Ratio Analysis to Illustrate the Essay

  • Length: 9 pages
  • Sources: 9
  • Subject: Business
  • Type: Essay
  • Paper: #95942424

Excerpt from Essay :

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The company tangible assets consist of the plant, property, equipment such as the fleet of aircrafts that the company uses for its business operations. Other tangible assets include various building the company is using for business operations. The company tangible assets also include company computers, brand names and various computer software than the company is using to improve its business operations. However, the company intangible assets declined by 1.2% between 2010 and 2011. The company loan notes also declined by 18.2% between 2010 and 2011.

Apart from the non-current asset, other aspect within the company balance sheet is the current asset. From the Table below. The trade and other receivable declined by 17.6%. However, the company was able to increase restricted cash by 317% and money market by 15.3%. The company also increased the derivable financial instrument by 57%.

£Million

2011

2010

Changes

Percentages

Current Asset

Asset held 4 sale

73

Trade & other Receivables

(29)

(17.6%)

Derivable Financial Instrument

83

53

30

57%

Restricted Cash

90

23

73

Money Market Deposit

40

15.3%

Cash & cash equivalents

1,100

21%

The other aspect in the company balance sheet is the total liabilities that consist of current liabilities and non-current liabilities. At the end of the fiscal year 2011, the total liabilities were £2764 Million (Current liabilities £1,177 Million plus Non-current liabilities £1,587 Million). However, the company total equity was £1,705. Based on the company financial position, the total liabilities is greater that the total equity. Total liabilities £2764 Million minus Total equity £1,705 Million=£1509 Million. The data show that the company source of fund is from the total liabilities. The data also reveals that the company is aggressively using the bank loan and other borrowing to finance its business operations.

More importantly, the report uses gearing ratio to measure the total amount funds raised from the total borrowing. The gearing ratio is a financial analysis that compares borrowed fund from the total equities. The gearing ratio also measures the degree by which company business activities are funded by the creditor's funds vs. company fund. (Bull, 2008). A company with high gearing ratio is more vulnerable to economic downturn because the company must service its debt regardless of the level of sales. On the other hand, higher equity proportion shows that a company is in good financial strength. (Spencer and Stradling 2005).

Gearing Ratio=Net Borrowing/Equity x100

2011=1364 / 1,705x100 =80%

2010=1590 / 1,501x100=105%

2011

2010

Change

Non-Current Borrowing

1,587

1,437

10.4%

Current Borrowing

1,177

1,065

10.5%

Total Borrowing

2,764

2,502

20.9%

Less Cash & cash equivalents

1,100

21%

Net Borrowing

1,364

(74)

(5.4)%

Based on the findings from the calculation, the company declined its Gearing ratio between 2010 and 2011.The decline was due to the decline in the total borrowing between 2010 and 2011. Typically, easyJet declined the total borrowing from £1,590 Million at the end of the 2010 to £1,364 Million at the end of 2011 fiscal year revealing 5.4% decline in the total borrowing. Despite the decline in the total borrowing, the company gearing ratio is still high revealing 80% at the end of the 2011 fiscal year. The figure reveals that the company is still aggressively financing its business operation from borrowing.

The paper provides the Current Ratio to measure the extent the company has been able to meet its short-term business liabilities.

Formula to calculate the Current ratio is as follows:

Current Ratio= Current assets / current liabilities.

2011= 1,738/1,177=1.5

2010= / 1,065= 1,515=0.7

Based on the data provided, easyJet current ratio was 0.7 in 2010 revealing that the company faced challenges to settle its short-term obligations. However, the company current ratio improved and increased to 1.5 revealing that the company was more capable of settling its short-term obligation.

The paper also examines the company total asset to enhance the greater understanding on the extent the company has been able to manage its total asset. The total assets comprise of the non-current plus current asset. The company was able to increase its total asset by 11.6% between 2010 and 2011. The current asset and non-current assets also increased by 14.7% and 9.8% respectively.

2011

2010

Change

Non-current asset

2,731

2,488

9.8%

Current Asset

1,738

1,515

14.7%

Total Asset

4,469

11.6%

From shareholder's perspective, the report provides the return on shareholders revealing the extent the company has been able to generate returns from shareholder's fund.

Return on Shareholder's Fund: Net Profits/Shareholder Fundx100

2011=225/1,705x100=13.2%

2010=121/1,501=8.1%

Changes=5.1%

Based on the ratio calculation, the company was able to increase the shareholder's return by 5.1%. The ratio reveals that the group was able to increase the shareholder return by 5.1% between 2010 and 2011. Major factor leading to the increase in the shareholder's return was attributed to the increase in the company net profits between 2010 and 2011.

This section reviews the easyJet consolidated financial position and based on the ratios provided, the company was able to increase the net profits, total assets and total equity. The overall results reveal that the company improve sale performances between FY2010 and FY 2011.

Analysis of Statement of Cash Flow

The statement of cash flow reveals the flow of cash within the company and it represents the amount the cash received and the cash spent with a given fiscal year. The Statement of cash flow is categorized into three activities. The cash flow from:

operating activities investing activities financing activities

2011

2010

Changes

Percentages

Net cash realized from operating activities

61

16.8%

Net cash spent in investing activities

(478)

(482)

(4)

(0.8)%

Net cash realized from financing activities

13

5.6%

Based on the calculation on the company cash flow, the company increased the cash realized from the operating activities by £61 Million representing 16.8% between 2010 and 2011. On the other hand, the net cash spent on investing activities declined by £4 Million representing a decline of 0.83% between 2010 and 2011. However, the net cash realized from financing activities increased by £13 Million representing 5.6% increase between 2010 and 2011.

The cash inflow increased because the company generated a strong net cash inflow because of the increase in the revenue per seat and increase in the forward booking. The company expenditure principally comprised of the acquisition of aircraft and payment for the order of aircraft. Between 2010 and 2011, the company ordered for 25 aircraft and by January 2011, the company received the remaining four A321 aircraft from British Airways. The net cash outflow declined by 0.8% between 2010 and 2011 because the company ordered for 25 aircraft in 2010 making the company net cash outflow in 2010 to be greater than the net cash outflow in 2011.

Moreover, easyJet realized more cash from financing activities in 2011 than 2010. The company realized £13 Million representing 5.6% growth in the net cash from financing activities. The major factor leading to the increase in the net cash realized from the financing activities is that the company was able to efficiently utilize its assets to generate cash.

Conclusion

The paper provides the analysis of the:

Group Income Statement

Statement of Financial Position

Group Cash Flow Statement

Based on…

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