Accounting

Commentary on Financial Ratios

Profitability Ratios

1.
Operating profit margin on ordinary activities Aer lingus -1.33, Ryan Air 20.16
Aer lingus shows a negative margin of 1.33 for the year 2008 this is largely attributable to the rising fuel costs Aer lingus had to face. This year fuel costs rose almost by 58.4.Another reason to the depleting operating profit margins is the decrease in passenger fares, although the number of passengers that traveled with Aer lingus this year has increased but because of the fall in passenger fares the revenue only increased by 5.6.

On the other hand, Ryan air has a better operating profit margin that is mainly because of the difference in sizes of the two companies. Ryan air is Europes largest low fares airline and therefore is a highly attractive to passengers looking for low fares. Ryan air also showed an impressive increase of 20 in the number of passengers that traveled with them as compared to last year. That also increased their revenue by 21 because they did not have to decrease their prices further as their fares are already cheap (Aer lingus plc, 2008).

2.
Operating profit margin including extra ordinary activities  Aer lingus -11.64, Ryan Air 16.84. The operating profit margin including extra ordinary activities has decreased to negative margin of -11.64.This largely due to the cost of exceptional items, these are one-off costs that includes  117.5mln in relation to staff cost restructuring in this year, a 5.9mln relating to a defense of a take over bid by RyanAir plc and some 17.5mln paid under the program for continuous improvement. Whereas, RyaniAir plc again shows a profit margin of 16.84, because they did not incur any major exceptional cost in the year 2008 .Ryan earned a tax gain of  10.6m from the disposal of five aircraft.

3. Net profit margin Aer lingus -7.96, RyanAir 14.38
The net profit margin of Aer lingus has decreased from the previous year, last year they shows a 105.3 m profit after tax but in 2008 they incurred a loss of 107.8m. This is mainly because of the rising fuel costs and heavy cost suffered under net exceptional items. RyanAir has an impressive net profit margin of 14.38, bit has decreased from the last years margin of 19.47.This could be because of the foreign exchange loss suffered of over  56m.

4. Return on Assets Aer lingus -5.45, RyanAir 6.45
This ratio shows Assets utilization with respect to the profit earned for the year. Aer lingus has a negative return its assets because of the loss incurred this year and it also invested big amounts in buying aircraft fleet and also expanding its operations outside Ireland. RyanAir showed an impressive return on its Assets despite investing heavily in buying Boeing aircraft

5. Return on Equity Aer lingus -12.58, RyanAir 15.47
The reason for a negative return margin on equity is that the company incurred loss for the year and it also issued ordinary shares for the year, including bonus shares. RyanAir has a better return on equity than Aer lingus in 2008, because they made a profit this year whereas Aer lingus incurred a loss. RyanAir did not issue any new shares this year in fact they exercised a share buyback of 59.5m ordinary shares.

6. Return on capital employed  Aer lingus 3.41, RyanAir 13.12
Aer lingus shows a positive margin on return on capital employed, because they made a profit of 105m in Earnings before interest and tax, despite the fact they further borrowed in a finance lease this year in long term liabilities. RyanAir showed a return of 13.13 on capital employed mainly because they did not borrow much in long term liabilities and also did not issue any shares this year (Ryan Air Plc, 2008).

Liquidity Ratios

1. Current ratio Aer lingus 1.36 times, RyanAir 4.064 times
Normally a current ratio of 2 times is considered a good one, but 1.36 times is not too bad considering the financial conditions Aer lingus is in. This Aer lingus current liabilities increased tremendously compared to the previous year, whereas the current assets only showed a slight increase. Ryan has an impressive current ratio of 2.06 times which means they have adequate level of current assets to meet their current liabilities.
However, this could also be a negative sign for the company because it may mean the company either has too much capital tied up in cash or it is unable to recover from receivables early enough.

2. Quick ratio Aer lingus 0.12 times, RyanAir 0.97 times
The quick ratio also known as acid test ratio reveals the more realistic picture than the current of companys ability to pay off its current liabilities. The low quick ratio suggests that entity is not able to generate enough cash resources, either because of declining sales or not able to collect receivables quickly enough.

It eliminates the illiquid types of assets like inventory from current assets because inventory is not considered to be as rapidly convertible into cash. Generally the quick ratio should be 11 or higher however this varies widely by industry. Aer lingus has a very low quick ratio of 0.121 it suggests that the company does not have enough liquid assets to cover its current liabilities. The probable reasons include the increase in current portion of finance lease obligation by   63.4million in the year ended 2008.The current liability portion of derivative financial instrument increased from  6.2million to  11.4million in 2008. Another possible reason seems to be that Aer lingus reclassified its financial assets as loans and receivables that were previously recognized as available for sale. As a result its liquid assets were reduced by  9.6million during the year, so the quick ratio was also decreased by the reduction in cash equivalents.

Ryan Air s ratio (0.97) is close to an ideal acid test ratio of 11 it suggests that the company is quickly converting receivables into cash and has faster inventory turnover and cash conversion cycles than Aer lingus. Though Ryan Air still needs to improve its quick ratio to an ideal ratio of 11 or higher to ensure that the company is able to cover its financial obligations.

3. Cash ratio Aer lingus 0.008 times, RyanAir 0.94 times
This ratio determines entitys ability to meet its current liabilities from its cash resources. Aer ingus has a very low cash ratio, indicating that it has a fewer cash resources to meet its current liabilities. T has not been able to receive cash from trade receivables to increase the companys cash reserves. RyanAir has a satisfactory ratio of 0.94 times, indicating that the company can meet its current liabilities from its cash resources.

Gearing Ratios

1. DebtEquity Aer lingus 1.70 times, RyanAir 1.53times
Aer lingus has a better debtequity ratio indicating that the company is less geared and raising finance through further issue of equity rather than borrowing from the lenders. RyanAir has a lower ratio than Aerlingus, mainly because it did not issue any further ordinary shares this year and raised finance through borrowing long term debt (Ryan Air Plc, 2008).

2. Total debt to total assets Aer lingus 62.91, RyanAir 60.46
Ideally this ratio should be around 50, but Aer lingus doesnt have too bad a ratio of total debt to total assets, indicating that the company can safely meet its liabilities from its resources. Ryan Air almost has a slightly better ratio than Aer lingus.

3. DebtCapital Employed Aer lingus 40.17, RyanAir 47.55
This ratio measures the debt the company has a percentage to the capital employed. Aer lingus has a satisfactory level of debt ratio compared to its total capital employed indicating that the company is mainly financing through equity finance. RyanAir has a higher percentage of debt indicating that the company is financing its needs through long term borrowings as it did not issue any further ordinary shares this year. It also had a buyback of 59.5m of its ordinary shares in 2008(Aer lingus plc, 2008).

4. Interest times earned ratio Aer lingus 2 times, RyanAir 6.45 times
This ratio measures how much the company earns in its earnings before interest and tax to cover its interest expense. Aer lingus has a considerably lower ratio indicating that its not earning enough to cover for the interest expense. This is due to the exceptional cost t ha to bear this year which has decreased its earnings before interest and tax. RyanAir has a satisfactory ratio of 6.45 times, which means that it is earning enough to pay off to the lenders.

Efficiency ratio

1. Asset turnover Aer lingus 68.45, RyanAir 44.88
This ratio determines how efficiently the company is utilizing its assets to earn revenue through them. Aer lingus shows an impressive ratio of 68.45 which indicates it is utilizing its assets quite efficiently. RyanAir has a low asset turnover indicating that assets are not being utilized well enough.

2. Account receivables Turnover Aer lingus 17.623 times, RyanAir 79.74 times
This ratio measures how well the company is doing to recover cash from its receivables, Aer lingus has a 17.623 times accounts receivables turnover ration, which indicates that the company is able to recover cash from debtors in time and maintains good credit terms with them.
Ryan Air has a very high ratio, indicating that the company may be allowing too much of credit period to customers to increase revenue. Though offering attractive credit terms to customers to increase sales is a good policy but in the long term it will harm the company in a way that it will not be able to pay off its obligations or finance its activities from its own resources, as a result company will be forced to borrow more loans.

Investor Ratios

1. Earning per share Aer lingus 0.20 euro cents, RyanAir 0.26 euro cents
This ratio shows the profit earned for the each issued stock, Aer lingus incurred a loss this year so thats why it has a negative earning per share. RyanAir made a profit in 2008 but its earnings per share is still lower considering that it did not issue further share and exercised a buyback option of it issued share capital (Aer lingus plc, 2008).

2. Dividend per share Aer lingus 0, RyanAir 0
This ratio measures the amount of dividend that is declared for the shareholders of the company. Both Aer lingus and RyanAir did not pay out any dividend this year to the shareholders. Although, its beneficial for the companies to retain profits which then can be used to fulfill future finance needs of the company but in the long run, not giving dividends to shareholders might damage the investors confidences in the company. And it will make the companys shares less attractive (Ryan Air Plc, 2008).

3. Dividend payout ratio Aer lingus 0, RyanAir 0
This ratio measures the amount of dividend paid out for the earnings per share. As both the companies did not payout any dividends to the investors so both have a zero ratio.

MeritsDemerits of Aer lingus
The above ratio analysis for Aer lingus shows a deteriorating performance for the year 2008 from the previous year. Although some of the factors that hampered the companys financial performance are uncontrollable for the company, like fuel costs which rose tremendously (almost doubled) from the previous year. The economic downturn also played its role in the companys financial problems, which forced the company to reduce its fares.

Almost all of the profitability ratios apart from the return on capital employed show negative margins. The loss which company incurred was due to the exceptional costs of  140.9m that Aer lingus had to bear. Excluding this non-routine exceptional cost, Aer lingus earned a profit of  21.2m it is also indicated by the positive return of 3.41 on capital employed (Aer lingus plc, 2008). Despite of the economic downturn and crisis in aviation industry, Aer lingus managed to increase the number of passengers from the last year, though it was offset by the reduction in travel fares. The Ancillary revenue increased by 37.7 from the last year, cargo revenue showed a slight increase of 5.5 and the other revenue head also increased by 11.5.

The companys liquidity ratios are not too impressive, which may be a risky sign for the company because it means that the company does not have adequate cash or cash equivalent to meet its obligations, it will lower the confidence of the investors and the lenders who might be unwilling to lend in future. The companys gearing ratios seem satisfactory which shows that Aer lingus has not been depending on borrowing debts for its financing needs. The lesser the gearing level a company keeps, the more the confidence investors show in that company.

Company has performed well in achieving impressive efficiency ratios, and is utilizing its assets efficiently. As the company incurred a loss this year, so it could not afford to pay its shareholders any dividends. Aer lingus managed to cut its cost by implementing a third part maintenance contract which saved more than  20.0m in cost in the first half of 2008.

Analysis of statement of Cash Flows for Aer lingus

Judged by the criteria of relevance and reliability, cash flow statements are an extremely useful source of information for the users of accounts. Users would be interested in the survival of the company which is dependent on its ability to generate cash to pay its payables rather than to make a profit. Cash flow statements are very reliable because they are free from subjective allocation of cost to particular accounting periods, and are free from subjective valuation models that dog the reliability of the balance sheet. With a cash flow statement what you see is what you get.

A provisional review of Aer lingus cash flow statement reveals a net increase of  18,266,000 in cash and cash equivalents in the accounting period. At the last year ended 31 December 2007, Aer lingus had a bank overdraft of ( 12,185,000), where as this year they managed to turn that around and had a positive cash and cash equivalent balance of  6,081 at the year ended December 2008. Below is the detailed analysis of how the cash inflows and outflows took place in the year ended 2008.

Operating Activities
Aer lingus payables increased in this year from the last year, which explains one of the reasons for the net cash and cash equivalent increase. Aer Lingus also received an income tax credit of  5,046,000, further increasing its cash balance.

Investing Activities
During the period the company earned a substantial inflow of cash through finance income which also had a positive impact on cash balance at the year end. Total of  54,798,000 interest was earned by the company under finance income, interest income earned on other financial assets of  4,420,000 and amortization of available-for-sale reserve   1,642,000. There was also an exchange gain on cas-.x