The company also improves its efficiency by lessening the day its pays off its suppliers and collects from its customers. An investor is most likely be attracted by the escalating share price of British Airways but be put off by the 0 dividend yield.
Profitability ratios measure the ability of the company to generate income from its investments less the costs incurred. The computed operating profit margin, which is the ratio of operating income to sales measures as a percentage of sales, the excess revenue from sales over cost of normal operation excluding financing. Net profit margin, on the other hand, is the ratio of net income to sales. Return on common equity (ROCE) is a variant of return on investment. The return on common equity assesses the rate of return on the investments of common stockholders in the company (Analyzing Company Reports 2005). Another ratio is the turnover ratio which shows to what the extent the company uses its assets to produce revenue. Logically, higher profitability ratios indicate a healthier financial condition.
Table 1 shows the computed profitability ratios of British Airways in 2006. In order to fully asses the profitability of British Airways in 2006, the company's profitability ratios for 2005 are also included. ...
During 2006, the airline is able to turn 8.3% of its revenue in operating profit and 5.5% into net income from the 7.20% and 5.0% recorded in the previous year, respectively. It should be noted that operation in the airline industry requires incurring huge operating costs which could justify the relatively low percentages. However, compared to its competitors like Ryaniar Ltd and Thomsonfly Ltd, British Airways lags far behind.
In term of asset turnover and return on equity, British Airways is in a downslide. It can be recalled that the main goal of a business organisation is the maximization of stockholder value which is reflected on its return on equity. British Airways declining ROCE indicates its deviation from this goal.
From the point of view of investors, British Airways appears to be mediocre investment relative to its competitors. This is also true for creditors who look at the profitability of a business organisation to assess its paying capacity. For managers, this can signal the company to check its management of cost and other disbursements.
Financial Leverage Ratios
Financial leverage ratios provide an indication of the long-term solvency of the firm. They indicate the extent of non-owner claims on the firm's profits as well as the firm's operating capability to meet its obligation. Gearing is the long-term debt to equity ratio which assesses the balance between liabilities and equity in the firm's long term resource structure. Another is the interest coverage ratio which measures the extent to which earnings cover the interest obligation of the company (Thomson 2002, p. C-6).
Table 2 shows the financial leverage ratios which reveal the capital structure of British Airways. The debt-to-assets and debt-to-equity ratios