Financial evaluation and analysis is a process which is used by the companies and the investors and financial analyse of the company to analyze the performance of the company in context with the finance. This process evaluates the budgets, projects, financial related entities etc of an organization to identify the suitability and the performance of the company. Normally, financial analysis process is used by the related parties to identify that whether the organization is stable, liquid, solvent and profitable enough to manage the performance and the position in the industry. Financial analyst and the financial manager of a company evaluate the financial statement and the financial transaction of a company to generate the idea about the performance of the company.
There are various tools to evaluate the financial performance of the company. All the tools are used by the companies to generate a basic idea about the different business transactions and the decisions of the company. In the report, British airways has been taken into the concern and the ratio analysis study has been conducted on the company to generate an idea about the stable, liquid, solvent and profitable position of the company.
“British airways” is the largest airline on the basis of fleet size in United Kingdom. The company has been founded in 1974. The head office of the company has based in Waterside at London Heathrow Airport. The company has been merged with a company, Iberia to diversify the market. The British airways are offering its services at many destinations in Australia as well as at international level. Currently, company is serving into 183 destinations. Company is registered in London stock exchange by the name of Boeing Company (Home, 2018). The financial evaluation explains that the last few decades was not that much good for the company. Various up and down has been faced by the company in last few decades.
The financial statement of the company has been evaluated to identify the performance of the company. The ratio analysis study has been conducted on the company to generate an idea about the stable, liquid, solvent and profitable position of the company as well as the changes into the financial statement of the company has also been evaluated on the basis of year 2013 to analyze that how much changes have occurred into the financial performance of the company in last five years.
Ratio analysis is a quantitative analysis which evaluates information that is combined in the financial statement of a company. Ratio analysis study is used by the companies to evaluate the various financial aspect of an organization. It explains about the stable, liquid, solvent and profitable position of the company. The ratio analysis study of the company is as follows:
Profitability ratios express about the ability of a business that is used to generate the earnings of an organization in comparison with the expenses and other related cost of the company in a particular time period. Profitability ratios make it easier for the investors and the analyst of the company to evaluate about the profitability level of the company. There are various ratios on the basis of that profitability position of an organization could be evaluated such as net profit margin, return on equity, return on assets etc. (Dewachter et al, 2015)
Return on assets measures the total profit which has been generated by the company against the total resources which has been used to generate the profit. The return on assets of British airways has been calculated and it has been found that the ROA of the company has been enhanced from 5.48% to 8.88% in 2017 from 2015.
|
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 measures the total profit which has been generated by the company against the total stockholder’s equity which has been invested to generate the profit. The return on equity of British airways has been calculated and it has been found that the ROE of the company has been enhanced from 82% to 96% in 2017 from 2015.
|
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 explains about the total profit of the company against the sales revenue of the company. The profit margin of the company has been evaluated further to recognize the profit position of the company and it has been found that the profit margin of the company has been enhanced from 5.39% to 8.78% in 2017 from 2015 (Bekaert & Hodrick, 2017).
|
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 express about the combination of assets and liabilities of the company and evaluates about the performance of the company. Efficiency ratios are used by the companies and the financial analyst to evaluate the commercial performance of the company. It measure the total time period in which the cash conversion cycle of an organization competes. There are various ratios on the basis of that efficiency position of an organization could be evaluated such as receivable turnover ratio, inventory turnover ratio, payable turnover ratio etc.
Inventory turnover ratio explains about the total time in which the inventory of an organization would be sold and new inventory would take place. Inventory turnover ratio of the company explains that the turnover times are quite similar in last 3 years. The company is following the same policies to manage the inventory.
|
Inventory Turnover |
||||
|
Average Inventory / |
47257000 |
43199000 |
44344000 |
|
|
Cost of Sales |
82024000 |
80731000 |
75996000 |
|
|
Answer: |
0.58 |
0.54 |
0.58 |
Inventory turnover days explain about the total days in which the inventory of an organization would be sold and new inventory would take place (Barr & McClellan, 2018). The inventory turnover days of the company are quite similar 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 |
Accounts receivable turnover:
Accounts receivable turnover ratio explains about the total time in which the receivables of an organization would be getting back and new receivables would take place. Accounts receivable turnover ratio of the company explains that the turnover times have been enhanced from 0.066 to 0.105. It explains that few changes have taken place into the receivable policies.
|
Accounts receivable tunrover |
||||
|
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):
Accounts receivable turnover days ratio explains about the total days in which the receivables of an organization would be getting back and new receivables would take place. Accounts receivable turnover ratio of the company has been enhanced from 24.22 days to 38.16 days (Barney & Hesterly, 2006). It explains that few changes have taken place into the receivable policies of the company.
|
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 express about the combination of current assets and current liabilities of the company and evaluates about the capability of the company to pay its short term debt obligation in a particular time period. Liquidity ratios are used by the companies and the financial analyst to evaluate the risk position and the liquidity position of the company. It measure the total times in which the current debt would be paid by the company on the basis of current assets (Wang & Chung, 2015). Liquidity position of an organization could be evaluated on the basis of current liquidity ratio and quick liquidity ratio.
Current ratio of an organization explains about the liquidity position of the company. It evaluates the short term debt payment capability of an organization. The current liquid position of the company explains about the lower rate.
|
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 |
Further, quick ratio of an organization explains about the liquidity position of the company. It evaluates the short term debt payment capability of an organization in terms of those assets which could be liquidated at any time into cash (Pearce, Robinson & Subramanian, 2000). The quick liquid position of the company explains about the lower rate in last 5 years.
|
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
Capital structure ratios evaluate the debt level, asset kevel and equity level of an organization. It measures the overall operations and the growth of the company by using the different sources through which the company has raised the funds. Capital structure position of an organization could be evaluated on the basis of debt, assets and equity level of the company (Lau, 2016). Capital structure ratios of the company are as follows:
Debt to asset ratio explains about the level of debts of an organization in terms of assets of the company. It measures the level of both the sources to identify the risk and return position of the company. Debt to assets ratio of the British airways is 0.112 in current year which has been enhanced from 0.104 in 2015.
|
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 |
(Titman, Keown & Martin, 2017)
Debt to equity ratio explains about the level of debts of an organization in terms of equity of the company. It measures the level of both the sources to identify the risk and return position of the company. Debt to equity ratio of the British airways is 1.214 in current year which has been enhanced from 1.5419 in 2015.
|
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
Investors’ ratios evaluate the market position of the company and measure the performance of the company. It measures the overall operations and the growth of the company in the market. Investment position of an organization could be evaluated on the basis of earnings, stock price etc of the company (Renz & Herman, 2016). Investor’s ratios of the company are as follows:
Earnings per share explain about the total net income of an organization in terms with total outstanding shares of the company. It measures the financial performance of the company. The earnings per share of the company have been 13.605 in 2017. The growth rate explains about the better increment.
|
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 |
Times interest earned ratio:
Times interest earned ratio explains about the earrings before interest and tax of an organization in terms with total interest payable amount of the company. It measures the financial performance of the company. The times interest earned ratio of the company has been 23.54 in 2017.
|
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 |
On the basis of the above calculation and evaluation, it has been found that various changes have occurred into the financial performance and position of the company in last 5 years. The profitability level of the company has been studied firstly and it has been found that the enough profits are generated by the company. The level of the profits has also been enhanced from last years in the current financial year of the company. Though, it has been found that the company should focus on the operating expenses of the company which is quite higher (Finkler et al, 2016). These changes would help the company to earn more. The return on equity and return on asset ratio of the comapny explains that the equity level of the company is quite lower and thus the return on equity of the company is quite higher than the return on assets of the company.
Further, the efficiency ratios of the company have been evaluated which explains about the efficient operations and position of the company. On the basis of calculations, it has been found that the inventory turnover ratio of the company is quite higher which explains about more working capital involvement of the company. So, the company should make few changes into inventory policies so that the working capital involvement could be lower and capital requirement could also be lower (Bekaert & Hodrick, 2017). In addition, the accounts receivable turnover days of the company are quite competitive and it explains about competitive position of the company.
In addition, the liquidity ratios of the company have been evaluated which explains about the liquid position of the company. On the basis of calculations, it has been found that the current liquidity ratio and quick ratios of the company has been lower form 2015 in 2017. These changes are quite competitive and explain about the better position of the company. Currently, the debt payment capability of the company is quite better in terms of industry.
Capital structure ratios have been discussed further. The capitals structure ratio of the company has been evaluated which explains about the risk and return of the company. On the basis of calculations, it has been found that the debt to equity level of the company is quite higher which explains that the level of debt is more than equity level. These changes are quite risky for the company. Though, the debt to asset level of the company is quite better and explains about the competitive position (Vogel, 2014).
Lastly, the investor ratios have been discussed further. The investor ratio of the company has been evaluated which explains about market position of the company. On the basis of calculations, it has been found that the market position of the company is quite better which explains that the investment opportunity of the company is quite attractive. The company is offering good returns to its stockholders.
Conclusion and recommendation:
On the basis of the above findings and discussion, it has been found that the few changes rare required to be done in the organization for the better performance of the company. The company should maintain the performance and the position according to the industry. Company is required t make the changes into its quite level. The equity level should be improved by the company for the better position of the company. On the other hand, inventory management policies are also required to be change to manage the working capital of the company.
To conclude, the current financial performance of the company is quite competitive, various positive changes have taken place into the performance of the company in last 5 years which has made the position of the company more attractive. The investors are recommended to make investment into the company for the great returns.
References:
Barney, J. B., &Hesterly, W. S. (2006). Strategic management and competitive advantage. Upper Saddle River, NJ: Pearson Prentice Hall.
Barr, M. J., & McClellan, G. S. (2018). Budgets and financial management in higher education. John Wiley & Sons.
Bekaert, G., & Hodrick, R. (2017). International financial management. Cambridge University Press.
Bekaert, G., & Hodrick, R. (2017). International financial management. Cambridge University Press.
Dewachter, H., Iania, L., Lyrio, M., & de Sola Perea, M. (2015). A macro-financial analysis of the euro area sovereign bond market. Journal of Banking & Finance, 50, 308-325.
Finkler, S. A., Smith, D. L., Calabrese, T. D., & Purtell, R. M. (2016). Financial management for public, health, and not-for-profit organizations. CQ Press.
Home. (2018). British Airways limited. (online). Reterived as on 27th April 2018 from https://www.britishairways.com/travel/home/public/en_us
Inventors. (2018). Boeing co. (online). Reterived as on 27th April 2018 from https://investors.boeing.com/investors/financial-reports/default.aspx.
Lau, C. (2016). Financial Management. Pearson.
Morningstar. (2018). Boeing co. (online). Reterived as on 27th April 2018 from https://financials.morningstar.com/ratios/r.html?t=BA
Pearce, J. A., Robinson, R. B., & Subramanian, R. (2000). Strategic management: Formulation, implementation, and control. Columbus, OH: Irwin/McGraw-Hill.
Renz, D. O., & Herman, R. D. 2016). The Jossey-Bass handbook of nonprofit leadership and management. John Wiley & Sons.
Titman, S., Keown, A. J., & Martin, J. D. (2017). Financial management: Principles and applications. Pearson.
Vogel, H. L. (2014). Entertainment industry economics: A guide for financial analysis. Cambridge University Press.
Wang. Y, & Chung, Y. (2015). Hotel brand portfolio strategy. International Journal of Contemporary Hospitality Management. 27(4). 561 – 584.
Yahoo finance. (2018). Boeing co. (online). Reterived as on 27th April 2018 from https://finance.yahoo.com/quote/BA/
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