Financial Analysis for Managers

Financial Analysis for Managers, This article consists of 14 pages and 2162 words. In order to have full access to this article, email us at thedocumentco@hotmail.co.uk

Ref No: 3415

Introduction

American and United Airlines are amongst the most reputable company group of Aviation industry. American Airlines, which is the world’s largest airline company in terms of its number of destinations and fleet size, is headquartered in Texas (American Airlines, 2017).

The company merged with the US Airways in order to overcome it operational issues, which have pleaded loss of the organisation. Whereas, United Airlines is the 6th world’s largest airline. The company maintains a great focus on effective financial practices in order to maintain a good financial position in the industry (United Airlines, 2017).

Profitability ratio

Profitability ratio is one of the ratios, which was used by the companies in order to determine the company’s ability to generate revenues in comparison to its expenses. Among these ratios profit margin is the ratio, which determines the company’s income with each dollar of sales produced by generating a comparison between company’s net income and net sales (Brigham, and Ehrhardt, 2013).

American Airlines
Profitability ratios	2013	2014	2015
Profit Margin Ratio=Net Income  / Net Sales	(1834)/26743	2882/42650	7610/40990
	-0.069	0.068	0.186

Table 1: Profit Margin Ratio. (Source Self-created)

 

The above-mentioned table shows the financial ratio analysis of the American airlines which shows that during the year of 2013 company have generated a loss in its operations, which is evident from the loss in the operations of the company.

However, in the year of 2014, the profit generated and the company have gained 6% of profit margin, which has increased up to 18% in 2015. The increase in the Profit margin ratio is one of the positive aspects as it represents increased profitability.

United Airlines
Profitability ratios	2013	2014	2015
Profit Margin Ratio=Net Income  / Net Sales	571 /38,279	1,132/38,901	7340/37864
	0.0149	0.0291	0.1939

Table 2: Profit Margin Ratio. (Source Self-created)

The aforementioned table demonstrates that United Airline has a ratio of 0.01 or 1% in the year of 2013. However, it increased up to 2% in the year of 2014 besides that in the next year it increased up with a high value of 19%, which means that United Airlines is improving at a rapid pace due to its high profitability although it had not a good position in the past years in their profitability.

Comparison Analysis

Profit Margin Ratio	2013	2014	2015
American Airlines	-0.069	0.068	0.186
United Airlines	0.0149	0.0291	0.1939

Profit margin ratio of the American and United Airlines both the year has increased their profitability during the last three years. However, United Airlines have increased their profit with very slight changes and the American Airlines have a generated a loss in its operations but the company has improved a lot of overtime.

Liquidity ratios

Liquidity ratio plays an essential role to determine the ability of a company to pay off all of its debts from the company’s assets. One of the widely used ratios to measure the liquidity of the company is Current Ratio, which was used to determine the level of short-term liabilities that can be reimbursed from company’s current assets (Brigham, and Houston, 2012).

American Airlines
Liquidity Ratio	2013	2014	2015
Current Ratio= Current Assets / Current Liabilities	14323/13806	11750/13404	9985/13605
	1.037	0.877	0.734

The table shown above exhibits those American airlines have a ratio of 1.03, which is evident from the high values of assets as compared to the liabilities of the company. However in the year of 2014 and 2015, the ratio have decreased up to 0.87 and 0.73 respectively, illustrates that the company do not have enough assets to pay back the liabilities.

United Airlines
Liquidity Ratio	2013	2014	2015
Current Ratio= Current Assets / Current Liabilities	8,702/12,107	7,547/12,508	7,828 /12,414
	0.719	0.603	0.631

The above-mentioned table illustrates that the United Airlines have a ratio of 0.71 which decreased up to 0.60 in the year of 2014 however, in 2015 the current ratio increased with a very slight amount up to 0.63.  The current ratio analyses show that the United Airlines do not have enough assets to pay off company’s liabilities as the ratios of all the year represents a value lower than 1.

Comparison Analysis

Current Ratio	2013	2014	2015
American Airlines	1.037	0.877	0.734
United Airlines	0.719	0.603	0.631

It has been identified that the American airlines have a high current ratio as compared to United Airlines in all the three years. However, it is suggested that higher current ratio shows the high-efficiency level of the company usually companies maintains a ratio of 1 to 2.

However, companies, which represent a ratio of less than 0.5, do not have much ability to pay off their debts and these aspects can affect the overall profitability and growth of the company.

It is recommended that American and United Airlines have to maintain a ratio of one or greater than one in order to increase their efficiency level. As investors and creditors consider those companies highly efficient which have a good liquidity position in the market (Bodie, 2013).

Efficiency Ratio

Efficiency ratio is used to determine the efficacy level of the company, which it uses to generate income by the use of the company’s assets. Amongst these ratios asset turnover is a ratio, which was used to conduct a comparison between net sales and average total assets, and determines the company’s ability to create sales through the assets.

American Airlines
Efficiency Ratio	2013	2014	2015
Asset Turnover = Net sales revenue/ Total assets	26743/42,278	42650/43225	40990/48415
	0.633	0.987	0.847

The ratio analyses for asset turnover show that the American Airlines have a ratio of 0.6, which increased up to 0.98 in the year of 2014 due to the increased sales. However, in the year of 2015, the company sales represent a little decline due to which the ratio decreased up to 0.84.

United Airlines
Efficiency Ratio	2013	2014	2015
Asset Turnover = Net sales revenue/ Total assets	38279/36,812	38901/36,595	37864/40,861
	1.0399	1.0630	0.9267

The analyses for asset turnover ratio indicates that the United Airlines have a high ratio of 1.03 which was slightly increased up to 1.06 in the year of 2014 which shows that the company’s efficiency level have increased over time. Whereas, in the year of 2015, the ratio decreased up to 0.92 which as the company’s assets have increased over time while the revenue of the company has decreased slightly.

Comparison Analysis

Asset Turnover	2013	2014	2015
American Airlines	0.6326	0.9867	0.8466
United Airlines	1.0399	1.0630	0.9267

The asset turnover ratio demonstrates that United Airlines a have a high-efficiency level in comparison with to American Airlines, which represent that, the company is highly efficient in its operations. Companies have high operational efficiency if they generate more revenues from company’s assets. Lower ratios demonstrate that the company legs behind the operational efficiency.

Gearing Ratio…..