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Table of Contents

Financial Analysis for Ryanair and Easyjet - Part 6

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2.3 Efficiency ratios

The other category of financial ratios is the efficiency ratios. Efficiency ratios focus on how efficient the firm is and how effectively it is managing its assets. There are different ratios included in this category and some of the most important ones have been discussed below.

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2.3.1 Average Inventory Turnover Periods

This ratio shows the time period a company takes to sell its inventory on hand (Besley, & Brigham, 2007). The ratio is achieved by diving average inventory turnover with number of days in a year as given below:

In order to understand the average inventory period requires understanding the average inventory turnover. Average inventory turnover as the name implies is the number of times the inventory of the company is sold and replaced with new stock. Therefore, simply calculated as:

The actual formula for the average inventory requires placing cost of goods sold in numerator however in case the cost of goods sold is not available it can also be calculated with sales in numerator. However, technically the former one is preferred as both variables are defined in the cost price as in the latter case the discrepancy of cost and sales price hit the assessment.

Inventory turnover is an important measure that highlights the operational efficiency of the firm for inventory management (Hilton, 2010). Further, inventory turnover period is a relative measure and therefore as assessment across competitors, industry average or over a period of time for the same firm provides meaningful insight. Though a low inventory turnover day(s) (or high inventory turnover) is considered a better statistics for a firm as it indicates that efficiency in converting inventory into cash and profit realization however, consistently declining measure is not always favorable as below certain level fast inventory replenishment increases cost of cost of buying at greater frequency. Hence, varying across industry and product type, Inventory Turnover days can be improved with adopting inventory management systems such JIT etc.

For Ryanair and easyJet, airlines do not have any kind of inventory and therefore this ratio for the airlines cannot be calculated.

2.3.2 Average Settlement period for receivables

This shows the time period taken by the company to receive its trade receivables. The shorter the duration, the better it is for the company (Ross, Westerfield, and Jordan, 2009). Average settlement period for receivables period identify the efficiency of the firm with respect to its post collection generation as well as credit policy. The rule for calculating same is as given below:

Whereas debtors turnover is calculated as given below:

Higher turnover or lower average number of days is better measure as it indicates quick conversion of the account receivable into cash. Though account receivable is considered as an asset prolonged account receivable increases the chances of bad debt. Further, under discussion efficiency measure is also relative measure and provides useful information in comparison with competitors, industry average or over period of time for the similar company. Various strategies are identified such as credit policy etc in order to develop a mechanism for timely collection. An efficient credit policy enables business to strike a useful and beneficial balance between increasing sales with credit facilitation as well as recovering amount from debtors as early as possible.

Both the airlines; Ryanair and easyJet deal on cash sales rather than credit sales and therefore this ratio is not applied on the airlines.

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2.3.3 Average settlement period for payables

Payables’ turnover period shows the time period the company takes to pay its liabilities (Besley, & Brigham, 2007). In contrast to apparent assumption that requires delaying payments to maximum firms attempt to strike the balance between the payment delays and cost incurred. Average settlement period is calculated as follows:

Where creditors turnover is calculated as:

Since trade payables are part of the current liabilities therefore, reduced creditors burden improves the current ratio of the firm. Since creditors or supplier attempt provide certain free credit period to customer and after that grace period interest is charged therefore firms attempts to delay payment for the free time and invest same for short term investment opportunities. The balance is also maintained with consideration that early paying customers of cash transactions remain in good books of the supplier; hence are given discounts by suppliers. Delayed payments also facilitate firm with opportunity to provide credit facility to their customers as well and pay creditors upon receiving from debtors. Hence, it is an interconnected cycle that varies from company to company to some while depending greatly on the industry norms. Being relative measure, the assessment provides insight with intra company comparison or the comparison within company over years. By applying the payable ratio to both the airlines, the ratio is very negligible.

2.3.4 Sales Revenue To Capital Employed

Sale revenue to capital employed is an efficiency measure that evaluates the efficiency of the firm in using employed capital. Since the capital employed incurs cost therefore the efficient organizations are required to generate optimal benefits from the assets. Capital employed includes long term debt and share holders’ equity. The ratio is calculated as followed:

Alike most of the ratio measures this is also relative measure, therefore, the productive information is hence developed either by comparing across industry competitors or year on year analysis.

Sales Revenue To Capital Employed of Ryanair

The sales revenue generated by amount of capital employed for the Ryanair has considerably position for improvement. With the consistent measure across the years from 2009 to 2012 the sales amount generated from capital employed has been between 0.50x to 0.60x. In year 2009, the sales generated from employing capital was 0.59 that declined by -15.41% as in year 2011. Over 2011 the sales generation ratio has increased again by 8.08%. The pattern in the constituents of the ratio refers that upon investment of capital the succeeding year sales witness the impact in sales. For instance, capital employed in 2010 as compare to 2009 was around 20% whereas the sale increase for the similar period was around 1.57. However, the sales increased in next year by 21.47% and similarly the compounded impact of both years’ investment continued to generate sales of similar magnitude in 2012 despite additional capital employed in 2012 was much lower.

  2012 2011 Change 2011 2010 Change 2010 2009 Change
Sales revenue to capital employed 0.61 0.54 13.77% 0.54 0.50 8.08% 0.50 0.59 -15.41%
Sales revenue 4,390.20 3,629.50 20.96% 3629.5 2,988.10 21.47% 2988.1 2,941.97 1.57%
Capital employed 7,185.30 6,758.30 6.32% 6758.3 6,013.30 12.39% 6013.3 5,008.18 20.07%

 

Sales Revenue To Capital Employed of easyJet

The sale generated with the capital employed is approximately equal throughout the period under study. However, sales in the year 2012 were greater than earlier performance of the capital employed. The reason of the same from the constituents has similar to that of the Ryanair where the sales generation actually takes place in the succeeding year to the capital employed. For instance, capital employed investment increased by 12.53% in 2010 as compare to 2009; and the combined effect of same was witnessed in the following year. Again in the year 2011 the sales generated was comparatively higher than capital employed and finally in the year 2012 despite decline in capital employed by -7.93% the sales generated appeared to by almost 11.65% higher while overall ratio increased by 21.26%.

  2012 2011 Change 2011 2010 Change 2010 2009 Change
Sales revenue to capital employed 1.27 1.05 21.26% 1.049 1.012 3.62% 1.01198 1.02145 -0.93%
Sales revenue 3,854.00 3,452.00 11.65% 3452 2,973.10 16.11% 2973.1 2,666.80 11.49%
Capital employed 3,031.00 3,292.00 -7.93% 3292 2,937.90 12.05% 2937.9 2,610.80 12.53%

2.3.5 Sales Revenue Per Employee

Productivity of the firm is also calculated by testing the productivity of the employees of the firm. Since each employee incurs cost therefore, it is important for the business to know the contribution of each employee. The contribution is, hence, has to be translated into sales. Therefore, sales revenue per employee is calculated as:

This measure is considered as the most important one mainly for the human resource department. It is considered as the litmus test for the companies specifically for managing the objectives per employees. Business also considers the measure for evaluating the performance of each unit of the firm or more appropriate to state is the comparing each division’s performance of the firm. Comparing measure with the competitor also provides information pertaining to the quality of HR employed by each firm hence its comparative results provide guideline for further investment in employees.

Sales Revenue Per Employee of Ryanair

Performance of employees in Ryanair has declined across the period of assessment except 2012 that witnessed increase by the quantum greater than decline. As evident sales per employee was approximately 46% in 2009 that declined in year 2010 by -8.01% to 42.49%. Further over the next year decline in measure was around -4.48%; approximately half of previous decline. The reason behind this decline show the strategic development across the human resource that initially focused on hiring the employees over 2010 and 2011 and the performance improvement started to appear in the year 2011 i.e. by 21.47%. Though this year also viewed increase in number of employees by almost similar magnitude of sales year; the combined effect can be seen from the sales increase in the last year of assessment by 20.96%.

  2012 2011 Change 2011 2010 Change 2010 2009 Change
Sales revenue per employee 48.87% 40.59% 20.41% 40.59% 42.49% -4.48% 42.49% 46.19% -8.01%
Sales revenue 4390.2 3629.5 20.96% 3629.5 2988.1 21.47% 2988.1 2941.965 1.57%
Total number of employees 8983 8942 0.46% 8942 7,032 27.16% 7,032 6,369 10.41%

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Sales Revenue Per Employee of easyJet

Sales to revenue employed being among the most important measure for the efficiency of employees has been consistent across the timeline understudy. Efficiency of the employees with respect to sales has declined over period of time from 46.19% in 2009 to 40.59% in 2011 and finally increased in the current year of 2012 by greater magnitude and reached to 48.87%. Evidence from the details of the components provide healthy signs with respect to performances as increase in sales across the years are in greater magnitude as compare to the increase in number of employees. Further this been achieved over a period of time. For instance, increase in number of employees was 10.40% in 2009 whereas sales increased by 11.49%; hence both increased almost similar magnitude. However, performance of employees increase immensely over 2010-11 as sales increase by 4X than increase in the number of employees. Further, though performance declined to sales increase by 2X as compare to employees hence yet appreciable.

  2012 2011 Change 2011 2010 Change 2010 2009 Change
Sales revenue per employee 46.97% 44.69% 5.09% 44.69% 40.40% 10.62% 40.40% 40.01% 0.99%
Sales revenue 3854 3452 11.65% 3452 2973.1 16.11% 2973.1 2666.8 11.49%
Total number of employees 8,206 7,724 6.24% 7,724 7,359 4.96% 7,359 6,666 10.40%

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