Company Overview
Evaluation on the financial statement of an organization is a process that helps the companies, professionals, investors and the other stakeholders to identify the real performance of the company and make better choices about the performance and the investment into the company. In this process, all the financial related entities such as budgets, projects, financial statement, and financial transactions etc of the business is identified and evaluated to reach over a conclusion. Basically, these studied are conducted by the different parties for different purpose. In context with the investors, financial analysis process is done to measure the stability level, profitability, liquidity, solvency etc level of the business to make an investment decision into the company (Higgins, 2012). In context with the financial manager, the financial statement of the company is studied to make an idea about the overall performance of the company and make the changes into the current policy and strategy of the company.
Financial analysis process includes various tools and techniques through which the financial performance of an organization could be evaluated easily as well as the position of the business could be maintained. In this report paper, ratio analysis, trend analysis etc study has been conducted on “British airways” to reach over a conclusion about the investment into the company.
“British airways” is an UK company which has been awarded as largest airline in 2017 in context with the fleet size. The operations and the activities of the company are handled by the head office of the company which is situated at Waterside at London Heat. It has been founded in the year of 1974 and from that, the company has merged with other company to diversify the market and manage the performance of the company. the company is offering its products and the services at international destinations which also include the Australian destinations. The current report explains that the company is serving into approx 183 destinations (Home, 2018). The financial analysis and evaluation explains that the company has faced various phases in last few years however the current performance of the company has been stable.
The financial evaluation study has been done on the financial statement of “British airways” to measure the financial performance and the financial changes of the company. the study of ratio analysis has been done on the company initially to evaluate the stability, profitability, liquidity, solvency etc level of the business to make an investment decision into the company. In addition, this study has also been performed to measure the changes into the financial performance of the company in last 3 years.
The study of ratio analysis is a technical and quantitative analysis that measures the information and the idea about the financial performance, changes and the position of the company (Gapenski & Reiter, 2008). This study is used by the investors as well as by the companies to evaluates and measure the numerous aspect related to the financial performance of the company. It further explains that how the company is performing in context with the stability, profitability, liquidity, solvency level. The ratio analysis of British airways is as follows:
Analysis and Findings
Profitability ratios are one of the crucial tools to measure the profit generation level of the business. It measures the net profit, gross profit and operating profit of the business through different financial term to measure the profit generation capabilities of the business. the profitability ratios make it easier for the analyst and the investors of the organization to measure the profit generation level of the business. Profitability ratios include various ratios to identity the profitability performance of the company. the profitability ratios of the company are as follows:
Return on assets (ROA) is a profitability ratio which measures the net profit of the business on the basis of the total resources of the business at a particular time period (Fridson & Alvarez, 2011). The ROA profitability level of British airways has been given in the below table which explains about improved return on assets from 2015 in 2017. The current ROA level of the business is 8.88% which is quite competitive.
|
Return on assets |
|
|
|
|
|
Net profit / |
51,76,000 |
48,95,000 |
81,97,000 |
|
|
Total assets |
9,44,08,000 |
8,99,97,000 |
9,23,33,000 |
|
|
Answer: |
% |
5.48% |
5.44% |
8.88% |
(Morningstar, 2018)
Return on equity (ROE) is a profitability ratio which measures the net profit of the business on the basis of the total equity of the business at a particular time period. The ROE profitability level of British airways has been given in the below table which explains about improved return on assets from 2015 in 2017 (Brigham & Houston, 2012). The current ROE level of the business is 96% which is quite competitive
|
Return on equity |
|
|
|
|
|
Net profit / |
51,76,000 |
48,95,000 |
81,97,000 |
|
|
Total stockholder’s equity |
63,35,000 |
81,70,000 |
85,50,000 |
|
|
Answer: |
% |
82% |
60% |
96% |
Profit margin (net profitability level) is a profitability ratio which measures the net profit of the business on the basis of the total turnover of the business at a particular time period (Madhura, 2011). The profit margin level of British airways has been given in the below table which explains about improved profit margin from 2015 in 2017. The current profit margin of the business is 8.78% which has been improved from 5.39% in 2015.
|
Profit margin |
|
|
||
|
Net profit / |
51,76,000 |
48,95,000 |
81,97,000 |
|
|
Sales Revenue |
% |
9,61,14,000 |
9,45,71,000 |
9,33,92,000 |
|
Answer: |
5.39% |
5.18% |
8.78% |
Figure 1: Profitability Ratios
Asset efficiency ratios are one of the crucial tools to measure the combination of total liabilities and assets of the company in order to identify the performance of the company. It measures the commercial performance of the business through different financial term to measure the working capital management capabilities of the business. The efficiency ratios make it easier for the analyst and the investors of the organization to measure the overall performance of the business (Chandra, 2011). Efficiency ratios include various ratios to identity the working capital management and performance of the company. The asset efficiency ratios of the company are as follows:
Inventory turnover ratio is an efficiency ratio which measures the total times in which the inventory of the business is sold and purchased. The inventory turnover level of British airways has been given in the below table which explains about similar performance of the company in last 3 years.
|
Inventory Turnover |
|
|
|
|
Average Inventory / |
47257000 |
43199000 |
44344000 |
|
Cost of Sales |
82024000 |
80731000 |
75996000 |
|
Answer: |
0.58 |
0.54 |
0.58 |
Inventory turnover days are an efficiency ratio which measures the total time period in which the inventory of the business would be turned. The inventory turnover level (days) of British airways has been given in the below table which explains about similar performance of the company in last 3 years
|
Inventory Turnover (days) |
|
|
|
|
|
Average Inventory / |
4,72,57,000 |
4,31,99,000 |
4,43,44,000 |
|
|
Cost of Sales |
# days |
8,20,24,000 |
8,07,31,000 |
7,59,96,000 |
|
Answer: (note the above needs to be x 365) |
210.29 |
195.31 |
212.98 |
Profitability ratios
Accounts receivable ratio is an efficiency ratio which measures the total time in which the debtor’s amount would be received and new debtor’s amount would take place (Rose & Hudgins, 2012). The accounts receivable turnover level of British airways has been given in the below table which explains about improved level of the company in last 3 years. It explains that more working capital is required by the business now.
|
Accounts receivable turnover |
|
|
|
|
Average trade debtors / |
8003000 |
7804000 |
9763000 |
|
Sales revenue |
9,61,14,000 |
9,45,71,000 |
9,33,92,000 |
|
Answer: |
0.083 |
0.083 |
0.105 |
Accounts receivable turnover days ratio is an efficiency ratio which measures the total time period in which the debtor’s amount would be received and new debtor’s amount would take place. The accounts receivable turnover days level of British airways has been given in the below table which explains about improved level of the company in last 3 years. It explains that more working capital is required by the business now.
|
Receivables Turnover (days) |
|
|
|
|
|
Average trade debtors / |
80,03,000 |
78,04,000 |
97,63,000 |
|
|
Sales revenue (note used operating revenue) |
# days |
9,61,14,000 |
9,45,71,000 |
9,33,92,000 |
|
Answer: (note the above needs to be x 365) |
30.39 |
30.12 |
38.16 |
Figure 2: Efficiency Ratios
Liquidity ratios are one of the crucial tools to measure the short term debt payment capability of the company in order to identify the risk level and the performance of the company. It measures the liquidity performance of the business through current assets and current liabilities to measure that whether the business would be able to repay all the current liabilities at any time (Rabin, 2013). The liquidity ratios make it easier for the analyst and the investors of the organization to measure the overall performance and the risk level of the business. Liquidity ratios include various ratios to identity the short term debt payment capability of the company. The liquidity ratios of the company are as follows:
Current ratio measures the current assets and liabilities of an organization to identify that whether the company has sufficient current assets to repay the current liabilities at any time. Current ratio makes it easier for the management of the company to measure the overall performance of the company. the current ratio of the company explains about lowered performance in current year. However, the company could repay the amount easily to the creditors of the company.
|
Current Ratio |
|
|
|
|
Current Assets / |
6,82,34,000 |
6,24,88,000 |
6,51,61,000 |
|
Current liabilities |
5,04,12,000 |
5,01,34,000 |
5,62,69,000 |
|
Answer: |
1.35 |
1.25 |
1.16 |
Quick ratio measures the quick assets and liabilities of an organization to identify that whether the company has sufficient quick assets to repay the current liabilities at any time. The quick ratio of the company explains about lowered performance in current year (Porcelli & Delgado, 2009). It explains that the risk level of the company is higher and company is required to improve the level of the assets to manage the performance.
|
Quick ratio |
|||
|
Current Assets – Inventory / |
2,09,77,000 |
1,92,89,000 |
2,08,17,000 |
|
Current Liabilities |
5,04,12,000 |
5,01,34,000 |
5,62,69,000 |
|
Answer: |
0.42 |
0.38 |
0.37 |
Figure 3: Liquidity ratio
(Morningstar, 2018)
Capital structure ratios are one of the crucial tools to measure the capital performance and asset, liability and equity level of the business (Mandell & Hanson, 2009). It measures the cost and risk performance of the business through identifying the changes into the capital structure of the business. The capital structure ratios of British airways are as follows:
Debt to asset ratio of British airways explains that the debt level of the business has been improved in context with the assets level. It explains that the leveraged position of the company has been better.
|
Debt to assets ratio |
|
|
|
|
|
Total debt / |
98,14,000 |
98,14,000 |
1,03,79,000 |
|
|
total assets |
9,44,08,000 |
8,99,97,000 |
9,23,33,000 |
|
|
Answer: |
% |
0.104 |
0.109 |
0.112 |
Return on assets
Further, debt to equity ratio of British airways explains that the debt level of the business has been lowered in context with the equity level. It explains that the risk level and cost level must be evaluated again by the company.
|
Debt to equity ratio |
|
|
||
|
Total debt / |
98,14,000 |
98,14,000 |
1,03,79,000 |
|
|
Total equity |
63,35,000 |
81,70,000 |
85,50,000 |
|
|
Answer: |
% |
1.549 |
1.201 |
1.214 |
Figure 4: Debt to equity ratio
Lastly, the investors’ ratios have been evaluated in order to identify the market position and the performance of the British airways. These ratios measure the investment level of the company in the market (Koropp et al, 2014). The investor’s ratio of the company is as follows:
Earnings per share (EPS) ratio explain the total earnings of the shareholder on the basis of the total earnings and the total stakeholders of the business. the EPS explains that the overall earnings of the company has been improved and explains about better performance of the company.
|
Earnings per share |
|
|
|
|
Net income |
51,76,000 |
48,95,000 |
81,97,000 |
|
Weighted average shares outstanding |
6,86,900 |
6,35,500 |
6,02,500 |
|
Answer: |
7.535 |
7.703 |
13.605 |
(Yahoo Finance, 2018)
Further, the times interest earned ratio of the company has been measured which explains about total interest amount in context with the EBIT of the company. The times interest earned ratio explains about improved performance of the company.
|
Times interest earned ratio |
|
|
|
|
EBIT / |
72,34,000 |
55,97,000 |
1,01,23,000 |
|
Interest payable |
3,39,000 |
3,65,000 |
4,30,000 |
|
Answer: |
21.339 |
15.334 |
23.542 |
Figure 5: Investor’s ratios
The above calculations and the analysis on the British airways explain that the company has faced various phases in last 3 years. Various levels of the business have been measured of last 3 years to identify the overall performance of the company. Firstly, the profitability position of the company has been studied and it has been found that the overall profit generation capabilities of the company have been improved. However, it has also been estimated that the operating expenses of the company are quite higher and due to which the net profits of the company are lower (DemaMoreno, 2009). If the organization would control on these expenses than the overall performance of the business would be better in terms of profitability.
Further, the efficiency ratios have been evaluated and it has been found that the overall ratios of the company explain that the high working capital is required by the company in current year to manage the performance of the company. It explains that few changes into the inventory level would improve the performance of the company and the requirement would also be lower.
Additionally, the liquidity ratios have been measured and it has been found that the current and quick liquidity level of the company has been lower form 2015 in 2017. It explains about lower cost of the company (Branes, 1987). However, it has been found that the business is required to improve the asset level to reduce the cost level.
Capital structure ratios further explains that the debt level of the company is required to be modified by the business on the basis of the risk and return of the business. the current capital structure is not optimal and thus few changes would help the business to improve the overall performance of the company.
Lastly, the investor ratios explain about overall investment position and the market level of the company (Investors, 2018). On the basis of calculations, market position of the company is quite better and thus if the investors would invest into the company than the return would be higher. It further explains about better position of the company in the stock market and non financial market.
Conclusion and recommendation:
To conclude, the financial performance of the company is average and thus few changes are required to be done by the business to improve the overall position of the company. The calculations and the findings on the British airways explain that the few changes into the financial policies and strategies would make the better changes into the overall financial level. The business is required to change the current assets, debt and equity level, inventory level etc to improve the overall position of the business. These changes would also reduce the financial risk of the company.
The analysis and the evaluation explain that the current financial performance and position of the company is better than the previous year performance of the company. Various positive changes and the better return level have taken place into the British airways’ performance in last 3 years. Due to which, the overall performance of the company have become more attractive. Through the study, it is recommended to the investors to invest into the firm for long term as it would offer higher return to the company.
References:
Barnes, P. (1987), The Analysis and Use of Financial Ratios: A Review Article, Journal of Business Finance & Accounting, 14 (4), p. 449-461
Brigham, E. F., & Houston, J. F. (2012). Fundamentals of financial management. Cengage Learning.
Chandra, P. (2011). Financial management. Tata McGraw-Hill Education.
DemaMoreno, S. (2009). Behind the negotiations: Financial decision-making processes in Spanish dual-income couples. Feminist Economics, 15(1), 27-56.
Fridson, M. S., & Alvarez, F. (2011). Financial statement analysis: a practitioner’s guide (Vol. 597). John Wiley & Sons.
Gapenski, L. C., & Reiter, K. L. (2008). Healthcare finance: an introduction to accounting and financial management. Chicago, IL: Health Administration Press.
Higgins, R. C. (2012). Analysis for financial management. McGraw-Hill/Irwin.
Home. (2018). British Airways limited. (online). Retrieved 30-07-2018, from https://www.britishairways.com/travel/home/public/en_us
Investors. (2018). Boeing co. (online). Retrieved 30-07-2018, from https://investors.boeing.com/investors/financial-reports/default.aspx.
Koropp, C., Kellermanns, F. W., Grichnik, D., & Stanley, L. (2014). Financial decision making in family firms: An adaptation of the theory of planned behavior. Family Business Review, 27(4), 307-327.
Madura, J. (2011). International financial management. Cengage Learning.
Mandell, L., & Hanson, K. O. (2009, January). The impact of financial education in high school and college on financial literacy and subsequent financial decision making. In American Economic Association Meetings (Vol. 4, p. 2009).
Morningstar. (2018). Boeing co. (online). Retrieved 30-07-2018, from https://financials.morningstar.com/ratios/r.html?t=BA
Porcelli, A. J., & Delgado, M. R. (2009). Acute stress modulates risk taking in financial decision making. Psychological Science, 20(3), 278-283.
Rabin, M. (2013). Risk aversion and expected-utility theory: A calibration theorem. In Handbook of the Fundamentals of Financial Decision Making: Part I (pp. 241-252).
Rose, P. S., & Hudgins, S. C. (2012). Bank management & financial services. McGraw-Hill Education.
Yahoo finance. (2018). Boeing co. (online). Retrieved 30-07-2018, from https://finance.yahoo.com/quote/BA/
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