Financial Analysis of Ryanair and British Airways
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Published: Thu, 28 Sep 2017
The purpose of financial analysis is to determine the financial health of a business. Generally, this analysis is performed by the professionals who prepare reports using the ratios taken from various financial reports. The financial ratios calculated are also helpful to compare with different business. The following analysis studies the four major financial positions of BA and Ryan air;
- Liquidity and
- Financial gearing.
It is the primary goal for any business, without this the business cannot be projected in long run. The purpose of measuring profitability is the key contribution for success of business. The ratios which are used to evaluate profitability are listed below:
- Return on ordinary shareholders funds (ROSF)
- Return on capital employed (ROCE)
- Net profit margin
- Gross profit margin.
It compares the amount of profit for the period available to the owner’s average stake in the business during that same period. The ratio is expressed below:
ROSF = (Net profit after taxation and preference dividend (if any) / ordinary share capital +reserves) × 100
The Ratios calculated for BA & Ryan air are shown below:
From the above table, it is clearly seen that BA values are inconsistent but whereas Ryan air tends to show improvement every year which gives more profits to the shareholders. From the definition we can say that the high ROSF %, the more profit available to shareholders.
The year 2011 considered to be good for both airlines BA and Ryan air, since they are making huge profits and improved revenues compared to their previous year performance. As a result, their ROSF had risen to 26% & 11.34% which resulting high profits to the shareholders.
This scenario has changed completely when it comes to 2012 for BA. If their investors left their money in bank, they could have got some positive returns. But instead BA returned (3.6%) to their investors. Though its revenue is increased by 8% and operational cost by 11% it continued to show appreciable operating results. However, due to exceptional costs items like expense related to pensions, BMI’s acquisition affected the BA economy. On the other hand, Ryan air returned 16.11% which is higher than previous year to the shareholders. This is because Ryan air revenue increased by 25% and profit by 50% approximately compared to 2011. (According to annual report 2012).Though its operating costs are increased due to (fuel price rise) it managed to balance that by increasing passengers fares of about 15%.
In 2013, BA has raised from loss of (3.6) % to 10.78%. This is because of company attains the profit from exceptional items (£57m) and IAG part of BA contributed £ (265m) and also revenue rose by 5.5%. Though inconsistent in fuel prices affects their operational costs which is almost 0.3% of their total operational costs. But BA managed to stabilise it by non-fuel costs which has risen in 2012. Whereas Ryan air revenue increased by 13% which is less compared to 2012 change. Since it’s a low cost carrier it should maintain passenger fare as low as possible in order to compete with its rivals but, inconsistency in fuel prices had raised their operational costs by 45% and passenger fare by 6%. At the end company operated in profits and returned 17.35% to the shareholders.
Based on ROSF results, we can say that Ryan air has performed well continuously in three consecutive year’s period by giving profits to its shareholders but BA shown some ups and downs in its results. Further ratios will give us more idea why the difference has been evolved in their performance.
ROCE (Return on capital employed):
It is a fundamental measure of business performance. ROCE is defined as the ratio of net operating profit to the capital employed. Capital employed is the difference b/w total assets and current liabilities. The ratio is expressed below:
ROCE = (NET PROFIT BEFORE TAX / CAPITAL EMPLOYED) × 100
The ratios calculated for BA and Ryan air is shown below:
The above table describes the ROCE of a company for a period 2011-2013. From the definition we can state that higher the value of ROSE is indicating that the company c generates more earnings per dollar of capital employed. It enables us to analyse and compare BA and Ryan air without the impact of tax. It also considered the long-term debt as a part of capital, which is not the case of ROSF.Thus; this ratio reveals how BA and Ryan air economized on its overall capital.
In 2011, BA performed well by giving a positive result due to increased revenue in 2011 from premium travel passengers. But the performance is shrined in 2012 due to rise in operational costs and loss of £ 41m on exceptional items and also £66m due to partnership with IAG. Due to this it had shown negative result in 2012. But in 2013, it again rises to 4.11% from (1.86%) because of the factors explained in ROSF.
Ryan air has shown continuous improvement for three years. In 2011 its profit increased by 26% and carefully balancing the fuel costs and operating costs. For the other two years also it continuous to shown good result even though operating cost rise to 45%. Thus, we can say from ROCE ratios Ryan air performed much better than BA. The gross-profit margin is studied below to measure the profitability.
GROSS PROFIT MARGIN:
It is a key financial factor that asses the profitability of a company core activities excluding fixed cost. Gross profit represents the difference b/w sales revenue and the cost of sales. The ratio is represented by gross profit to the sales revenue generated for the same period. It is a given by the formula shown below:
Gross profit margin = (gross profit/sales revenue) × 100
Gross profit margin ratios of BA and Ryan air is shown below:
It can be seen from above table that Ryan air performed well compared to BA. Though the values over three years slightly fluctuate but they were generating good profitability by improving their sales and proper balancing and control of fuel costs which has almost rise to 38% in 2013. Similarly airport charges and other operational costs were stabilised to make airline in profitable condition.
On other hand, BA also performed well except for the year 2012.in which its fuel costs rise by 14 %, maintenance by 15% and operating lease costs by 34%. Due to this they showed lower values. But by gaining proper control over the above costs mentioned they started to improve their profitability by 2013. Now net profit margin is studied in order to see whether the airline is able to improve its profitability.
NET PROFIT MARGIN:
It is the defined as the ratio b/w net profit before tax to the sales revenue. It also measures how much each of dollar earned by the company is translated into profits. If the value is low it indicates low margin of safety and higher risk that the sales decline will erase profits and lead to net loss. It is given by the formula as shown below:
Net profit margin = (profit before tax / sales revenue) × 100
Net profit margin ratios for BA and Ryan air shown below:
The above table depicts us Ryan air is operating much better than BA. From annual reports it is known that BA invested much money for long-term asset. Hence, their net profit margins are quite low in these three years. In 2011, it invested in IAG, bought BMI at £172.5m in 2012 and from 2011 it’s investing £5 billion every year for new fleet and up gradation of fleet and other.in 2011 it opened T5 which will be home to A380 fleet from 2013. On the other hand, Ryan air net profit margins are high since its investments for long term assets are low compared to BA. Ryan air continuously invest to buy new a/c’s hence it’s the reason that it has youngest fleet of planes in the world. In 2013 it decided to buy 175 new Boeing 737-800 a/c which will be a long term asset for the Ryan air to transport more no. of passengers.
In conclusion to the analysis of BA and Ryan air, profitability is measured by using various ratios. The results are fluctuated for BA whereas Ryan air tends to show improvement year by year from 2011-13. Both BA and Ryan air increased their revenues, gained some control over operational costs along the analysis and deliver positive returns except for the year 2012 for BA.
The efficiency ratios measure the efficiency in which various resources are managed and used in the business. The following ratios are used to evaluate the efficiency of the business:
- Average settlement period for receivables
- Average settlement period for payables
- Sales revenue to capital employed
- Sales revenue per employee
Average settlement period for Receivables:
A business will usually be concerned with how long it takes for customers to pay the amounts owing. The efficient and timely collection of customer debts is a vital part of cash flow management. So this is the ratio which is very closely watched in many businesses. It is given by the formula as shown below:
Avg.settlement period for receivables = (Trade receivables/sales revenue) ×365.
The ratios calculated for BA and Ryan air shown below table:
The values in above table depict the average number of days used to collect its revenue from debtors. Both BA and Ryan air has got appreciable shorter period to collect their revenue. In the analysis period from 2011- 13, BA managed to get back his revenue from receivables by an average of 17 days with slightly increased in 2013 compared to 2011. When it comes to Ryan air it has got very shorter period of an average of 5 days. From the table it is clearly seen that debtor days have fallen which means business is converting credit sales into cash much quicker than BA. This shorter period certainly asset for Ryan air liquidity.
Average settlement period for payables:
The average settlement period for payables measures how long, on average, the business takes to pay its trade payables. The ratio is calculated by a formula shown below:
Average settlement period for payables = (trade payables/credit purchases) ×365
The ratios calculated for creditors as shown below:
Sales revenue to capital employed:
This ratio examines how effectively the assets of the business are being used to generate sales revenue. Greater the value represents higher productivity. The ratio is calculated by a formula shown below:
Sales revenue to capital employed= (sales revenue/ (total assets-current liabilities))
The ratios are calculated for BA and Ryan air as shown below:
From the table it is clearly seen that both BA and Ryan air have utilised their assets properly to improve their productivity and hence it is the reason their values of productivity rising over past three years. The values of Ryan air is small compared to BA because Ryan air revenue is almost half of BA’s total revenue. At last despite of their company size both are making use of their assets properly.
Sales revenue per employee:
It is the ratio relates sale revenue generated to a particular business resource, which is labour. Higher the value indicates greater staff efficiency. Its ratio is calculated by a formula shown below:
Sales revenue per employee = (sales revenue / number of employees)
The ratio calculated for BA and Ryan air shown below:
The above tables describes about sales revenue per employee. Both companies uses different currency so for better analysis BA revenue is converted to euros according to exchange rate in that periods. The values clearly states that Ryan air is more labour productive than BA and other fact is noticed from table is that two companies increasing their efficiency over the analysis period 2011-2013.
These ratios are concerned with the ability of the business to meet its short-term financial obligations. Higher the ratio, the more liquid the business is considered to be, since liquidity is vital to the survival of a business. Liquidity is measured by the following ratios shown below:
- Current ratio;
- Acid test ratio.
It is defined as the ratio b/w liquid assets to the current liabilities. A higher current ratio is preferable to a normal one since liquidity is vital part in business. It is given by the formula as shown:
Current Ratio = (current assets/ current liabilities)
The current ratio values for BA and Ryan air shown below:
Values in above table clearly depict that BA current ratio values over three years <1. It means that their short-term liabilities exceeded their short term assets. The reason behind this can be clearly understood by analysing their cash flow statements. BA investing large amount of money during 2011-2013 for long-term assets benefits. They invested in getting IMG in 2011 and investing £5bilion every year for new a/c’s and the current fleet up gradation. Moreover, BA cash flow is burned with cash payments related to pension schemes almost £300m and finance costs of £90m in 2011-12. That’s the reason its current ratio value shrined in 2012 and it managed to rise in 2013.
On the other hand, Ryan air maintained its current ratio values >1 throughout analysis period in which it properly balanced short-term assets over liabilities and has got more liquidity compared to BA. In 2013 Ryan air current ratio value is decreased compared to 2012 because it has decided to buy 175 new Boeing 737 planes over next five years. Overall, Ryan air liquidity is better than BA.
This is an indicator that determines whether a company has enough short-term assets to cover immediate liabilities without selling inventory. This ratio is more reliable compared to current ratio because it doesn’t include inventory. This is given by a formula as shown below:
Acid-test ratio=current assets / current liabilities. (Excludes inventories in current assets)
The values for BA and Ryan are shown below:
From the table it is seen that BA values during analysis period is <1.So, from this we can observe that its current liabilities exceeded current assets and for repaying liabilities the company depends on inventories. To contrast Ryan air maintained its ratio >1.so, this ratio indicates that company experiencing good growth, fastly converting receivables into cash and also it can also overcome its financial obligations without depending on inventories.
In conclusion to the analysis of BA and Ryan air, liquidity is measured by using various ratios. The results are fluctuated for BA whereas Ryan air tends to show improvement year by year from 2011-13. Ryan air has got more liquidity compared to BA and it can easily overcome its financial obligations.
3.4 Financial Gearing:
It is the relationship b/w the contribution to financing made by the owners of the business and the amount contributed by others in form of loans. A business level of gearing is an important factor accessing risk. Gearing takes place of owner’s insufficient funds. Any business borrowing money from others agrees to pay interests; if the borrowing is heavy then this can be significant financial burden to the company. The ratios used to measure gearing are shown below:
- Gearing ratio;
- Interest cover ratio.
It is defined as ratio b/w long-term lenders to the long-term capital structure of a business. It is given by a formula as shown:
Gearing ratio = (non-current liabilities/capital employed)
The gearing ratios for BA and Ryan air calculated below:
The values from table states that both companies are highly geared businesses since their gearing ratios > 50%. Both the companies have high shares of long-term debt in their long-term capital structure. So both companies are subjected to financial risk. Ryan air tends to decrease its debts during analysed period which can be seen from the table by controlling their operational costs effectively during analysed period. Whereas, BA managed to decrease their debts with some fluctuations in values which can be observed from the years 2011-2013.so, a cash flow which is strong and reliable can handle high gearing effectively compared to cash flow which is unreliable .
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