Financial Analysis of Heathrow Airport Holdings Limited - Example

FINANCIAL ANALYSIS OF HEATHROW AIRPORT HOLDINGS LIMITED By Student’s Name Code + Course Name Professor’s Name University Cite, State Date Table of Contents Executive Summary……………………………………………………………………………….3 Introduction………………………………………………………………………………………4 A. Profitability Ratios……………………………………………………………………….4 B. Efficiency Ratios..………………………………………………………………………..7 C. Liquidity Ratios…..……………………………………………………………………….8 D. Gearing Ratios………..…………………………………………………………………..9 Horizontal Analysis...……………………………………………………………………………11 Vertical Analysis………………………………………………………………………………..12 Linking…………………………………………………………………………………………..13 Conclusion & Recommendation………………………………………………………………..14 References List…………………………………………………………………………………..15 Appendix..……………………………………………………………………………………….16 Executive Summary Heathrow Airport Holdings Limited profitability ratios postulate a positive phenomenon despite operation challenges in later years. For instance, the groups’ gross profit increases significantly in the period between 2009 and 2013 from a low of 0.18 to 0.36 respectively. The ROE and ROA also increases insignificantly between the two periods to facilitate an overall positive growth. Notwithstanding, the efficiency ratios also postulate a significant growth in the two periods as the group’s credit turnover ratio implicates a positive growth in the period between 2009 and 2013 from 0.39 to 297. This means that the firm has witnessed improvements in its capacity to pay suppliers on time hence a guarantee for future operations. The liquidity position of the firm however; seems to deteriorate significantly in the two periods between 2009 and 2013 from 0.44 to 0.39. This poor current ratio postulates that the group’s financial prowess and capacity to pay off short-term obligations as and when they fall due has reduced immensely. This is attributed to the decreasing levels of both the amount of cash and cash equivalents as well as trade and other receivables. The debtors ratio postulates a slower growth in the 5 year period indicating that less cash resources from debtors is being received by the firm hence a shortage of cash and cash equivalents. This, in turn, affects the level of current assets hence a poor liquidity ratio. The group’s gearing ratios also postulate significant imbalance given that most of the funds are accessed through borrowings as opposed to share capital. For instance, the loans per capital employed ratio remains stable at 5:1 ratio within the 5-years period. This is greatly depicted by the increased levels of debt in terms of short and long-term borrowings. In a nutshell, it can be seen that the group has made significant efforts to post significant profits at the expense of its gearing and liquidity position. Thus, it is recommended that the firm adopt stringent credit term policy that would allow access to cash flow resource as well as improve on its gearing ratio by adopting a retained earnings policy that sets aside substantial profits for reinvested purposes rather than paying-off dividends. Introduction Heathrow Airport Holdings Limited, which was formerly known as BAA, owns and operates larger UK-based airports like the London Heathrow Airport, Britain’s aviation hub and others like Aberdeen, Southampton and Glasgow Airports (Heathrow Airport Holdings Limited, 2010). The group is solely owned by FGP Topco Limited, which is a consortium that is owned and managed by the Qatar Holdings, Government of Singapore, China Investment Corporation as well as Universities Superannuation Scheme all holding a significant percentage share that lies between 8 and 25 per cent (Heathrow Airport Holdings Limited, 2010). The activities of the group are overseen by both the board and the executive committee with each of the airport being managed by a sole managing director and an entire management team that are tasked with the normal day-to-day operations as well as formulation and delivery of strategies. The focus of this paper rests with the provision of a recommendation to the Emirates Conference in form of a report that would advise the conference on whether or not to go ahead with the plans of constructing a newer runaway in London Heathrow Airport. Thus, the focus of the reports rests with the evaluation of ratio, horizontal and vertical analysis of the group before putting up recommendations for the conference to act upon. A. Profitability Ratios The group’s gross profit margin increases significantly in the five-year period from a low of 0.18 to a high of 0.36 in the periods between 2009 and 2013. This significant improvement in the gross profit ratio is a positive phenomenon as it postulates that enough revenues are maintained for purposes of saving and paying-up for any additional expenses that might be accrued within the future period (Benninga and Oded, 1997). It is assumed that the increase in the ratio might also be attributed to increased sales that might result from the group adopting intensive and effective marketing strategies like intense campaigns and promotions as well as offering air tickets at a discount (Marshall, McManus & Viele, 2008). The group’s profit margin ratio also increases in the period between 2009 and 2010 from 0.19 to 0.22 respectively. However, it decreases tremendously in the financial year ending 2011 to -0.02 before increasing again in the period between 2012 and 2013 from 0.09 to 0.17 respectively. This means that in the period between 2009/2010 and 2012/2013, the group enjoyed a greater proportion of sales revenue being translated to net income as opposed to the period ending 2011. The slower growth of net profit margins in the aforementioned period might be assumed as having been caused by poor economic conditions as well as marketing strategies for the firm (Marshall, McManus & Viele, 2008). The group’s return on assets ratio decreases significantly in the period between 2009 and 2011 from 0.02 to -0.003. However, the ratio picks up again in the period between 2012 and 2013 where it raises from 0.01 to 0.03. The latter increase is a positive phenomenon. It is assumed that the decrease in the former years might be attributed to poor asset utilization or poor maintenance and a lack of skilled personnel to effect enormous sales from the existing asset-base. On the other hand, it can be assumed that the increase of the ratio in the latter years is attributed to experienced and effective workers as well as efficient replacement of assets that are worn out (Marshall, McManus & Viele, 2008). The group’s return on equity ratio also decreases in the period between 2009 and 2011 from 0.17 to -0.02 respectively. However, the ratio rises again in the period between 2012 and 2013 from 0.1 to 0.19 respectively. The increase of the ratio in the latter years is a positive attribute. It is assumed that in these latter years as opposed to the former, the group was able to utilize a great portion of equity to generate sufficient levels of income (Marshall, McManus & Viele, 2008). In general, the groups’ profitability ratio postulates a positive phenomenon hence, a perfect financial health of the firm. Despite the financial hitches in the latter years of operations as result of higher taxation and finance costs, the group has been able to survival the tide. B. Efficiency Ratio The groups, asset turnover ratio increases in the periods between 2009 and 2013 from 0.11 to 0.15 respectively. The increase in the ratio is a positive indication altogether since it means that the group’s has improved its ability to record intensive sales per each dollar used in the purchase of assets. The increase in the sales revenues is attributed to increased passenger growth and also, increases in headline tariffs. Significantly, the airport car parking, rental and airside specialists also contributed to enormous profits. The group’s credit turnover ratio increases significantly in the 5 year period from a low of 0.39 in 2009 to 297 times in 2013. The increase is a positive phenomenon given that it indicates the capacity of the group to pay-off its suppliers has improved tremendously. This can be assumed to be affected by the efficiency of credit terms put forward to clear money owed to suppliers. It might also mean that the cash flow ratio of the firm is stable enough to allow payments in more than one cycle (Marshall, McManus & Viele, 2008). The group’s debtor’s ratio also increases insignificantly in the five-year period between 2009 and 2010 from 0.33 to 0.68 times. This cycle might be assumed to mean that the group allows a flexible credit term policy to its customers that owe money to the firm. This rather low debtor’s turnover ratio might also be attributed to increased sales revenues from the major operations of the firm so that debtors are allowed a more period to pay what they owe. It might also mean that the group enjoys a stable cash flow ratio that emanates from other areas of operations (Marshall, McManus & Viele, 2008). Receivable turnover ratio increases in the period between 2009 and 2012 from 4.29 to 5.76 times respectively. However, it drops significantly in the period ending 2013 to 3.93. The decrease in the ratio might be assumed to be caused by the group’s flexible credit policies that are fairly expounded in the credit turnover ratio. On the contrary, the firm might not be in need of this cash source given that it has a very workable profitability ratio that ensures sales revenues avail enough cash to conduct day-to-day operations (Marshall, McManus & Viele, 2008). In overall, most of the group’s efficiency ratios are deemed to be favorable given that they depict management’s prowess in deploying asset base to effect sales as well as its capacity to pay suppliers on time hence guaranteed of future supply of such products as aircrafts and other notable equipment. C. Liquidity Ratios The group’s current ratio decreases significantly in the period between 2009 and 2013 from 0.44 to 0.39 respectively. Despite this drop, the ratio increased significantly in the period between 2009 and 2010 from 0.44 to 0.86 respectively. It then drops to 0.36 and thereafter to a low of 0.31 in the period between 2011 and 2012. This drop in the current ratio postulates unhealthy phenomenon since it means that the firm’s ability to pay up short-term commitments as and when they fall due has dropped. The drop in the ratio is mainly attributed to the resultant drop in the current assets amount especially because of the drop in the value of cash and cash equivalents within the five year period. It can be noted that the group’s cash flow from investing activities has increased tremendously in the period between 2012 and 2013 from -£421M to £116M respectively. This is largely attributed to cash used in the purchase of property, plant and equipment, as well as cash used in investing in properties that increases tremendously between the two periods. Notwithstanding, the group’s cash flow indicates that the net cash used in financing activities has continued to increase in the period between 2010 and 2013 from £275M to £1,562M respectively. Following this line of reasoning, it is assumed that the cash and cash equivalents kept by the group for daily operations are minimal. In fact, the amount of restricted cash has also been on the rise within these periods prompting a further reduction in the liquid cash needed for paying-off short-term obligations for the firm. It is important to mention that the standard current ratio is 2:1 and thus, the group’s ratio fall below the expected hence a cause for alarm. Most notably, the acid test ratio of the group increases insignificantly in the periods between 2009 and 2013 from 0.34 to 0.37 respectively. This is as a result of increased amounts of cash being used in the investment of short term derivative financial instruments. The purchase of the derivatives financial instruments is carried out by the group as a way of strengthening its immediate current assets base and thus, the current ratio. In overall, it can be ascertained that the group’s liquidity ratio is unfavorable in comparison to the standard ratio requirements. Thus, there is a need to improve on this fundamental ratio in order to attract significant investor trust D. Gearing Ratios The group’s loans per capital employed ratio decreases slightly in the period between 2009 and 2010 from 5.56 to 4.51 respectively. It later increases from 5.12 to 5.67 before settling at 5.22 in the periods between 2011, 2012 and 2013 respectively. Despite the decrease in the first two years, these ratios are considered to be too higher in comparison to the standard requirements of 1:1. It means that the group accesses much of its finances as loans as opposed to equity. This has the likelihood of creating an imbalance and leading the group into paying-off enormous interests from revenues received as a result of the combination of the two finance options. While it might seem un-harmful in the present time, this has the likelihood of creating an enormous burden on the part of the group in terms of accumulated interest costs (Fisher, Heinkel and Zechner, 1989). It is important to note that the current ratio depicts as slower growth due to much investments being set aside for purchasing of plant, property and equipment as well as in investment activities. This has triggered the group into seeking of more and more long-term borrowings in order to meet the fundamental objective of a strong asset base within its portfolio. In consequence, the interest expense ratio also seems to decrease significantly in the period between 2009 and 2010 from a high of 1.38 to a low of 0.23 respectively. However, the ratio picks up again in the period between 2011, 2012 and 2013 from 0.78 to 1.12 and later to 1.37 respectively. Despite the ratio increasing in the latter years of operations, they are still low compared to 1.5 standard ratio requirements. The lowly placed ratio postulates that the group is not generating sufficient revenues that can be used to pay-off the immediate interest expense as and when they fall due (Graham, 2000). This insignificant level of the ratios might be attributed to the enormous borrowings conducted by the firm as indicated by the loans per capital employed ratio above as well as an increase in the amounts of long-term borrowings within the 5 year period. In general, the group’s gearing ratios are unfavorable. They postulate the group has not been able to strike an effective balance between loans and equity funds. It is important to remember that an imbalanced capital portfolio is likely to cause the group more harm than good in regards to increased levels of interest expense, loss of control to the supplier of funds as well as poor potential investors’ trust. Horizontal Analysis Income Statement Analysis: In regards to the income statement, a significant change in sales is perceived in the period ending 2013 where the percentage change is placed at 20%. This change can be attributed to significant increase in revenues due to perfect marketing strategies that continue to increase passenger traffic growth. It is also associated with increased revenues from car rentals, parking and airside shops. In regards to operational profits, there is a significant change within the 4 your period from a 75.7% in 2010 to 219.74% in 2013. This is largely attributed to a reduction in the operation costs of the firm visa vie the revenues that are being collected within the 4 year periods. In regards to net profits, there is a significant reduction in the profits in the period between 2009 and 2010 by -20.7%. This mainly attributed to the tremendous increase in the finance costs of the firm within that period from £825M to £943M as well as a reduction in the finance income from £898M to £173M. A significant increase of 87.85% is however noted in 2011 due to increased revenues in comparison to the expenses incurred within the period. There is a significant change in appropriations noted in all of the years with the period between 2011 and 2012 postulating negative percentages while 2010 and 2013 indicating huge performances. This can be attributed to increase sales revenues thus a significant portion remaining for distributions. Balance Sheet Analysis: In regards to non-current assets, a significant negative change is noted in the periods between 2011, 2012 and 2013 where the percentage changes postulates -6.89%, -11.31% and -6.16% respectively. This is attributed to a tremendous reduction in the group’s intangible asset base from £4,145 in 2009 to £3,084M in 2013. The group’s total current assets undergo significant level of negative changes that increases in the periods between 2011, 2012 and 2013 from -23.29% to-44.29% and later to -28.93% respectively. This reduction is attributed to significant reductions in the amounts of both trade and other receivables as well as cash and cash equivalents. For instance, cash and cash equivalents decreases from £354M to £143M in the period between 2009 and 2013 respectively. There is a significant reduction in total current liabilities in 2010, 2012 and 2013 from -52.53% to -20.06% and later to -18.63% respectively. The reduction is mainly attributed to a decrease in short-term borrowings in the period between 2009 and 2010 from £1,116M to £205M respectively and also, from £1,080M to £721M and later to £878M in the periods between 2011, 2012 and 2013 respectively. The percentage changes can be attributed to significant increase in derivatives financial instruments that increases from £504M to £1,177M in the period between 2009 and 2013 respectively. There is a significant change in the group’s total shareholder equity in the period between 2009 and 2010 by about 16.93%. This is largely attributed to the growth of retained earnings from a negative amount of about £ (2,130) M to £359M within the aforementioned period. Vertical Analysis There is a significant change in the total non-current assets in the period between 2009 and 2011 from -4.76% to -11.02%. This is attributed to the drop in the amounts invested in intangible assets. The values of both current assets and liabilities do not postulate a significant level of change in the 5 year periods. This is attributed to a stable proportionate increase in their values visa vie the total assets. The percentage remains relative at -90.44% to -91.57% for current liabilities while for current assets the percentage values are stable between -95% and 96% in the period between 2009 and 2013 respectively. The same applies for both total long-term liabilities and stockholders’ equity. Linking From the above discussion on ratio, horizontal and vertical analysis, it can be ascertained that the group’s liquidity position as well as revenues base are affected by the distinctive changes in the level of total assets as a percentage of other items within both income and balance sheet statement. It can be ascertained that the level of non-current assets have continued to drop due to a simultaneous drop in the amounts of intangible assets as well as elimination of retirement benefit surplus from the balance sheet. The vertical analysis indicate the group is experiencing a relatively stable proportionate change in both current assets and liabilities as well as the stockholder’s equity, which is greatly affected by the increase or decrease in retained earnings for that matter. Conclusion & Recommendation To sum up the analysis above, it can be noted that Heathrow Airport Holdings Limited has continued to make efforts to post impressive sales revenue at the expense of its liquidity and gearing positions, which are deemed unfavorable. Therefore, the following fundamental recommendations should be adopted by the management team; First, it is recommended that the group ensure that its liquidity position is strengthened enough in order to attract potential investors while at the same time maintain suppliers of materials and other resources. This can be conducted by way of ensuring that a significant sum of money is used to purchase short-term derivatives. It should also ensure that substantial cash flow resource is maintained as cash and cash equivalents for purposes of meeting short-term obligations. Second, it is recommended that the group devise newer ways of improving its gearing ratios in order to reduce the burden attributed to the payment of finance costs. This can be achieved through the adoption of stringent retained earnings policies that would minimize payment of dividends so that substantial amounts of profits are reinvested into operations. Third, it is recommended that the group improves its credit term policies in order to allow any possible credit sales paid on time. This is in a bid to improve on the cash flow resource for day-to-day use. References List Benninga, S, and Oded S, 1997, Corporate Finance: A Valuation Approach, McGraw-Hill, New York Fisher, E, Heinkel, R and Zechner, J. 1989, Dynamic capital structure choice: Theory and tests, Journal of Finance, 44, 19–40 Graham, R, J.2000. How big are the tax benefits of debt? The Journal of Finance, vol.LV, no.5: pp 1901-1942. Heathrow Airport Holdings Limited. 2010. 2010 annual report, Viewed 28 October 2014 http://www.heathrowairport.com/static/HeathrowAboutUs/Downloads/PDF/BAA_Limited_2010.pdf Heathrow Airport Holdings Limited. 2012. 2012 annual report, Viewed 28 October 2014 http://www.heathrowairport.com/static/HeathrowAboutUs/Downloads/PDF/Financial_Information/Heathrow-Airport-Holdings-Limited-%28formerly-BAA-Limited%29-31-December-2012.pdf Heathrow Airport Holdings Limited. 2013. 2013 annual report, Viewed 28 October 2014http://www.heathrowairport.com/static/HeathrowAboutUs/Downloads/PDF/Heathrow_Airport_Holdings_Limited_-_31_December_2013.pdf Marshall, DH, McManus, WW& Viele, DF, (2008). Accounting: what the numbers mean, 8th Ed. McGraw-Hill/Irwin, New-York. Appendix A. Profitability Ratios Year /Ratios 2009 2010 2011 2012 2013 Gross Profit Ratio = (Revenues-COGS/Revenues) (2,210-1,805)/2,210 =0.18 (2,312-1,822)/2,312 =0.21 (2,180-1,561)/2,180 =0.28 (2,362-1,636)/2,362 =0.31 (2,652-1,702)/2,652 =0.36 Profit Margin = Net income/sales 420/2,210 =0.19 (507)/2,312 =0.22 (51)/2,180 =-0.02 219/2,362 =0.09 457/2,652 =0.17 ROA =Net Income/total assets 420/19,648 =0.02 (507)/18,959 =-0.02 (51)/18,963 =-0.003 219/18,652 =0.01 457/18,152 =0.03 ROE= net income/total equity 420/2,408 =0.17 (507)/2,791 =-0.18 (51)/2,480 =-0.02 219/2,265 =0.1 457/2,427 =0.19 B. Efficiency Ratios Year /Ratios 2009 2010 2011 2012 2013 Asset turnover = sales/total assets 2,210/19,648 =0.11times 2,312/18,959 =0.12 times 2,180/18,963 =0.12 times 2,362/18,652 =0.13 times 2,652/18,152 =0.15 times Creditors turnover ratio= credit purchases/average no. of creditors (545+6)/1,413 =0.39 times (495+3)/4 = 124.5 times (549+1)/3 =183.3 times (555+7)/3 =187.3 times (588+6)/2 =297 times Debtors turnover= credit sales /average no of debtors (223+292)/1,573 =0.33 times (132+345)/1,324 =0.36 times (105+302)/598 =0.68 (120+290)/623 =0.66 times (132+288)/614 =0.68 times Receivable turnover ratio=sales/accounts receivable 2,210/(223+292) = 4.29 times 2,312/(132+345) = 4.87 times 2,180/(105+302) =5.36 times 2,362/(120+290) =5.76 times 1,652/(132+288) =3.93 times C. Liquidity Ratio Year /Ratios 2009 2010 2011 2012 2013 Current ratio= current assets/current liabilities 833/1,879=0.44 769/892=0.86 639/1,782=0.36 464/1,502=0.31 592/1,529=0.39 Acid test ratio =(cash+ accounts receivable+ short-term investment)/current liabilities (354+292)/1,879 =0.34 (345+380) /892 =0.81 (302+171+128) /1,782 =0.34 (290+132)/1,502 =0.28 (288+135+143)/ 1,529 =0.37 D. Gearing Ratios Year /Ratios 2009 2010 2011 2012 2013 Loans/Capital employed ratio= total debt/total equity (12,280+1,116) /2,408 =5.56 (205+12,379) /2,791 =4.51 (11,626+1,080) /2,480 =5.12 (12,123+721) /2,265 =5.67 (11,795+878) /2,427 =5.22 Interest cover ratio =EBIT/Interest Expense 1,136/825 =1.38 213/943 =0.23 801/1,033 =0.78 1,101/982 =1.12 1,191/867 =1.37 Horizontal Analysis i) Income Statement Analysis Year /Items 2009 (Base year) % Change in 2010 2011 2012 2013 Sales 2,210 (2,312-2,210)/2,210*100% =4.62% (2,180-2,210)/2,210*100% = -1.36% (2,362-2,210)/2,210*100% =6.88% (2,652-2,210)/2,210*100% = 20% Operational Profit 321 (564-321)/321*100% =75.7% (669-321)/321*100% = 108.4% (775-321)/321*100% =141.4% (1,027-321)/321*100% = 219.74% Net profit 420 (420-507)/420*100% =-20.7% (420-51)/420 =87.85% (219-420)/420*100% =-47.85% (457-420)/420*100% =8.87% Appropriations Attributed to equity (holders of parent) (161) (433-161)/161*100% =168.94% -30-161/(161)*100% =-118.63% (309-161)/(161) =-91.92% (709-161)/(161)*100% =-340.37% ii) Balance Sheet Analysis Year /Items 2009 (Base year) % Change in 2010 % Change in 2011 % Change in 2012 % Change in 2013 Total non-current assets 18,712 (18,190-18,712)/18,712*100% =2.78% (17,423-18,712)/18,712*100% =-6.89% (16,595-18,712)/18,712*100% =-11.31% (17,560-18,712)/18,712*100% =-6.16% Total current assets 833 (769-833)/833*100% =-7.68% (639-833)/833*100% =-23.29% (464-833)/833*100% =-44.29% (592-833)/833*100% =-28.93% Total current liabilities 1,879 (892-1,879)/1,879*100% =-52.53% (1,782-1,879)/1,879*100% =-5.16% (1,502-1,879)/1,879*100% =-20.06% (1,529-1,879)/1,879*100% =-18.63% Total long-term liabilities 15,357 (15,276-15,357)/15,357*100% = -0.53% (14,520-15,357)/15,357*100% =-5.45% (14,622-15,357)15,357*100% = -4.79% (14,196-15,357)/15,357*100% =-7.56% Total shareholder equity 2,387 (2,791-2,387)/2,387*100% =16.93% (2,480-2,387)/2,387*100% =3.89% (2,265-2,387)/2,387*100% =-5.11% (2,427-2,387)/2,387*100% =1.67% Year /Items % Change in 2009 % Change in 2010 % Change in 2011 % Change in 2012 % Change in 2013 Total Assets Values 19,648 18,959 18,963 18,652 18,152 Total non-current assets (18,712-19,648)/ 19,648*100% =-4.76% (18,190-18,959)/ 18,959*100% =-4.06% (17,423-18,963)/ 18,963*100% = -8.12% (16,595-18,652)/ 18,652*100% = -11.02% (17,560- 18,152)/ 18,152*100% =-3.26% Total current assets (833-19,648)/ 19,648*100%= -95.76% (769-18,959)/ 18,959*100% =-95.94% (639-18,963)/ 18,963*100% = -96.63% (464-18,652)/ 18,652*100% =-97.51% (592-18,152)/ 18,152*100% =-96.40% Total current liabilities (1,879-19,648)/ 19,648*100% =-90.44% (892-18,959)/ 18,959*100% =-99.63% (1,782-18,963)/ 18,963*100% = -90.60% (1,502-18,652)/ 18,652*100% = -91.94% (1,529-18,152)/ 18,152*100% =-91.57% Total long-term liabilities (15,357-19,648)/ 19,648*100% =-21.84% (15,276-18,959)/ 18,959 *100% = -19.42% (14,520-18,963)/ 18,963*100% =-23.42% (14,622-18,652)/ 18,652*100% = -21.06% (14,196-18,152)/ 18,152*100% =-21.80% Total shareholder equity (2,387-19,648)/ 19,648*100% =-87.85% (2,791-18,959)/ 18,959*100% = -85.28% (2,480-18,963)/ 18,963*100% =-86.92% (2,265-18,652)/ 18,652*100% =-87.85% (2,427-18,152)/ 18,152*100% =-86.62% Read More