Financial Statements of the USA Companies - Term Paper Example

Task: Analyzing Financial ments of Actual U.S. Companies Table of Contents Introduction 3 Industry Overview 3 The company analysis 5 The accounting policies 6 Ratio analysis 7 Recommendations 11 Works Cited 12 Appendix 1: the ratio formulas 13 Appendix 2: Figures used in the ratio calculations 13 Introduction The term paper presents the economic analysis of the airline industry in the U.S. Three airline companies have been selected to facilitate the analysis. The companies are United Continental Airline, US airways, and Southwest Airlines. The paper includes the influence of various economic factors on the performance of the industry. In addition, the financial analysis of the companies is provided. The economic analysis covers a four-year period from 2019 to 2013. The ratios used are NOPM, NOAT, GPM, OEM, ART, INVT, LTOAT, Current ratio, quick ratio, time interest earned ratio and debt to equity ratio. Finally, the analysis will be relied on to determine in which company to $ 20,000. Industry Overview Back in the seventies, the airline industry in the U.S was highly regulated. During the period, the government implemented strict policies to new entrants. The regulations put by the government set very high standards, which attracted more entry fee. As a result, the entry into the industry became more expensive. Potential entrants withdrew their entry plans. The consequences of the strict regulations were low competition, high prices, reduced quality of the airline services and decline in sales volume. Since the U.S. Government lifted the regulations, the entry of new players has been on the rise. Competition in the industry has increased leading to a rise in services standards. The quality of airline services increased as the competition grew tight. Companies had to improve their competitive standards, and one of the effective competitive strategies is constant quality delivery. Deregulation of the airline industry lead to the reduction of the fare prices, which made the airline services more affordable (Airline Deregulation, Revisited par. 1-7). Currently, most airline companies have a new plan that most analysts refer to as anti-competitive strategies. The consolidation strategy that has seen many airline companies merge is not supported by various authorities such as the Department of Transport. Companies following companies have merged into one: Air Trans merged with Southwest, the American airline merged with U.S Airways, United airline merged with Continental among other examples. The recent consolidation causes many fears as it could lead to monopoly. As a result, in 2013, the District of Columbia and Antitrust Division’s civil enforcement program legally challenged the consolidation strategy on the grounds that free competition and the quality level of services would be compromised (Airline Deregulation, Revisited par. 1-7). The challenges the industry faces are security threats, the increasing operating costs, the rising fuel cost, and health concerns. Since 9/11 terrorist attacks in the U.S., it has ben a requirement for airline companies to step up the security measures. As s result, the screening of all passenger luggage is among the new security measures introduced. The process takes time and increases the operating cost of the companies. Other issues such as the Ebola breakout have sparked the need to add passenger test and diversion of airlines not to mention the restrictions to various destinations viewed to pose potential threats to West Africa. However, the current increase in the U.S GDP and the disposable income sends a positive message to the industry. During peaks business seasons, the industry’s performance is likely to experience a boost as the consumption of airline services is likely to increase due to the increase in leisure activities. Amid stiff competition, the U.S. Airlines, the United Continental and the Southwest Airlines rely on competitive pricing strategies like the use discounts, proactive changes in the price structures, flyer initiatives, and intensive target promotion among other strategies (Cederholm 3-9). The company analysis U.S. Airways group, located in Delaware, primary deal is the provision of air transportation. The U.S. Airways is a holding company operating through its subsidiaries (wholly owned). Such subsidiaries are US Airways, PSA Airlines, and Piedmont Airlines, Inc. The United Continental airline’s primary activities are the provision of air transportation to both people and cargos. The primary activities of Southwest airline are similar to those of the U.S Airways’. Below are tables showing the total revenues and total assets (in $ millions) for the three companies between 2009 and 2013. Based on the tables, the two items exhibit an increasing trend between the periods (Annual Report: US Airways, United Continental Airways and Southwest Airways 25-35, 40-90) Southwest Airline Year 2009 2010 2011 2012 2013 Sales 10,350 12,104 15,658 17,088 17,699 Total assets 14,269 15,463 18,068 18,596 19,345 United Continental Airline Year 2009 2010 2011 2012 2013 Sales 16,335 23,325 37,110 37,152 38,279 Total assets 18,684 39,598 37,988 37,628 36,812 U.S. airways Year 2009 2010 2011 2012 2013 Sales 10,458 11,908 12,987 13,765 13,676 Total assets 7,454 7,819 8,335 9,396 16,556 The accounting policies The U.S Airways follow the guidelines provided by the US GAAP when preparing the financial statements. It poses plants and equipment whose values are recorded at cost. Second, the company’s policy regarding the treatment of the intangible assets is that intangible assets with finite economic life are amortized over their respective economic lives while, intangible assets with indefinite lives are tested for impairment annually. Third, the company recognizes certain revenues and defers those with incomplete earnings process (Annual Report 2013: U.S airways 92-97). Similarly, United Continental airline follows the follows the guidelines provided by the US GAAP when preparing the financial statements. Like the US Airways, United Continental airline recognizes certain revenues and defers hose with incomplete earnings process. They are classified as liabilities (Annual Report 2013: U.S airways 92-97). Second, like the US Airways, United Airways amortize the intangible assets over their economic lives while, the impairment review for intangible assets with indefinite economic are done annually. Third, like the US Airways, the United Airways value the plant and equipment at cost (Annual Report 2011: United Continental airline 92-100). Concerning the Southwest airline, the US GAAP guideline is preparing the financial statements. Southwest Airlines follow the same policies implemented by United Airlines and US Airways during the accounting treatment of the plant and equipment, revenues recognition and the treatment of intangible assets (Annual Report: Southwest Airlines 90-93). All the three companies engage in operating lease arrangement involving aircrafts and other equipment. As per the definition of an operating lease, the operating expenses of the leased assets are taken care of by the tenant (the companies). When the companies meet the operating and other costs related to the lease contracts, the profitability levels reduce (Annual Report: Southwest Airlines 90-93). Ratio analysis Debt/equity - ratio indicates the proportion of fixed charge capital in the capital structure of a firm. Below is the table showing the ratio for the three companies. 2009 2010 2011 2012 2013 AVG Trend SWA 0.608306 0.460959 0.451796 0.412328 0.298664 0.446411 decrease UCA -2.26894 6.62073 5.811739 8.645995 3.108905 4.383685 Inc/Dec USA -11.3352 47.65476 27.53333 2.644109 0.951159 13.48963 decrease Based on the average debt ratio for Southwest airline (SWA), for every $ 1 of equity, the company has $ 0.446411 of fixed charge debt. Comparatively, the leverage level of US Airways is the highest followed by United Continental. The trends of the ratios are as shown (Bowhill 265-284). Time interest earnings – this ratio evaluates a company’s ability to meet interest payments. Below is the table showing the ratio for the three companies 2009 2010 2011 2012 2013 AVG Trend SWA 1.408602 5.916168 3.572165 4.238095 9.755725 4.978151 increase UCA -0.27903 1.223058 1.960512 0.063183 1.612036 0.915952 Inc/Dec USA 0.388158 2.37386 1.302752 2.495627 3.282913 1.968662 Cyclic Based on the ratio averages for US Airways (USA), the company could pay interest expenses 1.968662 times. Based on the table, Southwest airline has the strongest capability to meet interest expenses followed by US Airways. The trends of the ratios are as shown. (Bowhill 265-284). Current ratio- this ratio measures the ability of the business to meet its current obligations using the current assets. Below is the table showing the ratio for the three companies. 2009 2010 2011 2012 2013 AVG Trend SWA 1.254858 1.294705 0.958526 0.909032 0.78506 1.040436 decrease UCA 0.788661 0.95255 0.965157 0.791306 0.711247 0.841784 Inc/Dec USA 0.835783 1.024296 0.964873 1.030555 1.239297 1.018961 Increase Based on the ratio averages for United Continental, the company had $ 0.841784 of current assets for every $ 1 of current liabilities. The liquidity level of Southwest airline was the highest followed by US Airways. The ratio trends for five years are as shown (Bowhill 265-284). Quick ratio – It measures the ability of a company to meet the short-term obligations using highly liquid assets. An extremely liquid asset is that which is readily converted into cash. Below is the table showing the ratio for the three companies. 2009 2010 2011 2012 2013 AVG Trend SWA 1.172272 1.173374 0.904919 0.808172 0.702784 0.952304 decrease UCA 0.758226 0.915698 0.911181 0.737647 0.656687 0.795888 Inc/Dec USA 0.754392 1.173374 0.904919 0.950147 1.1726 0.991087 Increase Based on the table above, US Airways is more capable of meeting the current obligations using more liquid assets followed by Southwest Airlines. The ratio trends for five years are as shown. (Bowhill 265-284). Gross profit margin- the ratio shows the level of a company’s profitability after meeting the costs related to sales (cost of goods sold). It also displays the capability of a business to meet the relevant operating costs. Unfortunately, the three companies have no record of either the gross profit of cost of sales (Bowhill 265-284). Return on equity- this ratio measures the proportion of a corporation’s profits attributed to the shareholder’s equity. Below is the table showing the ratio for the three companies. 2009 2010 2011 2012 2013 AVG Trend SWA 1.811196 7.359307 2.588338 6.021167 10.27808 5.611618 increase UCA 23.15902 14.64968 47.06534 -56.9337 20.29165 9.646403 Inc/dec USA 57.74648 597.619 47.33333 38.48943 12.80882 150.7994 Inc/dec Based on the above table, US Airways generate, on average, more return on equity than the other three companies followed by United Continental. The ratio trends for five years are as shown (Bowhill 265-284). Operating expense ratio – displays the effectiveness of the company’s cost management strategies. Below is the table showing the ratio for the three companies. 2009 2010 2011 2012 2013 AVG Trend SWA 97.4686 91.83741 95.57415 96.35417 92.77925 94.80272 Cyclic UCA 100.9856 95.81565 95.0741 99.88426 96.73189 97.6983 Cyclic USA 98.87168 93.44138 97.2434 94.26081 91.52076 95.06761 Cyclic Based on the table, on average, 95.06761% of the revenues of US Airways were operating expenses. United Continental has the highest operating expenses followed by US airline. The ratio trends for five years are as shown (Bowhill 265-284). Inventory turnover – displays the frequency with which the stocks were converted into cash. Unfortunately, the three companies do not incur the cost of sales. Therefore, it is impossible to determine the inventory turnover (Bowhill 265-284). Net operating profit margin- this ratio measures the ability of a company to manage its operating expenses such as the administrative costs. A high ratio signifies a lower level of the business’s operating expenses. Below is the table showing the ratio for the three companies. 2009 2010 2011 2012 2013 AVG Trend SWA 1.188406 5.270985 2.944182 1.767322 4.373128 3.108805 Cyclic UCA -0.78972 4.184352 4.920507 0.142657 3.189738 2.329508 Cyclic USA 1.032702 6.558616 2.602603 6.218671 5.845753 4.451669 cyclic Based on the table, on average, United Continental has the highest operating expenses (lowest net operating profit margin) followed by Southwest airline. The ratio trends for five years are as shown (Bowhill 265-284). Net operating asset turnover – the ratio measures the amount of revenue generated by the company’s net operating assets. It also indicates the utilization rate of the company’s net operating assets. Below is the table showing the ratio for the three companies. 2009 2010 2011 2012 2013 AVG Trend SWA 61.71981 66.74653 47.79665 41.99438 39.57286 51.56605 decrease UCA 52.90481 83.00965 46.21396 46.57354 52.9507 56.33053 Cyclic USA 25.52113 21.56533 21.32132 23.29822 54.14557 29.17031 Increase Based on the table, on average, United Continental airline exhibits the most efficient operating assets utilization level followed by Southwest airline. The ratio trends for five years are as shown (Bowhill 265-284) Long-term operating asset turnover- the ratio shows the amount of income generated by long-term operating assets (the utilization rate of the long-term operating assets). Below is the table showing the ratio for the three companies 2009 2010 2011 2012 2013 AVG Trend SWA 105.4203 92.39921 87.6421 84.08825 84.1234 90.73465 decrease UCA 83.12825 118.1265 72.73242 74.95155 74.69108 84.72596 increase USA 48.98642 41.23278 40.70224 42.23756 81.1677 50.86534 increase Based on the table, on average, Southwest airline exhibits the most efficient utilization level of long-term operating assets followed by United Continental Airlines. The ratio trends for five years are as shown (Bowhill 265-284). Account receivable turnover - the ratio measures the number of times the company’s due from creditors are paid within a financial period. The table below shows the ratio for the three companies. 2009 2010 2011 2012 2013 AVG Trend SWA 61.2426 62.07179 52.36789 51.46988 42.24105 53.87864 decrease UCA 21.9852 14.46063 27.32695 27.76682 25.4684 23.4016 Cyclic USA 36.69474 38.28939 39.7156 46.19128 38.71709 39.92162 Inc/Dec Based on the table, on average, Southwest airline collects receivables the most number of times compared to the other two companies. Therefore, it has the most strict debt policy (Bowhill 265-284). Recommendations The US economy is becoming stronger due to the increasing levels of gross domestic products. There are signs of a future increase in the disposable income of US citizens signifying a possible rise in the engagement of leisure activities. Therefore, there is anticipation of a rise in flight attendant, which will boost the industry’s performance. If I had $ 20,000, I would consider investing in Southwest airline. Investors have the following preferences: first, companies that can comfortably meet both long and short-term obligations. Second, firms that have low leverage level (low default risk). Third, companies with a high degree of efficiency and companies with high profitability levels. Southwest airline has the strongest liquidity level. It also has the lowest leverage level. The company’s profitability level is also high signifying a high growth potential. Last, the company has greater capacity of efficiently utilizing the long-term operating assets and the net assets. That means a strong focus on revenue generation. Consequently, Southwest airline is better placed to exploit growth opportunities in the industry, create value and maximize shareholder wealth. Works Cited Airline Deregulation, Revisited 2011. Web. 7 Feb. 2015. http://www.bloomberg.com/bw/stories/2011-01-20/airline-deregulation-revisitedbusinessweek-business-news-stock-market-and-financial-advice Annual report: Southwest Airline 2013. Web. 7 Feb. 2015. Southwest.investorroom.com/company-reports Annual report: United Continental Airline 2013.Web. 7 Feb. 2015. Annual report: US Airlines 2013. Web. 7 Feb. 2015. http://phx.corporate-ir.net/phoenix.zhtml?c=117098&p=irol-sec Bowhill, B, Business planning and control: integrating accounting, strategy, and people, Chichester, England: Wiley, 2008. Print. Cederholm, Teresa 2014, External factors that influence the airline industry. Web. 7 Feb. 2015. http://marketrealist.com/2014/09/must-know-external-factors-influencing-airline-industry/ http://ir.unitedcontinentalholdings.com/phoenix.zhtml?c=83680&p=irol-reportsannual Appendix 1: the ratio formulas Return on Equity (Net profit/equity)*100 Net operating profit margin (NOPAT/ sales)*100 Net operating asset turnover (Net operating assets/sales)*100 Gross profit margin (gross profit/sales)*100 Operating expense margin (operating expense/sales)*100 Accounts receivable turnover (sales/ receivables) Inventory turnover (cost of goods sold/inventory) Long-term operating asset turnover (long-term operating assets/sales)*100 Current ratio (current assets/current liabilities) Quick ratio (current assets-stock)/current liabilties Debt to equity (fixed change debt/equity) Time interest earned (EBIT/Interest charges) Appendix 2: Figures used in the ratio calculations US Airways (USA) 2009 2010 2011 2012 2013 Net profit -205 502 71 637 674 Equity -355 84 150 1,655 5,262 NOPAT 108 781 338 856 808 Net operating assets 2,669 2,568 2,769 3,207 7,484 Gross profit 0 0 0 0 0 Sales 10,458 11,908 12,987 13,765 13,822 Operating expense 10,340 11,127 12,629 12,975 12,650 Receivables 285 311 327 298 357 Cost of sales 0 0 0 0 0 Inventory 227 231 235 300 296 Long-term operating assets 5,123 4,910 5,286 5,814 11,219 Current assets 2,331 2,909 3,049 3,845 5,500 Current liabilities 2,789 2,840 3,160 3,731 4,438 Fixed charge debt 4,024 4,003 4,130 4,376 5,005 EBIT 118 781 426 856 1,172 Interest charges 304 329 327 343 357 Source: http://phx.corporate-ir.net/phoenix.zhtml?c=117098&p=irol-sec Southwest airlines (SWA) 2009 2010 2011 2012 2013 Net profit 99 459 178 421 754 Equity 5,466 6,237 6,877 6,992 7,336 NOPAT 123 638 461 302 774 Net operating assets 6,388 8,079 7484 7,176 7,004 Gross profit 0 0 0 0 0 Sales 10,350 12,104 15,658 17,088 17,699 Operating expense 10,088 11,116 14,965 16,465 16,421 Receivables 169 195 299 332 419 Cost of sales 0 0 0 0 0 Inventory 221 401 243 469 467 Long-term operating assets 10,911 11,184 13,723 14,369 14,889 Current assets 3,358 4,279 4,345 4,227 4,456 Current liabilities 2,676 3,305 4,533 4,650 5,676 Fixed charge debt 3,325 2,875 3,107 2,883 2,191 EBIT 262 988 693 623 1,278 Interest charges 186 167 194 147 131 Source: Southwest.investorroom.com/company-reports United Continental Airways (UCA) 2009 2010 2011 2012 2013 Net profit -651 253 850 -661 654 Equity -2,811 1,727 1,806 1,161 3,223 NOPAT -129 976 1,826 53 1,221 Net operating assets 8,642 19,362 17,150 17,303 20,269 Gross profit 0 0 0 0 0 Sales 16,335 23,325 37,110 37,152 38,279 Operating expense 16,496 22,349 35,282 37,109 37,028 Receivables 743 1,613 1,358 1,338 1,503 Cost of sales 0 0 0 0 0 Inventory 197 466 615 695 667 Long-term operating assets 13,579 27,553 26,991 27,846 28,591 Current assets 5,105 12,045 10,997 10,249 8,695 Current liabilities 6,473 12,645 11,394 12,952 12,225 Fixed charge debt 6,378 11,434 10,496 10,038 10,020 EBIT -161 976 1,837 52 1,259 Interest charges 577 798 937 823 781 Source: http://ir.unitedcontinentalholdings.com/phoenix.zhtml?c=83680&p=irol-reportsannual Read More