Financial Statement Analysis Individual Project

First of all, the main aim of this paper is to analyze the financial statements of Emirates Group, a fast-growing international airline with one of the youngest fleets in the sky and more than 400 awards for excellence worldwide (Emirates, n. d.).

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It should be noted that each financial statement is very useful for external and internal stakeholders. On one hand, balance sheet is useful for observing the dynamics of the companies assets, liabilities and shareholders equity. On the other hand, income statement shows the results of financial and economic activity over a certain period of time (quarter or year). The annual report reveals the structure of revenues and expenses during the reporting period, the total amount of operating profit, income (loss) from other activities, as well as the value of net income (loss) received during the reporting period. Income statement is very convenient for determining the companys profitability and efficiency. The cash flow statement is often used to define the companys net cash flows from different activities, including operating, financing, and investing. The companys strong financial position is provided by the effective management of enterprises cash flows. It should be stated that the cash flow statement reflects such information as cash generated from operations, cash flow from investing activities, and cash flow from financing activities, as well as respective changes in cash and cash equivalents.

However, income statement is the most useful form of reporting, since it reflects the information about the companys income and expenses. Basically, net income is a general indicator of any companys profitability. Therefore, if the company could prepare only one financial statement, income statement would be recommended, because the main purpose of most companies is to receive income. This financial statement represents the needed information.

In addition, the limitations and usefulness of the single-step income statement and the multi-step income statement should be compared. Generally, there are two most common types of the income statement format, which include single-step and multi-step reports. Single-step income statement is based on only one subtraction. The entire range of the companys revenues and gains, as well as expenses, is summarized. Finally, the total sum of the companys expenses is subtracted from the total sum of its revenues and gains. The usefulness of this type of income statement is based on the ability of the reader to analyze the structure of the companys revenues and expenses. However, single-step income statement does not provide information regarding the gross profit, which is a very important indicator of the companys activity.

Multi-step income statement is the second type of income report used by the firms. In order to calculate the companys net income, more than one subtraction is used. This type of income report provides more indicators, including operating income, gross income, earnings before interest and taxes, and others. For this reason, multi-step income statement is used more often than single-step income statement.

According to the assignments instructions, the core objective of the current paper is financial analysis of the Emirates Group. In order to provide detailed financial analysis, the results of horizontal and vertical analyses are provided. Based on the results of the financial analysis, the companys strengths and weaknesses are considered in the paper. The main aim of financial analysis is to provide recommendations in order to improve the companies financial state. Therefore, the recommendations for the improvement of the companies financial ratios are also provided in the current paper.

It should be noted that financial analysis requires the usage of financial statements, for example, income statements and balance sheets. Financial analysts includes examination of financial statements of an enterprise and provides some recommendations for the improvement of the current situation. However, there is no single approach to performing financial analysis. Some economists support an opinion that it is an analysis of the companys financial state. However, other economists put accent on a dynamic approach to analyzing the firms finances. They consider that financial analysis is an approach to financial processes practiced by every enterprise.

It would be reasonable to provide a clear definition from the economic dictionary. According to it,

Financial analysis is use and transformation of financial data into a form that can be used to monitor and evaluate the firm's financial position, to plan future financing, and to designate the size of the firm and its rate of growth. Financial analysis includes the use of financial statement analysis and funds-flow-adequacy ratio (Business definition for financial analysis, n. d.).

However, according to the majority of definitions, it is the analysis of the financial statement of a company (Business definition for financial analysis, n. d.).

In addition, due to the advantages of multi-step income statement, the operating profit and net income of Emirates for 2012 and 2013 should be analyzed.

Table 1

Revenue, Operating Profit, and Net Income for Emirates Group (in million AED)

Period Ending

March 31, 2014

March 31, 2013

March 31, 2012

Emirates

Total Revenue

80,717

71,159

61,508

Total Revenue (in % to prior year)

113,43%

115,69%

115,84%

Operating Income

4,260

2,839

1,813

Operating Income (in % to prior year)

150,05%

156,59%

Net Income

3,417

2,408

1,502

Net Income (in % to prior year)

141,90%

160,32%

As it is evident from the data provided in the Table 1, the total revenue of the Emirates increased from 2013 to 2014. The Emirates Groups total revenue increased by 15.69% in 2013 and 13.43% in 2014. It means that the companys total sales enhanced during the past two years. Other financial indicators also increased during the analyzed period. For example, the Emirates net income increased by 60.3% in 2013 and 41.9% in 2014, while its operating income enhanced by 56.6% in 2013 and 50.0% in 2014. Taking into account that net income is the most important indicator of the company activity, it can be concluded that the Emirates efficiency and profitability improved during the analyzed period.

In addition, a company may be more profitable than the other one due to a wide range of factors. It would be reasonable to consider the key success factors, which influence the companys effectiveness. Basically, there are a lot of elements that affect the companys profitability. Some of these factors are internal, i.e. they are under the companys control, while other factors cannot be controlled by the firm. It is known that the entire range of factors, which affect marketing decisions, vary, but they can be divided into the internal and external ones. It should also be noted that these factors can be classified using different records, as distinguished by scientists. Internal factors stem directly from the companys operations. As a result, the company is able to influence these factors in order to improve its marketing decisions. Thus, the companys profitability may differ due to different internal and external factors. Also, one firm may be more profitable due to the higher efficiency of its assets, suppliers reliability, better distribution, or more effective technologies.

In addition, the Emirates financial statement analysis should be conducted. In addition, the financial ratios for this company should be computed. The first group of ratios under consideration deals with profitability. This group includes the rate of return on total assets, rate of return on common stockholders equity, operating profit percentage, and net profit percentage.

Table 2

Emirates Groups Profitability Ratios

Profitability ratios:-

March 31, 2014

March 31, 2013

March 31, 2012

Return on Total Assets

3,36%

2,54%

1,95%

Return on Shareholders Funds

13,42%

10,46%

7,00%

Net Profit Percentage (based on profit after interest and tax)

4,23%

3,38%

2,44%

Operating Profit Percentage

5,28%

3,99%

2,95%

The return on total assets determines the profitability of total assets and shows how much profit the company receives per dollar of its total assets. In other words, this indicator means the percentage return or profit that management made on each dollar of assets (Definition of rate of return on total assets, n. d.). It is calculated as the ratio of the net earnings to companys total assets.

As it is evident from the data provided in Table 1, the Emirates Groups return on total assets increased from 1.95% in 2012 to 2.54% in 2013 and 3.36% in 2014. Thus, the efficiency of the companys assets increased during the analyzed period.

The rate of return on shareholders funds is the amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested (Return on equity ROE, n. d.).

In fact, the Emirates Groups return on shareholders funds increased from 7% in 2012 to 10.46% in 2013 and 13.42% in 2014. Operating profit percentage is calculated by dividing the companys operating profit by its total sales. This ratio shows the percentage of operating income in the structure of total sales. In general, this ratio is often used to assess the operating profitability. As it is seen from the data provided in Table 1, the Emirates Groups operating profit percentage increased from 2.95% in 2012 to 3.99% in 2013 and 5.28% in 2014. The net profit margin ratio can be calculated by dividing the net profit by net sales. There are several profit margin ratios, which state how much profit the company makes for every dollar of sales (Profit margin ratios, n. d.). Additionally, the Emirates Groups net profit margin also enhanced from 2.44% in 2012 to 3.38% in 2013 and 4.23% in 2014.

As a result, it can be concluded that the companys operating activity improved during the analyzed three years. It is also noteworthy that the entire range of profitability ratios showed improvement during the analyzed period. However, despite the increase in the companys profitability ratios, its profitability cannot be considered as high due to the comparatively low values of the mentioned ratios.

Liquidity ratios are applicable for the evaluation of the company ability to repay its liabilities. The company liquidity ratios are presented in Table 3.

Table 3

Emirates Groups Liquidity Ratios

Liquidity Ratios:-

March 31, 2014

March 31, 2013

March 31, 2012

Current Ratio

0,84

1,12

1,01

Quick Ratio (Acid Test)

0,79

1,07

0,95

Cash Ratio

0,24

0,21

0,30

Net Working Capital

-5,07

3,63

0,14

The current ratio indicates the sufficiency of the companys current assets to cover its current debt. Thus, this ratio characterizes the companys ability to cover current liabilities with the help of its current assets. According to data provided in Table 1, the Emirates Groups current ratio decreased from 1.12 in 2013 to 0.84 in 2013. It means that the companys ability to repay its current liabilities by selling current assets was impaired in 2014 fiscal year as compared to the previous one. It is noteworthy that the value of this ratio is below the normative value. For this reason, the companys liquidity can be considered quite low.

Quick ratio is the next indicator that is often used by investors and external users. It is well known that cash is an absolutely liquid asset. Therefore, with large amounts of cash the company does not need to sell merchandise inventories for repaying its debts. This indicator is calculated by dividing such high-liquid assets as cash, short-term investments, and accounts receivables by the number of total current liabilities.

The data provided in Table 3 shows that the Emirates Groups quick ratio decreased from 0.95 in 2012 to 0.79 in 2014. That is why the companys liquidity is low.

It is also worth mentioning the net working capital, which can be calculated by subtracting the organizations current liabilities from its current assets. Therefore, the Emirates Groups net working capital decreased from 3.63 million AED in 2013 to -5.07 million AED in 2014. It means that the companys current liabilities exceeded its current assets by 5.07 million AED in the year ended in March 31, 2014. Therefore, the Emirates Groups current assets do not cover its current liabilities. Thus, the previously made conclusion about the low liquidity is justified.

Based on the calculations provided in Table 2 and Table 3, it can be concluded that the Emirates Groups profitability has improved, while its liquidity has impaired in 2014 as compared to 2012. It is noteworthy that each company is faced with the issue of finding the optimal ratio between its stability and efficiency. For example, the Emirates Groups efficiency enhanced in 2014 as compared to 2012, while its stability fell.

In addition, the companys efficiency of using its inventories and trade payables may be assessed by efficiency ratios, including the inventory turnover and payables turnover. The companys inventory turnover period shows a number of times over which the firms inventory is sold and replaced. As it is evident from the calculations provided in Table 4, the Emirates Groups inventory turnover enhanced from 41.9 in 2012 to 45.5 in 2013 and 47.3 in 2014. It means that the companys effectiveness of using its inventory has improved.

Table 4

Emirates Groups Efficiency Ratios

Efficiency Ratios:-

March 31, 2014

March 31, 2013

March 31, 2012

Inventory Turnover

47,31

45,50

41,87

Accounts Receivable Turnover

8,88

8,14

7,57

Stock Holding Period (days)

115,18

118,14

127,38

Debtors Payment Period (days)

41,09

44,85

48,22

Creditors Payment Period (days)

122,45

128,30

117,98

Cash Conversion Cycle (days)

35,30

33,46

44,70

As it is known, the accounts receivables turnover describes a number of times that the accounts receivables are collected during the year. As it is evident from the calculations provided in Table 4, the accounts receivables turnover has increased during the analyzed period. It means that the Emirates Groups effectiveness of using its accounts receivables has also improved.

However, the Emirates Groups debtor payment period decreased from 48 days in 2012 to approximately 41 days in 2014. It means that the companys concerns of unreliable and doubtful clients have decreased.

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However, the Emirates Groups creditors payment period has increased from 118 days in 2012 to 122 days in 2014. In general, it means that the company has more difficulties in the process of repaying debts.

Cash conversion cycle is an indicator of the duration of time needed for company to transform the input resources into cash flows. It should be also noted that the length of the cash conversion cycle depends on many factors, including the process of production, reliability of suppliers, technology, etc. The shorter the cycle, the less time capital is tied up in the business process, and thus the better for the company's bottom line (Cash conversion cycle CCC, n. d.).

In addition, the companys cash conversion cycle can be calculated by dividing its cash and cash equivalents by total daily sales. Therefore, the longer length of time is needed for a company to sell its inventories and account receivables and. Therefore, the need to convert them into cash flows increases the cash conversion cycle. On the other hand, the increase of length of time needed for a company to pay its bills or accounts payable will reduce the cash conversion cycle.

In fact, any company tries to shorten this indicator, because it is used to compare the efficiency of management of several companies from the same industry. The low CCC means that the companys management is effective.

According to the data provided in Table 4, the Emirates Groups cash conversation cycle has shortened from 44 days in 2012 to 35 days in 2014. It is a positive trend.

Additionally, it should be noted that the companys solvency can be estimated by the debt-paying ratios. Therefore, the next very important indicator of financial stability of any organization is the debt ratio. This indicator is determined by dividing total liabilities by total assets. It shows the percentage of total liabilities in the structure of assets.

Table 5

Emirates Groups Solvency Ratios

Solvency Ratios:-

March 31, 2014

March 31, 2013

March 31, 2012

Debt-to-assets

0,75

0,76

0,72

Debt-to-equity

2,99

3,12

2,59

Gearing

3,99

4,12

3,59

Capitalization ratio

0,63

0,64

0,59

Long Term debt to Total Assets Ratio

0,43

0,43

0,40

Therefore, the Emirates Groups financial stability decreased, since the debt-to-assets ratio increased from 0.72 in 2012 to 0.75 in 2014. It means that the companys debts constitute 75% of total assets. For this reason, financial stability and solvency cannot be considered safe, since the values of this indicator are above the normative values. It should be noted that the organizations state can be considered safe if the value of this ratio is not more than 50%. As a result, the Emirates Group has problems with its financial stability.

The gearing ratio is calculated by dividing the companys total assets by its stockholders equity. The companys financial stability is not high due to the high values of gearing ratio that exceed the normative values during the analyzed period.

According to the data presented in Table 5, the companys financial stability cannot be considered high, due to the high values of the companies debt-to-equity ratio. For example, the Emirates Groups debt-to-equity ratio increased from 2.59 in 2012 to 2.99 in 2014. It means that the companys debts exceed its equity by 199%. As it is known, the companys solvency may be considered high if its debts do not exceed equity.

Analysis of the Companys Cash Flow Statement

In general, the companies cash flows should be considered in order to disclose the current tendencies. First of all, it should be noted that cash flows include the companys input cash flows minus its output cash flows. In addition, cash flows can be considered as the sum of the companys earnings and payments generated by its activity. The companys strong financial state is supported by effective management of the enterprises cash flows. Cash flows from operating activities are characterized by cash payments to suppliers for raw materials, salaries of staff, the companys tax payments and extra-budgetary funds, as well as other benefits associated with the implementation of the operational process. At the same time, this type of cash flows reflects revenues from buyers of products, from the tax authorities and certain other payments governed by international accounting standards.

Cash flows from investing activities include payments and receipts associated with the implementation of real and financial investments, the sale of fixed assets and intangible assets, long-term financial instruments rotation of the investment portfolio and other similar cash flows.

Cash flows from financing activities characterize the receipt and disbursement of funds related to the involvement of additional equity or share capital, long-term and short-term credits, payment of cash dividends and interest on deposits and certain other cash flows associated with the execution of external financing.

Table 6

Companys Cash Flows

2014

2013

2012

Emirates Group

Total Cash Flow From Operating Activities

12,649

12,814

8,107

Total Cash Flows From Investing Activities

-4,257

-15,061

-10,566

Total Cash Flows From Financing Activities

-7,107

1,240

-201

Change In Cash and Cash Equivalents

1,285

-1,007

-2,660

Additionally, the reviewed data should be commented. First of all, it should be noted that the Emirates Groups net cash from operating activities increased from 8.107 billion AED in 2012 to 12.649 billion AED in 2014. It can be concluded that the Emirates Groups cash flow from operating activities has increased during the analyzed period.

In addition, the Emirates Groups net cash flow from financing activities decreased from 201 million AED in 2012 to 7107 million AED in 2014. Generally, the companys net cash outflow from financing activities indicate the companys low solvency. The results of the solvency ratios only corroborate this conclusion.

Negative values of companys cash flows from investing activities indicate that the company invests a lot of available funds to expand its activity. Generally, the Emirates Groups net change in cash and its equivalents increased from -2.6 billion AED in 2012 to

1.2 billion in 2014. Therefore, the companys cash flow analysis shows the same results.

Altmans Z Score

In addition, such indicator as Altmans Z model should be used in order to estimate the companys capacity to become bankrupt and analyze its solvency during the last 3 years. As it is known, Altman used financial data of stable companies in his research, which have become bankrupt during the next 5 years. Altman included 22 financial ratios, which were shortened to 5 most important ones. Using this analytical method, Altman offered the following reliability equation:

Z = 1.2 1 + 1.4 2 + 3.3 3 + 0.6 4 + 0.99 5, where

X1 - working capital / total assets

X2 - retained earnings / total assets

X3 - earnings before interest and tax / total assets

X4 - market value of equity / total liabilities

X5 - sales / total assets. (Altman Z-Score, n.d.)

A score below 1.8 means the company is probably headed for bankruptcy, while companies with scores above 3.0 are not likely to go bankrupt. The lower/higher the score, the lower/higher the likelihood of bankruptcy (Altman Z-Score, n.d.).

Table 2

Altman Z-score for the Emirates Group

March 31, 2014

March 31, 2013

March 31, 2012

X1 - Working Capital / Total Assets

-0,05

0,04

0,00

X2 - Retained Earnings / Total Assets

0,03

0,03

0,02

X3 - Earnings Before Interest & Tax / Total Assets

0,03

0,03

0,02

X4 - Market Value of Equity / Total Liabilities

0,33

2,26

5,69

X5 - Sales / Total Assets.

0,79

0,75

0,80

Altman's Z-score

1,09

2,26

4,31

Therefore, according to the Altmans Z-score model, the companys probability of heading towards bankruptcy has been increasing during the three analyzed years. As it has been already assumed, the companys financial stability is impairing, due to the companys Z score below 1.8 during the 2014. It means that the probability of bankruptcy is quite high.

Additionally, it is important to note that the companys ROE is a measure of profitability of stockholders' investments. It shows net income as percentage of shareholder equity (Return on Equity (ROE) Ratio, n. d.). As it is evident from the calculations provided in Table 2, the Emirates Groups return on shareholders equity increased from 7% in 2012 to 10.46% in 2013 and 13.42% in 2014. Moreover, as it has been previously stated, the entire range of calculated profitability ratios has improved in 2013 as compared to the prior year. It means that the Emirates Groups efficiency and profitability have enhanced, but the improvement is not high.

It can be assumed that enhancement of the Emirates Groups ROE may be explained by the significant increase of its net income from 2.4 billion AED in 2013 to 3.4 million AED in 2014.

The Companys Financial Strengths and Weaknesses

In fact, the main financial strengths and weaknesses that the company has faced during the period under review should be considered. First of all, two of the most important strengths are growth of net income and total sales. It means that the demand for the companys production is expanding. Secondly, the organizations profitability and efficiency ratios have improved during the analyzed period. Therefore, it can be considered as the companys financial strength. Thirdly, its cash conversion cycle shortened from 44 days in 2012 to 35 days in 2014. This indicator is considered as the companys strength.

However, according to the results of the vertical, horizontal and ratio analyses, it can be concluded that there are more financial weaknesses than strengths. First of all, the companys profitability ratios were quite low during the analyzed three years. Secondly, it has become harder for the company to repay its debts. The organizations liquidity ratios have also impaired. Thirdly, the companys solvency ratios have also been weakened during the analyzed period. The company has become less financially stable, since its percentage of total liabilities in the structure of assets increased from 72% in 2012 to 75% in 2014.

Actions that Company Could Take to Improve Its Financial Ratios

After all, some steps that might improve the performance and financial position of the companies should be considered. The Emirates Groups effectiveness and profitability are low due to low values of the ratios during the past three years. However, the company is able to improve its profitability by increasing investments in the marketing activities in order to attract more potential customers. In addition, the company tries to provide only high-quality services for its customers. However, the Emirates Group should remove barriers for customers in order to stimulate total sales. That is why the companys managers should find other potential markets in order to improve its financial position.

The companies solvency may be improved by lowering the share of liabilities in the structure of total assets. The companys efficiency may be improved by increasing the companies total sales and selling the companies excess current assets.

Conclusion

To conclude, the analysis of the Emirates Groups financial statements has been conducted and conclusions have been made. According to the received results, it can be stated that the companys profitability, liquidity and solvency are quite low. Moreover, the companys liquidity and solvency ratios were impaired in 2014 as compared to 2012. It means that the companys financial state and its attractiveness to investors were deteriorated during the analyzed three years. Generally, the organizations financial state and its attractiveness are low.

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