Liquidity - Additional question 13 answer
| BAA | British Airways | easyJet | ||||
|---|---|---|---|---|---|---|
| 2002 | 2001 | 2002 | 2001 | 2001 | 2000 | |
| Current ratio | 1.6 | 0.8 | 0.8 | 0.8 | 2.6 | 0.7 |
| Acid Test ratio | 1.6 | 0.7 | 0.8 | 0.7 | 2.6 | 0.7 |
We can see great variability in the working capital ratios now as BA has low ratios and BAA has relatively high ratios, by the end of 2002 anyway. Why has easyJet's ratios suddenly almost quadrupled, though? Let's look at the working capital section of its balance sheet:
| easyJet Current assets |
2001 | 2000 |
|---|---|---|
| Stock | 0 | 0 |
| Debtors due within one year | 47,106 | 40,959 |
| Short-term investments | 0 | 0 |
| Cash at bank and in hand | 244,435 | 14,088 |
| Total Current Assets | 291,541 | 55,047 |
| Creditors: Amounts falling due within one year | -113,428 | -84,483 |
| Net current assets (liabilities) | 178,113 | -29,436 |
easyJet has had a massive injection of cash - from an issue of share capital that it had not spent (on new aircraft) by the end of the year.
If we take out the additional cash, we can calculate its ratios again to give us the underlying working capital situation. We'll assume that cash would have been the same in 2001 as it was in 2000 for this exercise:
| Revised ratios for 2001 | easyJet | |
|---|---|---|
| 2001 | 2000 | |
| Current ratio | 0.5 | 0.8 |
| Acid Test ratio | 0.5 | 0.7 |
We now see that easyJet's working capital management might be even more strict than it had been before, providing our estimate of its basic cash position is a good one.
In any case, all three transport-related businesses are managing their working capital aggressively by setting their ratios at such low levels.
Back to Additional question 13.
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