Emirates Airline Ratio Analysis, Business, and Economic Environment - Example

University: Student name: Subject: Date: Course code: SECTION I SUMMARY OF THE COMPANY ‘S BUSINESS AND ECONOMIC ENVIRONMENT Emirates is a global airline, serving 154 airports in 82 countries from its hub in Dubai, United Arab Emirates. Currently it operates the world’s largest fleets of Airbus A380 and Boeing 777 aircraft, it mainly provides commercial air transportation service.Emirates airline was established in 1985 by the government of Dubai with its headquarters being situated in Dubai, United Arabs Emirates. This company operates in the transport sector under the industry of airlines. Emirates Airline Company today is a subsidiary of The Emirates Groups whose headquarters are in Dubai. Emirates Airline Company provides airline services to its customers worldwide in form of travel and transportation services, air catering, first-class lounges, young flyer accommodations, in-flight entertainment cargo transport and chauffeurs (Morning star, n.d.). Emirates airline’ mission is to consistently offer high-quality value-for-money service and to be the best airline on all of its routes. Emirates Airline is actually one of the five airline industries which operates a jet airliner. This company in the 2007 received the award of being the eight-largest airline globally in terms international passengers transportation. Since the inception of this airline, it has received 250 international awards of excellence in the airline industry clearly defining its success (Morning star, n.d.). ECONOMIC ENVIRONMENT Emirates airline operates in one of the most competitive market sector in the world economy. Over the past 10 years airline market has been known to be the most dynamic market environment that requires the relevant market players to always be alert in strategizing for purposes of avoiding elimination from the harsh market environment where competition is at its best. Emirates airline is known to be economic stability and successful in the airline industry due to its high competitiveness worldwide. Despite the many challenges that this airline meets in various parts of the world, the entire management of emirates airline has always risen to address it with immediate effect and that is why actually the company is in a better economic condition than its main competitors in the entire world.Emirates Airlines is actually known to be one of the very few airlines worldwide that did not feel economic and aviation depression of the last few years other than other airlines because Dubai has put tireless efforts in marketing itself as a tourist destination with favorable tax incentives that each and every tourist would like to enjoy (Pandley, 2015). Dubai is world widely known to be commercial and tourist hub in the entire Middle East and that is why it’s said to be the City of Gold. This is actually supported with the massive shopping centers, clean white sand beaches, the dozens of world class luxury hotels such as the Burj Al Arab which is known to be the world's first seven star hotel to be established.Dubai has an economic advantage to Emirates Airline as its best geographically positioned since it is used as a connecting point between Europe and Asia/Australia meaning all airlines must pass by before reaching their destination (Leach, 2010). Due to its well-known commerce in cargo trades the Emirates Airline has an economic advantage of being contracted in transiting cargos to other destinations worldwide and is now operates wide body aircraft that accommodates the increasing international and regional growing cargo market demand more especially from Dubai. Emirates airline has been able to gain competitive position and advantage during their business operations in the market place due to their continuous marketing and business strategies which have seen the airline’s profits rise year in year out. SECTION II: RATIO ANALYSIS CALCULATION OF FINANCIAL RATIOS 2017 2016 2015 INDUSTRY ROE net income/Equity 4.131760415 22.58293 16.714983 28.06 Profitability ratios Net profit margin ratio Net profit/sales 1.731570714 8.764072 5.4515266 7.36 Gross profit margin ratio Gross income/sales 98.20991414 98.4012 98.547182 78.86 Operating cost ratio operating costs/sales 98.6708702 91.87305 95.616179 13.08 Efficiency ratios Fixed assets turnover ratio sales/fixed assets 0.893482854 0.951545 1.0370813 Receivables turnover ratio sales/receivables 8.439729893 8.958266 9.3045811 26.42 Total assets turnover ratio sales/total assets 0.688881028 0.700627 0.7787935 0.84 Inventory turnover closing stock/cost of goods sold *365 544.9432955 575.7978 555.90079 10.81 Leverage ratios Debt ratio Total liabilities/Total assets 0.712466477 0.694174 0.7459995 3.5 Debt to equity ratio Total liabilities/Total Equity 2.467829259 2.553032 2.9370006 0.14 Equity ratio Total equity/Total asset 0.28870169 0.271902 0.2540005 Long-term debt to assets ratio Total long-term debt/Total assets 0.395547804 0.404853 0.4363697 Return on Equity The return on equity of Emirates airline increased from the year 2015 to the year 2016 then later on it dropped drastically in the year 2017.This is a clear indication that the shareholders’ funds were not well utilized by the management to the interests of the shareholders. The shareholders invested more funds into the company which exceeded the net income that was generated by the company (Chandra, 2008). This is a clear sign of inefficiency in the management and most likely there was some other inefficiency amongst the employees leading to the wastes, low increases in the sales and high expenditure levels that contributed to the low returns on equity that were much below the industry standard of 28.06. Profitability The net profit margin of Emirates Airline in the year 2015 was 5.4% and 1.73% in 2017 which was below the industry level of 7.36%.This means that in these years the percentage of net profit to the sales was below standard due to high expenses and low sales. Thus the management is required at this point to either maintain the sales levels constant or cut on the expenses levels in order to meet the set industry profit margin levels. Alternatively, the management can consider increasing the sales of the company and maintaining the expenses of the company constant in order to meet the industry set standard (Chandra, 2008). However, in the year 2016 the company had profit margin level of 8.76% which was above the set industry standard of 7.36% which was as a rust of efficient management from the company management. The gross profit margin was 98.2%, 98.4% and 98.5% for the years 2017,2016 and 2015 respectively and this was above the industry level which was 78.86%.This was recommendable since it means that the management was able to sell its inventory at very high profits enabling it to remain with more money for financing the operating expenses of Emirates Airline such as salaries and other utilities (Pandley, 2015). Operating cost ratio The operating cost ratio were 98.7,91.6 and 95.6 for years 2017,2016 and 2015 respectively which is higher than the set industry level of 13.08.When the operating cost ratio is very high it means that the properties are not efficiently managed by the managers in a profitable manner as according to the interests of the investors and this means that the income from the property cannot meet the operational and maintenance costs and the management should consider raising the flight charges in order to lower the operating cost ratios to below 13.08%. Efficiency ratios Receivables turnover ratio The company’s receivables turnover ratio was 8.4, 8.95 and 9.3 for the years 2017, 2016 and 2015 respectively of which was lower than the industry set ratio of 26.42.This means that the management is not frequently collecting its receivables from the debtors and this is likely to affect the cash flows of the company since their funds seem to be tied for so long (Leach, 2010). A lower ratio is an indication of poor quality credit sales and receivables set by the management of Emirates Airline. Total assets turnover ratio Emirates’ total assets turnover ratio was 0.688, 0.7 and 0.77 in the years 2017, 2016 and 2015 respectively and this was slightly lower than the industry set standard ratio of 0.84. This shows that the company is not efficiently using the assets in generating the sales of the company. This might be due to fluctuations of number of people taking flights or management problems or production problems making some of the assets faulty (Chandra, 2008). The management should find a way of fixing those problems in order to be above the set standards. Inventory turnover ratio The inventory turnover ratios of Emirates airline were 545,576 and 556 in the years 2017, 2016 and 2015 respectively which is much higher than the set industry ratio of 11.Thisshows that the company cannot efficiently merchandise its inventory this is most likely because the company invests in non-salable inventory that ties a lot of money hence affecting the liquidity of the company and may discourage creditors and lenders from having business with the company because they feel that the company may not be able to meet its financial obligations when they fall due (Chandra, 2008). Leverage ratios Debt ratio This ratio is seen to be 0.71, 0.69 and 0.75 for years 2017,2016 and 2015 respectively of which is much below the set industry standard of 3.5.This kind of ratios mean that Emirates Airline the company is solvent indicating longevity of its existence since the asset value is much higher than the total liabilities of the company. This will highly contribute to creditors and lenders getting convinced that the company will be able to pay back what they will give on credit (Leach, 2010). Debt to Equity ratio Emirates airline has a debt to equity ratio of 2.47, 2.55 and 2.94 for the years 2017, 2016 and 2015 respectively and this is higher than the industry set ratio of 0.14.This indicates that the investors own a larger percentage of the company than the creditors thus makes it risky for the creditors since they control a small percentage of the company and incase it collapses,they will not be able to recover their debts. However, the trend shows that it has been reducing giving hopes of a drastic drop in the near future. Long term debt to asset ratio The debt to asset ratio of this company was 0.39, 0.40 and 0.43 for the years 2017, 2016 and 2015 respectively. There is a progressive decrease in this ratio from the year 2015 to the year 2017.This indicates that the company is gradually moving from dependence on long-term debts for the purposes of growth and instead its using other sources of capital for its expansion and this a financial advantage to Emirates Airline (Leach, 2010). SECTION III: EVALUATION OF THE CASHFLOWS OF EMIRATES AIRLINE Cash conversion cycle The cash conversion cycle of Emirates Airline since 2015 to 2017 has been 534,477 and 422 days respectively. This the time that the company actually takes to recover its cash from the current assets and pay its current liabilities. Since the company takes more than one year to convert its inventory into cash and collect its receivables to pay its current liabilities, it actually shows that the management is ineffective and the company is not financially health when it comes to the liquidity levels. However, the decreasing trend seen in the length of period taken by the company to get liquid and pay its current liabilities gives hopes to the creditors who wish to transact with the company (Pandley, 2015). The creditors and short-term lenders may be advised to compare this cash conversion cycle with those of close competitors of Emirates Airline in the Airline industry before making decisions. Cash liquidity ratios Quick acid ratio The quick acid ratios of this company were 0.49,0.62 and 0.49 for years 2017, 2016 and 2015 respectively which is higher than the industry set ratio. This implies that the liquidity levels of Emirates are at a better position for the creditors to easily agree to input funds into the company. Since it’s above the set standards, it means that the company has quick assets that can be converted into cash to meet the current liabilities whenever they come due thus giving the creditors and short-term lenders confidence in the company (Pandley, 2015). Current ratio Emirates Airline company had a current ratio of 0.72, 0.91 and 0.8 for the years 2017, 2016 and 2015 respectively which was above the set industry ratio standards. This shows that the current assets of Emirates Airline are very liquid in that they can easily be converted into cash to meet any pressing current liabilities and ensure continuous operation. However, it is risky in that the current assets that are liquid do not exceed the current liabilities indicating that there may be chances when the company may not be able to meet fully its obligations when they fall due, putting the creditors and lenders at risk of not being able to fully recover their debts in full in good time meaning cash flow problems (Leach, 2010). Cash Sources and Their Uses Thee cash sources are the cash flow statement activities and they actually include: Investing activities These are cash flow activities such the purchase of depreciable assets and the disposal of these assets such as motor vehicle and furniture. This type of activity becomes a source of cash when one sells that particular assets through the act of disposal .This activity becomes a use of the cash when an asset is bought using the cash. Emirates airline as a company buys depreciable assets such as the aircrafts and sells some of the depreciable assets such as the motor vehicles (Pandley, 2015). Operating activities Basically these are day to day business activities such as the receivables, the payables and credit cards. This actually excludes the purchase of depreciable assets and loan principal payments. It’s a source of cash when one is able to collect the receivables and make a profit. The use of cash comes about when one is not able to recover the receivables and pays the payables and ends up with a loss. Emirates airline engages in collection of receivables and at the same time it pays its payables. Financing activities This involves things like borrowing loans, debentures and paying the loans. It’s a source of cash when one receives a long term loan from a bank .The cash use is brought about when one actually pays the principal of the loan or there are drawings by the owner from the company (Leach, 2010). Emirates Airline has taken loans and it pays it and the same time it pays dividends to its shareholders. SECTION IV: OVERALL RATIO TREND Basing on the financial ratios of Emirates Airline for the past three years, the trends of the profitability ratios indicate that they are increasing meaning that the company’s overall performance will in the future rise to better ratios (Leach, 2010). An increase in the profitability ratios will be a competitive advantage to Emirates Airline in that it will attract more investors and lenders that will contribute more to its growth since it is assumed to be meeting its key obligations when they fall due fully. Currently the efficiency ratios are below the required standards thus putting the management at a risk. However, the trend indicates a continuous improvement in the efficiency of the company showing that in the near future the company management will be able to efficiently manage the company assets according to the interests of its shareholders and encourage more investors to put their funds in the business (Chandra, 2008). Currently the liquidity ratios are above the industry ratio and the trend for the past three years indicates an increase meaning the company is liquid. The future of the company is that the current liabilities will be repaid in good time and the creditors and lenders of the company will be in good terms with Emirates Airline. The leverage ratios indicate that the solvency level of the company is in a better position. The trend for the past three years shows that the solvency of the company has been improving and in the future the solvency ratio will be very high and that means that the company will not be relying on the debt from lenders for expansion instead it will be using its own funds or capital from the shareholders (Pandley, 2015). References Brigham, E. (2016) Financial Management: Theory & Practice - Page 576, New York: Cengage Learning. Chandra, P. (2008) Financial Management, New Dheli: Tata Mc-Graw Hill. International Accounting Standards Board, ‎Financial Accounting Standards Board (2008) Preliminary Views on Revenue Recognition in Contracts with Customers, London : Pearson Education. Karim, K. (2004) Environmental Disclosure Practices and Financial Performance, New York: Cengage learning. Leach, R. (2010) Ratios Made Simple, Petersfield: Harriman House ltd. Morning star, [Online], Available: HYPERLINK "http://financials.morningstar.com/ratios/r.html?t=WJA®ion=can&culture=en-US" http://financials.morningstar.com/ratios/r.html?t=WJA®ion=can&culture=en-US . Pandley, I.M. (2015) Financial Management, 11th edition, Vikas. Peterson, P. (1999) Analysis of Financial Statements, London : Pearson Education. Stickney, C. (2009) Financial Accounting: An Introduction to Concepts, Methods and Uses, New York: John Wiley & Son's. Stolowy, H. (2006) Financial Accounting and Reporting: A Global Perspective - Page 204, London: Pearson Education. Swansburg, R. (1997) Budgeting and Financial Management for Nurse Managers, New York: John Wiley $ Son's. Tracy, A. (2012) Ratio Analysis Fundamentals: How 17 Financial Ratios, London : Pearson Education. Walton, P. (2006) Global Financial Accounting and Reporting: Principles and Analysis, New York : John Wiley & Son's. Warren, C. (2006) Financial & Managerial Accounting - Page 531, London : John Wiley & Son's. Read More