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ratio analysis

Extracts from this essay...

Introduction

Findings Table of Contents Table of Contents * 1.0 Introduction ......................................................1 * 2.0 Findings .........................................................2-6 ? 2.1 Profitability Ratios.......................................2 ? 2.2 Activity Ratios.............................................3 ? 2.3 Liquidity Ratios.............................................4 ? 2.4 Gearing Ratios.............................................4 ? 2.5 Shareholder Ratios.......................................5 * 3.0 Conclusion.........................................................6 * 4.0 Bibliography ......................................................8 * 5.0 Appendix ......................................................9-13 ? 5.1 Easyjet and British Airways ratio calculation.............................................9 ? 5.2 Profit & Loss Account and Balance Sheet for Easyjet.............................................10-11 ? 5.3 Profit & Loss Account and Balance Sheet for British Airways.................................12-13 * 1.0 Introduction British Airways (BA) and Easyjet are two British airline companies. They are competitors in many aspects with different operational techniques. Easyjet is Europe's leading low-cost airline, which targets at both leisure and business markets on a range of European routes. It is one of Europe's largest Internet retailers with ticketless travel service. In addition, it offers a simple, 'no frills' service. On the other hand, British Airways is the world's biggest international airline whose worldwide route network covers 150 countries. Its customers can get the world's best personalized service. The purpose of this report is to compare and contract the financial performance by analyzing ratios. * 2.0 Findings ? 2.1 Profitability Ratios Return on capital employed (ROCE), gross profit margin and net profit margin ratios are used to tell owners, managers, employees and potential investors the profitability of the two companies.

Middle

They would be better to shorten the time within 30 days. ? 2.3 Liquidity Ratios Liquidity is a very important ratio for money lenders, suppliers and potential investors to access. It is defined as business has enough liquidity to pay any immediate bills that arise (Business Studies, 2004). It can be analyzed by looking at the current ratio and the acid test ratio. The current ratio for BA and Easyjet is 0.77 and 2.57.The ratio for Easyjet is a higher, which means that too much money is tied up inefficiently, while that of BA is not healthy, which are much below the generally safe level that is between 1.5 and 2. This suggests that it does not have enough working capital. The acid test ratio for BA is 0.72, which could indicate a potential problem that its current assets less stocks do not cover its current liability. However, BA is a service-base airline business, whose stocks are aerial consumption parts, expendable supplies, supplies on board, etc. The stock is likely to be sold quickly. So the lower acid test ratio is acceptable ( (current Assets - stocks)/current liabilities). ? 2.4 Gearing Ratios BA and Easyjet are quite different from each other at gearing ratio. The former is at 81.38% and the latter is at 42.62%. It shows that BA is high geared, which is more than 50%.

Conclusion

* 3.0 Conclusion As a whole, Easyjet is a preferable financial performer than British Airways, while the latter may have some potential financial problems. Analyzing the profitability, Easyjet has a better performance. It focuses on the low price tickets in the European routes. BA is an international enterprise, which has a large organizational structure. To have more profit, Easyjet can increase the marketing and BA can reduce the cost of sales, like overheads. Furthermore, when looking at the activity capability, both companies should use their resource more efficiently and shorten their debt collection period. Additionally, as for the liquidity capability, BA is lack of working capital and may meet debt problems in the short run, while Easyjet is in a good operating condition, whose liquid assets can be quickly switched into cash. Moreover, with regard to the gearing, Easyjet has a safer capital structure than BA. To both creditor and shareholders, it has a strong debt paying ability and low debt risk in the long run. BA can improve its ratio by reducing its long term borrowing relatively to its capital. According to the shareholder ratios, it is hard to compare and contract because of lack of some data from Easyjet. However, we should also be aware of the limitations of the ratio, such as price changing, Window dressing, lack of qualitative information, etc. and make adjustments as necessary.

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