Financial Analysis

Introduction

Financial analysis can be defined as the process of analysing financial statements of an organisation in which actual performance, available resources, profits, incomes, expenditures and revenues are evaluated. Main purpose of financial analysis is to assess that business is in profits or losses and it is performing well or not (Financial analysis, 2018). In all the companies financial analysts are hired by directors so that they can properly check final accounts that includes income statement, balance sheet and cash flow statement. It guides managers to formulate effective strategies for the business in order to attain predetermined objectives. Main aim of this report is to understand the importance and uses of financial analysis to analyse actual performance of a company. In this project report financial analysis has been conducted for two different organisations that are Southwest and Singapore Airlines. For the purpose of analysis different ratios like profitability, liquidity, efficiency and gearing ratios have been calculated for both the organisation. At last comparison performance of both the companies, strengths and weaknesses are discussed under this assignment.

Analysis Of Companies

Non financial analysis

Overview of Southwest Airlines:

It was established in year 1967 by Mr. Herbert Kelleher and Rollin King. Currently the organisation is operating business in US successfully. Its headquarter is in Dallas, Texas. The business in executed with the help of more than 57000 employees. Main goal of the organisation is to satisfy all its customers by providing them good services on low prices so that all of them can be retained for a long period. A unique boarding process is used by the company that helps to entertain customers while they have to wait for sometime while boarding (Vogel, 2014). In Southwest Airline the interior is also very attractive as in year 2001 it as introduced spirit interior in flights. Various characteristics of flights attracts large number of customers. The features that are included in the airline are free Wi-Fi, paid live television streaming on demand of visitors etc. An evolve interior has also been introduced in some sections of flight in which retro theme and eco friendly seats are launched by the organisation.

The most attractive thing which is offered to the customers is rapid reward. In this reward system some points are gifted by the organisation to the visitors all of them are provided according to cost of tickets. These points can be redeemed by customers to get a free ticket or a particular percentage of discount on their flights. Different types of promotional activities are used by the company while conducting marketing operations. It is mainly known for humour in all its advertisements (Laudon and Traver, 2013). Current slogan of Southwest Airline is “Low fares nothing to conceal”. Mission, vision and objective of the company are as follows:

Mission: 

Southwest Airline's mission is to deliver best quality services to the customers so that they get satisfied and organisation may attain higher growth.

Vision: 

Southwest Airline's vision is to become first choice of customers and to bee most loved, flown and profitable airline.

Objective: 

Main objective of the company is to capture large market area so that business can be expanded in more geographic locations in order to increase profits and sales (Annual report of Southwest Airlines, 2018).

Overview of Singapore Airlines:

It is one of the oldest airlines in world as it was founded in year 1947 and the operation of the organisation are commenced from year 1972. Peter Seah Lim Huat is the chairman of the organisation and Goh Choon phong is the chief executive officer of Singapore Airlines. Currently the organisation is having more than 14700 employees. It is owned by government of Singapore. Its headquarter is in Changi. For branding the business entity is using Singapore Girl. The business is operated by the airline in 32 countries with 62 different destinations. The organisation is having strong presence in Southeast Asian region (Sheikhi, Ranjbar and Oraee, 2012). When financial crisis had taken place in year 1997 the organisation have discounted its flights in some destinations. The airline is offering five different classes of services to its visitors that are economy, premium, business, first class and suites. The quality of food which is delivered to the customers is very good and different range of food is offered to the visitors. As Singapore Airline's business in executed by government hence the prices for the tickets is low as compare to other flights but it is very costly for the customers who belongs to other countries except Singapore. This airline is the part of world's 15 most preferable airlines. Vision, mission and objectives of the company are as follows:

Vision: 

The organisation is willing to maximise its profits by delivering good air transportation services to the customers.

Mission: 

Singapore Airline's mission is to be on the top of the airline industry in up coming period.

Objectives: 

Main objective of the organisation is to improve its performance so that it can increase its profits and number of customers (Annual reports of Singapore Airlines, 2018).

Financial analysis

Ratio analysis: 

It can be defined as the process of analysing different types of ratios that are calculated with the help of various information which is collected from financial statements of the organisation (Cucchiella, D’Adamo and Gastaldi, 2015). Calculation of some selected ratios for Singapore Airline and Southwest Airlines is as follows:

Profitability ratios: 

Such type of ratios are calculated to analyse overall profitability of an organisation. It depicts that company is earning profits or facing losses. It guides stakeholders to determine business's ability to generate profits against the expenses. It is very important for all the investors and other stakeholders as they use it to make strategic decision. Following ratios are calculated to evaluate profitability of both the business entities:

  • Net profit ratio:This ratio is calculated to analyse overall net profitability of the company after deducting all the costs that includes production, administration etc. It shows the relationship between net profit and organisation's sales. Calculation of this ratio is as follows:

Formula: Net profit after tax / total revenues * 100

 

Southwest Airlines:

 

Particular

2015

2016

2017

Net profit

2181

2244

3488

Total revenues

19820

20425

21171

Net profit ratio

11.00

10.99

16.48

Singapore Airlines:

Particular

2015

2016

2017

Net profit

407

852

442

Total revenues

15566

15229

14869

Net profit ratio

2.61

5.59

2.97

From the above calculations it has been analysed that net profit ratio of Southwest airlines is higher than Singapore airlines because of higher profits. The calculations shows that Southwest Airline's profitability is in increasing trend (Bragg, 2012).

  • Gross profit ratio: It is a profitability ratio which is used to analyse relationship between revenues and gross profit of companies. While management accountant of the organisation is trying to analyse operational performance then this tool can help effectively for the same purpose (Doss and et.al., 2013). Calculation of gross profit ratio is as follows:

Formula: Gross profit / total revenues * 100

Southwest Airlines:

Particular

2015

2016

2017

Gross profit  

6397

6274

6203

Total revenues

19820

20425

21171

gross profit ratio

32.28

30.72

29.30

Singapore Airlines:

Particular

2015

2016

2017

Gross profit  

1712

2096

2172

Total revenues

15566

15229

14869

gross profit ratio

11.00

13.76

14.61

As analysed form the above computation overall profitability of Singapore Airlines is very good as it is in increasing form. But if it is compared with Southwest than its profitability is lower than sourthwest. Overall profitability is low as it is decreasing year to year.

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Liquidity ratios: 

All the liquidity ratios are calculated by the financial analysts of organisations in order to analyse liquid strength of a company. It guides the managers while they are allotting funds to different divisions of organisation (Rudolf and Papastergiou, 2013). Following liquid ratios are calculated for Singapore and Southwest airlines:

  • Current ratio:This ratio is calculated by the accountant in order to determine that if the organisation is able to pay all its short term obligations or not. Ideal current ratio for furniture and manufacturing industry is considered to be as 2:1. It is measured with the help of current assets and liabilities of the organisation (Drake and Fabozzi, 2012). Computation for this ratio is as follows:

Formula: Current assets / Current liabilities

Southwest Airlines:

Particular

2015

2016

2017

Current assets

4024

4498

4815

Current liabilities

6905

6844

7406

Current ratio

0.58

0.66

0.65

Singapore Airlines:

Particular

2015

2016

2017

Current assets

7465

6776

5700

Current liabilities

6783

6440

6289

Current ratio

1.10

1.05

0.91

From the above table it has been analysed that current ratio of Singapore Airline is good as compare to Southwest Airline which means its liquidity is higher than Southwest. But overall liquid strength of Southwest Airlines is very good because it is increasing year to year. Current ratio of Singapore Airlines in decreasing with the year which means the organisation is not having effective liquid strength (Morano and Tajani, 2013).

  • Quick ratio:It is a liquidity ratio which is calculated to assess relationship between quick assets and current liabilities. It help the directors to analyse organisation's ability to meet all the short term obligations with the help of highly liquid assets. Ideal quick ratio for this industry is considered to be as 1:1. Calculation of the ratio is as follows:

Formula: Quick assets / current liabilities

Southwest Airlines:

Particular

2015

2016

2017

Quick assets

3713

4161

4395

Current liabilities

6905

6844

7406

Quick ratio

0.54

0.61

0.59

Singapore Airlines:

Particular

2015

2016

2017

Quick assets

7138

6462

5311

Current liabilities

6783

6440

6289

Quick ratio

1.05

1.00

0.84

Quick ratio of Southwest Airlines is fluctuating in all the three years and if it is compared with Singapore Airlines than its liquidity is low as compare to other organisation. Quick ratio of Singapore Airlines is continuously decreasing with year which means organisation may have to face financial crisis in up coming years.

Suggested: Analysis Of Financial Decision Making Performance Of Corporation Roast Ltd

Gearing ratios: All such type of ratios are related to the capital structure of a company in which contribution of internal and external liabilities are analysed. It help the stakeholders to analyse that what percentage of funds are acquired from internal and external sources separately. Following ratios are calculated under this type of ratio:

  • Debt equity ratio:It is calculated to analyse that what amount of external debts can be paid with the help of shareholder's equity. Debts equity ratio is also called risk gearing ratio and ideal ratio for this is considered to be 2:1 (Duguma, 2013). For organisations the calculation for this ratio is as follows:

Formula: Total debts / total equities

Southwest Airlines:

Particular

2015

2016

2017

Total debts

13954

14845

14680

Total equities

7358

8441

10430

Debt equity ratio

1.90

1.76

1.41

Singapore Airlines:

Particular

2015

2016

2017

Total debts

11458

11015

11637

Total equities

12464

12755

13083

Debt equity ratio

0.92

0.86

0.89

Debt equity ratio of Southwest Airline is continuously declining with year which means the debts are decreasing and equities are increasing. The organisation need to maintain its internal and external liabilities. Singapore Airline's Debt Equity ratio is fluctuating but in year 2017 organisation's debts are increased which means the organisation is in good situation (Calice and Ioannidis, 2012).

  • Total asset to debt ratio:This ratio is computed to analyse the proportion of total assets that are financed by external parties. Calculation of this ratio is as follows:

Formula: Total assets / total debts

Southwest Airlines:

Particular

2015

2016

2017

Total assets

21312

23286

25110

Total debts

13954

14845

14680

Total assets to debt ratio

1.53

1.57

1.71

Singapore Airlines:

Particular

2015

2016

2017

Total assets

23921

23770

24720

Total debts

11458

11015

11637

Total assets to debt ratio

2.09

2.16

2.12

From the above calculation it has been observed that Singapore Airline's total assets to debts ratio is higher than Singapore Airlines which means most of the assets in Singapore Airlines are financed by external parties as compare to Southwest Airlines.

Efficiency ratios: In such type of ratios overall efficiency of an organisation is evaluated by the managers and other executives. It can guide to the stakeholders to determine the funds that organisation is having to perform organisational activities and buy assets. Following ratios are calculated to assess efficiency of both the organisations:

  • Fixed asset turnover ratio:It is the ratio of sales to the value of fixed assets in which it is analysed that organisation is appropriately using all the fixed assets so that sales can be maximised. Calculation of this ratio is as follows:

Formula: Total revenues / Fixed assets

Southwest Airlines:

Particular

2015

2016

2017

Total revenues

19820

20425

21171

Fixed assets

17288

18788

20295

Fixed asset turnover ratio

1.15

1.09

1.04

Singapore Airlines:

Particular

2015

2016

2017

Total revenues

15566

15229

14869

Fixed assets

16456

16993

19020

Fixed asset turnover ratio

0.95

0.90

0.78

As analysed from above calculation fixed assets turnover ratio of Southwest Airline is higher as compare to Singapore Airlines. Ratio for both the organisation are decreasing with then years. If both are compared with each other Singapore Airlines is using all its assets appropriately that may result in higher profitability.

  • Total asset turnover ratio:This ratio is calculated to determine relationship between revenues and total assets of the company . Calculation of total asset turnover ratio is as follows:

Formula: Total revenues / total assets

Southwest Airlines:

Particular

2015

2016

2017

Total revenues

19820

20425

21171

Total assets

21312

23286

25110

Total asset turnover ratio

0.93

0.88

0.84

Singapore Airlines:

Particular

2015

2016

2017

Total revenues

15566

15229

14869

Total assets

23921

23770

24720

Total asset turnover ratio

0.65

0.64

0.60

From the above calculation it has been analysed that Total asset turnover ratio of both the organisations are decreasing. Both of them are using their assets appropriately for the purpose of increasing sales (Shouman, El Shenawy and Khattab, 2016).

Horizontal analysis of Income statement:

Southwest Airlines:

Particulars

Year 2017

Year 2016

Difference(In Amount)

Difference(In %)

Revenue

21171

20425

746

3.65

Less: Cost of revenue

14968

14151

817

5.77

Gross Profit

6203

6274

-71

-1.13

Expenses

2554

2451

103

4.20

Net Profit

3649

3823

-174

-4.55

Singapore Airlines:

Particulars

Year 2017

Year 2016

Difference(In Amount)

Difference(In %)

Revenue

14869

15229

-360

-2.36

Less: Cost of revenue

12697

13133

-436

-3.32

Gross Profit

2172

2096

76

3.63

Operating Expenses

1653

1124

529

47.06

Net Profit

519

972

-453

-46.60

Vertical analysis of balance sheet:

Southwest Airlines:

Particulars

2017

2016

 

Amount

Percent (%)

Amount

Percent (%)

ASSETS:

 

 

 

 

Current assets

4815

19.18

4498

19.32

Non Current Assets

20295

80.82

18788

80.68

Total Assets

25110

100

23286

100

LIABILITIES and EQUITY:

 

 

 

 

Current Liabilities

6905

27.50

6844

29.39

Non Current Liabilities

7775

30.96

8001

34.36

Stockholder's equity

10430

41.54

8441

36.25

Total Liabilities and equity

25110

100

23286

100

Singapore Airlines:

Particulars

2017

2016

 

Amount

Percent (%)

Amount

Percent (%)

ASSETS:

 

 

 

 

Current assets

5700

23.06

6776

28.51

Non Current Assets

19020

76.94

16993

71.49

Total Assets

24720

100

23769

100

LIABILITIES and EQUITY:

 

 

 

 

Current Liabilities

6289

25.44

6440

27.09

Non Current Liabilities

5348

21.63

4575

19.25

Stockholder's equity

13083

52.92

12754

53.66

Total Liabilities and equity

24720

100

23769

100

Graphs for the above calculations: 

Following graphs are formulated on the basis of above calculations of ratios:

Southwest Airline:

From the above graph it can be analysed that organisation's gross profit is high as compare to all other ratios. Net profit ratio is less than gross profit ratio but higher than all other ratios. Current and other ratios are lower than net profit and gross profit ratios.

Singapore airline:

From the above chart it has been analysed that gross profit ration of the company is very high compare to all other ratios. Net profit ratio of the company is lower than gross profit ratio. All the other ratios are lower than both the ratios.

Comparison Of Both The Airlines

Southwest Airlines:

Strength: As analysed form above analysis the identified strengths are as follows:

  • Increasing liquidity: Liquidity of the organisation is continuously increasing that helps to operate business appropriately. It is also beneficial to deal with possible future consequences that may affect the profitability of the company.
  • Appropriate use of assets: All the assets of the organisations are used appropriately by the employees and other members which results in increased revenues. It will help to deal with the problem of continuously decreasing profitability of the company.

Weaknesses: From the analysis of companies following weaknesses are observed:

  • Decreasing profitability: Profitability of Southwest Airlines is continuously decreasing  because organisation's cost of sales is increasing which has resulted in declined profits. The managers and other executives are required to take actions that may help to increase profitability (Cotter, 2012).
  • Declining external liabilities: External liabilities of the company is decreasing and internal liabilities are increasing which means the organisation will perform all the operation with the help of internal sources. It is suggested to the managers to manage all the internal and external liabilities because it is very important to use outsider's liabilities for business rather than equities.

Singapore Airlines:

Strengths: From the calculation of ratios following strengths have been analysed for Singapore Airline:

  • High profitability:Profitability of the company is continuously increasing which is because its revenues are enhancing with time. It will help to deal with the problem of decreased liquidity of the company.
  • Contribution of assets in increasing revenues:The assets of the company are utilised appropriately by the managers which helps to increase revenues. If sales and revenues get increased than it will help to increase profitability and higher profits will help to present a good image of the company in front of stakeholders.

Weaknesses: Following weaknesses are identified with the help of above analysis. All of the are based on the calculation of ratios.

  • Reduced liquidity:As analysed form current and liquid ratio liquidity of the company is continuous decreasing which will affect operational efficiency of the company. It is very important for the managers to manage all the funds appropriately so that liquidity can be managers in order to execute business smoothly. If an organisation is not having sufficient funds than it is not possible to execute business successfully. For all the business entities it is very important to maintain its liquidity.
  • Improper management of internal and external liabilities:Singapore Airline's internal and external liabilities are not maintain properly which affects the operations negatively. It is very important to use outsider's funds more than internal funds as it can help to execute business in more effective manner.

For both the companies it is very important to overcome all the weaknesses so that profitability and liquidity of the company can be enhanced. If the company is not able to deal with them than it will result negatively for the business.

Conclusion

From the above project report it has been concluded that financial analysis is the process of investigating financial statements of an organisation. It is mainly conducted for a specific period of time in which overall performance of the company is determined. Calculation of financial ratios is an appropriate method that can be used for accurate analysis of a company's performance. Ratios can also help the external and internal stakeholders to make strategic decisions. As it can guide investors to assess the possible rate of return on the invested amount and managers can form decisions to enhance performance of business entity. From the above report it has also been analysed that Southwest Airlines is better than Singapore Airlines as its liquidity is high and it is using assets appropriately that results in increased revenues.

References

  • Bragg, S. M., 2012. Financial analysis: a controller's guide. John Wiley & Sons.
  • Calice, G. and Ioannidis, C., 2012. An empirical analysis of the impact of the credit default swap index market on large complex financial institutions. International Review of Financial Analysis. 25. pp.117-130.
  • Cotter, D., 2012. Advanced financial reporting: A complete guide to IFRS. Financial Times/Prentice Hall.
  • Cucchiella, F., D’Adamo, I. and Gastaldi, M., 2015. Financial analysis for investment and policy decisions in the renewable energy sector. Clean Technologies and Environmental Policy. 17(4). pp.887-904.
  • Doss, D. A. and et.al., 2013. Economic and financial analysis for criminal justice organizations. CRC Press.
  • Drake, P. P. and Fabozzi, F. J., 2012. Financial ratio analysis. Encyclopedia of Financial Models.
  • Duguma, L. A., 2013. Financial analysis of agroforestry land uses and its implications for smallholder farmers livelihood improvement in Ethiopia. Agroforestry systems. 87(1). pp.217-231.
  • Laudon, K. C. and Traver, C. G., 2013. E-commerce. Pearson.
  • Morano, P. and Tajani, F., 2013. Break Even Analysis for the financial verification of urban regeneration projects. In Applied Mechanics and Materials (Vol. 438, pp. 1830-1835). Trans Tech Publications.
  • Rudolf, V. and Papastergiou, K. D., 2013. Financial analysis of utility scale photovoltaic plants with battery energy storage. Energy Policy. 63. pp.139-146.
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