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Financial Analysis Of American Airlines And British Airways

11 Pages 2731 Words 5916 Downloads

Introduction

Financial analysis is a tool used by an enterprise to evaluate profitability, performance and viability of a specific project or business. Financial analysis is a wide term includes financial key ratios, cash flows, analytical graphs and other measurement ratios and charts. With the help of results of these tools, user of a financial statement whether internal or external can easily interpret the typical financial data (Baxter and et. al., 2013). The chosen companies “American Airlines” and “British Airways” are surviving in same industry but American Airlines being an American company dealing in USD and British Airways dealing in UK pound. This report covers analytical comparison about financial performance and position of companies. Apart from this, specific calculation of ratios has also been done to determine the overall position of the company.

Company Profile

British Airways (BA)

BA was created by merging 4 companies in the year 1947. it turned into a private company in the year 1987 for increasing the scope of privatisation in the UK market. It is the largest airline in UK in when measured by fleet size, international destinations and international flights. It flies to more than 200 destinations in 75 countries all over the world and has 40% slots of Heathrow Airport. It is listed on London Stock Exchange.

American Airline's inc. (AA)

AA is an American airline company with its headquarter at Fort Worth, Texas. It the world's largest airline in terms of fleet size, revenue, kilometres flown, number of destinations served etc. It provides services in domestic as well international destinations with an average of 6700 flights per day in 350 destinations in more than 50 countries. It is founding member of One world alliance, which is world's third largest alliance. Its securities are traded under NASDAQ (Brigham and Houston, 2012).   

Indexation Analysis:

Indexation analysis means evaluation of a particular trading instrument, an investment sector, or a market as a whole. Stock analysts attempt to determine the future activities of an instrument, market or sector. It is a method for an investor and traders to make a decision relating to buying or selling of the company's share.

Stock analysis of the American Airlines Group Inc. (AA):

Current price of the AAL is around $ 32 to 34 with a Bid of 31.8 * 900 and Ask of 31.9 * 1000. Day's Range is $ 29.78 to $ 32.21.  

The average price of AAL as per historical data is (40.48 + 44.74 + 36.30 + 38.98 + 38.88) / 5 = $ 41.48 and current price is $ 32.04, current price is lower than the price as per the historical data, therefore an investor will love to invest in the shares of AAL because current price is undervalued.

It has a market cap of $ 14.757B and profit earnings ratio of 13.14 and EPS is 2.44 with current average volume of 9,692,020. The shares are less costly as compare of British Airways and have better chances of earning as an investor point of view.

Stock analysis of British airways (BA): 

In the British airways, there is rise in opening price of stock as compared to previous closing price. The opening stock price is 346.51 and bid rate is 351.21*800, ask rate is 351.95*800, day's range is 343.00 to 353.47.

The British airways have a share price as per historical share price is £196.58 whereas current market price is £ 352.61 so it is concluded that present price of the British Airways is higher than the historical price which means it is presently overvalued. Therefore, investor will never invest in the shares of British airways and it is costly than the shares of AAL of American airways. Therefore, investor will always invest in AAL as compare to British airways (Bromiley and et. al., 2015).

NOTE: Tables are shown in the appendix.

Vertical Analysis

This method is used by the companies in financial statement analysis, in which each item is expressed as a percentage of the base figure. It is used for a single point of time to see the increase or decrease in the accounts during that period for conducting a comparison of financial position of two companies (Dunning and Dunning, 2014).

Balance sheet comparison

In terms of Total Asset (TA) of British Airways (BA) is comparatively better than American Airline Inc. (AA) as the TA of AA in 2016 increased to 20.13% from 20.26% in 2015 and it has reduced to 17.80% in the 2017. Whereas, the change in the total asset of BA is increasing every year. This comparison shows the BA has more total assets than AA. Further, the percentage change in current liabilities of BA has been decreasing every year which shows that it has met its current liabilities. On the other hand, AA's current liabilities increased in 2017 to 29.12% from 27.05% in 2016. Hence, AA has greater financial risks (Hitt, Ireland and Hoskisson, 2012).

Income statement comparison

The income statement of AA on the basis of revenue shows that company is facing downward trend. These changes occurred due to the change in the US taxation policy. On the other hand, BA is carrying profitable business at consistent rate and is following an upward trend in terms of revenue. The change is because of BREXIT. It has impacted BA in a positive way.

NOTE: Statements are shown in the appendix.  

Horizontal Analysis

It is a technique of financial statement analysis, which is used to show the changes in the figures of financial statement over a span of time. It is used to evaluate the financial trend of the company (Lam, 2014).

Balance sheet comparison

The horizontal analysis shows that Total Assets of AA has reduced tremendously in the 2017. The figures of 2015 and 2016 were positive and total assets were increased with a percentage change from 3.22% to 5.91%, respectively. Also, it the current assets were decreased drastically. One the other hand, BA has always maintained its assets above zero or negative and is financially more stable than AA as the current liabilities of BA is comparatively lower than AA (Maskell, Baggaley and Grasso, 2016).

Income statement comparison 

Total revenue of AA is reducing which shows it ineffectiveness in carrying its activities. On the other hand, the sales revenue of BA is at consistent level and increasing every year. Also, the other operating expenses of both the companies shows that BA is better than AA (Olson and Wu, 2015).

Ratio Analysis

Ratio analysis of 2015:

 

AA

BA

PROFITABILITY RATIOS

 

 

Gross Margin

35

14

Net Margin

19

12

Return on Assets

16.51

5.34

EPS

11.07

7.44

PE Ratio

6.05

2.34

Ratio analysis of 2016:

 

AA

BA

PROFITABILITY RATIOS

 

 

Gross Margin

33

12.4

Net Margin

7

14

Return on Assets

5.37

5.31

EPS

4.81

7.61

PE Ratio

5.13

2.78

Ratio analysis of 2017:

 

AA

BA

PROFITABILITY RATIOS

 

 

Gross Margin

30

11

Net Margin

5

22

Return on Assets

3.74

8.98

EPS

3.9

8.98

PE ratio

13.14

1.86

Interpretation:

Gross Profit Margin

American Airlines has more gross profit as compared to British Airways, it shows American Airlines in more profitable.

Net Margin

Net profit of British Air is more as compared to American Airlines., it shows that British Airways has more net profits gaining capacity.

Return on Assets

From the analysis of 2015 and 2016, it can be seen that AA had more ROA as compared to BA. Whereas, in case of BA, ROA was high only in 2017. Therefore, it can be concluded that AA is better as it shown a consistent track of high ROA.

EPS

AA has higher dividend than BA and also the market price of its shares is more. (Convert the figures of AA in £)

PE Ratio

American Airlines has higher ratio leading to higher investment rate, It shows that American Airlines is able to provide more earnings and profits on its shares.

Ratio Analysis of 2015:

LIQUIDITY RATIOS

AA

BA

Current Ratio

0.73

0.83

Acid Test Ratio

0.56

0.31

Inventory Turnover

31.42

1.75

Receivable Turnover

25.65

12.77

Ratio Analysis of 2016:

LIQUIDITY RATIOS

AA

BA

Current Ratio

0.74

0.76

Acid Test Ratio

0.57

0.33

Inventory Turnover

30.3

1.79

Receivable Turnover

26.62

11.97

Ratio Analysis of 2017: 

LIQUIDITY RATIOS

AA

BA

Current Ratio

0.61

0.6

Acid Test Ratio

0.46

0.34

Inventory Turnover

26.58

1.74

Receivable Turnover

25.23

10.63

Interpretation:

Current Ratio:

This ratio indicates that the company's ability to pay its short term liabilities when they become due. From the above data, the current ratio of two viz. 2016 and 2017 of both the companies are almost same. But in the year, 2015, the ratio of BA increased due to high working capital in the company.

Acid test ratio:

this ratio measures the ability of the company to fulfil its current liabilities from the liquid assets. The high ratio shows the capability of AA to meet its obligations of current liabilities.

Inventory turnover:

A high ratio indicates either good and increased sales or insufficient inventory which make the business suffer loss. The high ratio of AA shows that the sales of company has increasing as compared to BA (Vernon and Aharoni, 2014).

Receivable turnover:

this ratio implies the time taken by the company to collect its accounts receivable of the sales made on credit. Higher turnover means company is collecting its receivable on time.

Cash Flow Ratio

AMERICAN AIRLINES

CASH FLOWS

2015

2016

2017

Operating Cash Flow  

0.52

0.47

0.32

Cash Flow Margin ratio

0.18

0.16

0.11

Asset Efficiency Ratio

0.15

0.13

0.09

 

BRITISH AIRWAYS

CASH FLOWS

2015

2016

2017

Operating Cash Flow  

0.32

0.28

0.36

Cash Flow Margin ratio

0.12

0.13

0.16

Asset Efficiency Ratio

0.1

0.09

0.12

Interpretation:

Operating cash flow: A ratio less than 1 indicates the inefficiency of company's cash to meet its current liabilities. The above ratios AA shows that it has been reducing in three years whereas, the ratio of BA is increasing. Hence, BA has sufficient cash to meet its current liabilities.

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Asset Efficiency Ratio: BA is being able to generate sales from its assets as compared to AA. This ratio is based on, higher the ratio, higher the ability of company to generate sales from the existing assets (Vogel, 2014).

Conclusion

From the above report, it has been concluded that analysis of financial statement is necessary before making an investment whether by acquisition, merger or takeover. Even an individual should also do the evaluation of financial position of the company for making an informed and right decision. The company or a person must know and expect a return for the amount it/he is going to invest. Therefore, from the above analysis of financial statements of both the companies, and vertical and horizontal comparison, American Airlines is a healthy and financial sound company. Hence, British Airways should invest in that company to expand its business by earning more profit.

References

  • Baxter, R. and et. al., 2013. Enterprise risk management program quality: Determinants, value relevance, and the financial crisis. Contemporary Accounting Research. 30(4). pp.1264-1295.
  • Brigham, E. F. and Houston, J. F., 2012. Fundamentals of financial management. Cengage Learning.
  • Bromiley, P. and et. al., 2015. Enterprise risk management: Review, critique, and research directions. Long range planning. 48(4). pp.265-276.
  • Dunning, J. H. and Dunning, J. H., 2014. Economic analysis and multinational enterprise. Routledge.
  • Hitt, M. A., Ireland, R. D. and Hoskisson, R. E., 2012. Strategic management cases: competitiveness and globalization. Cengage Learning.
  • Lam, J., 2014. Enterprise risk management: from incentives to controls. John Wiley & Sons.
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