The present report is to compare the financial statements of Air-Arabia and ARAMEX both in the transportation sector. In this report, comparison of liquidity ratios, debt management ratios, asset management ratios and the profitability ratios of these two companies. At first, the above mentioned ratios for each of the firms are calculated and then, a comparative study is made between these two companies’ ratios and analysis is done to find out the different aspects of the companies’ financial position.
Liquidity ratios which deal with the ability of the firm to meet its current obligations are: Current Ratio, Quick Ratio, Cash Ratio, Interval Measure and Net Working Capital Ratio.
The long term solvency of a company is determined by the Debt Management ratios. This is done by finding out the amount to which a firm uses the long-term debt as its source of financing. These ratios are: Debt Ratio, Debt-Equity Ratio, and Equity Multiplier ratio.
The Asset Management ratios are used by analysts to find out how fast the company can convert its resources into sales or cash. The asset management ratios are: Days Sales Outstanding, Fixed Asset Earnings Ratio, Inventory Turnover Ratio and Total Assets Turnover Ratio.
Profitability ratios are helpful in determining and evaluating the efficiency of the firm in terms of the profits earned. The profitability ratios are: Net Profit Margin, Gross Profit Margin, Operating Expense ratio, Return on Investment, Return on equity, Earnings per share.
Each of these ratios is useful to each of the parties related to the firm, viz. Lenders & creditors, Shareholders, Employees, Management, and Financial Analysts.
Current Ratio: This ratio measures the short-term solvency of a firm. This is obtained by dividing the current assets of any firm with the current liabilities.
Current Ratio =
For the present chosen firm, the current ratio upon calculation is 4.1179. This ratio is meant to be satisfactory 2 to 1 or more. As mentioned above, the ratio shows the short-term solvency of the company. The company in terms of current ratio is very liquid. This margin represents the margin of security for the creditors, more the ratio, higher is the security margin. This doesn’t mean that the firm is performing better; even a firm with less than the satisfactory level may perform better than the one with a higher number.
Quick Ratio: This ratio represents the ability of the firm to convert its asset into cash i.e. how fast the firm can change its assets into liquid assets (cash) is shown by this ratio.
Quick Ratio =
This ratio for the firm when calculated is 4.10889. This shows that the firm is satisfactory as the firm has a value of more than 1 to 1. And this implies that the firm’s inventories are sold and the company’s obligations are met well because the firm has more cash convertible assets per each current liability, 4.10899:1. A company may even perform well with low Quick Ratio if it turns its inventories effectively and pays its obligations faster.
Cash Ratio: This is another ratio for indicating the ready availability of cash with the company and relating it to the current liabilities of the firm. Even if the cash is less, it should not be a problem if the firm has a sound reserve borrowing capability.
Cash Ratio =
While cash available for the firm is 1,996,251,000 AEDs, the firm doesn’t have any marketable securities as per the report. After calculating this ratio by substituting the values in the formula, the ratio is 3.5842. This firm carries 358.42% of cash with it available. This may showcase an impression that the firm has more than enough of the readily available cash which may be a threat to the growth of the firm because money ideal is money wasted, it won’t yield anything.
Interval Measure: This is also a ratio which measures the ability of the firm to meet its regular cash expenditures. In this formula, a relation is established between liquid assets to the cash outflows operating daily. The latter figure is equal to administrative expenses plus cost for selling goods plus general expenses minus depreciation and other kinds of non-cash expenditures and the whole is divided by 365 (number of days in a year). The formula for calculating this ratio is as below:
Interval Measure =
The operating expenses are 1125053, this figure should be divided by 30×9 months, as indicated in the report; the income statement is for 9 months. Hence, upon calculation, average operating expenditure per day is 4537.2333. The interval measure when calculated is 504.373 days. This means that the firm has liquid assets sufficient for 504.373 days to continue its operations.
Ratio of Net Working Capital: This is yet another ratio that depicts the liquidity position of the firm. This ratio establishes a relationship between Net Working Capital and the Net Assets. The larger the Net Working Capital is, the better the company can meet its current obligations. The Net Working Capital is obtained after differentiating Current Liabilities from Current Assets excluding the short-term borrowings from banks. The formula is:
NWC Ratio =
The sum of fixed assets, current assets minus current liabilities gives Net Assets. After calculation, the values of NWC and Net Assets are 1736560 and 5514545 respectively. The ratio hence is .3149. This implies that the firm .3149 of the NWC can be used to fund one asset of the firm.
DEBT MANAGEMENT RATIOS:
Debt Ratio: If the firm wants to find out the ratio of interest-bearing debt that is there in the capital structure of the firm, this ratio helps the firm to calculate it. The debt ratio is obtained by dividing the total debt with the capital employed also called the net assets. Total debt includes in itself all the borrowings made by the firm viz. short-term as well as long-term. The formula for calculating the debt ratio is
As per the financial report of the company, no debt was taken by the firm and hence the debt ratio is zero. This implies that all the projects are financed by owners’ capital.
Debt-Equity Ratio: This is the ratio of the total amount of debt taken by the firm in the form of borrowings and net worth of the firm. The formula is as below:
Debt-Equity Ratio =
As discussed earlier, all the finances for the firm are made through owners’ capital and hence, even this ratio is zero.
Equity Multiplier: This is used to determine the firm’s capability of using the debt in order to purchase any asset. This ratio is given by:
Equity Multiplier =
This gives a relationship between the total assets (current and non-current assets) of a firm and the shareholders equity. The total assets of the firm are of worth 6,071,498,000 AED. The shareholders’ equity is 4,666,700,000 AED. Hence, the ratio is 1.301025 and it implies that 130.1% of assets are funded by 100% of the shareholders’ equity.
Days Sales Outstanding: This gives relationship between the accounts receivable and the average total credit sales made by the firm. This is a measure of the average number of days taken by a firm for collecting the revenue after it sells its goods or services. The formula for calculating this ratio is:
If in case the total credit sales figure is not mentioned, the sales figure is taken as total credit sales. Hence, the Accounts Receivable is sum of Trade and other Receivables and Due from related parties which is 292,211,000 AED and total sales is 1,469,179,000 AED, number of days being 270 (9 months x 30 days). The Days Sales Outstanding is 53.7014. Hence, the firm takes on an average 53 days to collect the debt given on sales of one unit of a good or for service being provided.
Turnover Ratio for Net assets: This ratio gives a relationship between the total sales made and the Net assets owned by the firm. The formula is
Net Assets Turnover Ratio =
The Net assets are of value 1,736,560,000 AED and the Sales are of worth 1,469,179,000 AED. The ratio upon calculating gives .8460. This indicates that AED .846 worth sales is made by the company for one AED of capital employed. This shows the firm is not utilizing its resources properly and the production is at stake.
Inventory Turnover Ratio: This shows the efficiency of the company in selling and producing its goods or products. This establishes a relationship between the cost of goods sold made by the firm and the average inventory. In case if the opening and closing inventory details are not given, value amount of goods in the inventory can be taken as average inventory.
Inventory turnover =
The ratio upon calculation is 231.86 and this says that the firm turns its inventory of finished products or services 231.86 times a year. This indicates that the sales of the company are in a good trend.
Total Asset turnover ratio: The ability of the company to generate sales from all the financial resources dedicated to the total assets is shown by this ratio.
Total Assets Turnover Ratio =
The ratio is .2419. This ratio after calculating shows that the .2419 AED of sales is made for investing one AED in both fixed and current assets.
Gross Profit Margin: This ratio relates the gross profit with the sales made. Gross profit is sales minus cost of goods sold. The difference between the sales revenue and COGS i.e. gross profit is 298,053,000 AED. The formula for calculating GPM is:
Gross Profit Margin =
Hence the ratio between gross profit and sales is .20287. This shows the efficiency with which the management manufactures each unit of a product or provides a unit of service.
Net Profit Margin: Similar to the gross profit margin, the net profit margin is calculated by dividing the net profit with the sales. To get more insight about the firm’s efficiency in producing goods or providing services to the customers. The ratio is:
Net Profit Margin =
The ratio is .264677. This shows the management’s efficiency in manufacturing, administrating and selling the products.
Operating Expenses Ratio: It explains the relationship between Expenses made for operation of the firm and sales made by the firm. This explains how the profit margin changes with sales. Operating expenses is the sum of COGS, selling and general administrative expenses.
Operating Expenses Ratio =
The ratio is 85.437% which shows that 85% of the sales have been consumed by the operating expenses.
Return on Investment: This shows the ratio between EBI (Earnings before Interest) and total amount of investment made. Hence ROI is:
This ratio is .64046 and this indicates that the firm gains 64.046% upon investing 100% of funds.
Return on Equity: This differs from the ROI in the sense that while ROI shows the efficiency of investment made by both lenders and owners, the ROE helps to calculate how effectively the owners’ equity is used.
The ratio is .07111 which implies that the firm has used only 7.111% of the owners’ funds.
As the significance and formulas for different ratios were indicated in the earlier section, this part is dealt only with the results and the interpretation that can be made.
Current Ratio: The current ratio for this firm is 2.5535; this indicates that the liquidity position of the firm is strong as it is greater than 2.
Quick Ratio: There is no detail mentioned about the inventory and hence the current ratio and the quick ratio are the same for this firm. This also states that the short-term solvency of the firm is sound.
Cash Ratio: This ratio is 1.3663 which indicates that the firm has enough cash at hand to pay its current obligations.
Interval Measure: The total operating expenses is 1,297,242 which when divided by 365 days gives the average operating expenses as 3554.0876. Finally, upon calculating, the value of this ratio is 263.8981. This means the firm has enough liquid assets to fund its operations for the above mentioned number of days.
Net Working Capital Ratio: The net working capital for this firm is 570611 (937917 – 367306). The net assets are of worth 1,690,916. Hence, the Net Working Capital Ratio is .33745.
DEBT MANAGEMENT RATIOS:
a) Debt Ratio: Unlike the above firm, this firm has taken debt and hence the debt ratio has some importance in the analysis. The total debt taken by the firm is 13,945 AED. The capital employed is 1623798 and the debt ratio is .0085878. This shows that the lenders have financed around .85878% of the net assets.
b) Debt-Equity Ratio: Unlike the above firm, this firm has taken debt and hence the debt ratio has some importance in the analysis. The total debt taken by the firm is 13,945 AED. The net worth is 1371607 and the debt ratio is .010166. This shows that the lenders’ contribution was .010166 per each unit of contribution made by the owners.
c) Equity Multiplier: This ratio indicates that the company, in order to buy 1 unit of an asset used 1.2655 of its debt.
ASSET MANAGEMENT RATIOS:
Days Sales Outstanding: The Company takes 64.087 days to collect the revenue after sales of a product or provision for a service is done.
Net Assets Turnover Ratio: This ratio is 1.2075 which says that 1.2075 units of sales are made with 1 unit of net assets.
Inventory Turnover Ratio: The inventory turnover ratio doesn’t exist for this firm as the report mentions nothing about the existence of an inventory.
Total Asset Turnover Ratio: A ratio of .95266 shows that the firm was able to generate .95266 unit sales with one unit of all the financial resources committed to the total assets.
Gross Profit Margin: The gross profit margin for this company is .5651 and
this shows that the firm manages the production of each unit with 56.51% efficiency.
Net Profit Margin: The net profit margin is .10542 which shows that the firm was not very effective in achieving the net profit as it is only 10.542%.
Operating Expenses Ratio: This ratio is .2105 which shows that the company 21.05% of sales has been consumed by the cost of goods sold and for the selling expenses and for other operating expenses.
Return on Investment: This ratio is .105995. This shows that the 10AED return was received with investment of 100 AED.
Return on Earnings: This is .1507 and this show that the firm uses the resources of owner with 15% efficiency.
Days Sales Outstanding
Net Assets Turnover Ratio
Inventory Turnover Ratio
Total Asset Turnover Ratio
Gross Profit Margin
Net Profit Margin
Operating expense Ratio
Return on Investment
Return on Equity
Looking at the figures, the current ratio, cash ratio, the liquidity position of the firm Air-Arabia is better when compared to ARAMEX. The interval measure is also higher for the former giving strength to the fact that Air-Arabia has more liquid assets when compared to ARAMEX. The NWC ratio shows that the latter firm has more liquidity when compared to the Air-Arabia. But when looked at the ratios keenly, it can be seen that Air-Arabia has more cash readily available than ARAMEX which is a harm to the growth of the firm, this is because of the fact that ideal money creates nothing. While seeing at the leverage position of the firms, the first firm did not go for debt while the second company took debt but in a less proportion. When coming to collection of credit sales revenue, Air-Arabia collects the credit revenues faster than the ARAMEX which shows that the firm either would have lesser sales or might have a better collection period. Coming to the Asset Management ratios, the Air-Arabia has been more rapidly generate sales from the assets involved. Finally, the profitability ratios show contrary results which are expected by looking at the figures in the above ratios. This part showed that the ARAMEX was able to make more profits when compared to Air-Arabia at gross profit level but when coming to net profit, the former has a greater number, probably due to the fact that ARAMEX had to pay taxes and also due to cost of debt. Coming down, the operating expenses in case of the Air-Arabia are more when compared to ARAMEX and hence, whatever profits are made, they are not healthily used in case of Air-Arabia. The ROI and ROE, main factors in determining the profitability of any firm shows that Air-Arabia has more prospects for profits when compared to ARAMEX.
Hence, it can be seen that while the liquidity position of Air-Arabia appears to be very strong, the firm still can make better utilization of the ideal cash available with it so that there would not only be a short-term growth but also a long-term growth. In every other aspect, it can be seen that Air-Arabia itself is performing well compared to ARAMEX. Even if Air- Arabia has a higher profits, most of its invested money is wasted in administrative and operating expenses, if these generate proportionate sales, the company would see a growth but if these expenses can’t yield proper results, the growth of the firm may be in hurdle.
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