Brief Description of Industry and Easy Jet - Assignment Example

Table of Contents Introduction 2 Brief Description of Industry and Easy Jet 2 Financial Analysis 3 Conclusion 13 References 15 Appendix 16 Introduction The success of a business is largely dependent on the manner in which they are able to grow and financial statement provides good information about it. Merely looking at the financial figures doesn’t provide any information but interpreting the same helps to understand it better. It helps to understand the manner in which the business has progressed, the future prospect, the sources of financing and so on. This report looks towards making a financial comparison of Easy Jet and Ryanair Holding for 2015 and 2014 so that the performance of both the companies can be gauged. The report also provides description about the industry, the business and the different sources of financing which was used by Easy Jet. The report will thereby help to understand the different core areas which both the organization needs to be stress on so that the future financial performance can be improved. This will also help investors to take useful decision of investing in the business and would help to analyze the risk and return associated with their investments. Brief Description of Industry and Easy Jet Easy Jet is a low cost airlines operating in the airline segment in Britain. The organization is listed on the London Stock Exchange and has both domestic and international services for its customers. Based on the service model which the business has adopted since it came into operation in 1995 the business has increased to a fleet of over 200 aircrafts. The airline operates on over 700 routes in 32 different countries. The airline operates in the service sector where customer satisfaction is a priority and the business looks at having different mechanism through which customer satisfaction can be enhanced. The main source of revenue for the business is by transporting people from one place to another whereas the secondary source of income is from transporting goods from one place to another. On an average Easy Jet transports over 65 million passengers which have contributed towards improving their bottom line. Since, it flies to 32 different countries and over 134 destinations it has been able to meet the different needs of customers at a lower price. Easy Jet relies of providing quality service to its customer so that they become loyal to the organization. This has helped Easy Jet to have a pool of loyal customers. Being a low cost provider has enabled them to attract people from all segment of the society and has contributed towards improving their bottom lines. Financial Analysis Analyzing the financial statement helps investors to take useful investing decisions as based on past performance and future expected performance decision to invest in the organization can be taken. Comparing the performance of one organization with another further helps to look at a bigger perspective and provide useful information regarding the manner in which different business decisions can be taken (Kramer & Johnson, 2009). The paper now looks to present the financial comparison of Easy Jet and Ryanair Holding so that the core strengths, weakness, past performance and expected future performance for both the companies can be analyzed. This will help investors to take useful investing decisions. The comparison of the ratios for Easy Jet and Ryanair Holding are as Profitability Ratios Profitability ratios help to analyze the manner in which the business was able to use the different resources to ensure better returns for the shareholders. The analysis helps to understand the manner in which different business decisions pertaining to investment, financing and business functioning were taken (Benjamin & Spencer, 2007). Organizations continuously strive towards improving their bottom lines so that return to the shareholders can improve. This provides businesses an opportunity to expand and raise fresh finance for the business. The profitability analysis which compares the performance of Easy Jet and Ryanair Holding is as Return on Assets (ROA): The ratio helps to analyze the manner in which both the short and long term assets are used by the business to generate profits. This ratio throws light on whether the business has more assets or fewer assets than required. It also provides insights regarding the changes which the business has to do with regard to their asset base so that productivity is improved. The ratios for Easy Jet and Ryanair Holding are as Figure 1: Return on Assets The comparison of the ratio for Easy Jet and Ryanair Holding shows that the use of assets have improved for both Easy Jet and Ryanair Holding in 2015 as compared to 2014. It signifies that assets were used in a better way so that the bottom line for the business can be improved. The analysis also shows that Easy Jet has performed better than Ryanair Holding in both the year highlighting better efficiency in use of assets. The performance of Easy Jet has been better because of higher profits and low asset base showing that assets were used more efficiently in generating profits. Net Profit Margin: This ratio helps to understand the profits which are finally attributed to the stakeholders. This ratio is calculated after deducting all the expenses and holds an important aspect for decision making as shareholders look towards it to understand the performance of the business (Deloof, 2003). A good profit margin ensures easy availability of finance as investors visualize the company to be performing well and feels that the investments are safe. This helps the shareholders to feel safe about their investment which thereby gets reflected in better business and economic decisions (Wong 2009). The comparison of the ratios for Easy Jet and Ryanair Holding are as Figure 2: Net Profit Margin The analysis shows that the net profit margin has improved for both Easy Jet and Ryanair Holding in 2015 as compared to 2014. This highlights better return for the shareholders and ensures that they are properly compensated for the risk undertaken by investing in the business. A more detailed look shows that Ryanair Holding performance has been better as compared to Easy Jet. This will require that Easy Jet looks towards reducing cost so that overall profits can be improved and the shareholders can be given better returns on their investment. In addition to it both Easy Jet and Ryanair Holding has to aim towards cutting down cost and improving business performance so that efficiency is achieved. Gross Profit Margin: This ratio helps to understand the profit which the business is able to earn after reducing the direct cost associated with the business. This ratio thereby helps to determine the price for the product which the business can look to charge in the market (Eljelly, 2004). The ratios for gross profit are as Figure 3: Gross Profit Margin The ratio highlights that both Easy Jet and Ryanair Holding have a substantial gross profit which has further increased in 2015 as compared to 2014. It is even seen that Easy Jet has a very high gross profit as compared to Ryanair Holding showing that the direct cost associated with the business is very low. This is a good sign but on the reverse the net profit is low highlighting very high indirect cost which needs to be controlled so that more and more returns can be attributed to the shareholders. Return on Equity (ROE): This ratio looks to understand the manner in which the business is able to compensate the shareholders. Having a sound ratio ensures that the shareholders are compensated fairly and they are happy with the organization which thereby ensures easy availability of finance for the business. The ratios are as Figure 4: Return on Equity The ratio highlights that both Easy Jet and Ryanair Holding have improved their returns to the shareholders in 2015 as compared to 2014. It is also seen that both the organization have nearly the same ratio with regard to return to shareholders showing consistency and efficiency in carrying out the different business activities. Efficiency Ratios These ratios are important for business as it helps to determine the manner in which the business is able to use its different resources to generate sales and ensure better profits for the business. This helps business to take important decisions pertaining to different resources which have to be purchased or sold in the future so that overall business performance is improved (Finance. 2011). The comparison of the ratios of Easy Jet and Ryanair Holding are as Receivable Turnover Ratio: This ratio helps to understand the manner in which accounts receivable is revolved in the market and the manner in which money is collected from the market (Lyroudi & Lazaridis, 2000). This helps business to formulate the credit policies so that financial risk for the business can be mitigated and overall business effectiveness can be improved for a long period of time. The ratios for Easy Jet and Ryanair Holding is as Figure 5: Receivable Turnover Ratio The ratio shows wide difference between Easy Jet and Ryanair Holding highlighting that businesses have adopted different credit policies. It is seen that Easy Jet revolves its debtors more in comparison to Ryanair Holding highlighting better credit policies. This has reduced the chances of bad debts thereby reducing the chances of a liquidity crunch in the business. Ryanair Holding have to improve their credit policies so that chances of bad debts is reduced and the business has sufficient liquidity through which the normal business activities can be carried out effectively. Asset Turnover Ratio: This ratio highlights the manner in which the business has been able to generate revenues from the investment made in assets. This helps the business to take decisions regarding the assets which has to be purchased or sold so that more and more revenues can be generated and the business is able to improve its performance (Sons, 2002). The ratios for Easy Jet and Ryanair Holding are as Figure 6: Asset Turnover Ratio A comparison of the ratios for Easy Jet and Ryanair Holding shows that the use of assets have decreased for both the companies in 2015 as compared to 2014 which is a worrying sign. Steps have to be taken to improve the use of assets so that bottom line can be improved. Further a substantial drop has been witnessed in the use of assets by Ryanair Holding as compared to Easy Jet which would require looking into the reasons so that steps can be taken to prevent it. Both the organization has to look at the manner in which the assets are used and have to take steps to ensure better productivity through the use of different assets. Liquidity Ratios This ratio looks into the short term liquidity and aims at having sufficient liquidity so that the daily expenses of the business can be easily met. This ratio is important as it helps to deal with the daily expenses and helps to understand whether the business would fall in a financial crisis or not (Padachi, 2006). The future funding capability of the business is based on the ratio and holds an important place in determining the manner in which business financials will be used for business development. The ratios for Easy Jet and Ryanair Holding are as Current Ratio: This ratio looks to ascertain whether the business will be able to meet its short term obligation out of short term assets so that business doesn’t face a liquidity crunch. This is one of the most important ratios as it helps to deal with the financial needs and looks to ascertain the manner in which the short term obligations will be met (Gandy, 2011). The ratios are as Figure 7: Current Ratio It is seen that the ratio for Easy Jet has decreased in 2015 as compared to 2014 which is a worrying sign. Further the ratio is 0.72 in 2015 and 0.88 in 2014 showing the inability of the business to meet its short term obligation out of short term assets. The business has to look towards finding out ways through which they can cover their short term obligations so that they don’t fall under a liquidity crunch. Quick Ratio: This ratio helps to analyze the ability of the business to meet its short term obligation after removing inventories. This ratio helps the business to take important decisions pertaining to inventory and ensure that appropriate steps are taken to reduce the chances of a liquidiy crunch (Antony, 2004). The ratios are as Figure 8: Quick Ratio The ratio for both Easy Jet and Ryanair Holding is very low and has decreased in 2015 as compared to 2014. The ratio shows the inability of the business to meet its short term obligations out of short term assets. The ratio for Ryanair Holding is further very low and steps have to be taken to improve it as the business would otherwise face difficulties associated with liquidity. Easy Jet also has to look towards improving the ratio so that better asset utilization becomes possible. Financial Leverage Ratios This ratio is of prime importance to investors as it helps to gauge the financial soundness of the business in relation to safety of funds and the timely payment of interest (Filbeck & Krueger, 2005). This also helps to find out the different avenues through which finance can be raised in the future and helps to take important financial decisions for the long term prospect of the business. The ratios for Easy Jet and Ryanair Holding are as Debt Ratio: This ratio helps to find out the debt that the business has with regard to the asset base and helps to ascertain whether the business will be able to pay its debt from its assets (Paul & James, 2006). The ratios are as Figure 9: Debt Ratio The ratio for both Easy Jet and Ryanair Holding is sound and shows that they have lower liabilities as compared to the assets base. This ensures that the business will be able to easily cover its debt. Further it is seen that Ryanair Holding has a lower debt component which is a good sign and increases the avenues to raise finance from different sources in the future. Easy Jet has to look towards working on similar strategies so that the ratio can be further reduced for better future prospects. Debt Equity Ratio: This ratio helps to understand the debt component which the business has with regard to equity and the manner in which the business will be able to pay its debt (Penman, 2007). The ratios are as Figure 10: Debt Equity Ratio The ratio highlights that both Easy Jet and Ryanair Holding have sufficient equity which would enable them to pay the debt easily. The ratio is slightly high for Easy Jet as compared to Ryanair Holding which would require working on different areas so that it can be controlled. It is imperative that the ratio is improved so that the options to raise finance in the future can be improved and better performance can be achieved. Conclusion The financial analysis shows that both Easy Jet and Ryanair Holding have performed in different areas and have done well in some areas and need to concentrate on other areas. It is seen that the industry is very competitive and the players have very little inventories. Since, the model of the industry is such where the business concentrates on customer satisfaction so having better service standards is important. It is seen that both the players have to look towards improving the liquidity ratio as it is a concern and would have an impact on the liquidity position of the business. It is imperative that both Easy Jet and Ryanair Holding look towards covering their short term obligations so that easy business proceedings can be carried out. Further, cutting down indirect cost is very important for Easy Jet as it has impacted its bottom line (Saleem & Rehman, 2011). The industry is such that huge expenditure has to be made for indirect services but still steps need to be taken to reduce it so that business is able to ensure better returns for the shareholders. Further, it is witnessed that both the players have very high fixed assets. Since, the nature of the business is such that acquiring aircrafts is costly and the business has to incur very huge expenses on fixed assets it has resulted in huge debts. This is an area of consideration for both the players as a mechanism has to be found out through which the business will be able to reduce the debt component and improve the overall efficiency so that business becomes more productive. Both the organization needs to further look towards developing the model where service is given utmost importance as the business performs in the service sector. This would require improving the service standard and ensuring better customer loyalty so that the cost of acquiring new customers can be reduced. The business needs to effectively work on different core areas so that business perspective is strengthened and the business is able to determine the different dimensions through which overall business dimensions can be better shaped. References Antony, T. 2004. Thin Capitalization: Issues on the Gearing Ratio. Journal on Australian Taxation, 7 (1), 39-57 Benjamin & Spencer, 2007, Interpretation of financial statement, Tata McGraw Hill, India Deloof, M. 2003. Does Working Capital Management Affect Profitability of Belgian Firms? Journal of Business Finance & Accounting, 30(3&4), 573-587. Eljelly, A. 2004. “Liquidity-Profitability Tradeoff: An empirical Investigation in an Emerging Market”, International Journal of Commerce & Management, 14(2), 48 - 61 Finance. 2011. Why business needs finance. Retrieved on April 18, 2016 from http://tutor2u.net/business/gcse/finance_why_needed.htm Filbeck, G., & Krueger, T. M. 2005. An analysis of working capital management results across industries. Mid-American Journal of Business, 20(2), 10-17. Gandy, M. 2011. Is a low current ratio bad? Retrieved on April 18, 2016 from http://www.markgandycfo.com/2011/03/is-a-low-current-ratio-bad/ Kramer & Johnson, 2009, Financial Statement Demystified, Prentice Hall, New Delhi Lyroudi, K., & Lazaridis, Y. 2000. The Cash Conversion Cycle and Liquidity Analysis of the Food Industry in Greece [Electronic Version]. EFMA 2000 Athens Padachi, K. 2006. Trends in working capital management and its impact on firms’ performance: an analysis of Mauritian small manufacturing firms. International Review of Business Research Papers, 2(2), 45-58. Paul & James, 2006, “Financial Reporting, Financial Statement Analysis and Valuation: A Strategy”, 6th Edition, India Penman S. 2007, Financial Statement Analysis and Security Valuation, the McGraw Hill Company Inc Sons, T. 2002, Financial Statement Analysis: A Practitioner Guide, 3rd Edition, Prentice Hall, New Delhi Saleem, Q. & Rehman, R. 2011. Impacts of Liquidity Ratios on Profitability. Interdisciplinary Journal of Research in Business, 1 (7), 95-98 Wong J. 2009, Financial Ratios-Solvency Ratios, Prentice Hall, New Delhi Appendix Ratio Calculation of Easy Jet and Ryanair Holding     Easy Jet Ryanair Holding Profitability Ratios   Year Year Year Year Description Formula 2015 2014 2015 2014 Net Profit Margin (Net Profit/ sales)*100 11.69 9.94 15.33 10.38 Return on Assets (Net Profit/Average Total Assets) * 100 11.35 10.04 7.11 5.93 Gross Profit Margin (Gross Profit/ Sales)*100 33.01 30.55 18.45 13.07 Return on Equity (Net Profit/Average Equity)* 100 24.37 20.72 21.47 15.91 Liquidity Ratios           Current Ratio (Total Current Assets/ Total Current Liabilities) 0.72 0.88 0.32 0.71 Acid Test Ratio (Cash + Marketable Securities+ Net Trade Receivable)/ Total Current Liabilities 0.61 0.75 0.32 0.71 Efficiency Ratios           Accounts Receivable Turnover Net sales/Average(Gross) Receivables 22.75 22.64 4.77 2.91 Fixed Asset Turnover Ratio Cost of goods sold/ Net Fixed Assets 1.30 1.46 1.04 1.63 Solvency Ratios & Gearing Ratios           Debt Ratio Total Liabilities/ Total Assets 0.54 0.52 0.31 0.28 Debt/Equity Total Liabilities/ Total Equity 1.15 1.06 0.92 0.74 Read More