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# Custom Financial Analysis - Easy Jet Essay

## EasyJet

EasyJet is a British airline that has its headquarters in Luton Airport, London. The airline operates both domestically and internationally. It has earned itself a name of the largest airline in the United Kingdom. This is measured by a number of customers that the airline has employed. It employs over 8000 workers. The company is one of the biggest companies in Europe, and this has seen the company listed in London Stock Exchange. The company serves 160 destinations in 40 countries.

The company operates as a low cost carrier. This is because it mostly operates a single type of aircraft. The company has experienced financial success in the last 3 financial years. Net profits are £121.3 mln, €225 mln, and £255 mln. This is a progressive increase over the two years. The revenue in the year 2012 is £3.854 billion. The operating income for the year 2012 is £317 mln.

## Air Berlin

This is an airline company that is rated as the sixth largest airline in Europe. Its headquarters are in Airport Bureau in Charlottenburg-Wilmersdorf, Berlin Germany. The airline focuses on serving local cities in Germany and Europe at large. The company employs approximately 9200 employees according to the report published in May 2012.

The company grew at a very fast rate since its inception in 1978. Over the years, it acquired other companies that are similar to it. These included Swiss charter airline Berlin, where it has acquired 49% of the shares. The company has also ensured adherence to various policies become one of the biggest airlines in Europe. The company has been performing exemplary well in the last two financial years. The trend in the net income in the years 2009, 2010, and 2012 are £9.47 mln, £97.16 mln, and £271.84 mln. The trend has been on an increase.

This paper analyzes financial performance of two big Airliners in Europe. The companies include EasyJet and the Air Berlin. Their financial statements are analyzed, and conclusions are drawn. The first section analyses the ratios that are used to evaluate the performance of the company. These ratios include profitability ratios, liquidity ratios, efficiency ratios, and the gearing ratio. During analysis of the ratios, financial statements of three subsequent years are considered. The trends of ratios are also observed, and, finally, the comparison is made between the EasyJet and Air Berlin Company.

## Profitability Ratios

Profitability ratios are used to determine entity’s use of its assets and the effectiveness with which it controls expenses to generate profits. These ratios show whether the entity has the capacity to generate earnings when compared to its expenses and other costs incurred by the business. Profitability ratios include gross profit margin, return on assets, return on capital employed, and return on assets.

### Gross Profit Ratio

As represented in calculation 1, Gross profit ratio is used to analyze profitability of a firm in relation to net sales during a certain financial period. The trend of EasyJet Company for three subsequent financial periods of 2010, 2011, and 2012 is 0.051, 0.07, and 0.08 respectively. The trend shows that the ratio has been increasing over the years. The company has been experiencing higher growth in gross profit over the years due to an increase in sales.

Gross margin for the Air Berlin Company is 0.04, 0.03, and 0.03 in the years 2009, 2010, and 2011respectively.

### Returns on Capital Employed

Return on the capital employed shows earnings before interest and tax that has been earned in relation to capital employed (Penman 2001). The EasyJet Company has over the years increased its capital that is being employed in order to generate revenue. It has increased from £1658 mln to £1794 mln since the year 2010. The increase in capital employed has increased efficiency in the firm and the firm is able to generate more earnings. The return on capital employed increases as the trend shows between financial years 2010 and 2012. The trend is 0.21, 0.270, and 0.3 in the years 2010, 2011, and 2012 respectively as shown in calculation 2.

## Liquidity Ratios

Liquidity ratios determine whether the firm has available cash to pay the current debt. Two airline companies calculate current ratio, acid test ratio, cash ratio, and operating cash flow ratio to determine whether the firm has liquidity capacity to pay its debt.

### Current Ratio (Working Capital Ratio)

Air Berlin Company’s current ratio shows that the company does not hold a lot of current assets at its disposal. The trend of working capital ratio over three years observed shows that current liabilities exceed current assents. This makes the ratio be less than 1.

As presented in calculation 3 the trend of the current ratio over three years increased during the first year and stagnated during the year 2010 and 2011. There is no big deviation in the amount of current assets to current liabilities. All ratios over three years are above 80%. Therefore, it means that ratios are just maintained at a point where there are excessive current liabilities over current assets.

Ratios can tell that the company has the ability to maintain its short-term obligations. The company uses the policy of maintaining current assets below the current liabilities. This is an advantage to the company because liquidity position of the company is maintained at a lower level than when working capital is high.

### Acid-test Ratio

The acid-test ratio is used to determine liquidity of the company when inventory and prepayments are misused from current assets over current liabilities. Calculation 4 shows the liquidity position when inventories are not included.

## Cash Ratio

As represented under calculation 5 the Cash ratio shows the amount that the company has in both cash at hand and cash in the bank. It shows the ability of the firm to meet its short-term and long-term financial obligations during a certain financial year.

EasyJet airline has maintained a stable cash ratio of 0.56 in the year 2011 and 2010. This is an improvement from year 2010, when cash ratio was 0.51. Cash ratio has been less than 1 over three financial years of EasyJet company operations. Just like the current ratio, the company has a policy to maintain its cash at very minimal level. Its cash ratio is maintained at very low levels.

In EasyJet Company, the cash level is maintained at almost half of current liabilities. The ratio trend is 0.51, 0.56, and 0.56 in the subsequent years 2009, 2010, and 2011 respectively. The company has stabilized ratios in last two years.

Air Berlin also maintains the cash ratio below 1. This means that the current liabilities exceed the liquid cash. The trend in the year 2009 and 2010 is maintained at a stable rate of 0.67, while in the year 2011 the ratio drops to 0.44.

When cash ratio of EasyJet and Air Berlin airliner is compared, EasyJet maintains its cash ratio at a higher rate than Air Berlin airline in the last financial year 2011. This trend, however, is different over financial years 2009 and 2010. Air Berlin cash ratio is higher than that of EasyJet airline.

### Cash Flow Ratio

Cash flow ratio shows the operating cash flow in relation to the total debt that the firm has. The ratio determines whether the firm has a capacity to cater for total debts in the future. Air Berlin maintains the ratio at very low level. In the last three years, the cash flow ratio was 0.07, 0.09, and 0.97. The trend is increasing over the years. Cash flow in the business has been increasing relative to the change in the debt level. This is represented under calculation 6.

Cash flow ratio is greater for EasyJet than for the Air Berlin. In the last three financial years the trend has been 0.26, 0.25, and 0.15. The trend of cash flow in EasyJet, unlike in Air Berlin Airliner, is decreasing. The decrease in cash flow ratio shows that cash from operating activities is decreasing at a higher rate than the total debt or the total debt is increasing more than cash from operating activities. This is not favourable to the welfare of the company. When the company is in this condition, this implies that it is using more debt than what it generates from operating activities.

## Activity Ratios (Efficiency Ratios)

Efficiency ratios measure whether the resources in the firm are utilized effectively. They include the average collection period, degree of operating leverage, DSO ratio, average payment period, asset turnover, stock turnover ratio, receivables turnover ratio, and inventory.

### Accounts Receivables Ratio

Accounts receivables represent the amount of money that the company expects to receive after it had issued goods on credit. The period that the company needs to collect this money should be maintained as low as possible. In calculation 7 the collection period for Air Berlin varies over different accounting periods. In the year 2009, it was 3 days, in the year 2010, it became 1 day and in the year 2011 it was 3 days. When the period of collection of debt is shorter, the firm is able to collect debts at a faster rate. The firm increases its revenue and profits. The risk of bad debt is also reduced.

### Average Payment Period

Average Payment Period=Accounts payable/ (Annual credit purchases/365 days)

The average payment period is the time that the firm needs to make payments for the goods that it has purchased during a certain financial period. The average payment period should be maintained at a high level. This is to make use of the money that the firm has generated into the things during the financial period.

Air Berlin has favourable payment period. As represented under calculation 8, the financial years 2009, 2010, and 2011, the payment period trend was 103 days, 85 days, and 97 days. This is because, on average, it has three months to pay for the liabilities.

### Net Asset Turnover

Net asset turnover shows whether the firm has efficiently utilized the assets in generating sales revenue for the company. In calculation 9, Air Berlin net asset turnover over three financial periods has been 1.34, 1.57, and 1.87 in year 2009, 2010, and 2011 respectively. The company is utilizing its total assets very efficiently. When profit margin is high, the net turnover ratio is low and vice-versa. Over the three financial years, the ratio is low. This implies that the company has a huge profit margin.

### Stock Turnover Ratio

Stock turnover ratio shows the number of times the stock is sold or has been utilized. Air Berlin Company had a consistent stock turnover ratio in the last two financial years. The ratio is maintained at 24. As shown in calculation 10, in the year 2009, stock turnover ratio was 27.04, which was higher than in the subsequent years.

When inventory or the stock turnover is high, carrying cost also increases. The cost of holding goods should be maintained as low as possible. This is achieved through maintaining low stocks in the firm.

### Receivable Turnover

Receivable turnover=Net credit sales/Average net receivables

The receivable turnover represents the number of times that the stock is being bought and utilized efficiently. The company should maintain the level of stock as low as possible in order to minimize the cost of holding the stock. There is a minimum level at which the level of stock should be demanded. The lead time should also be as low as possible.

## Gearing Ratio

Gearing ratio evaluates riskiness of debt of both companies. Various components are used to evaluate the level of debt in companies. As such, there are various gearing ratios that can be used to analysis the financial leverage of the two companies. They include total debt to assets ratio, total debt to equity ratio, equity multiplier, interest coverage ratio, fixed charge coverage ratio and long term debt to assets ratio. This paper analysis the gearing ratios of both companies independently and a comparative analysis is undertaken.

### Air Berlin Plc

In the year 2009, the values of the total assets, liabilities and equity were as presented in calculation twelve with assets of 2411537 The Company’s statement of financial information gives the report. As such, the following gearing ratios can be calculated

### Total Debt to Equity Ratio

Total debt to equity ratio = total debt/total equity

This ratio evaluates the amount of debt that is covered with equity. Calculation 13 indicates the value of the ratio to be 2.953249 in 2009.The ratio indicates that the total debt was twice the amount of equity during this year. This indicates that during this financial year the company was highly leveraged when considering the amount of equity.

### Interest Coverage Ratio

Interest coverage ratio = earnings before interest and tax/ interest*100

This ratio evaluates the amount of earnings that will be able to cover the interest expense of the company. During this year, the value of interest that could be covered with earnings was 45.48% indicating that during the year the company would make losses when not considering extraordinary items. This is illustrated under calculation 14.

Air Berlin Plc financial information for the year ended 31^{st} December 2010 and 2011 is summarised under calculation 15. The financial figures are to be applied in evaluating the gearing ratios in 2010 and 2011.

### Debt to Equity Ratio

The debt to equity significantly increased from 2009 to 2011. This is attributed to the significant rise in total debt over the years and a reduction of the total equity available to the firm from shareholders. This may be attributed to the fact that the company is not making profits and shareholders have poor returns on their investments. This is evidenced under calculation 16.

### Total Debt to Asset Ratio

Total debt to asset ratio= total debt/ total assets.

In calculation 17 the amount of debt is covered with the total assets available in the company. This shows that, in case of default, the assets can be used to cover the total debt present in the company.

## Interest Coverage Ratio

In calculation 18 the ratio is negative showing that the company made a negative profit during the two financial years and the earnings could not cover the interest expense of the company.

### EasyJet Gearing Ratio Analysis

The financial information necessary to calculate the gearing ratios is summarised in calculation 19.

### Debt to Equity Ratio

Total debt to equity ratio for the 3 year period is evaluated in calculation 20. The debt to equity ratio indicates that the company is highly leveraged and the total shareholders’ funds available cannot be used to meet the necessary to meet the whole amount of debt available in the company for the 3 year period. However, it is evident that the ratio has been improving because the equity funds increased at a higher rate than the debt available in the company.

## Total Debt to Assets Ratio

The ratios of the company indicate that over the 3 year period the asset would have been able to cover all the debt. Hence, the company is lowly leveraged when considering assets. The ratio has moderately improved over the period. This is presented under calculation 21.

### Interest Coverage Ratio

As represented in calculation 22 the interest coverage ratio shows that the company’s performance has been improving over the 3 years. As such, in 2009 the earnings could only cover the interest two times, in 2010 this improved to six times and in 2011 the earnings could cover the eight times of the interest expense. This is attributed to the significant increase in revenues over the three year period.

## Horizontal Analysis

The horizontal analysis evaluates the significant changes the financial statements of both companies. In Graph 1 the horizontal analysis shows that the revenue of the company increased by 14.913% in 2010 while, in 2011, it increased by 13.5284%. The operating income decreased over the same period. The consistent increase in revenue can be attributed to the rise in single ticket sales. Furthermore, bulk ticket sales to package and charter tour operators significantly increased. Ground services also reported a modest rise in revenues. The company did not record a gain on the disposal of any asset or a gain in the rise in fair value of stocks held; as a result, the company’s additional operating income declined.

## Operating Expenses

Graph 2 illustrates changes in operating expenses that have significantly increased over the three years. Operating expenses increased by 16.5% in 2010 and 18.4% in 2011. This increase is attributed to the cost of fuel. In addition, the airport and handing charges, costs of material for in flight sales, and handling costs also increased.

### The Trend of Net Profit

As illustrated under graph 3 the company incurred net losses during the year. As a result, the bar graphs are inverted. The company's losses have been increasing over three years. Company's losses in 2011 were very high. This is attributed to the fact that revenue increased by 13%, the costs increased by 18%. The effect of differences is reflected on the value of losses.