Question

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

2

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:
(i) The numbers of flights operated by Fly Co has remained the same in 2018 and
2019.
(ii) It is expected that there will be a significant reduction in the numbers of
flights operated by Fly Co in 2020.
(iii) 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
(a) Critically analyze and discuss the recent financial performance and financial
conditions of Fly Co and highlight areas of concern for the future
(b) Design an appropriate strategy in regard to the concern highlighted above.

(c) State clearly any limitations and assumptions that you made in your
calculations.

Answer 1

Given Information

	2019	2018	Industry Average
Net Profit Margins	8%	12%	10%
Total Aseets Turnover	0.75	0.73	0.75
ROA	6%	8.76%	7.50%
Debt Ratio	54%	80%	48%

1.If we consider the Net profit margin ,In the year 2018 it is 12% and 2019 is 8% ,It has been reduced from 2018.and also less than the Industry average.Overal company performance is good but not compared previos year 2018.

If we consider Total Assets turn over, It is an efficiency ratio that measures a company's ability to generate sales from its assets by comparing net sales with average total assets. The total asset turnover ratio calculates net sales as a percentage of assets to show how many sales are generated from each dollar of company assets. Based on given information Total assets turnover increased from 2018 to 0.75 and reached to Industry average.

Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets.Return on Assets (ROA) is an indicator of how well a company utilizes its assets, by determining how profitable a company is relative to its total assets. It has been reduced compared to 2018 and also less than industry average.So that efficiency of company reduced.

Debt Ratio is a financial ratio that indicates the percentage of a company's assets that are provided via debt. It is the ratio of total debt and total assets.Based on given information Debt ratio reduced from 2018 but slightly higher than Industry average it indicates company total assets contribution from debt has been reduced from 2018.It is a good indication and financial position.

Areas of concern and Appropriate strategy :

1.Company Profitability should be Increased,It has to decrease its unnecessary expenditure and find the way to improve the gross margin.Unnecessary expenditure means food expenditure for short distance flights can be reduced.

2.Return on assets has to be increased it means that efficiency of assets has to be increased.Run the existing flights with maximum capacity insetad of buying new ones.If efficiency improves ROA automatically improves.

3.Debt funds still to be reduced hence more debt funds cause interest out flow.Use company internal funds for expansion and other revenue expenditure.