◆ 2.2 Activity Ratios
Activity Ratio is analyzed internally by managers to focus on how efficiently a business employs its resources. The asset turnover ratio for these two companies are 3.99 and 1.12. This shows that for every ￡1 invested in net assets, ￡3.99 and ￡1.12 were generated. Because both of them are airline companies, there is often a heavy investment in fixed assets, which leads to the ratio being generally low. In addition, the stock turnover is very low which is at 7 days, but it is not very helpful to analyze here. Dave Hall (Business Studies, 2003, p395) said:
Business which supply services, such as bank, travel agents and transport operators, are not likely to hold very much stock. Therefore this ratio is not likely to be used by service industry analysts.
However, it is obvious that the longer it is, the worse it is for the business as the money is not available somewhere else. Furthermore, according to the calculation of the debt collection period, it is too long for the two companies pay for products they have bought on credit within 2 month. 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%. It implies that the majority of the total capital is borrowed. For the business operator, it will be hard to borrow money, because the creditor may have a financial risk. On the other hand, Easyjet is a bit low geared. It indicates that it is cautious for the company to invest by borrowing money, or it has enough capital, therefore there is no need to borrow a lot of money. When looking at interest cover, there is a significant difference that BA is 1.66 times and Easyjet is 18397 times. This suggests that problems of debt payments may be caused by the low ratio for BA; whereas, the ratio for Easyjet is good, and the debt paying ability in the long run is strong. Both ratios imply that Easyjet has a better debt paying ability than BA.
◆ 2.5 Shareholder Ratios
Shareholders’ ratios provide some information for investors so that they can make decisions about shares. Earning per share (EPS) is an important indicator to reflect the profitability of a company. Comparing EPS with BA and Easyjet, which are 10.60p and 15.20p, it shows that Easyjet has a better profitability and ability of appreciation of capital. With regard to price/earnings ratio (P/E), Easyjet which is 22.11 times will give inventors more confidence about the future of the business than BA which is 28.96 times. The dividend per share (DPS) is the ratio that shows how much the shareholders were actually paid by way of dividends (Biz/ed, 2008). The DPS for BA is 25.26per share, which means that BA gives investors 25.26p for each share. The dividend yield is the dividend per ordinary share expressed as a percentage of the current share price (Business Studied, 2004). For BA, the ratio is at 8.23%. It means that if you spend 100p on per share, 8.23p will be given as a dividend. The dividend cover used to access how many times a company’s dividends to ordinary shareholders could be paid from net profit to ordinary shareholders. The dividend cover for BA is 0.42 times, which means that the investors could receive 0.42 times of dividends in 2001. According to ROE, BA is at 3.84% and Easyjet is at 11.98%, which implies that Easyjet has a stronger ability to use the money from ordinary shareholders efficiently.
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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