Financial Statement Analysis - Ryanair Holdings Plc and Easy Jet Plc - Case Study Example

Financial ments Analysis All business organizations with corporate status have clearly set objectives andgoals. These goals are visibly defined outlined and so that the companies can achieve them efficiently and effectively. It is doubtless that every business firm’s major goal is to make and maximize profits. For firms to succeed in maximizing profits, they must be cautious about their financial trend. Firms must have a clear understanding of their financial information, as stated in their financial books to avoid losses and deficits (Fridson and Fernando 10). Financial statements analysis therefore, comes in handy. The essay entails an assessment of the financial positions of two companies, Ryanair Holdings Plc and Easy Jet Plc. The assessment is based on the analysis of these companies’ financial statements through the current and previous financial years. The companies considered in the essay are; Ryanair Holdings Plc and Easy Jet Plc. Both firms are public limited companies that are listed on the national stocks exchange market and have their shares traded in the public. The financial documents taken for reference in this analysis are; income statements, statements of financial position (balance sheets), and cash flow statements. Their financial information is analyzed for five financial years, of 2010, 2011, 2012, 2013, and 2014. Emphasis has been placed on specific elements of the books of finance, like; net income (net profit), assets, current liabilities, long-term liabilities, short-term liabilities, long-term debt, total shareholders’ equity and inventories. These elements are summed together to obtain their totals, for the five financial years. The sum totals for each year are applied appropriately to compute the ratios as per the set formulas. Profitability analysis is very crucial for these companies’ survival. Ratio analysis in this essay entails the computation and interpretation of financial ratios to ascertain the companies’ financial situation and performance. According to Fridson and Fernando, ratio analysis can be very helpful to shareholders, creditors, and the c company’s top management. Liquidity ratios together with profitability ratios are the most common financial ratios used in company financial analysis. Liquidity ratios are those that ratios that estimate the capability of a business to fulfill its short term debt obligations. They estimate the strength of a company in terms of paying off its short-term liabilities as they fall due (Palmer 35). Liquidity ratios are obtained through dividing cash and other liquid assets by the short term debts and current liabilities. They reveal the number of times the short term debt obligations are covered by the cash and liquid assets. In case the value is a figure that exceeds 1, then the short-term obligations are fully settled. In general terms, higher liquidity ratios always mean higher margins of safety that a company has to fulfill its current liabilities. Liquidity ratios that exceed 1 show that the corporation is in stable financial position and is less likely find drop into financial difficulties. Profitability ratios are used to estimate a company’s capability to obtain earnings relative to sales, assets and equity. The ratios help to evaluate the ability of a company to obtain earnings, profits and cash flows in relation to the amount of money invested. They show how the effectiveness of a company’s profitability is being managed (Fridson and Fernando 10).The value of inventory is taken to be relevant assets for computation in financial analysis, especially when computing liquidity ratios. The most common financial ratios used in company financial analysis are; Current ratio Quick ratio Cash returns on Capital invested Debt to equity ratio Long-term debt ratio Cash flow returns on sales Cash flow returns on assets Cash flow return on assets Operating Cash flows to current liabilities Cash flows operation index Once these ratios are obtained, the company’s top management will employ the relevant resources to conduct the risk analysis for the company. Risk analysis entails aspects like; Short-term liquidity, long-term solvency, credit risk, bankruptcy risk, financial reporting manipulation risk, and short-term liquidity. The financial ratios used in the analysis are the ones mentioned above. The following section entails the computations of these ratios and their interpretations. For Ryanair Holdings Plcs Profitability and Risk Analysis ratios Current ratio; which is a liquidity ratio that measures a company’s capability to settle its short-term obligations. It is also called the cash asset ratio, cash ratio, or liquidity ratio. A higher current ratio means a higher capability of a company to settle its debts. The formula applied to compute it is; = current assets/current liabilities 2010; = (12192.332/ 6167.408) = 1.9769 2011; = (13840.85/ 7312.06) = 1.8929 2012; = (15426.48/ 7223.7) = 2.1355 2013; = (14979.13/ 7608.57) = 1.9687 2014; = (13708.31/ 9052.51) = 1.5143 The Current ratio was highest in 2012, meaning this is the year when the firm was at its best position to settle its short term debts and obligations. Quick ratio; also called the acid test ratio or the ‘quick assets ratio.’ It is a gauge of the short term liquidity of a business (Helfert and Erich 67). It is used to measure a company’s short term debts and its most liquid assets. A higher quick ratio implies a better position of a company. The formula applied in calculating quick ratio is: (Current Assets – Inventories)/ Current Liabilities 2010; = (12,182.38/ 6167.408) = 1.9753 2011; = (13,830.1/ 7312.06) = 1.8914 2012; = (15,415.34/ 7223.7) = 2.134 2013; = (14,968.38/ 7608.57) = 1.9673 2014; = (13,698.36/ 9052.51) = 1.5132 The current ratio was highest in 2012, meaning it was the year when the company was in the best form. Operating Cash Flow to Current Liabilities; = Cash Flow from Operations/ Average Current Liabilities 2010; = (3468.57/ 6167.408) = 0.5624 2011; = (3129.47/ 7312.06) = 0.428 2012; = (4060.79/ 7223.7) = 0.562 2013; = (4073.53/ 7608.57) = 0.535 2014; = (4157.50/ 9052.51) = 0.459 The Operating Cash Flow to Current Liabilities ratio was highest in 2010. Long-term debt; = Long-term debt L/T debt + S/H Equity 2010; = (10708.99/ 10708.99 + 11337.43) = (10708.99/ 22046.42) = 0.486 2011; = (13184.55/ 13184.55 + 11756.52) = (13184.55/ 24,941.07) = 0.529 2012; = (12962.064/ 12962.064 + 13160.67) = (12962.064/ 26122.734) = 0.496 2013; = (12331.63/ 12331.63 + 13024.95) = (12331.63/ 25356.58) = 0.486 2014; = (10410.49/ 10410.49 + 13077.49) = (10410.49/ 23487.98) = 0.4432 The long-term debt is highest in 2011. Debt/Equity Ratio; which is a quantification of a firm’s financial leverage measured by dividing the total liabilities by stockholders’ equity. The ratio shows the percentage of equity and debt used by the company to fund its assets. The formula used to compute this ratio is = L/T debt S/H Equity 2010; = (10708.99/ 11337.43) = 0.9446 2011; = (13184.55/ 11756.52) = 1.1215 2012; = (12962.06/ 13160.67) = 0.9849 2013; = (12331.63/ 13024.95) = 0.9468 2014; = (10410.49/ 13077.49) = 0.7961 The debt to equity ratio is highest in 2011. Cash flow analysis ratios Cash flow return on assets; = cash flow from operations / total assets = cash flow from operations / revenues 2010; = (3468.57/ 30102.33) = 0.1152 2011; = (3129.47/ 34212.08) = 0.0914 2012; = (4060.79/ 35823.98) = 0.1134 2013; = (4073.53/ 35593.14) = 0.1144 2014; = (4157.51/ 35072.16) = 0.1185 The cash flow return on assets is highest in 2014. Cash flow return on sales; = cash flow from operations / revenues 2010; = (3468.57/ 11892.64) = 0.292 2011; = (3129.47/ 14445.41) = 0.2167 2012; = (4060.79/ 17473.0) = 0.232 2013; = (4073.53/ 19438.32) = 0.21 2014; = (4157.51/ 20046.07) = 0.207 The cash flow return on sales is highest in 2010. Cash flow operations index; = cash flow from operations / operating income. Large rates of cash returns on assets and revenues mean stable cash efficiency. A strong correlation between operating cash flows and operating income indicates sufficiency of cash flows. 2010; = (3468.57/ 1546.63) = 2.243 2011; = (3129.47/ 1936.27) = 1.616 2012; = (4060.79/ 2719.14) = 1.493 2013; = (4073.53/ 2858.44) = 1.425 2014; = (4157.51/ 2621.23) = 1.586 The operations index is highest in 2010. The profitability of Ryanair Holdings Plc has taken an upward trend from 2011 to 2014. Ryanair Holdings’ net income figures were 1215.09, 1490.91, 2230.39, 2265.81, and 2080 in 2011, 2012, 2013 and 2014 financial year respectively. The figures reveal a consistent upward trend for the company, which may be interpreted as a sign of stability in operation. Ryanair Holdings seem to be performing better than its competitors in the same sector, as per the figures. Via Current ratio, Ryanair Holdings Plcs has high annual figures; meaning the company is able to settle its debts, both short term and long term with ease (Helfert and Erich 67). Ryanair Holdings Plcs is therefore well positioned to face the future uncertainties. In the area of Quick ratio, Ryanair Holdings has fairly high figures, which is an indication that the company can be able to keep operating with more efficiency. The company’s future is bound to be penetrable. The long-term debt ratio of Easy Jet Company is fair, meaning the Company is better placed in terms of its capability to settle long-term debts. The debt to equity ratio is also fair; meaning the financial standing of Ryanair Holdings is good, in terms of the ability to repay its obligations. The companies are however far from the optimum debt to equity ratio of 1, which is considered acceptable. At 1, the liabilities are equal to the equity. For Easy Jet Plc Profitability and Risk Analysis ratios Current ratio; which is a liquidity ratio that measures a company’s capability to settle its short-term obligations. It is also called the cash asset ratio, cash ratio, or liquidity ratio. A higher current ratio means a higher capability of a company to settle its debts. The formula applied to compute it is; = current assets/current liabilities 2010; = (8362.248/ 5876.592) = 1.4223 2011; = (9593.76/ 6497.04) = 1.4767 2012; = (7325.04/ 6977.28) = 1.0498 2013; = (7992.96/ 7612.08) = 1.0500 2014; = (6960.72/ 7838.4) = 0.8880 The Current ratio was highest in 2011, meaning this is the year when the firm was at its best position to settle its short term debts and obligations. Operating Cash Flow to Current Liabilities; = Cash Flow from Operations/ Average Current Liabilities 2010; = (2005.97/ 13809.94) = 0.1453 2011; = (2340.48/ 15257.28) = 0.1534 2012; = (1440.72/ 13805.52) = 0.1044 2013; = (3400.32/ 13220.4) = 0.2572 2014; = (2174.88/ 12751.2) = 0.1706 The cash flow return on sales is highest in 2011. The Operating Cash Flow to Current Liabilities ratio was highest in 2013. Long-term debt; = Long-term debt L/T debt + S/H Equity 2010; = (5986.99/ 5986.99+ 8283.86) = (5986.99/ 14270.85) = 0.4195 2011; = (6320.4/ 6320.4+ 9411.6) = (6320.4/ 15732) = 0.4018 2012; = (4570.56/ 4570.56+ 9902.88) = (4570.56/ 14473.44) = 0.3158 2013; = (3267.84/ 3267.84+ 11133.84) = (4570.56/ 14401.68) = 0.3174 2014; = (2605.44/ 2605.44 + 11989.44) = (2605.44/ 14594.88) = 0.1785. The long-term debt is highest in 2010. Debt/Equity Ratio; which is a quantification of a firm’s financial leverage measured by dividing the total liabilities by stockholders’ equity. The ratio shows the percentage of equity and debt used by the company to fund its assets. The formula used to compute this ratio is; = L/T debt S/H Equity 2010; = (5986.992/ 8283.86) = 0.7227 2011; = (6320.4/ 9411.6) = 0.6716 2012; = (4570.56/ 9902.88) = 0.4615 2013; = (3267.84/ 11133.84) = 0.2935 2014; = (2605.44/ 11989.44) = 0.2173 The debt to equity ratio is highest in 2010. Cash flow analysis ratios Cash flow return on assets; = cash flow from operations / total assets = cash flow from operations / revenues 2010; = (2005.97/ 22093.8) = 0.0907 2011; = (2340.48/ 24668.88) = 0.0949 2012; = (1440.72/ 23708.4) = 0.0608 2013; = (3400.32/ 24354.24) = 0.1396 2014; = (2174.88/ 24740.64) = 0.0879 The cash flow return on assets is highest in 2013. Cash flow return on sales; = cash flow from operations / revenues 2010; = (2005.97/ 16411.51) = 0.1222 2011; = (2340.48/ 19055.04) = 0.1228 2012; = (1440.72/ 21274.08) = 0.0677 2013; = (3400.32/ 23504.16) = 0.1447 2014; = (2174.88/ 24989.04) = 0.0870 The cash flow return on sales is highest in 2011. Operations index; = cash flow from operations / operating income. Large rates of cash returns on assets and revenues mean stable cash efficiency. A strong correlation between operating cash flows and operating income indicates sufficiency of cash flows. 2010; = (2005.97/ 958.27) = 2.093 2011; = (2340.48/ 1484.88) = 1.576 2012; = (1440.72/ 1827.12) = 0.789 2013; = (3400.32/ 2743.44) = 0.012 2014; = (2174.88/ 3207.12) = 0.678 The operations index is highest in 2010. The profitability of Easy Jet Plc has also taken an upward trend from 2011 to 2014. Easy Jet Plc’s net income figures were 669.58, 1242.00, 1407.60, 2196.96, and 2484.00, in 2011, 2012, 2013 and 2014 financial year respectively. Via Current ratio, Easy Jet Plc has high annual current ratios meaning a higher capability of a company to settle its debts, Easy Jet Plc is well placed to face the future (Helfert and Erich 67). The low efficiency may impact the company’s productivity negatively in the future. In terms of cost control, the company will experience difficulties in the future. The financial standing of Easy Jet Plc, in terms of the ability to repay its obligations is poor. However, the company’s debt to equity ratio is far from the optimum debt to equity ratio of 1 where liabilities are expected to be equal to the equity. As mentioned in the previous section, the financial ratios computed above can be used to compare the financial positions of the two companies to ascertain the one that is better placed. For profitability ratios and liquidity ratios, a higher value is generally more desirable. In general terms, higher profitability ratios indicate more stability of a company. They mean accompany is better placed to settle its dues and obligations. The profitability of both companies has taken an upward trend from 2011 to 2014. Ryanair Holdings’ net income figures were 1215.09, 1490.91, 2230.39, 2265.81, and 2080 in 2011, 2012, 2013 and 2014 financial year respectively. Easy Jet Plc’s net income figures were 669.58, 1242.00, 1407.60, 2196.96, and 2484.00, in 2011, 2012, 2013 and 2014 financial year respectively. The figures reveal a consistent upward trend for both companies, which may be interpreted as a sign of stability in operation. Ryanair Holdings seem to be performing better than Easy Jet Plcs as per the figures. It is not accurate to interpret the stability or financial capability of a company barely with these figures (Palmer 231). Deeper assessment must be done to ascertain other silent elements that determine a firm’s efficiency and effectiveness. Some of the factors include the costs incurred by the company in its daily operations. In conclusion, the assessment of the financial position of any company is based on the analysis of its profitability against its leverage or liquidity. The profitability analysis process constitutes the analysis of the key financial ratios (Helfert and Erich 177). In the analysis, Ryanair Holdings Plc is better than Easy Jet Plc in the key areas of profitability and liquidity. The ratios computed and analyzed above reveal that Ryanair Holdings has more chances to face the future effectively and efficiently. It is because Ryanair Holdings is currently able to settle its debts and fulfill its obligations, both in the short run and the long run. Works Cited Fridson, S., and Fernando Alvarez. Financial Statement Analysis a Practitioners Guide. 3rd ed. New York: John Wiley & Sons, 2012. Print. Top of Form Helfert, Erich A., and Erich A. Helfert. Financial Analysis Tools and Techniques : A Guide for Managers. New York: McGraw-Hill, 2011. Print. Top of Form Palmer, Joseph E. Financial Ratio Analysis. New York, N.Y.: American Institute of Certified Public Accountants, 2013 {1983 Reprint}. Print Read More