Ratio Analysis and Investment Appraisal in Finance

This document provides an introduction to finance and discusses the concept of ratio analysis. It explores different financial ratios such as current ratio, shareholders liquidity ratio, gearing ratio, net assets turnover ratio, net profit margin ratio, stock turnover ratio, return on equity, interest coverage ratio, solvency ratio, and return on capital employed ratio. The document also covers the topic of investment appraisal and explains the steps involved in the decision-making process. It discusses different techniques used in investment appraisal, such as accounting rate of return and payback period.

FINANCE

Contents
INTRODUCTION...........................................................................................................................................3
TASK 1..........................................................................................................................................................3
TASK 2........................................................................................................................................................13
CONCLUSION…………………………………………………………………………………………………………………………………………13
REFERENCES..............................................................................................................................................17

INTRODUCTION
Finance is describe as management of capital or money which can be include various activities
such as investing, budgeting, lending to others, saving for future, borrowing and many more. It is
also consider as wide term which consist of analysing as well as processing stages related to
money such as investment or any other stage (Antras and Foley, 2015). It is generally bifurcate
into three type’s i.e. public finance, personal finance and corporate finance. The respective
assignment is based on three companies i.e. Flybe group plc, Ryanair holding public limited and
Easyjet Plc. They are planning to calculate ratio of three years which will help in analysing their
performance in order to determine which is good for investment and which is not. This will also
help them in indentifying which company is effective in a particular marketplace. Then in second
task they will develop a memo which is based on investment appraisal in respect of procedure
related to decision.
TASK 1
Ratio Analysis
Ratio Analysis can be used to express quick indication in regard to performance of firm.
The ratio will be divided as per short term solvency, efficiency ratio and investments ratio.
Strength – The strengths of the ratio analysis -
 It helps to validate operating, financing and investing decision of company. In ratio analysis company identifies problems and caught attention of management in
specific areas.
Weakness – There are weaknesses also -
 It ignores the price level because changes in inflation and looks in price level between
periods.
 Financial ratio cannot sort any problem related to financial problems.
Current Ratio – Current ratio shows how much company can pay off debts regarding
short terms (Porter, 2016). The financial report analysis depicts that from 2016 to 2018 Ryanair
has facing problems and fluctuation in current ratio. Decrease in the ratio means that FLYBE

isn’t in good position in liquidity. Current ratio is a comparison of current assets to current
liabilities.
Ryanair holdings public limited company – The ideal current ratio of company is 2:1, it means,
company have good ability to pay off their loans. In the year of 2018 to 2016 continue decrease
which is not good for the company.
Flybe group plc – From the financial ratio it’s been analysed that current ratio of the company in
2016 to 2018, 1.06, 0.96 and 0.71 respectively. In 2016 company can touch ideal ratio but after
some time it goes down.
Easy jet plc – The liquidity ratio of the company cannot reach to their ideal ratio.
Sh
areholders liquidity Ratio – It is describe about ratio which can be develop by dividing whole
equity of stakeholder by firm’s total assets (Philippon, 2015). They are generally indicate the
amount of assets on which stakeholder has its ownership. The respective ratio is generally
selected by an organization because through it an individual can evaluate total assets which are
funded by the equity shares.

Ryanair holdings public limited company – This will indicate about ratio that the respective
company have sufficient amount to pay off their shareholder in effective manner. The ratio
of respective company is 0.85, 0.97 and 0.1 which is from 2016 to 2018.
Flybe group plc – The respective company ratio is decreasing on continuous basis due to which
they are not able to pay their shareholders properly. According to data ratio of this company
is 1.03 in 2016, 0.47 in 2017 and 0.38 in 2018.
Easyjet plc – The ratio of this company is also decreasing day by day which shows that it will
not able to pay amount to its debt.
Gearing Ratio – This ratio refers to tool which is used by a company in order to determine
financial leverage as well as performance of a company (Cournède, Denk and Hoeller,
2015). It is mostly used method by a company in order to identify its financial fitness.
Ryanair holdings public limited company – the financial leverage of the respective company is
not effective because it is reducing day by day.
Flybe group plc – The leverage of company is boosting continuously because their performance
and popularity is increasing day by day.
Easyjet plc – The financial leverage is high which show that they are able to pay their debts in
effective manner.

Net assets turnover ratio – Through this ratio company able to determine its effectiveness and
its company assets which they earn from selling more and earning high revenue (Bouma,
Jeucken and Klinkers, 2017). If turnover ratio of a firm is high it means they are gaining
profit.
Ryanair holdings public limited company – The respective company turnover ratio is increasing
as well as decreasing year by year.
Flybe group plc – This Company is earning high turnover ratio as compare to other companies
which is effective for them.
Easyjet plc – The respective organization ratio is decreasing and increasing according to the time
and year.

Net Profit margin ratio – It is determine as a ratio or percentage which describe about income
generated by a firm by conducting their activities. It is determine in the income statement of
a company and always show in decimal form (Badarinza, Campbell and Ramadorai, 2016).
Ryanair holdings public limited company – The net profits of respective company is fluctuating
such as in 2016 it is increasing but suddenly in 2017 and 2018 it is starting decreasing.
Flybe group plc – The respective company net profit margin is decreasing due to which it
directly and indirectly affect on financial ratio.
Easyjet plc – The ratio of this organization is reducing which describe that they are not able to
earn sufficient.

Stock turnover ratio – Through respective ratio company able to determine effectiveness of
sales which describe about its turnover (Dang, Li and YangKarolyi, 2016). It is generally
determine about sales conduct by company and purchase department.
Ryanair holdings public limited company – The respective company didn’t have any stock
turnover ratio because they are not conducting business in stock.
Flybe group plc – Only respective organization is gaining stock turnover ratio because they are
dealing in it and its ratio is higher in 2017.
Easyjet plc – This company is also not have stock turnover ratio because they are also not
conducting business in stocks.

Return on equity (Net income) – It is generally calculated by a firm in order to measure its
financial effectiveness and performance as well as it also describe about role of management
in order to use assets properly (Weber, Alfen and Staub, 2016).
Ryanair holdings public limited company – The respective ratio of company is enhancing
continuously which shows that they can pay off its return on equity properly.
Flybe group plc – The equity of respective company is strong which shows that they can use it in
any function that is beneficial for them.
Easyjet plc – It shows that net income of respective company is reducing day by day which also
impact on their return on investment.

Interest coverage ratio – This is calculated by a company when they want to know about
effectiveness of a firm and their ability to pay interest on expenses on its debts which are
outstanding. It will fluctuate on regular basis which impact on company (Verguet,
Laxminarayan and Jamison, 2015).
Ryanair holdings public limited company – The corporation has incurred an overall interest on
debt however this may affect the expenditure on debts. If the entity maintains low ratio, this
implies their incapability to pay their interests on debts. In this regard, the ratios of this
entity from the year 2015 to 2017 are ascertained to be 14.06, 20.54 and 22.83 in the same
order. This gives them the opportunity to get loans as per the huge quantum of interest.
Flybe group plc – The state of this entity has been ascertained to be quite distinct as the ratios in
the respective entity comprise of negative figures from the time period of 2015 to 2017
exhibiting -9.33, 1.73 and -10.78. Thus lenders are apprehensive of loan repayment capacity
of company.
Easyjet plc – The ratios within this company are falling down at a continuous rate which implies
that the entity does hold much capability to make payment of interests and could not bear
debt expenditure of entity. The figures in this regard are 62.55, 9.46 and 14.07 from 2015 to
2017.
Solvency ratio – This ratio is based upon liability and asset and calculated from both
sides. It is utilised for the evaluation of capability of entity for meeting its obligation (Fourie,
Opperman and Kumar, 2015).

Ryanair holdings public limited company – The company maintains a solvency ratio from 2016
to 2018 of around 32.06%, 36.89% and 36.15% respectively.
Flybe group plc – The company does not have abilities to pay off their amount from investor.
They have figures of 27.11% within 2016, 19.04% within 2017 and 15.22% within 2018.
Easyjet plc – On liability side it has increased but asset side has decreased, so airline possesses a
good solvency ratio, having amount of 46.58% within 2016, 49.13% within 2017 and
46.93% within 2018.
Return on capital employed ratio – It is a financial ratio that are used to measure efficiency
and profitability of the company in the context of used capital (Norman and Nakhooda, 2015).
Ryanair holdings public limited company –The entity easily gets loan from other companies
because their efficiency is good regarding assets and liabilities which is 20.77 within 2016,
15.41 within 2017 and 16.88 within 2018.
Flybe group plc – This entity does not have adequate ROCE. During 2016 to 2018, the ratios are
3.55, -12.9 and -0.98 which is not good for the business and implies inability to repay loan.
Easyjet plc – It is also decreased that can show now efficiency of the company continue
decreased. The ratio of the company does not show good position it is from 2016 to 2018,
18.24, 11.49 and 7.77.

Non Financial ratio
The non financial ratio can include rate of particular product, efficiency of each employee
and KPI ratio to measure performance in terms of financial and non financial data (Gibb,
2016).
Profit per employee

As per the above chart it has been depicted that profit per employee and in the case of
Ryanair would be preferred for having much more proportion of profit margin in the subject
to all employees. It can provide efficiency and show greater profitability.
Operating Revenue/Cost of employees
The above graph implies that cost upon operating revenue is inclusive of the workforce.
There is flybe group plc which is ascertained to be having low costing upon personnel. This
means that they are not affected by employees turnover.
(b) In accordance with above mentioned financial and non financial ratios, it is gained that easy
jet is the best performing airline because it has a number of sources of profitability (Avdjiev,
McCauley and Shin, 2016). The outcomes associated with profitability shows that Ryanair is
best in profitability. In terms of non financial ratio, Ryanair reflects good performance.
Thus, the wholesome data shows that Ryanair is best in 5 ratios, easyjet in 4 ratios while
Flybe in 3 ratios.
(c) Ratio analysis provides performance of entity implying that Flybe group plc have poor
performance in contrast to other entities.
TASK 2
Subject – Investment Appraisal

(a) There are generally major four steps of capital investment which are concerning about
financial evaluation as well as it's going to assist within the procedure of decision-making
(Fourie, Opperman and Kumar, 2015). There is protected steps are-
 Project Screening – It could help to take a look at the opportunity of the task and allows
the business enterprise to warrants further attention.
 Analysis and acceptance- After examination, analysis of the mission and get specific
data than take delivery of inspiration regarding the commercial enterprise process.
 Monitoring and review – To get right end result monitor of undertaking sports than take
a review from others.
The investment appraisal is a specific location which could assist within the selection-making
technique regarding capital expenditure. It is engaged with marketing, strategic making plans and
organisational layout. The particular technique used within the selection making method because
it is based on the quantitative approach and forward-searching method (Bouma, Jeucken and
klinkers, 2017).
(b) For investment appraisal, there are most important techniques carried out via organisation
which might be-
 Accounting rate of return – The specific approach compares the income to make an
investment from the quantity that became invested. The unique method calculated
through average annual profit. The idea of economic ratio used as capital budgeting
(Norman and Nakhooda, 2015). It cannot be centred at the time fee of cash as well as
cash flows due to the fact it’s miles important component to arrange business in an
effective manner as an instance, in case annual profitability for a targeted task over 3
years span averages $100 in addition to common investment in a particular year is
$1000 then ARR can be $100/$1000 so the answer is 10%
Advantage – It is easy to calculate and easy to understand
Disadvantage –Typically it could forget about the cash flow from investing sports.
 Payback period – In this approach, the quantity associated with time due to the fact
there is calculating time period concerning to invested quantity. There are with specific
rate calculate that during which time get money and which mission is a hit as an
instance, firm B is making plans to begin project desires an initial investment of $110
million. The assignment is predicted to supply $20 million according to year in net cash

flow for 5 years. So, the pay returned length is preliminary investment/annual cash flow
that is $110/$20 answer is 5.5 years.
 Investment risk and sensitivity analysis – The specific analysis to evaluate diverse
values as an unbiased variable. The specific technique applied mainly areas that could
support to one or greater enter variables (Gibb, 2016). For example- there are
determining income fee of widget is $1000 and sue sold final 12 months for total sales of
$100,000. The transaction growth via 10% and quantity by means of 5% to increase
economic version. It could inform what takes place in the concerning of sales whilst
boom purchaser traffic by using 10%, 50% or 100%.
Advantage – With the help of sensitivity evaluation, analysis all information extensive and
understanding the relation in between variables and the reasons of impact to evaluation.
Disadvantage – It’s far especially primarily based on the assumption and not relative in nature
 Discounted cash flow - It is far referred to as appraisal approach that is used to evaluate
the quantity of an investment based regarding their future cash flows. With the assist of
these strategies the use of a discount rate and follow gift value to calculate predicted
future cash flows. For example: It is assumed that annual interest is 5% , in saving
account $1 on the way to be well worth $1.05 within one year. Likewise, if a $1 charge is
behind schedule for single year then its current value is $ 0.95 as this cannot be put into
their saving account (Badarinza, Campbell and Ramadorai, 2016.).
Advantage – It is nearest of the intrinsic cost of the stock that is most sound in valuation
approach after the analysis of confidence.
Disadvantage – The DCF evaluation based on the sensitivity even small adjustment reason of
DCF valuation in extensively way.
 Net present value – The particular method can display net cash inflows and cash outflows
in reference to particular period of time (Avdjiev, McCauley and Shin, 2016). The NPV
used in capital budgeting and investment planning to determine profitability of a projected
investment or assignment.
Advantage – The primary advantage of the approach to think about the fee of capital and the
danger inherent in making projections about the future.
Disadvantage – There is required to guesswork regarding the firm's price of capital and as a
result cost of capital is just too high.

According to the above given table, it’s been determine that company project worth of
£500,000 cash flows in connection with 5 years as well as discount rate can be 10%. The NPV
has been really worth of £368284 which implies to get fulfilment to be able to have a positive
worth. So, it is getting that from all the above technique NPV is higher than others.
CONCULSION
By conducting evaluation of above discussed point it can be summarised that for every
company finance is necessary because through it they able to conduct their work in effective
manner. Along with this, it can be evaluate that through analyzing financial ratio of the
companies Ryanair is gaining high investment perspectives. Through which it is determine that
performance of respective company is effective and strong which help them in gaining high
ratio. Appraisal of investment can be determined through qualitative technique that can be
adopted by an investor for the purpose of investment.

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