Exam Number: …F11023

Team: …Blue 8

Word Count: …1508

CRANFIELD SCHOOL OF MANAGEMENT

Full Time MBA Programme 2011/12

Term: 1

Part: 1

Accounting

WAC

This assessment/report is all my own work and conforms to the University’s

regulations on plagiarism 
An identical copy of this document has been submitted to the Turnitin system

 easyJet’s financial performance

Table of Contents

1. Executive Summary: 2

2. Problem Definition and Analysis 1

2.1 Ratios and explanations are included in appendix – 1 1

2.1.1 Profitability Ratios: 1
2.1.2 Efficiency Ratios: 1
2.1.3 Liquidity Ratios: 3
2.1.4 Financial Gearing: 3
2.1.5 Investment ratio: 3

2.2 Hedging on fuel prices: 4

2.3 Disruptions: 4

3. Conclusion: 4

4. Appendices 6

4.1 Appendix 1: Assumptions Used During Analysis 6

4.2 Appendix 2: Ryanair Holdings plc. Balance Sheet, Income Statement, and
Statement of Cash Flows 8

4.3 Appendix 3: Jet Fuel Price Fluctuation 15

4.4 Appendix 4: Classification of Financial Ratios 16

Efficiency Ratios 16
Efficiency Ratios 17
Liquidity Ratios 17
Financial gearing: 17
Investment ratios 18

4.5 Ratio calculations for easyJet and Ryanair 18

Values of terms used in ratio calculation 19
Key Ratios for easyJet and Ryanair 19
 easyJet’s financial performance

1. Executive Summary:

The report compares the financial performance of Europe’s two leading low cost
airlines easyJet and Ryanair. The data for consideration has been taken from the
financial reports of the two companies and financial ratios are calculated for the last two
fiscal years. The financial ratios for easyJet are compared on year on year basis and also
compared against those for Ryanair. However, the comparison becomes a little
complicated because of different fiscal year periods and different tax rates for the two
airlines.

easyJet seems to have performed very well on year on year basis. Its performances
against ratios against Ryanair are not bad either. It has achieved incredible efficiency
ratios by generating more revenue per pound invested. However, due to high operational
expenses, the operating profits drop fairly substantially when compared to Ryanair’s.

The profitability ratios are comparatively low and can be increased by cutting the
operational expenses. Its current ROCE is far from its target of an average post tax
ROCE of 12%.

The airline has significantly improved its profits compared to last year and is planning a
dividend payment and expansion plan simultaneously. A carefully thought out plan
needs to devised to successfully achieve both the goals.
 easyJet’s financial performance

2. Introduction

This report analyses the position and performance of Dairy Crest PLC using financial ratios from
their 2011 published accounts.

basing the ed on the their easyJet and its rival Ryanair over their past two fiscal years.
The two companies operate in different financial years. The data for easyJet is
considered from 1st October, 2008 to 30th September 2010, whilst that for Ryanair is
considered over 1st April 2009 to 31st March 2011.

2.1 Ratios and explanations are included in appendix – 1 

2.1.1 Profitability Ratios:

The 2011 published accounts show a significant dip in the return on shareholders’
funds by 13.2% from 2010 figures. Although profit for 2011 rose by 9.5%, total
shareholders’ equity increased by a larger percentage of 24.8%, due to an increase in
retained earnings, thus cancelling any effects of the higher 2011 profits.

Return on capital employed (ROCE) and operating margin rose slightly by 4.1% and
4.8% respectively from 2010 figures. Gross profit margin remained unchanged despite
a 4.8% improvement in the operating margin as the proportion of cost of goods sold to
group revenue stayed constant.

Compared to the 2011 performance of its peers in the food products sector, the ROCE
of Dairy Crest was 22.7% and 73.1% lower than that of Cranswick and Devro
respectively. Despite having a much higher operating profit, Dairy Crest was less
effective in generating operating profits compared to the average long-term capital invested in
the business.

The 2011 operating margin of Dairy Crest is similar to that of Cranswick. However, the operating margin of
Devro is about 200% more than those of the other two peers. Despite a huge group revenue, Dairy Crest
incurred equally huge operating expenses both in 2010 and in 2011 compared to the two peers. Thus for every
£1 of sales revenue an average of 6.21p was left as operating profit, after paying the cost of goods sold and
other operating expenses.

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 easyJet’s financial performance

2.1.2 Efficiency Ratios:

In 2011, Dairy Crest’s average inventories turnover period and average settlement
period for trade payables in 2011 increased by 8.7% and 8% to 53 days and 24 days
respectively. Raw materials and consumables as well as finished goods inventories both increased in 2011 while the
cost of sales decreased slightly. As inventories are usually expensive to hold, a shorter
inventories turnover period is preferred to a long one. Therefore, the company may have
pertinent reasons for increasing inventory held perhaps in anticipation of a rise in raw
material prices or a possibility of a supply shortage.

The increase in the average settlement period for trade payables is desirable in order to
free up funds. However, such a policy may result in the loss of goodwill of suppliers if it taken too far.

The sales revenue per capital employed dipped slightly in 2011 due to lower group
revenue with the capital employed remaining more or less the same. However, sales
revenue per employee increased but only due to a reduction in the number of employees
by 708.

2.1.3 Liquidity Ratios:

A food products company such as Dairy Crest would be expected to have a relatively low current ratio as it
holds mainly fast moving inventories of finished goods and a significant part of its sales would be made for
cash. However, all the liquidity ratios deteriorated in 2011 compared to 2010 values
showing a general decline in the ability of the business to meet its maturing obligations .
This was due to an increase in current liabilities mainly as a result of short term
borrowing increasing by 29 times and trade and other trade payables increasing by
about 18%.

At 1.02, a decrease of 19% from 2010, the current assets are just sufficient to cover the
current liabilities of the company. However, as the inventory is excluded from acid test
ratio, the value of the ratio (0.56) shows that Dairy Crest is unable to meet its current
obligations with its remaining current assets. An even more alarming issue is the
decrease by 39% from the 2010 figure for cash generated from operations to maturing
obligations to 0.36. It would be expected that the company should be able to generate
sufficient cash to cover it maturing obligations considering its relatively fast moving
inventory of perishable food products.

Compared to its peers Cranswick (0.84) and Devro (1.02), Dairy Crest is performing significantly lower with
regards to the acid test ratio. Therefore, this is unlikely to be a sector wide phenomenon but peculiar to Dairy
Crest. However, the apparent liquidity problem may be planned and short term and of no real cause for concern for
the business.

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 easyJet’s financial performance

2.1.4 Financial Gearing:

The gearing ratio for 2011 decreased by 11% compared to 2010 value, to 50.77% due to
a net reduction in total financial liabilities (long term and short term) and an increase in
retained earnings. Interest cover improved by 12% to 4.84 showing an improved
capacity to meet maturing interest obligations. Therefore, despite the apparent liquidity
issues, the operating profit of the business is able to cover interest payments by almost 5
times.

Dairy Crest seems quite highly geared compared to Cranswick and Devro at 19.34%
and 17.65% respectively. This has the advantage of increasing the return to shareholders
but makes the returns more volatile by increasing its sensitivity to changes in operating
profits. A gearing ratio of 50.77% compared to an average of 18% for both peers may
increase the perceived risk associated with the Dairy Crest thus increasing the cost of
the next tranches of capital.

2.1.5 Investment ratio:

The dividend cover increased by 5% to 2.19 in 2011 due to a higher profit after tax.
Dividend yield also increased but mainly due to a decrease in the share price year on
year.

Earnings per share increased by 6.4% to 43.20. However cash generated from
operations per share decreased by 12% to 96.17 due to a comparatively lower cash
position in 2011.

The earning per share for easyJet improved drastically from 16.75p in 2009 to 28.24p in
2010 due to significant increase in profits. It has even surpassed that of Ryanair.

easyJet plans to attract and award its shareholders by paying dividends in 2012.
However, given its current cash position and its plan to add new planes to its fleet to
expand the business, paying dividends does not seem to be a great idea. Nevertheless,
the airline is competing with Ryanair, which paid €500 m dividend in the year ending in

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 easyJet’s financial performance

2011. A careful review is recommended in this case to strike a balance between pleasing
the shareholders and also, maintaining enough investment and cash to fund its
expansion plans.

easyJet’s Price/earnings (P/E) ratio has declined from 18.2 to 14.2. It is a significant
decline considering that Ryanair’s P/E ratio decline from 17.0 to 15.0 only. easyJet
needs to carefully review its expansion and dividend plans as the market confidence in
the future of the business has seen a significant drop.

2.2 Hedging on fuel prices:

easyJet has very carefully hedged on fuel prices. The airline has achieved significant
reduction in operational expenses mainly driven by a unit fuel cost decrease equivalent
to £122.7 million. The airline can continue improving its profits by focusing on fuel
price hedging.

2.3 Disruptions:

It can also be argued that the financial ratios for easyJet have been more adversely
affected by disruptions from snow, volcanic ash than those of Ryanair as the latter
operates more in the continental Europe, which was relatively less affected than the UK,
easyJet’s main hub.

3. Conclusion:

easyJet has performed exceptionally well compared to the previous year. However, it is
clear that in spite of generating almost similar revenues, its operating profits are far less
than those of Ryanair. easyJet needs to review its business model to reduce the
operational expenses and improve some of the financial ratios.

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 easyJet’s financial performance

The airline has significantly improved its profits compared to last year and is planning a
dividend payment and expansion plan simultaneously. A carefully thought out plan
needs to devised to successfully achieve both the goals.

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 easyJet’s financial performance

4. Appendices

4.1 Appendix 1: Assumptions Used During Analysis

Year-ending period discrepancies: easyJet and Ryanair use two different fiscal year
periods for financial reporting. For the purposes of this report, easyJet: Period 1 occurs
1 October 2008 to 30 September 2009, Period 2 occurs 1 October 2009 to 30 September
2010. Ryanair: Period 1 occurs 01 April 2009 to 31 March 2010, and Period 2 occurs
01 April 2010 to 31 March 2011. Please see Figure 8 for visual reference.

Currency differences: Ryanair financial reports are calculated in Euro, easyJet reports
in British Pound Sterling (GBP). For conversion of Euro into GBP, the average value
for each Ryanair period was used: Period 1 uses 1.13 €/£, Period 2 uses 1.18 €/£.1

Cost of Sales and Gross Profit: Since it is unclear how to interpret Cost of Sales and
Gross Profit from the financial reports, ratios related to these values have not been
calculated.

Ratio Discrepancies: If there is any ratio discrepancy between those calculated within
this report and those reported within published sets of accounts, the reason is due to a
difference in calculation formula. Please see Appendix 4: Classification of Financial
ratios for the Definitions used.

Inclement Weather: (Figure 1, Below)

 easyJet: Period 2 experienced extreme disruptions in service to their customers
as a result of severe snowfall resulting in £20.8m of additional cost and lost
contribution of £25m. During the same period, due to the volcanic ash
disruption, easyJet had lost contribution and additional cost of £30m and
£27.3m respectively.

1
Source: http://www.oanda.com/currency/historical-rates/

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 easyJet’s financial performance

 Ryanair: Period 2 was affected by the same volcanic ash disruption, with a loss
and exceptional costs of £29m. Although discussed, additional inclement
weather is not given a loss value.
 None of these exceptional events have been taken into account while
calculating financial ratios. It is important to note that with these events, and
the difference in time periods, one might detract from yearly profit on one
company while not affecting the period of the other.

Lease vs. Own: Ryanair has purchased their fleet of aircraft and as a result is deducting
depreciation annually. easyJet primarily leases their aircraft fleet and therefore
depreciation is not deducted from Operating Profit.

1st Oct 2009 Period 2 1st Oct 2010 easyJet

Period 1 1st Apr 2010 Period 2 1st April 2011 Ryanair

Figure 1. Inclement Weather Diagram: Comparison of Time Periods

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 easyJet’s financial performance

4.2 Appendix 2: Ryanair Holdings plc. Balance Sheet, Income Statement, and
Statement of Cash Flows2

2
Balance sheet, income statement and statement of cash flows taken directly from Ryanair Holdings plc.
“Annual Report and Financial Statements 2011,” p.128, 129, and 132 respecively.

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 easyJet’s financial performance

Figure 2. Ryanair Holdings plc. Consolidated Balance Sheet

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 easyJet’s financial performance

Figure 3. Ryanair Holdings plc. Consolidated Income Statement

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 easyJet’s financial performance

Figure 4. Ryanair Holdings plc. Consolidated Statement of Cash Flows

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 easyJet’s financial performance

easyJet plc. Balance Sheet, Income Statement, and Statement of Cash

Flows3

Figure 5. EasyJet plc. Consolidated Balance Sheet

3
Balance sheet, income statement and statement of cash flows taken directly from EasyJet plc. “Annual
Report and accounts 2010,” p.55, 57, and 59 respectively.

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 easyJet’s financial performance

Figure 6. easyJet plc. Consolidated Income Statement

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 easyJet’s financial performance

Figure 7. easyJet plc. Consolidated Statement of Cash Flows

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 easyJet’s financial performance

4.3 Appendix 3: Jet Fuel Price Fluctuation

Figure 8. Five-Year Look Back of Monthly Fluctuation in Jet Fuel Price (in USD/Gallon)4

4
http://www.indexmundi.com/commodities/?commodity=jet-fuel&months=60

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 easyJet’s financial performance

4.4 Appendix 4: Classification of Financial Ratios5

Ratios Defined:
Profitability ratios: These express the degree of profit made by the business in relation
to other figures in the financial states
Efficiency ratios: These ratios measure the efficiency with which particular resources
have been used in the business.
Liquidity ratios: These ratios express the relationship between liquid ratios held and
amounts due for payment in the near future.
Gearing ratios: These measure the relationship between the contributions to financing
the business made by owners vs. amounts contributed by others in terms of loans.
Investment ratios: These measure the returns and performance of shares from the
perspective of the shareholders.

Efficiency Ratios

1. Return on ordinary shareholders funds ratio (ROSF) :

2. Return on capital employed (ROCE):

3. Operating profit margin :

4. Gross profit margin:

Efficiency Ratios

1. Average Inventories turnover period:

5
Eddie McLaney and Peter Atrill, “Accounting : An Introduction,” page 232.

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 easyJet’s financial performance

2. Average settlement period for trade receivables:

3. Average settlement for trade payables

4. Sales revenue to capital employed ( Net Asset turnover ratio):

5. Sales revenue per employee:

Liquidity Ratios

1. Current ratio:

2. Acid test ratio:

Financial gearing:

1. Gearing ratio:

2. Interest cover ratio:

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 easyJet’s financial performance

Investment ratios

1. Dividend pay-out ratio:

2. Dividend cover ratio:

3. Dividend yield ratio:

4. Earnings per share:

5. Price/earnings ratio:

4.5 Ratio calculations for easyJet and Ryanair

The ratios for the two companies were calculated with the help of financial statements
provided in the financial reports.6, 7 Below is a table of key values used to calculate the
ratios. Any assumption made in calculating these values is mentioned in the footnotes.

Values of terms used in ratio calculation

 Financial Year 2010 2009 2011 2010

  Easy Jet (in millions £) Ryan Air (in millions €)
Revenue 2973.1 2666.8 3629.5 2988.1
Operating Profit 173.6 60.1 488.2 402.1

6
Appendix 4: Easyjet plc. Balance Sheet, Income Statement, and Statement of Cash Flows
7
Appendix 5: Ryanair plc. Balance Sheet, Income Statement, and Statement of Cash Flows

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 easyJet’s financial performance

Finance Revenue 7.1 22.5 27.2 23.5

EBIT 180.7 82.6 515.4 425.6
Finance Cost 26.7 27.9 93.9 72.1
Profit for the year 121.3 71.2 374.6 305.3
Inventory8 73.2 73.2 2.7 2.5
Receivables9 73.7 155.5 50.6 44.3
Current Assets 1514.9 1482.2 3477.6 3063.4

Current Liabilities 1064.6 1062.2 1837.2 1549.6

Total Equity 1500.7 1307.3 2953.9 2848.6

Long Term Debt10 1084.6 1003 3312.7 2690.7
Short Term Debt11 127.4 117.6 336.7 265.5
Total Debt (debt) 1212 1120.6 3649.4 2956.2
Capital Employed 2712.7 2427.9 6603.3 5804.8
Dividend 0 0 500 0
Share Price 4.01 3.09 3.72 3.5

Number of Shares 429.5 424.9 1485.7 1476.4

Key Ratios for easyJet and Ryanair

 Financial Year 2010 2009 2011 2010

  Easyjet Ryanair
Profitability Ratios        
ROSF 8.08% 5.44%  12.68%  10.72% 
ROCE 6.66%  3.40% 7.81%  7.33% 

Operating profit margin  5.83% 2.25%   13.45% 13.46% 

Gross profit margin -  -   - - 

         
Efficiency Ratios        
         
Average Inventories turnover
 - -  -  - 
period

Average Settlement period for

9.04 days 21.28 days   5.09 days 5.41 days
trade receivables

8
Considering assets held for sale in case of easy jet.
9
Considering only trade receivables and not any other receivables
10
Considering only borrowings made for investment activities
11
Considering only borrowings made for investment activities

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 easyJet’s financial performance

Average settlement period for

 -  -  -  -
trade payables

Sales revenue to capital employed 1.1 times 1.1 times  0.55 times 0.51 times

Sales revenue per employee £431 k £411 k  €450 k  €425 k 

         
Liquidity Ratios        
     
 
Current Ratio 1.42 times 1.39 times  1.89 times 1.98 times
Acid test Ratio 1.35 times 1.32 times   1.89 times 1.98 times
         
Financial Gearing Ratios        
         
Gearing ratio  44.68 % 46.15 %   55.27 % 50.93 % 
Interest cover ratio 6.76 times  2.96 times  5.49 times 5.90 times 
         
Investment ratios        
         
Dividend payout ratio  - -   1.33 % - 
Dividend cover ratio  - -  0.75 times - 
Dividend yield ratio  - -   11.9 %  
Earnings per share 28.24pence  16.75pence  25.21cents  20.68cents 
P/E ratio 14.2 times 18.4 times 15.0 times 17.0 times

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