The Financial Performance of Cathay Pacific Airways and Fly Emirates Airways - Assignment Example

Financial Analysis xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Name xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Course xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Lecturer xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Date Introduction The fly emirates group consists of companies in the hospitality, tours, and travel industry. The most famous and active of the companies in the emirates group of companies is the fly emirates airways. It has several fleets of aircrafts, which transports their clients across different destinations across the world. On the other hand, the Cathay Pacific Airways is a company in the air travel industry. Like the fly emirates airways, Cathay Pacific Airways owns several aircrafts that airs their clients to different destinations in Asian, America and European continents. These two companies have heavy presence in United Arab Emirates (UAE). This report reviews the financial performance of these two companies. The report analysis the financial results of these companies for two years, that is 2011 and 2012 financial years. The report produces ratio analysis of these companies statement of financial performance to compare them. Ratios analysis Fly Emirates Airways The profit margin on sales indicates how much the company has earned without considering the indirect costs. The profit margin on sales decreased slightly, however, the sales and profits increased. The decrease in profit margin on sales is because of the increase n the costs of goods for sale. They increased at a higher proportion that the increase in sales. The return on assets increased, this is an indication that there was efficient utilization of assets. This was the same with return on equity, the shareholders earnings increased as the ratio indicates. The increase in return on equity increased the earnings per share. This is because return on equity and earnings per share are directly related to each other. The debt management by the management is effective. The company reduced its debt as the ratio of total debt to asset indicates. This reduces the gearing level of the company. The times interest coverage reduced as well. These debt management ratios are important in indicating the gearing position of the company. The liquidity ratios decreased, the company has enough current assets to meet the company's current obligations. The company's net working capital reduced by a small margin from 2011 to 2012. As such, ,its ability to meet short term obligations reduced. To make it stable, the company needs to reduce the short-term borrowings. Nevertheless, the company has enough working capital as indicated by the current ratio. The inventory turnover ratio increased considerably, the company almost doubled the inventory turnover which is very good improvement. The total assets and the fixed assets turnover also increased. The company increased the rate at which it used the total and the fixed assets to make revenue. The decrease of the day sales outstanding ratio is a good improvement. These ratios are a good indication of the maximum utilization level. The company used the company assets to the maximum to generate income. Ratio FLY EMIRATES Profitability ratios 2011 2012 Profit margin on sales 11.48 11.56 Return on assets 11.76 9.08 Return on equity 0.23 0.18 Earnings per share     Debt Management ratios     Total debt to total assets ratio 0.08 0.11 Times interest coverage ratio 26.56 35.82 Liquidity ratios     Current ratio 1.55 1.66 Quick (acid test) ratio 1.51 1.62 Cathay Pacific Airways The financial ratios of this company indicate that the company has experienced a big decline in financial performance from financial year 2011 to financial year 2012, the profit for the year dropped from HK$M5,670 in 2011 to HK$M1,128 in 2012 (a substantial drop). The company sales increased though from HK$M98, 406 in 2011 to HK$M99,376 in 2012. As a result, the company is highly geared as it has more debt than assets. The liquidity position is also very bad as the profits have dropped considerably. The company does not have enough assets to meets its obligations. These indicate that the company is in a risk of liquidation. The liquidity ratio indicates that the company is not in a healthy operational condition. The net working capital, indicated by the current ratio, is very poor. The company's short-term borrowings are more than it has to meet the borrowings. This can lead to operational barrier and therefore the company should address it by reducing the amount of short-term borrowing. The company's interest coverage ratio is also poor; the management should look in to improving the situation. Inventory turnover ratio indicates that the company increased its sales conversion ratio. The company increased the rate of turning inventory in to sales this is improvement. This, apart from being recommendable, accounted for the increase in the company revenue. Nevertheless, the company decreased the rate at which it used the total assets to generate revenue. This may be attributable to sale of crucial assets of the company. The fixed assets turnover also decreased. Lastly, the day sales outstanding ratio was strong. Ratio CATHAY AIRWAYS Profitability ratios 2011 2012 Profit margin on sales 1.80 5.59 Return on assets 0.73 4.13 Return on equity 0.02 0.10 Earnings per share     Debt Management ratios     Total debt to total assets ratio 0.15 0.11 Times interest coverage ratio 1.33 4.75 Liquidity ratios     Current ratio 0.65 0.25 Quick (acid test) ratio 0.62 0.22 Comparison of Fly Emirates Company and Cathay Pacific Company The financial ratios indicate that fly Emirates Company is in a healthy financial position. However, Cathay Pacific Company is not in a healthy financial position. The market performance for Fly Emirates Company is good; it is in a stable financial position. Although Cathay Pacific Company is making profits, the financial and market, performance is not good. Limitations of financial ratios According to, De Franco (2011) analysis of financial ratios of any company enable one evaluates the performance of the company and provides a comparison with other companies in the same industries. This provides a basis for decision making for the management or among the shareholders. However, the use of this financial ratio has very many limitations that make financial ration analysis not effective in evaluation of the company’s performance or providing a comparison with other companies in the industry. The analyzed financial statements provide the past information and performance of the company. Financial ratios do not put into consideration the change in price information for the company goods from year to tear thus gives distorted information when used to a compare the performance of the company between two consequent years. The users of financial information are however more concerned on the current and future performance of the organization, which the financial ratios analyzed, do not provide. The two companies despite being in the same industry are using different currencies, this means that the financial ratios used to analyze the performance of the two companies are not based on same currency basis and thus the analysis may be misleading. The financial ratios only give the qualitative performance of the two companies in the industry but ignore the factors that results to the issues analyzed in the comparison of the financial statements. For instance when we talk about a decrease in the profit margin ratio in Cathay Pacific company it does not give comprehensive information about the company but we are required to get to the details and establish whether it is because of the sales performance or profit margin (Brigham & Houston 2011). Recommendations The cost of sales takes a big percentage of the sales, to maximize profit, it is important that these companies minimis the cost of sales. Effective buying of purchases and the accompanying costs thereon can do this. To maximize the utilization of assets, the companies should ensure that the assets are used to their maximum and for the right way towards generation of income. Management of debt is crucial in determination of growth of these companies. As recommended by Groves & Allen (2010), these companies should maintain a debt to asset ratio seventy percent equity and thirty percent debt. In this way, the company will be able to meet their obligations and still have enough capital for investment and expansion. These companies, as Rana & Kouzani (2010 Suggest, should adopt cost effective strategies of production. This will increase the earnings and consequently increase in earnings attributable to the shareholders. Conclusions The Fly Emirates airways and the Cathay Pacific airways companies present a good base for comparison of their financial performance. The analysis of the financial statements performance illustrate that the two companies have experienced different returns and performance over the two years period. The Cathay airways have been experiencing low performance unlike the Fly Emirates Company, which have enjoyed a considerable stable and healthy financial performance (indicated in the financial performance). Conclusively, the Fly Emirates airways have had good financial performance than the Cathay pacific airways. References Brigham, E, F, & Houston, J, F, 2011, Fundamentals of financial management: CengageBrain com. De Franco, G, Kothari, S, P, & Verdi, R, S, 2011, the benefits of financial statement comparability: Journal of Accounting Research. Groves, B, A, & Allen, M, G, 2010, ITERA: IDL tool for emission-line ratio analysis: New Astronomy, 15(7), 614-620. Rana, M, Islam, M, & Kouzani, A, Z, 2010, Peak to average power ratio analysis for LTE systems: In Communication Software and Networks, 2010, ICCSN'10, Second International Conference on (pp. 516-520) IEEE. Appendix 1 Fly Emirates Airways financial statements and tables you used in your calculations Appendix 2 Cathay Pacific Airways financial statements and tables you used in the calculations Read More