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EASYJET PLC FINANCIAL ANALYSIS
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Table of Contents
Table of Figures 2
1.0 Introduction 3
2.0 Analysis of Financial Performance 3
2.1 Profitability Measures 3
2.2 Shareholder's Returns and Investments 5
3.0 Analysis of Financial Position 6
3.1 Liquidity Measures 6
3.2 Financial Gearing 7
3.3 Efficiency 8
4.0 Conclusion 9
5.0 Appendix 11
5.1 Ratios 11
6.0 Bibliography 13
Table of Figures
Figure 1: Profit fluctuations in 2015, and 2016 4
Figure 2: Trend obtained for ROCE 6
Figure 3: Gearing and trend line 8
1.0 Introduction
EasyJet is a British airline that was established in the year 1995. It operates under the low-cost carrier model and is based in Luton Airport, London. Ever since its emergence, EasyJet has to date operated on 803 routes. According to the EasyJet annual report 2016, the airline company operates in 132 airports in 31 countries. As of 30th September 2016, EasyJet had a "workforce of over 10,000 people, including 6,516 cabin crew members and 2,865 pilots" (EasyJet, 2016). More than 70% of the EasyJet customers are returning customers. The EasyJet digital application enables and instils customer satisfaction and increases revenue as a result.
This business report aims at interpreting and analysing the financial statements of EasyJet Airlines. A variety of ratios are used to accomplish the task. The results obtained will be used to determine the performance and the position of the airline company.
2.0 Analysis of Financial Performance
2.1 Profitability Measures
The EasyJet Airline Company has for the last five years recorded a positive digit regarding returns. The company has been making profits, with the year of 2015 recording the highest net profit in all those years. These gains are attributable to the fewer expenses compared to the revenue collected in all financial years. 2015 had a lesser amount of costs than the year 2016, proof of the higher profit in 2015. The gross profit and operating margins are observed to decline from the year 2015 to 2016.
The gross profit margin reduced by 2.29% from 39.69% to 37.40% between the two years. Consequently, the operating profit margin declined by 4.01% from 14.68% to 10.67%. This decrease is because the company's cost of revenue is not kept well under control. The cost of revenue for the company increased by £97 million from £2,826 million to £2,923 million between the two years. On the other hand, revenue decreased by £17 million. This massive increase in the cost of sales and the decrease in the total revenue is the primary cause of the declining gross profit margin. Consequently, the decline in operating profit margin is brought by the reduction in both the operating profit and revenue. The above-illustrated fluctuations are as shown in figure 1. The trend line illustrates the decline in 2016.
Figure 1: Profit fluctuations in 2015, and 2016
Compared to one of its rivals, British Airways, EasyJet PLC is not doing so well. British Airways' operating profit margin increased by a 1.2% for the prior year (ADVFN, 2016). This means good or the business despite the increase in its finance costs and the decrease in profit before and after tax. EasyJet PLC's returns are expected to rise in the years following 2016.
The net asset turnover for the company was 1.79 times and 1.45 times for the years 2015 and 2016 respectively. These numbers are high which signifies low investments. The turnover, however, reduced in 2016 by 18.99%. The turnover is higher compared to the other competitors in the industry.
The profitability of the company is also affected by the effective tax rate. In 2015, 20.12% of the company's income was used to pay taxes. This figure reduced to 13.74% in the year 2016. This shows a positive advantage for the company as less amount of money was used for taxes the following year. On the hand, this shows a reduction of the company's profit – which is the key determiner of the tax charged. If profit decreases, the tax charged decreases also (Bodie et al., 2014).
2.2 Shareholder's Returns and Investments
The company is relatively performing poorly when it comes to investments in 2016 compared to the previous year. The earnings per share decreased from 139.1 to 108.4. This signifies a 22.1% decline. The positivity in the earnings per share means well for the company, and shareholders feel motivated by these results. The decrease in basic earnings per share is attributable to the decrease of the profit after tax by £121 million. To make sure that earnings per share remain positive, the company needs to reduce its borrowing, both long-term and short-term, which will significantly raise the figure tremendously (Delen et al., 2013).
EasyJet has a desirable return on capital employed (ROCE). In 2015, the ROCE was 26.34% while in 2016, it was 15.47%. In 2016, according to the EasyJet annual report 2016, the company acquired 20 more aircrafts and mark-to-market movements. As a result, this reduced the profit for the year and increased the adjusted capital employed. These two changes led to the decrease of ROCE by 10.87% as shown in Figure 2. In this regard, the ROCE for the following years is expected to rise significantl since there will be less major acquisitions like in 2016. The rise will also be due to the expected increase in revenue generated by the new acquisitions, which as a result will increase the operating profit. In comparison to British Airways which acquired more 16 more aircrafts the same year, the company has a better ROCE. This presents it in a good position in the European airline industry. The ROCE trend for the two financial years is as shown below.
Figure 2: Trend obtained for ROCE
3.0 Analysis of Financial Position
3.1 Liquidity Measures
The liquidity of any company is measured by various factors and ratios including the current ratio. Specifically, fixed assets, as well as current assets come in handy in determining the financial positon of any company. EasyJet PLC is not left behind in this; it recently acquired 20 more aircrafts to increase their fixed assets and have a better position financially. These more aircrafts are a move towards the anticipated extra routes by the carrier. The current ratio for the company stood at 0.72:1 in 2015 and at 0.92:1 in 2016. For both years, the business had no enough cash to pay its debts. But as seen, there is an improvement in the current ratio by 27.78%. This change is brought up by a rise in current assets from £1,279 million to £1,454 million, up £175 million (13.68%), and a decrease in current liabilities from £1,768 million to £1,573 million, down £195 million (-11.03%). The greatest rival, British Airways has a stagnating current ratio and way below to that of EasyJet PLC. The current ratios for the British Airways for 2015 and 2016 are 0.74:1 and 0.76:1 respectively (ADVFN, 2016). The company is, therefore, at a better financial position that its competitor.
3.2 Financial Gearing
Interest cover and gearing are the main and key indicators of financial gearing of a company. EasyJet PLC must manage their financial risks to have a better financial position. The airline company had a gearing of 47.02% in 2015 and 44.04% in 2016. The company relies too much on debt to finance its long-term needs. There is a slight decline in this ratio by 2.98% as indicated in figure 3 below by the trend line. The decline is an improvement for the airline company, as it signifies that the company is reducing its over-reliance on debts to finance its needs in the long-term. The observed decrease is as a result of the increase of the shareholder's equity despite the fact that loans increased in 2016. Figure 3 illustrates the above decline.
Figure 3: Gearing and trend line
On the other hand, given their earnings, the company can pay its interests a lot of times over. EasyJet Airlines had an interest cover of 62.55 times in 2015 and 38.31 times in 2016. There is a huge drop in the interest cover between the two years by 38.75%. The reason for the huge decline is the decrease in operating profit and the increase in interest expenses as compared to the previous year. If this continues to fall, the company will not be able to meet their financial payments as they fall due. This can further reduce if the costs are not well managed. They can also reduce significantly if the finance costs and the level of debt increases.
3.3 Efficiency
The efficiency of any company or business is measured by its receivable and payable days. The receivable days of EasyJet PLC increased from 16 days in 2015 to 17 days in 2016. Although there is a slight increase in the receivable days, it means bad for the business. The company took longer in 2016 to receive payments from debtors than in 2015 by just one day. Bad debts and mismanagement of receivables are some of the causes of this increase in the collection period. The company can reduce the receivable days of their debtors by ensuring that they pay on time, chasing bad debts, and sending invoices to debtors on time.
The payable days for EasyJet Airlines PLC were 64 days in 2015, and this number plummeted to 70 days in 2016. As these data indicate, the airline took longer in 2016 to pay for all its purchases than in 2015 by six days. The company can use this as an advantage as it means that the money meant to be paid to creditors is now in the business. The company can use the money to fund other projects and run their daily operations. Suppliers' credit is a useful source of finance, but an increase in the payable days may also mean that the business may be struggling to pay its debt.
The above two ratios, receivable days and payable days, both show that the financial position of EasyJet PLC is stable. Just 16 to 17 days of receiving owed from debtors is a good indication of the stability of the company. This means that the company would have an increased cash flow and a lot of cash at their disposal for further spending. Also, the increase in the payable days is an indication of the same - having more cash at their disposal.
4.0 Conclusion
The above summary of EasyJet PLC's financial analysis and reporting defines its financial performance and position. Over the past five years, the company saw a higher profit margin in the year 2015 as compared to the other years. The company made profits in 2016, although they reduced slightly. The return on capital employed also decreased, with the company attributing the decrease to the purchase of 20 more aircrafts. The company wishes to cover more routes, and this move will raise their revenue. As a result, the return on capital employed will increase, and the company will have better returns to its shareholders.
Most of the ratios analysed above have shown a very stable and better financial position for EasyJet PLC. Both the receivable days and the payable days have indicated that the company had more cash at its disposal to utilise effectively in 2016. Financial gearing changes also signify improvements on the business financial position. Managing such a big entity dealing with huge amounts of cash is delicate and requires extreme caution. To finance all operations, the business may need external financing. Increasing the long-term loans would increase the financial gearing which would be bad for the business and its financial position as an individual firm as well in the industry.
5.0 Appendix
5.1 Ratios
EASYJET PLC
2016 2015
Ratio Formula Working Results Working Results
Gross profit % (gross profit)/revenue x 100 1746/4669 x 100 37.40% 1860/4686 x 100 39.69%
Operating profit % (operating profit)/revenue x 100 498/4669 x 100 10.67% 688/4686 x 100 14.68%
Effective tax rate (tax charge)/(profit before tax) x 100 68/495 x 100 13.74% 138/686 x 100 20.12%
ROCE (operating profit)/(capital employed) x 100 498/3220 x 100 15.47% 688/2612 x 100 26.34%
Current ratio (current assets)/(current liabilities) 1454/1573 0.92:1 1279/1768 0.72:1
Net asset turnover revenue/(capital employed) 4669/3220 1.45 times 4696/2612 1.79 times
Receivable days receivable/revenue x 365 217/4669 x 365 17 days 206/4686 x 365 16 days
Payable days payables/(cost of sales) x 365 564/2923 x 365 70 days 495/2826 x 365 64 days
Gearing loans/(equity+loans) x 100 2134/(2712+2134) x 100 44.04% 1996/(2249+1996) x 100 47.02
Interest cover (operating profit)/interest 498/13 38.31 times 688/11 62.55 times
6.0 Bibliography
ADVFN. (2016). British Airways Annual Financial Report. [Online]. Available at: https://uk.advfn.com/stock-market/london/br-air-6-75-bds-53NU/share-news/British-Airways-PLC-Annual-Financial-Report/74101781 [Accessed 29 December 2017].
Bodie, Z., Kane, A. and Marcus, A.J., 2014. Investments, 10e. McGraw-Hill Education.
Delen, D., Kuzey, C. and Uyar, A., 2013. Measuring firm performance using financial ratios: A decision tree approach. Expert Systems with Applications, 40(10), pp.3970-3983.
EasyJet. (2016). EasyJet annual report and accounts 2016. [Online]. Available at: http://corporate.easyjet.com/investors/reports-and-presentations/2016 [Accessed 28 December 2017].
EasyJet. (2016). What we do. [Online]. Available at: http://corporate.easyjet.com/about/what-we-do [Accessed 28 December 2017]/
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