Role Of Accounting Information In Business: Financial Statement Analysis Of British Airways And Easy Jet

Description and analysis of the role of accounting information in a business context

Describe and analyse the role of accounting information in a business context.

Analyse a set of financial statements including balance sheet, profit and loss accounts and cash flow statements.

Demonstrate the relationship between accounting data and financial planning and resource allocation decisions.

Financial statement analysis refers to the process of scrutinizing and evaluating financial declarations of a corporation in a bid to arrive at better economic decisions. The analysis of the financial declarations can help the owners of the business concern as well as other interested users of the financial statements to evaluate the data available from the financial declarations. The present study concentrates on the crucial assessment of the financial declarations as well as analysis of monetary results during a specific period of time by using the important financial ratio. In this particular case, the study draws special reference to the operations of British Airways and Easy Jet Plc. British Airways also popularly known as BA is essentially considered the largest airline in the United Kingdom in terms of the size of the fleet and is the second largest only after Easy Jet in United Kingdom, based on the total number of passenger carried (Britishairways.com. 2016). However, The Easy Jet is regarded a low cost carrier (LCA) in Britain that operates in both domestic as well as international services scheduled  in 32 different nations (Corporate.easyjet.com. 2016).

The financial data that can be accessed from the financial declaration of the two companies British Airways and Easy jet can be analysed for the purpose of understanding the financial conditions of the two firms. Therefore the financial statement analysis of the two firms can help in carrying out a comparative analysis of the financial conditions of the two corporations over a period of three years that is the 2013, 2014 and 2015. In addition to this, the financial statement analysis can help in the providing the users of the financial information with important information regarding key factors that can help in decision making and finally assist in survival of the business.

Comparison of the performance of the companies selected based on these ratios

 As rightly put forward by Davies and Crawford (2012), there is essentially two factors that can affect the survival of the business. The survival factors include the profitability and the solvency. The profitability of a business concern primarily depends on the capability of a business to generate revenue that is essentially in excess of the total expenses incurred by the corporation. However, the solvency of a corporation mainly refers to the potential of a firm in meeting the requirements of the financial compulsion. The financial statement can also be used to analyse the financial performance and position of a firm and help in prediction of the future performance of the corporation with special orientation to the operations of British Airways and Easy Jet. The comparative analysis by way of the financial statement analysis can be in terms of the intra company basis, intercompany basis and at the same time industry average. The financial ratio can also be classified into five different classers that consist of the profitability ratio, the liquidity ratio, efficiency ratio, market performance test ratio as well as the capitalisation ratio (Eisen 2014)

Comparison of the performance of the companies selected based on these ratios

Ratio Analysis

Profitability Ratio:

Gross Profit Margin

As rightly put forward by Harrison, Horngren and Thomas (2013), the gross profit margin refers to a significant profitability ratio that enumerates the percentage of total sales that can surpass the total costs of revenue or n other words the costs of the goods sold. The gross profit margin computes the efficiency of a corporation in utilizing the available materials as well as labours for the purpose of manufacturing and selling the products and services of the corporation effectively. The gross profit margin of British Airways is computed to be 61.13418302 in 2013, 58.08446257 in 2014, and 58.15162272 in 2015 (Britishairways.com 2016). The gross profit margin has decreased during the 2014 and 2015 as compared to the figure registered in 2013. The decrease in gross profit margin over the three years put forwards the fact that the efficiency of the management of the company to generate profit out of the sales of the company y has decreased. Again, the gross profit margin for Easy Jet is recorded to be 21.98215124 in 2013, 23.12789927 in 2014 and 25.86427657 (Corporate.easyjet.com 2016). The gross profit margin for Easy Jet shows a steady increase over the three years. This reflects the fact that the efficiency of the company to generate greater amount of profit out of the sales has increased over the years. However, the gross profit margin of British Airways is comparatively greater than that of the Easy Jet. This implies that the British Airways is superior in terms of the potential of the firm to convert into profit out of the sales (Horngren 2013).

Gross Profit Margin
British Airways	2013	2014	2015
Gross Profit	426900	441500	458700
Sales	698300	760100	788800
Ratio	61.13418302	58.08446257	58.15162272
Gross Profit Margin
Easy Jet
Gross Profit	936000	1047000	1212000
Sales	4258000	4527000	4686000
Ratio	21.98215124	23.12789927	25.86427657

Table 1: Gross Profit Margin

(Source: Created by Author)

Graph 1: Gross Profit Margin

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The return on equity essentially represents an important dimension of the profitability of a firm that can enumerate the total profit that the company can create out of the equity of the shareholders of the corporation (Kemp and Waybright 2013).  The return on equity of British Airways is registered to be 17.89188665 in 2013, 11.98163734 in 2014 and 20.70904264 in 2015 (Britishairways.com 2016). The return on equity of the firm significantly decreased during the year 2914 as compared to the figure recorded during the year ago period. However the same ratio again registered an increase during the period 2015. This indicates that the efficiency of the firm to generate returns on the invested equity increased during the period 2015. On the other hand, the return on equity of the Easy Jet is recorded to be 18.06627326 in 2013 that again increased to 19.18976546 in 2014 and thereafter to 23.38881776 in 2015 (Corporate.easyjet.com 2016). The increase in the return on equity is a sign of positive financial condition of the corporation as the rate of return on equity investments have steadily increased during the period. Again, the return on equity of Easy Jet is comparatively greater than that of the British Airways.

Ratio Analysis

Graph 2: Return on Equity

(Source: Created by Author)

Return On Equity
(British Airways)	2013	2014	2015
Profit after interest and tax	123500	78300	132600
Owner’s Equity	690257	653500	640300
Ratio	17.89188665	11.98163734	20.70904264
Return On Equity
Easy Jet
Profit after interest and tax	398000	450000	548000
Owner’s Equity	2203000	2345000	2343000
Ratio	18.06627326	19.18976546	23.38881776

Table 2: Return on Equity

(Source: Created by Author)

Liquidity Ratio:

Current Ratio:

Graph 3: Current Ratio

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Current Ratio
(British Airways)	2013	2014	2015
Current Assets	446893	390800	409900
Current Liabilities	269545	293800	304400
Ratio	1.657953217	1.330156569	1.346583443
Easy Jet
Current Assets	1448000	1261000	1279000
Current Liabilties	1379000	1420000	1768000
Ratio	1.050036258	0.888028169	0.72341629

Table 3: Current Ratio

(Source: Created by Author)

The current ratio refers to the ability of a corporation to return or pay back the short term obligations in terms of debt (Needles and Powers 2012). The ideal benchmark for particular ratio is 2:1 that reflects the fact that the current assets of a corporation need to be exactly double to that of the current liabilities of a corporation. The corporation that possesses double the current assets in terms of the current liabilities is said to have a favourable or else a desirable financial condition. British Airways recorded a current ratio of the 1.65 during the year 2013. However, the current ratio of the company decreased to 1.3 during the year 2014 (Britishairways.com 2016). Again, the ratio increased during 2015 to 1.34 although insignificantly.

On the other hand, the current ratio of Easy Jet is recorded to be 1.05 during the year 2013 that decreased in the subsequent year to 0.88 during the year 2014 and to 0.77 during the year 2015 (Corporate.easyjet.com 2016). The decrease in current ratio of Easy Jet represents an unfavourable condition as the current assets of the company have considerable decreased in comparison to the current liabilities (Needles and Powers 2012). Furthermore, the current ratio of the British Airways is greater than that of the Easy Jet. This indicates that the financial condition of the British Airways is comparatively better than that of the Easy Jet during the particular period although the ratio has decreased over the years.

Quick Ratio

Graph 4: Quick Ratio

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Quick Ratio
(British Airways)	2013	2014	2015
Cash and cash equivalents	168160	185200	207100
Current Liabilities	269545	293800	304400
Ratio	0.623866145	0.63036079	0.680354796
Easy Jet
Cash and cash equivalents	1013000	424000	650000
Current Liabilities	1379000	1420000	1768000
Ratio	0.734590283	0.298591549	0.367647059

Table 4: Quick Ratio

(Source: Created by Author)

The quick ratio represents the firm’s capability to meet up the current liabilities by using the current assets possessed by the corporation except the inventory (Shim, Siegel and Shim 2012). The quick ratio is obtained by dividing the quick assets of the firm by the current liabilities. The quick assets of a business concern essentially consist of the cash and the marketable securities. Based on the financial declaration for the three year 2013, 2014 and 2015, the quick ratio for the British Airways is calculated to be 0.623866145 during 2013, 0.63036079 during 2014 and 0.680354796 during 2015 (Britishairways.com 2016). The results of the ratio analysis reveal the fact that the quick ratio of British Airways have increased during the three years although insignificantly.

Gross Profit Margin

On the contrary, the quick ratio for Easy Jet is enumerated to be 0.734590283 in 2013, 0.298591549 in 2014 and 0.367647059 in the year 2015 (Corporate.easyjet.com. 2016). The quick ratio of Easy Jet has decreased significantly during the year 2014 and 2015 as compared to the year 2013.  The decrease in the quick ratio indicates an unfavourable condition as it reflects the fact that the quick assets are comparatively greater than the current liabilities (Warren, Reeve and Duchac 2013). The lower ratio implies a decrease in liquid position and an undesirable financial condition. The quick ratio of Easy Jet is comparatively higher than that of the Easy Jet during 2013. However, the quick ratio of British Airways is higher than that of the Easy Jet during the years 2014 and 2015. Therefore, the financial condition of British Airways is comparatively better than that of Easy Jet based on the outcomes of the quick ratio.

Efficiency Ratio

As rightly indicated by Warren, Reeve and Duchac (2013), the accounts receivable turnover ratio is essentially computed by dividing the overall annual sales of the corporation by the average receivable balance of the corporation during a specific period of time. In other words, this particular ratio also represents the efficiency of the firm to collect the receivables effectively (Deegan 2013). The receivable turnover ratio of British Airways is recorded to be 63.75085923 in 2013. The ratio of British Airways increased to 65.6433364 during 2014 and thereafter the ratio again declined to 64.45803753 in 2015 (Britishairways.com 2016). The decrease in the ratio during the year 2015 reflects the fact that the company isles frequently collecting the receivables during the year 2015 as compared to the year ago period. Again, the asset turnover ratio of Easy Jet is registered to be 11.14372945 in 2013, 8.869008173 in 2014 and 9.346991037 in 2015 (Corporate.easyjet.com 2016). The asset turnover ratio for Easy Jet first decreased during the year 2014 as compared to the figure registered during 2013. However the figure also increased to 9.346991037 during 2015 from 8.86900 in 2014. The asset turnover ratio of British Airways is therefore higher than that of the Easy Jet that in turn reflects a better financial condition of the British Airways.

Graph 5: Receivable turnover Ratio

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Receivable Turnover Ratio	2013	2014	2015
(British Airways)
Receivables	121965	136700	139300
Credit Sales	698300	760100	788800
Ratio	63.75085923	65.6433364	64.45803753
(Easy Jet)
Receivables	130000	110000	120000
Credit sales	4258000	4527000	4686000
Ratio	11.14372945	8.869008173	9.346991037

Table 5: Receivable turnover Ratio

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Asset Turnover Ratio

Graph 6: Asset Turnover Ratio

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Asset Turnover Ratio
British Airways	2013	2014	2015
Net Sales	698300	760100	788800
Average Total Assets	1030668	1010300	1029000
Ratio	247.2954433	274.6080372	279.797862
Asset Turnover Ratio
Easy Jet
Net Sales	4258000	4527000	4686000
Average Total Assets	4412000	4482000	4828000
Ratio	352.2597461	368.6646586	354.2647059

Return on Equity

Table 6: Asset Turnover Ratio

(Source: Created by Author)

Asset turnover ratio represents the efficiency of different corporations to employ assets. This ratio refers to the ability or else the efficiency of the usage of the assets possessed by the firm to generate revenue out of the sales (Vogel 2014). The asset turnover ratio is primarily computed by dividing the total sales of the firm by the average assets and then multiplying the same by 365 days (Watts 2013). The asset turnover ratio for British Airways is recorded to be 247.2954433 in 2013, 274.6080372 in 2014 and 279.797862 in 2015. The increase in assets turnover ratio reflects the fact that the company is utilizing the assets effectively (Britishairways.com 2016). On the other hand, the asset turnover ratio of Easy Jet is registered to be 352.2597461 in 2013, 368.6646586 in 2014 and 354.2647059 in 2015 (Corporate.easyjet.com. 2016). This ratio of Easy jet has decreased during 2015 as compared to the year ago period indicating an unfavourable condition. The asset turnover ratio of Easy Jet is better than that of the British Airways and indicates greater efficiency of the company in comparison to the other.

The examination of financial announcements by making use of the important ratio is vital for understanding the financial information of the corporation, identifying with the existing financial trends that are visible over a specific period and evaluating the overall financial circumstances of the business unit. Again, the ratio is a marker of different financial inclination and tendency of a firm. The pecuniary managers of both the companies British Airways and Easy Jet can extort significant information that is available from diverse financial propensities that allows appropriate execution of dissimilar financial tactics and amendment of the current financial strategies (Weil et al. 2013).

Furthermore, the managers of the two organizations British Airways and Easy Jet can employ the receivable turnover ratio and other asset turnover ratio with the intention and purpose of evaluation of the extent of competence of the two organizations in exploitation of the obtainable resources (Davies and Crawford 2012). Again, the turnover ratio aids in gaining a deep understanding as regards the financial state of the corporation and analyse the reasons that lead to both the increase or decrease in the overall ratio of the two corporations British Airways and Easy Jet. The increase in the inventory ratio implies that the management of both the corporations need to re-examine the overall budget set by the managers for the inventory. This is so because the corporation can miss an opportunity of the sales because of recurring stock-out of the firm. Additionally, the managers in the finance department of the two companies can utilize the cash in addition to the liquidity ratio with the intention of determination of the total amount of investment.

Conclusion and recommendations

The above study helps in gaining a clear overview regarding the evaluation of the financial condition of British Airways and the Easy jet. Finally, it can be said that the ratio analysis helps in acquiring inclusive understanding concerning the financial state of affairs of both British Airways and Easy Jet. However, the present study also helps in acquiring thorough understanding regarding the financial circumstances based on the outcomes of the ratio analysis. The findings of the result reflect the fact that the British Airways has superior profitability in comparison to the financial condition of Easy Jet during the period 2013, 2014 as well as 2015. Again, the liquidity ratio of British Airways is also greater than that of Easy Jet reflecting higher potential of the firm to meet the current liabilities. However, on the other hand, the ratio analysis reveals the fact that Easy Jet has greater efficiency in terms of the British Airways.

References

Britishairways.com. 2016. Book Flights, Holidays & Check In Online | British Airways. [online] Available at: https://www.britishairways.com [Accessed 26 Jul. 2016].

Corporate.easyjet.com. 2016. easyJet plc. [online] Available at: https://corporate.easyjet.com [Accessed 26 Jul. 2016].

Davies, T. and Crawford, I. 2012. Financial accounting. Harlow, England: Pearson.

Deegan, C., 2013. Financial accounting theory. McGraw-Hill Education Australia.

Eisen, P. 2014. Accounting.

Harrison, W., Horngren, C. and Thomas, C. 2013. Financial accounting. Boston: Pearson.

Horngren, C. 2013. Financial accounting. Frenchs Forest, N.S.W.: Pearson Australia Group.

Kemp, R. and Waybright, J. 2013. Financial accounting. Boston: Pearson.

Needles, B. and Powers, M. 2012. Financial accounting. Mason, OH: South-Western Cengage Learning.

Shim, J., Siegel, J. and Shim, J. 2012. Financial accounting. New York: McGraw-Hill.

Vogel, H.L., 2014. Entertainment industry economics: A guide for financial analysis. Cambridge University Press.

Warren, C., Reeve, J. and Duchac, J. 2013. Corporate financial accounting. Mason, Ohio: South-Western Cenage Learning.

Watts, R.L., 2013. Conservatism in accounting part I: Explanations and implications. Accounting horizons, 17(3), pp.207-221.

Weil, R.L., Schipper, K. and Francis, J., 2013. Financial accounting: an introduction to concepts, methods and uses. Cengage Learning.