Ratio Analysis Of British Airways Plc Finance Essay

British Airways PLC is the largest international airline of United Kingdom. It is based at the London Heathrow Airport and the busiest airports in the world. It is serves 96 million passengers a year using around 441 airports in 86 countries and more than thousand planes. British airway is fiercely competitive, heavily regulated and highly exposed to changes in customer behaviour and consumer confidence. British airway has a total market capitalisation of approximately £3299 million, Shares in Issue 1153 million and the current share price is 286p. The past economic environment creates a new challenge to the company they concentrate their efforts to seize long-term opportunities for growth.

2. Background

Feb 2008 – In this fiscal year, British Airways is targeting a 10 percent operating margin, which is said to be the highest in its history, as it taps demand for premium travel …It once again declared that it is targeting a full-year sales growth of 3 to 3.5 percent.

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May 2008 – British Airways Operational Environment to keep up with competitors and to incorporate fuel efficient aircraft to its ageing fleet, British Airways signed a firm contract on 28 May 2008 for two Airbus A138… British Airways Report on British Airways …The airways has an Operational Environment in order to keep up with its competitors and to combine its fuel efficient aircraft to its ageing fleet, British Airways has signed a firm contract for two Airbus A138 on 28 May 2008.

Jul 2008 – Merger talks were started between British Airways and Iberia in the year 2008 due to the decrease in passenger demand, whereas on the other hand the pension fund deficit was around 3 billion pounds ($5 billion) – and the outcome of the combined entity was striking.

British Airways plans to reduce seating, raise ticket prices as there was a 90% fall in the first quarter which was three days after announcing merger talks with Iberia.

Mar 2009 – By March, 2009 its revenues rose to £8.99 billion whereas it was £8.75 billion a year agoBritish Airways’ revenues rose to £8.99 billion for the year ended March 31, 2009. The same stood at £8.75 billion in the same period a year ago. “Reduced passenger and cargo demand and high fuel prices last summer contributed to our 220 million pounds …. The introduction of Reduced passenger and cargo demand and high fuel prices helped in the contribution of the 220 million pounds operating loss in the last year.

April 2009 – during the global recession period, Europe’s third- biggest carrier, the British Airways Plc, gave an approval of a voluntary severance for a total number of 300 workers because the traffic of passengers extended to a great deal.

Jul 2009 – By John Bowker LONDON (Reuters) – British Airways (BAY.L) has not ruled out a major rights issue to help shore up its balance sheet but analysts see such a move as an absolute last resort and one that could destroy management credibility.

Sep 2009 – On this day the first EMBRAER 170 jet was delivered by Embraer in São José dos Campos, Brazil, the headquarters, to British Airways. This aircraft was configured with 76 seats and in a singleclass layout, which will be operated by BA CityFlyer, British Airways’ wholly owned regional subsidiary. Also to mention that the regional subsidiary operates international and domestic routes from London City Airport.

Oct 2009 – A new service is to be launched by the British Airways from Gatwick to Montego bay, Punta Cana twice in a week.

Nov 2009 – British Airways (BA) has operated for 23 years at London Heathrow and finally has bid farewell to the facilty.

Jan 2010 – British Airways has been operating Japan in the past 62 years and at present it operates 7 flights in a week between London Heathrow and Narita International Airport.

British Airways Flying Club Piper PA-28-236 G-ODAK. Shoreham 6/3/ 2010.

Sep 2010 – British Airways provides an Increase in the number of Flights to the Caribbean – Just the Filed in: Flight, Travel Campbell River Firm Restoring the Past – DC-3 Called a Flying Time Capsule

3. Ratio analysis

3.1. Ratio Analysis- British Airways PLC

RATIO

2010

2009

B/W

Operating profit margin

231

7994

2.89%

220

8992

2.45%

B

Current

2674

3740

.71

2346

4142

.56

B

Quick

2674-98

3740

.69

2346-127

4142

.54

B

Fixed Asset turnover

7994

7973

1

8992

8142

1.1

W

Return on capital employed

231

10677-3740

3.33%

220

10488-4142

3.47%

W

Return on equity

425

2113

20.11%

358

1846

19.39 %

B

Debt to equity

4824

2113

2.28

4500

1846

2.43

B

Dividend yield

5.20

122.8

4.23%

5.02

150.9

3.33%

B

Price to earning ratio

250

38.5

6.49

137.5

32.6

4.21

W

Earning yield

38.5

250

15.4%

32.6

137.5

23.7%

W

Return on total assets

425

10677

3.98%

358

10488

3.41%

B

Sales per employee

7994

79097

£ 518565.8

8992

72375

£ 490196.9

B

Stock turnover

412 x 365

25842

5.819 days

417 x 365

21890

6.953 days

W

Dividend cover

38.5

5.20

1.123

32.6

5.02

2.502

W

Account receivable turnover

499 x 365

7994

22.78 days

530 x 365

8992

21.51 days

W

Account payable turnover

3160 x 365

25842

44.63 days

2963 x 365

21890

49.41 days

W

Total Asset turnover

7994

10677

0.75

8992

10488

.86

W

Gearing

4824

4824+2113

69.54%

4500

4500+1846

70.91%

B

3.2. Interpretation and Explanations of ratios

3.2.1. Operating profit margin

The Operating Profit Margin measures the Operating Profit in relation to the Net Sales.  This reveals the operating efficiency of the company. The higher the Operating Profit Margin, then more efficient is the business.

Operating Profit 

Operating Profit Margin =

Sales 

As a result of analysis, the operating profit margin of the year 2009 is 2.45% and that of the year 2010 is 2.89%. The operation margin of the year 2010 is higher than that of the year 2009, so it can be concluded that the company is performing an efficient operation.

3.2.2. Current ratio

The current ratio compares all the Current Assets of a company to all the Current Liabilities.  What this ratio basically tells us is if the company had to sell all its readily available assets, would it be able to pay off its immediate debt? A ratio under 1 suggests that the company would be unable to pay off its obligations if they came due at that point.

Current Assets

Current Ratio =

Current Liabilities

As a result of analysis, the current ratio of the year 2009 is 0.56 and that of year 2010 is 0.71. Current ratio of both years is below 1 so it can be concluded that the company is not in good financial health. Also it can be said that the company is performing good since the current ratio of 2010 is higher when compared to that of 2009.

.

3.2.3. Quick ratio

Also called the Acid-Test Ratio, the current ratio compares all the Current Assets of a company to all the Current Liabilities just like the Current Ratio, but the Inventories are subtracted from the Current Assets.

Current Assets – Inventory

Quick Ratio =

Current Liabilities

As a result of analysis, quick ratio of the year 2009 is 0.54 and that of the year 2010 is 0.69. Current ratio of 2010 is higher than 2009, so the company is in a favourable position

3.2.4. Fixed Asset turnover

The Fixed Asset Turnover is measure a company’s effectiveness in generating Net Sales revenue from investments back into the company. The higher the Fixed Asset Turnover ratio, the more effective the company’s investments in Net Property, Plant, and Equipment have become.

Sales 

 Fixed Asset Turnover =

Fixed asset 

From the analysis of the last two years, fixed asset turnover of the year 2009 is 1.1 and the year 2010 is 1. Fixed asset turnover is low in the year 2010, so it can be said that the company is not as effective compared to the year 2009.

3.2.5. Return on Capital employed

It is a ratio that indicates the efficiency and profitability of a company’s capital investments. ROCE should always be higher than the rate at which the company borrows otherwise any increase in borrowing will reduce shareholders’ earnings.

Operating profit 

 Return on capital employed =

Total assets –  Current liability

As a result of analysis, the return on capital employed of the year 2009 is 3.47% and the year 2010 is 3.33%. Return on capital employed of the year 2010 is less than the year 2009, so it can be said that, profitability of the company is less when compared to 2009.

3.2.6. Return on equity

The Return on Equity measures the Net Earnings in relation to the Equity.  Return on Equity describes how well contributions from stockholders generated earnings for the company.

Net Earnings

 Return on Equity =

 Equity 

From the analysis of return on equity ratio, it is 19.39% for the year 2009 and 20.11% for the year 2010. In the year 2010 return on equity ratio is high, so profitability of the company is high compared to 2009.

3.2.7. Debt to equity ratio

The Debt to Equity Ratio compares the company’s dollar amount owed to creditors to the dollar amount supplied by investors of the company.

 debt

 Debt to Equity Ratio =

Equity 

As a result of analysis, the debt to equity ratio of the year 2009 is 2.43 and that of the year 2010 is 2.28. Ratio of the year 2010 is low, so it can be said that the company is at favourable position.

3.2.8. Dividend yield

A financial ratio that shows how much a company pays out in dividends each year relative to its share price. In the absence of any capital gains, the dividend yield is the return on investment for a stock.

Dividends per Share

 Dividend Yield =

Share price

As a result of analysis, the dividend yield of the year 2010 is 4.23% and the year 2009 is 3.33%, so it can be concluded that cash flow in the year 2010 is more than in the year 2009.

3.2.9. Earnings per share

The Earnings Per Share compares Net Earnings to the number of Shares, and is simply how much earnings has been generated per one share of stock during the period reported.

Profit after tax

 Earnings Per Share =

Number of share 

As a result of analysis, the earnings per share for the years 2009 and 2010 are 12.56p and 5.84p. Earnings per share in the year 2010 are less compared to the year 2009, so it can be said that the company is not performing good.

3.2.10. Price to Earnings ratio

The Price to Earnings Ratio compares the Share Price to the Earnings per Share.  This ratio is a quick measure of how “expensive” the stock of a company may be.

Share Price 

 Price to Earnings Ratio =

Earnings Per Share

From the analysis of the price to earnings ratio, it is 6.49 for the year 2010 and is 4.21 for the year 2009. So it can be concluded that the company’s share has gone down in the year 2010 when compared to the year 2009.

3.2.11. Earning yield

It is the earnings per share for the most recent 12-month period divided by the current market price per share. The earnings yield shows the percentage of each dollar invested in the stock that was earned by the company.

Earnings Per Share 

 Earning yield =

Share Price

As a result of analysis, the earning yield for the year 2009 is 23.7% and the year 2010 is 15.4%. Investment percentage of the year 2010 is lower than the year 2009, so the company has not been performing well in the year 2010.

3.2.12. Return on total assets

The Return on Total Assets measures the profit before interest in relation to the Total Assets.  The Return on Total Assets identifies how well the investments of the company have generated earnings back to the company. Higher the ROA number, the better, because the company is earning more money on less investment.

Profit before interest

 Return on Total Assets =

Total Assets

As a result of analysis, the return on total assets of the years 2010 and 2009 are 3.98% and 3.41% respectively. Return on total assets in the year 2010 is higher when compared to the year 2009 and hence it can be said that the company has earned high with its investment in the year 2010.

3.2.13. Sales per employee

The name indicates how the sales/employee ratio is calculated: a company’s annual sales divided by its total employees. Higher sales-per-employee figures are generally considered more efficient than those with lower figures.

Sales revenue

 Sales per employee =

Average number of employees

As a result of the analysis, sales per employee of the years 2009 and 2010 are £ 490196.9 and £ 518565.8 respectively. Sales per employee of year 2010 are higher than that of the year 2009 and hence in the year 2010 the company has earned more profit with a fewer number of employees compared to the previous year.

3.2.14. Stock turnover (in days)

 Stock turnover ratio shows how many times over the business has sold the value of its stocks in terms of days. A high stock turnover is better, because money is then tied up for a lesser time in stocks.

Sales x 365

 Stock turnover (in days) =

Cost of sales

The result of analysis of stock turnover for the years 2009 and 2010 are 6.953 days and 5.819 days. Stock turnover in the year 2010 is lower than the year 2009. So turning the stock of the company to money in the year 2010 is better.

3.2.15. Dividend cover

The dividend cover ratio tells us how easily a business can pay its dividend from profits. A high dividend cover means that the company can easily afford to pay the dividend and a low value means that the business might have difficulty paying a dividend.

Earnings per share

 Dividend cover =

Dividend per share

As a result of analysis, the dividend cover of the year 2009 is 2.502 and the year 2010 is 1.123. Dividend cover of 2010 is lower than the year 2009. Hence it is difficult for the company to pay dividend in the year 2010 compared to 2009.

3.2.16. Account receivable turnover

This is the ratio of the number of times that accounts receivable amount is collected throughout the year. A high accounts receivable turnover ratio indicates a tight credit policy. A low or declining accounts receivable turnover ratio indicates a collection problem, part of which may be due to bad debts.

Debtor x 365

 Account receivable turnover =

Sales

Form the analysis of the account receivable turnover; it is 22.78 days for the year 2010 and 21.51 days for the year 2009. Account receivable turnover of the year 2010 is higher, and so, collection in the year 2010 is hard compared to the year 2009.

3.2.17. Account payable turnover

The measure shows investors how many times per period the company pays its average payable amount.  If the turnover ratio is falling from one period to another, this is a sign that the company is taking longer to pay off its suppliers than it was before. 

Creditor x 365

 Account payable turnover =

Cost of sales

From the analysis of account payable turnover it is 49.41 days for the year 2009 and 44.63 days for the year 2010. Account payable turnover of the year 2010 is less, so it can be concluded that the company is taking longer time to pay off its suppliers than the year 2009. 

3.2.18. Total Asset turnover

The amount of sales generated for every pound’s worth of assets. It is calculated by dividing sales in pounds by assets in pound. The higher value of asset turnover is better.

Sales 

 Total Asset Turnover =

Total Assets 

As a result of analysis, the total asset turnover of years 2010 and 2009 are 0.75 and 0.86. In the year 2010, asset turnover is less, so the company was not effective as in the year 2009.

3.2.19. Gearing ratio

Gearing is a measure of financial leverage, demonstrating the degree to which a firm’s activities are funded by owner’s funds versus creditor’s funds. A company with high gearing is more vulnerable to downturns in the business cycle.

Debt 

 Gearing ratio =

Debt + Equity 

From analysis, the gearing ratio of the years 2010 and 2009 are 69.54% and 70.91% respectively. Gearing ratio of the year 2010 is less compared to that of 2009, so the company had a good financial strength in the year 2010.

4. The impact of current events

Revenue of the company was decreased to 7,994 m in the year 2010 which was favourable for the company

Earnings per share in the year 2010 and 2009 were 38.5 and 32.6 and hence the company’s earnings from shares are high compared to the year 2008.

Operating profit of the company is high in the year 2009 compared to the year before. This is good for the company.

The company has failed to give enough dividends in the year 2009 compared to the previous year. So it has failed to attract the shareholders.

Total equity of the company has increased in the year 2010 which is not a good sign for the company.

Cost of sale of the company is raised in the year 2009 compared to the previous year. Thus the company’s expenditure has been increased in 2009. Hence, cost of sale should be reduced by the company.

Account receivable turnover is higher in the year 2010 when compared to the year 2009, which is not good for the company.

Account payable turnover is high in the year 2009 compared to the previous year which is not favourable for the company.

Fixed asset turnover of the company is almost equal in the last two years and hence this does not have any impact on the company.

From the ratio analysis most of the ratios turned positive result. This is shows that the company performing well.

From the above analysis and the financial data of the company, we can say that the company’s performance is good in the year 2010 when compared to the previous year.

5. Prediction for the future

The British Airways PLC Company has performed well in the last year compare that of past years. and this may be because of the financial crisis which occurred in the year 2009.as a result of the above analysis the company is expected to perform well in future in order to maintain its standard. For this it should enhance the services and offers given to the customers and also provide good and reliable service. This may help in attracting more customers. The company should offer more facilities compared to the other telecommunication companies and this will greatly help the company to develop and grow in the forthcoming years.

Conclusion

The Vodafone group PLC is a well-established international company in the telecommunication sector and has a good name in the market. The company has failed to perform well in the year 2009 compare to the year 2008 and this may be because of the financial crisis. But in spite of the crisis it had a good financial history in the past years. So there is a strong hope that Vodafone Group PLC will perform well in the coming years.