Question

Q1: Financial Statement Analysis

Q1: Fly Co is an international airline which flies to more than 226 international destinations in 118 countries. Fly Co experienced rapid initial growth but in recent years the company has been facing a range of difficulties and challenges. The following are the key financial data and information for recent years ending 31 December

Fly Co	2019	2018	Industry average
Net profit margins	8%	12%	10%
Total Asset Turnover (TAT)	0.75	0.73	0.75
Return on Assets (ROA)	6.%	8.76%	7.5%
Debt ratio	54%	80%	48%

The following information is relevant:

1. The numbers of flights operated by Fly Co has remained the same in 2018 and 2019.
2. It is expected that there will be a significant reduction in the numbers of flights operated by Fly Co in 2020.  
3. The licenses with five more major airports are due to expire in Dec 2020.

Required:

Prepare a report for the top management. In your report you should   

1. Critically analyze and discuss the recent financial performance and financial conditions of Fly Co and highlight areas of concern for the future
2. Design an appropriate strategy in regard to the concern highlighted above. (3marks)
3. State clearly any limitations and assumptions that you made in your calculations. (3marks)

Answer 1

a. In 2019 there is on -par -with industry asset utilisation, as seen by the total asset turnover (TAT)--ie. $ revenues generated per $ of assets utilised---

Despite the above, ROA has decreased , due to the low profit margin, as compared to the industry average.

That shows that operating & non-operating expenses are out of control---decreasing the margin.

One reason may be increased finance charge due to high level of debt---Company's debt seems to way-too-higher than the industry's average

So, areas of concern are operating activities & debt level.

b.Given that 2020 may see reduction in no.of flights,revenues may fall further.

So, Fly Co must try to reduce /optimise operating costs.

Should renew licenses with the five airports , in time , so that there are no operational hazzles.

Also , review its debt level and try to carry an optimal level of debt, in line with industry average.

c.Assumption made is that long-term interest bearing liabilities form a sizeable portion of debt & that debt-interest forms a good portion of above-the-line item in the income statement of the company.

Asset utilisation is on par with the industry average.

which means revenue generation level is also on par with industry.

But, it is only the net profit generated out of those revenues & Debt ratio that differ widely fro the industry.

So, that is the basis for the assumption that costs /expenses need to be looked into --along with debt-levels , which may also give insights about the interest costs.