Investment Project Analysis, a case of British Airways

Introduction

Investment refers to the process of spending part of one’s wealth in an activity or project that is expected to generate profits in the foreseeable future. Since the aim of any investor is to make profits, the initial steps before the investment involve assessment of the proposed investment project(s), to determine its profitability. Although some factors such as economic fluctuation can lead to the unpredictable future, the analysis of the cost-effectiveness of a project assumes that natural calamities won’t occur over the project’s period. The productivity of a company is best evaluated based on the historical performance. This report shows a case investigation of the British Airways organization, in view of two budgetary proportions; benefits and liquidity proportions. The business is additionally assessed against its main rival, to decide whether it recently performed superior to its rivals. Contingent upon the aftereffects of the estimations, a supposition will be made on whether to put resources into task or reject the venture opportunity.

INVESTMENT CASE

The company under examination is British Airways. It is an organization situated in the UK, based in Waterside, England. The organization was established in the year 1974, and has extended its routes to more than 183 destinations over the globe. The carrier is the biggest in the European region, as far as the armada size of more than 300 planes. The organization primarily owns three plane sorts; the Boeing, Airbus, and Embraer (Britishairways.com, 2018). The organization's accounted for income as at the year 2017 was £ 12,237 million, which was 8.4% over that declared in the earlier year (11,402).

The British Airways will likewise be contrasted with its main rival, Southwest Airlines Co. The organization poses a solid rivalry to British Airways, for the most part through pricing strategy (Southwest.com, 2018). The organization is based in Dallas, Texas. The Southwest Airlines Co. was set up in 1967 however it authoritatively started the task in the year 1971, and along these lines, it's more seasoned in the industry as compared to British Airways. The organization has an armada size of 706, and 100 terminals over the globe. The organization is a business to more than 48,000 representatives as indicated by the report given in 2017. The net gain produced by the business in 2015 was US$ 3,352 million. As shows in the chart below, the British Airways has had a stable income generation over the recent years.

Source: https://www.statista.com/statistics/264296/british-airways-worldwide-revenues-since-2006/

SECTOR OUTLOOK

The United Kingdom’s airways sector is one of the most important sectors of the economy. According to the recent governmental surveys, the sector accounted for over 3.6% of the UK economy. The contribution of the industry to the GDP was £51.966 billion (parliament.uk, 2018). The recent innovations such as the invention of the Boeing airplane has boosted the sector, with the sector experiencing a substantial growth in revenue since the invention. According to the financial projections done in the industry, the sector is expected to remain stable in the foreseeable future.

FUNDAMENTAL ANALYSIS

Stock Performance

a. Stock Price

The historical prices of a stock are a key consideration in deciding on whether to invest in a particular stock. A stock that shows a growth over time is preferred over the one with frequent fluctuations in prices. As shown in the graph below, the prices of the British Airways company have been on an increase over the past five years covered in the analysis.


b. Stock beta

The stock’s beta offers essential information for gauging the stock volatility, and systematic risk. Upon knowing the beta of a stock, and that of the industry in which the stock trades, it becomes easy to evaluate the stock’s performance in the sector. As provided in the stock analysis website (yahoo finance), the British Airways stock beta, calculated from three year data is 1.59. The beta of the since the industry/ market beta is usually set at 1.0, this shows that the British Airways stock has a positive fluctuation with respect to the industry. This is a positive trend.

BRITISH AIRWAYS SWOT ANALYSIS

The SWOT analysis is an important tool for evaluating the businesses’ current and future conditions. The understanding of the opportunities a business has, as well as its strengths makes an investor make an informed decision. A business with many opportunities, and strengths is preferred. On the other hand, the understanding of the business’s risks and weaknesses acquaints a potential investor with important information. For instance, investing in a business that has a high degree of risks or significantly high weaknesses is not encouraged. The British Airways’ SWOT analysis is presented in the table below.

STRENGTHS

- Many years of experience in the industry (over 90 years)

- strong Brand image

- Backed by the UK Government

- Has own engineering branch for servicing/ repairing their own planes

- It’s a Tech-Savy company (online booking system)

WEAKNESSES

- Strong employee union, capable of disrupting operations

- over dependence on UK market

- little exploitation of the international markets

OPPORTUNITIES

- The ability to expand to new markets

- Mounting pressure on small companies

- Innovating new planes (innovated Boeing)

THREATS

- High competition in the industry

- High governmental regulations

- Improved infrastructure in the developing countries make it easy to use other modes of transport

Company Profitability

The use of Productivity analysis for assessing a business aids in making an infrmated decision as far as investment is concerned. The productivity examination depends on the historical financial statistics of the firm, to decide whether the organization made any financial gains over the period. The examination of the British Airlines productivity depends on the two latest operational years. The information was acquired from the organization's public report for the year finishing 2017. The accompanying table demonstrates the productivity ratios for the British Airways firm.


a. The Operating Profit margin

This is a standout amongst the most critical ratios for assessing of productivity. It assesses the measure of cash that is left over in the wake of paying off for the business’s expenses. The assurance of the exact benefit of an entity includes deduction of the company’s expenses from the income generated from business activities. The working profit proportion checks the extent of benefit to the aggregate pay, and accordingly the higher the proportion, the greater the venture. From the benefit examination table over, the organization's working edge was 13.74 %. This demonstrates the organization's benefits in the wake of meeting the operational costs are a genuinely colossal positive number, and along these lines the organization is making benefits.

Net profit margin

It refers to the proportion of benefit that is left over in the wake of paying for all costs brought about amid the operating time frame. The extent of the estimation of net overall revenue tells how much the business has succeeded or flopped over the covered time frame. The net revenue proportion is critical in venture alternatives assessment since it makes it conceivable to contrast a business and others inside a similar industry. From the productivity examination table, the net revenue was 11.48%, which implies the organization easily met its operational expenses and stayed with generous income.

Return on assets (ROA)

It is a quantity of the proportion of organization's gainfulness. It demonstrates the viability of the business in utilizing the resources for create incomes. It is determined by partitioning the overall gain by the aggregate resources. The ROA for the British Airlines for the evaluated year was 13.25%, which shows that the company efficiently utilized its resources to make income.

b. Return on equity (ROE)

The ratio represents the proportion of the organization’s gains, which is produced with the utilization of a solitary unit of the investor's value. Since in enterprises, income is created by utilizing the cash put into the firm by the investors, it is essential to assess the income produced per each dollar of the investor utilized. From the estimation, the ROE for the British aircraft company was 39.69%. This is an enormous number, which implies the organization was exceptionally proficient in utilizing investors' cash to create incomes.

THE LIQUIDITY RATIOS

As defined by Lartey, Antwi & Boadi (2013), Liquidity alludes to the capacity of the company’s valuable assets to be promptly changed into money. It is imperative for an enterprise to be in a situation to meet its present-day expenses. The failure of a business to meet its momentary onuses may make a significant issue the organization, at more awful prompting the downfall of the endeavor. To guarantee that a company does not endure the results of the failure to provide food for the present obligations, it is vital to keep up specific cash levels. The organization is maintained in solid money related status by guaranteeing that it accrues adequate advantages for providing for the current obligations. The proportions of cash liquidness are fundamental in surveying the capacity of a company to honor its extant commitment. The key cash proportions are examined underneath.


The Current Ratio

It is a perfect proportion in evaluating the capacity of the business to meet its dire commitments. An organization with a high value of current proportion is in a sound budgetary state because it can meet a majority of its present obligations. On account of British Airlines and Southwest, aircrafts were 51.53% and 73.54% individually. The outcomes demonstrate that the two organizations can meet a decent proportion of their present liabilities.

The Quick Ratio

It is a proportion of liquidity that is firmly identified with current proportion however does exclude inventories. This measure is more fluid than the present proportion, and it does exclude stocks. This measure demonstrates the organizations, capacity to provide food for its commitments direly, dissimilar to current proportion that takes a gander at a time of up to a year. From figuring the fast proportions of Southwest Airlines and British Airlines were 94.23% and 98.11% respectively. This demonstrates, if the two organizations were liable to a commitment that needed to be met with prompt impact, British aircrafts could be in a superior place to satisfy the prerequisite contrasted with the Southwest Airlines.

LONG-TERM RISK RATIOS

The long haul chance proportions enable the financial specialist to anticipate the eventual fate of any venture and consequently settle on a quality choice on whether to contribute or dismiss the speculation opportunity. The organizations with high dangers, over the long haul, aren't right to put resources into. The accompanying table demonstrates the long-run proportions of the two carriers.


Debt to equity ratio

D/E ratio looks at the measure of obligation gathered by the organization, on the proprietors' promoters. The proportion is critical in deciding whether the investors' stake in the entity can adequately support the organization costs. From the examination, the obligation to value proportions for Southwest Airlines and British Airways 0.33 and 7.05 separately. The rates are little, showing that the organizations don't have a potential long haul hazard.

Debt to Asset ratio

The obligation to resource proportion is a proportion of dangers over the long haul. It measures the value of the benefits accrued by the organization against the obligations. On the off chance that an entity has a high proportion of obligations to resources, it infers that the endeavor is profoundly hazardous and subsequently putting resources into it might expose the financial specialist to high dangers. From the examination, the obligation to resource proportion for the British aircraft and Southwest carriers were 12.05%, and 94.26% individually. This demonstrates it is less hazardous to put resources into British Airways than its rival

Time Interest Earned Ratio

This is a proportion of long haul dangers identified with business. It evaluates the working capital against the intrigue cost. This proportion means to assess the portion of the working capital that is apportioned to the intrigue expenses. From the investigation, the time premium made proportion for the British aircraft, and Southwest carrier was 9.44 and 17.12 separately. This demonstrates putting resources into The Southwest is more hazardous than British bearers.

Conclusion

In making investment decisions, a ton of little choices must be settled on before the essential choice is come to. For the financial specialist to settle on a cool-headed choice on which proportions to use in settling on a choice on the stock to put resources into, it is vital to allocate weight to every classification of proportions and a right translation of the stock beta. Looking at the historical stock prices, the increasing prices trend is a good indicator of a potential profitability. However, it’s important to consider the company performance in the industry, as it has potential to influence the future prices.

The liquidity proportions are critical in breaking down the venture alternative. This is on the grounds that; the capacity of an organization to meet its momentary commitments decides its reality after some time. A standout amongst the most essential cash proportions is the brisk proportion because it demonstrates the capacity of an organization to satisfy rapidly momentary responsibilities easily. From the point of view of the two aircrafts, British Airways has a superior quick proportion of (98.11%), contrasted with The Southwest (94.23%). This proportion demonstrates that British Airways can meet a greater amount of its commitments than its partner.

In view of the two most noteworthy money related examination proportions; gainfulness and quick ratio, obviously British Airways adapt superior to Southwest Airlines. The best venture choice is the one that remunerates the financial specialist with significant yields at negligible dangers (Hochberg, Ljungqvist, & Lu, 2007). Since the point of any financial specialist is to appreciate greatest advantages with insignificant dangers of misfortune, a decision is achieved that the investor ought to put resources into the British Airways stock.

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