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Analysis of Financial Performance

Discuss about the Advance Reporting for Journal of Financial Research.

Ryan air is the largest and low fare airline that is based in Ireland. The company is a public listed company and trades in New York, London and Dublin. Ryan air is committed towards low cost airfare and it is introducing competition for the growing airline market in Europe it has the potential to offer the passengers with the lowest fare in the industry and high efficiency and low cost in the airport. The company started its operation during 1985 and launched 15 flights per day day between London Gatwik Airport Waterford and Turbine support. Despite of being successful, Ryanair is committed to lower airfare, maximization of low fare seats and increasing the service frequency. Direct competitors of the company are various airlines that includes Scandanavian airline, Lufthansa, Alitalia, Air France and Aer Lingus. However, the company’s unparalleled low fares, comfortable in-flight service, high frequency, on time flights have helped it to win continuous increase in customer number and supports from them (Ryanair.com 2018).

Ratio

Formula

2017

2016

Profitability Ratio

Operating profit margin

Operating profit / sales *100

23.08

22.34

Net profit margin

Net profit / Sales *100

19.79

23.85

Return on capital employed

PBIT/ Capital employed * 100

17.09

18.60

Liquidity ratios

Current ratio

Current assets/Current Liabilities

1.56

1.43

Quick ratio

(Current assets -Stock)/ Current liabilities

1.56

1.43

Solvency ratios

Debt to equity ratios

Total liabilities/Shareholder’s equity

1.71

2.12

Interest coverage ratio

Profit before interest and tax / Interest payable

22.83

20.54

Activity ratios

Trade receivable turnover

Sales/average accounts receivable

110.43

103.58

Trade payable turnover in days

365 / trade receivable turnover

3.31

3.52

Inventory turnover ratio

COGS/average inventory

1426.25

1680.74

Inventory turnover

365/inventory turnover ratio

0.26

0.22

Investment ratio

Dividend yield

Dividend paid/market price per share * 100

3%

3%

Price earnings ratio

Market value per share/Earning per share

0.87

0.70

Profitability ratios are used to measure the profitability status as well as the performance of the company. It is the ability of the company to earn profit and the term profit states the amount left with the company after deducting all the expenses and costs associated with generating income (Acheampong, Agalega and Shibu 2014).

  • Operating profit margin – it indicates the amount of profit available with the company after meeting various production costs like raw materials and wages for the labours. The ratio is also expressed as percentage of the sales and thereafter it reveals the company’s efficiency with regard to cost control and expenses related to business (Delen, Kuzey and Uyar 2013). It is observed that the operating profit of the company has been increased from 22.34% to 23.08% over the years from 2016 to 2017.
  • Net profit margin – it is the revenue percentage left with the company after deducting all the expenses. It states the profit amount that the business can generate from the sales. It is one of the widely used ratios in finance (Afonso, Baxa and Slavik 2018). Investors closely look at net profit margin as it reveals the efficiency of the company regarding converting the revenue to profits that is available for the shareholders. It is observed that the net profit of the company has been reduced from 23.85% to 19.79% over the years from 2016 to 2017.
  • Return on capital employed – this is profitability metric and used to measure the efficiency of the company to generate profits from the employed capital. It reveals the investors that how many dollars the company can earn as profit from each dollar of employed capital (Babalola and Abiola 2013). It is observed that the return on capital employed of the company has been reduced from 18.60% to 17.09% over the years from 2016 to 2017.

It evaluates the company’s ability make payment of the current liabilities when they become due and payment of long-term debt when they become current. It reveals the company’s cash levels and the efficiency in converting the assets into cash for paying off the liabilities and various other short-term obligations.

  • Current ratio – it is the liquidity ratio and is used to measure the ability of paying off the short term obligations. It is important for measuring the liquidity as the short-term obligations are payable within next 12 months period. Therefore, the company has limited time for raising the fund to pay off the liabilities and have to be paid with the available current assets like cash, trade receivables and the marketable securities. It is identified that the current ratio of the company is in increasing trend and is increased from 1.43 to 1.56 over the years from 2016 to 2017.
  • Quick ratio – quick ratio is also used to measure the liquidity of the company. The only difference between current ratio and quick ratio is that the quick ratio while computing the current assets the assets that takes long time to get converted into cash like inventories and prepaid expenses are not taken into consideration. It is identified that the current ratio of the company is in increasing trend and is increased from 1.43 to 1.56 over the years from 2016 to 2017.

This ratio is used to measure the efficiency for meeting the long-term debts. Further, the solvency ratio reveals the company’s size for after tax profit and does not take into account the expenses related to non-cash expenses as against the debt obligation of the company.

  • Debt to equity ratio – it is the financial ratio that indicates the percentage of shareholders equity and percentage of debt in total assets of the company. This ratio is also known as the leverage or gearing or risk ratio as it is closely related to the leverage of the company. The ratio of less than 1 represents that the portion of debt is lower as compared to equity (Jarrow 2013). On the contrary, the ratio of more than 1 represents that the debt portion is higher than the equity. Looking at the calculation table it is found that the debt to equity ratio of the company for both the years is quite high. However, the position is improved and the company was able to reduce the debt to equity ratio from 2.12 to 1.71 over the years from 2017 to 2016.
  • Interest coverage ratio – this financial ratio measures the ability of the company to make payment towards interest on the outstanding debt. Interest coverage ratio is not at all concerned about payment of the principal amount of debt. As an alternative it measures the ability to pay-off the debt interest (Frank and Keith 2016). This ratio is used by the investors and creditors for analysing the risk and profitability of the company. For example, the investor is generally concerned regarding the increase of his investment value. Further, a big part of the appreciation is depended upon the operational efficiencies and profits (Leary and Roberts 2014). It can be seen from the table that the interest coverage ratio of the company over the year from 2016 to 2017 has been increased from 20.54 times to 22.83 times.

Activity ratios are the financial analysis that is used for measuring the efficiency of the business for converting capital accounts, liabilities and assets into sales or cash. If the business is able to convert the assets into sales or cash quickly, it will be regarded as more efficient.

  • Trade receivable – it is the activity ratio and is used to measure the times that the business can convert its account receivable into cash under a specific period. to be more specific, the accounts receivable ratio computes the times the business can collect the accounts receivable in the year (Zhuo-hua et al. 2015). It states the efficiency with regard to collection of the credit sales from the customers. It can be seen that the trade receivable turnover of the company is increased from 103.58 times to 110.43 times over the period from 2016 to 2017. Further, it can be seen that the company takes on an average 3.52 days and 3.31 days respectively for 2016 and 2017 to collect its receivable from the debtors.
  • Inventory turnover – it is the efficiency ratio that states the efficiency with regard to management of inventories for the specific period. In other words, it is used to measure the times the company can sell the inventory amount during specific period. The ratio is crucial as the total turnover is depended upon 2 major components of the performance (Palepu, Healy and Peek 2013). 1st component is the purchase of stock and 2nd component is sales. If large inventories are purchased the company have to sell larger amount for improving the turnover. Further, the sales have to match with the purchase of inventory otherwise it will not turn efficiently. Therefore the sales and purchase department must be correlated with each other (Robinson et al. 2015). It can be seen that the inventory turnover of the company is reduced from 1680.74 times to 1426.25 times over the period from 2016 to 2017. Further, it can be seen that the company takes on an average 0.22 days and 0.26 days respectively for 2016 and 2017 to sell its inventories.

Investment ratios are used to analyse the performance of the company’s share. Apart from the shareholders, the investment ratios are important for the potential investors to analyse its sustainability and completion in the industry.

  • Dividend yield – it states the percentage of earning that is paid by the company as dividend as compared to the share price. Normally the companies that make profit only pays dividend (Zack 2013). Therefore, the investors consider the company that pay dividend as safe for the purpose of investment. it can be observed from the annual report of the company that the dividend yield of the company both 2016 as well as 2017 is 3%.
  • Price earnings ratio – it indicates the amount of dollar an investor can expect to earn from the earning of the company (Briston 2017). Therefore, the P/E ratio sometimes called as the price multiple as it states how much the investor prefers to pay for each dollar of the earnings. The price earnings ratio of the company has been improved and increased from 0.70 to 0.87 over the year from 2016 to 2017.

Ratio Calculation

Conclusion

It can be concluded from the above calculation and analysis of ratio that though the operating profit of the company has been increased from 22.34 to 23.08 over the years from 2016 to 2017, the net profit margin is reduced from 2.85 to 19.79. The reason behind this is that during 2016 the company received € 317.5 million on account of gain from the disposal of the financial assets available for the purpose sale. The solvency position as well as the liquidity position of the company has been improved in the year 2017 as compared to the year 2016. The price earnings ratio of the company is increased from 0.70 to 0.87 and the dividend yield for both the years is same at 3%. Further, the company is efficient with regard to collecting the debts from customers and converting the inventories into sales or cash.

Particular

2017

2016

Cash flow

€ 1,224 million

€ 1,259.2 million

Operating profit

€ 1,534 million

€ 1,460.1 million

Earnings per share

105.30 Cents

116.26 Cents

Cash flow – the cash flow of the company has been reduced from € 1,259.2 million to € 1,224 million over the year from 2016 to 2017. The reason behind the reduction mainly was increase in the amount of investing activities from € 283.6 million to € 1,290.8 million over the year from 2016 to 2017 (DeFusco et al. 2015). However, the company was able to reduce the cash used in financing activities from € 1488.1 million to € 671.6 million over the year from 2016 to 2017. Further, it was able to increase the cash from operating activities from € 1846.3 million to € 1927.2 million over the year from 2016 to 2017. Therefore, the company is efficient with regard to its cash position for the last 2 years (Ryanair.com 2018).

Operating profit – the operating profit of the company has been increased from € 1460.1 million to € 1534 million over the year from 2016 to 2017. The reason behind the decrease is the increase of operating expenses from € 5075.7 million to € 5113.8 million over the year from 2016 to 2017 (Chandra 2017). Therefore, despite of increase in revenue over the year from 2016 to 2017, owing to increase in the operating expenses the company’s operating profit reduced in 2017 as compared to 2016. However, the operating profit margin of the company increased to 23.08% in 2017 from 22.34% in 2016. Therefore, the percentage of increase in revenue was more as compared to percentage of increase in operating expenses (Ryanair.com 2018).

Ratio Analysis

Earnings per share – the earning per share of the company have been reduced from 116.26 euro cent to 105.30 euro cent over the years from 2016 to 2017. The reason was the reduction of profit from € 1,559.1 million to € 1,315.9 million over the year from 2016 to 2017 (Ryanair.com 2018). Therefore, the company shall try to minimise its operating expenses to increase the profit which in turn will increase the earning per share (Ogiela 2013).

If the return aspect is considered it can be observed that the company is regular in paying dividend to the shareholders and the dividend yield for both 2016 as well as 2017 is 3%. The earnings per share of the company for 2017 are 105.30 cents whereas the market price of the share on closing of the year 2017 was € 91.93 per share. Further, as per the chairman’s report the company returned more than € 1 billion to the shareholders for the year ended 2017 through buyback of shares (Ryanair.com 2018). Further, it approved buyback for € 600 million. Moreover, the highlights are –

  • Profit after tax went up by 6% to €1.316 billion
  • Average fares reduced by 13% to €41;
  • Unit costs were reduced by 11%
  • Year 3 of our Always Getting Better (“AGB”) program was smoothly delivered and Year 4 is already been announced
  • 206 new routes were launched and 10 new bases were opened
  • com became no. 1 airline website all over the world (Ryanair.com 2018).

Taking into consideration all the above mentioned facts it can be said that the company is a good options for investment.

It can be concluded from the above discussion that the company have some positive area as well as some negative areas with regard to investment approach. If the return factor is considered, then it can be identified that the company is efficient in creating return from sales as well as creating return for the shareholders. Further, the liquidity position of the company has been improved in 2017 as compared to the year 2016. On the other hand if the risk factor is taken into consideration it can be identified that the company is highly leveraged. Though it has improved its position in 2017 as compared to 2016, the debt portion of the company is still high as compared to equity. If the efficiency factor is taken into consideration it is found that the company is efficient in collecting debts and converting the inventories into sales or cash. Taking into consideration all these factors it can be said that the company is a good options for investment.

Reference

Acheampong, P., Agalega, E. and Shibu, A.K., 2014. The effect of financial leverage and market size on stock returns on the Ghana Stock Exchange: evidence from selected stocks in the manufacturing sector. International Journal of Financial Research, 5(1), p.125.

Afonso, A., Baxa, J. and Slavik, M., 2018. Fiscal developments and financial stress: a threshold VAR analysis. Empirical Economics, 54(2), pp.395-423.

Babalola, Y.A. and Abiola, F.R., 2013. Financial ratio analysis of firms: A tool for decision making. International journal of management sciences, 1(4), pp.132-137.

Briston, R.J., 2017. The stock exchange and investment analysis (Vol. 3). Routledge.

Chandra, P., 2017. Investment analysis and portfolio management. McGraw-Hill Education.

DeFusco, R.A., McLeavey, D.W., Pinto, J.E., Anson, M.J. and Runkle, D.E., 2015. Quantitative investment analysis. John Wiley & Sons.

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.

Frank, K.R. and Keith, C.B., 2016. Investment analysis and portfolio management.

Jarrow, R., 2013. A leverage ratio rule for capital adequacy. Journal of Banking & Finance, 37(3), pp.973-976.

Leary, M.T. and Roberts, M.R., 2014. Do peer firms affect corporate financial policy?. The Journal of Finance, 69(1), pp.139-178.

Ogiela, L., 2013. Data management in cognitive financial systems. International Journal of Information Management, 33(2), pp.263-270.

Palepu, K.G., Healy, P.M. and Peek, E., 2013. Business analysis and valuation: IFRS edition. Cengage Learning.

Robinson, T.R., Henry, E., Pirie, W.L. and Broihahn, M.A., 2015. International financial statement analysis. John Wiley & Sons.

Ryanair.com., 2018. Official Ryanair website | Book direct for the lowest fares | Ryanair.com. [online] Available at: https://www.ryanair.com/gb/en/ [Accessed 6 Apr. 2018].

Zack, G.M., 2013. Financial Statement Analysis. Financial Statement Fraud: Strategies for Detection and Investigation, pp.209-213.

Zhuo-hua, Z.H.O.U., Wen-nan, C.H.E.N. and Zong-yi, Z.H.A.N.G., 2015. Application of cluster analysis in stock investment.

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