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Financial Statements - Essay Example

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Two competitive companies, namely Easyjet and Ryanair in the air transporation sector have been selected for comparative assessment of their financial performances. The comparative study is made on financial analysis using ratio analysis. The areas of performances analyzed are…
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Financial Statements Essay
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Financial Statements

Download file to see previous pages... d of the companies are for the year 2008.The areas covered are profitability, liquidity, financial risks, investments attractions and overall growth of the companies.
The ratios employed to assess the profitability of two competitive airlines are Operating profit margin, Net Profit Margin, ROCE, and earnings per share. Gross profit margin cannot be employed as the airline business is not a goods trading business. Operating Profit Margin “measures the percentage of each sales dollar remaining after all costs and expenses other than interest and taxes are deducted. It represents the pure profits earned on each sales dollar.”(Lawrence J. Gitman, page 144)i Easyjet operating profit margins are mere 3.85% as compared to massive 19.78% of Ryanair. The reason for such difference is the efficiency employed by Ryanair in operating expenses to reach a turnover of $27138222000. On the other hand the turnover of $2362.8m has been achieved by Easyjet at huge operating cost of $2271.8m.
Net profit margins take into consideration all expenses including depreciation and finance expenses before taxes. It will be noted that Easyjet has shown improvement in net profits margin of 4.66% when compared to its own operating profit margins of 3.85. The reason is that Easyjet has net finance income and not the expenditure. It is because of this reason Ryanair/s net profit margin of 16.17% is lower than its operating profit margin of 19.79 as it has finance expenses are higher than finance income. But Ryanair’s net profit margin is certainly higher than Easyjet because of its efficiency shown in controlling the expenses.
Return on capital employed (ROCE) is more realistic ratio of profitability “if the assets are stated at current value rather than at historical cost; that is, there is a revaluation reserve included in the capital employed.” (Philip Ramsden, page 42)ii Taking this limitation into account, Easyjet has a very poor ROCE of 3.81% as compared to 8.19% of Ryanair. ...Download file to see next pagesRead More
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