Financial Analysis: British Airways Plc - Case Study Example

Financial Analysis: British Airways Plc. Number Financial Analysis: British Airways Plc. Table of Contents Table of Contents 2 1. Narrative Summary 1.1. Importance of Narrative Summary Narrative summary of the annual report is a consolidated overview of the position of the business presently and also provides information on any challenges posed to the business in future. This information is utilized by auditors who analyze this information for its reliability in comparison to the financial statements and users can in this manner build up their opinion whether it is safe to invest in this business or not. 1.2. Chairman Statement and CEO Statement CEO or Chief Executive Officer has unlimited authority in the organization and has an executive position in the business, whereas the Chairman is the controller of the entire Board of Directors. Both, the statements of Chairman and CEO provide an objective but rich view of the financial status of the organization. Furthermore it also gives the achievements and challenges of the company. There are certain parallels between their statements such as • Their discussion on the loss that the company has incurred in 2008/09, • Increased rivalry and achievements of the airline in respect to its operations The difference that prevails in their statements is that the Chairman is more oriented towards the present structure of the company. This is evident from: • His discussion of the merger with Iberia and other companies, all under consideration • The role of CAA in regulating BAA airports • The British government in meeting the financial crisis • Upcoming London Olympics Whereas the CEO report provides future outlook of the business keeping in view • The tougher economic conditions the airline is focusing on in lieu of which it is cutting back its operational costs and reducing its fleet size (British Airways, 2009). 1.3. Issues in CFO Report Report presented by the CFO is to propose the reasons for losses occurring in year ending 2009. All this is mentioned to be because of the current economic recession and increase in prices of fuel. CFO report also discusses different business sectors’ performance in the year ending 2009. Some highlights of the report by the CFO may be of great interest for investors though. These include: • Rise in revenue by 2.7% to £8,992 million compared to the last year • Company’s operating expenditure increased by 16.9% in the same period which exceeds its revenues resulting in a loss of £401mn. • The company did not announce any dividends for the year ended • Earnings per share is -32.6p • Operational costs comprise of fuel costs and interest costs (British Airways, 2009). 1.4. Risks and Uncertainties The yearly report recognizes foremost dangers and uncertainties associated to the business. These dangers are recognized as those associated to brand recognition, rivalry, consolidation and deregulation, liability funding, natural environment, fuel cost and currency fluctuation, fuel supply, slowdown of the international financial position, government interference, operational constraints at the Heathrow Airport, key suppliers, benefits after retirement and incidences involving security and safety of passengers. Some of these dangers such as government guideline, currency fluctuations, security etc could be mitigated through effective risk administration although not all of them can be taken and the airline has to integrate these dangers into their enterprise decisions. Risks sway the continuity of the enterprise without interruptions and British Airways have underscored these dangers as a part of their risk administration and business governance schemes which are furthermore revealed in the yearly report (British Airways, 2009). 2. The Audit Report 2.1. What is the role of auditors? Auditors are responsible for providing financial information which is accurate and to independently evaluate the precision of financial information. 2.2. Auditors & Auditors Opinion Ernst & Young LLC is one of the most renowned audit firms and the financial statements of British Airways Plc. have been audited by them. Their views on the financial statements include: 1) The financial statements of British Airways give true and fair view in accordance with International Financial Reporting Standards (IFRS) 2) The report on directors’ remuneration is prepared in accordance with the Companies Act 1985 and 3) The directors’ report and business review are in line with the financial information provided by the company (British Airways, 2009). The audit opinion is concluded after rigorous audit activities and diversified study of the operations. The audit opinion implies that the fiscal information offered in the financial statements of British Airways, is organized in accord to the established accounting standards and practices under IFRS. The directors’ compensation which is of main concern to shareholders and general public is also examined for comprehensiveness and correctness. In adding up to this the business evaluation and matter of corporate governance which are enclosed in directors’ statement are also charged by auditors to make certain that the management of the company assures the accomplishment of adequate controls, whistle blowers and audit teams responsibly lapse the whole accounting and reporting framework. 2.3. Submission of Audit Report The auditors submit their audit report on a different date than the actual year end. The reason for this is due to the reason that the auditors only finish their review and evaluation of interior controls only when the year being evaluated ends. The review of the same report takes a number of weeks before the report can be finalized. 3. Performance Analysis 3.1. Consolidated Income Statement A consolidated review of the company income statements points out that • Revenue is rising upwards by 2.7%. This was mainly due to devaluation of currency and a rise in cargo bookings • This resulted in improvement of 9.4% in cargo sales • Overall the traffic was seen to have declined in 2009 • Other income also declined £60 million • The fuel and oil costs surged by 44.5%. This alone augmented to 32% of the total expenditure of British Airways. This expenditure totaled to 26% last year. This was all due to the increase in price of fuel globally • The company suffered an operating loss of £358 million which has weakened the company net position in 2009 (British Airways, 2009) 3.2. Change in Fuel and Costs Prices of Fuel and Oil are the main contributors to the cost of operations. Changes in these prices are seen to have moved the prices positively or negatively. $148 per barrel in July 2008 was the stipulated price for fuel which made fuel expenses hike up to £915 million, even though the airline business was slow. The company underwent profound fuel surcharges and losses. 3.3. Earnings per share Earnings per share would help an investor realize how much return is expected from the investment. The statistics show that Primary EPS of British Airways was -32.6p in 2009 and 62.1p in 2008 (British Airways, 2009). This indicates that the company has incurred a loss in 2009 which has resulted in negative EPS for the year. 3.4. Financial Ratio Analysis Four ratios calculated in the following section are helpful in interpreting the company’s position to any investor. As seen below from the table of calculated ratios: • Current ratio is lower than 1 which means that British Airways is probable to have problems in achieving its short term goals. • Debt to Equity Ratio is too high which means the company is under a lot of debt and is probable to have difficulties in paying that off. • Net Profit Margin is negative which means there is no return on the capital being invested and similarly, • Return on Equity is also negative which means that the company is not at all profitable. Ratio 2008 2009 Current Ratio 3,111/ 3,492 = 0.89 2,346/ 4,142 = 0.57 Debt to Equity Ratio 4,538 + 3,492 /3,262 = 246.17% 4,500 + 4,142 /1,846 = 468.15% Net Profit Margin 726/ 8,758 = 8.29% (358)/ 8,992 = -3.98% Return on Equity 726/3,062 = 23.71% (358)/ 1,646 = -21.75% Source for figures (British Airways, 2009) 3.5. Comparability Issues Comparability issues include the difficulty in comparison of British Airways with another company. The reason for this being 1) Difference among the nature of business environment and conditions governing other companies 2) Difference in accounting treatments in other companies 3) Difference in the date the fiscal year closes. Financial ratios can be compared in order to remove the differences to some but this analysis might not be useful in removing all the factors discussed in this analysis. 4. Review of Consolidated Cash Flow Statement A consolidated review of the company’s cash flow statements points out that British Airways has a net cash flow of £133 million from its activities in 2009. This shows a downfall from £303 million in 2008 (British Airways, 2009). The major chunk of cash flows are derived from 1) Interest received of £105 million 2) Downfall in interest bearing deposits of £202 million and 3) Inflow from long term borrowings of £377 million. However on the other hand major consumption of cash flow has been 1) Acquiring of property, plant and equipment worth £547 million 2) Payoff of leased liabilities of £402 million and 3) Payoff of Interest around £177 million (British Airways, 2009). It is significant to examine the Cash Flow statement with deference to the limitations of the income statement as the corporation organizes its cash flow using indirect method which relies on the figure of net profit in the income statement. The net income figure is derived from deduction of cost of sales, expenses and other charges. As a result, the user of this information needs to recognize the limitations of net profit figures in conditions of the correctness of the income statement constituents. 5. Notes to the Financial Statements Three significant figures included in the remarks to the economic declarations are: 5.1. Summary of Accounting Policies The part in the remarks presents accounting principles and methods which have been utilized by the business to record and report distinct enterprise transactions and economic elements. This permits users to comprehend how and why separate economic numbers differ between businesses as they take up distinct accounting treatments for reporting. 5.2. Segment Information Notes to economic declarations encompass segment data which presents list of assets, liabilities and details of transactions and later earnings or reduce affiliation with them flanked by distinct segments of the matching business. This data is significant as it assists to consider risk inside the business and it is broadly utilized by investigation to recognize and realize distinct constituents of an entity working together. One feeble enterprise segment can have influence on the entire. Therefore, not just economic status of enterprise segments but furthermore dangers affiliated with their procedures require to be understood. 5.3. Financial Risks Management Objectives and Policies Information considering economic dangers and company’s principles to organize them are furthermore encompassed in remarks to the economic statements. British Airways is faced with many dangers as recognized in the preceding sections. This data piece presents economic facts and numbers considering distinct dangers and really quantifies them and the activities taken by the business to organize and mitigate them. Thus, this permits users to pattern standards of the enterprise affiliated with diverse enterprise risks. 6. Limitations of Annual Report The most vital limitation of the use of economic data accessible in yearly accounts from an investor’s issue of outlook is that this data is chronicled and the time gap between the time of announcing of yearly report and buying into can give increase to matters which may sway the enterprise severely. The yearly report could encompass economic ratio investigation and competitors’ analysis. Also comprehensive abstract of economic best features of preceding years could have been supplied to enhance comparison. May be comprehensive data considering the enterprise of its subsidiaries and their economic place could have been encompassed in the yearly report. References British Airways. (2009). British Airways 2008/09 Annual Report and Accounts. London: British Airways Plc. Read More