Liquidity Ratios Current Ratio

The current ratio for BA, spanning five years from 2004 to 2008 shows the company’s relatively consistent ability to cover its liabilities. Ideally the current ratio should be above 1, as this indicates that there are more than enough current assets to fully cover any current liabilities suffered by the company. BA however has only exceeded 1 once in 2006, but this figure has slightly dipped over the last two years. But by remaining slightly less than 1 means that overall BA is able to meet its debt obligations.

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Flybe on the other hand has not been as consistent with meeting its short-term obligations. Falling to its lowest over the five years to 0.75 in 2006, the current ratio improved in 2007, but again dipped to 0.91 in 2008. This could imply that the company is struggling to keep enough current assets to meet its current liability obligations. When comparing Ryanair and easyJet, it can be ascertained that there has been a gradual decrease in the current ratio for meeting liability obligations.

In 2004, both companies were able to meet their obligations twice over, with current ratios exceeding 2. But by 2008, both the companies’ current ratio has decreased substantially. Considering this change, both companies may have made changes to the way they held current assets, by utilising their current assets more, but it may also be that the current liabilities have increased. The current ratio for Virgin shows that over the past five years, the company has been able to meet its current obligations, with more current assets available to do so in recent years. But in 2008, the ratio fell slightly, and this may be an indication that current liabilities have increased.

When considering all five companies together, it can be said that although BA has been consistent, and Virgin’s current ratio has progressively increased, easyJet and Ryanair are performing better overall with higher current ratios than the other companies. A higher current ratio indicates more liquidity for the companies. The industry current ratio is 1.09, and when comparing this to the five companies, BA and Flybe are slightly underperforming at just less than 1, however the other three companies are exceeding this, which suggests that they are performing well. As a cash intensive industry, the aviation industry should be high in terms of assets, and therefore be able to meet its debt obligations, and this can be seen when comparing the companies with the industry as a whole.

Quick / Acid Test Ratio: Using this ratio means considering the companies’ ability to meet their short-term liabilities by eliminating stock, that cannot always be readily converted into cash. By eliminating the stock element, the current assets of the companies will be slightly lower, thus the trends followed by the current ratio are mirrored by the quick ratio. Therefore this ratio shows that easyJet and Ryanair are still able to meet their liability obligations better than the other companies. This gives a clearer indication of the companies’ liquidity positions. The quick ratio for the industry currently stands at 0.79, and when considering this, all the companies have effectively utilised their current assets to meet their current liabilities as their ratios are above the industry average.

Efficiency Ratios – Asset Turnover Ratio:

The performances of all five companies are at different levels in terms of asset turnover. Aside from easyJet which has slightly decreased over the last five years, the other companies to some extent have increased their asset turnover ratios. easyJet has been reasonably consistent, but with turnover not matching the assets held and accumulated over the last five years, the ratio has been at its lowest of 0.76 in 2007.

Flybe and Virgin on the other hand has been effectively employing assets in order to increase turnover, as a steady increase over the past five years has shown their asset turnovers to more than exceed the assets acquired. Virgin has had the more progressive increase in asset turnover from 1.15 in 2004, increasing to 1.48 in 2008. But the asset turnover for Flybe fell in 2007 to 0.96, and this may have been due to an excessive increase in aircraft purchase, but this fall picked up tremendously in 2008, reaching 1.60.

Although BA and Ryanair have shown an increase in their asset turnover ratios over the last five years, the underperformance indicates that the two companies are struggling to generate the turnover required in order to effectively utilise the assets employed. When looking at all five companies collectively it can be seen that Flybe has the highest asset turnover ratio, followed closely by Virgin. But with a more consistent growth in asset turnover, Virgin is employing assets which are generating higher revenues, whereas Flybe, although has a high asset turnover ratio, has been fluctuating through out the five year period. The asset turnover for the industry is 0.80, and when taking this in to account, all the companies are exceeding the expected turnover, however Ryanair is lagging behind. This result goes against the concept of a budget airline, which should have a high asset turnover as revenue is generated quickly.

Profitability Ratios – Net Profit Margin:

Ryanair and easyJet had a continuous increase in their net profit margins from 2004 to 2007, with the profit margin for Ryanair being much higher than easyJet. But in 2008, the net profit margins for both companies fell drastically; this could be for a number of reasons such as the affects of the ‘Credit Crunch’. Virgin however has not been consistent, with very low profit margins, its highest was in 2006 reaching to 4.12%, and in 2008 it fell further to 0.82%. This is not a very promising profit margin as it indicates that there is a lack of cost control. The only company out of the chosen five which has been continually consistent is BA, progressively rising from 1.72% in 2004 to 7.79% in 2008. But the company whose profit margin has seen numerous fluctuations is Flybe, with negative profit margins in 2006 and 2007, it recovered in 2008, increasing by 12%, this may have been due to the effects of the looming recession causing customers to choose cheaper travel options.

Taking all five companies into account it can be seen that although in 2008, the profit margin fell by almost 5%, Ryanair has the highest net profit margin, and this could be due to high revenues and low expenditures. Looking at Flybe over five years it has struggled the most in terms of net profit margins, but considering the 2008 figures, it is performing better than Virgin, whose net profit margin is under 1%. With an industry ratio of -10.61%, the industry as a whole is suffering, but considering the companies which have been chosen, although Flybe had negative net profit margin for 2006 and 2007, its recovery meant that all the companies were performing above the industry as a whole.

However when considering the net profit margin, the asset turnover ratio must also be considered, as the secondary ratios to the ROCE, a high profit margin will generally mean that sales prices are high, which will consequently depress the revenue, and so lower the asset turnover of a company. With a high asset turnover a company must generate a high volume of sales, and in order to do this, prices must be kept low. Therefore this type of high asset turnover will be expected from the low-cost airlines, whereas the high profit margin will be the resultant of high profit margins of the international long-haul airlines. However the opposite is seen, with Ryanair showing a high net profit margin and low asset turnover, and Virgin showing high asset turnover and low net profit margin.

ROCE: This ratio combines profitability and asset utilisation of airlines, and is the most important profitability ratio. Ryanair, easyJet and Virgin have all seen the ROCE go up and down in the past five years. With Ryanair staying relatively constant in the 10% range, it fell in 2008 to 8.25%, easyJet also saw a fall from 10.65% in 2007 to a more drastic 4.92% in 2008. These two companies may have suffered this decrease for a number of reasons, and one may be due to the increased competition from airlines such as Flybe, who experienced negative ROCE in 2006 and 2007, but increased considerably by 2008 to 21.10%.

This may be due to the purchase of new assets (aircraft), which may reduce ROCE at first. When looking at the two Atlantic companies BA and Virgin, it can be ascertained that BA has seen a gradual increase in ROCE from 2.52% to 11.21% over the last five years, however Virgin has struggled with its highest ROCE being 10.68% in 2006, and it has been reduced to 0.98% by 2008. Therefore it could be said that when using capital to generate profit, it is not working as efficiently as the other companies.

Therefore by considering all five companies together, it can be seen that in 2008 Flybe performed the best in terms of using its capital effectively in order to maximise the return on the capital employed. On the other hand Virgin has struggled to utilise its capital effectively. There can be various reasons for such trends occurring for the companies, and increased price-cut competition can prove very detrimental to companies such as Virgin, who as a global company will have greater expenditures and capital. Overall Ryanair proved to be the most profitable in terms of the highest ROCE over the five year period.

Stability Ratios – Gearing Ratio: In an attempt to ascertain how a company is financed, it is important to look at the gearing ratio, which considers which proportion of the company is financed by debt and by equity. High gearing is potentially risky due to too much debt finance causing uncertainty within the company, as debt obligations must be met regardless of the company’s financial position. Looking at the chosen companies, it is apparent that there are substantial differences in the way each company funds its operations. When looking at this ratio, it can be said that due to a stable revenue stream, the aviation industry may be able to finance a higher proportion of debt compared with other sectors.

Virgin and BA have both had decreasing gearing ratios over the years, which is a good sign, showing that the companies are reducing their finances in terms of debt, consequently increasing their equity finances. On the other hand Ryanair and easyJet have both been gradually increasing in terms of debt to equity, however their gearing is relatively low, and therefore the balance of finance between debt and equity is of comparatively low risk. But Flybe however has very high gearing of 24.55 in 2008, and considering the risks attached, can prove very detrimental to the company. Although the gearing has fluctuated for Flybe through the years, the current year’s gearing shows the company’s current situation of being financed with a relatively high amount of debt.

When comparing all five companies, high gearing can cause Flybe to be more susceptible to funding problems, with more debt finances meaning that more cash will be tied up in paying for these debt obligations. With the recession causing a decrease in customer numbers, the other four companies will be more able to contend with the deflation as less of their finances are debt obligations. This can also be seen when considering the industry gearing ratio of 6.80, which is exceeded by Flybe. However Flybe is a relatively new company, originally British European, it re-emerged in 2002 with a new name and repositioned itself as a full service, low-fare airline, this may therefore be the reason behind Flybe’s high gearing.