easyJet is a British low-cost airline that flies in over thirty European countries and on 820 foreign routes. Since its inception in 1995, the company has increased its revenues and profits while also achieving the top network position. The purpose of this study is to examine and compare easyJet's financial status and performance in 2016 to those of 2015. It is important to note that, like any other airline, its financial success is influenced by unusual circumstances such as political stability along its routes and economic growth. easyJet’s net profit margin fell from 11.69% in the year 2015 to 9.15% in the year 2016. For the year 2015, the company earned 0.1169 euros from each euro of revenue while for the year 2016, it generated 0.915 euros. Despite the fall in profitability, the company can meet its liabilities as well as distribute dividends to its investors. The decline in profitability is attributed to the 6.4% decline in the company’s total revenue. easyJet attributes the fall in revenue to the terrorist events in Paris, Turkey, and Nice which lead to reduced demand for air travel. Also, Brexit had the effect of strengthening the euro meaning that the British travelers were affected by paying higher prices.
The return on equity (ROE) fell from 24.79% in 2015 to 17.21% in 2016. The meaning is that for the year 2016, the company generates an income of 0.1721 euros from every euro of stockholder equity. The reduction in the ROE is attributable to the decline in net income and a 20.59% increase in the shareholder’s equity. ROE shows how efficiently a company uses its stockholder’s funds to generate profit and a reduction might be an indicator that the management does not efficiently utilize the investor’s funds (Brigham and Ehrhardt 2013. P.85).
The rate of return on capital employed (ROCE) fell from 22.48% in 2015 to 16.98% for the year 2016. The meaning is that for every euro investment in capital employed, easyJet generated operating profits of 0/2248 and 0.1698 euros for the year 2015 and 2016 respectively. The decline results from the fall in operating income as well as a 4.18% increase in the capital employed following the acquisition of twenty new aircraft. A good ROCE is higher than a company’s borrowing rate, and for 2016, the average Libor rate was 1.3% while the ROCE is 16.98%, an indicator that it is utilizing its employed capital and it sustained shareholder wealth maximization (Jones and Felp 2013, p.215)
Liquidity Position
The current ratio slightly improved from 0.7234:1 in 2015 to 0.9243:1 in 2016. For the year 2016, the current assets were 0.7234 times the current liabilities, and this is a clear indicator that easyJet’s current assets are insufficient to pay off the current liabilities (Costea and Hostiuc 2009, p 251). The current ratio for both years is less than 1, and the meaning is that the company will have difficulties meeting their short-term obligations when they fall due. In such a case, the company should continue its efforts to increase its current assets and reduce its current liabilities to improve its liquidity position.
easyJet’s quick ratio for the year 2016 was 0.7540, an increase from 2015’s ratio of 0.6476. For both years, the quick ratio is less than 1, an indicator that easyJet might face difficulties paying off its current liabilities from the available quick assets (Viera 2010, p.4). In this case, the company might be forced to sell its capital assets to settle its short-term obligations, and this should be a worrying sign for the creditors.
For the year 2016, the cash ratio was 0.4539, an increase from 2015’s figure of 0.3676, meaning that for the year 2016, the company has cash to pay only 45.39% of the current liabilities. The cash ratio is less than 0.5 for both years, an indicator that easyJet does not maintain an adequate cash balance to pay off its current liabilities. The ratio gives a clear picture of the ability of easyJet to meet its short-term debts because it might not take months or years to collect all its trade receivables, leaving cash as the only option to settle debts.
Efficiency
The trade receivables turnover ratio for the year 2016 is 22.08 while for 2015 is 22.30. easyJet was able to collect its credit sales an average of 22 times or every sixteen days. Such a high ratio shows that the company is extremely efficient in collecting its trade receivables. Fast collection of receivables (Attari and Raza 2012, p.189) is important because it provides cash which is essential for the daily operations of the company.
The fixed assets turnover ratio for the year 2016 is 1.15, a decrease from 2015’s ratio of 1.32 indicating that the company utilized its fixed assets efficiently in 2016 compared to 2016. easyJet generated 1.15 times more sales compared to the net book value of its assets, an indicator that it utilizes its fixed assets efficiently. Since the ratio is greater than 1, potential investors will be encouraged to invest in the company because the company can generate a high amount of sales from its fixed assets. Creditors will be willing to provide loans to easyJet because the company can make sales which are a guarantee that the loans will be repaid.
Gearing Ratio
The gearing ratio for the year 2016 is 0.2788:1, an increase from 2015’s figure of 0.2241:1. The ratio for 2016 is higher because the easyJet received approval from the UK Listing Authority to issue a 3 billion euros medium term note, increasing its debt levels. easyJet has a low gearing ratio because, for 2016 and 2015, the debt is 27.88% and 22.41% of the total equity respectively. A low gearing ratio is an indicator that the company is using less leverage to pay for its operations and therefore, it is less likely to face any difficulties in repaying the interest payments and principal amount. By looking at this ratio, the company’s lenders have the assurance that their loans will be repaid and will be willing to lend it funds (Carruthers 2009, p.222)
Investment potential
The company’s earnings per share (eps) for the year 2016 is 1.08 euros, a decrease from 2015’s eps of 1.38 euros. A reduction in the eps is a clear indicator that the profits of a company have fallen, and this is not an optimistic sign to investors (Athanasakou, Strong, and Walker 2009, p.17). The eps for 2016 means that every share of common stock earned a profit of 1.08 euros while in 2015, it earned a profit of 1.38 euros. easyJet’s investors are not happy because the eps has fallen and this might be an indicator in the short term that the company’s profits are declining. According to Lazonick (2014 p.50), most investors have the expectation that a higher eps drives the stock price higher and as a result, a majority of them look out for companies with a higher earnings per share.
The price-earnings ratio (P/E) for the year 2016 is 9.36 while for the year 2015 is 12.68. The meaning is that during the year 2016, investors were willing to pay 9.36 pounds for every pound of earnings while in 2015, they were ready to pay 12.68 for every pound of earnings. A reduction in the P/E ratio means that the investors anticipate the company to perform poorly (Deschow, Ge, and Schrand 2010, p.388) and this is reflected in the fact that the company’s profits reduced and the price of its stock reduced from 1750 GBX in September 2015 to 1007 in 2016.
Evaluation of the strategy
easyJet’s capital investment strategy is to change the mix and the ownership of its fleet. The company does this by deferring new orders, reducing utilization during low demand periods, and extending the lease contracts. Such a strategy is efficient because it enables the company to carry out an accurate forecast of the number of aircraft it should maintain in a year 9Bernardo, Kirby, and Mavris 2015, p.100). Also, an accurate forecasting of the fleet makes forecasting of the demand levels by customer’s easier facilitating efficiency in all its routes (Srisaeng 2015, p.8). The strategy of having a flexible fleet reduces the costs because the company can acquire larger and economical aircraft models (Wensveen and Leick 2009, p.130) which reduce the cost per seat, fuel expenses, and lead to a more efficient crew.
The company intends to increase its return on capital through the efficient allocation of aircraft and capacity by moving them to routes which have greater opportunities. The company has closed routes which do not attain their objectives and open new routes which promise a higher return (Njoya and Niemeier 2011, p. 58). The company is a low-cost carrier, and I believe that closing of the unprofitable routes is essential to keeping its costs to a minimum. Of importance is that such a move allows it to allocate its capacity to locations where demand is higher (Castelli, Pellegrini, and Pesenti 2011, p.37), and costs of operations are lower. However, the company should focus on offering a better customer experience in addition to its low-cost model to create higher demand for its services.
The company intends to reduce earnings volatility by hedging its foreign exchange and fuel transactions. The company reported that an increase in its fuel costs was one of the reasons its net income reduced and the fluctuations in the foreign exchange rates have meant some of its customers have had to pay higher prices (Christo[her and Holweg 2011, p.70). Hedging reduces the risk of easyJet earnings being affected by higher fuel prices (Carter et al. 2013, p.341) in the future and the volatility in foreign exchange. However, I am concerned that most of its hedges result in losses, for instance, it posted a loss of 347 million euros on its cash flow hedges during 2016.
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