COMMENTS ON THE RATIOS

Gross profit margin:

 It is the ratio of gross margin expressed as a percentage of sales. It indicates how

much profit a company makes after paying off its Cost of goods sold.
 A positive Gross Profit is only the first step for a company to make a net profit. The
gross profit needs to be big enough to also cover related labor, equipment, rental,
marketing/advertising, research and development and a lot of other costs.
 Over the past 4 years, Air France’s gross profit margin has increased but still weak
and lower than his competitors.

Operating profit margin:

 Shows the efficiency of a company controlling the costs and expenses associated with
business operations. Also known as return on sales. Investors pay attention to that one
bcs it shows the proportion of revenues that are available to cover non-operating costs
like paying interest.
 Over the past 4 years, the figures has increased, Air France Group has slowly managed
to improve its profitability since the worst years in the aftermath of the global
financial crisis.
 Its 2017 operating profit margin was finally back to the 5.7% achieved in the last year
before the global financial crisis. Air France-KLM improved its operating margin,
however, it remains less profitable than the other big legacy group, Lufthansa

Net profit margin:

 Indicates how much net income a company makes with total sales achieved.
 A higher net profit margin means that a company is more efficient at converting sales
into actual profit.
 The net profit margin is decreasing in 2017 and is negative but it’s due to a non-current
net expense of 1,948 million euros. Including this impact, the profit margin stands at -
1,1% decreasing compared to 2016 and the previous years. Excluding this non-current
expense, the 2017 net profit margin ratio would be +6%.

Return on equity (ROE):

 Return on Equity (ROE) measures the rate of return on the ownership interest
(shareholder's equity) of the common stock owners. It measures a firm's efficiency at
generating profits from every unit of shareholders' equity (also known as net assets or
assets minus liabilities).
 ROE shows how well a company uses investment funds to generate earnings growth.
  ROEs between 15% and 20% are considered desirable.
 Globally, Air France has a bad ROE because off accumulated losses carried over
several periods or years. Air France used to borrow money to cover accumulated
losses instead of issuing more shares through equity funding. This, lead to negative
shareholders' equity. Typically, the funds received from issuing stock create a positive
balance in shareholders' equity. Financial losses that were allowed to accumulate in
shareholders' equity would show a negative balance, and any debt incurred would
show as a liability. In other words, a company could cover those losses with borrowed
funds, but shareholders' equity would still show a negative balance. In 2017 Air
France increased its capital reserved to China Eastern Airlines and Delta Air Line (
750 millions Euros)

Net working capital:

 Working Capital is a measure of a company's short term liquidity or its ability to cover
short term liabilities. The more working capital, the less financial difficulties a
company has.
 It’s less than 1 but it has increased over the past 4 years bcs the debt are decreasing.
 It’s complicated to get a loan. That means that the firm would have to sell its current
assets in order to pay off its current liabilities.
 This improvement is mainly due to the increase of cash despite the short term debt
increase (800M€ VS 372M€)
 Improvement of its cash flow over the past 4 years but not yet sufficient
 It’s complicated for the company to get a loan. That means that the firm would have to
sell its current assets in order to pay off its current liabilities.

A ratio less than 1 is considered risky by creditors and investors because it shows the
company isn’t running efficiently and can’t cover its current debt properly.

Equity ratio:

 There is a continuous improvement of equity over the past 4 years but remains weak.
 We note that the significant improvement of 2017 is mainly due to the capital increase
of Euros 750 millions.
 Air France does not release sufficient of results to strengthen its stockholders' equity.
This situation may affect the capacity of the company to get a loan.

Debt ratio:

 Indicates what proportion of a company’s financing asset is from debt: good way to
check a company’s long-term solvency. A lower ratio is better. Value of 1 or less
shows a good financial health of a company.
 As at 31 December 2017, net debt had been further reduced to 1,657 million euros
versus 3,655 million euros at 31 December 2016, an improvement of 1,998 million
euros from operating free cash flow and issued capital.
 The Group completed capital increases totaling 751 million euros.

EBIDTA solvency:
  Used as a solvency ratio, the EBITDA coverage ratio measures a company's ability to
pay off liabilities such as debts and lease payments.
 It compares EBITDA and lease payments to the company's total debt payments and
lease payments. There is an improvement but still lower than other major airlines
companies.

Gearing ratio:

 Despite a significant improvement over the past 4 years, Air France still has a high
proportion of debt to equity.
 Air France business is highly geared. As a result, the company would be at
greater financial risk, because during times of lower profits and higher interest rates,
the company would be more susceptible to loan default and bankruptcy.

CONCLUSION:
In 2017 it was significant improvements compared to the previous years:

 Operating income at 1,478 million euros, up 65% compared to 2016.

 Significant balance-sheet de-risking linked to the de-recognition of two pension plans,
with a related non-current net expense of 1,948 million euros. Including this impact,
the net result stands at -291 million euros. Excluding this non-current expense, the
2017 net result stands at +1,657 million euros.
 EBITDA stand at 3,09 millions euros up 25 % compared to 2016 .
 Significant strengthening in the group’s financial structure with a net debt reduction of
2 billion euros resulting from strong operating free cash flow and issued capital.

However and despite these improvements Air France is still in turbulence area, due, mainly to
the following reasons:

 The global context remains uncertain given the current geopolitical environment and
fuel price trends
 Too high operating cost compared the competition
Hard competition from low cost companies on the short haul segment and from Gulf
countries companies for the long haul segment
 The level of debts is still high witch cause huge amounts of interest expenses
 The company is less competitiveness than the other major European companies
( Lufthansa, BA…)
 Permanent threat labor disputes which cost a lot to the company (Pilots strikes)

Considering all these above elements, the going concern of the company is seriously
threatened.