Financial Analysis for Managers - PDF

Added on - 21 Apr 2020

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Running head: FINANCIAL ANALYSIS FOR MANAGERSFinancial Analysis for ManagersName of the Student:Name of the UniversityAuthor’ Note:Course ID:
1FINANCIAL ANALYSIS FOR MANAGERSTable of ContentsTerms of reference:..........................................................................................................................2Executive Summary:........................................................................................................................4Ratio analysis:..................................................................................................................................5Analysis of Jet2:..............................................................................................................................8Analysis of Ryanair:......................................................................................................................14Comparison between Jet2 and Ryanair:........................................................................................21Conclusion and recommendations:................................................................................................26References and Bibliographies:.....................................................................................................27Appendices:...................................................................................................................................31
2FINANCIAL ANALYSIS FOR MANAGERSTerms of reference:In this report, a financial comparison has been carried out between two airlines, one is theBritish low-cost airline, Jet2 and another is an Irish low-cost airline, Ryanair. Both had beenEuropean carriers before the Brexit effect and these two airlines have benefitted and sufferedbeing members of the Euro zone, particularly during the declining stock market.Ryanair is a low-cost airline in Ireland established in 1984 and it’s headquarter is locatedin Swords, Dublin, Ireland. The primary operational bases of the airline are at London Stanstedand Dublin airports. It is the largest European airline in terms of scheduled passengers flown andit has carried most global passengers in contrast to any other airline in 2016 (Ryanair.com2017).The rapid expansion helps in characterising the airline, which is due to the deregulation ofthe aviation industry in Europe in 1997 along with the success of its low-cost business model.The route network of Ryanair serves 34 nations in Europe, the Middle East (Israel) and Africa(Morocco).Jet2 is a British low-cost airline based at Leeds Bradford Airport, England. It is the fourthbiggest scheduled airline in UK. In addition, the airline holds a “UK Civil Aviation AuthorityType A Operating Licence” for carrying passengers, cargo and mail aircrafts having 20 oradditional seats (Jet2.com 2017). The route network of Jet2 serves 47 sun destinations and itsemployee base is around 4,000 in April 2015.The financial analysis would be made for assessing the non-financial measures includingbreakdown by various divisions and measures of corporate social responsibility, efficiency,liquidity, profitability and gearing constituting of both time series and cross-sectional analysesfor both the airlines. Along with this, the similarities and dissimilarities of both the airlines
3FINANCIAL ANALYSIS FOR MANAGERSwould be computed, after which a summary of the results would be drawn and suggestionswould be made for improving the financial performance of both the airlines.
4FINANCIAL ANALYSIS FOR MANAGERSExecutive Summary:In this report, a financial comparison has been carried out between two airlines, one is theBritish low-cost airline, Jet2 and another is an Irish low-cost airline, Ryanair. Both had beenEuropean carriers before the Brexit effect and these two airlines have benefitted and sufferedbeing members of the Euro zone, particularly during the declining stock market. The primaryaim of ratio analysis is to compute and interpret the financial ratios for monitoring andevaluating the financial position and performance of the organisations. The shareholders,management and creditors of the concerned organisations would be interested in this analysis.By comparing the profitability position, it could be inferred that Ryanair is leading interms of profit, while in terms of generating and providing returns, Jet2 is in a better positioncompared to the former. Ryanair is enjoying a stable liquidity position in the UK aviationindustry compared to Jet2. Since the debt burden of Jet2 is greater in contrast to Ryanair, it couldbe inferred that the former is more risky to become bankrupt in future. Although both the airlinesare struggling to maintain a competitive position in the market, Jet2 is in a better positioncompared to Ryanair. Thus, it could be inferred that both the airlines are struggling to maintaintheir solvency positions; however, if compared, Ryanair is in a favourable position in contrast toJet2.To conclude, it could be observed that both the airlines being parts of the Euro zone, havesuffered as well as benefitted. Both the airlines depend on tax benefits for gains and in order torestrict them from going into debt, they need to declare bankruptcy.
5FINANCIAL ANALYSIS FOR MANAGERS
6FINANCIAL ANALYSIS FOR MANAGERSRatio analysis:The primary aim of ratio analysis is to compute and interpret the financial ratios formonitoring and evaluating the financial position and performance of the organisations. Theshareholders, management and creditors of the concerned organisations would be interested inthis analysis (Arrozio, Gonzales and Da Silva 2016). The following are the types of ratios thatwould be computed:Profitability ratiosLiquidity ratiosDebt ratiosActivity ratiosGearing ratiosProfitability ratios:In the words of Barnardet al. (2014), profitability ratios gauge the profit-generatingcapability of an organisation in relation to assets, sales and equity. These ratios provide aneffective platform to judge the individual performance of an organisation and they are beneficialto contrast a firm with its rivals in relation to the industrial benchmark. The profitability ratiosthat would be considered in this report include the following:Operating margin = Operating profit/ Sales revenueNet margin = Net profit/ Sales revenueReturn on equity = Net profit/ Average shareholders’ equity
7FINANCIAL ANALYSIS FOR MANAGERSReturn on total assets = Net profit/ Total assetsLiquidity ratios:Liquidity explains the extent to which a security or an asset could be purchased quicklyor it could be sold in the market without having any impact on the price of the security or asset.In this context, Attig and Cleary (2014) remarked that accounting liquidity gauges the easethrough which an individual or organisation could clear the financial obligations with liquidassets available to them. The two liquidity ratios that would be applied in this report constitute ofthe following:Current ratio = Current assets/ Current liabilitiesQuick ratio = (Current assets – Inventories – Prepaid expenses)/ Current liabilitiesDebt ratios:Debt ratios gauge the degree of leverage of an individual or a firm, which depicts theportion of the assets owned on the part of the organisation and the amount financed through debt(Bekaert and Hodrick 2017). The following debt ratio is taken into account in the form ofgearing, which is described later on in the report:Debt ratio = Total liabilities/ Total assetsActivity ratios:As pointed out by Bodie (2013), activity ratios gauge the ability of an organisation toconvert various accounts within the balance sheet statements into sales or cash. These ratiosgauge the relative efficacy of an organisation depending on asset utilisation, leverage and other
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