Analysis of Easyjet's annual report

¶ … ratio analysis to illustrate the company financial strength and weakness. The report also compares the company financial statements of FY 2010 and FY 2011 using the company balance sheet, cash flow statement and the income statement. The paper prepares relevant financial ratios to compare the company financial strength between 2010 fiscal year and 2011 fiscal year.

Organization Overview

Easy Jet Airline Company Limited, commonly referred as 'easyJet', has rapidly recorded a business growth since 1995. EasyJet is the fourth largest low cost passenger airline in Europe with 7.6% of market shares. The company focuses on the point-to-point flight that allows easyJet to offer non-stop and direct routes to avoid the costs associated with baggage transfer, and transit passenger assistance. Easy Jet derives its competitive market advantages from implementing market pairs with top airlines to achieve market shares in Paris, London Gatwick, Amsterdam, Milan Malpensa, and Geneva. Easyjet is listed in the London stock exchange, and the company derives its competitive market advantages by engaging with different subsidiaries. (easyJet, 2011). The industry that the group operates is under major airlines and the company top five competitors are Ryanair Holdings PLC, Delta Air Lines Inc., United Continental Holdings, Singapore Airlines Ltd., and China Southern Airlines. Despite the competitive market environment that the company is operating, easyJet has been able to overtake its competitors recording the share price of $531. (Yahoo Finance, 2012).

EasyJet operates in 30 countries and operates on 580 routes across 130 airports. The company principal activities are to provide the airline services across Europe. The company operates in Europe, the UK, Austria, Denmark, Bulgaria, Belgium, France, German and other 18 countries in Europe. The company also operates in Africa at Morocco, Egypt and South Africa. The company headquarter is in Luton, in the UK, the company employs about 8, 288 employee to implement the company operations. At end of the 2011 fiscal year, easyJet could boast of different fleets, which include

"167 easyJet A319, 35 easyJet A320 and two Boeing 737-700. As of September 30, 2011, the Company owned 129 aircrafts, which included 105 easyJet A319 and 24 easyJet A320. As of September 30, 2011, its operating lease included 56 easyJet A319, six easyJet A320 and two Boeing 737-700." (Stockopedia, 2012 P1).

Evaluation of the company Business Performances

The report uses the income statement to demonstrate the business performances of easyJet. The 2011 annual report of easyJet provides the income statement that reveals the company net income, which is derived by subtracting revenues from the company expenses:

Net Income=Revenue-Expenses

The company total revenues represent all the income derived from its sales of services provided to customers while the expenses represent the money spent to generate revenue. By evaluating the company financial statement, the report demonstrates the significant changes that occur within the company financial record between 2010 and 2011.

At the end of 2011 fiscal year, the company demonstrated a strong financial position by recording the total revenue of £3,452 million. Between 2010 and 2011, easyJet recorded a 16.1% growth in the revenue and at the end of the 2011 fiscal year, the company realized £269 millions from business operations revealing 54.6% increase between 2010 and 2011. The company was to record a strong financial performances due to the company commitment to make air travel easy and affordable to million of people across Europe. The company was also able to strengthening its business performances despite the rising in aviation taxes, increase in the fuel costs and weakening of economy cross Europe. Typically, the company delivered £248 million in the net profit at the end of 2010 fiscal years despite the increase in the fuel cost. Although, the company has been able to demonstrate the healthy financial record, however, the increase in the fuel costs and effect of volcano in 2010 affected the company financial performances. Typically, easyJet incurred the costs of £27 Million due to the effect of volcanic eruption in 2010.

Despite the company financial performances, the operating expenses increased £211.8 Million in 2010 to £269 Million at the end of the 2011 fiscal year. Despite the increase in the operating expense, the operational performances of easyJet reflects the increase in the customer satisfaction increase from 6% points in 2010 to 79% point at the end of the 2011 fiscal year.

Consolidated Group Income Statement

The macroeconomic environment that the company is operating remains difficult because there was 4% decline in the number of tourists travelling across Europe. Despite this backdrop, the company net income increased from £121.3 Million at end of the 2010 fiscal year to £225 Million at the end of the 2011 fiscal year. The company total current assets increased from £1.5 billion at the end FY 2010 to £1.74 billion at the end of the FY2011 making the company total assets to increase from £4 Billion in 2010 to £4.4 Billion at the end of 2011 fiscal year. Despite the increase in the net income, easyJet was not been able to reduce its total liabilities where the company total liabilities increase from £2.5 billion at the end of 2010 fiscal year to £2.76 billion at the end of the 2011 fiscal year. The company recorded the increase in the total liabilities due to the increase in the fuel costs across Europe

The company operating costs increased from £2.7 Billion at the end of FY 2010 to £3.2 Billion at the end of FY 2011. The company operating costs increased between 2010 and 2011 due to the increase in the fuel costs. Moreover, the ground operating costs increased by 3%, which was attributed to fluctuation in the exchange rate. However, easyJet was able to decline the maintenance costs by 9.5%, because the company reduced the number of lease aircrafts used for its business operations.

More importantly, easyJet increased its net profits by 84.9% between 2010 and 2011 making the company to boast of £1.4 billion of cash and money market deposit. (easy Jet Annual Report 2011). The paper uses the operating margin to provide the greater understanding of the company operating margin ratio. Operating margin ratio is also known as operating income margin and it measures the operating income realized from the sales of every one pound. The formula to calculate the operating margin is as follows:

2011 = 269/3,452X100=7.79%

2010=

174/2,973x100=5.85%

Change=1.94%

Based on the results of the calculation, it could be seen that easyJet was able to increase its operating margin by 1.94% between 2010 and 2011. The company was able to generate £7.79 and £5.85 for every £1 sales that the company recorded in 2011 and 2010 respectively. However, by comparing the company operating margin and operating profits. The company demonstrated better performances in operating profits than operating margin because the company recorded the increase of 1.94% in operating margin while the company recorded 55% increase in the operating profits.

The paper calculates the net profit margin to enhance the greater understanding on the extent the company has been able to increase its net profit margin between 2010 and 2011. The net profit margin is calculated as follows:

2011=225/3,452x100=6.52%

2010=121/2,973x100=4.07%

Change=2.45%

Based on the calculation, the net profit margin of easyJet increased by 2.45%, the company was able to increase the net profit margin because the company declined the maintenance costs by reducing the number of aircraft that the company put under lease. More importantly, the easyJet also moved away from leasing the expensive Boeing aircraft. To cut costs, the company increased the number of A320 aircraft, which was more affordable than Boeing aircraft. Typically, the company was able to decline the tax charge from £33 Million to £23 Million in 2010 and 2011 respectively. Typically, the total comprehensive income statement increased from £181 Million in 2010 to £204 Million in 2011 revealing 12.7% increase during the period.

In conclusion, the company consolidated income position of easyJet reveals that the company increased both revenue and the net profits between 2010 and 2011. Moreover, the company was able to increase both the operating margin and the net profit margin making the company to demonstrate a strong financial position between 2010 and 2011. Although, the company recorded the increase in the costs on depreciation from £72 Million to £83 Million, nevertheless, the company was able to increase the net profits from £121 Million in 2010 to £225 Million in 2011.

Statement of Financial Position

EasyJet annual report contains the company statement of financial position that consists of balance sheet. The balance sheet reveals the company assets, equity and the company liabilities. Similar to the statement of consolidated income state, the paper also analyzes the company statement of financial position that compares the company relevant ratios between 2010 and 2011.

The company statement of financial position consists of non-current assets, current assets and current liabilities.

£Million

2011

2010

Changes

Percentages

Non-Current Asset

Goodwill

0

0%

Intangible Assets

86

87

(1)

(1.2%)

Plant, Property, & equipment

2,149

1,928

11.5%

Derivative financial instruments

24

8

16

Loan notes

11

13

(2)

(18.2%)

Restricted cash

33

33

0

0

Other noncurrent assets

63

54

9

16.7%

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.