nancial Reporting & Analysis Coursework 2017Part A Emirates’ profitability declined sharply when compared to previous years. The net profit margin (NPM) and return on assets (ROA) were used to analyse the firm’s performance.
NPM concerns a company’s ability to generate earnings after taxes relative to its revenue. This fell from 8.76% in 2016 to 1.73% in 2017. The reason for the large decline in NPM is due to the significant increase in operating costs. One of the main contributors were Emirates’ funding 23 new aircrafts on operating lease, increasing operating costs by just under 6 billion AED . Revenue increased marginally and as such did not match the substantial rise in costs.
The airlines ROA has fallen over the last 4 years. When comparing 2016 and 2017 figures, we see a 4.95 percentage point decrease in ROA. The decline in ROA symbolises that Emirates are not using their assets to generate their profit as effectively as before. Furthermore, Emirates’ ROE decreased significantly this financial year.
The ROE portrays how much profit the airline generated with shareholders’ investments. This is important to investors as net profit adds value to shareholders. The ROE fell from 22.72% in 2016 to 4.26% in 2017 (Appendix A). These figures tell us that for every 1 AED the owner invested, the business made a profit of 0.23 AED in 2016 however in 2017 this was only 0.
04 AED. A lower ROE could make Emirates’ look less attractive from a shareholder’s point of view. The firm’s liquidity position weakened as shown by the decrease in the current ratio and quick ratio. A company’s liquidity is central as it gives them the ability to meet unexpected changes in financial requirements. The current ratio decreased from 0.82 in 2016 to 0.
73 in 2017 (Appendix C). This occurred because of the significant decline in assets, with the decline in cash being the biggest contributor to this. Cash held decreased by 3.2 billion AED (The Emirates Group ,2017). This reduction could be a problem for Emirates if faced with a tough financial period, as they may not have enough cash to cover their operations and be more at risk paying back their short-term liabilities.Efficiency is another area in which the firm struggled this year.
The asset turnover decreased by 0.2 (Appendix B). The main contributor to the decline is the increase in equity, this decline is a problem as it suggests that the company’s assets aren’t generating as much revenue as they should, especially with the increase in assets from the previous year. Despite all this, Emirates’ long term financial structure is improving. The gearing ratio, which compares the company’s borrowings to their equity, has been decreasing over the past couple years, as seen in Appendix D where the gearing value decreased from 155% in 2016 to 145% in 2017. Even though the airline increased their borrowing in the past year, the gearing ratio reduced because of the growth in equity.
This shows that although Emirates struggled with profitability, they have reduced their leverage which will make long term growth more sustainable. Part BEmirates are one of the world leaders in the aviation industry. They have had constant growth over the years which has lead them to be one of the dominant figures in their sector. The wide range of destinations which they fly to (141 destinations) has increased their customer basis and strengthened revenue. (The Emirates Group ,2017).
Another strength of Emirates is their strong advertising and sponsorship list, especially in sport (Emirates 2017). which gives them a platform to increase brand awareness and build a connection with their consumers. Other strengths include, excellent customer service and a strong workforce of 64,768 employees. A weakness of Emirates is their loss in profits in the 2016/2017 financial year. Their profits significantly dropped by just under 6 billion AED . This emphasises the poor management in finances as they should have been prepared for change. Another weakness is the exclusion of customers which cannot afford the ticket price of an international airline which stops the airline from increasing revenue.
Emirates have many opportunities to raise their status and boost their brand identity in the industry. The Dubai world expo which takes place in 2020 is great opportunity, with millions of tourists visiting Dubai. With Emirates being one of the main sponsors of this event, the expo last 6 months bringing people from around the world to showcase their new discoveries . Furthermore, improvements in technology and the use of big data in the future will improve customer experience during air travel, this analysis of customer behaviour and will allow Emirates to make improvements in these areas. An increase in fuel prices is a threat for Emirates, as the rise in fuel costs reduces the amount of profit attainable. In addition to this, the government are putting in place projects, such as tree planting, in order to reduce CO2 emissions . This threatens the airline industry as these projects will increase their costs.
There has also been an increase in strong competition due to the relatively low barriers to entry the industry . This is visible through their decline in the world best airline rankings, they have fallen from first place in the year before to fourth place in 2017. Part CFinancial reporting and analysis has limitations to its use. One issue is the lack of qualitative information which financial analysis provides.
The ratios calculated ignore how the non-financial factors could affect the way the business functions. For example the reason for the decline in the Emirates’ net profit margin from 8.82% to 1.78% could have been affected by non-financial factors which we are unaware of. Factors such as , poor management skills and decline in customer satisfaction are some possible contributors to the outcome of these ratios, as they effect the amount of revenue the airline receives and ultimately the amount of profit they make.
This is an issue as it doesn’t provide us with the full scope of information, so we ae not able to make effective decisions to improve as we are not taking into account all the causes. The different accounting practices businesses use causes limitations to arise when analysing their performance. For example, there are several different techniques when calculating deprecation in financial reporting such as, straight line depreciation and reducing balance deprecation (Lodhia K, 2017). The different methods provide different values when calculated. For example Emirates and their competitors may use opposing methods which causes the deprecation value in their financial statements to differ.
This affects stakeholders when analysing their statements as the comparisons would not be accurate. Finally, financial reporting allows firms to manipulate their statements to make their performance look better than it is. When a firm manipulates it affects the economy as the relative stakeholders which have invested in the firm which they believe are performing lose out on a lot money if the company becomes bankrupt. For example, if the Emirates lied about their revenue in order to window dress their finical failure this tear this could have detrimental effects in the future on the staff within the firm as they could suddenly lose their jobs if they became bankrupt.
Appendix AProfitability RatiosRatio2014201520162017Return on Equity(profit after tax)3,417×100=13.42% 25,4714,728×100=16.71% 28,2867,318×100=22.58% 32,4051,450×100=4.13% 35,094Net profit margin3,417×100= 4.
23% 80,7174,728×100=5.45% 86,2787,318×100 = 8.76% 83,5001,450×100=1.73% 83,739Return on assets3,417×100= 3.
36% 101,6044,728×100=4.25% 111,3627,318×100=6.14% 119,1791,450×100=1.19% 121,558RatioFormulaReturn on Equity(profit after tax) ROE = Net Profit After Tax x100 Total Equity Net profit margin NPV = Net Profit After Tax x100 Revenue Return on assetsROA = Net Profit After Tax x100 Total Assets Appendix BEfficiency ratios Ratio2014201520162017Asset turnover 80,717 = 3.225,47186,728 = 3.128,28683,500 = 2.632,40583,739 = 2.435,094Average debtors’ collection period9086 x365 = 41days80,7178589 x365 =36 days86,7289321 x365 =41 days83,5009922 x365 =43 days83,739RatioFormulaAsset turnover Asset Turnover = Revenue Equity Average debtors’ collection period Average debtor’s collection period = Trade Receivables x365 RevenueAppendix CLiquidity RatiosRatio2014201520162017Current Ratio27,354 = 0.
8432,42827,735 = 0.8034,48131,427 = 0.8238,52427,836 = 0.7338,382Quick Ratio 27,354 – 1706 =0.
79 32,42827,735 – 1919 =0.75 34,48131,427 -2106 =0.77 38,32427,836 -2238 =0.67 38,382RatioFormulaCurrent Ratio Current Ratio = Current Assets Current Liabilities Quick Ratio Quick Ratio = Current Assets – Inventory Current Liabilities Appendix DLong term financial structure RatiosRatio2014201520162017Gearing Ratio42,431 x100 =167% 25,47147,808 x100=169% 28,28650,105 x100=155% 32,40551,002 x100=145% 35,094Total Borrowings (short + long)38,500+3931=4243142,426+5382= 4780840845+9260=5010540171+10831=51002RatioFormulaGearing Ratio Gearing Ratio = Total Borrowings Total Equity References The Emirates Group (2017), 2016-17 annual report, Available at: https://cdn.ek.aero/downloads/ek/pdfs/report/annual_report_2017.
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