Air Transportation Industry - Essay Example

As potential investors there are over a dozen financial ratios that can be used to gauge the overall corporate performance, efficiency and profitability. These ratios provide a framework for the potential investor to be able to analyze the potential of a company as well as allow a base of comparison between the industry and the prospective stock investment. After analyzing the company, environment and competition, we have chosen sis ratios that best provide the necessary insight in order to best evaluate Rynair’s corporate performance and provide a clear base of comparison with the airline industry. First we chose Operating Profit as our initial measure of economic performance. Since Operating profit is the cornerstone of the success of any company, and it serves to provide an overall picture of a business in general. It is clearly an indicator of the success of the strategic planning and decisions made during the course of the course of the year by management in general. One can clearly gauge also how the company performed compared with the competition. In order to calculate the operating margin you have to divide operating income by the total revenue. The Operating Profit for RynAir for the year 2007 was 21.09% (471,745/2,236,865) compared with an industry average of 0.6 % (Dun & BradStreet, 2007). Here we can perceive that management definitely is plating their cards right at RynAir. They are demonstrating a level of efficiency and profitability that is vastly superior to any competitor. The financial ratios we have chosen portray a clear image of the Rynair’s profitability, solvency and resource efficiency. The first two ratios we have chosen measure the firm’s level of solvency, or its ability to pay its liabilities. These two are the Quick Ratio and Debt to Equity Ratio. The Quick Ratio or Acid test ratio is the most demanding and clear portrayal of a company’s true level of liquidity.  It serves as one of the main metrics used by financing institutions in order to gauge the credit worthiness of a business or corporation. In order to compute the quick ratio, first obtain the current assets and subtract the inventory, this number represents the "quick assets" or the type of assets that can be converted to cash immediately. From this total of quick assets the total of current liabilities must be discounted. The result from this formula is the quick ratio. Due to the fact that inventory is rarely sold as quickly as the more liquid assets, this is why inventory levels are excluded from the calculation By analyzing the Acid Test ratio, a potential investor to gauge the operating cash flow position of the company as well as the firm’s level of solvency compared with the industry standard. The industry standard median for the quick ratio is .8 compares with Rynair’s quick ratio of 2.0684 (2,311,860m / 1,117,730m).Which as we can plainly perceive is over 250% higher than the industry standard whish represents a far superior level of solvency, which places RynAir at a significant competitive compared with the industry. In the case of the Debt to Equity Ratio, it gauges how much money a company should safely be able to borrow for expansions or long term investments. The ratio is calculated by obtaining the company’s total liabilities and dividing this number by the amount of total stockholder’s equity. Corporations and businesses that have a debt to equity ratio of close to 50%, should be analyzed carefully to rule out liquidity or solvency trouble. Therefore it is safe to say that businesses with limited working capital, and current / quick ratios that are uncharacteristically low compared with the industry, is a sure sign of financial weakness. RynAir Debt to Equity Ratio is 1.27(3,151,472/2,539,773), compared with an industry median average for 2007 of average of 1.416.Which in term is slightly lower that industry average, does not represent a detrimental factor at all. It places them in slightly less leveraged position that the industry which allows them to be able to expand more readily if need be. The next two ratios chosen have to deal with the company’s overall profitability. These ratios are Return on Assets (ROA) and Return on Equity (ROE). The ROA of a firm establishes the relation between the company’s earnings in and to all of the assets available for use. ROA helps a potential investor gauge how much of a gain or profit he can obtain for each $1 in assets invested. Depending on the nature of each industry, certain industries are very asset heavy; such as the in the case of the airline industry. In this case ROA serves as an excellent measuring stick of corporate performance. There are two different generally accepted ways of calculating ROA. The first alternative is to multiply Net profit margin x Asset turnover ratio. The second option involves taking Net Income and dividing it by Average Assets for the period. In the case of RynAir, their ROA is 18.21% ($401,401M/ 2,203,951.5M). The industry average is a 4.4% return on assets, the level of efficiency and profitability far outstrips the competition. Their ROA is almost 5 times higher than the industry average, once again demonstrating the level of profitability and efficiency that is clearly uncharacteristic for the industry. Return on Equity (ROE), is the other profitability ratio we will analyze. This ratio is one of the most significant guidelines of overall of profitability, it clearly demonstrates to the potential investor how profitable a company is in comparison with its total Stockholder’s equity. The formula used to determine the ratio for Return on Equity is: Net Profit/Average Shareholder Equity for Period In general we can expect the industry to average around 13.3%, in the case of RynAir, it has a 17.71%.As we can plainly perceive the trend demonstrating RynAir leadership in the industry is undeniable. As a business that has a high return on equity is more likely to be one that is capable of generating cash internally, it explains the fact that they possess such as low level of indebt ness, and are optimizing their use of assets much more efficiently than the industry. ROE- $401,401M / 2,265,879M =.1771 or 17.71% . Certainly as an investor one cannot truly appreciate and understand the complexities of such a complicated and volatile industry, such as in the airline industry. This company has outpaced and outsmarted a whole industry sector. Their competition should follow suit and learn from the successes of RynAir in order to better deal with uncertainty just like they have demonstrated. One can clearly see that the volatile nature of the industry will not quiet down, and this level of performance they have attained so far it’s not necessarily indicative of future growth. One of the best resources for factual and strategic information of any corporation is their annual report. There is a wealth of information that the typical investor does not even bother to analyze or read. The annual report includes all the future plans, expansions, new business venture initiatives, strategic plan and course of action for the short and long term. This information and other contained in the Annual Report serves as an element of support or backbone to your financial analysis. It is obvious that an investor needs to keep himself up-to-date in his portfolio as well as future investments and the annual report is only once a year with contingency planning limited based on to scope or lack of information available at that time. As we know the economy, the markets and businesses are always in a constant flux or change. In this case the best source of information for the potential investor comes from reading the financial news and of course the corporate website which serves as the best source of updated information about current events, news, and corporate initiatives is the internet, and specifically the company website of the corporation involved. In general current events, contingencies, changes in strategy that occur during the normal course of business will all be included in the website. One aspect that intrigued me, since I have not studied in detail the competition is what the main factors or strategies that have distinguished the management of RynAir. It’s worth studying on a deeper level, what have been the causes for the downfall of the airline industry in general and how RynAir seems to be beating them all at their own game. There is a lot to learn from this case and further inquires could be made as to how RynAir has effectively dealt with the volatility of the market and its downfall and the competition has not figured it out. As we saw in our analysis RynAir has become the best in the business as far as profitability, efficiency, and solvency and most obviously this has been a direct result of management, their employees and their mutual initiatives. The company seems to be geared towards maintaining their leadership position since have grown at a steady level, regardless of economic uncertainty or the competition. References Dun & Bradstreet (2007). Air Transportation Industry Ratios. Retrieved May 20, 2008 from Dun & Bradstreet database. Read More