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ratio analysis for wizz air...

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R ATIO A NALYSIS

OF

W IZZ A IR H OLDINGS PLC

This Report will advise the investors of Wizz Air on their current financial position as compared to last year and top 10 competitors from the same industry in order to help investors to decide whether they should buy, sell or hold their shares. Wizz air is the largest low-cost airline company in Central and Eastern Europe which was established in September 2003 with flights to 106 destinations on over 350 routes in 37 countries. The company carried in excess of 15.8 million passengers on more than 100,000 flights in calendar year 2014 and as at 31 December 2014 had carried over 85 million passengers in total since the start of its operations on 19 May 2004.

C AT E G O R Y

FORMULA

Y EAR

Y EAR

C H A NG

T O P 10

2014

2013

E

CO MPETITO RS

Profit for the year*100 Equity

54.74%

41.08 %

+13.66%

18.44%

Return on Capital Employed: Operating profit*100 Capital Employed

45.81%

20.08%

+25.73%

13.91%

Operating profit margin: Operating profit*100 Sales

10.85%

4.46%

+6.39%

13.43%

24 days

31 days

-7 days

14 days

Asset turnover ratio: Sales revenue Capital employed

4.22x

4.50x

-0.28x

1.09x

Current ratio: Current assets Current liabilities

0.77:1

0.70:1

+0.07

1.36:1

Acid test ratio: Current assets – inventories Current liabilities

1.08:1

0.97:1

+0.11

1.36:1

PROFITABILITY Return on Equity

EFFICIENCY

LIQUIDITY

Average settlement period for trade receivables: Average trade receivables*365 Sales revenue

GEARING

INVESTMENT

Gearing ratio: Non-current liabilities*100 Capital Employed

33.29%

62.35%

-29.06%

41.44%

Interest cover ratio: Operating profit Interest payable

15.05x

5.97x

+9.08x

24.78x

138.6p

47.3p

+91.34p

21.29

15.96

8.28

+7.68

6.35

Earnings per share: Profit for the year Number of ordinary shares Price/Earnings ratio: Market value per share Earnings per share

Profitability Wood and Sangster (2012: 368) states “Profitability ratios are used among other things, to measure the performance, to identify whether a company may be worthwhile investment opportunity, and to determine a company’s performance”. Wizz air’s profitability has improved as compared with FY2013, with a major increase in return on capital employed ratio of 25.73%. This means that the company is making efficient use of its capital, indicating that a large amount of profits is invested into the company for the benefit of shareholders, which is generating higher earnings-per-share. One reason for this is that although the asset turnover ratios slightly decreased by 0.28, the operating profit margin increased with 6.39% leading to a higher ROCE ratio. Alternatively, research conducted by CAPA (centre for aviation) shows that the profit margin improvement in FY2014 was due to a 4.2% cut in CASK (cost available per seat km) which was principally driven because of a reduction in average fuel and favourable airport mix development, also there was 2.0% increase in RASK (revenue available per seat km) which was mainly because the average passenger ticket revenue per passenger increased resulting from a higher maturity of Wizz Air’s route network and also a higher passenger demand in 2014 than in 2013.Moreover, Wizz Air’s sales increased by 16.2% over the period which may be due to an increase in passengers carried by 11.5%. Additionally, Wizz Air expanded its services in another 8 countries leading to an increased number of potential costumers therefore more sales. Return on equity ratio is also widely used by investors in order to measure company’s earnings performance. ROE ratio is specifically for shareholders and is

aimed at measuring the return that they should expect from their share in the business. Particularly, a reason for this increase is the improvement in ROCE and also the major decrease in gearing ratio which in consequence positively affects return on equity ratio.

Efficiency Boczko and Davies (2005:163) argue that “efficiency generally relates to the maximisation of output from resources devoted to an activity or the output required from a minimum input of resources”. The average settlement for trade receivables decreased by 7 days to 24 days in 2014 which means that Wizz Air is making use of its funds from accounts receivables faster. Moreover, with this ratio reduced the risk of some receivables remaining unpaid reduced as well. Asset turnover ratio determines the amount of sales that are generated from each pound of assets. Companies with high profit margins have low asset turnover (Collier, 2009). The company’s asset turnover ratio slightly decreased and it could be due to a notable increase in assets, especially cash and cash equivalents. New capital was introduced in the company in 2014 to finance the opening of a new base in Ukraine and to start services in another 8 countries, and as a result it is expected to increase sales significantly over the next years, which makes it a great opportunity for investors.

Liquidity Testing a company’s liquidity is an important step for investors when analysing a company. Liquidity ratios are concerned with the ability of a business to pay its shortterm debts as they become due (O’Regan 2007:245). However, according to investopedia (n.d) bankruptcy analysts and mortgage originators frequently use the liquidity ratios to determine whether a company will be able to continue as a going concern. In this case, Wizz Air’s current ratio slightly increased, although investors would prefer a higher ratio of at least 1. This increase could be due to an increase in current assets, the trade receivables decreased which therefore lead to an increase in cash in hand and at bank. Although there is a 27% increase in current assets it didn’t affect the current ratio significantly because the current liabilities also

increased by 21%, therefore there was only a slight change in current ratio (appendix). Acid test ratio is also important to investors as it is a more conservative version of current ratio, mainly because it is eliminating the most liquid current asset which is the inventory. Wizz Air’s quick ratio improved which means that they have enough current assets (excluding inventory) to cover their current liabilities. This is a good sign of improvement although it is not a huge increase it is substantially enough to pay dividends without relying on loans which decreased by £32.44m. A reason for this is that the inventory in this case is not a significant asset being only 2.5% from all current assets, therefore in this industry, inventory is not the most important factor. However, Wizz Air expanded its services in 8 countries and added 6 more aircrafts to its fleet which will therefore ensure future cash inflows as well as improved profitability ratios.

Financial Gearing Another important factor when analysing a business’s current position is financial gearing and Atrill and McLaney (2012: 202) explains that a business’s level of gearing is an important factor in assessing risk. Given that, Wizz Air’s gearing ratio significantly decreased and can now be considered low-leveraged by investors therefore is a safe investment. This decrease could be mainly because shareholders’ equity increased by £71.9m over the year thus long-term liabilities decreased substantially by £33.8m. It can also be seen that the increase in this ratio also helped return on equity increase at a major figure which should help investors make a positive decision. Another reason is that according to the annual report a part of the company’s convertible debts were converted into shares in the company. However, due to this decrease, Wizz Air is more financial stable than its main competitors which puts the Company’s investors in a good position. Interest payable slightly increased in FY2014 from the previous year, and the operating profit significantly increased by £58.62m, which nearly tripled the interest cover ratio.

Investment According to Boczjo and Davies (2005:169) investment ratios generally indicate the extent to which a business is undertaking capital expenditure to ensure its survival

and its ability to sustain current revenue and generating future increased revenue.Earnings per share increased by 91p which means that Wizz Air is generating a significant dividend for its investors, which should therefore attract more investors. Perhaps one reason for this is the change in profits from £25m to £73m. This increase also reflects on the improvement in operating profits, but also the effect of issuing additional shares in 2013. Wizz Air’s competitors are driven by a smaller profit, which makes Wizz Air a fast growing company. However, according to Elliot and Elliot (2011:679) “price/earnings ratio is significant because, by combining it with a forecast of company earnings, analysts can decide whether the shares are currently over-or undervalued”. That been said, at this very point Wizz Air seems to be a growing company, but it needs further investigation to see whether P/E ratio indicates strong growth or the overpriced shares. On the other hand, from the given ratios, competitors’ P/E ratio seems to be neither too dangerous nor too conservative.

Conclusion To conclude with, according to the financial analysis Wizz Air is a company worth investing in. Also, Wizz Air has established itself as being the most consistent in profitability with the FY2014 being the third year of high profitability which is good for investors. The company is able to offer low fares below almost all of its competitors while remaining profitable and thus to drive demand growth and market share (CAPA, n.d). Furthermore, Wizz Air plans to increase their fleet along with passenger numbers which therefore means safe long-term development and growth for the company. I would therefore advise investors to purchase more shares in Wizz Air whilst they can benefit from the strong growth and the market penetration which the company offers.

References: Alexander, D. and Britton, A. (1999) Financial reporting. 5th edn. London: Thomson Learning, London, United Kingdom. Atrill, P. and McLaney, E. (2012) Accounting and finance for non-specialists. 8th edn. Harlow: Financial Times/Prentice Hall.

Boczko, T. and Davies, T. (2005) Business accounting and finance. 2nd edn. Maidenhead: McGraw Hill Higher Education. CAPA (2015) Wizz Air: growing at 15% annually, one of Europe's most profitable airlines "not desperate" for IPO, http://centreforaviation.com/analysis/wizzair-growing-at-15-annually-one-of-europes-most-profitable-airlines-notdesperate-for-ipo-187715 [Last Accessed on 28/11/2015] Collier, P.M. (2009) Accounting for Managers, 3rd ed. London: John Wiley & Sons Ltd Elliott, B. and Elliott, J. (2011) Financial accounting and reporting. 15th edn. United Kingdom: Financial Times Prentice Hall. Investopedia (n.d) Ratio Analysis: Using Financial Ratios, http://www.investopedia.com/university/ratio-analysis/using-ratios.asp [Last Accessed 28/11/2015]. O’Regan, P. (2006) Financial information analysis. 2nd edn. United Kingdom: Wiley, John & Sons. Penman, S. H. (2006) Financial statement analysis and security valuation. 3rd edn. Boston, MA: McGraw Hill Higher Education. Wood, F. And Sangster, A. (2012) Business Accounting, Harlow, Pearson. Young, D. and Cohen, J. (2013) Corporate financial reporting and analysis. 3rd edn. United States: John Wiley & Sons.

Appendices...