Free Accounting Essays - EasyJet’s overall performance in 2004
Introduction
This report will outline the overall performance and prospects of EasyJet Plc during the year ending 30th September 2004. In analysing the company’s overall performance in 2004 we will conduct a financial ratio analysis. The purpose of calculating financial ratios is to help assess the position and performance of a business. A ratio simply expresses the relationship of one figure with another figure and, provided the information is available, ratios can usually be calculated with little difficulty. In case of accounting ratios both figures used are taken from the financial statements. By calculating ratios, which reflect key relationship e.g. the relationship between profit and sales, it is possible to reduce the complexity of the profit and loss account and balance sheet to a small number of key ratios.
EasyJet at a Glance
Ø Passengers +20%
Ø Profit Before Tax +21%
Ø Cash on balance sheet rises to £510 million (+52%)
Ø Revenues up to £1.1 billion (+17%)
Ø Number of aircraft that entered service during the year = 22
Ø Number of airports served = 44 (www.easyjet.com)
The above performance indicators show both financial performance as well as more specific non-financial indictors that are important to EasyJet and the Airline Industry.
Financial Ratio Analysis
· LEVERAGE RATIO
The debt to equity ratio for the company as at end of 30th September 2004 is 0.7; this means that for every £1 contributed by equity shareholders to finance the business, lenders and creditors have contributed £0.70. Therefore, the company has average gearing ratio to that of the industry average suggesting that there is unused debt capacity. This means the company can borrow more to reinvest in new aircrafts or increase the range of routes being offered to customers. The below average leverage ratio is also due to the fact that EasyJet has never declared or paid dividend to ordinary shareholders, as its policy has been to retain the funds and reinvest it back to the business. Generally speaking, the higher the gearing ratio, the less protection is being offered to creditors. The gearing ratio has increase from 0.5 to 0.7 from 2003 to 2004.
The debt to total assets ratio of 40.4 per cent shows the extent to which lenders and creditors are financing the assets of EasyJet. EasyJet’s current interest coverage ratio shows that the company should not incur any adverse reaction from lenders and creditors should it require more debt financing. Currently the business is generating £18.70 worth of profit to cover each £1 of interest charges.
· LIQUIDITY RATIO
The current ratio (liquid assets such as cash, stock and debtors) compared against current liabilities – production costs (including marketing) shows that the company appears to have coverage available for short-term obligations. For financial year 2004, we see that the current ratio is 2.2 in comparison to 1.8 in 2003. The quick ratio (excludes stock) and the current ratio for EasyJet is one of the same, as EasyJet does not carry any physical production stock. With a ratio of 2.2 EasyJet has £2.20 worth of current assets for every £1 worth of current liabilities. This ratio of 2:1 would be considered satisfactory.
· OPERATIONAL RATIOS
Operational (activity) ratios will highlight how efficiently the resources of the business are being managed. The most important of which is linked to stock. As EasyJet is not in the business of manufacturing any physical products but in the business of providing air travel those ratios are inappropriate. More industry specific non-financial (none balance sheet and profit and loss oriented) ratios/indicators should be considered. Such as the increase in passengers, Number of aircrafts that entered the service during the year, revenue passenger kilometre (RPK), number of airports served, and number of new routes served. Indicators such as “81 per cent of flights arriving within 15 minutes” which is 7 per cent better than 2003 are more appropriate operational measurements.
· PROFITABILITY RATIOS
This will highlight the operating performance of the business. The first indicator is the Gross profit margin, showing trading performance of the company declining from 16.8 per cent at 2003 down to 14.8 per cent by 2004. The decrease in the gross profit margin and the corresponding increase in sales suggest that EasyJet has lowered fares in order to stimulate sales. This is due to the extensive price competition from rival low cost airline Ryanair. The Net profit margin however, has increased from 3.5 per cent to 3.8 per cent in 2004. This indicates that the company has become more cost efficient in distribution and marketing activities. The Return on Equity (ROE) has also increased from 4.3 to 5.2. This ratio shows that the return the equity shareholders are receiving from their investment in EasyJet. The Return on Capital Employed (ROCE) considers the profit available to suppliers of long-term capital; this has decrease slightly from 5.88 to 5.33. The decline in this ratio is not significant enough to concern investors and lenders, however, EasyJet may want to consider its ticket pricing policy. The high ROCE ratio indicates that EasyJet is fully utilising its assets in generating sales.
· CASH FLOW
A high cash flow coverage ratio of 28.07 suggests that EasyJet has the capacity to take on additional debt; failure to do so may indicate that the management is not availing itself of a relatively cheap form of finance. However, when we consider last years ratio of 52.3 we can see that management have this year been utilising more of this cheap debt capital. EasyJet is very cash rich with cash flow from operating activities more then doubling from 77.2 million to 160.5 million this year. Operating cash flows have resulted in EasyJet increasing cash in the year of 179.7 million.
· STOCK MARKET INDICTORS
Stock market indicators in the form of Earning per Share (EPS) indicate that EasyJet would be an interesting and profitable investment proposal. Although the earning efficiency (as highlight from the profitability ratios) provide investors with positive signals about the company already, EPS shows an increase on last year from 8.24p to 10.34p. The price-earning ratio also indicates that the company is a viable investment choice, the ratio of 18.22 means that if £187.70 is paid for shares, then 18.22 years of current earnings of 10.34 pence per share are being bought. This shows that the stock market has confidence in the company. The dividend yield for Easyjet is zero, this shows the return currently earned in the form of dividends from an investment in shares. EasyJet has never declared or paid any cash dividends on Ordinary Shares and does not anticipate paying cash dividends in the foreseeable future. Currently it is the Directors' intention to retain earnings for use in EasyJet’s business for the foreseeable future.
Limitations of Financial Ratio Analysis
Financial ratio offers a useful means of highlighting the strengths and weaknesses of a business. As a result they provide useful signposts for further analysis. Although the calculation of financial ratios is fairly straightforward, skill and judgement are required in interpreting the results. Therefore, in considering the performance of EasyJet through ratio analysis alone any without any trend analysis is somewhat limited. For a more in-depth analysis of performance we need to consider trend analysis.
Conclusion
The report on the overall performance and prospects of EasyJet shows that it is a highly successful company, which is expanding rapidly. The gearing ratio showed that the company is taking on more debt to finance expands in terms of acquiring more aircrafts and also to finance expansions in terms of launching new routes. This ensures that management of EasyJet are fully utilising the available debt capacity available to them. Liquidity ratio analysis shows that the company has significant current assets in terms of cash and debtors to cover its obligations to creditors.
None-financial indicators specific to the airline industry also indicate that EasyJet is operationally efficient in its utilisation of aircrafts and use of airports. Key performance indictors of on time flight arrival, cost per available seat kilometres etc all shows positive indication of successful operational undertaking.
Profitability ratios both in terms of gross and net profit margin show positive indication of success, however, the gross margin has declined on previous year. This is principally due to the intense price competition within the industry. However, due to cost efficiencies and control net profit margin has increase on previous years figures. This indicates successful cost leadership strategies being implemented by EasyJet. ROI, ROE and ROCE all indicate positive use of shareholders funds and total capital employed within the business.
EasyJet has also seen increase cash in the year due to large increases in cash flow from operating activities. Finally, stock market indicators of EPS have also seen positive increases on last year’s earnings and the price-earning ratio also suggest that investors have great confidence in the company’s future earnings. So in conclusion, we can say that EasyJet has had a successful financial year in 2004.
Bibliography & References
1. Atrill, P; Harvey, D; Mclaney, E; Accounting for business 2nd Edition (1994), Butterworth Heinemann
2. Glautier, M.W.E; Underdown, B.; Accounting Theory and Practice 5th Edition (1994) Pitman Publishing
3. www.easyjet.com
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