Project of Advance Financial Management

Hassan Zaryab
L1f15BCMH0005
2016
University of Central Punjab

• History
Sir Stelios Haji-Ioannou, owner of the Easy group of brands - which includes Easyjet,
has contacted the board of African budget airline Fastjet over a number of licence
breaches. EasyGroup is the brand owner and licensor of Fastjet.

• Introduction
In any contemporary operating organisation, progress that the company is
making is recorded as basis for, among a host of other essential things, decisionmaking and as a benchmark for measuring the firm’s performance for the period
under scrutiny. A financial situation analysis is one such yardstick that
documents current and future financial situation in an attempt to determine a
financial strategy to help achieve organisational goals. As formally defined by
Riahi-Belkaoui in 1998, financial analysis ‘is an information processing system
used to provide relevant information for decision making’ (p. 1). The main
sources of information for such analyses are published financial statements of
the concerned company. Various accounts from published financial statements
are evaluated in relation to each other to form performance indicators, which are
then compared to ‘established’ standards. These performance indicators are
better known as ratios, and constitute the main tools of conventional financial
analysis. For the last several years, businesses have seen the rapid growth of the
number of firms offering financial situation analysis services. This serves as a
proof that more and more organisations are realising the importance of the
analysis of their financial situations in order to keep up with the demands of the
business world nowadays.
This paper is an analysis of financial situation of easyJet plc, one of the
leading low-cost civil aviation companies in existence, operating in a very tough
and highly competitive industry. The main purpose of this paper is to examine
the financial statements of the company for the last twelve months by using

tools such as Ratio Analysis to see how much growth easyJet has been able to
achieve and also to see what might be the other factors that can influence the
company’s growth and its decision making and than to see the limitations of the
financial analysis. These performance indicators are better known as ratios and
constitute the main tools of conventional financial analysis. For the last several
years, businesses have seen the rapid growth of the number of firms offering
financial situation analysis services. This serves as a proof that more and more
organisations are realising the importance the analysis of their financial
situation in order to keep up with the demands of the business world.

• EasyJet mission and vision statement
Every company has its mission to obtain certain objective and goals. It's a guiding
principle of what the company is today and what it will be in future. EasyJet has its
own mission; to provide their customer with safe, good value and point to point air
services.

• OUR VALUES
Safety:

We never compromise on safety

Simplicity:

We cut out the things that don’t matter to keep us lean
and make it easy

One team:

Together we’ll always find a way

Integrity:

We stand by our word and do what we say

Passion:

We have a passion for our customers, our people and the
work we do

Pioneering:

We challenge to find new ways to make travel easy and
affordable

EasyJet PLC (EZJ)

EZJ Income Statement

Current Ratio

Liquidity
Ratio

Quick Ratio
Networking Ratio

Activity
Ratio
Ratio
Analysi
s

Leverage
Ratio

Profitability
Ratio

Receivable
Turnover Ratio
Inventory
Turnover Ratio
Total Asset
Turnover Ratio
Fixed Asset
Turnover Ratio
Debt To
Shareholder
Equity Ratio
Interst Coverage
Ratio
Gross Profit
Margin Ratio
Net Operating
Income
Net Profit Margin
Return To Equity
Ratio
Earning Per Share
Brake Up Value
Per Share

• Liquidity Ratio:
Liquidity tells about the ability of a company to efficiently and
economically accommodate its deposits and increase in asset.
• Current ratio:It tells us about the company’s current asset relation with current
laibilties.
Current ratio= Current Asset /current liability
Current Ratio
Years
Current Asset
Current Liabilities
Current Ratio

2014
1261
1420
0.89

2015
2611
3904
0.67

Current Ratio
1
Current Ratio
0.5
0
2014

2015

Interpretation
Current ratio we mean at which level a business is able to pay off its
debts using current assets.
It is evident in the computations that easyJet was always in better position to
meet its short-term debt as compared to those of rivals in a peruse of the rivals’

current ratios. This means that easyJet is always bale to meet their current
liabilities using their current assets (cash, inventory, receivables).
This analysis clarifies that the ability of APL about its payment of its current
liabilities using current assets, has been fluctuating upward and downward trend
which is in 2015 at 0.67 and in 2014 it was 0.89.

 Quick ratio
It measures those assets which are quickly converted into cash and then
compared with current liability.
Quick ratio= Quick asset/ current Liabilities

Years
current asset
Inventory
Current Liabilities
Quick ratio

2014
1261
--1420
0.89

Quick Ratio
2015
2611
--3904
0.67

Quick Ratio
1
0.8
0.6
0.4
0.2
0
2014

Quick Ratio

2015

Interpretations:
Since quick ratios are perceived as a sign of the company’s financial
strength or weakness. A higher number would indicate stronger financial
performance, and a lower one means weaker performance.
Quick ratio is a ratio that tells the power of a business to pay off its debts,
the graph trend shows that its company pay off capacity is fluctuating at closely
certain point and the trend is in 2014 was upward while in 2015 is downward.
 Total Asset Turnover Ratio
 Total Asset turnover= Seles/total assets
Years
Sales
Average Total Assets
Asset Turnover Ratio

2014
2825
6107
1

2015
4686
2872
0.77

Total Asset Turnover
1.5
Total Asset Turnover

1
0.5
0
2014

Interpretations

2015

This ratio helps us to find that how much an organization using its
resources to manage the profit.
As in APL graph shows that they are using their resources very efficiently
that the asset turnover ratio is decreasing from 2014 to 2015.

Leverage ratio
This ratios shows those activities of a firm are supported by creditors,
funds as opposed to owners.
The following ratios can be used to identify the financial strength and risk
of the business.
Debt to Equity Ratio
Total debt / equity
Year
Total Debts

2014
563

2015
1064

Total Equity
debt to Equity Ratio

2172
0.26

3988
27

Debt to Equity Ratio
3000.00%
Debt to Equity Ratio

2000.00%
1000.00%
0.00%
2014

2015

Interpretations:
This ratio measure under which financing source of business can be
determined.
In the debt equity ratio of EASYJET has not a great fluctuation in its
equity. In 2014 to 2015 increasing 0.26 to 27.

 Net Profit Margin
The net profit margin ratio relates the net profit for the period to the sales
during that period.

(Profit After Taxes/ Sales)
Years
Profit After tax
Sales
Gross profit Margin Ratio

2014
491
2825
0.17

2015
548
4686
0.12

Net profit Margin
17.00%
20.00%
15.00%

12.00%

10.00%
5.00%
0.00%
2014

Interpretations:

2015

Net profit Margin

The ratio of the net profit to the amount of sales is witnessed to decrease
over time, as larger costs are experienced by the company, especially for
easyJet who belongs to the aviation industry, where overhead costs are
said to go skyrocket high, mainly resulted from increase in oil prices
worldwide,
In the gross profit margin ratio company has a continuous downfall trend
since last 2 years.

Return on Equity
This ratio shows the profit attributable to the amount invested by the owners
of the business
Net profit / equity
Years
Net Profit Taxes
Equity
Return on Equity

2014
491
4482
0.109

2015
548
9602
0.057

Return on Equity
15.00%
10.00%

10.90%

5.00%
0.00%
2014

Interpretations:

Return on Equity
5.70%

2015

In this interpretations of return on equity we may conclude that company
is down falling in its equity return trend.

 Earning Per Share
Net profit after tax / no. of shares outstanding
Years
net profit after tax
no of outstanding shares
Earnings per share

2014
491
397
1.23

2015
548
794
0.69

Earnings per share
1.5
1

1.23

Earnings per share
0.69

0.5
0
2014

2015

Interpretations:
In this graph it is shown that APL earning per share is increasing as
compare to the 2014 in 2015 while in there is a slight change occurred
towards downfall.

• Account payable turnover:Years
Cost of goods sold
Account Payable
AccountPayable Tourover

2014
1525
1110
1.37

2015
2634
2046
1.28

Account Payable Tourover
1.4
1.35

1.37

Account Payable Tourover

1.3

1.28

1.25
1.2
2014

2015

The accounts payable turnover ratio is a short-term liquidity measure used to
quantify the rate at which a company pays off its suppliers. In 2014 company
pay 1.37 times and in 2015 company pays 1.28 times to suppliers.

• Cash Flow Coverage
Cash flow coverage = Net Cash Flow/ Annual Interest Expense

Years
Net Cash Flow
Annual Intrest Expense

2014
616
0

2015
589
2

Cash flow coverage

0

295

Cash Flow Coverage
400
300

Cash Flow Coverage

200
100
0
2014

2015

This coverage ratio compares a company's operating cash flow to its total debt,
which, for purposes of this ratio, is defined as the sum of short-term borrowings,
the current portion of long-term debt and long-term debt.

• Average Collection Period

Years
Average Accounts Receiveable
Total Sales/365
Average Colletion

2014
200
7.73
25.87

2015
405
12.83
31.56

Average Collection Period
40
30

Average Collection Period

20
10
0
2014

2015

The average collection period is the approximate amount of time that it takes for
a business to receive payments owed, in terms of receivables, from its
customers and clients. In 2014 25.87 days are required for collection while 2015
31.56 days are required from collection which is not satisfactory for company
that the average collection period is increasing.

• Working Capital
Working Capital = Current Assets - Current Liabilities

years
Current Assets
Current Laibilites
Waorking Capital

2014
1261
1420
-159

2015
2611
3904
-1293

Working capital
12
10
8
6
4
2
0

Working capital is a measure of both a company's efficiency and its shortterm financial health.

• Horizontal And Vertical Analysis

Balance Sheet
Amount in millions$
Current Assets

horizonta
2015 l

2014

Cash and Short Term
Investments

1261

Cash

1915

Percentage
2014

-654
#VALUE!
-1040

-51.86%
#VALUE!
-245.28%

110
-205

19.61%
-102.50%

verticle
0.73343546
5
#VALUE!
0.560704711
0.17273075
5
0.155112984

-205
#VALUE!
#VALUE!

-102.50%
#VALUE!
#VALUE!

0.155112984
#VALUE!
#VALUE!

-

-

424

1464

561

451

200

405

200

405

Total Inventory

-

-

Prepaid Expenses
Other Current Assets,

-

-

76

291

1261

2611

-215
-1350

-282.89%
-107.06%

0.111451551
1

2542

5597

-3055

-120.18%

0.58289939
6

Cash & Equivalents
Short Term
Investments
Total Receivables, Net
Accounts Receivables
- Trade, Net

Total
total current assets
Fixed assets
Property/Plant/Equipment,
Total - Net
Property/Plant/Equip
ment, Total - Gross

_

_

#VALUE!

#VALUE!

Accumulated
Depreciation, Total

_

Goodwill, Net

365

Intangibles, Net
Long Term Investments
Note Receivable - Long

_
730

-365

-100.00%

238

-125

_

-110.62%
#VALUE!

4 _

0.00%

113
_

Term

#VALUE!

Other Long Term Assets,
Total

197
Other Assets, Total
Total Fixed Assets

_

426

-229

9602

-5120

-116.24%
#VALUE!
-114.23%

_
4482

#VALUE!
0.07602582
8
0.02478650
3
#VALUE!
#VALUE!
0.04436575
7
#VALUE!
1

• Verticle
analysis

Income
statement
years
Revenue
CGS
Gross Profit
total operating expense
Operating Income

2014 %age
2825
100%
1525
54%
1300
46%
2192
78%
634
22%

Liabilities

2014

2015 %age
4686
2634
2052
3998
688

2015 Change

%

Accounts payable

134

101

33

Accrued expenses

329

326

3

0

0

0

104

194

-90

853

1,147

-294

1,420

1,768

-348

Total long term debt

472

322

150

Total debt

576

516

60

Deferred income tax

186

176

10

Notes payable/short-term
debt
Current portion long-term
debt/capital leases
Other current liabilities, total
Total current liabilities

Minority interest
Other liabilities, total
Total liabilities

100%
56%
44%
85%
15%

--

--

#VALUE!

232

313

-81

2,310

2,579

-269

Vertical
0.03916246
25%
6
0.12640558
1%
4
#DIV/0!
-87%
-34%
-25%
32%
10%
5%
#VALUE!
-35%
-12%

0
0.07522295
5
0.44474602
6
0.68553703
0.12485459
5
0.20007754
9
0.06824350
5
#VALUE!
0.12136487
1

• Uses of Ratio Analysis
1. To evaluate performance to compare to pervious year and to competitor and
the industry.
2. To set benchmarks or standards for performance.
3. To highlight areas that need to be improved, or areas that offer the most
promising future potential.
4. To enable external parties, such as investors or lenders, to assess the
creditworthiness and profitability of the firm.

• Limitations of Financial Ratios
There are some important limitations of financial ratios that analysts should be
conscious of:
 Many large firms operate different divisions in different industries. For
these companies it is difficult to find a meaningful set of industry-average
ratios.
 Inflation may have badly distorted a company's balance sheet. In this
case, profits will also be affected. Thus a ratio analysis of one company
over time or a comparative analysis of companies of different ages must
be interpreted with judgment.
 Seasonal factors can also distort ratio analysis. Understanding seasonal
factors that affect a business can reduce the chance of misinterpretation.
For example, a retailer's inventory may be high in the summer in
preparation for the back-to-school season. As a result, the company's
accounts payable will be high and its ROA low.
 Different accounting practices can distort comparisons even within the
same company (leasing versus buying equipment, LIFO versus FIFO,
etc.).

 It is difficult to generalize about whether a ratio is good or not. A high
cash ratio in a historically classified growth company may be interpreted
as a good sign, but could also be seen as a sign that the company is no
longer a growth company and should command lower valuations.
 A company may have some good and some bad ratios, making it difficult
to tell if it's a good or weak company.
In general, ratio analysis conducted in a mechanical, unthinking manner is
dangerous. On the other hand, if used intelligently, ratio analysis can provide
insightful information.

• CONCLUSION
As a concluding note, annual impairment tests for sizeable fixed assets
should lead to a better valuation of the business, which would result to a better
view of the financial situation of the civil aviation company. Generally, the
accounting policies of easyJet meet the IFRS and the aviation industry standards
as well. Notwithstanding several critical but otherwise minor entries, it can be
sufficiently agreed upon that easyJet’s accounts “give a true and fair view of the
state of affairs” and consequently ”have been properly prepared” (easyJet). The
results for the financial statements audit of easyJet done by
PricewaterhouseCoopers LLP were evidently well-planned and performed the
audit so as to obtain all the information and explanations which were considered
necessary in order to provide the auditors with sufficient evidence to give
reasonable assurance that the financial statements and the part of the Directors’
remuneration report to be audited are free from material misstatement, whether
caused by fraud or other irregularity or error. In forming the opinion in this
paper, the overall adequacy of the presentation of information in the financial
statements and the part of the Directors’ remuneration report to be audited are
also evaluated.