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Introduction

Financial analysis of an organisation is undertaken by the management for assessing the financial performance of the business over the period. It enables the firm to understand their position among the competitors and in the market (Nankervis, Miyamoto and Taylor, 2005). In this particular study, two organisations would be analysed based on their audited data. One is Air Berlin Plc which is a budget carrier and another is Iberia Plc which is a traditional national carrier. Therefore, evaluation of financial ratios shall be performed to make comparative analysis. Also, some non-financial measures would be considered to assess the performance of both the firms.

Financial Measure

1. Profitability Ratios

It is used by the firms for assessing the ability of the firm in generating earnings in comparison to incurred costs or expenses (Thukaram, 2007).

a. Net Profit Ratio

Table 1

 

 Net Profit Ratio

Iberia

Air Berlin

2012

2013

2014

 

2012

2013

2014

-0.127

-0.120

0.0948

 

0.0015

-0.076

-0.0905

It can be observed from the above table that both the companies are not able to generate enough sales that can boost their net income. In the year 2014, Iberia made a sale of €4122 million (Iberia, 2015). In comparison, Air Berlin generated €4160 million revenue. Despite of slight increase in the sales value, the net profit ratio of Air Berlin is in a negative side in comparison to Iberia. The trend of the ratio shows that Air Berlin is facing higher loss and Iberia’s performance has improved in 2014 than previous years (Air Berlin, 2015). However, the rate of performance rise is very less and also reduced turnover, high tax and interest amount might have affected its earnings. Therefore, it can be indicated that both the firms being a part of Eurozone has suffered high drop in their net sales thereby leading to decrease in net profit.

b. Return on Shareholder’s Equity

The above ratio is calculated to measure the profitability of the company by using shareholder’s equity (Khan and Jain, 2011).
Table 2

Iberia

Air Berlin

Return on Shareholder's Equity

 

2012

2013

2014

 

2012

2013

2014

1.913

0.903

-7.592

 

0.0578

11.290

1.252

From the above results, it can be discussed that the investments done by the shareholders of Iberia do not show a positive return. In 2014, the company generated loss by investing the shareholder’s investment in different resources. Due to this, the firm was not able to generate income. However, in preceding years, particularly 2012, the shareholders of Iberia saw a 191% return on their investment (Iberia, 2013). The trend depicts that the rate of return has massively gone down and it is assumed that it would decrease further as the company is not able to utilise the shareholders’ investment. On the other hand, in spite of decline in net income and fall in shareholders’ investment, Air Berlin managed to generate return in 2013 in comparison to 2012 (Air Berlin, 2014). However, in 2014, the return on equity has gone down but the company has been able to generate return. Therefore, it can be pointed that Air Berlin has been quite successful in accumulating profit in contrast to Iberia.

c. Return on Assets (ROA)

Table 3

Iberia

Air Berlin

Return on Assets

2012

2013

2014

 

2012

2013

2014

-0.0986

-0.0834

0.0673

 

0.00313

-0.1537

-0.2009

It can be viewed that in 2014, ROA of Iberia has improved and generated return of 6% whereas in the same year Air Berlin suffered decline of around 20%. The decline in the total net assets in 2014 affected Air Berlin (Air Berlin, 2015). The company sold two aircraft and assets depreciation is some reasons that lead to negative return. The trend shows that return on assets for Air Berlin has a downward movement. Therefore, it can be assumed that in the near years the company would be finding it tough to generate expected return from the assets held by them.

On the contrary, despite of fall in the rate of return on assets in 2012 and 2013, Iberia has been able to convert its return into positive value (Iberia, 2014). It shows that the company was able to use its total assets efficiently to generate income. After 2013, the trend of return is on increasing side and if the company continues to use the assets in profitable ventures then it would further show an increasing return.

d. Return on Capital Employed

Table 4

Iberia

Air Berlin

Return on Capital Employed

 

2012

2013

2014

 

2012

2013

2014

-0.101

-0.0818

0.0278

 

-0.203

-0.161

-0.0014

In reference to above table, it can be understood that Air Berlin has not been able to incur income from the capital invested. The company paid €449.9 million for the redemption of interest-bearing liabilities, which is one of the cause due to which the company generated loss from their employed capital (Air Berlin, 2015). On the other hand, Iberia has been able to gain 27% as a return from its investment despite of fall in return in 2012 and 2013 (Iberia, 2014). It indicates that the firm effectively managed its capital and invested in improving the performance of business. Therefore, the trend of the particular ratio shows return of Iberia has increased and there is possibility that it would rise further which may be difficult in case of Air Berlin.

2. Efficiency Ratio

This ratio is calculated by the firms for analysing how they are using its liabilities and assets internally (Tracy, 2012).

a. Total Asset Turnover

Table 5

Iberia

Air Berlin

Total Asset Turnover

2012

2013

2014

 

2012

2013

2014

0.773

0.695

0.709

 

1.985

2.021

2.219

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