Free Accounting Dissertations - Report To: Management From: Financial Analyst Date: 2nd May 2005 Subject:
REPORT
To: Management
From: Financial Analyst
Date: 2nd May 2005
Subject: EasyJet’s overall performance in 2004
Introduction
This report will outline the overall performance and prospects of EasyJet Plc during the year ending 30th September 2004. In analysing the company’s overall performance in 2004 we will conduct a financial ratio analysis. The purpose of calculating financial ratios is to help assess the position and performance of a business. A ratio simply expresses the relationship of one figure with another figure and, provided the information is available, ratios can usually be calculated with little difficulty. In case of accounting ratios both figures used are taken from the financial statements. By calculating ratios, which reflect key relationship e.g. the relationship between profit and sales, it is possible to reduce the complexity of the profit and loss account and balance sheet to a small number of key ratios.
EasyJet at a Glance
Passengers +20%
Profit Before Tax +21%
Cash on balance sheet rises to £510 million (+52%)
Revenues up to £1.1 billion (+17%)
Number of aircraft that entered service during the year = 22
Number of airports served = 44 (www.easyjet.com)
The above performance indicators show both financial performance as well as more specific non-financial indictors that are important to EasyJet and the Airline Industry.
Financial Ratio Analysis
LEVERAGE RATIO
The debt to equity ratio for the company as at end of 30th September 2004 is 0.7; this means that for every £1 contributed by equity shareholders to finance the business, lenders and creditors have contributed £0.70. Therefore, the company has average gearing ratio to that of the industry average suggesting that there is unused debt capacity. This means the company can borrow more to reinvest in new aircrafts or increase the range of routes being offered to customers. The below average leverage ratio is also due to the fact that EasyJet has never declared or paid dividend to ordinary shareholders, as its policy has been to retain the funds and reinvest it back to the business. Generally speaking, the higher the gearing ratio, the less protection is being offered to creditors. The gearing ratio has increase from 0.5 to 0.7 from 2003 to 2004.
The debt to total assets ratio of 40.4 per cent shows the extent to which lenders and creditors are financing the assets of EasyJet. EasyJet’s current interest coverage ratio shows that the company should not incur any adverse reaction from lenders and creditors should it require more debt financing. Currently the business is generating £18.70 worth of profit to cover each £1 of interest charges.
LIQUIDITY RATIO
The current ratio (liquid assets such as cash, stock and debtors) compared against current liabilities production costs (including marketing) shows that the company appears to have coverage available for short-term obligations. For financial year 2004, we see that the current ratio is 2.
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