Financial Analysis of Thomas Cook (2015-2018) - ACFI5020 Report

This report provides a comprehensive financial analysis of Thomas Cook, examining its performance from 2015 to 2018 using ratio analysis. The analysis covers liquidity, capital structure, profitability, and turnover ratios, comparing Thomas Cook's performance with that of Amadeus IT Group. The report identifies key financial challenges and weaknesses, particularly in debt management and operating profits. It also explores the factors contributing to the company's business model failure, including external forces like Brexit, weather, competition, and internal issues such as bad management and high debts. Recommendations are provided to address these deficiencies, focusing on improving operating profits and sales. The report concludes with a discussion on the lessons learned from Thomas Cook's collapse, emphasizing the importance of conservative financial management and strategic planning.

ACFI5020

Contents
Introduction...........................................................................................................................................2
Task-1....................................................................................................................................................2
Ratio analysis........................................................................................................................................2
Task-2....................................................................................................................................................8
Recommendation...................................................................................................................................8
Task-3....................................................................................................................................................9
Business model used..............................................................................................................................9
Conclusion...........................................................................................................................................11
References...........................................................................................................................................12

Introduction
The report brings out a discussion on Thomas Cook, which has started in 1841 by Thomas
Cook. It was the first company, which offer pleasure through pleasure tours by air. Thomas is
equipped with nearly 44 aircrafts with the fly by offering financial services that include
Thomas Cook`s passport. Therefore, recently the company has faced collapse of business
model due to external forces such as Brexit, weather, competition, bad management, and
debts (Altman et al., 2017).
Amadeus IT Group is among top travel technological company through which it can connect
to travel ecosystem, which means new business travel opportunities listed in the Spanish
stock. The report has analysed the business performance through ratio analysis, which is an
effective tool to analyse the financial performance of the company. Further, there is a
recommendation on the deficiencies of the performance occurred due to failure of business
model. With continuation, the report will consider the discussion on failure of business
model. For the financial analysis, the report uses four-year financial data of Amadeus IT
Group and Thomas cook (Thomas Cook, 2016b).
Task-1
Ratio analysis
Ratio analysis is a tool, which examine the organisational performance by comparing
comparative data and financials. The comparison is based on four-year financial performance
such as 2015, 2016, 2017, and 2018 of Thomas cook and Financial Data of Amadeus IT
Group. The financial analysis considers liquidity position, capital structure positioning, long-
term debt analysis, profitability analysis, and the turnover ratio (Altman et al., 2017).

2015 2016 2017 2018
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
Current ratio
The current ratio analyses the liquidity positioning of company. The ratio examine the ability
of organisation to pay off short term debts. This ratio is quite useful to the investors as it
shows how effectively manages its working capital to manage its business. Red indicates
Financial Data of Amadeus IT Group and blue indicates Thomas cook (Amadeus IT Group,
S.A. and Subsidiaries, 2016). The ideal ratio for current ratio is 2:1, which shows that
Thomas cook has a current ratio of .44, .72, .36, and .50 whereas on the other hand, Amadeus
IT group`s current ratio is .60, .47, .54, and .51 (Thomas Cook, 2016a). This interprets that
both companies have same level of liquidity position. In 2015, Amadeus IT Group has high
liquidity ratio as compared to Thomas Cook. In 2016, Amadeus IT Group has low liquidity as
compared to Thomas Cook. In 2017, Amadeus IT Group has higher liquidity as compared to
Thomas Cook and so on. The liquidity position of both the companies have to be improved as
no company maintains 2:1 standard (Altman et al., 2017).

2015 2016 2017 2018
0.00
0.05
0.10
0.15
0.20
0.25
0.30
operating Margin
The profitability ratios is a good measure to determine the company`s performance especially
investors. This shows how effectively the company uses its total assets, how it reduces its
operational and non-operational costs, and strives to increases its sales. The profitability
measure considers such as return on equity, operating margin, and return on total assets
(Liang, Lu, Tsai, and Shih, 2016).
Operating margin indicates how revenue is left after cost of goods and other operating
expenses. It is calculated as dividing the operating earnings and revenue. The Thomas cook
generates 19 percent, 3 percent, 4 percent and 3 percent in 2015, 2016, 2017, and 2018. On
the other hand, Amadeus IT Group generates 27 percent in 2015, 27 percent in 2016, 27
percent in 2017, and 28 percent in 2018. Amadeus IT Group performs explicitly well as
compare to the Thomas Cook (Thomas Cook, 2016b).

2015 2016 2017 2018
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1.00
return on equity
Return on equity elaborates the percentage of the returns by using the shareholder`s fund. It is
calculated by dividing net profit to the total shareholder’s fund. The results shows that by
using the shareholder’s fund, the company (Thomas Cook) generates 57 percent, 52 percent,
89 percent, and 33 percent. On the other hand, Amadeus IT Group earns 46 percent, 44
percent, 50 percent, and 44 percent. Between both the companies, it is seen that Thomas has
used its shareholder’s fund in an efficient way (Thomas Cook, 2016a).
2015 2016 2017 2018
0.035 0.029 0.034
0.015
0.15 0.16 0.17
0.14
Return on total assets is the financial ratio, which uses percentage of profits where companies
earn with total assets. It is calculated by considering the net income by the total assets.

Thomas Cook indicates that Amadeus IT Group generates 15 percent in 2015, 16 percent in
2016, and 17 percent in 2017 and 14 percentage in 2018. Thomas cook indicates 3 percent, 2
percent, 3 percent, and 1 percent in all the four years. It is seen that Thomas cook has not
been performing good when resuming with the use of total assets.
Capital structure ratio
2015 2016 2017 2018
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
Capital structure is determined by debt-equity ratio, which shows the degree of long-term
finances and equity employed in the capital structure. Two components will include equity
and debt, which will greater impact the capital structure. The appropriate ideal ratio for debt
equity ratio is 1:1. A good debt equity ratio is 1 to 1.5 ratio. Capital structure of Thomas cook
indicates that the company is highly leveraged and it depend more on debt. On the other
hand, Amadeus IT Group indicates that it more rely on equity funds to finance their activities
such as debt-equity ratio has 0.53, 0.49, .64, and .82 percent in 2015, 2016, 2017, and 2018.
There is a huge risk in the capital structure of Thomas Cook (Thomas Cook, 2017).

2015 2016 2017 2018
1.45 1.21 1.23 0.65
16.70 16.60
42.68
30.93
Interest coverage rati o
Interest coverage ratio has been used to determine how quickly and easily the organisation
can pay back the interest expenses on debt. This ratio is calculated by dividing the company`s
earnings before tax and interest by the organisation’s interest and expense. A lower ratio is an
indication where the company is at default on the loan payments. Thomas Cook pays its
obligation at 1.45, 1.21, 1.23, and .65 times in between 2015 to 2018. On the other hand,
Amadeus IT Group is able to pay its interest debt in 16.7, 16.6, 42.6, and 30.93. Amadeus IT
Group. Is quite active and efficient in paying its interest debts (Thomas Cook, 2018).
2015 2016 2017 2018
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
Days in receivables

Amount receivable is the number of days, where the invoice is outstanding and has to be
collected. The evaluation determines the effectiveness of the company`s credit with the
collection efforts when allowing credit to the reputable customers (Williams, and Dobelman,
2017). Unnecessary high ratio determines more time regarding the cash flow issues. The
cycle is nearly appropriate as both the companies have 22, 32, 29, and 30 times from 2015 to
2018. On the other hand, both companies here undertakes 28, 28, 25 and 36 times from 2015
to 2018 (Thomas Cook, 2017).
Task-2
Recommendation
Thomas cook has not been managing its financials in an efficient way as it rely more on debt
and long term loans. The debt equity ratio of the company is nearly more than 2, which says
the investor`s fund at high risks as the company will have to engage in high interest paying
obligations. Amadeus IT Group has maintained adequate debt obligation in the capital
structure. Strong recommendation to Thomas Cook says that the organisation has to improve
its operating profits, as the operating expenses of the company is too high. Other outlook to
improve operating profits is to increase the sales. Range of recommendation relate to
guidance, which would not achieve change with new and powerful regulators lead to
introduce for the replacement of financial reporting council (National review law, 2019). It
covers the range of recommendation when relating to audit reform, corporate governance,
executive pay, and bonuses. Pensions can change the contribution that will include
recommendation in UK code of conduct “pension contributing rates for the executive
directors and payment lieu.” Enforcement clawback provisions for the future performance
bonuses arrangements included when ensuring in situations as large bonuses are paid and it is
clear when terms of award are not met with the possible legal claw (National review law,
2019).

Task-3
Business model used
Due to growing complex business environment, there were many reasons of collapse such as
Brexit, bad management, competition, banks, debts, and bad management. On the other hand,
weak and newly integrated business model revealed that Thomas cook has collapsed with
liabilities with £9 billion. The company nearly owned £585 million to customers and the £45
million to the employees. Trade creditors own £885 million and £44 million from the
corporate group functions. Special manager continued the negotiation for the sale of assets,
which include aircraft and other engineering stock (Phil, 2015). Payment made to the
creditors is dependent on value of assets as being realised. Other ore factors that ruined
business model such as reduction in the demand, reduction in geographical trading areas,
change in the customer holiday patterns and increasing challenges from the competitors. With
decrease in group`s income level due to factors laid above, the top management took
decisions to write down value of goodwill laid in group`s accounts by £1.1 billion (Sim, &
Wright, 2017).
Directors almost determined to shut down the business as they found them insolvent in terms
of both liabilities and assets with cash flow where it is necessary to petite to wind up the
organisations with the group. Cook continued trading with vast majority of liabilities that do
not even exist. Customers will not need compensation for the cancelled holidays with staff as
being influenced. The government kept the British company in organisation and also allowed
them to restructure in an effective way. With continuous trading, Thomas cooks has proven to
be quite expensive with irresponsible (Sollberger, and Ehlert, 2016). There is a doubt where
Brexit procedure will lead several UK customers when delaying the holiday plans. Thomas
has remained reliable unit and condor airline serving the German market stretching to claim
Brexit affecting the Germans tourists. Weather is another issue for the tour operators. It

seemed to have high hangover in 2019. Thomas cook has bad year because of the volcanic
ash clouds form the Iceland disruption across Europe. The price movement of Airbnb with
the budget holidays has partnership deals with expedia when trying to attract online crowd
attempting to own more. Furthermore, blame game is full swing where Thomas cook suspect
lenders leading Royal bank and Lloyds banking group did not commit to financial rescue
packages offering backstop funding and improve the position of the creditors. Banks had to
argue to support the over-stretched organisation for years (Amadeus IT Group, S.A. and
Subsidiaries, 2017).
Bad management and eccentric travelling agencies lead to failure of business model. Thomas
cook`s borrowings are too high. Underlying blame for the position going back to deal with
the era of chief executive. It is shocking to remember where by the end of 2007 after merging
with myTravel, Thomas Cook thought that it has flushed cash and unnecessary spent £290m
while buying back of shares (Sollberger, and Ehlert, 2016).
There are many lessons, which has to be learnt from the collapse of organisation’s business
model. Tour operators fund themselves conservatively when business conditions are fragile
due to mercy of events in the industry where most of the amount gets in the summer. From
the time, when Thomas cook has raised £425 million form the shareholders in 2013 and
finally seeming to be on the path to enhance when spring in the last year. By 2018, the
organisation is worth £2 billion (Pratley, 2019). Shareholder fundraising to deal with the
dangerous debt (long-term debts on which the company started relying on). Improper
planning of Thomas cook demanded into customers waiting for the refunds for the holiday
packages with travel organisation after making payments as being missed through the self-
imposed deadlines. The customers also complained through social media regarding their
missing refunds and lack of communication. The regulators of the industry has also blamed
delays to UK travel industry, which is the largest repayment program on complexity on the

date of booking as being received from Thomas cook and the issues with incomplete and
fraudulent claims forms (Boyas, and Teeter, 2017).
Conclusion
From the above discussion, it is seen that there are several recommendations emphasising on
the point of consideration as being raised by BEIS. Recommendations include government
taking the help to prevent the monumental collapse with Thomas cook from consideration
companies reflecting the way through which organisations are running properly. Dramatic
changes in the nature has made industry to offer huge discounts. The financial analysis is the
measure through which the business examines the performance of the organisation through
ratio analysis. The evaluation says that Thomas Cook is highly leveraged company whereas;
Amadeus IT Group is highly dependent on the shareholders fund. Thomas cook has to
improve its capital structure. This shows that investors are at high risk while investing in
Thomas cook. Ratio analysis is the best tool to analyse the business position, which ensures
that each perceptron of the stakeholder can be met. Profitability ensures that there should be
appropriate amount of distribution to the shareholders from the profits it has earned.
Thomas cook thought of sensible plan where it wants to reinvent business model with heavy
investment. The company has paid interest charges to the lenders then it could spend on
investment. After some time, theory seems to be spiral value of proposal package then it
started with £750 million in the recapitalisation as being backed by the Chinese firm.