2.13 faculty of Business and Law

Individual Coursework:

Advanced Corporate Finance-Bankruptcy

To: An Analyst

From: Pxxxxxxx

Subject: Evaluation of the bankruptcy risk for easyJet Plc

Date: 16th February 2023

This memorandum evaluates the possibility of easyJet plc going to bankruptcy. I have

used three models in my analysis: Beaver, Altman and Argenti.

Beaver

Beaver is a univariate model which is based on comparing financial ratios with industry

norms (Nikolovska, F). I did the Beaver models for easyJet, Ryanair, Wizz-Air, and

industry. (Appendix1).

From 2019 to 2020, easyJet’s cashflow ratio decreased slightly, below Wizz-Air and

industry level, which shows easyJet had weak ability of cashflow to service total debt,

the company is risky and may bankruptcy soon. However, in 2021, the liquidity of

easyJet rose to 1.56, exceeding Ryanair, Wizz-Air, and industry standard. This means

easyJet improved short-term debt servicing capacity, is stable and there is no

bankruptcy risk.

Different ratios lead to opposite evaluations, this shows the Beaver model is

inconsistent. Although Beaver gives specific numbers to predict failure of company, a

single ratio cannot measure or predict the company’s situation due to the complex

environment. Plus, the actual failure status of each company selected is known, it is

inaccurate to extrapolate from known results.

Altman

Altman is a multi-variate bankruptcy model, which compensates limitation of Beaver,

defining five financial ratios and weights for the assessment of a company’s stability

(Kozarević). The company is safe when Z-score is more than 3 while the company will

be highly likely to bankruptcy when Z-score is below 1.8.

EasyJet’s Z-score in 2019 is 2.15, which indicates easyJet was in normal risk range.

During 2020 to 2021, Z-score rose from 0.55 to 0.67, below 1.8, which means although

easyJet has potential failure, the situation has improved. (Appendix2)

However, Altman’s theory is created a long way from now (1968), we cannot confirm

whether weighting factors have changed because of changing business environments.

And only 5 ratios cannot reflect the complex business environment. Besides, the

selected failure companies using information was for the year prior bankruptcy, the

same as Beaver, extrapolating patterns from known results is inaccurate.

Argenti

Argenti is a qualitative model which can avoid limitations of quantitative models,

divided into three parts: defects, mistakes, and symptoms of failure. The company is

without risk to bankruptcy when the A-score is below 18, and it is normal for a company

if its A-score between 18 to 25. When the A-score is higher than 25, the company has

high possibility to bankruptcy.

In Appendix 3, the total easyJet's A-score is 18, which means easyJet is in the normal

risk range and stable. For defect, I gave a score is 3/45, which means the company is

safe (below 10/45), so easyJet may have hidden budgetary problems but overall is

without risks. For mistake, I gave a score of 15/45, the pass score, this shows easyJet is

in normal condition.

However, Argenti model is based on information, and is subjective in nature. As a

model for qualitative analysis, Argenti's limitation is that there is no fixed standard,

different people with different ideas will reach different conclusions.

Conclusion

By analysis, we conclude that easyJet may have underlying budgetary or other problems,

is within the normal bankruptcy risk range and unlikely to bankruptcy in the upcoming

years. Due to the limitations of three models and the huge impact of the covid-19 on

the whole industry, we need more information and methods to predict easyJet's

bankruptcy accurately as possible.

Kind Regards,

Pxxxxxxx

References (NOTE – this is not Harvard)

⚫ CEO Secrets: Johan Lundgren of EasyJet shares his advice, Available at:

https://www.bbc.co.uk/news/av/business-60484839 [Accessed: 20 February 2023]

⚫ EASYJET 2022 ANNUAL REPORT AND ACCOUNTS GOVERNANCE, Available at:

https://corporate.easyjet.com/~/media/Files/E/Easyjet/pdf/about-easyjet/easyjet-2022-

annual-report-and-accounts-governance.pdf [Accessed: 20 February 2023]

⚫ EasyJet chief Johan Lundgren cuts pay to match predecessor. Available at:

https://www.bbc.co.uk/news/business-42859853 [Accessed: 20 February 2023]

⚫ EASYJET PLC STATEMENT OF RESPONSIBILITIES OF THE CHAIRMAN AND

CHIEF EXECUTIVE, Available at:

https://corporate.easyjet.com/~/media/Files/E/Easyjet/pdf/about-easyjet/division-ceo-

chairman-responsibility.pdf [Accessed: 20 February 2023]

⚫ Kozarević, E. and Pirić, D. (2022) ‘Evaluation of the Revised Z’-Score Model as a

Predictor of a Company’s Financial Failure’, BH Economics Forum / BH Ekonomski

Forum, 16(1), pp. 11–29. Available at:

https://eds.s.ebscohost.com/eds/pdfviewer/pdfviewer?vid=1&sid=e34a4f04-eaf6-4a8a-

a9ce-d8f38c2a3fe8%40redis [Accessed: 19 February 2023]

⚫ Nikolovska, F., Dimkovska, M.Z. and Stojanova, M. (2018) ‘Application of Statistical

Models for Forecasting the Financial Crisis in the Enterprises’, Proceedings of the

International May Conference on Strategic Management, pp. 191–199. Available at:

https://search.ebscohost.com/login.aspx?direct=true&AuthType=ip,sso&db=bsu&AN=1

31746514&site=eds-live&scope=site [Accessed: 20 February 2023].

⚫ Simanca H., F.A., Barbosa Guerrero, L.M. and Palacios Rozo, J.J. (2022) ‘Altman Z-

Score Econometric Insolvency Prediction Model For Risk Coverage In

Companies’, Webology, 19(6), pp. 565–575. Available at:

https://eds.s.ebscohost.com/eds/pdfviewer/pdfviewer?vid=1&sid=209a0f03-9a62-4e0b-

ac16-7d41f3d02826%40redis [Accessed: 19 February 2023]

⚫ Svetlana Alexandrovna-Chernyavskaya et al. (2022) ‘Practical means to forecast

potential bankruptcy and financial insolvency of companies’, Revista de Investigaciones

Universidad del Quindío, 34(S2). doi:10.33975/riuq.vol34nS2.943.

⚫ TUI’s aviation CEO joins easyJet, Available at: https://www.travelmole.com/news/tuis-

aviation-ceo-joins-easyjet/?region=uk [Accessed: 20 February 2023]

Appendix

Appendix1-Beaver

£ £ £

Cashflow Cash flow in total = -£755,000 -0.11 -£542,000 -0.08 £1,098,000 0.21

Total debt (Total liability) £7,134,000 £6,574,000 £5,178,000

Net income(PAT) Net income = -£858,000 -0.09 -£1,079,000 -0.13 £349,000 0.04

Total Asset £9,773,000 £8,473,000 £8,163,000

Capital structure Total Debt = £7,134,000 0.73 £6,574,000 0.78 £5,178,000 0.63

Total Asset £9,773,000 £8,473,000 £8,163,000

Liquidity Current Asset = £4,165,000 1.56 £2,563,000 0.67 £2,119,000 0.79

Current Liability £2,677,000 £3,826,000 £2,668,000

Working Capital Working capital = £1,488,000 0.15 -£1,263,000 -0.15 -£549,000 -0.07

Total Assets £9,773,000 £8,473,000 £8,163,000

Turnover

Cash interval=Cash to "fund

expenditures for operations"-

where "fund expenditures for

operations"=operating

expenses-depreciation &

amortisation 1.76 0.70 0.24

operating expense = £2,500,000 £3,809,000 £5,948,000

Depreciation = £456,000 £485,000 £484,000

Amortisation&Impairment = £24,000 £18,000 £15,000

£2,020,000 £3,306,000 £5,449,000

30/09/2021 30/09/2020 30/09/2019

easyJet-Beaver

£ £ £

Cashflow Cash flow in total = -£2,085,353 -0.32 £1,176,304 0.13 £1,761,953 0.26

Total debt (Total liability) £6,543,476 £8,715,431 £6,888,873

Net income(PAT) Net income = -£864,723 -0.08 £574,990 0.04 £758,686 0.07

Total Asset £10,673,804 £13,422,598 £11,359,465

Capital structure Total Debt = £6,543,476 0.61 £8,715,431 0.65 £6,888,873 0.61

Total Asset £10,673,804 £13,422,598 £11,359,465

Liquidity Current Asset = £2,957,913 0.98 £3,903,849 0.80 £3,261,066 0.93

Current Liability £3,004,425 £4,882,315 £3,511,904

Working Capital Working capital = -£46,512 -0.004 -£978,466 -0.07 -£250,838 -0.02

Total Assets £10,673,804 £13,422,598 £11,359,465

Turnover

Cash interval=Cash to

"fund expenditures for

operations"-where "fund

expenditures for

operations"=operating

expenses-depreciation &

amortisation 1.65 0.58 0.28

operating expense = £2,108,524 £6,530,258 £5,727,097

Depreciation = £486,412 £663,627 £549,083

Amortisation = Nil Nil Nil

Impairment = Nil Nil Nil

£1,622,112 £5,866,631 £5,178,014

30/09/2021 30/09/2020 30/09/2019

Ryanair-Beaver

£ £ £

Cashflow Cash flow in total = -£247,915 -0.08 £590,370 0.21 £363,315 0.41

Total debt (Total liability) £3,246,723 £2,764,561 £887,223

Net income(PAT) Net income = -£486,894 -0.12 £248,805 0.06 £254,415 0.12

Total Asset £4,019,234 £3,857,408 £2,203,412

Capital structure Total Debt = £3,246,723 0.81 £2,764,561 0.72 £887,223 0.40

Total Asset £4,019,234 £3,857,408 £2,203,412

Liquidity Current Asset = £1,410,383 1.27 £1,393,432 1.19 £1,455,587 1.99

Current Liability £1,109,021 £1,171,712 £729,991

Working Capital Working capital = £301,362 0.07 £221,720 0.06 £725,596 0.33

Total Assets £4,019,234 £3,857,408 £2,203,412

Turnover

Cash interval=Cash to "fund

expenditures for

operations"-where "fund

expenditures for

operations"=operating

expenses-depreciation &

amortisation 1.79 0.67 0.70

operating expense = £998,723 £2,088,246 £1,739,726

Depreciation = £286,383 £331,032 £75,299

Amortisation&Impairment = £7,489 £6,550 £5,859

£704,851 £1,750,664 £1,658,568

Wizz Air-Beaver

30/09/2021 30/09/2020 30/09/2019

Cashflow Cash flow in total -0.17 0.09 0.29

Total debt (Total liability)

Net income(PAT) Net income -0.10 -0.01 0.08

Total Asset

Capital structure Total Debt 0.84 0.71 0.55

Total Asset

Liquidity Current Asset 1.27 0.89 1.24

Current Liability

Working Capital Working capital 0.07 -0.05 0.08

Total Assets

Turnover

Cash interval=Cash to

"fund expenditures for

operations"-where "fund

expenditures for

operations"=operating

expenses-depreciation &

amortisation 1.73 0.65 0.40

Beaver-Industry (average of Ryanair, Wizz Air, and easyJet)

30/09/2021 30/09/2020 30/09/2019

Appendix2-Altman

£ £ £

Area Formula 2021 2020 2019

R1 Working capital = £1,488,000 0.15 -£1,263,000 -0.15 -£549,000 -0.07

Total asset £9,773,000 £8,473,000 £8,163,000

Weighted 1.2 0.18 -0.18 -0.08

R2 Retained Earnings = -£858,000 -0.09 -£1,253,000 -0.15 £116,000 0.01

Total assets £9,773,000 £8,473,000 £8,163,000

Weighted 1.4 -0.12 -0.21 0.02

R3 Earnings before interest and tax = £111,000 0.01 £960,000 0.11 £2,215,000 0.27

Total assets £9,773,000 £8,473,000 £8,163,000

Weighted 3.3 0.04 0.37 0.90

R4 Market Value of Equity = £5,024,090 0.70 £2,291,056 0.35 £4,567,894 0.88

Book Value of Total Liabilities £7,134,000 £6,574,000 £5,178,000

Weighted 0.6 0.42 0.21 0.53

R5 Sales = £1,458,000 0.15 £3,009,000 0.36 £6,385,000 0.78

Total assets £9,773,000 £8,473,000 £8,163,000

Weighted 1.0 0.15 0.36 0.78

Z-score 0.67 0.55 2.15

easyJet-Altman

£ £ £

Area Formula 2021 2020 2019

R1 Working capital = -£46,512 -0.004 -£978,466 -0.07 -£250,838 -0.02

Total asset £10,673,804 £13,422,598 £11,359,465

Weighted 1.2 -0.01 -0.09 -0.03

R2 Retained Earnings = £2,753,467 0.26 £3,762,649 0.28 £3,585,029 0.32

Total assets £10,673,804 £13,422,598 £11,359,465

Weighted 1.4 0.36 0.39 0.44

R3 Earnings before interest and tax = -£691,369 -0.06 £1,019,682 0.08 £866,446 0.08

Total assets £10,673,804 £13,422,598 £11,359,465

Weighted 3.3 -0.21 0.25 0.25

R4 Market Value of Equity = £21,635,535 3.31 £14,485,578 2.97 £16,079,913 2.33

Book Value of Total Liabilities £6,543,476 £4,882,315 £6,888,873

Weighted 0.6 1.98 1.78 1.40

R5 Sales = £1,393,472 0.13 £7,529,553 0.56 £6,598,772 0.58

Total assets £10,673,804 £13,422,598 £11,359,465

Weighted 1.0 0.13 0.56 0.58

Z-score 2.26 2.90 2.65

RYANAIR-Altman

£ £ £

Area Formula 2021 2020 2019

R1 Working capital = £301,362 0.07 £221,720 0.06 £725,596 0.33

Total asset £4,019,234 £3,857,408 £2,203,412

Weighted 1.2 0.09 0.07 0.40

R2 Retained Earnings = £606,213 0.15 £1,133,209 0.29 £1,137,417 0.52

Total assets £4,019,234 £3,857,408 £2,203,412

Weighted 1.4 0.21 0.41 0.72

R3 Earnings before interest and tax = -£415,405 -0.10 £341,388 0.09 £263,634 0.12

Total assets £4,019,234 £3,857,408 £2,203,412

Weighted 3.3 -0.34 0.29 0.39

R4 Market Value of Equity = £5,166,482 1.59 £2,660,646 2.27 £2,631,333 16.74

Book Value of Total Liabilities £3,246,723 £1,171,712 £157,232

Weighted 0.6 0.95 1.36 10.04

R5 Sales = £628,936 0.16 £2,444,061 0.63 £1,998,018 0.91

Total assets £4,019,234 £3,857,408 £2,203,412

Weighted 1.0 0.16 0.63 0.91

Z-score 1.07 2.77 12.46

WizzAir-Altman

Appendix3-Argenti

Argenti-Defects

Item Score Support

Management deficiencies

1.Autocratic chief executive

(8)

0/8 The chief executive of easyJet is Johan

Lundgren, who is appointed in December

2017. During the BBC interview, he said

multi-source information can help him in

decision-making and he tries to lean and

understand different information and advice

in his career.

In 2018, he demonstrated to the public his

insistence on equal pay and equal

opportunities for males and females by

cutting his own salary to match that of his

predecessor. And he also proposed some

provisions in favor of female pilots and

female employees.

These show that Johan Lundgren is not a

autocratic chief executive because he not

only accepts multi-source advice but also

tries his best to provide a fair environment

for easyJet and the industry. He should

provide more regulations which are only

benefit for males especially for himself if he

is an autocratic chief executive.

2. Failure to separate role of

chairman and chief

executive (4)

0/4 In the "Division of responsibilities of

chairman and CEO", which is included in

corporate governance documents of EasyJet

plc, EasyJet plc separate the roles of

chairman and chief executive clearly.

EasyJet announced that the Chairman's

primary role is to lead the Board and ensure

that it operates effectively, the Chairman is

expected to be independent on appointment

and is expected to remain independent

throughout his tenure, while the Chief

Executive's primary role is the day-to-day

running of the Company's businesses and the

development and implementation of strategy

(Division of responsibilities of Chairman

and CEO,2022).

3.Passive board of directors

(2)

0/2 EasyJet board of directors is executing its

succession plans to find appropriate

candidates and keep the balance between

skills and experience. For instance, the board

of directors in EasyJet plc takes the initiative

to train candidates and develop more suitable

candidates for the Board to ensure

themselves keep balance and dynamic.

And during 2022, faced with a drastic

reduction in flight capacity due to staff

shortages at the airport, EasyJet's Board of

Directors made an immediate decision to

respond to the change and EasyJet plc

offered to reduce the pressure on the airport

while reducing the loss of passengers by

reducing the number of flights in advance.

This shows the board of directors can keep

the internal energy, face and deal with

change positively.

4.Lack of balance of skills in

management team-–

financial, legal, marketing,

etc. (4)

0/4 In the easyjet-2022-annual-report-and-

accounts-governance, it is obvious that the

management team of easyJet is

comprehensive and strong in all aspects. For

instance, the managers` key areas of

expertise covers technical aspect (flight

operation, data information technology),

marketing (marketing, customer), legal

(legal, compliance, and regulatory), and

financial, etc.

5.Weak finance director (2) 0/2 Kenton Jarivis is appointed as CFO of

easyJet plc in 2021, who is a graduate of a

leading university with extensive experience

as CEO of AVIATION and in a number of

senior group finance roles. EasyJet believes

in his strengths and said Kenton Jarivis

would be instrumental in getting easyJet out

of the covid impact.

In fact, the financial position of easyJet

has improved since Kenton Jarivis joined.

All of turnover, net income, and market

capitalization of easyJet increased during

2021 to 2022. EasyJet CEO also recognizes

ability of Kenton Jarivis.

6.Lack of ‘management in

depth’ (1)

0/1 Almost member of board and

management team has management

background or experience, so easyJet's

management has a strong management base.

And then, the control of management in

easyJet is effective. The board of easyJet

establishes strategic priorities and oversees

implementation, ensures every plan can be

implemented. Plus, the Board and managers

meet monthly to understand the operations

and direction of the company.

7.Poor response to change

(15).

0/15 The biggest change in recent years is

covid. During the period of covid, easyJet

secured the company by financial gearings,

saving costs, and adjusting employees. In

2020, easyJet faced change positively and

managed to raise $631 million to ease the

financial pressure at the time. Although

easyJet experienced losses, flight

cancellations and redundancies during the

covid, easyJet took actions to avoid greater

loss and survived the huge challenges and

changes of the covid-19.

Accounting deficiencies

1.No budgetary control (3) 3/3 During 2019 to 2021, the total debt of

easyJet was increased while the turnover was

decreased, which means perhaps actual

performance of the company is not as good

as expected or there is imbalance because of

ineffective budgetary. And a good budgetary

control should consider the impact of covid,

but in 2021 there was still large loss in

easyJet, which means the budgetary is not

effective enough.

2.No cash flow plans (3) 0/3 During 2020 to 2021, cash inflow from

operating activities rose due to covid-19,

which means easyJet has difficulty in

turnover. To response to this situation, from

2020 to 2021, easyJet increased cash inflow

from investment and finance activities,

reduced the stress by disposing fixed asset,

increasing the long-term liability, and

reducing current liability. EasyJet gives itself

an opportunity for buffer through planning

cash flows.

3.No costing system (3) 0/3 EasyJet drives low-cost model and

maintains the advantage through continued

cost action. To recover from the effect of

covid-19, easyJet reduced operating cost and

improved the process, save amount of cost

successfully. This shows that easyJet has an

effective costing system which can help

company.

Total 3/45

Argenti-Mistakes

Item Score Support

1. High gearing (15) 15/15 Gearing=debt/equity, the gearing of

easyJet in 2022 is 1.95 (FAME database),

which is high gearing and shows that easyJet

has large proportion of debt to equity. It is

not positive for the company because its

equity cannot afford its total liability, it will

be risky when emergency or unexpected

event occur.

2. Overtrading (15) 0/15 Overtrading refers to the excessive buying

and selling of stocks by either a broker or an

individual trader. And a company will

overtrade if seeking more sales offers easy

credit to its customers on long payment

terms. For easyJet, the turnover does not

increase constantly. And the increase in

current asset is not exclusively related to

changes in current liability, which means the

company did not give up long-term growth

to blindly rise sales.

3. The big project (15) 0/15 The big project is both internal and

external project, the failure of which will

lead the company down. For easyJet, it not

only operates flight business, but also

involves the holiday booking and car-hire

service. Even if there is a failure with a

project, the company still has other projects

that can be sustained and will not be

immediately bankrupted by the failure of one

project.

Total 15/45

Argenti- Symptoms of failure

Item Score Support

1.Finanial signs (4) 0/4 From 2021 to 2022, although easyJet was

still in loss state, there was an improvement

in 2020, the year most affected by covid-19.

This shows easyJet is recovering from the

covid-19 with a healthy situation.

Then, the long-term liability decreased,

which means the future pressure of easyJet

reducing, it is also positive for the company.

Plus, current asset of easyJet in 2022 rose,

which indicates that the company has better

liquidity.

2. Creative accounting (4) 0/4 EasyJet has its own internal audit

committee, and it also engages external

auditors to audit its financial reporting.

There is no evidence to suggest that easyJet

has creative accounting in accounts.

3. Non-financial signs (3) 0/3 Firstly, management salaries of easyJet

are not frozen, which means the condition of

easyJet is healthy.

Secondly, although depreciation in 2021 is

lower than depreciation in 2020, I think this

change can be recognized as normal

situation because it is single year change. In

2022, the depreciation of easyJet increase

rather than keep decreasing.

Thirdly, easyJet still provides various

benefit for its employees, including training,

speedy boarding on flights, and free

allocating seats. All of these is benefit for

easyJet retaining talent to improve its long-

term development.

In addition, the company is committed to

eliminating the gender pay gap and

providing equal work opportunities, easyJet

provides better environment and equal

opportunity for females, which is also

positive for long-term development.

4. Terminal signs (1) 0/1 Although easyJet still loss-making, the

company is recovering from the covid-19

and improving.

Total 0/12

Total A-score 18/102