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Financial Ratio Analysis of British Airways

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INTRODUCTION

British Airways is the largest international airline in the world. It is based at the busiest international airport of the world named Heathrow Airport with holding 42% of land slots. It has a global flight network through partners such as American Airways in US and Qantas in Australia.

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It serves about 150 destinations in some 75 countries. British Airways is, through its subsidiary British Airways World Cargo the words twelfth largest cargo airline. British Airways world cargo has global fright opportunities through the British Airways flight routes. Due to recession, British Airways faced loss in the year 2008-09. So the company took the decision to get merged with Lberia. As a result it reported half yearly profit of 158m, first in last two years. In 2010 it revealed the double whammy of volcanic ash cloud from Iceland and cabin crew strikes. British airways reported a pre-tax loss of 164m, larger than 148m loss it made in the same period last year. But they performed really better at the end of the current year and gained profits.

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British Airways’ earliest predecessor was an Aircraft Travel Pvt. Ltd. It was found in 1916. On August 25, 1919 the company inaugurated the world’s first scheduled international airways service. In November 1936 British Overseas Airways Corporation was found. The long term service was started by British European Airways in 1946. After the integration of British Overseas Airways Corporation and British European Airways, British Airways was found in March 1974. Company was officially incorporated in the year 1984. Company’s operational headquarter is situated at Heathrow airbase. Company serves to more than 150 top destinations of the world and carries about 32 million passengers on average annually. British Airways faced many ups and downs during its journey. Company faced losses due to the strike of its crew members. The strike continued for 22 days and led company to the estimated loss of ?150m. After earning good profits in the previous years, it faced huge collapse during mid of 2008 and it continued for around two years. In 2010 company announced to merge with Lberia. And finally on April 8, 2010 the combination was established. After this combination, now at the end of this year it is estimated that company will have profits. Combination of British Airways and Lberia will lead company to great profits. Performance is improving day by day. Performance of last six months is far better than previous time period.

Financial Analysis

Current Ratio:

?m

Years2009-20102008-20092007-2008
Current Assets267423463148
Current Liabilities374041423244
Proportion0.710.570.97

Interpretation:

This Ratio is to calculate that which assets we can turn in to cash. In current liabilities we count long term borrowings, Bills payable etc. The ratio in year 2008 was 0.97which came down in year 2009 to 0.57 and in 2010 it was felt down to 0.71. This shows the current assts are recovered in 2010 after fell down in 2009.

Quick Ratio:

?m

Years2009-20102008-20092007-2008
Liquid Assets257622193036
Current Liabilities374041423244
Proportion0.690.540.94

Interpretation:

This ratio is to calculate the liquid assets of the company. In year 2008 ratio was 0.94 which reduced to 0.54 in year 2009 but once again in year 2010 it came back to 0.69. The reason behind that current liabilities effects ratio indirectly.

Stock Turnover:

?m

Years2009-20102008-20092007-2008
Sale799489928758
Stock98127112
Proportion82days71days79days

Interpretation:

The average number of Days Company hold the stock called stock days. In year 2008 the stock turnover was 79 days it slight came down in year 2009 to 71 days but in year 2010 it again went up to 82 days. Company should circulate their stock and generate cash in small days for better growth.

Debtors Collection Period:

?m

Years2009-20102008-20092007-2008
Debtors*365182135193450213890
Sales799489928758
Proportion23days22days25days

Interpretation:

Sale or investment in fixed assets is good but company should check their debtors. This ratio helps to calculate that average in what time company receive money from debtors. British Airways debtor’s collection period in 2008 was 25days which came down in year 2009 to 22days and in2010 to 23days respectively. It is good sign for company is able to collect money in short period.

Creditors Collection Period:

?m

Years2009-20102008-20092007-2008
Creditors*365227395243090236520
Cost of Sales799489928758
Proportion29days28days28days

Interpretation:

This ratio is almost same like debtor’s collection period ratio the only difference is that this ratio is to calculate in what time company pay to their creditors. In 2008ratio was 28days which remained same in year 2009 it slight up in year 2010 to 29days. It shows that company’s reputation is very good for payment.

% of Wages:

?m

Years2009-20102008-20092007-2008
Wages*100134600146600143300
Sales799489928758
Proportion0.17%0.17%0.17%

Interpretation:

This ratio helps to calculate averagely how much company spend to sale the goods or provide the service. In year 2008 this ratio was 0.17% which remains also same in next two years. It means company’s good management is able to control the wages.

Gearing Ratio:

?m

Years2009-20102008-20092007-2008
Short term lib.& overdrafts+ Long Term Lib. *100509700504900518400
Shareholder funds191316443033
Proportion267307171

Interpretation:

In gearing Ratio Company finance it from high level loans. In year 2008 this ratio was 171 but in year 2008 it rapidly up to 307in year 2009 but in year 2010 it again come down to 267. It means company did well after 2008 to maintain their gearing ratio.

Fixed Assets Turnover:

?m

Years2009-20102008-20092007-2008
Sales799489928753
Fixed Assets752078027890
Proportion1.061.151.11

Interpretation:

This ratio shows the increase and decrease in utilization of company’s fixed assets. In year this ratio was 1.11 which slight increase in year 2009to 1.15 but just come down in year 2010 to 1.06. Fixed assets somehow depend on the sale of the company.

Total Assets Turnover:

?m

Years2009-20102008-20092007-2008
Sales799489928753
Total Assets101941014811038
Proportion0.790.890.80

Interpretation:

This ratio helps to measure that what is the ratio of company’s total assets turnover. Company’s total assets turnover was 0.80 which was just more in year 0.89 and in year it just down in year to 0.79.

Return on Capital Employed:

?m

Years2009-20102008-20092007-2008
P.B.I.T or (L.I.B.T)*100(53100)(40100)88300
Long Term Liabilities+ Share Capital647260067794
Proportion-(8.23)-(6.68)11.33

Interpretation:

R.O.C.E ratio is the perfect way to calculate the profitability of the company. R.O.C.E of British Airways was 11.33 in year 2008 which became negative in next two years 2009 and 2010 to -6.68 and -8.23. It clearly reflects that company’s revenue goes up but its profit falls down. It means that company went in loss in last two years.

Gross Profit %:

?m

Years2009-20102008-20092007-2008
Gross Profit*100%(23100)(22000)87500
Sales799489928753
Proportion(0.03)%(0.03)%0.10%

Interpretation:

G.P ratio is the share of the company compare to its sales. Gross profit is the margin on sales before deduct tax. In year 2008 company’s profit was 0.10% but in next two years company faces loss ratio 0.03% equally. It means that company definitely not being successful to improve their revenue to make the profit.

Net Profit %:

?m

Years2009-20102008-20092007-2008
Net Profit/(Loss)*100%(42500)(35800)69600
Sales799489928753
Proportion(2.45)%(4.46)%10.09%

Interpretation:

Net profit is the remained profit after deduct tax. This amount is the net amount of the company. British Airways conclude 10% net profit in year 2008 but in next two years 2009 and 2010 it shows the loss 5% and 10%. It shows overall strength of the organization. These ratios prove that company faces losses from last two years.

Marginal Ratio:

?m

Years2009-20102008-20092007-2008
Net Profit/(Loss)(425)(375)680
Sales799489928753
Proportion(0.06)(0.05)0.08

Interpretation:

Marginal ratio is to calculate the margin of company on net profit. This ratio is very flexible ratio. The marginal ratio of the company in year2008 was 0.08 but in next two years it goes in to negative (0.05) and (0.06). Because company face losses in these two years so it effect marginal ratio of company.

Solving Ratio:

?m

Years2009-20102008-20092007-2008
Shareholder funds *100191300164600303300
Total Assets101941014811038
Proportion18.7716.2227.48

Interpretation:

This ratio clearly shows that the solving ratio percentage is down from last 2008 year continuously. In year 2008 the ratio was 27.48 which were good but after that in 2009 it came down to only16.22 but it starts recovering from last year. It is now good sign for company.

Assets Cover:

?m

Years2009-20102008-20092007-2008
Total Assets101941014811038
Long Term Debt344630742751
Proportion2.963.304.01

Interpretation:

Assets cover ratio of the company is coming down from last three years. In 2008 it was 4.01 but in year 2009 it reduced to 3.30 in year 2010 it again fell down to 2.96. This is really not a good sign for the company. Index is enlightening that company’s assets are sharing high proportion of debts which indicates that shareholders are losing faith in company’s performance.

Operating Ratio:?m

Years2009-20102008-20092007-2008
Operating Expenses822592127880
Net Sales799489928758
Proportion1.031.020.90

Interpretation:

This ratio shows the overall efficiency of organization. It is an important ratio for any company. In 2008 company ratio was 0.90 which climb up to 1.02 and 1.03 in years 2009 and 2010. It is a good sign for company. It means company will took up their profit in future.

IMPACT OF EVENTS:

British Airways faced biggest loss of its history ?401 million in year 2008-09. The reason behind that were 15days cabin crew strike and ash cloud due to volcano explosion in Iceland. But April 2010 bring some relief for British Airways when they successfully merge with Lberia the Spanish airways company. After this merger company come back on track company report ?158 million profit in first six months after merger. There was an unexpected raise of 8.4% in revenue. After two years continues loss company first time come up with profit. British Airways expecting good result and definite increase in their profit.

RECOMANDATION:

British Airways is very well known company. It is true that company faces losses continuously from last two years, But Company handle the situation very effectively. The company merge with Spanish airways company Lberia. After this merge company is come back on track company had made ?158m in first six months. So it is advisable that still company is trustable. After all these still British Airways has bright future.

CONCLUSION:

After analyse ratios it conclude that British Airways pass through lots of up and downs. Company faces losses from last two years continuously. Still company is able to run their business effectively. In year 2008 company revenue was 8753 which slight up in 2009 to 8992 but in 2010 it was again fall to 7992. There is no doubt that company’s revenue come up in 2009 but if we see company’s gross profits and net profits ratios, company is in loss from last two years continuously. In year 2009 company G.P ratio was (2.45) and in 2010 was (2.89).Same in net profit/(loss) ratio in 2009 was (4.46) and in year 2010 was (6.64). In R.OC.E ratio also shows the negative return after 2008. In 2009 ratio was (6.68) in 2010 it was come up to (8.23). But after merging with Lberia in April 2010 British Airways starts deal with profits which is good sign for company. So it concludes after two years losses still company’s future seems bright.

References:

https://fame.bvdep.com/version-2011222/cgi/template.dll?checkathens=1&kick=1&product=1&user=student%40beds.ac.uk&pw=dsQVymWfUHCPaHwR7YzRVg%3d%3d 20th march 2011

www.Britishairways.com 22nd march 2011

Dyson, John R. – Accounting for non-accounting students 8th edition. FT Prentice Hall.

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Financial Ratio Analysis of British Airways. (2019, Apr 12). Retrieved June 24, 2019, from https://phdessay.com/financial-ratio-analysis-of-british-airways/.