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Discuss about the case study of Fundamentals of Value Creation Expansion and Investment opportunities.

Profitability Analysis

The main purpose of this assessment is to analyze the financial statements of Flight Center Travel Group Ltd which is engaged in providing flight services to the customers. The report will be considering the financial information of the business which are taken for the annual report of the company for a period of five years. The assessment will also be including computation of key financial ratios of the business which are related to profitability, solvency and liquidity aspects of the business. The report will also focus on analyzing the key financial ratios of the company in order to interpret the performance of the company over the last five years considering from 2014 to 2018.

Flight Center Travel Group Ltd is regarded as one of the largest outlets of retail travel services which is provided in Australia. The company is known for its swift and smooth travel services. The company was established in 1982 and has its headquarters in Brisbane, Australia. As per recent estimates, the company has a turnover of 20 billion and contributes to the employment needs of the economy by hiring and retaining more than 20000 employees around its different areas of operations in total. The company has operations in around 23 countries and has a travel management network which is over 90 countries around the Globe.

The assessment can be sub-divided into two parts which is calculation part where key financial ratios are to be computed for the company and the analysis part which will be explaining the position of the business in the market among the close competitors. The analysis of ratios will also be determining the performance and growth of the business during the year. The assessment will also be considering another company for the purpose of conducting a comparative analysis which is known as Webjet. It is a significant competitor of FLT.The ratios will be computed which are related to solvency, liquidity and profitability of the business which are analyzed for five years The purpose of this comparative analysis is to assess the financial position of both businesses

The profitability of the business considers the revenue generating capability of the business from operational activities of the business. The profitability of the business is to be determined with the help of key financial ratios which are net profit margin, return on assets, return on equity and return on investments of the business(Lawrence, 2013). The ratios which are considered for the analysis are considered to be key financial ratios of the business and are indicators whether the business are in right tracks judging from the goals and objectives of the business.

Particulars

2013(%)

2014(%)

2015(%)

2016(%)

2017(%)

2018(%)

net profit margin

12.65

9.37

10.86

9.32

9.07

9

return on equity

26.13

19.48

21.67

18.7

16.63

17.66

return on assets

10.95

8.65

9.87

8.45

7.45

7.97

return on invested capital

23.9

18.73

20.8

18.09

15.96

17.14

Liquidity Analysis


The above table shows the calculation of net profit margin of a business, return on  assets and equity and return on invested capital of the business which are considered to be key financial ratios of the business. The pie chart  reflects profitability ratios of the business for the year 2018. The net profit margin as shown over the table has been more or less steady as reflected in the pie chart. The net profit margin has increased from 9.37  in the year 2014 to 10.86 in the year 2015 Thereafter the profit margin has slightly diminished since 2015 and currently it stands at 9% in the year 2015.this suggests that the costs of the business has increased and the sales has not increased to that extent(Delen, Kuzey & Uyar, 2013).. The return on equity and return on equity of a business are considered to be important financial indicators for the success of the business. The return on equity has also shown fluctuating return over the years. In the year 2015 the company had the maximum return on equity at 21.67. This suggests that the company is earning fluctuating returns on its equity. The company needs to take steps to make sure it can improve that.  The return on assets has also shown a similar trend , with the company making maximum return on equity in the year 2015 at 21.67%( Kim, Kraft, & Ryan, 2013). thereafter it has slightly diminished which suggests that the company is not making enough return on its assets. This corroborates to the fall in profits of the company(Tayeh, Al-Jarrah & Tarhini, 2015). The return on invested capital of the business is shown to be a similar trend as well with an inconsistent pattern. The company made most return on 2015 and thereafter it has slightly diminished because of the fall in profits of the business. The return on investment is computed to be 18.09% in the year 2016, and thereafter slightly diminished .It further diminished  in the year 2017 because of fall in profits. Thereafter it made a slight recovery in the year 2018 , owing to the fact that the company improved its profits.


The above graphs portrays the profitability ratios of FLT for a period of five yers between 2013 to 2018.

The profitability ratios of Webjet is computed by considering the estimates that are provided in the annual reports of the business. the key financial ratios relating to profitability of Webjet is  shown below:

particulars

2013

2014

2015

2016

2017

2018

Net profit margin

15.7

22.14

19.84

19.81

30.92

7.79

Return on equity

14.06

29.59

23.07

18.99

28.5

12.58

Return on assets

7.01

14.61

10.54

7.65

12.04

5.26

return on invested capital

12.28

28.76

17.6

14.33

22.2

10.95


The above table and graph shows the key financial ratios of Webjt which is computed by considering the key financial ratios of the business which are net profit margin, return on equity , return on assets and return on investment of a business. The net profit margin in the business shows an estimate of 7.79%  in the current year 2018  . It has reduced significantly from the previous year . which was shown at 30.92% .The reasons for this is due to the fact that the costs have gone up significantly or the sales have been reduced significantly. The return on equity has increased significantly in the year 2014, with its maximum of 29.59% achieved by that year. In the coming years it has shown that it has an inconsistent pattern with the significant reduction in the year 2018 from 2017. It reduced from 28.5 % to 12.58% in the year from 2017 to 2018. the return on assets has shown an increasing trend followed by a decreasing trend in the five years. This is due to a fall in the profits of a company(Elshandidy, T., Fraser & Hussainey, 2013) .

As shown in the graph above, the net profit margin of FTL is slightly higher than Webjet. The  net profit margin is the most important indicator of profitability and the same is shown for Webjet as well. By comparing the profitability of the business , it suggests that the operational structure of the FTL is better than  Webjet . Thus the profitability of FTL is better than Webjet . Hence the management of Webjet needs to think about the profitability aspect of the business.

The liquidity of the business refers to the ability of the company to effectively meet the current obligations of the business(Ball, Li & Shivakumar, (2015). The ratios which will be computed and considered in this section are current ratio and quick ratio which are discussed in details in coming paragraphs. The liquidity position of Flight Center Travel Group Ltd is to be judged from the analysis of current and quick ratio of the business. The liquidity ratios of the business consist of quick ratio and current ratio which are considered to be an important indicator for the success of the business(. In the case of  FLT. the liquidity ratios of the business is computed to considering the financial statements of the business for five yaer and the same is presented in the table below.

Particulars

2013

2014

2015

2016

2017

2018

Current ratio

1.39

1.5

1.48

1.44

1.43

1.45

Quick ratio

1.35

1.47

1.45

1.41

1.37

1.38


The above pie chart depicts the liquidity ratios of the business for the year 2018na and the various components that are included below. The liquidity ratios of the business are shown in the above figures and the same shows current ratio and quick ratio. The current ratio of the business is shown to be 1.45 in the year 2018. This suggests  that the liquidity ratio of the firm is favorable. The current ratio has shown an increasing trend over the years which suggests that the cash position of the firm is favorable and that the firm is in a good position to pay off its debts(Dontoh, Ronen & Sarath, 2013). The quick ratios of the business is shown to be at 1.38 in the year 2018 which further shows that the liquidity position of the business is appropriate.

The liquidity graph is shown in the above figure during the five years period. the liquidity ratios are depicted in the above figures shows that the management of FTL is more than capable  of meeting the current obligations of the business effectively. the liquidity measure is an important estimate which is considered by all the stakeholders that are involved in the business(Hoberg & Maksimovic, 2014). the  management must make attempts to maintain and further improve the liquidity of the business. In the case of Webjet, the liquidity ratios are computed and is illustrated in the following table

 Particulars

2013

2014

2015

2016

2017

2018

Current ratio

1.27

1.59

1.34

1.05

1.46

0.93

Quick ratio

1.2

1.46

1.27

1

1.37

0.91


The liquidity ratio which is computed for Webjet Ltd is shown in the above graph and table. The current ratio of the business is shown to have been positive , except it dipped remarkably in the last year  and is shown in the table below. The current ratio of the business is shown to be 0.93 in the year 2018. While in 2017 it was 1.46. This suggests that the firm is not in a good financial position at the present moment. Thus the current ratios of the business are not appropriate and this shows that the firm is not in a good position to pay off its debts to creditors(Behr, Norden and Noth, 2013). The quick ratios of the business also shows the liquidity position of the business and the same is shown to be 0.91, which also suggests that the firm is not in a good position financially and pay off their debts in due time.

The following table shows the liquidity position of FPL with the help of Webjet. Both companies have a similar liquidity structure in that both companies have a sound financial position. With a current ratio of 0.93 and 0.91 for Webjet and FTL , This suggests that both companies are sound enough to pay off its debts.

The solvency ratios of a business refer to the capital structure which is used by the business for the purpose of financing different activities of the business and also meeting the day to day expenses of the business(Geng, Bose & Chen, 2015). The significant ratios which are computed under this head are debt equity ratios. Net gearing Ratio which can analyze the capital structure which is used by the business and how the same has changed over the five years period. A table showing computation of key ratios falling under the solvency category is shown below:

particulars

2013

2014

2015

2016

2017

2018

Financial leverage

2.31

2.2

2.19

2.23

2.24

2.2

Debt equity ratio

0.07

0.12

0.09

0.18

0.21

0.2

Interest coverage ratio

12.08

10.82

15.03

13.06

12.42

15.25


The pie chart shown above relates to solvency ratios of the business for the year 2018. The above table shows computation of key solvency ratios of the business during the year. The ratio which is shown below in the above figure are financial leverage, debt equity ratio and interest coverage ratio. The financial leverage reflects the borrowings of the company and the estimate is shown to be 2.2 for the current year. The debt equity ratio is shown to be at 0.2 and 15.25 in the year 2018. The financial leverage has largely remained constant throughout the five years , which suggests that the borrowings of the company has largely remained constant. The company has financed its borrowings by twice the amount that it has used to finance its assets. This suggests a degree of financial risk for the company. The debt equity ratio is a long term solvency ratio that indicates the soundness of long term financial policies of a company. It shows the relation between the assets that are financed by the creditors and the assets financed by shareholders. The company has a debt equity ratio of 0.2, which indicates that the business is in a good solvency position. Interest coverage ratio did exhibit a declining pattern , however it showed a  considerable growth in the last year, 2018. The interest coverage ratio is a measure of a company’s ability to meet its interest payments . It measures how easily a company can pay interest expenses on outstanding debt. The interest coverage ratio of this company is very high which suggest that the company has a lot of financial obligations due in respect of the loans it took.It is an adverse position of the firm  whivh is  considerably risky for the firm. Also this ratio is steadily increasing and showing a positive trend.

The above graphs shows the solvency ratios of the business in relation to the capital structure used by businesses for meeting all expenses of the business. The decisions which are related to capital decisions are considered to be important for decision making process of the management and also for the overall development and growth of the business(Loughran & McDonald, 2016).

In the case of Webjet, the solvency ratios are computed in the table which is shown below.

2013

2014

2015

2016

2017

2018

financial leverage

2.2

1.86

2.46

2.49

2.28

2.45

debt equity ratio

0.21

0.24

0.26

0.11

0.17

0.2

interest coverage ratio

13.19

20.84

23.47

24.78

19.19

9.75


The financial leverage of this company is stated to be 2.45  at the year 2018. and has significantly progressed from 2014 onwards.  The debt equity ratio has shown an increasing trend in the early years and then later decreased in the later years. This suggests that the firm has borrowed money from outsiders and that it has borrowed money at a steady rate.  The interest coverage ratio has showed an increasing trend in the early years , and then showing a decreasing trend in the following years. This ratio suggests that the company is due  significant interest obligations and need to find ways how to reduce it.

The above graph indicates that the debt equity ratio for the year 2018 of both companies Webjet and FLT. It is similar for both companies. The capital structure for both companies is equally financed by debt capital .The level of risk is the same in both companies.

Conclusion 

The company FLT is engaged in the operations of providing retail flight services in Australia and is one of the leading airline companies in Australia. The discussion which is shown for FLT shows that the financial performance of the business is appropriate and the business, although had a difficult period between the years 2014-2016 is now slowly but steadily gaining momentum and is heading towards growth and development. The profitability, solvency and liquidity ratios reflect the improvement in the financial position of the business.

In this report a critical analysis of the three important statements which are included in the financial statements are analysed in a detailed process. The profit and loss statement shows different elements which are included in the statement and the different activities which are undertaken by the management for generating revenues and profits of the business. Although the revenue has increased , yet the profit margin has fallen as shown in the profit and loss statement. The significant financial ratios are computed and analyzed accordingly inn order to identify the financial performance of the business. The analysis shows that the profitability ratios and liquidity ratio of FLT is better than Webjet and hence it needs to come up with a situation to tackle it. The analysis confirms that both the businesses is in a growth phase and that there is more scope for development in the future.

References:

 Bhandari, S. B., & Iyer, R. (2013). Predicting business failure using cash flow statement based measures. Managerial Finance, 39(7), 667-676.

Ball, R., Li, X., & Shivakumar, L. (2015). Contractibility and transparency of financial statement information prepared under IFRS: Evidence from debt contracts around IFRS adoption. Journal of Accounting Research, 53(5), 915-963.

Behr, P., Norden, L. and Noth, F., 2013. Financial constraints of private firms and bank lending behavior. Journal of Banking & Finance, 37(9), pp.3472-3485.

Call, A. C., Chen, S., & Tong, Y. H. (2013). Are analysts' cash flow forecasts naïve extensions of their own earnings forecasts?. Contemporary Accounting Research, 30(2), 438-465.

Delen, D., Kuzey, C., & Uyar, A. (2013). Measuring firm performance using financial ratios: A decision tree approach. Expert Systems with Applications, 40(10), 3970-3983.

Dontoh, A., Ronen, J., & Sarath, B. (2013). Financial statements insurance. Abacus, 49(3), 269-307.

Elshandidy, T., Fraser, I., & Hussainey, K. (2013). Aggregated, voluntary, and mandatory risk disclosure incentives: Evidence from UK FTSE all-share companies. International Review of Financial Analysis, 30, 320-333.

Enekwe, C. I., Agu, C. I., & Eziedo, K. N. (2014). The effect of financial leverage on financial performance: evidence of quoted pharmaceutical companies in Nigeria. IOSR Journal of Economics and Finance, 5(3), 17-25.

Farshadfar, S., & Monem, R. (2013). Further evidence on the usefulness of direct method cash flow components for forecasting future cash flows. The international journal of accounting, 48(1), 111-133.

Geng, R., Bose, I., & Chen, X. (2015). Prediction of financial distress: An empirical study of listed Chinese companies using data mining. European Journal of Operational Research, 241(1), 236-247.

Gitman, L. J., Juchau, R., & Flanagan, J. (2015). Principles of managerial finance. Pearson Higher Education AU.

Hoberg, G., & Maksimovic, V. (2014). Redefining financial constraints: A text-based analysis. The Review of Financial Studies, 28(5), 1312-1352.

Kim, S., Kraft, P., & Ryan, S. G. (2013). Financial statement comparability and credit risk. Review of Accounting Studies, 18(3), 783-823.

Klingenberg, B., Timberlake, R., Geurts, T. G., & Brown, R. J. (2013). The relationship of operational innovation and financial performance—A critical perspective. International Journal of Production Economics, 142(2), 317-323.

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Li, X. (2015). Accounting conservatism and the cost of capital: An international analysis. Journal of Business Finance & Accounting, 42(5-6), 555-582.

Loughran, T., & McDonald, B. (2016). Textual analysis in accounting and finance: A survey. Journal of Accounting Research, 54(4), 1187-1230.

Robinson, T. R., Henry, E., Pirie, W. L., Broihahn, M. A., & Cope, A. T. (2015). International Financial Statement Analysis, (CFA Institute Investment Series). John Wiley & Sons.

Sidharta, I., & Affandi, A. (2016). The empirical study on intellectual capital approach toward financial performance on rural banking sectors in Indonesia. International Journal of Economics and Financial Issues, 6(3), 1247-1253.

Tayeh, M., Al-Jarrah, I. M., & Tarhini, A. (2015). Accounting vs. market-based measures of firm performance related to information technology investments. International Review of Social Sciences and Humanities, 9(1), 129-145.

Wang, C. (2014). Accounting standards harmonization and financial statement comparability: Evidence from transnational information transfer. Journal of Accounting Research, 52(4), 955-992.

Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Financial & managerial accounting. John Wiley & Sons.

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