Financial Decision Making : Easyflight

FINANCIAL DECISION
MAKING

TABLE OF CONTENTS
PART 1: BUSINESS PERFORMANCE ANALYSIS....................................................................1
1.1 Statement of profit or Loss ...................................................................................................1
1.2 Statement of Financial Position.............................................................................................2
1.3 Statement of Cash Flows.......................................................................................................4
1.4 Market Segment Analysis......................................................................................................6
PART 2: INVESTMENT APPRAISAL..........................................................................................6
2.1 (A) Management forecast......................................................................................................6
2.1 (B) Investment appraisal techniques......................................................................................6
2.2 Sources of Finance.................................................................................................................8
2.3 Non-financial factors...........................................................................................................10
REFERENCES .............................................................................................................................12

PART 1: BUSINESS PERFORMANCE ANALYSIS
1.1 Statement of profit or Loss
Ratio analysis of Easyflight Plc for the period of 2017 and 2018 is as follows:
Particulars Formula 2017 2018
Gross profit 3031 3211
net profit 443 541
Net sales 4527 4686
Gross profit ratio Gross profit / Net
sales * 100
66 % 68%
Net profit Ratio net profit / sales * 100 9.8 % 11.5 %
Gross profit ratio
Gross profit ratio refers to a profitability ratio which is used for calculated gross profit Of
company against sales revenue. Gross profit ratio is used by company and investors for
evaluating operational performance of organization. It is also used as metric for assessing
financial health of company. It shows how efficiently company is managing its direct costs.
Higher the gross profit ratio higher the efficiency of company to operate its business. It tells
investors about the capability of company to create product or provide services in more cost
efficiently in comparison to its customers (Frydman and Camerer, 2016).
Analyzing the current position of Easyflight gross profit ratio of company is 68 % as
against its sales. Company is having a high gross profit which shows that company is efficiently
managing its operations. Being a service industry it has to take care of various other measures for
providing services to customers. Seeing the gross profit of company it is analyzed that company
is good in managing its operation in a cost effective and efficient manner. Company will also be
able to carry its other expense as it is having sufficient profits. Company can even increase its
gross profits by analyzing internal factors which can be enhanced for increasing it revenue.
Net Profit
1

Net profit ratio is also a profitability ratio that is used for calculating net profits in
percentage terms. It shows with how much amount company is left after incurring all cost and
expenses that are related to production, administration & financing. It is used to analyze strength
of company to manage its operation after production costs that is from gross profits that are
available to company. By analyzing the above ratios it can be said that company has increased its
profits from last year (Harrison, 2016).
Company is presently having Net profit ratio of 11.5 % in year 2018 which is quite good.
Company has gained a rise in its net profit from previous year which shows that company is
putting its efforts for improvements and to increase its profit. Company is required to take steps
and new strategies for better management of its operating cost for increasing its profits.
Company should analyze possible costs that could be reduced so that company's profit can rise.
Company is facing costs mainly at ground handling therefore company should deeply assess the
areas which are unproductive or which are acquiring costs with no returns. Apart from that
company is not having considerable financing cost. It is essential for company to focus on its
operating activities to provide increase returns to investors. Increase in profit will enable
company to have resources that are necessary for expansion plans. Expansion is not possible id
company is not available with adequate profits, therefore it is important to focus on managing its
operations. Company has to manage its operation in such a manner so that is available with
sufficient profits. Profits are very important as they are the main source through which company
will be planning for future activities and plans.
1.2 Statement of Financial Position
Particulars Formula 2017 2018
Current assets (CA) 1382 403
Current liabilities
(CL)
576 538
Stock 121 154
Prepaid expenses 0 0
Quick assets (QA) CA – (Inventory +
prepaid expenses)
1261 249
Current ratio CA / CL 2.4 0.74
2

Quick ratio QA / CL 2.18 0.46
Current Ratio
Current ratio is a liquidity ratio which is used for measuring ability of company to pay its
short term obligations or that are due within a year. It is used by investors for assessing how
company can maximize current assets on balance sheet (Frydman and Camerer, 2016). Company
had high current ratio in previous year of 2.4 which shows high strength of company. current
ratio of company has declined to very low level. It shows how much assets are available that can
be liquidated for meeting its current liabilities. Current ratio of Easy flight is 0.74 times which
shows that company is not having enough assets that can be utilized by it for other factors of
company . . High current ratio shows strong position of company to repay its debts and short
term obligations. Company should take necessary steps for evaluating areas that can improve the
effectiveness of company.
Liquid assets are necessary but more than required gives a negative image to investors
about company. They may frame an image of ineffectiveness, inefficiency or lack in managing
its operations. Company is having high trade receivables that shows company is facing problems
of collecting its outstandings company's current assets are high because of trade receivables,
and there is risk factor involved in that case as not all debtors are good and company might have
to face drawback because of bad debts. Company should evaluate the tenure of receivables and
make suitable bad debts provision for managing its further operations. Higher Current ratio of
company shows is considered acceptable as it shows that company is able to meet its liability,
whereas lower current ratio shows that company is at risk of default. At the same time very high
current ratio indicates that the assets of company are not being efficiently used. Company has to
make appropriate utilization of resources.
Quick Ratio
Quick ratio is also known as acid test ratio, that shows company's ability in meeting its
short term operational needs by using liquid assets of company (Stewart and et.al., 2018). This
3

ratio is similar to current ratio. Quick ratio is mainly used by lenders for analyzing position of
company to repay its debts. Company is having quick ratio of 0.46 times which is considerable
after deducting inventory it shows more reliable position of company but when compared to
previous years it has declined to very low level as in previous year it was 2.18. The decline may
be because of company has utilized its assets for other activities. By seeing the position of
company by quick ratio it is having enough assets to repay its debt for which it can get loans and
funds when in need. Where a typical analyst will also see that company is having trade
receivables, which can change decision of investors. They also need to assess the capacity of
company to collect its debts. When talking about overall financial position that company is
having sound position I market. Company is having high retained earnings that could be utilized
for various expansion plans as well enhancement of its servicing facilities. It can also be figured
that company do not give more dividends to its shareholders and retains major portion of its
earnings. Retained earnings can also be used for payments of dividend in case where company is
not having adequate profits for distribution. Retained earnings shows that company is not taking
steps towards improvements or innovation. Retain earnings has grown at a considerable rate
therefore it is necessary to assess the sources and transfers. In company's non current assets
property has also increased that shows company has purchased assets for company. Purchase of
assets may be because company is planning to make addition in its flight services or for other
providing other related services.
This ratio is given more preference over current ratio as it gives more reliable results
about company's financial strength. The difference in this ratio is that it does not considers
inventory in current assets and only compares quick assets to current liabilities. Values for quick
ratio vary with company and industry. Theoretically it is considered that high ratio shows that
position of company is better, but analyst and investors compare quick ratio with industry
average. Inventory is not considered as it sometimes becomes difficult for companies their
liquidity (Tamir and et.al., 2015).
1.3 Statement of Cash Flows
Operating Cash Cycle
Operating cycle is defined as length time between purchase time of inventory and time
taken by company to collect cash from accounts receivable. It states the time required by
4

company for turning purchases to cash receipts due from customers. It shows number of days for
which cash of company remains blocked within operation of business.
Particulars Calculations 2017 2018
Inventory turnover
ratio
29.5 38.10
Account receivable
turnover ratio
16.04 16.13
Operating Cycle
Ratio
(365/ Inventory turnover ratio) +
(365 / account receivable turnover
ratio)
52 days 32 days
From the above study it is identified that operating cycle of company has declined to 32
days in 2018 from 52 days in 2017 previous year company has take necessary steps for reducing
its cycle. Lower the operating cycle beneficial for company as it will help to use it cash assets
efficiently. Company has reduced operating cycle and it will help company to repay its debts or
to make additional purchases(Shouzhen and Su, 2015).
Particulars Calculations 2018
Cash flows from operating
activities
464
Net Sales 4686
Average total liabilities 2222
Net sales 4686
Current Liabilities 538
Cash flow margin ratio 0.09
Cash flow from operation /
average total liabilities
20.80
5

From analysing cash flows it is identified that company is seen that company has high
cash inflows during the period. Cash flow margin ratio of company is adequate that, low ratio
shows that company makes less cash sales. Operating activities has gone down as company has
paid dividend in current year.
Company has paid dividend in year 2018, and has also made purchases in current year of
property. But it is identified that company has paid dividend because of which net cash flows has
reduced of company. Company should not have paid dividend this year because its purchases of
property.
1.4 Market Segment Analysis
From reports it is analysed that in England company is having gross profit ratio of 63 %
but its net profit is only 10.95 % which shows that company has lacking in managing its
operations with increase in profits. For improving its revenue company should use skimming
pricing policy. For enhancing its operation it should use modern budgeting technique.
In France net profits are 33.04 % which shows that it is efficiently managing its
operations. It is not having high revenues but seeing its position it is efficiently managing its
operations. Penetration pricing policy can be used for increasing its sales. ABC analysis should
be used by company for its operating effectiveness.
Looking at reports of Scotland performance of company is good. It is also having net
profit of 14.72 % which is increase from previous year. Company can still increase its profits by
focusing on operating activities of company. Here also company should use penetration policy. It
should use budgetary technique for properly managing its operation to reduce its expenses.
PART 2: INVESTMENT APPRAISAL
2.1 (A) Management forecast
As per the given exhibit 3, initial investment in France in 2017 was £3000 million.
Management forecast shows that there will be increase in the revenue in coming 10 years. It is
beneficial for Easyflight company to expand its business in France as variable cost is increasing
over a period of time as well as contribution has also increases from 75 to £863 million. Forecast
says that company has earned revenue after deducting debts from £100 million to £1121 million.
2.1 (B) Investment appraisal techniques
Investment appraisal is used to determine attractiveness of investment. There are
collection of techniques through which company assess project viability (Carvalho, Meier and
6

Wang, 2016). Easyflight company use these techniques in measuring the cash flows and then
give priority to projects accordingly. There are various techniques which are as follows:
Payback period:
It is one of the most effective techniques used by companies to measure risk associated
with investment. It identifies the total time required to recover funds invested time taken to reach
breakeven point. This investment technique is suitable for small investment projects. It is
important to evaluate and determine the time taken for cash flows of project to pay the initial
investment of the project. It is used by the management of company in effective decision
making (Frydman and Camerer, 2016). Thus, it is beneficial for Easyflight if its payback period
is shortest, firm reaches breakeven point quickly. It is mostly used when liquidity is essential
element to select a project.
Benefits
 It assists company in ranking the projects.
 It is beneficial for the company which are related to instability, change in technology and
uncertainty because it does not allow cash flow projection beyond a period.
Limitations
 Payback ignores time value of money so it cannot determine the selection of right project.
 It ignores profitability of project as if there is short payback period that doesn't means
that it cannot generate profits (Francis and et.al., 2015).
From the exhibit 3 it can be interpreted that Easyflight payback period is approximately 7
years and 11 months and the total time taken to complete the project is 8 years. If firm invest in
France than breakeven point will arise in 7 years 11 months.
Accounting rate of return:
It is the return expected on the initial investments in percentage. Higher the ARR higher
is the return and vice versa. It is used to compare the returns of ARR and management of
company in order to reject or accept the project. It is beneficial for Easyflight in decision making
and earn higher return (Stewart and et.al., 2018).
Benefits
 No other reports are used in determining ARR as accounting information is taken as base.
 ARR measure the profitability of investment.
 Share options are available to employees as a part of incentive.
7

Limitations
 ARR methods dismiss time factor.
 There is no benchmarking system to decide whether project need to be rejected or not.
 Company uses net income instead of cash flows and net income may be manipulated
which may not provide accurate return (Chambers, Echenique and Saito, 2016).
It can be interpreted that ARR or rate of return on investment of Easyflight is 11.4%.
ARR is neither high nor lower so Easyflight can make investments in France and earn return of
11.4%.
Net present value:
NPV is variation between present value of cash inflows and outflows. It is used by
company in planning and analyzing profitability associated with investment. If NPV is higher
than it is said that company will get higher return.
 It gives importance to time factor which makes it accurate.
 High priority is given to risk and profitability.
 It assists in deciding profitability with the help of cash flows instead of profits.
Limitations
 It is not useful in comparing two projects.
 It requires prediction of cash flows which may be sometimes incorrect (Mitchell,
Hammond and Utkus, 2017).
 There is difficulty in determining accurate cost of capital.
From the exhibit 3 it can be interpreted that Easyflight NPV is 830. It is beneficial for
company to invest in France as the future value of investment after 10 years is 3000. It is
concluded that company will increase its revenue by investing in France.
2.2 Sources of Finance
As Easyflight want to invest in airport retail business in 2019 for which company need
funds. There are various sources of funds such as retained earnings, term loans, bank loan,
working capital loan and venture capitalist etc. Easyflight may use its retained earnings and take
bank loan for funds (Tamir and et.al., 2015).
Bank loan:
It is one of the most easiest and common form for taking fund. Bank provides medium
and long term loans with various interest rates according to the bank. Bank loan is beneficial for
8

investing in plant & machinery, land and buildings etc. Banks charge lower rate of interest. Bank
grant loans to companies by checking and evaluating their financial statements whether the
company is capable of repaying back the amount of loan with interest. Loan is given for specific
period of time and is expected to be repaid with interest.
Benefits
 Flexibility: Bank loan is flexible for organizations, there is no need to make regular
installments rather when bank demands full amount is paid (Smith and et.al., 2018).
 Cost effective: Bank loans are cheap in position of interest rate as compared to credit
cards and overdrafts. Having lower interest rate, company prefer bank loan over credit
cards.
 Ownership: Bank does not have any ownership on the company after giving loan. Whole
ownership is with the company. Bank does not have any right to monitor who company is
using the funds.
Limitations
 Strict requirements: For granting bank loans there are some requirements that need to be
fulfilled by the company. Bank needs some security in return like collateral, assets etc
(Guastello, 2016). Company need to be capable of repaying the money back with interest.
It is find by evaluating financial statements of the company.
 Repayment burden: There is a need to make periodic payment to banks which may create
burden upon companies. If companies make late payment than bank report to credit
bureaus which make a negative impact on credit scores.
Retained earnings:
It is the amount left called net income after paying all the expenses, dividends. Retained
earnings are personal savings of company. Company may re-invest this money in expanding its
business. The money which is not paid to the shareholders is called retained earnings. It is also
used by the company in emergency situation. It reduces the cost of issuing equity, ownership
remains with the company. It is useful for companies in operating daily activities of business and
further capital investment. The purpose of retained earning is to repay the old debts, meeting
needs of working capital etc (Shouzhen and Su, 2015).
Benefits
9

 Expansion and diversification: Companies uses retained earnings in expanding and
developing their business globally. There is no need for company to take loans from
banks as firm has enough savings for further capital investment.
 No obligations: If companies issue equity shares than firm has to pay dividends to their
shareholders and if companies take help of debt finance interest need to be paid.
Whereas if company uses retained earnings there is no obligation of paying interests and
dividends.
Limitations
 Over capitalization: If company started to invest retained earnings regularly than their
will be insufficient funds. It will create challenge for company in dealing with difficult
situation (Harrison, 2016).
 Shareholders criticism: Shareholders are affected by the policy of dividend, if company
invest more retained earnings than it will create disputes among shareholders and
company. Shareholders have ownership stake in the company. They may take decision in
keeping the retained earnings high or low.
From the above discussion of sources of finance it can be recommended that Easyflight
need to invest some of its retained earnings and remaining amount can be taken as bank loan.
Company want to invest £2000 million and there is £1822 million earnings available. It is
beneficial for company to invest some of its retained earnings so that there is no burden of
repayment of loan. Saving some of the retained earnings will lower down shareholders criticism.
2.3 Non-financial factors
There are various non-financial factors which need to be kept in mind by Easyflight
company in planning investment and decision making. These factors are as follows:
 Future legislation: Company need to critically analyze the market in which they want to
invest. Company need to compare the legislation's and laws of countries through which
firm take decisions. For instance in UK there are different employee legislation acts,
company need to analyze itself whether it has capability to match the requirements of
current and future legislation (Francis and et.al., 2015). Easyflight want to expand its
business in airport retail thus, firm need to do research about retail business of country in
which they want to expand.
10

 Market trends and analysis: Market analysis is one of the most important factor for
making investment. Easyflight need to do market research to find out market trends,
customers needs, purchasing power and new strategies for marketing, competitors
analysis in order to take strategic decisions and compete in the market. By doing market
research company will know its strengths and weaknesses which need to be improved
and used in business growth. Company also finds some opportunities through which firm
created its brand and increase its market share. It will increase business capabilities and
reputation by gaining knowledge, skills. Market analysis will improve relation with
suppliers and customers. Various threats are also identified which need to be overcome
by taking strategic actions (Chambers, Echenique and Saito, 2016).
 Enhancing staff morale: HR manager of company also need to take care of its staff. HR
need to frame policies and maintain standards according to the international market
which will benefit Easyflight in sustaining in the market. HR of Easyflight need to
motivate employees by giving training to employees, giving rewards, appreciation,
promotion for their hard work. By providing training session to staff, they will get to
know about the new technologies and strategies which will encourage them in performing
well which will increase the profits of company.
 Protecting intellectual property: It is essential for Easyflight to protect its intellectual
property right such as copyrights, patents, trademarks etc. in order to compete in the
market by gaining competitive advantage. It will increase profitability of company by
making its business products and services unique (Tamir and et.al., 2015).
11

12