ACCOUNTING ASSIGNMENT


Ryanair is a company that can be used as an example of the ultimate success. It is a company that operates in an extremely unfavourable economic environment and sill manages to accumulate huge amounts of money. Its net profit for 2003 was Euro 239.4 mil (an increase of 59% from previous year). Ryanair operates in a sector of the global economy adversely affected by such unfavourable occurrences as the war in Iraq, the outbreak of Sars in China, the foot and mouth disease in Europe, and more than anything else by September 11th. Despite all of the above in 2003, Ryanair declared their 13th consecutive year of increased profitability. As mentioned above, Ryanair’s net profit from the year before increased by 59% to Euro 239.4 mil and the return on investment increased by 54% in earnings per share to Euro 31,71 cent each. How does Ryanair achieve all of the above is not a mystery. They simply follow the model set up for them by Southwest Airlines in the US. Thus Ryanair grows and prospers while its competitors lag behind. For example the traffic growth for Ryanair for 2003 was 42%, its average fare declined by 6%, and its cash reserves increased by Euro 1.1 bill. Ryanair came No 1 for punctuality with 92.5%, far ahead of British Airways with 79.3%. Ryanair was also No 1 for flight completions with 99.24%, where British Airways were with 98.57%. Ryanair constantly cuts on the fares it charges, while at the same time it cuts on its costs, thus still increasing both efficiency and its profit margins. If we have a close look at Ryanair’s financial statements through the use of ratios, we can estimate what the company’s performance in 2002 and 2003 was.


In general ratios help us draw conclusions regarding the financial well-being and performance of a company. As well as that tax authorities use ratios to examine and compare the information presented by the entity under review with the others existing in that sector of the economy. Hence, through ratio analysis, factors can be identified that would not otherwise be apparent. Ratio analysis is also used to review trends and compare entities with each other, thus one can see, at a glance, how one entity is performing and how its financial structure compares to others of a similar nature. Without ratios, financial statements would be largely uninformative to all but the very skilled. With ratios, financial statements can be interpreted and usefully applied to satisfy the needs of the reader. Although there are a number of other factors that should be taken into consideration, ratio analysis is the first step in assessing an entity and removing some of the mystique surrounding the financial statements, thus making it easier to pinpoint items, which might be subjected to further investigation.


If we have a close look at the ratio analysis of Ryanair for 2002 & 2003, we will find out the following:


ROCE Ratio= (Profit before interest & tax/(total assets-current liabilities))*100


2003: (264,550/(2,466,707-377,539))*100=12.67%


2002: (172,374/(1,889,572-308,192))*100=10.9%


There is no widely agreed definition as of what the right percentage of the ROCE should be. Hence care must be taken when comparing this ratio, as calculated for one company and as reported for another. ROCE mainly compares the profit earned to the funds used to generate that return. In theory, the higher the ratio, the more profitably the resources of the company have been used. Thus the only thing we can say about the above situation with Ryanair, is that the ROCE percentage has increased for 2003, thus the return on the capital employed in 2003 was much better than what it was in 2002.


Gross Profit Ratio= (gross profit/total sales revenue)*100


2003: (263,474/842,508)*100=31.27%


2002: (162,933/624,050)*100=26.11%


The gross profit in both years is quite high, but even more so in 2003, which means that the company was making more money in 2003, than in 2002.


Mark-up Ratio= (gross profit/cost of goods sold)*100


2003: (263,474/579,034)*100=45.50%


2002: (162,933/461,117)*100=35.33%


Net profit Ratio= (net profit before tax/total sales revenue)*100


2003: (264,550/842,508)*100=31.40%


2002: (172,374/624,050)*100=27.62%


The Net Profit Ratio indicates how much safety there is in the price of a company. In theory again, the price can be reduced up to 8% without causing a company to make a loss. The net profit ratio as a general guide is a sensible indicator of safety, as