Emirates Airlines is one of the large airlines of the world. It is also considered i most luxurious airlines. This is Dubai’s national airlines. It was found in 1985. It serves almost 2400 flights per week. All these figures clearly depict its glory. (Emirates Airlines, 2010)
The financial analysis is done by using the financial statements of Emirates Airlines, the largest airline in the Middle East. In the analysis we deal with the following determinants:
Liquidity Ratios
Profitability Ratios
Turnover Ratios
Leverage Ratios
Liquidity Ratios:
These are the ratios that determine the capability of a firm to meet its short term obligations. It includes:
Current Ratio
It describes the ability of a company to meet its short term liabilities with its short term assets.
=Current Assets/Current Liabilities
2009
2010
Current Ratio = 31,919/17,753
Current Ratio = 36,870/19,552
Current Ratio = 1.797
Current Ratio = 1.8857
In 2009 Current ratio was 1.797 while in 2010 it is 1.8857. By above analysis it is clear that company has more liquidity in year 2010. Company has more short term assets to meet its short term liabilities.
Quick Ratio
Slightly tougher test than above it depicts it eliminates those assets that may be difficult to convert into cash like inventory etc.
= (Cash + Short-Term or Marketable Securities+ Accounts Receivable) / Current Liabilities
2009
2010
Quick Ratio = 2619+4549+7109/17,753
Quick Ratio = 1176+9335+7008/19,552
Quick Ratio = .804
Quick Ratio = .8960
Quick ratio was .804 in 2009 while it increased to .8960 in year 2010. Strengthening of quick ratio clearly shows that company has strong liquidity position in year 2010.
Cash Ratio
It measures the capability of a firm’s cash, along with other investments that can be easily converted into cash in order to pay its short term liabilities.
= (Cash + Short-Term) / (Current Liabilities)
2009
2010
Cash Ratio = 2619+4549/17,753
Cash Ratio = 1176+9335/19,552
Cash Ratio = .403
Cash Ratio = .5375
Cash ratio analysis is also depicting the same result as quick and current ratio as company’s cash ratio is also increased in year 2010.
Profitability Ratios:
They include:
Gross Margin
= Gross Profit / Sales
2009
2010
Gross Margin= 489/3159
Gross Margin= 598/3121
Gross Margin= .1547
Gross Margin= .1910
Gross profit margin was .1547 in 2009 while it increased to .1910. This clearly shows that company has increased its gross profit margin and profitability increased by significant amount. Gross profit individually can not comment on net profitability of company.
Operating margin
= Operating Income or Loss / Sales
2009
2010
Operating Margin= 467/3159
Operating Margin= 559/3121
Operating Margin= .1478
Operating Margin= .1791
Emirate’s operating margin was .1478 in 2009 and .1791 in 2010. Operating margin is also increased in 2010. This ratio is supporting the fact of increased profitability of Emirates Airlines.
Net Margin
= Net Income or Loss / Sales
2009
2010
Net Margin= 507/3159
Net Margin= 613/3121
Net Margin= .1604
Net Margin= .1964
Net profit margin can be considered as most accurate ratio for evaluating profitability of any organization. Company’s net margin increased from .1604 to .1964 in year 2010. This clearly shows that company is moving strongly towards profitability. Difference in ratio is also very significant which shows that company is getting success in its operations.
Return on Assets
= Net Income + After-tax Interest Expense)/ Average Total Assets
2009
2010
ROA= 507+20/3947
ROA= 613+14/4638
ROA= .1335
ROA= .1351
Return on Assets shows any organizations total return over their assets which tells that how good organization is in utilizing its assets. Company’s ROA increased from .1335 to 1.1351 in year 2010. But change in value is not significant.
Return on Equities
= Net Income / Average Shareholders’ Equity
2009
2010
ROE= 507/15571
ROE= 613/17475
ROE= .0325
ROE= .0350
Return on Equities shows total return over shareholder’s equity. ROE was .0325 in year 2009 while it increased to .0350 in year 2010. This shows that company has created more worth for its shareholders in year 2010.
Leverage Ratios:
The ratios are used to depict that more the debt more are the risks associated with the company since the company’s assets are the first right of its debt-holders. They include:
Debt/Equity Ratio:
= (Short + Long-Term Debt-Term Debt) / Total Equity
2009
2010
D/E Ratio= (2852+16753)/17475
D/E Ratio= (1372+15140)/15571
D/E Ratio=1.121888
D/E Ratio= 1.060433
Debt to equity ratio shows total debt over total equity of any company for a given period. Here total debt consists of total long term and short term debt which when divided by the total shareholders’ equity for that period gives the Debt to equity ratio. D/E ratio was 1.121 in year 2009 and decreased to 1.06 showing that the total debt coverage of the company decreased in the period.
Interest Coverage:
= Operating Income / Interest Expense
2009
2010
Interest Coverage= 559/14
Interest Coverage= 467/20
Interest Coverage = 39.9285
Interest Coverage= 23.35
Interest Coverage calculates as operating income over interest expense of the company. This ratio tells the interest covering capacity of the operating income for a given period for the company. Cleary the reduction in the interest coverage shows the reduction in the interest paying capacity of the company in the given period.
Turnover Ratios:
Receivables Turnover Ratio = Total Sales/ Average Receivables
2009
2010
Receivables Turnover Ratio = 3121/697
Receivables Turnover Ratio = 3159/590
Receivables Turnover Ratio = 4.4777
Receivables Turnover Ratio = 5.3542
Turnover ratio calculates as total sales for a given period over average receivables for the same given period. This has increased for the company from 2009 to 2010 from 4.477 to 5.352. This increase clearly shows that total sales have increased significantly over credit sales and thus the current assets in the form of cash must have improved.
Average Collection Period = 365/ Receivables Turnover
2009
2010
Average Collection Period = 365/4.4777
Average Collection Period = 365/ 5.3542
Average Collection Period = 81.515
Average Collection Period = 68.1707
Average collection period is the average period in which the cash for the company will be collected. This is calculated as average receivables over a division of total sales over 365. Average collection period for the company have reduced from 81.515 to 68.17 indicating that collection has improved.
Benefits of Analysis
Financial analysis diagnoses company’s current condition. It also tells about company’s past records and its future prediction. Company’s financial strength and weakness can be known by analysis of its financial statements. Analysis is profitable for both: Company insiders and outsiders. Company’s management can know about success and failure for their strategies in monetary terms while outside investor can sense his investment risk with respect to size of investment and type of investment. In this particular example, financial analysis of Emirates Airlines shows that profitability of this company has increased in year 2010. This judgement came through analysis of several profitability ratios. So it is clear that Company management can rely on their strategies as these were proved successful. Liquidity ratio also increased from 2009 to 2010 which shows that company has increased its liquidity to meet its short term liabilities. An investor can find this as a good sign. Leverage ratio has declined in year 2010 which shows that company is less risky in year 2010. This is another good sign for an investor. Receivable turnover ratio tells about company’s credit policies. (Financial Ratios)
Conclusion
By above analysis it can be concluded that company has increased its profitability by significant amount in year 2010. Liquidity ratio tells that company has strengthened its liquidity in 2010.
After calculating the leverage and turnover ratios we can conclude saying that the cash collection of Emirates Airlines has improved for the year 2010 as compared to 2009. The reduction in the collection period is a clear indication of this. Also the debt ratio of the company has reduced indicating that the company is in the better and strong financial condition as compared to 2009.