Financial Analysis for Ryanair and Easyjet - Part 4


2.2 Gross profit margin

Gross profit margin shows the profit the company has generated after deducting the cost of goods sold (Ross, Westerfield, and Jordan, 2009). Gross profit shows the profits that the firm generates excluding its costs of production or the direct costs that are incurred. Therefore it is important ratio to analyze the production costs and if the production costs are too high then it will lead to lower operating and net profit margin so the gross profit margin is an important ratio in analyzing the costs of production of the firm. It is calculated by the following formula

Firms that achieve higher gross profit margins than the others then this shows that their production cost is less than the production cost of other firms. Moreover, the management would like to have lower production cost or higher gross profit margin because higher gross profit margin would mean that the cost of the company is less than the other company.

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Gross Profit Margin Of Ryanair

Gross profit margin has been over 50% across the term of assessment. The margin was considerably high in the year 2009; however, with low gross profit. Though the margin declined by almost 8% in the year 2010; however, it remained consistent around same level in following years of 2011 and 2012. Due to hit of recession, the sale increased only by 1.57% in over 2010-09 but as soon as the economy rebound the sales increased at a rate of above 20%. Further, along with increase in sales, the COGS decreased. The incremental positive impact of decline in cost of goods sold is attributed to decline in fuel cost despite the fact there has been incremental increase in Air Craft rentals as Ryan increased fleets size during the term. Decline in the Gross Profit margin of despite increase in Gross Profit in over 2012-11 is for caused due to immense increase in airport handling and rout charges. Hence, point to mention is the fact that though Ryanair is increasing its destination however, this increase accounts the greater percentage of non-primary airports hence, sales in not increasing in same proportion.

2012 2011 Change 2011 2010 Change 2010 2009 Change
Gross Profit margin 61.47% 61.35% 0.21% 61.35% 59.73% 2.71% 59.73% 67.97% -12.13%
Sales 4,390.20 3,629.50 20.96% 3629.5 2,988.10 21.47% 2988.1 2,941.97 1.57%
COGS -2,698.80 -2,226.60 21.21% -2226.6 -1,784.80 24.75% -1784.8 -1,999.76 -10.75%
Gross Profit 1,691.40 1,402.90 20.56% 1,402.90 1,203.30 16.59% 1,203.30 942.20 27.71%


Gross Profit Margin of easyJet

The Gross profit margin has improved greatly over the years specifically in the year of 2011 and 2012. The makeable increase got the GP margin above 50% and within three years from 2009 to 2012 GP margin increased by almost double from 33% in 2009 to 59% in 2012; hence, highlights the increased commitment to improve performance of the airline. Though increase in sales is not aligned with increase in COGS as it is mainly for the reason that easyJet has increased its presence in Airports that are ranked primary and hence incurred excessive cost in ground operations. It is also for the reason that gross profit increase over 2011-2010 run into negative number and upon establishing the standing the gross profit rebound in 2012 with consistent rise in sales but controlled increase in COGS. However, decline in sales increase pace is a matter of concern. Concern originates as the firm has already increased its performance as well as customer performance.

2012 2011 Change 2011 2010 Change 2010 2009 Change
Gross Profit margin 59.86% 58.49% 2.35% 58.49% 39.84% 46.79% 39.84% 33.71% 18.19%
Sales 3,854.00 3,452.00 11.65% 3452 2,973.10 16.11% 2973.1 2,666.80 11.49%
COGS -2,307.00 -2,019.00 14.26% -2019 -1,184.60 70.44% -1184.6 -899.00 31.77%
Gross Profit 1,547.00 1,433.00 7.96% 1433 1788.5 -19.88% 1788.5 1767.8 1.17%

2.2.1 Operating profit margin

Operating profit margin shows the operating profit the company has earned from the total revenue generated (Besley, & Brigham, 2007). Operating profit is an important ratio for the management in particular as it shows how good the operations are of the company. Moreover, operating profit of the company shows the profits that the company operations are able to generate and it does not include the cost that the company pays for interest expenses and taxes. It is calculated using the following formula.

The management would like to achieve higher operating profit margin because it would mean that the more portion of sales is being used to yield operating profits. The higher the operating profit margin of the company, the lower would be the cost and all expenses. So, keeping all the things constant, the management would like to have higher operating profits than lower operating profit.

Operating Profit Margin Of Ryanair

As already noted that the firm revived performance in years 2010 onwards therefore operating profit margin has increased from 3.15% in 2009 to 13.46% that is almost above 300%. It refers that firm has made considerable improvements in managing its overhead operating costs and increased the operating profits by over 300%. Hence, overall increase in operating profit margin is mainly from strapping of operating cost and the contribution from sales has been but not very drastic during the period. The assessment is also asserted from the fact that operating profit margin showed negative increase in over the comparison of year 2011-2010 where though the sales increased yet limited strapping of operating cost was conducted and further again in year 2012 with consistent increase in sales the operating profit margin increased by nearly 16%. Point of attention with respect to negative operating profit margin can be attributed to one time cost incurred in 2011 related to Icelandic volcanic ash related cost. This cost has not been incurred in other years. Therefore, with respect to the referred cost identification it can be stated that firm is well aware of controlling operating expenses for maintaining the operating profit margin.

  2012 2011 Change 2011 2010 Change 2010 2009 Change
Operating Profit margin 15.56% 13.45% 15.69% 13.45% 13.46% -0.04% 13.46% 3.15% 327.39%
Sales 4390.2 3629.5 20.96% 3629.5 2988.1 21.47% 2988.1 2941.965 1.57%
Operating Profit 683.2 488.2 39.94% 488.2 402.1 21.41% 402.1 92.631 334.09%

Operating profit margin of easyJet

Alike gross profit margin assessment, it can be well stated that operating profit margin also reflect consistent increase over the period of assessment. Though the pace of increase declined over time i.e. increase pace in year 2010-2009 was 159% that declined to 33% in 2011-2010 and further went south to 10.21% in 2012-2011. However, with this pace within three years operating profit margin increased from 2.22% in 2009 to 8.59% in the year 2012; hence, more than 3.5xs. Increase in operating profit margin has been centered in increase in operating profit as evident from the facts that operating profit increased to €173.6 in 2010 from €60.1 in 2009. Further, operating profit increased to €269 in 2011 from €173.6 in 2010. The decline in pace of operating profit margin was supported by considerable increase in sales which was 16% in the referred time. However, as the sales increase its pace the incremental margin of sales returned back to its previous position of 11% increase per annum which was also reported in 2010 – 2009. The curtail pace of operating profit growth became more evident with operating profit margin increase of only 10.21% over 2012-2011. However, as already mentioned earlier, decline in sales increase pace in 2012 is a matter of concern and for this reason, the management started investing more on sales and marketing. The concern is aggravated as firm is incurring an additional cost in Selling and marketing in 2010 and 2011. Hence, in such case firm needs to value its Selling and marketing expenses as even without incurring this additional cost, sales growth rate was similar. Further, in case the firm has increased sales by such percentage with mentioned increased expenses to inculcate the impact of increased market competition is then a case otherwise. Hence, the point shall be explored with in depth market assessment.

  2012 2011 Change 2011 2010 Change 2010 2009 Change
Operating Profit margin 8.59% 7.79% 10.21% 7.79% 5.84% 33.46% 5.84% 2.25% 159.09%
Sales 3854 3452 11.65% 3452 2973.1 16.11% 2973.1 2666.8 11.49%
Operating Profit 331 269 23.05% 269 173.6 54.95% 173.6 60.1 188.85%

2.2.2 Net profit margin

Net profit margin shows the ratio of net profit that the company has generated from the total revenue it earned (Friedlob, & Plewa, 1996). Therefore this ratio excludes all the expenses, taxes, costs from the revenue and shows the final profits. The net profit margin is the final profit that has been generated after excluding all the costs of production, operating costs, cost of finance and taxes that the company has paid. Net profit is an important ratio as it shows the net returns that the company has generated and which can be distributed to the shareholders of the firm. It is calculated using the following formula:

Net profit is the final profit and it is one of the most important ratios. This ratio is used by many users including competitors, shareholders, management, employees etc. The more the net profit of the company, the better it is able to give to the shareholders of the company as well as better it is able to retain it. Higher net profit means that the cost and expenses along with the taxes and finance cost of the company is low in comparison to the other firms that have a lower net profit. So keeping all the things constant, the management and shareholders would like to achieve higher net profit margin. Moreover, firms use net profit margin of competitors and industry to set benchmark and then try to formulate strategies accordingly.

Net Profit Margin Of Ryanair

Net profit being the final income that rests with individual or business has is very important measure. The net profit margin of Ryanair also reflects the recovery of the overall economy. This recovery has been from the decline in profits in the tough economic times. The net profit margin increased from -5.57% in the year 2009 to 12.76% in the year 2012. Further, the recovery was mainly witnessed in the year 2010 like other profit measures that showed recovery. Onwards to 2010, the increase in sales has been consistent around 20%, therefore, this increase in profit margin is mainly attributed to increase in profits. Net increase is profits in the 2012, as near to double to that of 2010-2011, is mainly from the finance incomes that increased from €27 million in 2011 to €44 million in 2012. But at the same time, finance expense has also increased considerably. In addition to this, further increase is attributable to gain on sale of property that generated €10.4 million along with this decline in the other expenses from €67.3 million in 2011 to €50.2 million in year 2012.Year 2012 also generated exchange income of €4.3 million that was consistently generating loss for the company. Hence, all these form the basis of the increase in net profit. Point to mention here the fact such increases in the income statement that increased net profit greatly has been caused by activities that are not either not conducted very frequently such sales of assets that only benefitted the business with this considerable amount once in 2012 and by minimal amount in 2010 and in addition to this similar goes for the exchange gains. Hence, poses question to the efficiency of the firm.

  2012 2011 Change 2011 2010 Change 2010 2009 Change
Net Profit Margin 12.76% 10.32% 23.68% 10.32% 10.22% 1.02% 10.22% -5.75% -277.68%
Sales 4390.2 3629.5 20.96% 3629.5 2988.1 21.47% 2988.1 2941.965 1.57%
Net Profit 560.4 374.6 49.60% 374.6 305.3 22.70% 305.3 -169.173 -280.47%

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Net Profit Margin easyJet

The net profit margin has been considerably high of easyJet in year to year comparison of 2009 to 2010 and 2010 to 2011 with change rate of more than 50%. However, the measure declined to 1.5% in the year 2012 to 2011. Exploring the reason of impact between constituents refers that pace of net income geared up the net income margin ratio. Net income over 2009 to 2010 has been increased by 70.37% that further increased to 85.49% over the comparison of 2011 to 2010. However, as the net income increasing momentum declined to 13.33% for the year 2011-2012; net profit margin pace also declined by almost full. Hence, contribution of the net income constituents is of critical importance. Exploring the net income constituents it was found that all other element are showing somewhat smooth movement; however, the firm has paid high tax in the year 2012. The tax paid in 2012 is €62 million in contrast to €23 million and €32 million paid in 2011 and 2010; hence, the tax paid by the airline increased almost two times as compare to 2010 and 3 times as compared to 2011.

  2012 2011 Change 2011 2010 Change 2010 2009 Change
Net Profit Margin 6.62% 6.52% 1.51% 6.52% 4.08% 59.76% 4.08% 2.67% 52.81%
Sales 3854 3452 11.65% 3452 2973.1 16.11% 2973.1 2666.8 11.49%
Net Profit 255 225 13.33% 225 121.3 85.49% 121.3 71.2 70.37%

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