Financial Management: Singapore Airlines - Assignment Example

Financial Management: Singapore Airlines 1. Introduction The history of Singapore Airlines can be marked back to the year 1947 when it operated as a part of the Malayan Airways. In 1966, it was transformed into Malaysia-Singapore Airlines (MSA). Finally, in 1972, with the splitting of MSA, Singapore Airlines formally came into existence. Since then the company has not looked behind, achieving great heights of success with each passing year. In the 1970’s, along with including Boeing 747 to its convoy and starting flight services to Western Asia; Singapore Airlines also took the initiative to offer free of charge headsets, options of food in conjunction with free drinks in the economy category. It was also the first airlines to come up with satellite-supported in-flight communication system in 1991. The company is also credited with the idea of developing an International Culinary Panel comprising of worldwide prominent chefs, in addition to, the commencement of audio and video on choice facilities. Meanwhile, female air travel attendants, known as the Singapore Girls, have carried on the tradition of dressing in sarong kebaya outfit. Today, Singapore Airlines is one of the most reputed companies around the world. Changi Airport functions as the airline’s focal point from where it offers flight services to 35 countries around the world including regions of East Asia, South Asia, and South East Asia alongside the region between Australia and Europe. It is also known for operating the world’s two longest continuous commercial flights from Singapore to Newark and Los Angeles. The company is also attributed as the launcher of Airbus A380, the world’s biggest traveller airplane. The financial performance of Singapore Airlines has always been encouraging with the exception of the year 2009-10. However, the company was able to recuperate and deliver excellent financial results in the year 2010-11 (Singapore Airlines, 2012). 2. Calculations 3. Financial Ratios Current Ratio = Current Assets / Current Liabilities (2010-11) = 9,779,200,000 / 6,232,300,000 =1.57 times (2009-10) = 6,548,700,000/ 4,519,600,000 =1.45 times Debt Ratio = Total Debt / Total Assets (2010-11) = (10,041,700,000) / 24,544,500,000 = 40.91% (2009-10) = (8,735,000,000) / 22,484,300,000 = 38.85% Return on Assets = Net Income / Total Assets (2010-11) = 1,092,000,000 / 24,544,500,000 = 4.45% (2009-10) = 215,800,000 / 22,484,300,000 = 0.96% Return on Equity = Net Income / Total Equity (2010-11) = 1,092,000,000 / 14,502,800,000 = 7.53% (2009-10) = 215,800,000 / 13,749,300.000 = 1.57% TIE (Times Interest Earned) = (EBT + Interest Expense) / Interest Expense (2010-11) = (1,271,300,000 + 70,100,000) / 70,100,000 = 19.14 times (2009-10) = (63,200,000 + 68,900,000) / 68,900,000 = 1.92 times 4. P/E Ratios Singapore Airlines P/E (Price Earnings Ratio) = Market price per share / Earning per share (2010-11) = 13.68 / 0.91 = 15.03 times The second company selected of the same sector is Tiger Airways, another airline company of Singapore. Tiger Airways P/E (Price Earnings Ratio) = Market price per share / Earning per share (2011) = 1.33 / 0.074 = 17.97 times The P/E Ratio of Tiger Airways is slightly better than that of Singapore Airlines. This means that currently, investors are willing to pay more per dollar of accounted proceeds for Tiger Airways (Tiger airways Airline, 2011). However, taking other financial ratios into account along with the recent resurgence of Singapore Airlines after an unfortunate 2009-10 financial year, it can be stated that Singapore Airlines is more attractive in the eyes of investors as compared to the Tiger Airways. If the P/E Ratio of Tiger Airways is applied, then Singapore Airlines’ share price would be: Share Price ($ per share) = (P/E Ratio) X (Earning per share) = 17.97 X 0.91 = 16.35 5. Graph and Share Price Movement The chart comparing the share price of Singapore Airlines with that of the ST index has been graphed at the following link. http://uk.finance.yahoo.com/echarts?s=C6L.SI#symbol=c6l.si;range=2y;compare=^sti;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined; One noticeable divergence of the Singapore Airlines share price from the path of the ST index occurs during the period November 2010. During this period, the share price of Singapore Airlines suddenly fell to a low $15.78 where ST index rose swiftly to record a high of $3313.63 (Yahoo UK and Ireland Finance, 2012). This movement of share price is also supported by a press story ‘Singapore Airlines grounds three A380s’ published on 10 November, 2010 in The Guardian. According to this article, Singapore Airlines was forced to ground three A380s after it was revealed that the engines of these planes contained oil tarnishes. This incident took place just a few days after Qantas A380’s engine blew away after taking off. After thorough inspection of the engines, the Singapore Airlines gradually recommenced the services of the three affected planes. Meanwhile, the company apologized its customers; for the interruption due to the mechanical faults. However, the apology could not prevent a slump in the passenger and cargo load as the disruptions negatively influenced the views of the customers with respect to the service of the Singapore Airlines. As a result, the share price of the Singapore Airlines also plummeted (Associated Press, 2010). 6. Further Financial Ratios and Report Few other financial ratios of Singapore Airlines: Return on Turnover = Net Income / Revenues (2010-11) = 1092,000,000 / 14524,800,000 = 7.52% (2009-10) = 215,800,000 / 12707,300,000 = 1.70% Price/Book Value = Market price per share/ Book value per share (2010-11) = 1.35 times (2009-10) = 1.15 times Quick / Acid Test Ratio = (Current Assets - Inventory) / Current Liabilities (2010-11) = (9,779,200,000-389,500,000) / 6,232,300,000 =1.51 times (2009-10) = (6,548,700,000-429,500,000)/ 4,519,600,000 =1.35 times Fixed Asset Turnover =Revenue / Net fixed Assets (2010-11) =14,524,800,000/ 13,877,600,000 =1.05 x (2009-10) =12,707,300,000 / 15,063,900,000 =0.84 x Total Asset Turnover =Revenue/ Total Assets (2010-11) =14,524,800,000/ 24,544,500,000 =0.59 x (2009-10) =12,707,300,000 / 22484,300,000 = 0.56x Report In this report, I plan to brief you with the financial performance of the Singapore Airlines during the last year on the basis of facts, figures and financial ratios. Singapore Airlines, a leading airline company in the world exhibited exceptional financial performance in the last trading period of 2010-11. Though the company’s financial position had fallen sharply during 2009-10 due to various natural calamities such as earthquakes in Japan and New Zealand along with harsh weather in the West, however, it managed to recuperate itself and come up with flying colours in the financial year 2010-11. The revenues of the company have increased from $12707.3 million to $14524.8 million which demonstrates that the returns from the company’s activities have undergone a handsome improvement of 14.3%. There has been a huge boost in the operating profit as it has risen by an unbelievable 1911.5%, from $63.2 million to $1271.3 million, illustrating the fact that the company’s income from operating actions have augmented seriously. The company’s working capital has also increased, which is again a good sign. Total Assets have been enhanced by 9.2%. Net cash generated from operating activities has also gone up by 67.2%. On the other hand, the drastic drop in the number of employees from 33.8% illustrates that Singapore Airlines is moving towards achieving efficiency in its processes by rightsizing the company. The earning per share has increased from 18.2 cents to 91.4 cents, by a mammoth 402.2%, illustrating the amount of benefit current shareholders are earning on each of their shares. If you buy the shares of Singapore Airlines, you will not only enjoy the high earning per share but will also reap the benefits of the fact that dividend per ordinary share has increased by almost 5 times to 60 cents in the course of the last twelve months. People may argue that the yearend share price and market capitalization have fallen in the last year by 10%, however, such small fluctuations in share prices are common in the world of today (Singapore Airlines, 2011). Moreover, it is good for a potential purchaser like you so that you could take advantage of this downward variation in share price and buy the share now; and later on, when the share gets back to its original price, you can obtain the profits (Baker et al. 2005). The financial ratios of Singapore Airlines have also improved tremendously in the last trading period. The current ratio has increased from 1.45 times in 2009-10 to 1.57 times in 2010-11, showing that the company’s liquidity position has become better as it is covering its current liabilities with its current assets in a much healthier manner now (Besley et al, 2008). If inventories, the least liquid form of current assets, are taken out; even then the company is guarding its current liabilities with its current assets in a safe method, as depicted by an improved Quick ratio of 1.51 times (Gibson, 2011). The Debt ratio has amplified slightly by around 2% which is not really a concern at the moment. The important ratios for a prospective shareholder such as you are the Return on Assets, Return on Equity and Return on Turnover. Return on Asset ratio shows the amount earned on each dollar of asset. It has increased from 0.96% to 4.45% during the last year. Return on Equity ratio has jumped from 1.57% in 2009-10 to 7.53% in 2010-11. The Return on Turnover has also boosted up by approximately 5% to 7.52%, which signifies that the company’s profit per dollar revenue has improved. Moreover, the TIE (Times earned ratio) has progressed from 1.92% in 2009-10 to an incredible 19.14% in 2010-11. This illustrates that Singapore Airline’s ability to pay off its accumulated interest has increased. It is now operating in a much wider margin of safety. The improved Fixed Asset and Total Asset Turnover ratios explain that the company is generating more revenue on its fixed assets and total assets respectively (Bull, 2008). Thus, considering the immense potential of financial growth displayed by the Singapore Airlines in the last trading period, I would highly encourage you to buy the shares of this company as it is surely going to achieve a lot more in times to come (Singapore Airlines, 2011). Bibliography Associated Press. (2010). Singapore Airlines grounds three A380s. The Guardian. [online] 10 November, 2010. Available from: http://www.guardian.co.uk/world/2010/nov/10/singapore-airlines-grounds-a380-qantas[Accessed 12 February 2012]. BAKER, H. K., & POWELL, G. E. (2005). Understanding financial management: a practical guide. Malden, MA, Blackwell Pub. BESLEY, S., & BRIGHAM, E. F. (2008). Essentials of managerial finance. Mason, OH, Thomson/South-western. BULL, R. (2008). Financial ratios: how to use financial ratios to maximise value and success for your business. Amsterdam, CIMA. GIBSON, C. H. (2011). Financial reporting & analysis: using financial accounting information. Mason, Ohio, South-Western. SINGAPORE AIRLINES. (2011). Singapore Airlines Annual report 2010/11. [Online] Available from: http://www.singaporeair.com/pdf/Investor-Relations/Annual Report/annualreport1011.pdf[Accessed 12 February 2012]. SINGAPORE AIRLINES. (2012). Singapore Airlines – Our History. [online] Available from: http://www.singaporeair.com/en_UK/about-us/sia-history/[Accessed 12 February 2012]. TIGERWAYS AIRLINE. (2011). Annual report 2011. Tigerairways.com.[Online] Available from: http://www.tigerairways.com/news/Annual_Report_2011.pdf[Accessed 12 February 2012]. Yahoo UK and Ireland Finance, (2012). SIA Share Price Chart. [online] Available from: http://uk.finance.yahoo.com/echarts?s=C6L.SI#symbol=c6l.si;range=2y;compare=%5Esti;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined[Accessed 12 February 2012]. Read More