Financial analysis refers to a process of evaluating organizations, projects or budgets, in order gauge the extent of profitability, efficiency, liquidity, and solvency John (1991). Ratio Analysis is a way of critically analyzing the financial performance of an entity by relating different items contained its financial statements. This is one of the methods used to assess the financial performance of a company. Thus, the financial analysis in this research will entail analysis of the financial statement of British Airways Plc of years 2007-2012. The ratios are also compared with its own previously analyzed financial statements in order to determine its economic progress. The ratios used in this analysis are categorized into different groups. These include profitability, efficiency, liquidity, and market valuation ratios
However, business analysis puts emphasis on how to carry on with the company's business functions and operations in order to minimize overall costs whereas at the same time making economic use of resources and supporting customers in order to remain highly competitive in the global markets (Lonergan 2007).
2.0 Financial ratio analysis
2.1 Ratio analysis
Financial analysis is a process by which finance identifies the company's financial performances by comparing the entities in the statement of financial position and those in the income statements (Megginson 2008).
2.2 Current ratio
The most common solvency ratios are the current ratio, the quick or acid test ratio, and cash ratio (Erich 2001). The current ratio decreased from 0.71, 0.48 to 0.25, and then increased to 0.49 then decreases to 0.47 in 2007, 2008, 2009, 2010, and 2011 respectively. This is an indication that, between the years 2010 to 2009, the ability of British Airways Plc to pay for its short term financial obligations declined. However, this was not the case in the year 2010 because the current ratio increased to 0.49 from 0.25.
This is to mean that British Airways Plc acquired more current assets in 2009 as compared to the year 2009 and 2011. It can also mean that British Airways Plc increased its short term obligations in 2011. The recommended level of current ratio is 2.0.
2.3 Acid test ratio.
The acid test ratio is one of the measures of the firm's ability to pay for all its immediate liabilities at the same time without disposing the stock (Flood 2012). British Airways Plc had an acid test ratio of 0.69, 0.46, 0.22, 0.47 and 0.45 in 2007to 2011 respectively. A firm with an acid test ratio of less than 1 is said to have liquidity shortage. Over the five years, based on the acid test ratio, British Airways Plc is not in a position to pay for its short term liabilities. The firm's performance in the year 2007 was better than other years because its ratio was 0.69, which was slightly higher than for the other four years.
2.4 Cash ratio.
The cash ratio of British Airways Plc has decreases from 0.14, 0.096, 0.04 then it increases to 0.0977 then decreases to 0.089 respectively over the five years. This indicates a poor performance in the liquidity position of British Airways Plc over the covered period. This is to mean that the ability of British Airways Plc to repay short term debt is poor in the year 2009 compared to the other four years. This can be attributed to decrease in the cash flow of the British Airways Plc from operating, financing and investment activities. The recommended level of cash ratio is 1.0. The company must have had liquidity shortages in those five years because the cash ratio was below the recommended level.
2.5 Return on equity.
This ratio is used to indicate the amount of net operating income which is returned to the owners of the company or shareholders. This ratio measures British Airways Plc profitability by showing the amount of profit the shareholders obtained from their investment. Return on equity of British Airways Plc has decreased over the three years from 2007, 2008 and then 2009then increases from 2010 to 2011. This indicates a rise in the amount of returns the shareholders got from British Airways Plc in the year 2010 and 2011. The returns are in the form of dividends. In short, the financial performance of British Airways Plc is better in 2011 compared to that of other years.
2.6 Net profit margin
The net profit margin of British Airways Plc has declined between 2007, 2008, and 2009 then it increases on 2010 and 2011. The net profit margin was 7.9%, 3.5%, -4%, 2.6% and 7.1% between 2007, 2008, 2009, 2010 and 2011 respectively. This can be attributed to increased operating expenses that were experienced by British Airways Plc. In addition, this can be attributed to the unfavorable conditions that were experienced in 2009. Based on the net profit margin, the financial performance of this company is better in 2007 and 2011 than other years.
2.7 Return on investment
The return on investment is the ratio that measures the amount of returns in terms of income that one gets from an investment. Every investor expects a certain percentage of return on the amount invested. The return may either be certain or uncertain. In these five years, the ratio is 5.7%, 2.6%, -3.1%, 1.3% and 5.1% respectively. In the year 2009, the rate of returns to the investors was too low. There is a sharp increase on the rate of investment in British Airways Plc in the year 2010and 2011 compared to 2008 and 2009. This is an indication of good financial performance of this company in this year. The return on capital employed has gone up from -3.1%, 1.3%, and 5.1% in the year 2009, 2010 and 2011respectively. This ratio is used to measure the level of efficiency and profitability of an investment done by an investor in British Airways Plc.
2.8 Receivable collection period
The receivable collection period has increased between the five years period of 2007, 2008, 2009, 2010and 2011. In five years, the receivable collection period was at 163, 156, 183, 292 then 211 respectively. This translates to mean that British Airways Plc have relaxed in the debt collection process.
2.9 Gross profit margin
The gross profit margin of British Airways Plc has declined an indication of poor financial statements. This ratio reveals the proportion of money that remains from revenues after deducting the total costs incurred in making sales (Dutta 2010). It acts as a source for paying additional expenses. In terms of financial performance, it means that 2008 and 2010 were better than other three years. The gross profit margin of British Airways Plc for five years is 0.89, 0.907, 0.701, 0.95 and o.89 respectively. In addition, the operating expense ratio of British Airways Plc has increased over time which has resulted to the reduced profits.
2.10 Stock holding period
The stock holding period for British Airways Plc has increased for the first three years the n decreases for the next two years. The stock holding period for the five years is 3.08, 4.4, 5.7, 5.5 and finally 5.2. the increase in the stock holding period has increased the stock holding cost. This has also contributed to decline in the profit of the company. This increase in the stock holding period can be as result of the low demand of the company product.
3.0 Financial threats of British Airways Plc
Over the five years, based on the acid test ratio, British Airways Plc is not in a position to pay for its short term liabilities. British Airways Plc had an acid test ratio of 0.45 in 2011. A firm with an acid test ratio of less than 1 is said to have liquidity shortage.
The net profit margin of British Airways Plc is declining over the years these is evidenced by the use of ratio analysis calculated from financial statement of British Airways Plc. This can be attributed to increased operating expenses that were experienced by British Airways Plc.
There is a sharp decline on the rate of investment in British Airways Plc. This is an indication of poor financial performance of this company in this year.
4.0 Recommendations
The analysis shows that the British Airways Plc performance is declining. Comparing the financial performance for five years there is a notable decline. The management should come up ways of ensuring financial performance recovery. For example, measures of cost reduction should be done. For instance, the amount spent on administrative expenses and wages should be substantially reduced. To achieve this, there will be a reduction of the total number of employees. Acquisition of assets mostly noncurrent is required by British Airways Plc. To improve the liquidity position of this company, there is a need by management of increase the total assets. The management should increase the total assets to ensure higher liquidity position. There is a need for the management to reduce the amount of current liabilities. This will improve the liquidity level of the company. The company should engage on more aggressive debt collection methods than it has done in the past. This will help reduce the receivable collection period. Debtors' analysis should be done before making any credit sales.
Appendices
Financial Report and Planning
RATIO
FOMULA
VALUES
quick ratio
2007
2008
2009
2010
2011
current ratio
current asset/current liabilities
0.71
0.48
0.25
0.49
0.47
quick ratio
current asset-inventory/current liabilities
0.69
0.46
0.22
0.47
0.45
Cash ratio
liquid funds/current liabilities
0.14
0.096
0.04
0.0977
0.087
PROFITABILITY RATIO
2007
2008
2009
2010
2011
net profit margin
net profit after tax*100/sales
7.90%
3.50%
-4%
2.60%
7.10%
Gross profit margin
gross profit/sales
0.89
0.907
0.701
0.95
0.87
return on investment
net profit after tax/total assets
0.057
0.026
-0.031
0.013
0.51
CAPITAL RATIO
2007
2008
2009
2010
2011
trade payable payment period
trade payables*365/sales
163
136
183
292
211
stockholding period
365 x Average stock/ Cost of sales
3.08
4.4
5.7
5.5
5.2
return on equity
earnings after tax/equity
0.27
0.16
0
0.09
0.311
