Free Accounting Dissertations - 8 In 2003. The Quick Ratio (excludes Stock) And The Current Ratio For Easyjet
8 in 2003. The quick ratio (excludes stock) and the current ratio for EasyJet is one of the same, as EasyJet does not carry any physical production stock. With a ratio of 2.2 EasyJet has £2.20 worth of current assets for every £1 worth of current liabilities. This ratio of 2:1 would be considered satisfactory.
OPERATIONAL RATIOS
Operational (activity) ratios will highlight how efficiently the resources of the business are being managed. The most important of which is linked to stock. As EasyJet is not in the business of manufacturing any physical products but in the business of providing air travel those ratios are inappropriate. More industry specific non-financial (none balance sheet and profit and loss oriented) ratios/indicators should be considered. Such as the increase in passengers, Number of aircrafts that entered the service during the year, revenue passenger kilometre (RPK), number of airports served, and number of new routes served. Indicators such as 81 per cent of flights arriving within 15 minutes which is 7 per cent better than 2003 are more appropriate operational measurements.
PROFITABILITY RATIOS
This will highlight the operating performance of the business. The first indicator is the Gross profit margin, showing trading performance of the company declining from 16.8 per cent at 2003 down to 14.8 per cent by 2004. The decrease in the gross profit margin and the corresponding increase in sales suggest that EasyJet has lowered fares in order to stimulate sales. This is due to the extensive price competition from rival low cost airline Ryanair. The Net profit margin however, has increased from 3.5 per cent to 3.8 per cent in 2004. This indicates that the company has become more cost efficient in distribution and marketing activities. The Return on Equity (ROE) has also increased from 4.3 to 5.2. This ratio shows that the return the equity shareholders are receiving from their investment in EasyJet. The Return on Capital Employed (ROCE) considers the profit available to suppliers of long-term capital; this has decrease slightly from 5.88 to 5.33. The decline in this ratio is not significant enough to concern investors and lenders, however, EasyJet may want to consider its ticket pricing policy. The high ROCE ratio indicates that EasyJet is fully utilising its assets in generating sales.
CASH FLOW
A high cash flow coverage ratio of 28.07 suggests that EasyJet has the capacity to take on additional debt; failure to do so may indicate that the management is not availing itself of a relatively cheap form of finance. However, when we consider last years ratio of 52.3 we can see that management have this year been utilising more of this cheap debt capital. EasyJet is very cash rich with cash flow from operating activities more then doubling from 77.2 million to 160.5 million this year. Operating cash flows have resulted in EasyJet increasing cash in the year of 179.7 million.
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