Financial Statements Analysis - Research Paper Example

Financial ratios enable to understand operating performance and financial condition of the company through profitability ratio, liquidity ratio, activity ratio, financial leverage ratio, and shareholders’ ratio. This assignment conducts a financial ratio analysis of two companies of Airline Industry; they are Lufthansa Airline (LH), and Emirates Airlines (EK). Financial ratios are evaluated using information from the income statement and balance sheet. These two documents are obtained from the websites (“Lufthansa Annual Report 2013”,n.

d; “The Emirates Group Annual Report 2012-2013”). Financial ratios are evaluated for the years 2012, and 2013. Liquidity ratio measures short-term solvency – the ability of the company to meet its debt obligation. It is expressed through the financial ratios, such as Current ratio (CR) = Current assets / Current liabilities, and Quick ratio (QR) = (Cash + Marketable Securities + Receivables) / Current liabilities. It is expected that a company current assets will be higher than the current liability.

The values of current ratios in Table 1 shows that Lufthansa can somehow cover its current obligation while Emirates has about 3 times current assets to cover its current liabilities. The quick ratio values show that LH is less liquid than EK; can only manage to repay less than 50% of its current liability using cash and cash equivalents. The industry average quick ratio is 0.4 (“Airline Industry”, n.d.); it shows that LH is on the line with the industry while EK is in a better position than most companies in the industry These ratios belong to the efficiency category; it shows how efficiently a company is using its assets.

This assignment uses Inventory turnover (IT) = Cost of goods sold (COGS) / Inventory, Fixed asset turnover = Revenue / Fixed assets, Assets turnover = Revenue / Total asset, and Day’s sales outstanding (DSO) = 365 / Receivable turnover = 365 / (Revenue / Receivable) to