Wizz Air Financial Analysis: A Case Study

Introduction: Wizz Air's Financial Performance: Key Ratios Examined

In the context of a business unit, preparation, analysis, and evaluation of financial aspects are highly required for strategy formulation and attracting investors. This report is based on Wizz Air Holdings, which offers high-quality travel services to customers. This, report will evaluate the company's financial performance by taking into account IAS. The report also presents the role of an independent audit framework for an organization.

Task 1: Evaluating Compliance and Accounting Policies in Financial Reporting

1. Compliance ratio of some general accounting polices

The ratio analysis of Wizz Air Holdings for 2022 is as follows:

Operating cash flow ratio

The company has a very low operating ratio, which indicates that the company's operations are effective enough to cover all the upcoming obligations. This indicates that the company's liquidity position is not good (Financial statement of Wizz Air Holdings, 2022). The company should focus on speedy collection from the customer by providing various incentives and penalties on late payment. The unnecessary expenses should be reduced and the maintain forecast regarding the cash flow.

Inventory turnover ratio

This indicates that the company is effective enough in converting its inventory into cash as it is fulfilling the ideal ratio of the industry. The company has effective inventory control measures and should focus on improving the same. The company should focus on improving the marketing strategy which helps in creating the demand for the inventories.

Gross profit ratio

The effective gross profit ratio ranges from 50% to 70 %, which indicates that the company is not effective enough in generating profit. To improve the profit, the company should focus on improving the sales by adopting effective marketing strategies. The company should focus on improving the efficiency through which the cost could be reduced and the profit margin could be improved. The company should also focus on evaluating its pricing strategy and modification should be done where needed.

Debt to equity ratio

An equity ratio less than 1 is a good indicator which means that the company is having less liability than the equity. It also indicates that the company will not face a financial crisis while expanding its business operations. The company is at high risk because of too little debt in the capital structure (Czajor, 2022). The company should focus on modifying the capital structure and involving debt as this will help in reducing the expenses.

This ratio indicates that the profitability, solvency and liquidity position of the company is not attractive, which can create difficulties in the future. The company should adopt appropriate measures to increase the position. In inventory turnover, the company is following the conservative principle and valuing the cost of inventory at the lower cost

2. Compliance ratio of the International Accounting Standard

Current ratio

The current ratio of the company is 1.14, which is much less than the ideal ratio for the company, which means the company is not effectively investing in the current assets of the organization. To improve the position of the compan, ity should focus on investing in the current asset and delay the purchase of the fixed asset. The company increases this ratio by paying off all the current liability of the company.

Quick assets ratio

The company has a quick ratio of more than 1, which indicates that the company is sufficient enough in paying off all its current liability by selling off the quick asset (Kurniawan, 2021). This also indicates that the company will have an effective inventory management system which means the company is effectively managing its carrying and ordering cost.

Asset turnover ratio

This indicates the efficiency of the company in employing its asset in generating the Sales and revenue. The effective asset turnover ratio is greater than 1, which determines that the company is not efficient in using its assets to increase the sales of the company. The ratio could be improved by investing in a marketing strategy which will help in enhancing the sales of the company. This also suggests that the company is employing a bad method for tax collection.

Return on total asset ratio

It is the ratios which identify the efficiency of the company by identifying the relation between the earnings and the assets. This indicates that the company is not generating profit and is incurring losses, which results in poor performance of the organization. To improve the ratio the company should pay attention to adopting an effective marketing strategy which will help in increasing the sales. The company should modify the pricing strategy which will help in improving the profit of the organization.

This 4 ratio indicates that the company is effectively compliant with the rules and regulation of the section IAS 16. This prescribes that the company's future benefit and cost from the assets should be reliably measured. The company's current liquidity position is not effective so in future, it could create difficulty in paying off the obligations. The assets are not effectively employed for improving the sales and profit of the business.

3. Accounting policies for the Wizz Air holding Plc

One significant accounting policy for the company is the revenue recognition. The policy states that the company should identify the revenue based on the time when it has been earned or realized, irrespective of the time the actual payment has been received. 4 principles need to be satisfied for the effective application of the policy. Once the goods are sold, the seller does not possess any ownership over the goods. There should be a certain level of assurance related to the receiving of the payment. The revenue should be in a form which can be measured. There is a high amount of complexity in deciding the revenue for the airline industry because of factors such as loyalty programs, ticket sales and ancillary services. The tickets for the airlines are sold in advance, which makes it difficult for Wizz Air Holding to determine the actual time of the revenue. There is an option for the cancellation of the tickets, which makes it difficult to estimate actual revenues. The airline company needs to allocate some portion if the revenue to the free fights or other loyalty program.

ASC 606 and IFRS 15 accounting guidelines have been created which help in overcoming the challenges faced by the company. This includes creating a contract between the passenger and the company which indicates that once the ticket is booked, no refund will be provided, which does not impact the revenue of the company (Penman and Zhang, 2020). The guideline includes identifying and allocating the transaction price to each performance obligation. The revenue for the company will be marked when the actual flight take place. The effective practice for the implementation of the principle is to create a policy of the company which complies with the counting guidelines. The revenue process can be efficiently done by adopting the well advance technology which can help in effective accounting. The company should provide training and development sessions which help in increasing the efficiency of the accounting and finance personnel. The revenue recognition issue could be solved by improving cooperation and coordination between the different departments of the organization. In this way, airlines could effectively analyse the revenue recognition of the company by adopting all the suitable measures and practices.

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4. Role of external audit report of the Wizz Air holding

The external audit plays an important role for the organization as this will help in providing the information without bias and help in gaining the trust of the stakeholders. Some of the importance of the external audit is as follows:

• Helps in improving the control and the internal system: The external report will provide the clarity regarding the internal control to the management. This will help in identifying deficiencies in the working of the Wizz Air holding on which they need to work on for improving the performance of the organization.
• Enhance creditability: The report created through external audit helps in creating the creditability in the industry. They confirm that the financial statement provided by the company did not include the window dressing and the stakeholder feel secure in investing the company.
• Help in gaining the shareholder confidence: The external audit helps in providing transparency and clarity to the shareholder regarding the company's interest (Saputra and Yusuf, 2019). The report provides information regarding the direction in which Wizz is working and how this will help in fluffing the interest and needs of the company.
• Confirmation regarding compliance with the legal framework: Stakeholders are interested in knowing that the working of the company does not neglect the legal framework. The external audits confirm compliance with the laws and regulations.
• Increase the goodwill: The external audit provides the true position of the company, and the positive review helps in increasing the goodwill and reputation of the company. The information provided in the report does not include any biases, which helps in increasing the confidence of the stakeholder and creates a better image of the company.

Conclusion

It has been identified from the report that Wizz air holding is effectively following all the general accounting principles of the accounting. The company is ineffective in using its assets for generating profit and will not be able to meet its short term obligation. The company follows the revenue recognition principle by recording its revenue at the time the flight take place. The company's creditability and goodwill are increased by the external audit.

References

Books and Journals

• Czajor, P., 2022. Property, plant and equipment–possibilities of influencing the financial results of entities under Polish accounting regulations and IAS 16 (including Polish tax law regulations). Tax Avoidance, Accounting and Financial Reporting, p.63.
• Kurniawan, A., 2021. Analysis of the effect of return on asset, debt to equity ratio, and total asset turnover on share return. Journal of Industrial Engineering & Management Research, 2(1), pp.64-72.
• Penman, S. and Zhang, X.J., 2020. A theoretical analysis connecting conservative accounting to the cost of capital. Journal of Accounting and Economics, 69(1), p.101236.
• Saputra, I.G. and Yusuf, A., 2019. The role of internal audit in corporate governance and contribution to determine audit fees for external audits. Journal of Finance and Accounting, 7(1), pp.1-5.

Online

• Financial statement of the Wizz air holdings. 2022. [Online] available through: <https://wizzair.com/en-gb/information-and-services/investor-relations/investors/annual-reports>