The company also improves its efficiency by lessening the day it pays off its suppliers and collects from its customers. An investor is most likely to 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 than 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 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. Based on the computed net profit margin and operating profit margin, the company’s profitability has improved. During 2006, the airline is able to turn 8.3% of its revenue in operating profit and 5.5% into net income from 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 Ryanair Ltd and Thomsonfly Ltd, British Airways lags far behind.