Another important financial ratio used to analyze the financial performance and in particular profitability of the company is the Return on Equity (ROE). Return on equity shows the profits that have been generated from the shareholders’ equity (McLaney, 2009). Return on equity is an important ratio of investors in particular. Investors look to earn the highest return on the amount they have invested in the company and therefore they look for higher returns on the equity or the investment they have made to the organization. Moreover, competitors are also keeping an eye on such ratio because they need to give comparable returns to their shareholders as well and therefore return on equity is an important financial ratio (Gitman, 2003). The following ratio is used to calculate the ROE of any company:
The higher the return on equity of the company, the better it is able to use the equity or investment of the shareholders. As shareholders and investors would like to receive higher returns or profits on their investment, thus it is important for the management to analyze this ratio and try to increase it. Return on equity is also used as a benchmark by the firms and they try to compare the ROE of the company with the competitors and industry and then formulate strategies to adjust the ROE accordingly.
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Return On Equity Of Ryanair
Return on equity has improved with a smooth consistency over the period of time. Ryanair has managed to take business from negative domain to the attractive positives. As already noted earlier, the business has managed to take off the recession hit performance from 2009 that generated negative returns on equity of 6.98% to straight positive 10.72%. The quantum of increase for the comparison of 2011 to 2010 declined greatly and then revived in comparison for 2011 to 2012. This revival was though not equal to previous rise of 2010 to 2009 but near to double of 2011 to 2010. Assessment of the increase in return on equity from the constituting element, it can be stated that both elements contributed in the increased however, the dominant contribution has been from the rise in net income that ultimately increased the equity. Therefore, contribution of the equity has been to the extent of the reserves added to the share capital and none additional share capital has been generated. Hence, increase in net income managed to increase share of return on equity. Therefore, factors addressed in the previous discussions pertaining to the net income are also applicable here and are important to be considered in order to retain the investors’ interest in the stocks of the company.
|Return on Equity||16.95%||12.68%||33.64%||12.68%||10.72%||18.33%||10.72%||-6.98%||-253.63%|
Return On Equity Of easyJet
Performance improvement of the easyJet as reflected in above discussion prevails that there has been constant positive rising return on equity. The improvement in the performance of the firm with respect to return on equity over three years can be picked from the fundamentals that increased from 5.45% in 2009 to 14.21 in 2012; hence increased by almost 3x within three years.
Sectional assessment of return on equity measure constituents provides important information. easyJet has increased its equity consistently over years of assessment as from equity amounting to €1307 million in 2009 the firm increased it to €1794 million in 2012. The increase is not only from adding the reserve. Number of ordinary shares in the years 2009 has been 1,203 that increased to 3,444 in 2010 and then high amount equity component of the capital was raised that increased number of share to 11,800 in 2011. Further, in the year 2012 the equity segment of capital was raised that surged number of share to 15,900. Hence, over period of three years 14,300 additional share have been issued. Since consistent rise in number of shares reduced the return attributable to each share. Hence, the performance of easyJet can be regarded as extremely extra ordinary that managed to increase return on equity from mentioned percentages.
|Return on Equity||14.21%||13.20%||7.71%||13%||8.08%||63.26%||8%||5.45%||48.41%|
Return on assets (ROA) is another important ratio used to analyse the profitability of the company. ROA of the company shows the profits, company has generated from the total assets of the company (Ross, Westerfield, and Jordan, 2009). Return on equity showed the returns that the company has generated using the investment made by the shareholders; however return on assets shows how the company has used its total assets to achieve the net profit. It can be calculated using the following formula:
Return on assets are very much similar ratio to the return on equity however the difference is that ROA shows how the company is using its total assets in generating profits rather than only the equity of the shareholders. So it focuses on all the assets that the company has and not just the investment of the shareholders. The higher the value of ROA, the better and more profitable the organization is and the better the organization is using its assets to generate profits.
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Return On Assets Of Ryanair
Consistent with the discussion in prior measures for the Ryanair this measure also develops the similar pattern of performance that took the business from the south direction results to north. The return on assets over three years increased from -6.65% in 2009 to 6.23% in 2012. Rise in return on assets for over 2009-2010 has been more than 150%. This is huge rise despite case that Ryanair also increased assets by near to 200% during the same period. Hence, incremental rise of net income during the stated period of approximately 300% has been damped by rise in assets (as increased asset formed the denominator of the measure). In addition to this, the measure consistently rises with increased net income i.e. 22% rise in 2010-11 and 49% rise in 2011-2012; however, the alongside rise of assets spread the benefit of incremental rise of net profit. Higher the assets rise lower is return on asset as evident from the change in net profit remained at 22% in 2010-2011 while change in total asset for the same period has been 13.65% ; therefore the resulting change in return on net income has been 7.95%. On the other hand, change on net profit for the 2011-2012 has been 49.60% and resulted change in return on asset by 42.87% as year on year increase in asset has been 4.71%. Hence, return rise is spread over comparatively less asset base then earlier years.
|Return on Assets||6.23%||4.36%||42.87%||4.36%||4.04%||7.96%||4.04%||-6.65%||160.68%|
Return on assets of easyJet
Return on asset for easyJet increased at comparatively higher pace in 2009, 2010 and 2011 in contrast to 2012. Exploring the factors behind mentioned variation refers to increase in net profit over 2009-2010 with almost 70% while the similar component increased by 85% in the following year. A constant increase in the return on assets has been found.
|Return on Assets||5.94%||5.03%||17.92%||5.03%||3.03%||66.13%||3.03%||1.94%||56.34%|
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