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    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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