annual Report only presents the financial picture and results for one period. In order to understand the financial condition better, he should be able to see the financial statements of shorter periods, such as the quarterly statements. Also, he may need to see the data for the past 5 or 10 years to enable him to see the trend as well as to examine the impact of major macroeconomic and other events on the companys financial performance in the course of a longer period of time. Secondly, there are a lot of elaborations and qualifications on the financial statements that he can only get from the Notes to the Financial Statements. Such Notes are often stated in highly technical jargon that is often virtually incomprehensible. For example, there might be off-balance sheet liabilities that can have a tremendous impact on the business when they materialise. When a huge pension liability is recognised, for example, it may cause the shareholders equity to become negative, thus endangering the investors capital. Unless the reader understands the language, he cannot be forewarned. Third, and finally, there are numerous by which accountants can manipulate the financial data because some manipulations are not prohibited by generally accepted accounting principles. The management may resort to manipulation in order to give an appearance of stability to investors and thereby support share prices. My recommendation to you is to make a comparative study of easyJet and the airline industry as a whole and with other member companies of the industry. While on one hand it is not easy to overcome technical jargon, at least one can use other information sources and analyses to supplement the reading of Annual Reports. Aircraft safety The consolidated balance sheet shows only Property, plant and equipment, but there are numerous references to maintenance in the Notes. Elsewhere, the company takes pride in its maintenance record. The CSR report in its website maintains that most of its aircraft are young, averaging 2.2 years old, and that its plains average 85 percent load factor which means improved efficiency. The company undertakes regular maintenance work on its aircraft as part of the provisions of the operating lease agreements with the lessors. The companys safety policy is excellent and should induce confidence among travellers and investors alike. Cash liquidity easyJet had significant cash flow generated from operating activities in 2008 amounting to $296.2 million, up 9.2 percent from the previous year level. The cash expenditure during the year was $324 million for the purchase of property, plant and equipment, and $118 for the acquisition of a subsidiary, GB Airways. Net cash flows from financing activities were nearly insignificant, with payment of bank loans ($43 million) being almost cancelled out by new drawdowns of bank loans $40 million. Exchange rate fluctuations resulted in some gain in cash source of $29 million. The cash flow statement shows the changes in the balance sheet items. They tell the investor how the company obtained its cash and how such cash were used, on a net basis, over a period of one year. Sources of cash are net profits and depreciation expense, reduction in asset items and increases in the liability and equity items. Uses of cash are the increase in asset items and the repayment of liabilities and reduction in equity. The income statement only shows the the revenues, expenses and the net profits. The net profit and the depreciation charge which is added back becomes the major part of cash generated from operating activities. On the basis of data presented in the Annual Report, easyJet has a healthy cash position, and its cash generated from operations are preparing the company to undertake investments when the right opportunity comes. Corporate Social Responsibility & ethical practice All major corporations devote some of their resources to improve their public image through the exercise of corporate social responsibility. One component thereof is a set of ethical precepts that the company and its employees follow and carry out in fulfilling their duties. For this company directors, officers, and employees are enjoined to do their work efficiently and diligently while treating all customers and other people "with courtesy and decorum." (Annual Report 2008, 25). Procurement is subject to controls to ensure openness and transparency and avoidance of conflict of interest. There are also rules on accepting gifts and gratuities. Such ethical behavior, together with impeccability in environmental and social activities, is designed to sustain business success, calculated to yield positive benefits for stockholders, suppliers, and consumers.(Annual Report 2008, 18) Conclusion. Becoming a wise and sophisticated investor requires diligent study and the consistent use of good judgment. The Annual Report gives one a view of the company and its fundamentals. Assuming the data therein are reliable, the understanding of the financial figures and their relationships is a good start for the analytical investor. He must go further - by consulting other information sources through the press and the Internet. At the same time, he should not forget that technical analysis and its tools are available. Technical analysis enables the investor to time his market entry and exit. Bibliography Brealey, RA, Myers, SC & Marcus AJ 1999, Fundamentals of corporate finance, 2nd edn., McGraw Hill, New York. Brigham EF & Gapenski, LC 1996, Intermediate financial management, 5th edn., The Dryden Press, Orlando, FL Ryanair expects losses, Centre for Aviation, viewed 15 Nov 2009 (http://www.centreforaviation.com/news/share-market/2009/11/03/ryanair-expects-losses-in-3q2010-and-4q2010-on-continued-fare-reductions/page1) APPENDIX Answers to questions. easyJet Questions Do you think the Business Review in easyJet’s Annual Report provides the essential information for users of their financial statements? Which groups of users in particular would find it valuable? The groups of users of Annual Report data and information may be enumerated as follows: 1) individual investors, 2) retirement and pension funds, 3) mutual funds, 4) insurance companies, 5) trust department of commercial banks, 6) financial and investment analysts and advisors, 7) creditors, and 8) government regulators. The Business Review section of easyJets’s Annual Report presents some - but not all - essential information for users of their financial statements. The information provided in the Business Review consists of those that the management feels are important for the reader to know before giving more detailed and in-depth information. 2. Identify the key aspects of business performance discussed in the Business Review that Emmanuil should know. Use your judgment to identify those that would be of more interest to your client. Not having had a good idea of what easyJet does, it is necessary to inform the prospective investor about what the airline does and what in general is its strategy and business model which gives the company distinctive competence in the budget airline market. A major development such as its acquisition of another airline should be mentioned, denoting an aggressive expansion strategy that will probably yield long-term benefits for stockholders. Secondly, the information on the companys profit performance in the midst of a difficult environment should be mentioned - the fact that it has managed to achieve a positive , though reduced, return on equity of 7.6 per cent in 2008 compared to that of the year before. Thirdly, its healthy cash flow generated from operations and the availability of financing for future fixed asset acquisitions is worth mentioning. The acquisition and disposition of aircraft, and the justification for these decisions may also be mentioned. This implies that expansion and/or diversification of routes in its network can be undertaken when opportunities present themselves. Fourthly, the management’s initiatives to enhance revenue and at the same time control costs to cope with inflation triggered by fuel cost increases can indicate the management’s concern for consistency in profit performance resulting in stable share prices. Cost management can include hedging strategies that the management has uses in order to reduce the risk of spiraling fuel prices and exchange and interest rate volatilities. 3. How does the segmental analysis provided in the Annual Reports help a user to analyse business performance? Do you think that easyJet could provide a more detailed geographical segmental analysis? The company has only one segment, as the Annual Report points out -- that of "providing low-cost airline service." The geographical segment of the Group relates to the origin of its revenues which is Europe. For many large businesses, segmental analysis provides an insight into the distribution of its revenues and profits across the different segments. The management consistently refuses to provide a detailed segmental analysis in its Annual Reports. 4. Identify one of EasyJet’s main competitors, and evaluate the relative quality of both reports in terms of how informative they are for a potential investor. (see Ryanair accounts) Ryanair presents its reports in a more readable, investor-friendly fashion, though not as elegant looking as that of easyJet. The topics are presented in a logical, more easily comprehensible manner. It also provides more detailed financial information. 5. Refer to the Audit Report for easyJet plc. Who are easyJet’s external auditors? Will they continue to audit the company next year? What sort of audit opinion did Easyjet receive in 2007? Explain, in your own words, what such an audit opinion means. The external auditors are PricewaterhouseCoopers LLP which had been reappointed in February 2008. The terms of reference of that reappointment addressed areas of actual and potential conflicts of interest of Board members. In order to preserve auditor independence, the auditor was not to be asked to provide consulting services unless this was "in the best interest of the company. " The company spent L0.9 million for non-audit services paid to the auditors and other parties in 2008. The opinion given by PricewaterhouseCoopers LLP, consisting of four paragraphs, is totally favorable, which may be quoted as follows: • the Group financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state of the Group’s affairs as at 30 September 2008 and of its profit and cash flows for the year then ended; • the parent company financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union as applied in accordance with the provisions of the Companies Act 1985, of the state of the parent company’s affairs as at 30 September 2008 and cash flows for the year then ended; • the financial statements and the part of the Report on Directors’ remuneration to be audited have been properly prepared in accordance with the Companies Act 1985 and, as regards the Group financial statements, Article 4 of the IAS Regulation; and • the information given in the Directors’ report is consistent with the financial statements (Annual Report, p. 45) With the favorable opinion and existing good professional relationship between easyJet and the auditors, it is expected that PricewaterhouseCoopers will again be hired to do the external audit job in 2009. Analysis of content (80%) 6. Identify and discuss the main elements of business risk faced by easyJet. What is your assessment of the likely impact of the current global financial crisis on easyJet’s business risk? These business risks are classified mainly into operational risks and financial risks. The Annual Report identifies several elements of operational risk faced by the company. These include the economic demand risks for air travel owing to the global financial crisis and other factors and changing consumer attitudes, the moves of competitors, regulatory intervention, industrial action, and others. The financial risks are the increasing or unstable fuel prices and currency fluctuations, adverse movements in financing costs and interest rates, and liquidity risk coupled with the risk that investment may be constrained by lack of cash or accessibility to sources of cash. For the European airline industry the impact of the global financial crisis on consumer demand for travel is evident in the reduced profitability of many companies in 2008. For the budget-fare airlines such as easyJet, however, such impact was dampened by reduced fares, cost cutting, and the creative moves to diversify and expand ancillary sources of revenue. The profit squeeze was caused mainly by acceleration of fuel oil prices. According to forecast, easyJet is expected to remain profitable in 2009. The airline industry in general is expected to recover only in 2011 (See http://www.centreforaviation.com/news/share-market/2009/11/03/ryanair-expects-losses-in-3q2010-and-4q2010-on-continued-fare-reductions/page1 ) 7. Explain easyJet’s accounting policy for the treatment of research and development (R&D) expenditure, and discuss its implications for reported profitability. There is no mention in the Annual Report or in easyJets’s website of research and development. External sources of information on the company also failed to give any data on budget or expenditure on Research and Development during the last five years. In general, R&D is undertaken by companies in order to support the corporate strategy for long-term growth. Companies like Boeing and General Electric allocate massive sums of money for research and development in order to maintain as well as improve their lead in the market over the long haul. Such expenditures are capitalized and amortized over a period of years a new technology is being marketed and will thus affect the profit margin, being an expense, but will not affect the cash flow from operations. 8. Do you believe easyJet is an ethical company? What evidence is provided (or lacking) in the Annual Report to support your opinion? All major corporations devote some of their resources to improve their public image through the exercise of corporate social responsibility. One component thereof is a set of ethical precepts that the company and its employees follow and carry out in fulfilling their duties. For this company directors, officers, and employees are enjoined to do their work efficiently and diligently while treating all customers and other people "with courtesy and decorum." (Annual Report 2008, 25). Procurement is subject to controls to ensure openness and transparency and avoidance of conflict of interest. There are also rules on accepting gifts and gratuities. Such ethical behavior, together with impeccability in environmental and social activities, is designed to sustain business success, calculated to yield positive benefits for stockholders, suppliers, and consumers.(Annual Report 2008, 18) 9. The Annual Report provides a series of ratios which may help users to analyse business performance. Identify some key ratios, and explain why you believe these are useful for potential investors. The Annual Report provides very few ratios of interest to investors. A diligent researcher would have to dig into the financial statements and compute the other ratios which the normal investor would consider meaningful. The ratios provided in the Annual Report are the profit margins, return on equity, and gearing ratio (defined as the proportion of loan capital to the total capital employed). The current ratio is important because it tells the investor how adequate are the liquid current assets to pay for current obligations when they fall due within the year. The benchmark is 2:1, but industry norms differ according to stability (utility companies, with stable earnings, can usually operate with lower current ratio.) The excess is called net working capital (here $301 million for easyJet in 2008). A more stringent ratio - the acid-test ratio - measures current assets less inventory in relation to current liabilities. Companies that derive their revenue from services usually have very minimal inventory levels, hence the acid-test ratio does not diverge much from the current ratio. The debt-to-equity (or gearing) ratio (easyJet: .287) shows the proportion of debt relative to the owners equity, and tests a companys ability to pay liabilities out of the net assets. A high gearing ratio that is close to 1 (e.g. .90) would be a danger signal for investors because it means that the company is taking a risk that it will shoulder a large interest expense, at the same time compromising its ability to settle obligations in order to survive. A high gearing ratio is possible for diversified companies and companies with stable cash flows such as General Electric, if the profit expected significantly exceeds interest payments on the debt. Another solvency test is the ratio of long-term debt to total capitalisation (long-term debt plus equity). This measures how much of the long-term capital is accounted for by long-term obligations. The investor will examine the financial statements in order to derive this ratio. In addition, the investor must look for return on revenue, return on assets, and return on equity (7.8 percent in 2008 for the latter). These ratios tell him that the company is efficient in increasing sales and controlling costs, thereby yielding higher values for investors. Additional relevant ratios that can be derived are earnings per share, price-earnings ratio, and dividend yield. 10. Discuss the potential problems which may arise in trying to compare easyJet’s financial performance with that of a key competitor based solely on the financial statements. Explain whether the use of ratios can help to overcome such problems. There is no uniformity in the way companies in general, and even companies in a specific industry, present their Annual Report. Some are complex and couched in heavily technical language (such as that of easyJet) and others are simpler, designed to help the investor understand the information (Ryanair is an example). For the investor with little or no accounting background, wading through the Annual Reports and the financial statements can quite laborious. The financial statements are quantitative information that the management communicates to investors and other persons concerning the performance of the business. The balance sheet shows a snapshot of a companys assets and fund sources as of a specific date. The income statement pertains to revenues, expenses, and profits for a particular accounting period. The cash flow statement shows the sources and uses of cash, also for the same period. All these are passive data, i. e., data rendered as identification and description of the quantitative outcomes of company operations. They do not describe the relationships of the data or what these relationships mean. The diligent investor would have to extract meaning out of the welter of data through the analysis of relationships and through the computation of financial ratios. While financial ratios can help the studious investor understand financial data, they are not sufficient. The reasons are as follows: Firstly, the Annual Report only presents the financial picture and results for one period. In order to understand the financial condition better, he should be able to see the financial statements of shorter periods, such as the quarterly statements. Also, he may need to see the data for the past 5 or 10 years to enable him to see the trend as well as to examine the impact of major macroeconomic and other events on the companys financial performance in the course of a longer period of time. Secondly, there are a lot of elaborations and qualifications on the financial statements that he can only get from the Notes to the Financial Statements. Such Notes are often stated in highly technical jargon that is often virtually incomprehensible. For example, there might be off-balance sheet liabilities that can have a tremendous impact on the business when they materialise. When a huge pension liability is recognized, for example, it may cause the shareholders equity to become negative, thus endangering the investors capital. Unless the reader understands the language, he cannot be forewarned. Third, and finally, there are numerous leeways by which accountants can manipulate the financial data because these are not prohibited by generally accepted accounting principles. The management may resort to manipulation in order to give an appearance of stability to investors and thereby support share prices. 11. Refer to easyJets’s consolidated balance sheet and explain whether the company’s aircrafts are being kept well renewed. Use any ratio you think is relevant. The consolidated balance sheet shows only Property, plant and equipment, but there are numerous references to maintenance in the Notes. Elsewhere, the company takes pride in its maintenance record. The CSR report in its website maintains that most of its aircraft are young, averaging 2.2 years old, and that its plains average 85 percent load factor which means improved efficiency. The consolidated balance sheet shows only Property, plant and equipment, but there are numerous references to maintenance in the Notes. Elsewhere, the company takes pride in its maintenance record. The CSR report in its website maintains that most of its aircraft are young, averaging 2.2 years old, and that its plains average 85 percent load factor. The company uses "preventive" maintenance through investment in new aircraft, efficient use of aircraft, avoidance of congested hub airports, and focusing on short-haul destinations. easyJet incurs liabilities for maintenance costs in respect of aircraft leased under operating leases during the term of the lease. These arise from legal and constructive contractual obligations relating to the condition of the aircraft when it is returned to the lessor. To discharge these obligations, easyJet will also normally need to carry out one heavy maintenance check on each of the engines and the airframe during the lease term. easyJet is contractually obliged to carry out maintenance on leased aircraft, and the cost of this is provided based on the number of flying hours and cycles operated. Supplementary rent is pledged to lessors to provide collateral should an aircraft be returned in a condition that does not meet the requirements of the lease and is refunded when qualifying heavy maintenance is performed, or is offset against the costs incurred at the end of the lease. A charge is made in the income statement based on hours or cycles flown to provide for the cost of these obligations. Estimates required include the likely utilisation of the aircraft, the expected cost of the heavy maintenance check at the time it is expected to occur, the condition of the aircraft and the lifespan of life-limited parts. The bases of all estimates are reviewed once each year, and also when information becomes available that is capable of causing a material change to an estimate, such as renegotiation of end of lease return conditions, increased or decreased utilisation, or unanticipated changes in the cost of heavy maintenance service 12. Refer to easyJet’s Consolidated Cash Flow Statement: Did easyJet generate significant cash from operations during 2008? What were the most significant uses of cash during the year? What additional important insights into a company’s performance are offered by a Cash Flow Statement as compared with an Income Statement? easyJet had significant cash flow generated from operating activities in 2008 amounting to $296.2 million, up 9.2 percent from the previous year level. The cash expenditure during the year was $324 million for the purchase of property, plant and equipment, and $118 for the acquisition of a subsidiary, GB Airways. Net cash flows from financing activities were nearly insignificant, with payment of bank loans ($43 million) being almost cancelled out by new drawdowns of bank loans $40 million. Exchange rate fluctuations resulted in some gain in cash source of $29 million. The cash flow statement shows the changes in the balance sheet items. They tell the investor how the company obtained its cash and how such cash were used, on a net basis, over a period of one year. Sources of cash are net profits and depreciation expense, reduction in asset items and increases in the liability and equity items. Uses of cash are the increase in asset items and the repayment of liabilities and reduction in equity. The income statement only shows the the revenues, expenses and the net profits. The net profit and the depreciation charge which is added back becomes the major part of cash generated from operating activities. 13. In your opinion what are the limitations of easyJet’s Annual Report, and what additional information do you believe should be included that is likely to be useful to users? The easyJet Annual Report looks sophisticated and highly technical in the way the data and information are presented. For government regulators, the Annual Report would probably obtain high marks, but for the investor, it will be difficult for him to obtain the meaningful information that he is looking for. It would have been more convenient if the language had less jargon and were reader friendly. Ryanair did better in this respect. I have read many Annual Reports, and some of them show more ratios and charts, and they display more comparable periods - five years or more of balance sheet and income statement data -- not just two years. This is an area where easyJet needs improvement. The Annual Report only gives historical data. It does not say how the company is doing today or during the past months. It does not say how much the share prices are or have been in the recent periods. It is therefore recommended that the investor consult other sources of information - magazines, financial newspapers, blogsites of financial and investment analysts, and websites such as msn, yahoo, and reuters. Aside from fundamental data, he should also look at the price movements and trends and consider using technical indicators such as moving averages. According to brokerage, Collins Steward, easyJet is expected to outperform the market in terms of yields, despite the challenging revenue environment, with the carrier also expected to see increased demand of at least 3.4%. The brokerage added that easyJet has “very strong earnings momentum over the coming years. Returns are set to bounce back into value-creation territory, and there is scope for further upside if costs can be cut further than management’s current plan”. http://www.centreforaviation.com/news/share-market/2009/11/03/ryanair-expects-losses-in-3q2010-and-4q2010-on-continued-fare-reductions/page1 Read More