Accounting: Ratio analysis - Singapore Airlines
...ncluded after the operating profit, a decrease by 70.3 (2002-2001), and approximately $40 million in 2003-2001. External factors:   2002-2001 profit analysis: The revenue decreased in 2002-2001 was due to: 1) economic slowdown when the events of September 11 created a reduction in services to routes such as the United States. In addition: Passenger revenue dropped 5.6% Cargo revenue 12.8% (-$66 million) Bellyhold revenue from Singapore Airlines Cargo fell marginally (-0.2%) to $584 million. 2) Government restrictions: Restrictions on air traffic rights Equity ownership restrictions 3) lower returns from Air New Zealand and Virgin Atlantic contributed to a significant decline in the share of the profits of associated companies. A provision of $267 million for the diminished value of our investment in Air New Zealand. Expenditure reduction due to September 11: Salary reductions between 2.5 and 15 per cent which created a drop in staff costs of $188 million (-14.3%) was largely due to the absence of profit-sharing bonus this year compared with a payment equivalent to 4.54 months in the previous year. There were also savings from nil provision in wage adjustment and wage cuts for all staff Profit: an overall decrease in profit from the previous year 2002-2003 profit analysis:: An overall increase in revenue: The revenue in 2003-2002 has increased by 4.6% due to increase in the airline’s performance. Performance of 2003 revenue has increased due to the increase in revenue source by: Passenger revenue by 7.0% Excess baggage revenue by 2.8% Non-scheduled services by 0.6 % Bellyhold revenue from SIA Cargo 5.3% Direct operating revenue 6.8% Indirect operating revenue 38.1% 2003-2002 passenger revenue increased due to the increase in passenger’s seating capacity by 5.3% and 0.5% in load factor. The indirect operating revenue has highly increase due to the collection of safety and security insurance imposed on passengers after September 11, 2001. However, by the end of the year with the combined effect of the SARS outbreak and the out coming of the Iraqi war created a steep fall in passenger load factors in March by a 65.9 per cent decline in passenger revenue. Increase in Expenditure: Staff costs The costs have increased by 7.6% (12.3%) after being restated due to the restoration of the previous year cut back of the employee salaries and gaining more employee (staff costs and overall staff costs) and profit sharing “profit bonus” which was not imposed the previous year. Other costs There were an increase in maintenance costs and depreciation and amortization due to the increase of more aircraft’s. In addition with oil prices rising on expectations of war in Iraq. Strategy to reduce costs: Due to the high rising costs and higher expenses creating lower profits Singapore airlines is planning to cut costs, according to Ann, (2004) Singapore Airlines are planning to cut costs by 1.6 billion dollars or $950 million. The airlines will cut expenses by 10 percent to 20 percent, or 800 million dollar to 1.6 billion dollars. In addition growing competition rises from low cost carried such as AirAsia and Qantas airways which is also expanding in the region. According to Sreenivasan (2004:p.1) cutting cost will be through: targeting costs cuts at staff: 1)training staff for the new strategy-multitask workers for low carriers 2)redundancies 3)change the medical benefits scheme to make workers co-pay instead of the company paying the entire costs: seek lower costs from its supplier ranging from fuel to food suppliers mitigating the impact of higher costs of fuel through hedging maintain full service premier global airlines. selling more tickets through the internet, in this way the airline would cut out travel agents, who are paid commission fees of 5-10 percent of the ticket price the aircraft maintenance is now done by the 87% owned unit SIA engineering company. Long term solvency ratios: Interest coverage:  Cash flow from operation/interest expenses SIA 2002-2003 2002-2001 2001-2000 2000-1999 1999-1998 1236.1/52.1=23.7 571.3/46.9=12.3 1991.2/44.4=44.8 1482.1/38=39 1799.7/29.1=61.8 Emirates Airlines 2,251,679/42,598 = 52.85 Cash flow from operation to total liabilities  Operating cash flow/total liability SIA Year 2003-2002 1236.1/4800=0.26 or 26c Year 2002-2001 571.3/4782= 0.12 or 12c Year 2001-2000 1991.2/3635.5 =0.54 or 54 c Year 2000-1999 1482.1/3502.8=0.42 or 42 c Year 1999-1998 1799.7/3245.8=0.55 or 55c Emirates airlines: Year 2003-2002 * 0.48169 = average currency change of 2003-2002 "Oanda currency site, 2004" 2,251,679*0.48169/10,261,407*0.48169= 1,084,611.2/4,942,817.2 =0.22 or 22 cents Debt to total assets:  SIA total liability/ total assets 2002-2003 2002-2001 2001-2000 2000-1999 1999-1998 1998-1997 4800/ 4782/ 3635.5/ 3830.4/ 3502.8/ 3245.8/ 17,676.6 17,719.8 17,034.9 16,163.6 15,253.5 14,214.5 0.27 0.27 0.21 0.24 0.23 0.23 Emirates airlines 2003-2002 10,261,407/14,079,442=0.73 Equity ratio  SIA shareholders equity/ total assets 2002-2003 2002-2001 2001-2000 2000-1999 1999-1998 1998-1997 10,606/ 10,169.7/ 10,413 / 11,460 / 10,998.8/ 10,425.8/ 17,676.6 17,719.8 17,034.9 16,163.6 15,253.5 14,214.5 0.60 0.57 0.61 0.71 0.72 0.73 Emirates airlines 2003-2002 3,708,574/14,079,442= 0.263 The long term solvency relates to the firm’s ability to meet its long-term obligations. It shows how much of the business’ capital is provided by lenders versus owners and gives an indication of how easy it will be for lenders to recover their money have an effect on the amount of long-term money a firm can borrow (Wall Street City, 2004). The overall Long term solvency of SIA company ratio shows that the company is financed well and has the ability to meet its long term obligation, the company has a great flexibility in meeting its financial obligations and it can cover its interest obligation with no difficulty. SIA company could make its interest payments at 23.7 times and is considered lower than the other years but an improvement from year 2002-2001, Emirates airlines interest coverage rate in 2002-2003 was 52.85 which is also high, however, Emirates Airlines and SIA are considered to have higher interest coverage in comparison to Japan Airways which had an interest coverage of 4.5 in 2002-2003 (Japan Airways interim financial Report, 2003). In addition, SIA company’s ability to pay its total debt from its operating cashflow has improved from 0.12 in 2002-2001 to 0.26 2003-2002, a (+53%) and is also considered higher than its competitor Emirates Airlines (0.22), which indicates its high financial security. Another indicator is its debt to total assets which shows a stability and that SIA's creditors own only 27% of the assets in comparison to Emirates Airlines which 73% of its creditors own the assets, therefore the debts are financed well in proportion to assets and financial risk is lower. Also, the Equity ratio remains on an acceptable range with a 60% of the assets owned by share equity, where only 26% of emirates airlines assets are owned by equity. The ratio remains acceptable because a low ratio determines that the company is not accepted by many shareholders and a very high number would show that the assets are too dependent on the shareholders fund. Efficiency ratios: Debtors’ turnover net sales/average debtors  Year 2003-2002 10.4 8,047/773.8 (651.9 + 895.7/2) 365/10.4= 35 days Year 2002-2001 7,694.7/ 989 (895.7 + 1082.4/2) = 7.7=47 days Year 2001-2000 9,125.8/1068.3 (1082.4+1054.2/2) 8.5 = 43 days Year 2000-1999 8,200.7/ 1034.9 (1054.2 + 1015.6/2) 7.9 = 46 days Year 1999-1998 7,072/ 1189.7 (1015.6+1363.9/2) 5.9 = 61 days Year 1998-1997 6,953.5/ 1282.8 (1363.9 + 1201.7) = 5.4 67 days Emirates airlines 2003-2002 in DHS 9,342.6/1772.9 = 5.2 /365 70 days Efficiency: The efficiency ratio tells us how management are using its assets to generate sales, it . indicates whether or not the increase in sale is due to debtor increase or the decrease is to whether debtor are taking more time to pay (Bazley et al, 2004). The debtors’ turnover shows that the amount of debts received had been declining throughout the years which shows an improvement in the collection days. This shows that the period given for uncollected debts are shorter and cash is collected faster than the previous years. Emirates airlines had an average collection period of 70 days in the financial year of 2003-2002 in comparison with SIA which has a 35 day average collection period. The collection period of SIA is considered more efficient in comparison with its competitor and to its previous collection days. This shows that cash collected from debtor is fast and contribute to an increase in sales. Short term solvency ratios: Current ratio  SIA: current assets/current liability 2003-2002 2002-2001 2001-2000 2000-1999 1999-1998 1,397.5/3,316.1 2,2126.7/3,275.2 2,431.5/3,043.4 2442.5/3268.6 3001.3/2,942.9 0.42 0.65 0.80 0.75 1.02 Emirates airlines * 0.48169 = average currency change of 2003-2002 (Oanda currency site, 2004) 2003-2002 6594.4 * 0.48169/3876.5* 0.48169 3176.4565/1867.2712 1.7 Cashflow from operations to current liabilities  SIA 2003-2002 2002-2001 2001-2000 2000-1999 1999-1998 1236.1/3,316.1 571.3/3,275.2 1991.2/3,043.4 1482.1/3268.6 1799.7/2,942.9 37.2 cents 17.5cents 65 cents 45 cents 61.2 cents Emirates airlines * 0.48169 = average currency change of 2003-2002 "source: " 2251.679 * 0.48169/3876.5* 0.48169 1084.6112/1867.2712 =58 cents Short term solvency This shows the ability of the firm to meet its short term obligation. This includes the relationship between the current monetary assets, such as debtors and cash, and current liabilities (Bazley et al, 2004). The ability of the SIA to meet its short term obligation is low compared to its competitors and has also been decreasing through out the year, this increases the short term financial risk. The ability to pay the short term debt based on cashflow has improved from last year, however it still remains low in compared to the previous years. Furthermore, it is considered low (SIA : 37.2 cents) compared to its competitor Emirates Airline (58 cents). SIA's current ratio has been declining over the year, which indicates that the company is having more difficulty to meet its short term obligation. In addition, the current ratio remains low a (0.42) in comparison to its competitor (Emirates airlines) 1.7. This means that SIA's low ratio decreases the ability to meet obligations with available funds and increases the financial risk. Therefore, Management should attempt to build liquidity during the year and investigate the wisdom of extending the maturity of its debt. However, the low current ratio is due to the lower current assets and higher liabilities. In addition, the low number of assets is due to disposing of seven air fleet and leasing 16 air fleets by the end of the financial year. It is also important to note that the operating cash flow is considered low due to the external factors, which created a lower operating cash flow to the higher current liabilities. However, the company is efficient in managing the debts and the company is able to meet its long term obligations. Profitability ratios: Earnings per share  Net profit after tax/ Weighted average number of ordinary shares used SIA 2003-2002 2002-2001 2001-2000 2000-1999 1999-1998 618.1/1218.1=0.51 567.2/1218.1=0.46 1422.2/1244.8=1.16 1267.1/1272.9=0.99 0.63 51 cents 46 cents 116 cents 99 cents 63 cents Assets turn over  Sales/ average total assets: SIA 2003-2002 2002-2001 2001-2000 2000-1999 1999-1998 8,047/17698.2 7694.7/17377.35 9125.8/16599 8,200.7/15,708.55 7,072/14,734 0.45 0.44 0.55 0.52 0.48 Emirates airlines 2003-2002 In Dirhams 9,342/14,079.4= 0.66 Gross profit margin  net sales - cost of goods sold / net sales SIA 2003-2002 2002-2001 2001-2000 2000-1999 1999-1998 1998-1997 209.0 /8,047 413.1/7,694.7 903.3/ 9,125.8 714.8/8,200.7 455.5/7,072 669.5 /6,953.5 2.6% 5.4% 9.9% 8.7% 6.4% 9.6% Emirates airlines 2003-2002 1,000,511/9,341,589=10.71% Net profit margin:  Net profit/net sale: Profit produced by each dollar of sales after payment of interest. SIA: 2003-2002 2002-2001 2001-2000 2000-1999 1999-1998 1998-1997 618/8,047 567.2/7,694.7 1,422.2/9,125.8 1,267.1/8,200.7 813.7/7,072 919.5/6,953.5 7.7% 7.4% 15.6% 15.4% 11.5% 13.2% ...