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# Financial Analysis for Ryanair and Easyjet - Part 3

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## Chapter 2. Financial Ratios

As there are different types of financial ratios; therefore these financial ratios are divided into different types. The major types or categories of financial ratios are:

• Profitability ratios
• Efficiency ratios
• Liquidity ratio
• Gearing ratio

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### 2.1 Profitability ratios

Profitability ratios are the first of the categories of the financial ratios. Profitability ratios are considered very important as these ratios are used to analyze the financial performances particularly how much the profit the company is generating (Arnold, 2008). Maximizing the profits is one of the main objectives of the organization and therefore profitability ratios are very important. There are different profitability ratios and some of the most important ones have been discussed in this section of the report.

2.1.1 Return on ordinary shares

Return on the stocks is the most important aspect that attracts the investors to invest in the company and purchase the ordinary shares of the company. Shareholders analyze the returns on ordinary shares and then make the decision whether to invest in the company or not. Shareholders would like to receive higher returns on their shares or investment they make therefore return on ordinary shares is an important ratio for them (Besley, & Brigham, 2007). The following formula is used to calculate the return on ordinary shares:

The higher the return on ordinary shares, the better satisfied are the investors and it also shows that the firm is able to better use the funds of the shareholders in converting into the profits. Investors or shareholders are likely to invest in the firms that have higher return on ordinary shares in comparison to the firms that have lower return on ordinary shares. Or it can be said that keeping all the things constant, investors or shareholders would invest in the firms that have higher returns on ordinary shares in comparison to the firms that yield lower return on ordinary shares.

Return On Ordinary Shares Of Ryanair

Return on ordinary shares of Ryanair has an increasing trend as the returns of the company have been increasing. By closing analyzing the changes in the net income as well as in the share capital and reserves of the company it can be found that both the elements have been showing an increasing trend. The net income of the company has been increasing and same is the case with the value of the ordinary shares. However the increase in the net profit of Ryanair has a higher rate in comparison to the rate of increase in the value of the shareholders capital and reserves. Therefore with more increase in the net profit the ratio of Return On Ordinary Shares of the airline has been increasing since 2009.

In the year 2010, the change in the return on ordinary share was more than 250% and this was because of the reason that in the year 2009, the airline reported a loss whereas the condition of the airline improved in the year 2010 where the return on ordinary shares of the company jumped from a loss of almost 7% to 10.7%. Thus the returns have improved by more than 250%. The major reason for the increase in the ratio was because of the increase in net profit which increased by 280% whereas the share capital and reserves only increased by 17.5%.

The net profit of Ryanair did not increase with the same pace in the year 2011 on year to year comparison however the net profit still showed improvements. An increase of 22.7% was found in the net profit of Ryanair in year 2011 where net profit of the company increased from €305.3 million to €374.6 million. However the net increase in the ratio of return on ordinary share in the year 2011 was 18.32%.

In the year 2012, the net profit of Ryanair increased further as the company reported return on ordinary shares of 16.95% which has been the highest since 2009. The major reason for the increase in the return on share was the constant increasing net profits of the airline. The airline after the recession has improved its overall revenues as well as profitability and this has been helpful for the company in improving returns to the shareholders. The net profit of Ryanair has improved by almost 50% in the year 2012. On the other hand, the value of share capital and reserves have also increased in the year 2012 however this increase was only 12% so it resulted in increasing the return on ordinary shares.

 2012 2011 Change 2011 2010 Change 2010 2009 Change Return on ordinary shares 16.95% 12.68% 33.64% 12.68% 10.72% 18.32% 10.72% -6.98% -253.63% Net Profit 560.4 374.6 49.60% 374.6 305.3 22.70% 305.3 -169.173 -280.47% Share capital+ reserves 3,306.00 2,953.40 11.94% 2953.4 2,848.10 3.70% 2848.1 2,424.57 17.47%

Return on ordinary shares of easyJet

The return on ordinary shares of easyJet has been improving since 2009. The net profit of easyJet has also been improving just like Ryanair however the increase in the net profits of easyJet is not similar to the increase in net profits of Ryanair. In the year 2009, Ryanair had reported a loss whereas easyJet was already having positive net profits in this year. The net profits of easyJet increased by 70% in the year 2010 and with an increase of 10% in the share capital and reserves it resulted in increasing the return on ordinary shares by almost 55% as the return on ordinary shares increased from 5.35% to 8.28%

In the year 2011, when the airline industry started improving and showing growth, the change in net profit of easyJet further increased by 85% in this year as it jumped from €121.3 million to €225 million. However in the year 2012 the growth in the net profit was 13%. Thus the return on ordinary shares showed 13.3% and then 14.56% in the years 2011 and 2012 respectively.

 2012 2011 Change 2011 2010 Change 2010 2009 Change Return on ordinary shares 14.56% 13.31% 9.39% 13.31% 8.28% 60.81% 8.28% 5.35% 54.84% Net Profit 255 225 13.33% 225 121.3 85.49% 121.3 71.2 70.37% Share capital+ reserves 1,751.00 1,690.00 3.61% 1690 1,465.10 15.35% 1465.1 1,331.60 10.03%

2.1.2 Return on capital employed

Return on capital employed is the other important ratio that has been used to analyze the profitability of the company. Higher the value of the return on capital employed ratio, the better the organization is able to use the capital that it has, and therefore organizations need to make use of their capital in the best possible manner in order to achieve the highest possible return on capital employed (Brealey, Myers, Allen, & Mohanty, 2007). Return on capital employed can be calculated using the following formula:

Return on capital employed of Ryanair

Return on capital employed of the company is dependent on two important factors; net profit and the capital employed by the firm. The net profit of the airline has been increasing since 2009 however capital employed by the company has not increased with the same pace. With the increasing net profits of the airline and slight increase in the capital employed the ratio of return on capital has been showing an increasing trend. The return on capital of the company was -3.38% as the net profit in the year 2009 was a loss of €169.173 million. However after 2009, as the airline industry started showing improvements, Ryanair was also able to capitalize on the growing trend and the company was able to record a net profit in the year 2010. The return on capital employed of Ryanair in the year 2010 was 5% and then it further increased to 5.5% in the year 2011 showing an increase of 9% particularly because of the increase of net income. The net income in this year was increased by 22%. In the year 2012, the airline further improved as the return on capital employed jumped to 7.8% thus showing an increase of more than 40%. Again the main reason for this increase was the drastic increase in the net profits which increased by almost 50%.

 2012 2011 Change 2011 2010 Change 2010 2009 Change Return on capital employed 7.80% 5.54% 40.71% 5.54% 5.08% 9.17% 5.08% -3.38% -250.30% Net profit 560.4 374.6 49.60% 374.6 305.3 22.70% 305.3 -169.173 -280.47% Capital employed 7,185.30 6,758.30 6.32% 6758.3 6,013.30 12.39% 6013.3 5,008.18 20.07%

Return on capital employed of easyJet

As discussed, the net profit of easyJet has been increasing and since 2009 it has drastically increased from €71.2 million to €255 million in the year 2012. Therefore it is indicating that the strategies adapted by the management have been successful to a great extent. Return on capital employed of easyJet was 2.73% in the year 2009 which increased to 4.13% showing an improvement of 51% however the trend of increase in the return on capital continued as it then increased to 6.83% and then 8.41% in the year 2011 and 2012.

 2012 2011 Change 2011 2010 Change 2010 2009 Change Return on capital employed 8.41% 6.83% 23.09% 6.83% 4.13% 65.54% 4.13% 2.73% 51.40% Net profit 255 225 13.33% 225 121.3 85.49% 121.3 71.2 70.37% Capital employed 3,031.00 3,292.00 -7.93% 3292 2,937.90 12.05% 2937.9 2,610.80 12.53%