MFR (Managing Financial Resources) Individual Assignment - European LCCs and Easyjet Financial Analysis

MFR (Managing Financial Resources)
Individual Assignment
European LCCs and easyJet
Financial Analysis
Name: Hisham El Sherbini
Course: Executive MBA EM12
Date: 29th of March 2013

Table of Contents
1. Executive Summary ....................................................................................................................... 1
2. Introduction .................................................................................................................................. 1
2.1. Overview of the Industry....................................................................................................... 1
2.2. Overview of the Organisation ............................................................................................... 2
3. Management Ratios ...................................................................................................................... 3
3.1. Profitability Ratios ................................................................................................................. 3
3.1.1. ROCE (Return on Capital Employed) .............................................................................. 4
3.1.2. ROS (Return on Sales).................................................................................................... 5
3.1.3. Sales Generation ........................................................................................................... 6
3.2. Liquidity (or Working Capital) Ratios ..................................................................................... 8
3.2.1. Current Ratio and the Liquid (Acid Test) Ratio .............................................................. 8
3.2.2. Stock (Inventory) Turn and Days ................................................................................... 9
3.2.3. Trade Receivables (Debtor) Days .................................................................................. 9
3.2.4. Trade Payables (Creditor) Days ................................................................................... 10
3.3. Gearing/Leverage Ratios ..................................................................................................... 11
3.3.1. Borrowing Ratio .......................................................................................................... 11
3.3.2. Income Gearing (Interest Cover) ................................................................................. 12
3.4. Employee Ratios .................................................................................................................. 13
3.4.1. Profit Per Employee .................................................................................................... 13
3.4.2. Sales Per Employee ..................................................................................................... 14
3.4.3. Fixed Assets Per Employee .......................................................................................... 14
3.4.4. Borrowings Per Employee ........................................................................................... 15
4. Investor Ratios ............................................................................................................................ 16
4.1. Earnings Per Share (EPS) ..................................................................................................... 16
4.2. Price Earnings (PE) Ratio ..................................................................................................... 17
4.3. Net Assets Per Share ........................................................................................................... 18

4.4. Dividend Per Share (DPS) .................................................................................................... 19
4.5. Dividend Yield ..................................................................................................................... 20
4.6. Dividend Cover .................................................................................................................... 21
4.7. Market to Book (MB%) and Return on Equity (ROE%) ........................................................ 22
5. Conclusion................................................................................................................................... 24
6. References .................................................................................................................................. 25
7. Appendices ................................................................................................................................. 26
7.1. Appendix A Glossary......................................................................................................... 26

Hisham El Sherbini MFR Assignment
1. EXECUTIVE SUMMARY
This report will attempt to analyse the Financial Performance of easyJet over the last 5 years (2008-
2012). The report starts by introducing the sub-industry of the LCCs (Low Cost Carriers) as well as the
chosen company, easyJet. From there, we immediately dig into the financial analysis of the
company. We are approaching this analysis from, predominantly, an Investors angle. Even though
Company Valuation and, possibly, other areas are out of the scope of this report and they would
have been useful in completing the picture, we will try and shed some light on the financial health of
easyJet and whether it can be seen as a potentially good investment.
easyJets accounts are published on the 30th of September of the respective year. We will generally
be using easyJets Annual Reports as a source of data unless otherwise noted. In that case, the Osiris
database (BvD, 2013), OneSource (OneSource, 2013) or other sources will be used. This data will act
as the catalyst to different financial ratios used.
2. INTRODUCTION
2.1. OVERVIEW OF THE INDUSTRY
Najda (2003) defines an LCC to be an airline that operates a point-to-point network, pays employees
below the industry average wage, and offers no frills service.
The concept originated in the United States with Southwest Airlines, which began service in 1971.
The trend spread to Europe and the rest of the world by the beginning on the 1990s. In Europe the
trend started in 1991 when the Irish company, Ryanair, previously a traditional carrier, transformed
itself into an LCC. The timeline in Figure 1 shows how the rest of the airlines followed suit. It is now
generally accepted that a low-cost airline offers low fares and eliminates most traditional additional
passenger services (Macrio et al, 2007).
Figure 1 - European LCCs Timeline
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Illustrated in Figure 2, the published members statistics report by ELFAA (2012) suggests that the
top 5 European LCCs, by many standards such as number of passengers, daily flights and aircrafts are
Ryanair, easyJet, Norwegian, vueling and Wizz Air.
Figure 2 - Members' Statistics December 2012
Passengers (m) Average Load Factor (%)

5.8 0.6
7.2 4.7 0.8 100
12 90
80
14.8 79.6 70
60
17.7
50
59.2 40
30
20
10
Ryanair easyJet 0
Norwegian vueling
Wizz Air Flybe
transavia.com Jet2.com
Sverigeflyg Volotea
Number of Daily Flights Destinations Routes Number of Aircrafts
1600
1400
1200
1000
800
600
400
200
0
(ELFAA, 2012)
2.2. OVERVIEW OF THE ORGANISATION
easyJet was founded in March, 1995, by Sir Stelios Haji-Ioannou to offer low-cost flights in Europe.
The timeline in Figure 3 shows how easyJet went from one success to another. They expanded
massively but steadily over the last 18 years. It is interesting to note how the concept of LCC is now
becoming blurred as easyJet have started to aim towards business users. In 2011, they extended and
enhanced their agreement with Amadeus, arguably the largest GDS (Global Distribution System)
Page | 2
provider in the world, to penetrate the corporate travel market so that they can gain a larger market
share. In 2011 as well, they introduced Flexi-Fares aimed at Business Travellers. These fares included
unlimited flexibility to change the date of their flights up to two hours before the scheduled
departure time, automatic speedy boarding, no booking fees as well as checked in hold bag included
at no extra cost. At the start of 2012, easyJet announced a pan European commercial agreement
with American Express Global Business Travel. The new deal means that it will be working with
American Express as one of its first Travel Management Company partners (easyJet, 2012b).
Figure 3 - easyJet's Timeline
(easyJet, 2013a)
3. MANAGEMENT RATIOS
Henley Business School (2012:89) suggests that:
One of the most effective means of assessing an organisations performance

is the use of management ratios[They] can be used very effectively to
inform management of the most critical issues requiring their attention,
thereby providing a valuable control mechanism for management.
3.1. PROFITABILITY RATIOS
Henley Business School (2012) suggests how important for management to answer the question
how much profit is being generated on capital invested.
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3.1.1. ROCE (RETURN ON CAPITAL EMPLOYED)
The ROCE attempts to relate the profit to the assets that are tied up within the business (Henley
Business School, 2012). The numerator usually used in this ratio is the PBIT (profit before interest
payable and tax) whereas the denominator can either be the Net Assets (total assets less current
liabilities) which is commonly used in the UK or the Total Assets which is used more in other
countries such as the USA. The former measure of the ROCE is referred to as the ROA/RONA (Return
on Assets) whereas the latter is referred to as ROTA (Return on Total Assets) (Henley Business
School, 2012). In their Annual Report (easyJet, 2010:01), easyJet calculates the ROCE by dividing
normalised operating profit after tax by average net debt plus average shareholders equity. Using
this calculation usually results in a higher absolute size of the ratios (Mills and Print, 2006).
However, using the ROTA gives a more complete picture. That is why we ensured that we used it
here, besides the RONA.
Hence, to calculate the ROCE for easyJet for the last 5 years (2008-2012) according to both the RONA
and the ROTA variations (Mills & Print, 2006), we can use the following:

% = 100

% = 100

Year 2008 2009 2010 2011 2012

PBIT (m s) 144.2 82.6 173.5 272 342
Net Assets (m s) 2186 2610.8 2937.9 3292 3031
Total Assets (m s) 3095.8 3673 4002.5 4469 4295
RONA% 6.60 3.16 5.91 8.26 11.28
ROTA% 4.66 2.25 4.33 6.09 7.96
ROTA% RONA% Total Assets (m s)
PBIT (m s)
12.00 Net Assets (m s)
5000
10.00 4500
4000
8.00 3500
3000
6.00 2500
2000
4.00
1500
1000
2.00
500
0.00 0
2008 2009 2010 2011 2012 2008 2009 2010 2011 2012
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Interpretation:
easyJets PBIT shows a stable incline following the drop in 2009, a year that Sir David Michels, the
Non-Executive Interim Chairman, described as one of the most challenging trading environments
for many years (easyJet, 2009).
In 2009, the PBIT dropped to 82.6m from 144.2 in the previous year but they stayed profitable
unlike quite a few other airlines. As per OneSource (2013), Ryanair, its closest competitor, made
over a 100m euros loss in PBIT during that year.
Except for the drop in 2009, easyJets ROCE showed a steady climb since then. The ROTA% for
Ryanair for that year was -2.83% (BvD, 2013). With the help of a reduction in the Total Assets in
2012, the ROTA showed an even better climb. This reduction was mainly due to the payment of a
special dividend as well as the accelerated repayment of 162 million mortgage loans. Their
actions reduced excess liquidity and they ended the year with a cash and money market
deposits balance inline with their policy of holding 4 million cash per aircraft in the fleet
(easyJet, 2012a).
3.1.2. ROS (RETURN ON SALES)
The Return on Sales ratio gives an indication of the average profit margin achieved by a
company.(Mills & Print, 2012:97). The numerator used is the same PBIT whereas the denominator is
the Sales Revenue. Hence the ratio will look as follows:

% = 100

Year 2008 2009 2010 2011 2012

PBIT (m s) 144.2 82.6 173.5 272 342
Sales Revenue (m s) 2362.8 2666.8 2973.1 3452 3854
Return on Sales % 6.10 3.10 5.84 7.88 8.87
Return on Sales % Sales Revenue (m s)
10.00 PBIT (m s)
4500
9.00
4000
8.00
3500
7.00
3000
6.00
2500
5.00
2000
4.00
1500
3.00
2.00 1000
1.00 500
0.00 0
2008 2009 2010 2011 2012 2008 2009 2010 2011 2012
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Interpretation:
Mills & Print (2006) suggest that The expected value of this ratio will differ quite considerably for
different types of businesses. For LCCs, the ROS is around 7.89% (OneSource, 2013). Ryanair,
however, reported a consistent figure above 10% over the last 5 years except in 2009 when they
reported a loss. Their average over the 5 years was still high at 8.77% (OneSource, 2013).
easyJets average over the same 5 years is 6.358%, less than Ryanair but strong, consistent, and
higher than most competitors.
Even through the tough year of 2009, easyJet reported a steady climb in revenues offsetting the
86 million unit increase in fuel costs and 31 million reduction in interest income (easyJet,
2009). As mentioned in the previous section, they stayed profitable even with the drop of profits
which contributed to the drop in ROS during 2009.
3.1.3. SALES GENERATION
Mills & Print (2006:99) presents the Sales Generation Ratio as the value of sales (revenue)
generated from each of total assets. Hence, it can be calculated by dividing Sales Revenue by Total
Assets:
Using the data previously used in the last two ratios:
Year 2008 2009 2010 2011 2012

Sales Revenue (m s) 2362.8 2666.8 2973.1 3452 3854
Total Assets (m s) 3095.8 3673 4002.5 4469 4295
Sales Generation 0.76 0.73 0.74 0.77 0.90
Sales Generation Total Assets (m s)
1.00 Sales Revenue (m s)

5000
0.90
4500
0.80
4000
0.70
3500
0.60 3000
0.50 2500
0.40 2000
0.30 1500
0.20 1000
0.10 500
0.00 0
2008 2009 2010 2011 2012 2008 2009 2010 2011 2012
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Interpretation:
Mills & Print (2006:100) highlighted that A low ratio could be due to a decrease in sales and/or
an increase in total assets. As a general rule, the higher the ratio, the better.
The slight drop in 2009 can be accounted to the increase in total assets which is mainly due to the
net increase in property, plant and equipment in the year being 509.6 million. The main
contributor was new aircraft delivered, pre-delivery deposits for future deliveries and non-
aircraft fixed assets totalling 515.0 million. This is indeed as part of the annual strategy process
where they have agreed a fleet plan to deliver growth of around 7.5% per annum over the next
five years (easyJet, 2009).
easyJets revenues are made of Ancillary and Passenger revenue, the latter contributing with the
most part (80%). Even though Ancillary revenue increased by 40.6% to 516.3 million in 2009,
driven mainly by increases in the checked bag charge, Passenger revenue in 2009 grew by only
7.8% to 2,150.5 million. Despite the 16.0% increase in average aircraft during the period,
capacity in terms of seats flown increased by only 1.8% as a result of the decision to reduce flying
activity particularly through the winter. That was mainly in response to the rise in fuel price at the
beginning of 2009; however, utilisation returned to more normal levels for the summer (easyJet,
2009).
A similar situation was recognized in 2010 when the total assets increased considerably as the net
book value of property, plant and equipment increased by 315.9 million, driven principally by
the addition of a net 21 owned A320 family aircraft. However, as the Passenger revenue
increased at a better rate than in 2009, the Sales Generation ratio showed a slight climb (easyJet,
2010).
The better climb in 2011 was due to a less increase in total assets mainly because of, only, a 221
million increase in property, plant and equipment. In spite of significant increases in APD, VAT
and similar taxes levied on passenger, Passenger as well as Ancillary revenues increased
considerably contributing to a better ratio (easyJet, 2011).
The main reason for the hike is 2012 was, as we mentioned earlier, was mainly due to easyJets
decision to reduce excessive liquidity.
Overall, easyJets managements decisions over the last 5 years helped them weather the storm
in 2009 and 2010, and get into a more favourable position in the two of years that followed.
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3.2. LIQUIDITY (OR WORKING CAPITAL) RATIOS
Mills & Print (2006: 101) rightly emphasise that While profitability is undeniably important, the need
to achieve a satisfactory liquidity position is vital for survival.
There are different ratios we can use to illustrate the liquidity of easyJet. The data required include
Current Assets, Receivables, and Current Liabilities (from the Balance Sheet) as well as Cost of Sales
and Sales (from the Income Statement) (Mills & Print, 2006).
3.2.1. CURRENT RATIO AND THE LIQUID (ACID TEST) RATIO
The Current Ratio attempts to measure the ability of a company to meet its financial obligations
falling due within one year. It is calculated by dividing current assets by current liabilities (Mills &
Print, 2006: 102) as follows:
The Liquid ratio attempts to measure a companys ability to pay its way in the short-term without
having to liquidate inventoryIt is calculated by deducting inventory from current assets then
dividing the result by current liabilities(Mills & Print, 2012: 103) as follows:
( )
=

easyJet does not report any inventory and, hence, the Liquid Ratio will, mathematically, be equal to
the Current Ratio.
Year 2008 2009 2010 2011 2012

Current Assets (m s) 1415 1482.2 1514.9 1738 1327
Current Liabilities (m s) 909.8 1062.2 1064.6 1177 1264
Current Ratio/Liquid Ratio 1.56 1.40 1.42 1.48 1.05
Current Ratio/Liquid Ratio Current Liabilities (m s)
1.80 Current Assets (m s)

2000
1.60
1800
1.40 1600
1.20 1400
1.00 1200
1000
0.80
800
0.60
600
0.40 400
0.20 200
0.00 0
2008 2009 2010 2011 2012 2008 2009 2010 2011 2012
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Interpretation:
Mills & Print (2006:103) argues that a very low ratio indicates potential difficulties However,
the converse, a high current ratiocould mean that the company has idle resources. This ratio
has been suffering from the rule of thumb that current assets should be double that of current
liabilities for all companies. However, it would vary by the industry. In our case, the industry
benchmark is 1.42 times (Reuters, 2013).
Looking at the ratio between 2008 and 2011, we can see it is very much in line with the industry
benchmark. The decline from 1.48 to 1.05 times in 2012 was due to a planned reduction in the
cash and cash equivalent from 1,100m to 645m (easyJet, 2012). Still, the ratio shows easyJets
ability to pay off short-term obligations and stay solvent. It is worth noting that that of Ryanair
for 2012 was 2.38 times (Macroaxis, 2013).
3.2.2. STOCK (INVENTORY) TURN AND DAYS
The Inventory Turn Ratio is a measure showing the number of times inventory is turned over on
average in a given period (usually one year) (Mills & Print, 2012: 104):
Again, since easyJet does not report any Inventory, this ratio would be inapplicable.
3.2.3. TRADE RECEIVABLES (DEBTOR) DAYS
The Debtor Days shows the number of days on average that trade receivables take to pay their
invoices (Mills & Print, 2012). It is calculated as follows:
Year 2008 2009 2010 2011 2012

Trade Receivables (m s) 142.1 158.4 76.5 84 124
Sales Revenue (m s) 2362.8 2666.8 2973.1 3452 3854
Debtor Days 21.41 21.15 9.16 8.66 11.45
Debtor Days Sales R evenue (m s)
25.00 Trade Receivables (m s)

4500
4000
20.00
3500
3000
15.00
2500
2000
10.00
1500
5.00 1000
500
0.00 0
2008 2009 2010 2011 2012 2008 2009 2010 2011 2012
Page | 9
Interpretation:
The debtor days have decreased considerably after 2009, which can be seen as a good sign. Mills
& Print (2006:106) suggest that the lower theratio the more effective is the system of credit
control and, as a general rule, the lower the ratio the better.
Mills & Print (2006) suggest that monitoring trade receivable days in aggregate as well as
undertaking trade receivable age analysis is very desirable. Trade receivables are indeed
monitored by easyJet and allowances are created when there is evidence that amounts due,
according to the terms of the receivable, may not be collected. Amounts due from trade
receivables are short term in nature and largely comprise credit card receivables due from
financial institutions with credit ratings of at least A and, accordingly, the possibility of significant
default is considered to be unlikely (easyJet, 2012).
The Debtor days are still considered high compared with Ryanair which was 4.24 in 2012
(Morningstar, 2013a) and are suggested to be among the industry's worst according to
Bloomberg (2013). This implies that revenues are still not necessarily being collected in the most
efficient manner.
3.2.4. TRADE PAYABLES (CREDITOR) DAYS
The Creditor Days Ratio shows the number of days of trade payables that is being held on average
(Mills & Print, 2012). It is calculated as follows:
Using the Cost of Goods Sold figure from Osiris:
Year 2008 2009 2010 2011 2012

Trade Payables (m s) 77.5 99.2 79.2 90 109
Cost of Sales (m s) 1943.5 2241 2330.7 2645 2816
Creditor Days 14.20 15.76 12.10 12.11 13.78
Creditor Days Cost of Sal es (m s)
18.00 Trade Payables (m s)

3000
16.00
14.00 2500
12.00 2000
10.00
1500
8.00
6.00 1000
4.00
500
2.00
0.00 0
2008 2009 2010 2011 2012 2008 2009 2010 2011 2012
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Interpretation:
As a general rule, the higher the ratio, the better because it is an indication of an efficient credit
control. When comparing it with the debtor days, especially over the last three years, we can
clearly see that it is higher which is definitely a more favourable position as it means that it takes
easyJet more days to pay their debt than for their debtors to pay theirs.
3.3. GEARING/LEVERAGE RATIOS
Businesses can secure finance from many sources ranging from shareholders to lenders. One of the
key differences between the two is that the interest payable on borrowed funds is deductible as an
expense whereas shareholder dividends are paid from the after tax income. And, hence, there can
be a distinct advantage for a company raising debt as opposed to equity. However, the point at
which increasing the proportion of debt to equity will be perceived as a risk should be avoided.
Hence, we calculate gearing/leverage ratios to measure the proportion of debt to equity and other
measures to assess the firms ability to service its debts from its current profits (Mills & Print, 2006).
3.3.1. BORROWING RATIO
This ratio shows the number of times total borrowings exceed equity (Mills & Print, 2006):
Using the Total Shareholders Equity figure from Osiris:
Year 2008 2009 2010 2011 2012

Total Borrowings (m s) 626.9 1120.6 1212 1300 957
Equity (m s) 1278.2 1307.3 1500.7 1705 1794
Borrowing Ratio 0.49 0.86 0.81 0.76 0.53
Borrowing Ratio Equity (m s)
1.00 Total Borrowings (m s)

2000
0.90
1800
0.80
1600
0.70
1400
0.60 1200
0.50 1000
0.40 800
0.30 600
0.20 400
0.10 200
0.00 0
2008 2009 2010 2011 2012 2008 2009 2010 2011 2012
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Interpretation:
easyJets borrowing ratio has been consistently under 1 times, an indication that they do not
place a great reliance upon borrowing thane equity. In that case, we consider them low geared.
That is, in general, a favourable position as a company which has high gearing is particularly
vulnerable and might find that it cannot continue to finance its borrowings (Mills & Print, 2006).
As the increase in equity was minimal and steady over the last 5 years, an increase in total
borrowings for the years 2009-2011 resulted in a slightly higher ratio. This can be explained but
the fact that, as we mentioned earlier, easyJet added new aircrafts to their fleet in the three
2009-2011 the purchase of which was funded from additional borrowings.
In 2012, easyJets conservative of a 50% limit on net gearing applied in line with the gearing
reductions in 2011 and 2012 helped in reaching a ratio of 0.53 times the shareholders funds,
noticeably lower than Ryanair which was 1.11 times (Macroaxis, 2013) and lower than the
industry average of 2 times (Morningstar, 2013b).
3.3.2. INCOME GEARING (INTEREST COVER)
The income gearing ratio measures the extent to which interest payable is covered from pre-tax
profits plus interest payable (Mills & Print, 2006):

= 100
( )
Year 2008 2009 2010 2011 2012

Interest Payable (m s) 34 27.9 19.5 24 25
PBIT (m s) 144.2 82.6 173.5 272 342
Income Gearing % 23.58 33.78 11.24 8.82 7.31
Interest Cover 4.24 2.96 8.90 11.33 13.68
Income Gearing % PBIT (m s)
Interest Cover Interest Payable (m s)
40.00 400
35.00 350
30.00 300
25.00 250
20.00 200
15.00 150
10.00 100
5.00 50
0.00 0
2008 2009 2010 2011 2012 2008 2009 2010 2011 2012
When expressed as the ability of the company to service debt commitments from profits, the ratio is
known as the interest cover ratio.
Page | 12
Interpretation:
The interest cover ratios in 2008 and 2009 declined due to the margins in these two years having
been severely impacted by higher fuel associated with decrease in operating profit, additional
borrowings and new draw-downs net of repayments and foreign exchange movements on the
retranslation of debt (easyJet, 2009).
easyJet managed to improve its revenues and later lower its borrowing in 2012. Therefore the
interest cover in 2012 improved to 13.68 times which means that easyjet is more capable of
meeting its interest obligations from operating earnings. Compared with Ryanair, which was 6.8
times only for the same area, we can see easyJet being in a better position (Morningstar, 2013a)
3.4. EMPLOYEE RATIOS
Organisations of all types try to ensure that they derive as much value as possible from [their]
resources (Mills & Print, 2006:111). Besides aircrafts, easyJets most valuable resources are people.
3.4.1. PROFIT PER EMPLOYEE
This ratio shows the value of PBT generated by each employee (Mills & Print, 2006):
Year 2008 2009 2010 2011 2012

Profit Before Taxation (Th s) 110200 54700 154000 248000 317000
Number of Employees 6375 6478 6887 7724 8206
Profit Per Employee (Th s) 17.29 8.44 22.36 32.11 38.63
Profit Per Employee (Th s) Number of Employees
45.00 Profit Before Taxation (Th s)

350000
40.00
300000
35.00
30.00 250000
25.00 200000
20.00 150000
15.00
100000
10.00
50000
5.00
0.00 0
2008 2009 2010 2011 2012 2008 2009 2010 2011 2012
Interpretation:
This ratio is very much in line with the ROCE. We explained the drop in 2009 but, since then,
easyJet improved its profit through robust revenue and growth in passenger bases outside the
Page | 13
UK. This resulted in a growth in the number of employees and standby crews to leverage new
revenue opportunities (easyJet, 2011).
3.4.2. SALES PER EMPLOYEE
This ratio shows the value of sales generated by each employee (Mills & Print, 2006). It is
calculated as follows:
Year 2008 2009 2010 2011 2012

Sales Revenus (m s) 2362.8 2666.8 2973.1 3452 3854
Sales Per Employee (th s) 370.64 411.67 431.70 446.92 469.66
Sales Per Employee (th s) Number of Employees
500.00 Sales Revenus (m s)

9000
450.00
8000
400.00
7000
350.00
6000
300.00
5000
250.00
4000
200.00
3000
150.00
100.00 2000
50.00 1000
0.00 0
2008 2009 2010 2011 2012 2008 2009 2010 2011 2012
Interpretation:
In line with the growth of the airline, the employment levels across Europe have continued to
grow, this is reflected in the calculated ratios. There is increase in sales driven by the growing
number of employees. Hence the robust in sales reflects the efficiency and profitability of the
company's capital investments in employment.
3.4.3. FIXED ASSETS PER EMPLOYEE
It gives an indication of the value of fixed assets per employee (Mills & Print, 2006):
Page | 14
Year 2008 2009 2010 2011 2012

Fixed Assets (m s) 1680.8 2190.8 2487.6 2731 2968
Fixed Assets Per Employee (th s) 263.65 338.19 361.20 353.57 361.69
Fixed Assets Per Emplo yee (th s) Number of Employees
400.00 Fixed Assets (m s)

9000
350.00 8000
300.00 7000
250.00 6000
5000
200.00
4000
150.00
3000
100.00 2000
50.00 1000
0.00 0
2008 2009 2010 2011 2012 2008 2009 2010 2011 2012
Interpretation:
easyJet saw maturing of capacity investments by the increased proportion of owned aircraft in
the eet. The robustness of the balance sheet is driven by their efficient asset allocation and
competent operating performance, a healthy position (easyJet, 2011)
3.4.4. BORROWINGS PER EMPLOYEE
This ratio shows the value of the borrowings attributable to each employee. It is calculated by
dividing the total borrowings by the average number of employees (Mills & Print, 2006):
Year 2008 2009 2010 2011 2012

Total Borrowings (m s) 626.9 1120.6 1212 1300 957
Borrowings Per Employee (th s) 98.34 172.99 175.98 168.31 116.62
Borrowings Per Employee ( th s) Number of Employees
200.00 Total B orrowings (m s)

9000
180.00
8000
160.00
7000
140.00
6000
120.00
5000
100.00
4000
80.00
3000
60.00
40.00 2000
20.00 1000
0.00 0
2008 2009 2010 2011 2012 2008 2009 2010 2011 2012
Page | 15
Interpretation:
The overall trend indicates that borrowings per employee rose in line with the increase of
borrowings; there was growth in the number of employees which reflect the efficient utilisation
of human resources in managing easyJets capital and generating surplus revenue as per other
employees ratios.
The drop in 2012 was associated with the drop in borrowings though the number of employees
went up to meet easyJets capacity growth obligation.
4. INVESTOR RATIOS
Investor ratios can be used by the investor to assist in investment decisions. [They] can also be used
by the directors of the business to measure the effect management decisions might have on the
future share price and dividends (Mills & Print, 2006:114).
4.1. EARNINGS PER SHARE (EPS)
The EPS is one of the most widely quoted statistics when there is a discussion of a companys
performance or share value (Walsh, 2008). It is the basis for the calculation of a number of other
investor ratios (Mills & Print, 2006). It is calculated as follows:
It serves no purpose to compare the EPS in one company with that in another because a company
can elect to have a large number of shares of low denomination or the other way around. A
company can also decide to increase or reduce the number of shares on issue. However, the growth
of EPS over time is a very important statistic. Furthermore, that growth can have a significant
influence on the market price of the share (Walsh, 2008).
Since there is only a small difference between the Weighted average number of ordinary shares
used to calculate basic EPS and the Weighted average number of ordinary shares used to calculate
diluted EPS, we will only be using the first figure (basic EPS). Using the figures from the Annual
Reports:
Page | 16
Year 2008 2009 2010 2011 2012

Profit Attributable to Shareholders (m s) 83.2 71.2 121.3 225 255
Number of Shares (m) 419.4 421.9 426.5 429 408
EPS (Earnings Per Share) (Pence) 19.80 16.90 28.40 52.50 62.50
EPS (Earnings Per Share) (Pence) Number of Shares (m)
70.00
500
60.00 450
400
50.00
350
40.00 300
250
30.00
200
20.00 150
100
10.00
50
0.00 0
2008 2009 2010 2011 2012 2008 2009 2010 2011 2012
Interpretation:
easyJets commitment to sustain high returns to shareholder is demonstrated in its growing EPS
for the last five years. In 2012, it few 19.0% to 62.5 pence per share. Of this increase, 13.6% is
due to growth in profit after tax and 5.4% due to the impact of the share consolidation following
payment of the special dividend in March (easyJet, 2012).
The stable growth in EPS is positive signalling to investors for easyJets strong financial position
and the high value of its shares. The consistent improvement in the EPS figure year after year is
indication of continuous improvement in the earning power of easyJet (Accounting for
Management, 2012).
4.2. PRICE EARNINGS (PE) RATIO
The PE ratio shows the relationship between the market price of shares and their earnings from the
most recent published accounts[It] is expressed as a multiple, with the magnitude of the ratio
providing some indication of how the market values the future earnings potential of a share (Mills &
Print, 2006:115). It is calculated as follows:
The Market Price of Share used is the Closing price of the share on the date the accounts are
published which is the 30th of September (easyJet, 2013b).
Page | 17
Year 2008 2009 2010 2011 2012

Market Price Of Share (Pence) 343.63 413.67 403.52 375.16 580.50
EPS (Earnings per Share) (Pence) 19.80 16.90 28.40 52.50 62.50
Price Earnings Ratio 17.36 24.48 14.21 7.15 9.29
Price Earnin gs Ratio EPS (Earnings per Share) (Pence)
Market Price Of Share (Pence)
30.00
700.00
25.00 600.00
20.00 500.00
400.00
15.00
300.00
10.00
200.00
5.00 100.00
0.00 0.00
2008 2009 2010 2011 2012 2008 2009 2010 2011 2012
Interpretation:
The company has generally no direct control over their PE ratio but they can influence over the
short-term perhaps through good public relations exercise (Walsh, 2008).
There is no normal value for the PE ratio which differs over time (Mills & Print, 2006). It is clear
from the diagram above how it fluctuated from being high in 2009 due to low earnings but a
strong market view to dropping over the next couple of years because of the increase in EPS.
In 2012, the market showed its appreciation of easyJets financial performance and consistency,
represented in the rise in share price and, accordingly, the PE ratio. Since the publishing of their
latest accounts in September, 2012, the share price has almost doubled by close of market on
24th of April, 2013.
A climbing and strong PE ratio is advantageous. It strengthens the companys position in different
ways such as new funds can be raised at a favourable price as well as the ability of the company
to make acquisitions on favourable terms (Walsh, 2008).
4.3. NET ASSETS PER SHARE
This ratio shows the amount which each equity share is covered by the net assets of the company
(Mills & Print, 2006:116). It is calculated as follows:
Page | 18
Year 2008 2009 2010 2011 2012

Net Assets (m s) 2186 2610.8 2937.9 3292 3031
Net Assets Per Share (pence) 521.22 618.82 688.84 767.37 742.89
Net Assets Per Sh are (pence) Number of Shares (m)
900.00 Net Assets (m s)

3500
800.00
3000
700.00
600.00 2500
500.00 2000
400.00 1500
300.00
1000
200.00
500
100.00
0.00 0
2008 2009 2010 2011 2012 2008 2009 2010 2011 2012
Interpretation:
At times where the easyJets share price fluctuated over the last 5 years, the NAPS showed a
steady climb and an increase in the value of assets.
The drop in 2012 is due to planned reduction of net assets but, at the same time, easyJet decided
on share consolidation following payment of the special dividend in March resulting in just a
slight reduction in the total number of shares (easyJet, 2012).
4.4. DIVIDEND PER SHARE (DPS)
The DPS shows the amount of gross dividend, in pence, allotted to each equity share (Mills & Print,
2006):
The DPS was retrieved from the annual reports (easyJet, 2012).
Page | 19
Year 2008 2009 2010 2011 2012

Gross Dividend (m s) 0 0 0 47.19 97.92
Dividend Per Share (pence) 0.00 0.00 0.00 10.50 21.50
Dividend Per Share (pence) Number of Shares (m)
25.00 Gross Dividend (m s)
500
450
20.00
400
350
15.00 300
250
10.00 200
150
5.00 100
50
0.00 0
2008 2009 2010 2011 2012 2008 2009 2010 2011 2012
Interpretation:
It was not until November 2010 that easyJet decided to pay dividends for the first time, following
more than a year of lobbying from Sir Stelios Haji-Ioannou, its founder and largest shareholder
(Financial Times, 2013). That was also influenced by the fact that, at 30 September 2011, they
had 1.4 billion of cash and money market deposits. Since the Board policy is to hold a cash
reserve of 4 million per aircraft, the remaining 584 million was made available to finance
committed aircraft orders and pay proposed dividends (easyJet, 2011).
In 2012, ordinary DPS grew by 104.8% to 21.5 pence per share. easyJet announced that dividend
policy is being amended to pay out one-third of profit after tax for each year, up from the one-
fifth. They had no plans to propose a further special dividend so that excess liquidity will continue
to be used where appropriate to pay down mortgage debt (easyJet, 2012).
The above can be seen as exciting news for shareholders who rely upon dividends as an income
stream, especially with the annual growth in dividend from 2011 to 2012 (Mills & Print, 2006).
4.5. DIVIDEND YIELD
The Dividend Yield shows the dividend payable on an equity share expressed as a percentage of the
market price of a share. It provides an indication of the return generated on a share investment, but
only in terms of the part of the return that is distributed (Mills & Print, 2006):

= 100

Page | 20
Year 2008 2009 2010 2011 2012

Dividend Per Share (pence) 0 0 0 10.5 21.5
Market Price of Share (pence) 343.63 413.67 403.52 375.16 580.50
Dividend Yield % 0.00 0.00 0.00 2.80 3.70
Dividend Yield % Market Price of Share (pence)
Dividend Per Share (pence)
4.00
700.00
3.50
600.00
3.00
500.00
2.50
400.00
2.00
300.00
1.50
200.00
1.00
0.50 100.00
0.00 0.00
2008 2009 2010 2011 2012 2008 2009 2010 2011 2012
Interpretation:
DY is significantly high compared to previous year which is associated with tangible increase in
DPS, very much affected by the dividend policy which has been amended as we mentioned
above. This correlated with the company commitment to delivering market leading returns
(easyJet, 2012:6).
Whilst delivering shareholder expectations of a strong capital base as well as returning superior
pay-out, the DY comes as 2% as per 2013, Market price 1130p, which is higher than both the
industry benchmark 1.10% and the sector norm for 1.65% (Reuters, 2013).
4.6. DIVIDEND COVER
The Dividend Cover ratio shows the number of times dividend is covered by earnings attributable to
shareholders (Mills & Print, 2006). It is calculated as follows:
Page | 21
Year 2008 2009 2010 2011 2012

Earnings Per Share (pence) 19.80 16.90 28.40 52.50 62.50
Dividend Per Share (pence) 0 0 0 10.5 21.5
Dividend Cover N/A N/A N/A 5.00 2.91
Dividend Cover Dividend Per Share (pence)
6.00 Earnings Per Share (pence)
70
5.00 60
4.00 50
40
3.00
30
2.00
20
1.00 10
0.00 0
2008 2009 2010 2011 2012 2008 2009 2010 2011 2012
Interpretation:
Being only there for two years, we might not be able to draw a trend related to dividend pay.
There might be little doubt regarding whether dividend is safe and that it can be maintained since
the DPS went up not very much in line with the EPS (Walsh, 2008).
4.7. MARKET TO BOOK (MB%) AND RETURN ON EQUITY (ROE%)
The MB% ratio shows the extent by which the market value of a company exceeds the book value. It
provides an indication of the companys financial position as perceived by the market. As for the
ROE, it is a measure of shareholder profitability (Mills & Print, 2006).
The MB% is calculated as follows:

% =

The Market Value of Equity is calculated as the Market Price Per Share multiplied by the Number
of Shares in issue during the period.
The ROE can be calculated by dividing the profit attributable to shareholders by the book value of
equity:

% = 100

Page | 22
For quoted companies, such as easyJet in our case, the ROE% can also be calculated using market
value of equity as follows:

% = 100

Year 2008 2009 2010 2011 2012

Earnings Per Share (pence) 19.80 16.90 28.40 52.50 62.50
Market Price Per Share (pence) 343.63 413.67 403.52 375.16 580.50
Book Value of Equity (m) 1278 1307 1501 1705 1794
Profit Attributable to Shareholders (m s) 83.2 71.2 121.3 225 255
MB% 112.75 133.50 114.66 94.40 132.02
ROE% (using Book Value) 6.51 5.45 8.08 13.20 14.21
ROE% (using Market Value) 5.76 4.09 7.04 13.99 10.77
10125.61 5733.50 2680.86 5391.68
ROE% (using Market Value) MB%
ROE% (using Book Value)
160.00
16.00
140.00
14.00
120.00
12.00
100.00
10.00
80.00
8.00
60.00
6.00
4.00 40.00
2.00 20.00
0.00 0.00
2008 2009 2010 2011 2012 2008 2009 2010 2011 2012
Interpretation:
In 2009, easyJet emphasized their focus on growth with margin improvement with the aim of
achieving a 15% return on equity in the medium-term (easyJet, 2009). The ROE% has, indeed,
been improving steadily since then.
In 2012, they got closer to their 15% target by achieving a 0.14 of profit for every 1 of
shareholders' equity, giving the stock an ROE of 14.21%. This increase, however, is lower than
that seen in either ROCE measure due to the increase in effective tax rate from 9% last year to
20% this year (easyJet, 2012).
The Book Value has been consistently in line with the Market Value except of a slight deviation in
2012 accounted mainly to the share price going up. By looking at the MB% at the same time, we
can see how the market has been appreciating easyJet in that year.
Page | 23
5. CONCLUSION
The ratio analysis we used showed a very strong performance for easyJet and an admirable recovery
since 2009. Managements decisions have been going in favour of the company. The market seems
to very much value the company to the extent that, since the accounts were last published in
September, 2012, the share price almost doubled to a closing of 1,144p (24th of April, 2013).
Hence, easyJet can indeed be seen as a very good investment whether for dividends or growth.
Page | 24
6. REFERENCES
Accounting for Management (2012) Earnings per share (EPS) ratio [Accessed 21st of April,
2013] http://www.accountingformanagement.org/earnings-per-share-eps-ratio/
Bloomberg (2013) EasyJet plc [Accessed 22nd of April, 2013]
http://investing.businessweek.com/research/stocks/financials/financials.asp?ticker=EZJ:LN&
dataset=balanceSheet&period=A&currency=native
BvD (2013) Osiris [Accessed 31st of March, 2013] https://osiris.bvdinfo.com/version-
2013328/Search.QuickSearch.serv?_CID=1&context=9813BHE6VVLOAZ
OneSource (2013) OneSource [Accessed 31st of March, 2013]
http://globalbb.onesource.com/web/Reports/ReportMain.aspx?KeyID=44662562&Process=
CP&FtrID=UNIFIEDSUMMARY
easyJet (2008) Annual Report
easyJet (2012a) Annual Report
easyJet (2012b) Europe by easyJet Press Information Kit
easyJet (2013a) Our Timeline 1995-2010 [Accessed 21st of April, 2013]
http://traveller.easyjet.com/features/2010/11/easyjet-timeline-1995-2010
easyJet (2013b) Share Price - Historic Calculator and Lookup [Accessed 19th of April, 2013]
http://corporate.easyjet.com/investors/share-price-information/historic-calculator-and-
look-up.aspx?sc_lang=en
ELFAA (2012) members statistics December 2012 [Accessed 20th of April, 2013]
http://www.elfaa.com/Statistics_December2012.pdf
Financial Times (2013) EasyJet plans debut dividend as profits jump [Accessed 08th of April,
2013] http://www.ft.com/cms/s/0/5617287e-f15a-11df-8609-
00144feab49a.html#axzz2PpM5nrpx
Henley Business School (2012) Managing Financial Resources Module Core.
Mills, R. and Print, C. (2006) Business Finance and Accounting for Managers, Henley-on-
Thames: Value Focus.
Macrio, R, Viegas, M & Reis, V (2006) Impact Of Low Cost Operation In The Development Of
Airports And Local Economies
Macroacis (2013) Compare Equities [Accessed 22nd of April, 2013]
http://www.macroaxis.com/invest/compare/EZJ.L
Morningstar (2013a) Ryanair Holding Plc [Accessed 22nd of April, 2013]
http://financials.morningstar.com/ratios/r.html?t=XLON:RYA&region=GBR
Morningstar (2013b) easyJet plc [Accessed 22nd of April, 2013]
http://quotes.morningstar.com/stock/ejttf/s?t=EJTTF
Reuters (2013) Financials: easyJet plc (EZJ.L) [Accessed on 22nd of April 2013]
http://uk.reuters.com/business/quotes/financialHighlights?symbol=EZJ.L
Walsh, Ciaran (2008) Key Management Ratios The 100+ ratios every manager needs to
know, Pearson Education
Page | 25
7. APPENDICES
7.1. APPENDIX A GLOSSARY
Acronym Meaning Note

LCC Low Cost Carriers
ELFAA European Low Fares Airline Association
Page | 26

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MFR (Managing Financial Resources)

Course: Executive MBA EM12

Date: 29th of March 2013

2.1. Overview of the Industry....................................................................................................... 1

2.2. Overview of the Organisation ............................................................................................... 2

3. Management Ratios ...................................................................................................................... 3

3.1. Profitability Ratios ................................................................................................................. 3

3.1.1. ROCE (Return on Capital Employed) .............................................................................. 4

3.1.2. ROS (Return on Sales).................................................................................................... 5

3.1.3. Sales Generation ........................................................................................................... 6

3.2. Liquidity (or Working Capital) Ratios ..................................................................................... 8

3.2.2. Stock (Inventory) Turn and Days ................................................................................... 9

3.2.3. Trade Receivables (Debtor) Days .................................................................................. 9

3.2.4. Trade Payables (Creditor) Days ................................................................................... 10

3.3. Gearing/Leverage Ratios ..................................................................................................... 11

3.3.1. Borrowing Ratio .......................................................................................................... 11

3.3.2. Income Gearing (Interest Cover) ................................................................................. 12

3.4. Employee Ratios .................................................................................................................. 13

3.4.1. Profit Per Employee .................................................................................................... 13

3.4.2. Sales Per Employee ..................................................................................................... 14

3.4.3. Fixed Assets Per Employee .......................................................................................... 14

3.4.4. Borrowings Per Employee ........................................................................................... 15

4. Investor Ratios ............................................................................................................................ 16

4.1. Earnings Per Share (EPS) ..................................................................................................... 16

4.2. Price Earnings (PE) Ratio ..................................................................................................... 17

4.3. Net Assets Per Share ........................................................................................................... 18

4.5. Dividend Yield ..................................................................................................................... 20

4.6. Dividend Cover .................................................................................................................... 21

4.7. Market to Book (MB%) and Return on Equity (ROE%) ........................................................ 22

7.1. Appendix A Glossary......................................................................................................... 26

2.1. OVERVIEW OF THE INDUSTRY

Figure 1 - European LCCs Timeline

Figure 2 - Members' Statistics December 2012

Passengers (m) Average Load Factor (%)

Number of Daily Flights Destinations Routes Number of Aircrafts

2.2. OVERVIEW OF THE ORGANISATION

Figure 3 - easyJet's Timeline

Henley Business School (2012:89) suggests that:

One of the most effective means of assessing an organisations performance

3.1. PROFITABILITY RATIOS

3.1.1. ROCE (RETURN ON CAPITAL EMPLOYED)

Year 2008 2009 2010 2011 2012

3.1.2. ROS (RETURN ON SALES)

Year 2008 2009 2010 2011 2012

3.1.3. SALES GENERATION

Using the data previously used in the last two ratios:

Year 2008 2009 2010 2011 2012

1.00 Sales Revenue (m s)

3.2. LIQUIDITY (OR WORKING CAPITAL) RATIOS

3.2.1. CURRENT RATIO AND THE LIQUID (ACID TEST) RATIO

Year 2008 2009 2010 2011 2012

1.80 Current Assets (m s)

3.2.2. STOCK (INVENTORY) TURN AND DAYS

3.2.3. TRADE RECEIVABLES (DEBTOR) DAYS

Year 2008 2009 2010 2011 2012

25.00 Trade Receivables (m s)

3.2.4. TRADE PAYABLES (CREDITOR) DAYS

Using the Cost of Goods Sold figure from Osiris:

Year 2008 2009 2010 2011 2012

18.00 Trade Payables (m s)

3.3. GEARING/LEVERAGE RATIOS

3.3.1. BORROWING RATIO

Using the Total Shareholders Equity figure from Osiris: