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(ii) (iii) (iv) Air Asia and MAS Profitability Performance Analysis Air Asia and MAS Liquidity Management Analysis Air Asia and MAS Gearing Ratio Analysis Air Asia and MAS Investment Ratio Analysis
Appendix A: Air Asia 2009 and 2008 Financial Statements
Appendix B: Air Asia 2007 and 2006 Financial Statements
Appendix C: MAS 2009 and 2008 Financial Statements
Appendix D: MAS 2007 and 2006 Financial Statements
Appendix E: Ratio Definition
(8 marks) Below are 4 profitability ratios that help to access Air Asia and MAS Airline company performance. and understanding their profitability in relation to other relevant cost in 2006 to 2009 financial year. In selecting the companies. avoid financial institutions and any company that has been involved in a major acquisition or merger in the past three years. Analysing two companies will enable you to judge the performance and financial position of the companies better as you will be able to compare and contrast the performance and financial position of each company. Net Profit Percentage (NP%) . Required:(i) (a) Calculate ratios which will assist you to assess the performance of the companies over a period of three to five years. The annual reports of most companies can be obtained from the company websites. Gross profit Percentage (GP%) *Note: MAS Gross Profit is calculated as follow: 2.Financial and Management Accounting Assignment 1 Select two companies that operate in the same industry. 1. It is strongly recommended that the companies are based in the same country as this will reduce your problems in terms of different legislation and accounting practices.
which generate gross profit more than 20% with its leaner operation expenses. One reason is Air Asia has better operation efficiency. because Air Asia takes their derivative gain/loss value into their ‘Operating Expenses’ account. and finally increase to 6. Unfortunately the incomes gained for MAS from the non-core service business (generated from sales of plane.873 4. Return on Shareholders’ Fund/Equity (ROSF/ROE) (b) Compare the performance of the two companies.85 in 2009. dropped to 3. between the two airline companies. and etc) are not consistent. Therefore. properties. else they be compared on unequal basis and thus do not provide true picture to possible investor MAS 2009 EBIT= (Loss)/Profit From Operations + Derivative Gain = -628. in all years except 2008. gross profit percentage and net profit percentage calculated above indicates Air Asia generates better return than MAS from 2006 to 2009 financial year.163.3.01 in 2007. (16 marks) MAS airline have high revenue comparatively to Air Asia. However. except year 2008. Thus the negative (or low positive in financial year 2007) gross margin performance. However. gain from hedging against fuel and currency. ROCE the fundamental measure of business performance fluctuates irregularly from -5.26 in 2008. This enables fairer judgement. MAS with business strategy Going Beyond Expectations had over run their operation cost to the extent that is non-sustainable by core operating revenue income. moving up to 10. explaining the likely reasons for the differences between their performance over the period. . ROCE and ROSF/ROE between financial year 2007-2009 as shown in analysis in section (i)-(a).133 = 534.25 in year 2006. MAS could rely on Other Operating Income and Derivative Gain to generate positive net profit. Return of Capital Employed (ROCE) *Note: MAS 2009 EBIT is calculated as below to enable comparable comparison.260+ 1.
Base on the computed figures.74billion in 2009. may or may not have taken any position in fuel price hedging. Air Asia can be said to perform better than MAS in ensuring consistent return to the shareholders. There is an exceptional in 2008. despite other operating expenses remained lower. crude oil price plummet to low value. to be explained later) comparatively with MAS. MAS. Aircraft Fuel Expenses was exceptionally higher than 2009 fuel spending. instead of carrying the burden from wrong decision in fuel price hedged. Nonetheless. But the any decision made at that time gave them the benefit of performing better than Air Asia in financial year 2008. from 4. resulted to Air Asia taking position to hedge against the rising fuel cost. . thus the loss reported in year 2008. This is also done to allow Air Asia to compete competitively for new financial year. Air Asia decided to write off the high cost fuel against market price of the time. Looking at Air Asia 2008 income statement. when the quantity of fuel hedge at high price would flow over to following financial year. generally shows a consistent positive ROCE with growth from 2006 to 2009 (except 2009.Air Asia on the other hand. eroding the operation profitability. This adoption makes the ROCE and the ROE computed difficult to compare against Air Asia return to investor. Worse. computed in section (i)-(a). in lined with the financial year revenue. most likely because of their growing and profitable core airline service operation. in 2008 financial year as Loss on Unwinding of Derivatives. financial liabilities and certain contracts to buy or sell non-financial items. MAS after adopting new Financial Reporting Standard 139 (FRS139) that establishes the principles for recognizing and measuring financial assets. had to write-off contingency losses in the balance sheet resulting to drop in equity to 0. where Air Asia had performed poorly against MAS in all four profitability ratio. One reason is due to crude oil price fluctuation. Crude oil price in 2008 had climbed at significantly pace.19billion recorded in 2008. Shortly after this. resulting Air Asia operating with high fuel cost.
Inventory Holding Days (IHD) . Liquidity Ratios 1. (10 marks) To comment the liquidity and working capital management. Quick Ratio Efficiency Ratios 1.(ii) (a) Calculate ratios that will enable you to comment on the liquidity and management of working capital over the period. we can use liquidity ratios and efficiency ratios to measure the airlines performance over the years. Liquidity ratios measure the ability of the business to meet its short-term financial obligations. while efficiency ratios measure the how are the resources of the business are managed. Current Ratio 2.
Payables Payment Days (PPD) 4. Cash Conversion Cycles (b) Discuss the likely causes and effects of the changes in the liquidity ratios over the period of two years. Current ratio is comparison of business liquid assets with current liabilities. (15 marks) Table ii-b-1: Summary of liquidity calculated from section (ii)-(a) Comparing 2008 and 2009 financial years. Air Asia current ratio and quick ratio had increased as shown in table ii-b-1 above. Receivables Payment Days (RPD) 3. Hence the increase of Air Asia current ratio .2. whilst MAS in the same years experienced dropped in both ratios.
Such movement of assets and liabilities.8million as show in MAS balance sheet in Appendix C. Mentioned. hence the minor change of Air Asia quick ratio compared to its current ratio. in the capital management. we can say the quick ratio changes are similar to current ratio changes explanation. MAS current assets on the other hand. Air Asia and MAS has a special circumstance in quick ratio computation. while its inventory increased slightly in value. so the business maybe experiencing some liquidity problem. can be undesirable at some extend. Payable payments days (PPD) for both airlines had increased though at different rate from 2008 to 2009.6billion in 2008 to RM4. comparatively to other current assets. Air Asia operation outsource their aircraft major maintenance. Air Asia might have choose to shortened payables period in 2008 in return for better savings from other suppliers in order to reduce losses incurred from the hedging activities. the more liquid the company's working capital position is. . because with ratio of 0. Thus inventory required to ensure business continuation. Therefore on average. the RPD stand almost the same in both 2008 and 2009 years which could possibly means the receivable as a whole could fall proportionately. The major increase was vastly contributed by cash build up. Else. but in a smaller way compared to Air Asia. Hence the small changes in number of holding days for both airlines. which measures the number of days a company's cash is tied up in the the production and sales process of its operations and the benefit it gets from payment terms from its creditors. a direct result of drop in 2009 revenue.signified increase in company current assets significantly against their current liabilities from 2008 to 2009.5 days was mainly due to drop in cost of sales. dropped from RM6. Therefore in summary. Such practice would inevitably bring down receivables payment days (RPD) quite considerably on average basis. MAS inventory holding days increased from 9. The aboves contribute to the cash conversion cycles management. which is observable in the quick ratio calculation.1 to 11. Air Asia and MAS passenger flight service would receive advance payment before deliverable. possibly contributed from hedging activities against fuel. Air Asia was operating with relatively high fuel cost. service industries usually carry minimal stock. Reason is because both airline companies are service base providers. MAS circumstances would be similar. one as mentioned in section (i)-(b). This explained the low number of inventory holding days for both airline companies. while MAS too made improvement. because the value to the stocks is relatively low compared to their revenue. The changes in Air Asia receivables would could be due to stronger higher income generated from their passenger airline sector which brings the other income revenue substantially lower by proportion. its movement trend is similar to current ratio trend. the PPD increased substantially from 87. thus the differentiation within the two years is not as large as Air Asia. cash and bank balances. Despite lower in 2009 financial year by MAS.2days to 142. Noticeably. This is noticeable for the current ratio computation in section (i)-(b). and had increase in current liabilities. The shorter this cycle. and etc.7billion in 2009. whatever the circumstances maybe. on-line merchandising. or Air Asia might had improvement in their collectibles from incomes generated from the non-core service deliverables. or be strictly given only short-term payment period. the hedging activities bu Air Asia would substantially reduce the PPD of year 2008. This commodity product would be paid as used. while MAS which carry more inventory for maintenance purposes would have relatively larger drop in quick ratio against its current ratio. with receivable incomes from cargo freight. is relatively small. Thus. advertising. and may not be very active in the hedging activities. currency and interest rates amounting RM584. while MAS carry many major maintenance internally. In Air Asia. Air Asia had certainly improved its liquidity vastly from 2008 to 2009.86 means MAS current assets is about adequate to payback 86% of its current liabilities.9days. This resulted to Air Asia require fewer inventory comparatively to MAS. Two possibilities. available in form of deposits. as we can observe from Air Asia balance sheet attached in Appendix A.
under the ROCE computation table (b) Discuss the capital structure of the two companies and the implications of the funding decisions that were made in the past. It may also due to such standard adoption. However. thus raising their gearing ratio. a favourable return to equity owners. . inevitably declined the ROSF/ROE value of Air Asia to -30. as in Air Asia for year 2006. by injecting the same proportion of capital accordance to loans borrowed. The increase in 2009 gearing was mainly due to the incorporation of FRS139 standard required which reduced the equity as a whole. the negative profit incurred from operations. The increase in borrowings funded Air Asia activities to generate better return in year 2007 compared to 2006. which would totally devastate the shareholders. 2007 and 2009. simply because at high gearing.(iii) (a) 1. that MAS decided to reduce the borrowings in order to lower its gearing value that may have cut down the 2009 operations size. With the borrowings. Air Asia can leverage on the funds available to finance its business expansions such as acquiring more aircraft.56 to 29. and externally by loans borrowed. Provided the profits before the interest and taxation can cover the interest. expanding its Low Cost Carrier Terminal facilities.97. Interest Cover *Note: Please refer to the explanation on MAS 2009 recalculated EBIT value. Thus the ROSF/ROE value increased from 17. with increased borrowings in year 2008. Air Asia had increased their long term borrowings substantially against equity increased. ( 4 marks) Gearing 2. basically to generate higher revenue turnover that cannot be supported by equity alone.93. As for MAS. tends to be beneficial to the shareholders. Calculate gearing ratios for the two companies. in section (i)-(a). any changes in operating profit will lead to a proportionately greater change in ROSF ratio. they more or less maintained their gearing ratio from 2006 to 2008. From 2006 to 2009. Such decisions were made with expectation to generate higher returns to the shareholders. ( 8 marks) Air Asia and MAS business operations had been financed by both internally by the shareholders as equity.
due to other income from sales of plane and property. Earnings Per Share (EPS) . As these are non-sustainable. thus in this aspect.MAS has high interest cover ratio 2007 financial year. and may take away the confidence of investors who analyses this ratio. the higher the finance cost which is tax-deductable for both airliners. Undoubtedly. Dividend Payout Ratio (DPR) 2. t= 0 3. hence the precedence in acquiring higher loans. increasing financial loans has another benefit to the shareholders that is the tax-deductibility of loan interest. (iv) (a) Calculate investment ratios for the two companies. (8 marks) 1. you can use the current share price as the share price on the last day of the financial year may be difficult to obtain. The higher the loans. For this purpose.5cents. However dividend declared by MAS in 2007 is tax-exempt of 2. the interest cover can be seen to fluctuate from year to year. Dividend Yield Ratio t = dividend tax credit.
the EPS and P/E ratio reflected poorly. From 2006 to 2009. MAS on the other hand does not generate strong profitability from its core operation. or could be an indicative of share price being overvalued. thus not in good position to announce dividend payout to their shareholders. spread of H1N1at year end and etc. and investment ratios are tools that savvy investors would use to help analyse the position of stock price and whether is dividend payout favourable. In this year and beginning 2009. Unfortunately.4. . but also on the EPS that measure the fundamental share performance. tend to performed better in calculated EPS value. MAS that has lower issued of ordinary share compared to Air Asia. MAS can retain the existing investors’ confidence as well as attracting new investors. thus retained all profits for reinvestment into their operation. Price/Earnings(P/E) Ratio (b) Discuss the implications of the investment ratios to existing and potential investors in this industry. On the other hand. Air Asia is on the verge of continual expanding its business. the year with many unforeseen circumstances such as crude oil price fluctuation. and investors who underlie the importance of dividend payout. while new investors taking opportunity to buy and keep the lower share price with expectations of gaining share price value towards future. Generally. there are investors that that might be interested in long-term capital share price gain as mentioned above. there are investors who look for capital gain in share price. existing investors would be satisfied with MAS EPS achievement. both airline companies will unlikely attract investors who focus on the dividend return. with existing investors disposing the shares in order to cut losses as they dropped. there were many transactions of Air Asia share. which probably explain the dropped in share price in year 2009. EPS value of Air Asia generally increased and sustained with earnings of RM0. By right. These investors would not only focus on the dividend payout and yield. Hopefully. However analysing the P/E ratio. Undoubtedly.21 per share in 2009. with the better EPS and lower P/E ratio in year 2009. As for year 2008. economy crisis. the high value in 2008 would imply either the public had high confidence over MAS future business. (16 marks) What investors want is to gain profitable return from investment made. which most certainly would make existing investors satisfied with company performance while attracting new investors with its lower P/E ratio that indicates the share price is not overly overvalued. the market had higher stringer perceive of second scenario of MAS share price being overvalued in 2008.
(15 marks) As third party outsiders. the depreciation value for both companies would be different and often not detectable by outsiders. In doing so. MAS airline financial account does not stipulate detailed expenses. Without knowing detailed transactions. One major problem with published report is the time of release. or possibly overstate the profits in some circumstances. For example. and the airlines 2010 report may only be released in another few months. Such creative accounting poses serious problems to outsiders who rely on financial ratios. Companies often apply particular accounting policies or structure particular transactions in order to portray healthy financial performance. Rapid changes takes place now like none before. we cannot determine factor that caused the organisation to incurred negative profit. often do not represent actual value or includes inflation influence. These hence understate. can be considered obsolete when public received it. Another limitation is related to quality of the financial statement. Assets declared in the balance sheet. It is February 2010 now. Hence. it would also influence ratios computation like ROCE value. we do not have access to asymmetric information like the internal operation team of the public company has. If such circumstances. For example. This is common to many public companies whether they often only release information beneficial to them. and company B choose to depreciate the same Machine Y in 10 years. thus by the time published report which is a ‘snapshot’ of the business at the reported moment. we have no means to tell whether the company is operating efficiently. .(v) Discuss the problems that are faced by people who wish to assess the performance and financial position of a public company if only the published reports are available. while keeping the negative information as vague possible. which are dependent on the quality of the reported statements. It may not be as helpful in analysing the company’s today’s performances. and utilising the company funds to the beneficial of the shareholders. The asset values are recorded in balance sheet usually less any formulated amount off for depreciation purpose. company A may choose to depreciate Machine Y in 5 years.
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