Financial Analysis for Ryanair and Easyjet - Part 9

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Chapter 3. Formats Of Assessment

Appraisal of the company performance using ratio analysis requires some benchmark. Since most of the measure does not have any set standards to evaluate the performance of the firm therefore businesses or investors or analyst are required to develop assessment in any of the formats given below:

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3.1 Horizontal analysis

Horizontal analysis as the name implies the assessment of the ratios performance over the years. It signifies that analyst in valuing the fundamentals’ performance of the firm develops comparison of the financial statement over certain period of time. The selection of the time line for assessment is based on the discretion of the investor or analyst or company or researcher. Hence, there are not set guidelines for such standard further, the comparative assessment over years require to use the measure using exactly similar mechanism in valuing the constituents in order to achieve the desired consistency in assessment. For instance, in case of dividend per share if special dividend is paid in particular year for some extra ordinary reason and same in included in measuring the dividend per share for that particular year, the year on years assessment will face the variation in trend mainly hence, misleading the researcher. Hence, year on year assessment of the company or horizontal assessment of the company is an important method in exploring if over the years’ period of time company has managed to increase the performance or also if the case is otherwise (Gitman, 2003).

3.2 Vertical analysis

Vertical assessment of the financial statements is the assessment of relative share of each component of the statements with respect to its total accounts. For instance, every component of income statement is measured in relative to income statements main constituent sales. Similar methodology is adopted in balance sheet assessment where each constituent is measured with respect to total assets. Hence, in contrast to the horizontal assessment where the base measure is taken as some other year, vertical assessment provides information of business within same year. It provides chance to explore the position in overall performance of the firm with identification of areas of improvements (Gitman, 2003).

3.3 Horizontal analysis and vertical analysis

Horizontal and vertical analysis is another method that the organizations use in order to analyze the performance of the company. Horizontal analysis is used by organizations in order to know about the progress of the company over the successive years. In this analysis, figures of the company of current period are compared to that of the figures of previous years. By this analysis, the company and its shareholders evaluate company’s overall performance and the areas which need to improve. In this analysis, figures of both financial statements i.e. profit and loss statement and balance sheet are compared. Figures of various heads of both the statements are placed side by side so that the reader has a fair idea of the performance of company (Gitman, 2003)

Vertical analysis of financial statements is conducted in order to compare the financial statements of companies of different sizes and relative annual differences within one business. In this method, different items are compared to a single item in the accounting period and all amounts are expressed as a percentage of total amount (Besley, & Brigham, 2007).

One of the key points of conducting horizontal analysis is to analyze how things have changed over a period of time and these changes are called trends in accounting terms. For example, one company’s financial statements are compared over the period of two years i.e. 2011 and 2012. Company’s sales in 2011 were €20,000 and in 2012, sales increased to €23,000 which shows change of €3,000 over a year. Similarly, with increase in the sales, there will be an increase in the gross profit and it will subsequently affect other items on the income statements. By doing horizontal analysis, organizations will have a better understanding of how the company is performing over a period of time and what changes have been taken place (Besley, & Brigham, 2007).

Similarly, in case of conducting vertical analysis of financial statements, organizations are better able to compare financial statements of companies of different sizes. Through this analysis, organizations look at every item on the statement as a percentage of sales which tells where the company’s revenue is going. Once vertical analysis is done, the organization is in a better position to tell which of the items of the company are absorbing its profits. By taking out the percentage of all items of financial statements, the organization can easily tell which head has been allocated with more budgets and then it can take appropriate measures to cut down on the expenditure on those items which are unnecessary (Besley, & Brigham, 2007).

Both the methods of analyzing financial statements of the organization carry equal importance and therefore; are taken by the organizations to evaluate their performance over the time and at each level. Therefore it identifies that the horizontal and vertical analysis are important for the management as these analysis techniques would reveal important information as well as help in identifying important trends. So first of all, the horizontal analysis of Ryanair would be discussed and then the vertical analysis of easyJet would be discussed. The report will then analyze the balance sheet of Ryanair horizontally and then horizontal analysis would be applied on the balance sheet of easyJet.

3.4 Horizontal analysis of Ryanair

The revenues of the airline have been increasing since 2009. The company has reported an increase in the revenues in the year 2011 by 21.5% and then the revenues further increased in the year 2012 by almost 21%. Therefore it is showing that the company has been able to improve its overall revenues and it can be identified as the number of flights and number of passengers travelling with Ryanair has been increasing every year. Thus it is helping the company to increase its revenues. In addition to this, as the company is planning to expand its services and operate in more locations, it has further helped the airline to improve its position and revenues.

Among all the operating costs, the fuel cost of the airline is the most important costs. The ratio of sales to fuel cost of Ryanair in the year 2011 was increased by 37% and with the increasing fluctuations in the prices of the fuel; the operating profitability of the company was decreased because of this reason. The fuel costs continued to increase as the company has been increasingly focusing on more flights and thus as a result it is increasing the fuel costs.

The other major cost that the Ryanair has to incur is the staff costs or the salaries. The staff costs of the airline increased by 8.3%, 12.27%, and 10.3% in the years 2010, 2011 and 2012 respectively. The main reason for the increase in the staff costs is the number of employees of the airline has been increasing. Therefore with more flights and the airline needs more staff and therefore this has resulted in increasing the staff costs.

The total operating expenses of Ryanair have increased by 21% in the year 2011 and then by 18% in the year 2012. However as the company has been expanding its services and serving more clients this has resulted in increasing the operating costs as well. However the important thing is that the operating profit of the company has increased as the increase in the operating costs is less than the increase in the overall revenue of the airline. Thus the operating profit of the company has increased by 334%, 21% and almost 40% in the years 2010, 2011 and 2012 respectively.

The interest expense of the airline has also increased over the years thus it is showing that the company is borrowing more funds and increasing its debt with the passage of time. Moreover, with the increasing profits of the airline, the tax expense of the airline has also increased during this period. The increase in the tax expense of Ryanair has increased by 30% and 57% in the years 2011 and 2012. Moreover the profit that is attributable to the shareholders of the company has increased as the company has reported an increase of 22% and 50% in the years 2011 and 2012. So it is indicating that the company is able to improve its position with the passage of time and as the industry is improving its situation the company is able to capitalize on the increasing demand of the passengers and by fulfilling their needs Ryanair is able to increase its revenues and ultimately profits.

Operating revenues 2012 2011   2010   2009  
Scheduled revenues 3,504.00 2,827.90 23.91% 2,324.50 21.66% 2,343.87 -0.83%
Ancillary revenues 886.2 801.6 10.55% 663.6 20.80% 598.10 10.95%
Total operating revenues – continuing operations 4,390.20 3,629.50 20.96% 2,988.10 21.47% 2,941.97 1.57%
Operating expenses              
Staff costs -415 -376.1 10.34% -335 12.27% -309.30 8.31%
Depreciation -309.2 -277.7 11.34% -235.4 17.97% -256.12 -8.09%
Fuel and oil -1,593.60 -1,227.00 29.88% -893.9 37.26% -1,257.06 -28.89%
Maintenance, materials and repairs -104 -93.9 10.76%     -66.81 -100.00%
Aircraft rentals -90.7 -97.2 -6.69% -95.5 1.78% -12.75 648.84%
Route charges -460.5 -410.6 12.15% -336.3 22.09% -286.56 17.36%
Airport and handling charges -554 -491.8 12.65% -459.1 7.12% -443.39 3.54%
Marketing, distribution and other -180 -154.6 16.43% -144.8 6.77% -12.75 1035.42%
Icelandic volcanic ash related cost   -12.4 -100.00%        
Total operating expenses -3,707.00 -3,141.30 18.01% -2,586.00 21.47% -2,849.33 -9.24%
         
Operating profit – continuing operations 683.2 488.2 39.94% 402.1 21.41% 92.63 334.09%
         
Other income/(expense)              
Finance income 44.3 27.2 62.87% 23.5 15.74% 75.52 -68.88%
Finance expense -109.2 -93.9 16.29% -72.1 30.24% -130.54 -44.77%
Foreign exchange gain/(loss) 4.3 -0.6 -816.67% -1 -40.00% 4.44 -122.52%
Loss on impairment of available-for-sale financial asset       -13.5 -100.00% -222.54 -93.93%
Gain on disposal of property, plant and equipment 10.4     2 -100.00% 0.00  
Total other expense -50.2 -67.3 -25.41% -61.1 10.15% -273.12 -77.63%
Profit before tax 633 420.9 50.39% 341 23.43% -180.49 -288.93%
Tax expense on profit on ordinary activities -72.6 -46.3 56.80% -35.7 29.69% 11.31 -415.54%
Profit for the year – all attributable to equity holders of parent 560.4 374.6 49.60% 305.3 22.70% -169.17 -280.47%

3.5 Horizontal analysis of income statement easyJet

Revenues of easyJet have also been showing an increasing trend. The airline has been able to improve its total revenue every year as the revenues have increased by 11.5%, 16% and 11.6% in 2010, 2011 and 2012. Thus constant growing revenue is showing the improving performances of the company.


As discussed earlier, the fuel costs are the major costs of the airline and with the increasing revenues of the company, the fuel costs of the airline has also been increasing. Thus it is indicating that with more passengers travelling through easyJet the cost of the fuel is increasing.

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The overall operating profit of easyJet has been showing great results for the company. The operating profits of the airline improved by 188% in the year 2010 and then the operating profits increased by 55% and then this year the increase in the operating profit of the company on a year to year basis showed almost 23% increase. Thus it reveals that the management has been focusing on improving the earnings and these results have been shown in the financial statements as well. The same trend is being followed by the profit before tax of the company. However with more earnings, the airline has to pay more taxes and thus the tax expense of the airline has increased during the time when the earnings have increased. The increase in the tax charges of easyJet increased by 170% in the year 2012 and this also influenced the profit of the year. The net profit of the year for easyJet was only also increased by 13% whereas the operating profit of this year shown an improvement of 23%. However the profit in the year 2011 showed an increase of more than 85% from the year 2010. Moreover, the earnings also have improved in the year 2010 where the net profit showed an increase of almost 70%. Thus it can be said that the revenues and profits of easyJet have been improving, however Ryanair has been able to show more improvements and more growth in its financial statements in comparison to easyJet though, both these airlines have been showing improvements.

  2012 2011 2010 2009  
Seat Revenue 3794 3389 11.95% 2401.7 41.11% 2150.5 11.68%
Non-seat revenue 60 63 -4.76% 571.4 -88.97% 516.3 10.67%
Total revenue 3854 3452 11.65% 2973.1 16.11% 2666.8 11.49%
Fuel -1149 -917 25.30% -733.4 25.03% -481.5 52.32%
Ground operations -955 -923 3.47% -274.4 236.37% -255.9 7.23%
Crew -432 -407 6.14% -336 21.13% -306.6 9.59%
Navigation -280 -285 -1.75% -256 11.33% -232.3 10.20%
Maintenance -203 -179 13.41% -176.8 1.24% -161.6 9.41%
Selling and marketing -104 -102 1.96%
Other costs -200 -171 16.96%
EBITDAR 531 468 13.46% 361.3 29.53% 225.1 60.51%
Aircraft dry leasing -95 -109 -12.84% -102 6.86% -116.2 -12.22%
Depreciation -97 -83 16.87% -72.5 14.48% -55.4 30.87%
Amortization of intangible assets  -8 -7 14.29% -6.2 12.90% -4.4 40.91%
Operating profit 331 269 23.05% 173.6 54.95% 60.1 188.85%
Interest receivable and other financing income 11 9 22.22% 7.1 26.76% 22.5 -68.44%
Interest payable and other financing charges -25 -30 -16.67% -26.7 12.36% -27.9 -4.30%
Net finance charges -14 -21 -33.33% -19.6 7.14% -5.4 262.96%
Profit before tax 317 248 27.82% 154 61.04% 54.7 181.54%
Tax charge -62 -23 169.57% -32.7 -29.66% 16.5 -298.18%
Profit for the year 255 225 13.33% 121.3 85.49% 71.2 70.37%
Earnings per share
Basic 62.5 52.5 19.05% 28.4 84.86% 16.9 68.05%
Diluted 61.7 52 18.65% 28 85.71% 16.6 68.67%

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