Financial Analysis Assignment: Critical Analysis on Financial Health & Performance of Jet2 Plc
Question
Task: IAG (International Airlines Group) Profile: (http://www.iairgroup.com/phoenix.zhtml?c=240949&p=aboutoverview)
International Airlines Group is one of the world's largest airline groups with 533 aircraft flying to 274 destinations and carrying almost 95 million passengers each year. It is the third largest group in Europe and the sixth largest in the world, based on revenue.
Formed in January 2011, IAG is the parent company of Aer Lingus, British Airways, Iberia and Vueling. It is a Spanish registered company with shares traded on the London Stock Exchange and Spanish Stock Exchanges. The corporate head office for IAG is in London, UK.
IAG combines leading airlines in Ireland, the UK and Spain, enabling them to enhance their presence in the aviation market while retaining their individual brands and current operations. The airlines' customers benefit from a larger combined network for both passengers and cargo and a greater ability to invest in new products and services through improved financial robustness.
The airline industry is moving gradually towards consolidation though some regulatory restrictions still prevail. IAG's mission is to play its full role in future industry consolidation both on a regional and global scale. British Airways and Iberia are members of the one world alliance.
Financial Analysis Assignment requirements
IAG would like to acquire another airline for the Group in the next 3 years. You are asked to present a critical analysis of an airline of your choosing for the Board’s consideration. Your analysis should be presented to the Board as a Report using the latest two annual reports of British Airways (GROUP), for comparison, and your chosen airline. The Report must address the following:
Critically analyse the financial performance and position of the Companies from the Board’s perspective. You are expected to select and calculate exactly 10 ratios of your choice over each of the three-year periods for this purpose. Explain, with reasons, if the airline you have chosen to analyse and compare with British Airways is a worthy prospective investment for the Group. If your in-depth analysis leads you to conclude it is not, you will not be penalised for your choice, but will be expected to advise the Board accordingly. Please site all relevant sources of the data used in the analysis. Use graphs and tables wherever necessary to enhance the presentation of the report.
Answer
Introduction
The financial analysis assignmentreport focuses on the financial health and performance of Jet2 Plc, in the current financial year. Jet2 Plc is one of the largest operational multinational airlines company in the UK. The company is a listed company (LSE: JET2)on London Stock Exchange. Last year (2020) company have revenue of 3584.7 million and operating profit earned that year 293 million. Along with passenger flights the company also provides charter flights, resorts & hotels and cruise lines (Jet2plc.com, 2021).This report analysed company financial performance and compared with the performance and position of British Airways Group. Analysis of this report is based on ratios, which are derived from the annual report of Jet2 Plc and International Airlines Group (British Airways Group).
Financial performance and position analysis
Profitability
Gross profit margin:
The gross profit margin is a metric that shows the profit earning ability of its products and services. The gross profit is the portion of revenue after deducting the cost of sales. A higher rate of gross profit margin is showing a higher ability of earnings. Here in the company Jet2 Plc, the company has a gross profit margin of 14.04%, and in the previous year, it was 13.76 this shows that the efficacy of earnings increases over the year, compared to British Airways (BA) Group the company has a higher gross margin. As BA Group has a negative gross margin due to loss in 2020 (Nalurita, 2017).
The return on equity:
The return on equity is the metric that measuresthe earnings of the company from an equity perspective this means the earning is how much of invested equity is measured through this ratio. Here in the company, Jet2 Plc has a return on equity of 19.85%. It indicates that shareholders earned this year, 19.5 for every 100 investments. The return is good compared to its peer company BA Group that has negative returns for the same period. BA Grup has an ROE of -494.14% (Laitinen, 2017)
Figure 1: Profitability ratios of Jet2 plc and BA Group for 2020. Liquidity
For the working capital management and to avoid short-term insolvency risk a company has to maintain proper liquidity. From the current ratio and quick or acid test ratio analysed the liquidity position of Jet2 Plc.
Current ratio:
The current ratio is the ratio between current assets and current liabilities. The current ratio is showing the proportion of current assets and current liabilities of the company. The ideal current ratio should be between 1.2 and 2. Here the company Jet2 Plc has the current ratio of 1.145 for the year 2020 that indicates that the company can easily pay off all its current liabilities at a time and also can handle any short-term emergency. However at the same time, BA Group has a current ratio of 0.68, this refers to the company having low short-term assets than its current liabilities and the company has a higher risk for out of cash (Madushanka and Jathurika, 2018).
Quick ratio:
The quick ratio is the metric that shows dependency on inventories in managing short-term liquidity. The quick ratio is the ratio between current assets and current liabilities after inventories are excluded from current assets. The ideal quick ratio should be 1(one) to avoid any inventory scarification. In 2020, Jet2 Plc has a quick ratio of 1.144 and this indicates that the company has more than the ideal liquidity and can be paid off all short-term liabilities without sacrificing any inventories. In the same period, BA Group has a quick ratio of 0.65 refers to low liquidity and it cannot pay off all the current liabilities at a time after sacrificing its all inventories (Husain and Sunardi, 2020).
Figure 2: Liquidity ratios of Jet2 plc and BA Group for 2020
Gearing or financial leverage
Financial leverage is very important as it shows the long-term financing risk and the leverage the company enjoyed from its financing decisions. From the debt-equity and interest covers ratio analysed the current financial leverage and risk of company Jet2 Plc.
Debt-equity ratio:
The debt to equity ratio is the ratio of long-term debt and equity capital. The portion of debt compared to equity in the capital structure is derived from this ratio. A higher debt to equity ratio indicates higher financial leverage as the debt is used high than the equity capital. However, if the higher debt capital causes a high cost of capital then it is not a good condition and shows a greater risk of financing. To know the pressure from debt another ratio (interest cover ratio) is calculated to know, how much the interest expenses compared to its earning is. Here in the company, Jet2 Plc has a debt-equity ratio of 60.13% that indicates that for 100 equity capital the company has 60.13 debt capital. Compared to BA it is very low, BA has a 379.94% debt-equity ratio in 2020 (Husna and Satria, 2019).
Interest cover ratio:
The interest cover ratio is calculatedby dividing EBIT by interest expenses.The higher interest cover ratio means a lower portion of earning is spent for debt capital holding. Here ion the company Jet2 Plc has an interest cover ratio of 0.15 which is very low and refers to low risk. Compared to the BA Group which has the negative interest covers ratio due to loss showing a high risk of debt holding (Halim, 2017).
Figure 3: Financial Leverage ratios of Jet2 plc and BA Group for 2020
Managerial efficiency
The management efficiency ratios can interpret the management efficiency of the company. The assets turnover ratio of the company is showing the assets management efficiency. Here in Jet2 Plc, the company has a 1.06 assets turnover ratio that indicates that the company generates 1.06 times more revenue from its assets. At the same time, BA Group only generates revenue of 0.26 from its 1 asset (McCosker, 2021).
The inventory turnover ratio that measures the inventory management of any company indicates that the company Jet2 Plc has bad or weak sales in 2020 as its inventory turnover ratio of the period was 0.15. At the same period, its peer company has a high inventory turnover of 10.86. This indicates that industry sales are not much affected that is in Jet2Plc(Herawati and Fauzia, 2018).
The receivable turnover ratio measures the credit collection efficiency of the company. A higher receivable turnover ratio reflects the lower time of collection. Here in the company Jet2 Plc, it has 4.2 indicates for lesser credit collection efficiency. At the same time, its peer company BA Group has a receivable turnover ratio of 26.04, showing better management efficiency (Amalia,Fadjriah and Nugraha, 2020).
Figure 4: Management efficiency ratios of Jet2 plc and BA Group for 2020
Conclusion
From the comparison ratio analysis of Jet2 Plc with British Airways Group, it is found that in some areas Jet2 has stayed ahead of the BA group. Jet2 Plc has Lower but positive profit management in 2020 and it is showing that the company is more profitable than its peer. Also, the company has a better short-term liquidity position and lower the risk of long-term financing. The only area the company needs to worry about is management efficiencies. Therefore it can be concluded that if IAG acquires Jet2 Plc it can rectify the issue of management it will become a more valuable company. From the overall perspective, it can be suggested that Jet2 Plc is a perfect company to acquire by IAG.
Reference list
Amalia, S., Fadjriah, N.E. and Nugraha, N.M., (2020) The Influence of the Financial Ratio to the Prevention of Bankruptcy in Cigarette Manufacturing Companies Sub Sector. Solid State Technology, 63(3), pp.4173-4182. https://www.researchgate.net/profile/Nugi-Nugraha/publication/348755391_The_Influence_of_the_Financial_Ratio_to_the_Prevention_of_Bankruptcy_in_Cigarette_Manufacturing_Companies_Sub_Sector/links/600f342ea6fdccdcb87edb65/The-Influence-of-the-Financial-Ratio-to-the-Prevention-of-Bankruptcy-in-Cigarette-Manufacturing-Companies-Sub-Sector.pdf
Halim, A., (2017) Pengaruh Current Ratio, Debt to Equity Ratio dan Debt to Assets Ratio TerhadapProfitabilitasPada Perusahaan Manufaktur Yang Terdaftar Di Bursa Efek Indonesia Periode 2012-2015. JurnalUniversitasMaritim Raja Ali Haji, 1, p.14. http://jurnal.umrah.ac.id/wp-content/uploads/gravity_forms/1-ec61c9cb232a03a96d0947c6478e525e/2017/08/JURNAL47.pdf
Herawati, A. and Fauzia, F.I., (2018) The Effect of Current Ratio, Debt to Equity Ratio and Return on Asset on Dividend Payout Ratio in Sub-sector Automotive and Component Listed in Indonesia Stock Exchange in Period 2012–2016. KnE Social Sciences. https://www.knepublishing.com/index.php/Kne-Social/article/view/3450
Husain, T. and Sunardi, N., (2020) Firm's Value Prediction Based on Profitability Ratios and Dividend Policy. Finance & Economics Review, 2(2), pp.13-26. https://riiopenjournals.com/index.php/finance-economics-review/article/view/102
Husna, A. and Satria, I., (2019) Effects of return on asset, debt to asset ratio, current ratio, firm size, and dividend payout ratio on firm value. Financial analysis assignmentInternational Journal of Economics and Financial Issues, 9(5), p.50. https://search.proquest.com/openview/ca61658de174e8aae6f268e3d33aef10/1?pq-origsite=gscholar&cbl=816338
Iairgroup.com, (2021) Results and reports. [online] Iairgroup.com. Available at:
Jet2plc.com, (2021) Investors. [online] Jet2plc.com. Available at:
Laitinen, E.K., (2017) Profitability ratios in the early stages of a startup. The Journal of Entrepreneurial Finance, 19(2), pp.1-28. https://digitalcommons.pepperdine.edu/cgi/viewcontent.cgi?article=1304&context=jef
Madushanka, K.H.I. and Jathurika, M., (2018) The impact of liquidity ratios on profitability. International Research Journal of Advanced Engineering and Science, 3(4), pp.157-161. http://irjaes.com/wp-content/uploads/2020/10/IRJAES-V3N4P297Y18.pdf
McCosker, P., (2021) Interpretation of Financial Statements. Financial and Managerial Aspects in Human Resource Management: A Practical Guide, Emerald Publishing Limited, pp.23-37. https://www.emerald.com/insight/content/doi/10.1108/978-1-83909-612-920211004/full/html
Nalurita, F., (2017) The effect of profitability ratio, solvability ratio, market ratio on stock return. Business and Entrepreneurial Review, 15(1), pp.73-94. https://trijurnal.lemlit.trisakti.ac.id/ber/article/view/2080
Appendices
