Annual Reports for Two British-Based, Assessment

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6%, versus 6.1% in 2008. The return on equity was -6.1% in 2009 and was 15.5% in 2008. The asset and equity levels were relatively stable for the two years, so most of the changes can be attributed to changes in the net income. To investigate those net income changes, the margins can be analyzed. The gross margin for 2009 was 3.14%; for 2008 it was 19.8% and for 2007 it was 21.1%. The net margin for 2009 was -5.7%; for 2008 it was 14.3% and for 2007 the net margin was 19.4%. What this indicates is that the decline in the profits and therefore in the ROE and ROA stems from a decline in operating profit.

For Ryanair, the operating revenues increased 8.4%, but the operating expenses increased 30.9%, leading to the sharp decline in operating profit. This focuses attention on the key cost drivers that contributed to this unusually large increase in operating costs. In this situation, the primary culprit is the fuel charge, which increased 58.9%. The dollar value increase of the fuel and oil expense was around two-thirds of the total increase in operating expenses. The managerial report to shareholders explains this increase. Fuel costs increased for all airlines but unlike other airlines Ryanair does not pass along such increases in the form of a fuel surcharge. This is a strategic decision that the company uses to maintain its position as the lowest-cost carrier in all of its markets. Not imposing a fuel surcharge, however, means that the company must absorb all of the increase in fuel prices. As a result, the profitability margins suffered in 2009. The company attempted to mitigate the impact of high fuel costs through hedging, but lost that gamble in late 2008 (part of fiscal 2009) when fuel prices crashed after management had locked in a price of $124 per barrel (Robertson, 2009).

The debt ratios are an indicator of the company's long-term financial position. This information is crucial both to potential shareholders and to lenders (and potential lenders). The debt ratio, debt-to-equity ratio and the interest coverage ratio are all used as indicators of the firm's long-term financial position. For Ryanair, the debt ratio in 2009 was 34.3% and in 2008 was 30.0%. The debt-to-equity ratio in 2009 was 90.5% and in 2008 it was 75.9%. These figures indicate that Ryanair has increased its gearing in the past year. The gearing ratio is not abnormal for an airline, nor is it cause for concern among shareholders or bondholders either.

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However, if a long-term trend emerges that the company is steadily increasing its gearing without having sufficient strategic motivation to do so, that could be an indicator of financial distress. Of more concern, however, is the decline in the interest coverage. As the operating profit has declined, so too has the value of this ratio. Interest coverage in 2008 was 5.5 times, while in 2009 it was .70 times. This indicates that the company is barely making enough money at present to cover its interest obligations, whereas in 2008 it was easily making enough money.

Of particular interest to the present and future shareholders are the investment valuation ratios. The latest Ryanair annual report was as of March 31, 2009. At that time, the company's share price was worth €2.8975 (Yahoo Finance UK, 2010). The earnings per share reported in the annual report was a loss of €0.1144. This compares with earnings per share of €0.2584 and €0.282 in 2008 and 2007 respectively. The share price on March 31, 2008 was €2.755. This indicates a return to the shareholders of 5.17% for the year as Ryanair does not pay any dividends at present. Using these figures, we can determine the price/earnings valuation for Ryanair at the end of each fiscal year. At the end of the 2009 fiscal year the P/E ratio was -25.3; at the end of the 2008 fiscal year it was 10.66. A negative price/earnings ratio typically indicates a firm that lost money the previous year. The price reflects the expectation of future profits, however. For 2008, the expectation of future profits priced the company as a multiple of 10.66, which is a relatively conservative valuation suitable for a mature business. Given the slight bump in Ryanair's stock price despite the fuel price troubles, the market clearly has not changed its view of the company as a relatively stable long-term play.

Ryanair's financial health is generally in good shape. The company lost money in fiscal 2009 largely because it did made a strategic decision not to charge a fuel surcharge and then subsequently botched its hedging attempts. Despite this, the company remains liquid and has a relatively low debt ratio, particularly for an airline. Although the fuel strategy has resulted in short-term damage to the company's margins, profits and returns, the market still holds a lofty view of Ryanair, its stock price having increased even.....

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