Essay on FINANCE 1

Submitted By farhanrind66
Words: 1532
Pages: 7

INTRODUCTION:
This Study shows that how various methods and tools like financial ratios are being used in analysing the financial position of a company, as per market value and as well as the assets value of a company. This study also shows that weather the company is efficiently managed or not with the help of Financial ratios, in order to ascertain that company is worth acquiring or not. Here, the company taken into the consideration is British Airways. British Airways is one of the leading airlines in United Kingdom. It is reaching to over 550 destinations to the best located airports in the world and at the suitable time. It serves half a million passengers every year as per their standards of hospitality adding more and more to their valued customers. The British Airways group consists of British Airways Plc and a number of subsidiary companies including in particular British Airways Holidays Limited. Nearly about 50,000 people were employed by British Airlines for its smooth operational functioning. Heathrow and Gatwick airports are its two main operation bases at London. British Airways has the maximum amount of runways in Heathrow Airport, which adds more value to British airways in terms of convenient flight landing and take offs and aircraft hangar for their parking.(British Airways[online] 2009).

FINANCIAL RATIOS:
Brigham et al. (1991) States, Financial ratios are the first and foremost step in analysing the performance of an organisation. It acts as a bridge to connect financial statement with financial accounts. Cox et al. (2000) conveys that, financial ratios are the precious tools through which current financial position of the company can easily be assessed. Some important significance of financial ratios are :
a. it provide a common platform for comparison to established trends from past years
b. to set benchmark for the other organisations prevailing in the market
c. for comparing interested party(bank) from satisfactory assumed standards.

CLASSIFICATION OF FINANCIAL RATIOS:
1. Liquidity ratios
A. Current ratio 2. Gearing ratios
B. Debt to equity ratios 3. Profitability ratios
A. Net profit margin ratio
B. Gross profit margin ratio
C. Return on capital employed

1. LIQUIDITY RATIOS According to Brigham et al. (1991), liquidity is one of the most important elements for analysts to conduct their analysis. It shows that whether the organisation would be able to meet its maturing obligations.
Liquidity mainly involves cash and it is viewed as the lifeblood for a company flowing to all parts of the organisation, in absence of which the company would not be able to move a single step.”If at any point the cash fails to flow properly, a clot occurs that can damage the business and, if not addressed in time, can prove fatal.”(Pike et al. 2003). Liquidity ratios are calculated by summing the amount of cash and other current assets to the current obligations. The commonly used liquidity ratio is current ratio, described below.
A. CURRENT RATIO: Current ratio is usually expressed by relating the amount of current assets per unit of current liabilities.( Mclaney, 1997).
Current ratio express the relationship between current assets with current liabilities. If current assets rises faster than the current liabilities, current ratio will rise and this would be the positive sign for the company’s financial management. It is calculated by dividing current assets to the current liabilities . Brigham et al (1991)
Formula for calculating current ratio:
Current ratio = Current assets Current Liabilities
Previous year’s current ratio for British Airways (2007)
3431/3625 = 0.95
Current ratio for British Airways in 2008
3148/3244 = 0.97

Current ratio has been increased by .02 in financial year 2008.

2. GEARING RATIO:
In order to express the correlation between financing through shares and financing through long- term debts gearing ratio is used. In other words, Gearing ratio…