QUESTION 1
Adjusted Trial Balance
Statement of Comprehensive Income
Balance Sheet
QUESTION 2
Financial ratios
Financial analysis
Analysis of liquidity
Current ratio
At the of the financial year 2015, the current ratio for British Airways was 0.5965 indicating that its current assets could pay off 59.65% of its short-term liabilities. This further shows that the company had a low liquidity since its current assets were insufficient to meet the short-term obligations (Gibson, 2012, p. 243). The ratio declined from 0.6512 in 2014 and 0.6300 in 2013. The trend shows that the liquidity of British Airways improved in 2014 but declined in 2015. On the other hand, the current ratio for Ryan Air & Easy Jet was 1.7161 at the end of the year 2015 showing that it had sufficient current assets to repay all its current liabilities. The ratio was 1.9687 in 2013 and 1.5143 in 2014. This shows that the liquidity of Ryan Air & Easy Jet decreased in 2014 but improved in 2015.
Quick ratio
The quick ratio for British Airways at the end of the year 2015 was 0.5721 implying that the company’s quick assets could repay only 57.21% of its current liabilities. The ratio was down from 0.6962 and 0.627 in 2013 and 2014 respectively. This shows that the liquidity of the firm decreased in both 2014 and 2015. The quick ratio for Ryan Air & Easy Jet’s was 1.7155 at the end of 2015 meaning that the airline had adequate quick assets to repay its short-term obligations. The quick ratios for 2014 and 2013 were 1.5132 and 1.9673 respectively. The quick ratio for the company was almost the same values as the firm’s current ratios since it had a low amount of inventory.
Ryan Air & Easy Jet’s liquidity ratios were higher than those of British Airways in each of the three years. This shows that Ryan Air & Easy Jet had a higher liquidity than that of British Airways. Furthermore, British Airways’ current assets were inadequate to repay its short-term liabilities while Ryan Air & Easy Jet had adequate current assets to repay its short-term obligations.
Profitability analysis
Operating margin
British Airways’ operating margin for the year 2015 was 10.93% up from 8.32% in 2014 and 6.2% in 2013. This shows that the company’s operating activities were profitable in each of the three years (Stice and Stice, 2010). The operating margin increased in each of the years indicating that the profitability of British Airways improved in 2014 and 2015. The company’s operating revenues increased as the airline began operating new routes such as Kuala Lumpur, among other routes. Ryan Air & Easy Jet had an operating margin of 18.45% in 2015 up from 13.08% and 14.71% in 2014 and 2013 respectively. This indicates that the company was profitable and that its profitability improved in 2015.
Net profit margin
The net profit margin for British Airways was 22.13% in 2015 up from 5.99% and 2.46% in 2014 and 2015 respectively. The substantial increase in the net profit margin in 2015 is attributed to the gain on sale of property, plant, equipment and investments. Ryan Air & Easy Jet had a net profit margin of 15.33% indicating that it earned a net income of £0.1533 for every dollar of total operating revenue. The net profit margin declined from 11.66% in 2013 to 10.38% in 2014 before increasing to 15.33% in 2015. The above ratios show that Ryan Air & Easy Jet had a higher profitability than British Airways in each of the three years.
Return on assets
British Airways had a return on assets of 16.31% in 2015 up from 5.23% in 2014. The increase in the return on assets indicates an improvement in the profitability of British Airways. The improvement is largely attributed to the large profit it earned on the sale of property, plant and equipment. Ryan Air & Easy Jet’s return on assets was 7.11% in 2015 up from 5.93% in 2014. Ryan Air & Easy Jet had a higher return on assets than that of British Airways indicating that it had a better profitability.
Return on equity
British Airways had a return on equity of 54.55% indicating that it earned a net income of over £0.55 for every dollar of equity. The return on equity is high indicating that the company had a higher profitability during the year. The ratio increased from 11.45% in 2013 to 33% in 2014 indicating an increase in the profitability of the firm. Ryan Air & Easy Jet had a return on equity of 21.48% up from 15.91% and 17.40% in 2014 and 2015 respectively.
The above profitability ratios show that Ryan Air & Easy Jet was more profitable than British Airways during the three years. It had a higher operating margin, net profit margin and return on assets. The return on equity for British Airways was higher because of the small value of equity in the company as compared to that of Ryan Air & Easy Jet.
Solvency ratios
Debt ratio
British Airways’ debt ratio for the year ended 2015 was 0.701 indicating that 70.1% of its assets were financed through borrowing. The debt ratio is high showing that the company has a weak solvency. The debt ratio decreased from 0.8436 in 2014 and 0.794 in 2013 showing an improvement in the solvency of the corporation (Horngren, Harrison and Oliver, 2012, p. 806). Ryan Air & Easy Jet had a debt ratio of 0.6689 at the end of 2015 up from 0.6271 in 2014 and 0.6341 in 2013. The debt ratios indicate that British Airways had a higher leverage and a weaker solvency than that of Ryan Air & Easy Jet.
Debt-equity ratio
British Airways had a debt-equity ratio of 2.344 showing that its total liabilities were more than twice the value of its equity. The debt-equity ratio declined from 5.393 in 2014 and 3.856 in 2015 showing that the solvency of the company improved in 2015. The debt-to-equity ratio for Ryan Air & Easy Jet was 2.02 for 2015 up from 1.682 and 1.733 in 2014 and 2013 respectively. The increase shows a decrease in the solvency of Ryan Air & Easy Jet in 2015. The ratio indicates that Ryan Air & Easy Jet had a stronger liquidity than British Airways.
Interest cover/Times Interest Earned Ratio
This ratio shows the extent to which the company’s earnings cover its interest expense. It is important in assessing the possibility of the company defaulting on interest obligations. In the year 2015, British Airways had a Times Interest Earned ratio of 9.43 times in 2015 indicating that its earnings were sufficient to meet its interest obligations. The interest cover increased from 5.023 in 2013 to 7.915 in 2014 indicating an improvement in the solvency of the firm. Ryan Air & Easy Jet’s interest cover increased from 8.232 in 2013 to 8.916 in 2014 then to 15.06 in 2015. The trend shows an improvement in the solvency of the company.
The above ratios indicate that Ryan Air & Easy Jet had a stronger liquidity than that of British Airways. The solvency of Ryan Air & Easy Jet declined in 2015 while that of British Airways improved in 2015. Both companies had a low solvency since the debt ratio was more than 50%. A higher leverage could be beneficial to the companies since it reduces the cost of capital. Besides, it increases the return on equity since both companies had a positive return on assets. The DuPont analysis indicates that an increase in leverage has a positive impact on the return on equity provided the firm’s return on assets is positive.
Efficiency ratios
Receivables turnover
In the year 2015, British Airways had a receivables turnover of 20.95 implying that it collected money from its receivables 21 times during the year. This implies that it took approximately 17 days from the day of credit sale to collect money from the receivable. The receivables turnover increased from 22.07 in 2014 and 21.43 in 2013. The increase in accounts receivable indicates that the efficiency of British Airways in collecting its accounts receivables improved in 2014 and 2015.
Ryan Air & Easy Jet had a receivables turnover of 94.08 in 2015 implying that it collected money from its receivables 94 times during the year. The high receivables turnover shows that the company was efficient in collecting its receivables. The company took an average of about 4 days to receive money from its receivables. Ryan Air & Easy Jet’s receivables turnover declined from 87.06 in 2013 to 86.69 in 2014. The trend implies that the firm’s efficiency improved in 2015 but declined in 2014.
Ryan Air & Easy Jet had a higher receivables turnover than British Airways. This shows that it was more efficient in managing its accounts receivables that British Airways. Accounts receivables turnover and the collection period are important contributors to the liquidity of the companies. A higher receivables turnover leads to a greater liquidity since less cash is tied up in receivables. Both companies have higher receivables turnover since they are service companies and sale on credit is not as high as in merchandising companies.
Total assets turnover
In the year 2015, British Airways had a total assets turnover of 0.737 indicating that it made a total revenue of £0.7371 for every dollar of total assets. The ratio is low indicating that the company is not efficient in using its total assets in generating revenue. This is not necessarily a bad deal for an airline due to the heavy investment in assets. Service companies do not need to have high assets turnover. The ratio declined from 0.9581 in 2013 to 0.8729 in 2014 before decreasing further to 0.7371 in 2015. The decline indicates a decrease in the company’s effectiveness to generate revenues. Ryan Air & Easy Jet had an asset turnover of 0.464 in 2015 down from 0.5716 in 2014 showing that the company’s effectiveness in using its assets to generate income.
The efficiency analysis above shows that Ryan Air & Easy Jet had a better efficiency in revenue collection than British Airways. British Airways had a better asset turnover than Ryan Air & Easy Jet.
Conclusion
Ryan Air & Easy Jet had a better financial performance than British Airways as shown by the profitability ratios. Its profitability ratios were higher than those of British Airways. The high profitability was due to an increase in load factor, average fares, passenger traffic, among other factors. It also had a better liquidity than British Airways with its current assets greater than the value of current liabilities unlike those of British Airways. The high liquidity is also contributed by its efficiency in the management of assets. Finally, Ryan Air & Easy Jet had a stronger solvency than British Airways. Therefore, Ryan Air & Easy Jet had a better financial performance and was more financially stable than British Airways during the years 2015, 2014 and 2013.
Bibliography
Gibson, C. (2012). Financial reporting and analysis. 13th ed. New York: Cengage Learning.
Horngren, C., Harrison, W. and Oliver, . (2012). Financial Accounting. 7th ed. Upper Saddle
River, N.J.: Pearson/Prentice Hall.
Stice, E. and Stice, J. (2010). Financial Accounting. Mason, Ohio: South-Western Cengage
Learning.
