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  • Subject Name : Accounting and Finance

Table of Contents

Rationale behind Ratio Analysis.

Liquidity Ratios.

Conclusion.

References.

Rationale Behind Ratio Analysis

Financial analysis is considered as the process of estimating the projects, businesses, finance-related transactions and events in order to examine the overall performance and sustainability of the organization (Aydiner et al., 2019). It is basically used to analyze the solvency, liquidity and profitability level of the company to order effectively decision making process. If it is done for internal purposes, then a financial analysis can help the management in making future decisions in an effective and efficient manner and if it is done externally, then it helps the investors to select the best investment opportunities from where they can grab higher returns on their investment. It is considered as an overall aspect of the finance function of the organization that includes examination of historical information and data to obtain information about the current and future financial position and health of the company. The goals and objectives of the business organization are set in financial terms and their results are also measured in financial terms. There are three major sources of data used for financial analysis, namely, statement of profit and loss, balance sheet and the statement of cash flows.

Liquidity Ratios

Ratio Name

Formula

2019

 

2018

2017

 

Liquidity Ratios

Current Ratio

Current Assets / Current Liabilities

1.35

 

1.16

0.89

Quick Ratio

(Cash Equivalents + ST Investments + Accounts Receivables) / Current Liabilities

0.83

 

0.58

0.3

Liquidity ratios help in measuring and analyzing the ability of the company to pay off its current liabilities. It relates to the cash availability and other short term assets to cover up short term debts, accounts payable and other current liabilities. The ideal current ratio stands at 2:1 and the company’s ratio is lower than this ideal ratio (Rashid, 2018). However, the current ratio of Easy Jet is rising continuously which indicates good liquidity position of the company. Company’s current assets are increasing at a higher speed as compared to its current liabilities. The quick ratio of the company is also rising. In 2019, the quick ratio has been increased to 0.83 from 0.58 in 2018 which indicates that the firm has sufficient amount of funds and assets to pay off the amount of current liabilities. Therefore, the overall liquidity position of the company is quite good.

Profitability Ratios

Net Profit Margin

Net Income/ Net sales

21%

28%

24%

Return on Assets

Net income/ Total Assets

12.71%

16.76%

14.43%

Return on Equity

Net income/ Shareholder's Equity

21.17%

30.70%

31.09%

Profitability ratios help in measuring and analyzing the financial performance of the company in an effective and efficient manner by taking into consideration the total amount of revenue received by the company in a specific year, operating expenses incurred by the company along with shareholders' equity (Sroufe & Sroufe, 2018). It refers to the performance of the company’s management in utilizing the resources of the business. There is a fall in the net profit margin of Easy Jet from 28% in 2018 to 21% in 2019 which indicates that the cost of goods sold is rising that might be resulting due to fall in sales revenue, unfavorable purchase pattern, inefficient promotional policies adopted by the company and so on. The return on assets ratio has also been declined from 16.76% in 2018 to 12.71% in 2019 which is showing that Easy Jet is not effectively using its assets. Fall in the ratio of return of equity from 30.70% in 2018 to 21.17% in 2019 indicates that the company is decreasing the amount that it is paying as dividends to its shareholders on the amount invested by them. Fall in return on equity also shows that the company is retaining a higher amount of profits to meet its future growth prospects.

Efficiency Ratios

Asset Turnover Ratio

Net Sales / Total Assets

59.89%

59.84%

60.92%

A/R Turnover Ratio

Net Sales / Accounts Receivable Balance

49.96%

88.78%

878.55%

Efficiency ratios help in accomplishing a better understanding of the usage of assets by the company in a specific period of time (Arkan, 2016). The asset turnover ratio of the company is quite similar for the years 2018 and 2019. This indicates that the company is using its assets in a consistent manner over the past three years. However, there has a significant decline in accounts receivable turnover ratio from 2018 to 2019. In 2019, accounts receivable ratio is 49.96% which was at 88.78%.

Financial Gearing Ratio

Debt to Equity

Total Debt / Total Equity

10.10%

11.60%

15%

Financial gearing ratio is considered as an appropriate tool to measure the leverage of the company. It is generally considered safer for the company to have lower debt to equity ratio as on debt, regular payment of interest is to be made irrespective of the amount of profits earned by the company (Ehrhardt & Brigham, 2016). This ratio has been declining over the past three years which shows that the amount of total equity is increasing as compared to the debt amount. Lowering down the interest expenses will help the company in raising the profit level which can then be used to pay off higher dividend to the equity shareholders.

Conclusion on Key Financial Ratio Analysis

It can be concluded that financial analysis is essential for all types of business owners and managers in order to determine and analyze the progress of the organization towards achieving the goals and objectives of the company along with competing with other rival firms in the industry. It must be performed regularly by the management to identify and adopt the trends that are influencing the operations of Easy Jet Company. It is considered beneficial for the company owners to conduct financial analysis as it provides important measures of the success or progress of the company from the perspective of investors, creditors and other outside analysts.

References for Key Financial Ratio Analysis

Arkan, T. (2016). The importance of financial ratios in predicting stock price trends: A case study in emerging markets. Finanse, Rynki Finansowe, Ubezpieczenia, 79(1), 13-26.

Aydiner, A. S., Tatoglu, E., Bayraktar, E., Zaim, S., & Delen, D. (2019). Business analytics and firm performance: The mediating role of business process performance. Journal of Business Research, 96, 228-237.

Ehrhardt, M. C., & Brigham, E. F. (2016). Corporate finance: A focused approach. Cengage learning.

Rashid, C. A. (2018). Efficiency of Financial Ratios Analysis for Evaluating Companies’ Liquidity. International Journal of Social Sciences & Educational Studies, 4(4), 110.

Sroufe, R. P., & Sroufe, R. P. (2018). Value Creation for Stakeholders and Shareholders', Integrated Management.

Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Accounting and Finance Assignment Help

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