Financial ratios are one of the tools that are applied in financial analysis. This is because they help an analyst in creating the overall image of an organization. This is achieved since the ratios provide insight on various aspects of the organization that includes profitability, cash flow ratios, debt ratios and profitability ratios. These ratios are instrumental in ensuring that the analyst understands the financial soundness of the firm before investing in it (Shim and Siegel, 2000). Although these ratios face various shortcomings, they are essential in providing a bird’s eye view of the company from an analytic angle which helps in understating the organization in a detailed perspective. This reduces the chance of making errors that may be costly for the investor.
Gross profit margin is a ratio that is used in financial analysis. This ratio is critical in determining the organizations performance since it helps the organization assess what is causing it (the ratio) to fluctuate. There are two variables that are fundamental in determining the fluctuation of this ratio namely the cost of sales and sales value (Shim and Siegel, 2000). Therefore, the ratio will increase as the sale value increases or if the cost of sales reduces and vice versa. Ryan air realized a growth in its gross profit margin from 14.7% to 15.5%. This will mean that either the organization effectively managed to reduce a cost of sales or increase sales. However, considering that this is an airline business, increase in sales is more realistic than reduction in cost of sales. This is evident from the company books of accounts that show the revenue grew from 4490.2 to 4884. Easy jet posted similar trend where its gross profit ratio rose to 16.6% that can be attributed to improved revenue generation during that year.
Net profit ratio is also integral to financial analysis. This ratio is important in assessing the company performance since it shows the fluctuation in earning on the yearly basis. Therefore, an increase in this value will be a favorable effect to the company since it shows that the company current year earning has increased. The fluctuation in this ration is based on sales and costs. Both Ryan air and easy jet experience an increase in this ratio from 11.6% to 12.7% and 6% to 9.3% respectively. This is attributable to increases sales and improved efficiency in cost management.
Return on equity is also known as return on owners’ investment (Shim and Siegel, 2000). This is obtained through comparing earning attributable to shareholders with equity. This is because the owners have the last claim in a business hence all other financiers of the business have to be paid first before the shareholders. As such, this ratio is useful in determine the ability of the firm to ensure shareholders benefit from their investment. Therefore, one would be keen to monitor the fluctuation of this percentage since an increase in its value has a favorable effect on the firm. Ryan air experiences a reduction in return on capital which means that the company ability to ensure shareholders returns reduces from 17.4% to 16.9% while easy jet experiences an improvement from 14.2% to 19.7%. This shows that Easy jet outdoes Ryan in insuring that return on owner’s investment is guaranteed in case of liquidation. This implies that Easy jet increase in sales, in relation to the capital the shareholders have, is higher than Ryan air.
Return on asset shows the rate at which the organization asset contribute to the company revenue. As a result, this can be viewed as a measure of accuracy and efficiency in utilizing the organization assets to generate income. Ryan air experiences a slight increase in this ratio from 6% to 6.3% while easy jet also experiences a slight increase from 9.2% to 9.3%. However, easy jet assets have higher contribution to revenue generation than Ryan air assets.
Return on capital employed shows the ability of the organization to effectively employ the capital employed to generate income. This is obtained through comparing operating income and the total capital employed. Ryan air experiences a drop inability to use employed capital to generate revenue from 9.25% to 8.8% while easy jet records an increase from 10.4% to 15.7%. Also, easy jet has a higher ratio than Ryan air which implies that easy jet exceeds Ryan air inability to utilize capital employed to generate revenue.
Total debt ratio is a comparison of total liability and total assets. This ratio shows the amount in which debt finance total assets. Ryan air has 63% which is constant for the two years while easy jet ratio drops from 58% to 54% in 2013. This implies that Ryan air finances 63% of its assets on debt while easy jet finances 54% of its asset in 2013 on debt and 58% in 2012. The higher the debt ratio the more riskily a firm is considered to be in relation to investment (Shim and Siegel, 2003).
Total debt to equity ratio is the comparison of the company total debt and equity. This ratio shows the proportion of equity and debt the company is using to finance its assets. Ryan air has a ratio of 1.7 while easy jet has a ratio of 1.2. This means that Ryan uses a higher proportion of debt to finance its assets than easy jet. In addition, even though there is no recommended amount of debt, a company with a lower total debt to equity ratio is more favorable (Morgan, 2011). This is because the company freedom in choosing its activities is not limited by demands from creditors.
Capitalization ratio is a measure of the debt component in the organization capital structure. Therefore, an average level of this ratio is a measure of the organization capital fitness. This is because it shows the company has adequate prudence in leverage usage hence freedom from creditors. There is no amount of debt that is considered right (Brigham and Houston, 2004). Therefore, 0.43 and 0.19 capitalization values in Ryan air and easy jet can only be compared between the two to mean that easy jet uses less of long term debt than Ryan air.
Current ratio shows the ability to meet the organization short term monitory obligation and remain with adequate working capital. The ideal ratio is 2:1. Therefore, Ryan air 2.14 and 1.97 are close to the ideal while Easy jet 1.05 and 1.04 is substantially far from the ideal. This implies that Ryan has a better ability to meet it short term obligation than Easy jet and remain with enough working capital.
Cash ratio shows the ability of the firm to meet its short-term monitory obligation. This differs from one industry to another but 1:2 is considered to be standard. 1.4 is close to 2, therefore, in 2013, Ryan had an adequate solvency to meet short term obligation compared to 0.6 which is way below 2 in 2012. Easy jet had 0.51 and 0.7 in 2012 and 2013 respectively which means the company would experience difficulties in meeting short term obligations. This implies that Easy jet may be overcapitalized since it has allocated more resources in investment than in operations. As such, this compromises the liquidity of the organization in such a manner that it constrains its ability to have adequate funds to meet its obligation as and when they arise (Paramasivan, and Subramanian, 2009). This may be dangerous to the organization since it may compromise its credibility in the eyes of the creditors.
Free cash flow to Operating cash flow shows the proportion of cash flow that is available to the firm that is not committed to investment. Therefore, 0.81 means 81% of that free cash flow is available for usage in 2013 by Ryan air and 31% is available for usage by Easy jet. This means that Ryan air has a larger ability to finance capital expenditure from internal sources than easy jet. Also, Ryan air ability to finance capital expenditure internally improves in 2013 while Easy jet stagnates at 0.31.
Dividend coverage ratio is the number of times an organization can meet the obligation to pay dividends. This implies that Ryan can meet 2 times dividend payouts in 2013 while easy jet can manage 3.2 times in the same year while Ryan can meet the payment of dividend 1.97 times in the year 2012 while easy jet can meet 1.3 times in the similar period. This implies that the ability to cover divided into Ryan improves hence ensuring that they can deliver more return to the investor capital in 2013 than in 2012. Easy jet also observes a similar trend
Capital expenditure coverage ratio is the measure of the company ability to acquire long term assets using internal funds. The higher the ability, the more the company is perceived to be stronger (Paramasivan, and Subramanian, 2009). Ryan air has a value of 0.5 and 5. 53 which mean in 2012 the company can only manage to finance 0.5 of its capital expenditure from internal sources while, in 2013, it can finance 5.53 times of its capital expenditure internally. Easy jet 1.15 means it can finance 1.15 times of capital expenditure in 2013 and 0.67 in 2012.
Net book value per share is the comparison of the value of a share in relation to the company net assets. In both years, both shares have been fairly valued by the market since there is only a slight difference in the annual average value at the market price of a share and the net book value per share. Also, the market prices are within a close range with the market price average since the fluctuation in prices are small hence they can be termed as stable. Such securities are not favorable for an investor who wishes to accumulate capital gains since there is minimal chance of capital gains due to the small fluctuations and the matching of net book value and market price. As such, one should obtain such shares with the aim of receiving dividends.
Ryan air has a higher payout ratio that easy jet in both years. However, each record an increase in the payout ratio meaning that they paid more dividends in terms of proportions of the earning per share in 2013 compared to 2012. Also, Ryan air has a better dividend policy than Easy jet since it pays more dividends to its shareholders. This minimizes the chances of conflict of interest between the board and shareholders (Paramasivan, and Subramanian, 2009). However, this means the company accumulates reserves at a slower pace than Easy jet it retains less proportion of its profit.
Brigham, EF, and Houston, JF, 2004, Fundamentals of financial management (10th ed.). Mason, Ohio: Thomson/South-Western.
Morgan, G, 2011, financial management (3rd ed.), London: BPP Learning Media.
Paramasivan, C, and Subramanian, T, 2009, financial management. New Delhi: New Age International (P) Ltd., Publishers.
Shim, JK and Siegel, JG, 2000, Financial management (2nd ed.). Hauppauge, N.Y.: Barron's.
Shim, JK and Siegel, JG, 2003, Financial management (3nd ed.). Hauppauge, N.Y.: Barron's.