Financial gearing ratios are related to the capital structure of the company. The inclusion of debt in the capital structure increases the risk and therefore it is important for the management to know and analyze the financial gearing ratios.
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Gearing ratio shows the ratio of the long term debt to the total capital employed by the company (Besley, & Brigham, 2007). The higher the gearing ratio of the company means that there is more debt in the capital structure of the company. If the company has too much debt then it leads to an increased level of risk. However if there is no debt in the capital structure, then the company is not able to take advantage of the leverage. Leverage allows the firm to maximize the returns of the shareholders (Bevan, and Danbolt, 2002). It is calculated using the following formula
Gearing Ratio Of Ryanair
The gearing structure of the Ryanair has been moving within 65-35 ratio approximately across the assessment years. The ratio has increased by almost 2% over 2009-2010 followed by 9.54% in 2010-2011; however then declined by the 7.53% over the last year of assessment in 2011-2012. Since the change in ratio is caused by change in any of the components such as either increase/ decreased in the long term debt or the rise/ decline in capital employed; the reason for such decline is to be explored from constituents within. Hence, the review presented that over the years of increase of gearing ratio the long term debt has been increasing and since long term debt is also a constituent of capital employed therefore it is also increasing. However, in the year 2012 small portion of the long term debt has been paid off i.e. -1.69% therefore the ratio declined. Further, to mention that equity portion of the capital employed didn’t increase other than yearly contribution of retained earnings reserves to it.
|Long term debt||3,256.80||3,312.70||-1.69%||3312.7||2,690.70||23.12%||2690.7||2,195.50||22.56%|
Gearing Ratio Of easyJet
The gearing ratio for easyJet has been declining over a period of time. The movement have been along the structure of approximately 60-40 to 70-30 (equity –debt). Initially easyJet had the gearing ratio of 38.42% in the year 2009 that declined to 36.92% in 2010; i.e. change of -3.90%. In the following year of 2010 the ratio had further declined to 34.78% in 2011 with percentage declined of 5.79%. Finally in the year 2012 gearing component has changed to 27.32% in contrast to 34.78% of 2011. The reason behind such declined has been the greater increase in the equity component of the capital employed. The equity component of easyJet has increased from €1,307 million to €1794 million over 2009 to 2012 (also discussed earlier). Though the long term debt also has increased its contribution in the total capital employed in the initial years and then the firm paid off long term debt reducing it from €1145 million in 2011 to €828 million in 2012. Hence, decline in the long term debt as well as increase in equity component in the capital employed formed the basis of changing structure in gearing.
|Long term debt||828.00||1,145.00||-27.69%||-1145||1,084.60||5.57%||1084.6||1,003.00||8.14%|
Debt ratio shows the ratio of the total liabilities of the company in the capital structure (McLaney, 2009). The higher the level of debt in the capital structure of the company, the more risk the company has. However many believe that some level of debt in the capital structure is significant as it allows the firm to maximize the wealth of the shareholders. With more debt, a firm has to pay interest expenses, therefore it is a fixed costs and with increase in the fixed cost of the firm, the risk of the firm increases. The debt ratio is calculated using the following ratios:
Debt ratio of Ryanair
The debt ratio constituting the combination of increasing or decreasing liability section’s contribution to the total assets has been decreasing over time. The debt component in the first year of assessment has been 140.57% to the total asset. Immediately in the next year of 2010 debt component declined to 56% of total assets. This refers that business reduced the risk of huge liability from the assets. Though the liability section increased by 18% over 2010-2009, 21.45% over 2011-2010 and portion of 1.52% was paid off in the over 2011-2012; however, the rise in total assets has been considerably greater than the rise in the liabilities. For instance, total assets increased by 197.41% over 2010-09 as compare to 18.62% rise in total liabilities. Further, in the following year rise in liability has been greater than rise in total asset over year 2011-2010; however, still change in structure conducted in 2011 maintained impact. Similarly, further pay off the liability in 2012 and increase in assets reduced the debt contribution in total assets from 59.91% to 56.35% over 2011-2012. Further, to mention this rise in asset has been financed by the equity component of the capital structure.
|Current liabilities + long term debt||5,071.80||5,149.90||-1.52%||5149.9||4,240.30||21.45%||4240.3||3,574.69||18.62%|
Debt ratio of easyJet
easyJet has also reduced the contribution of debt in the total assets from 56.23% in 2009 to 48.71% in 2012. Hence, the reduction in the debt constituent for the total assets has been around 3.0% to 6.0 % per year across the years of assessment. Further, though liabilities section increased over 2009-2011 however, increase in the assets over such period was approximately double than increased total liabilities; hence, resulting in the dominant impact of assets rise reflected in ratio. In addition, though in the year 2012 assets base has declined by 3.89% over 2011; decline in percentage of total liability was greater i.e. approximately double by about -9.91% thereby further reducing the share of liability in total assets. Important to mention is the fact that firm has increased its assets with increased equity component that rose considerably across the period understudy i.e. from €1307 million to €1794 million.
|Current liabilities + long term debt||2,092.00||2,322.00||-9.91%||2322||2,149.20||8.04%||2149.2||2,065.20||4.07%|
Interest cover ratio shows the ability of the firm to pay off its interest expenses from the Earnings before interest and taxes. Therefore interest cover ratio of the firm shows how safe the firm is to pay off its interest expense (Gitman, 2003). If the firm is not in a good position then it leads to higher risk and therefore the firm should increase its earnings before interest and taxes so that it is in a safe position to pay off its interest. Interest cover ratio is calculated using the following formula:
The higher the value of the interest cover ratio, the better it is for the firm because with higher ratio it reveals that the firm is in a safer position than the other firm that has a lower interest cover ratio. Moreover, the higher value of this ratio shows that firm has the ability and the safer it is.
Interest cover ratio of Ryanair
Ryanair managed to fetch the interest coverage ratio from point of concern in 2009 to a healthy position within single year and then continued the momentum of improvement. Such as in 2009 the point in time in which the company was among the businesses that received bad hit from recession; the Ryanair recovered and the ratio has improved to the attractive position of 5.58X in 2010. In the following years there have been mixed trends of changes in the component of the ratio such as in 2011 the interest expense increased by 30% as compare to 2010 while in EBIT increased by 21.41%. On the other hand rise improvement in ratio of 2012 as compare to 2011 being 20.34% has generated impact from incremental rise in EBIT by almost double to that of rise in interest expense. However, the most dominant impact remained from increased rise in EBIT by 334% over 2010-2009. This rise generates the origin from decline in operating expenses and year 2010 did not incur the cost of maintenance, materials and repairs as well as Icelandic volcanic ash related cost. In the following year of 2011 though the cost of maintenance, materials and repairs was incurred however, income statement presented considerable rise in sales revenue with greater magnitude than expenses. Hence, rise in interest coverage ratio that originated from not incurring certain operating expenses continued with sales improvement in following years.
|Interest cover ratio||6.26||5.20||20.34%||5.20||5.58||-6.77%||5.58||0.71||685.96%|
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Interest cover ratio of easyJet
Interest coverage ratio of easyJet has been considerably healthy over the period of assessment; further it has further shown immense improvement for same period. Interest coverage ratio of the easyJet has improved from 2.15Xs in 2009 to 13.24X in the year 2012; the percentage increase year on year from 2009 to 2012 has been from 201.83%, 37.91% and 47.66%. Such incremental improvement in the interest coverage position refers to the strategic attention towards reducing the level of risk in capital structure by reducing the debt constituent. Sectional assessment refers that ratio improvement did not receive that mention worthy impact from the interest expense i.e. Year -on- year 2010-09 the decline in expense component has been -4.30% only where as the ration increased by 201.83%. On the other hand EBIT has increased by 188.85% during the same period. Therefore the impact has been dominantly generated by improvement in EBIT. Further exploration of the EBIT improvement from income statement referred to the effect generated from sales revenue; though the relevant expenses also increased but the quantum of sales increase is much higher hence passing the effect to EBIT.
|Interest cover ratio||13.24||8.97||47.66%||8.97||6.50||37.91%||6.50||2.15||201.83%|
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