British Airways Financial Statements - Example

Question One

Internal Users of financial statements

Internal users of financial statements include the shareholders (owners), employees, and management. The shareholders provide the start-up capital and the funds necessary to run an organization. They are interested in the financial statement information about their investments because they need to know whether their investments are being employed in a proper way or not and the return on their investments together with the dividend pay-out ratio. This information is important in deciding whether to keep their investments intact or to withdraw from the company. The information also helps the shareholders in assessing their personal taxes (Siddiqqui, 2015).

Employees use financial statement information to determine their job security. The financial information about the company is helpful in determining whether they will continue to receive their pay and bonuses in future or not. They rely on the profitability and sales information of the company to know the financial health of the company, and the possibility of employment opportunities and pay rise in the future. This information leads them to make a decision on whether to keep working in the company or look for opportunities elsewhere (Puneet Accounting, 2016).

Financial statement information is important for management in carrying out their functions of planning, organizations, controlling, co-ordinating, and directing activities within the organization (Vincent, 2014). They use the financial statement information to assess the profitability of a project or business in which they have allocated the resources. They use financial statement information to evaluate the financial positon of the organization so that they can make the necessary changes within the organization to improve the expected results.

External users of financial statements

External users of financial statement include investors, regulatory bodies, creditors, and customers. The regulatory bodies use the financial statement information to assess whether the company is in compliance with the set regulations such as environment protection laws, tax laws, consumer protection laws, and employee protection laws. The regulatory bodies also seek to protect the public from being exploited by the company.

Creditors use financial information to assess the credit worthiness of the company. They are interested in the liabilities side of the financial statements. A company with high debt ratio may not be suitable to supply goods to on credit. Creditors in this case refer to lenders like bank and trade creditors like suppliers. They use the information from financial statements to set terms of credit and to analyse the financial health of the company in order to decide whether to offer credit or not.

Customers use the financial information to assess the financial viability of the company, especially those who have a long term relationship with the company. They would like to know whether they will continue to receive the products or services in the long term or not. Customers are also interested in movement of prices of the products; therefore, they would like to know whether the company has instituted cost cutting initiatives that can lead to price reduction.

Investors also use financial statement information in assessing the inherent risk in putting their money in the company. They analyse the profitability of the company in order to decide whether to offer resources to the company or not. The potential investors are interested in knowing that their investments will be in safe hands, so they are interested to know the prosperity of the entity, in all angles; from profitability, compliance with the accounting standards, and other regulations.

Question Two

Primary Objectives of British Airways

British Airways has a vision to become the world’s leading global premium airline. Its primary objective is to increase the shareholders’ wealth. The secondary objectives of British Airways are first to improve customer experience, minimize cost of running the business, growing the business, and corporate social responsibility (British Airways, 2009). In a bid to achieve the objetive of increasing the customer experience, the management has ensured punctuality and proper baggage handling across all networks. The innovation of the new ‘Club World’ in the premium section has also improved customer service. There is also a good reception for the customers, to ensure that they can rest before and after a flight. With the flactuating fuel prices, there is a need to monitor and regulate costs of operations. The severance program initiated in 2008 has reduced the total number of managers by one thrid; leading to reduced operational costs. The resources were also arranged in a manner necessary to meet demand and and use fuel most effiiently (References for Business, 2015).

British Airways also plans to grow in order to meet the growing demand of customers. It has established new paths between London and Hyderabad and St Kitts. It also has subsidiary companies like OpenSkies, which serve customers between Europe and North America. Additional acquisitions of L’Avion in 2008 and launching of JFK service in New York also serves to contribute towards the growth of this company. Another way in which the company seeks to achieve this objective is through the six new aircrafts (Boeing 777-300ER), two of which were purchased and four leased. The company has also undertaken to train its staff, those who work both in the air and on ground, to deliver high class hospitality. The in-flight entertainment system and the app than enables the customers to check in from their mobile phones, also seeks to improve customer experience.

The corporate responsibility objective involves activities and goals to recycle waste, reduce carbon emmissions and wastes, minimize noise and air pollution. These goals are set to be achieved through the continuous investments in community relation programmes and raising money to help the needy in society. The company seeks to reduce carbon emmissions by 25 percent per Revenue Passenger Kilometer (RPK).

In order to achieve these goals and objectives, British Airways has aligned its activities towards one major goal of becoming a global premium airline. Its customers, employees, partners, and other stakeholders have all been taken into consideration during the designing of these objectives. The company has sought to achieve exellence in performance of its activities, in order to serve all its stakeholders (British Airways, 2010).

Question Three

Profitability Ratios

The operating profit margin ratio is calculated as the operating pofit or earnings before interst and tax divide by sales and multiplied by 100%. The resultant figure implies the ability of the company to monitor and control its operating costs such as rent and rates, electricity expense, administrative costs, cleaning expense, and other operating expenses (McGrawHill Higher Education, 2016).

The net profit margin is calculated as the profit after tax divide by the sales figure, miltiplied by 100%. The figure indicates the company’s capability to control its financing expenses, including the interest expense (McGrawHill Higher Education, 2016). The profitability ratios for British airways in the four years are calculated below:

Year

2011

2012

2013

2014

Operating Profit (x) in £ Million

518

233

708

975

Sales (y) in £ Million

9,987

10,827

11,421

11,719

Operating Profit Margin Ratio= x/y

5.19%

2.15%

6.20%

8.32%

Net Profit (a) in £ Million

672

114

284

702

Net Profit Margin (a/y)

6.73%

1.05%

2.49%

5.99%

Table 1: Profitability ratio analysis for the year 2011-2014. Source: (FE Investigate, 2015).

Figure 1: Figure showing the trends in the profitability ratios between 2011 and 2014

The graph shows a drop in the profitability ration between 2011 and 2012, meaning that there was a significant increase in the operating costs, which can be attributed to the increasing fuel costs and a decline in the cargo revenue due to the weak cargo market (British Airways Plc, 2012). However, there was a steady increase in the ration from 2012 to 2014 due to the high performance in the premium carbin and British Airways holiday package.

The net profit margin also reahed bottom in the year 2012 but increased steadily in the subsequent two years. The drop in 2012 is attributed to increase in non-fuel costs which came as a result of acquisition of BMI and the restructuring costs. The steady increase in the subsequent years is as a result of the accrued benefits from the restructuring (British Airways Plc, 2013).

Efficiency Ratios

These ratios show the efficiency with which the company’s management has utilized its resources in generating its revenues. Debtors Turnover is calculated as annual credit sales over average debtors. It shows how many times customers receive the service on credit, after paying their debts to the company. Creditors turnover is calculated as the annual credit purchases over average creditors. It indicates how many times the company made credit purchases after paying its suppliers(McGrawHill Higher Education, 2016).

Year

2011

2012

2013

2014

Credit Sales

80

33

41

0

Beginning debtors

368

448

481

522

Closing debtors

448

481

522

516

Average Debtors

408

464.5

501.5

519

Debtors Turnover

0.20

0.07

0.08

-0.01

Credit Purchases

370

689

252

0

Beginning Creditors

5103

5473

6162

6414

Ending Creditors

5473

6162

6414

5595

Average Creditors

5288

5817.5

6288

6004.5

Creditors turnover

0.069969743

0.118435754

0.040076336

0

Table 2: Efficiency ratio Analysis. Source: (British Airways Plc, 2013).

Figure 2: Graph showing the trends in efficiency ratios

The graph indicates that the debtors turnover decreased significantly over the years, meaning that customers who bought on credit reduced over time and paid less number of times. The drop in 2012 can be attributed to the acquisition of British Midland Airways as the company took up its trade, assets and liabilities in November 2012 (British Airways Plc, 2012). The creditors turnover increased in 2012 but declined steadily over the next two years, meaning that the company takes longer time to pay its debts. The rise in 2012 is attributed to the significant increase in the value of accruals and defferred income, mainly the customer loyalty programmes.

Financial/Stability Ratios

These ratios indicate the level of debt and equity financing in the company. The Debt ratio is calculated as total debt divide by total assets. It shows the percentage of assets that is financed by debt. The value of total debt is calculated by summing up the current and non current liabilities. Another financial ratio is the Times Earning Ratio which indicates how many times the interest expense can be paid from the company’s earnings. It is calculated as the profit before interest and tax divide by interest expense (McGrawHill Higher Education, 2016). The debt ratio and times earning ratio for British Airways in the years 2011 to 2014 are calculated below:

Year

2011

2012

2013

2014

Current Liabilities

6,024.00

6,866.00

6,917.00

6,831.00

Non Current Liabilities

5,045.00

4,590.00

4,849.00

5,825.00

Total Debt

11,069.00

11,456.00

11,766.00

12,656.00

Total Assets

13,227.00

13,997.00

14,031.00

14,451.00

Debt Ratio

0.84

0.82

0.84

0.88

Profit Before interest and tax

518.00

- 89.00

105.00

665.00

Interest Expense

161.00

173.00

176.00

37.00

Price Earning Ratio

3.22

- 0.51

0.60

17.97

Table 3: Financial Ratio Analysis Source: (British Aiways Plc, 2015).

Figure 4: Graph showing the movement in financial ratios from 2011 to 2014

The graph indicates that the debt ratio has remained almost constant throughout the years. It also shows that an average of 84% of the company’s assets are financed by debt. The price earning ratio dropped in 2012 but started to rise again. In 2013, the figure of price earning ratio shot up due to the high profit levels experienced in 2014 and a significant decrease in the bank loans. The reduced loans meant a significant reduction in the value of interest expense during the year. The negative value in 2012 was due to the losses in the year, attributed to the acquired liabilities and lossess from British Midland Airways.

Investor Ratios

Earnings Per Share (EPS) is used to show the profitability of the firm per share held by each investor. It is calculated as the profit after tax, interest and preference dividends divide by the number of ordinary shares held. A high value of EPS indicates that each investor share has high earning power. The Dividends per share (DPS) is calculated as the dividends paid divided by the number of ordinary shares issued. It is used to indicate the dividend that has been received for each share held by an investor. The Dividend Payout Ratio represents the percentage of earnings that was distributed as dividends. It is calculated as DPS divide by EPS and multiplied by 100% (McGrawHill Higher Education, 2016). Investor ratios for British Airways are below:

Year

2011

2012

2013

2014

Profit After Tax

672.00

114.00

284.00

702.00

Prefferred Dividends

-

-

-

-

Net Profit after Tax and preferred dividends

672.00

114.00

284.00

702.00

Number of Ordinary shares

1,996.00

1,996.00

2,144.00

2,144.00

EPS

0.34

0.06

0.13

0.33

Dividends Paid

0

0

0

0

DPS

-

-

-

-

Dividend Payout Ratio

0%

0%

0%

0%

Table 5: Investor ratio analysis Source: (British Airways Plc,2015)

Figure 5: Graph showing the movement in investor ratios between 2011 to 2014.

From the graph above, it can be noted that the DPS is constant at zero throughout the four years. This is attributed to the fact that directors throughout the year have recommended that no dividends be paid throughout the four years. The earnings per share declined in 2012 due to the signifiant drop in the profit value attributed to the acquisition of BMI and the increased restructuring costs. The steady increasein 2013 and 2014 is attributed to the high performance in the premium carbin and British Airways holiday package.

Conclusion

In general, British Airways performed poorly in the year 2012, due to the acquistion of BMI and British Midland Airways, which resulted to high restructuring costs. In the subsequent years however, general performance of British Airways was top notch. The benefits of the restructuring that the company underwent in 2012 began to acrue. An investor will be interested in investing in British Airways now due to the high profitability values.

Reference List

British Airways., 2009. British Airways 2008/09 Annual Report and Accounts. [Online]Available at:<https://www.britishairways.com/cms/global/microsites/ba_reports0809/pdfs/Strategy.pdf> [Acessed 7 May 2016].

British Airways., 2010. Director's Report and Business Overview. [Online] Available at: <https://www.britishairways.com/cms/global/microsites/ba_reports0910/our_business/strategy2.html> [Acessed 7 May 2016].

British Airways Plc., 2012. Annual Reports and Accounts: year Ended 2012. Harmondsworth: British Airways. [Online]Available at:<http://www.google.co.ke/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0ahUKEwj9iPv_tcfMAhXLPxoKHc4QAMAQFggdMAA&url=http%3A%2F%2Fphx.corporate-ir.net%2FExternal.File%3Fitem%3DUGFyZW50SUQ9NTYzNTg1fENoaWxkSUQ9MjYzNjgwfFR5cGU9MQ%3D%3D%26t%3D1&us> [Acessed 7 May 2016].

British Airways Plc., 2013. Annual Reports and Accounts: Year Ended 31/12/2015. Harmondsworth: British Airways Plc.[Online]Available at: <http://www.google.co.ke/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&ved=0ahUKEwj9iPv_tcfMAhXLPxoKHc4QAMAQFggkMAE&url=http%3A%2F%2Fphx.corporate-ir.net%2FExternal.File%3Fitem%3DUGFyZW50SUQ9NTYzNTg2fENoaWxkSUQ9MjYzNjgxfFR5cGU9MQ%3D%3D%26t%3D1&usg=AFQjCNGGVEPLL> [Acessed 7 May 2016].

British Aiways Plc., 2015. British Airways Annual Reports and Accounts: year ended 31/12/2014.[Online]Available at: <http://www.google.co.ke/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0ahUKEwi4ieCVuMjMAhXKnRoKHaLbAuMQFggdMAA&url=http%3A%2F%2Fphx.corporate-ir.net%2FExternal.File%3Fitem%3DUGFyZW50SUQ9NTczNzgxfENoaWxkSUQ9Mjc2MjY2fFR5cGU9MQ%3D%3D%26t%3D1&us> [Acessed 7 May 2016].

FE Investigate., 2015. Annual Financial Reports. British Airways Plc. [Online] Available at:< http://www.investegate.co.uk/ArticlePrint.aspx?id=201503191304459196H> [Acessed May 7 2016].

McGrawHill Higher Education., 2016. Chapter 13: Financial Statement Analysis . [Online]Available at: <http://www.gws_rd=ssl#safe=active&q=financial+statement+analysis+pdf> [Acessed 7 May 2016].

Puneet Accounting., 2016. Users of Accounting Information. [Online]Available at: <http://www.yourarticlelibrary.com/accounting/users-of-accounting-information/49976/> [Acessed 7 May 2016].

References for Business., 2015. Company History Index: British Airways Plc.[Online] Available at: <http://www.referenceforbusiness.com/history2/2/British-Airways-PLC.html> [Acessed 7 May 2016].

Siddiqqui, F., 2015. The users of accounting information and their needs. [Online] Available at: <https://www.linkedin.com/pulse/users-accounting-information-needs-fareed> [Acessed 7 May 2016].

Vincent, V., 2014. Five Functions of Management by Henri Fayol. [Online] Available at: <http://www.toolshero.com/management/five-functions-of-management/> [Acessed 7 May 2016].