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Financial Ratio Analysis

Financial Ratio Analysis can be regarded as a procedure of considering accounting as well as other financial data and bringing them together in a form that reflects the strength as well as weaknesses of the business concern. Businesses are mainly concerned with different financial activities. In a bid to ascertain specific financial status of a corporation, it is important to prepare, present and analyse financial statements that in turn can be used for decision making process. The current study aims to analyse and interpret financial statements and establish significant association between diverse items of financial declarations with reference to WestJet Airlines. WestJet Airlines Limited is a Canadian airline that provides different scheduled as well as charter air services to around 100 destinations across Canada, USA, Europe, Central America, Caribbean and Mexico (WestJet.com, 2017).

Financial Ratio analysis can be referred to as specific mathematical comparisons of essentially the financial declaration accounts or else categories (Needles, 2013). In particular, the associations between the financial statements assist the investors, internal management of the company as well as the creditors of the company to comprehend the performance of the business concern and helps in detecting the areas that needs improvement.

As rightly indicated by (), sales analysis involves examination of the absolute sales generated by the corporation West jet Airlines that refers to size. In this case, the sales can be considered as the overall rate of change in sales. This can be enumerated using the formula:

Sales was recorded to be 4646433 CAD and this increased to 5129024 CAD. Thus, it can be said that the sales figure of the corporation have increased during the period 2015 as compared to the year ago period.

As correctly put forward by Warren et al., (2013), the overall liquidity condition of a firm can be properly evaluated by using current ratio enumerated for the specific business organization. Particularly, this ratio helps in understanding the overall potential of the business organization to make repayments and settle different obligations of the corporation that generate during span of short term.

Liquidity Ratio

Current Ratio

2014

2015

Current Assets

1730326

1502271

Current Liabilities

1338301

1551925

Ratio

1.292927

0.968005

Table 1: Calculation of liquidity ratio

(Source : WestJet.com, 2017).

Figure 1: Current Ratio

(Source: WestJet.com, 2017).

Analysis of current ratio reveals the fact that the current ratio of the firm has diminished to 0.96 during the period 2015 as compared to the year ago figure of 1.29 recorded during the period 2014. Nevertheless, the current ratio prove inadequate from the perspective of the industry standard that is set at 2:1 for specifically the current ratio (Fabozzi & Peterson, 2013). Thus, management of West jet Airlines need to develop and enhance the current assets of the firm as compared to the registered current liabilities of the corporation.

Sales Analysis

Profitability ratio: Brigham & Ehrhardt (2013) suggests that the profitability ratio can be regarded as a significant financial dimension that can be properly implemented in a bid to assess the overall potential of the business organization to generate earnings in relation to expenditure of the corporation during a specific period. Essentially, the ratio “return on Assets” also simply referred to as ROA can be treated as an indicator that refers to the extent as well as degree of profitability of the corporation in comparison to assets possessed by the corporation (Swamy, 2014). In addition to this, this particular ratio also aids in evaluating the capability of the corporation to generate income out of the obtainable assets of the business organization. Furthermore, return on equity (ROE) indicates that the extent of profitability of the corporation that is compared to assets of the corporation. Cortesi et al., (2015) helps in evaluating the capability of the corporation in order to acquire income out of the present assets of the corporation West jet Airlines. Nevertheless, “return on equity” points out towards total amount of earnings by the business corporation that can be presented using a percentage of shareholders’ equity of the corporation (Luypaert, 2016).

Profitability Ratio

2014

2015

Return on Assets

Net Profit

283957

367530

Total Assets

4646433

5129024

Ratio

0.061113

0.071657

Percentage

6.11129

7.165691

Return on Equity Capital

Net Profit

283957

367530

Equity

1777502

1959993

Ratio

0.159751

0.187516

15.97506

18.7516

Table 2:  Calculation of profitability ratio

(Source: WestJet.com, 2017)

Figure 2: Return on Assets

(Source: WestJet.com, 2017)

Figure 3: Return on Equity Capital

(Source: WestJet.com, 2017).

Analysis of the findings reveals the fact that the return on assets have increased during the period 6.11 to 7.16 during the period 2015. The increase in the return on assets reflects increase in the overall efficiency of the corporation that in turn can help in generation of higher return from particularly employed equity of the corporation (DeFusco et al., 2015). In addition to this, return on equity capital as shown in the table shows that the return has increased from 15.97 recorded during the year 2014 to 18.75 registered during the period 2015. This also indicates a favourable financial condition of the firm as higher ratio indicates desirable financial condition of the corporation.

As rightly put forward by Gode & Ohlson (2013), solvency ratio that is also known as the leverage ratio essentially enumerates the potential or else the ability of a firm to sustain operations indeterminately by comparing different levels of debt with specifically the equity, earnings as well as diverse assets. However, the solvency ratio also helps in identification of varied issues of a going concern and the capability of the firm to repay all the bills particularly in the long term period. Thus, this ratio helps in critical analysis of the overall potential of the business concern to disburse and at the same time pay off different obligations of the firm to its creditors, holders of the bond as well as bank in the long term period (Clor-Proell et al., 2015). In this context, it can be said that better solvency ratio essentially points out towards more creditworthiness of the firm and greater financial soundness of the organization in the long term.

Liquidity Ratio

Analysis of the ratio calculation for the firm West Jet Airlines replicates the fact that the solvency condition of the firm has remained the same during the time period 2014 and 2015. The debt to equity ratio indicating the overall amount of debt of the company in comparison to the equity of the firm has remained at 1.61 during the two year period. In addition to this, the total equity of the firm in terms of the total assets of the firm has also remained at the same level that is at 0.38 during both the years. However, as the result of debt to equity ratio suggests, management of the firm West jet Airways can work towards decreasing the liabilities in order to enhance the solvency condition of the firm. Again, as per the results of the equity ratio, the equity of the firm need to be augmented for augmenting the solvency position of the company (Van Horne & Wachowicz Jr, 2014).

Solvency Ratio

Debt to Equity Ratio

Total Liabilities

2868931

3169031

Total Equity

1777502

1959993

Ratio

1.614024

1.616858

Equity Ratio

Total Equity

1777502

1959993

Total Assets

4646433

5129024

Ratio

0.382552

0.382138

Table 3:  Calculation of solvency ratio

(Source: WestJet.com, 2017).

Figure 4: Debt to Equity Ratio

(Source: WestJet.com, 2017)

Figure 5: Equity Ratio

(Source: WestJet.com, 2017).

As suggested by Palepu et al., (2013), the efficiency ratio that is also known as the activity ratio essentially enumerates the way a company can utilize all their assets in a bid to generate higher income. The accounts receivable turnover ratio enumerates the number of times a specific business can essentially its overall accounts receivables and acquire cash during a particular period of time. Business concerns can be considered to be very liquid in case if it can convert its accounts receivables into cash faster (Wahlen et al., 2014). Again, the asset turnover ratio enumerates the overall capability of a firm to develop sales out of then possessed asserts of the firm. This is essentially carried out by comparing the net sales generated by the company with the total assets of the business concern. However, the asset turnover ratio enumerates the net sales and expresses the net sales as a percentage of the total assets in order to express the number of sales that can be generated from assets of each dollar of the company (Zack, 2013).  

Analysis of the ratio reflects the fact that asset turnover ratio has decreased to 0.78 as recorded during the period 2015 as compared to the figure of 2014. This reflects the fact that the company is failing to efficiently utilize all the assets of the company to generate higher amount of sales. This shows an unfavourable financial condition of the firm West jet Airlines.

Profitability Ratio

Again, analysis of the accounts receivable turnover ratio shows that this too has declined to 49.05 during the period 2015 as compared to the figure of the year ago period recorded to be 72.36 during 2014.  This reflects the fact that the company’s credit sales are less likely to be collected.

Efficiency Ratio

Accounts Receivable Turnover Ratio

Net Credit Sales

3976552

4029265

Average Accounts Receivable

54950

82136

Ratio

72.36673

49.05602

Asset Turnover Ratio

Net Sales

3976552

4029265

Average Total Assets

4646433

5129024

0.855829

0.785581

Table 4: Efficiency Ratio

Source:

Figure 6: Accounts Receivable Turnover Ratio

Source:

Figure 7: Asset Turnover Ratio

Source:

As righty put forward by Legoux et al.,  (2014), cash flow ratio for the firm West Jet Airways indicate an efficiency that can rate the flows of cash to the overall assets of the business concern without getting affected by the income recognition or else measurements of income. Analysis of the results of the cash flow ratio indicates the fact that the cash flow on total assets has increased during the year 2015 to 0.17 as compared to the year ago figure of 0.12 recorded during the period 2014. The higher ratio indicates a more favourable financial condition of the corporation. This essentially indicates that the cash flow from varied operating activities of the firm has increased in comparison to the total assets of the corporation.

Cash ratio enumerates the capability of the firm to make payments by using the cash and cash equivalents of the firm. Analysis of the recorded results of the cash ratio reflects the fact that the cash ratio of the firm has decreased considerably to 0.76 during the period 2015 as compared to the year ago figure registered during the period 2014. The cash ratio of 1.04 registered during the period 2014 shows that the company can pay off all its obligations of current liabilities using the cash as well as the cash equivalents. However, the condition deteriorated during the period 2015 with the decrease in the ratio.

Cash Flow Ratio

Cash Flow on total assets

Cash Flow from operational activities

576663

876441

Total Assets

4646433

5129024

Ratio

0.124109

0.170879

Cash Ratio

Cash and Cash Equivalents

1358071

1183797

Current Liabilities

1338301

1551925

Ratio

1.014772

0.762793

Table 5: Cash Flow Ratio

Source:

Figure 8: Cash Flow on Total Assets

Source:

Figure 9: Cash Ratio

Source:

Analysis of the financial statements of the firm reveals the fact that the liquidity position of the company West Jet Airlines have deteriorated during the period 2015 as compared to the period 2014. This indicates the fact that the current assets of the firm needs to be increased for enhancing the capability of the firm to meet the current liabilities (Vogel, 2014). However, the results of the profitability ratio reflects the fact that the net profit of the firm has increased with respect to the net assets of the assets measured by the ratio “Return on Assets”. The profitability of the firm has also increased in respect of the return on equity capital as the net profit of the firm has increased with respect to the equity. However, the solvency of the firm has remained at the same level during the period 2014 and 2015. Nevertheless, both the efficiency ratio indicate that the unfavourable financial condition in terms of efficiency as cash flow ratio indicates a desirable condition. This ratio indicates the increase in the cash flow from varied operating activities with respect to the total assets. However, on the other hand, the cash ratio has decreased indicating the decline in the potential of the firm to pay off the current liabilities using the cash and cash equivalents.

Solvency Ratio

The company WestJet has a passionate as well as caring attitude that can be regarded as the building block of the specific corporate culture of the firm. The primary goal of the firm is to improve the lives of everyone in the world of WestJet by delivering safe, friendly air travel experience that is simultaneously affordable (WestJet.com, 2017). The organizational culture is to take care of the WestJetters who in turn takes good care of the guests and thereby supports the entire business. Thus, it can be hereby mentioned that the management of the organization follows a people centric culture where the employees of the organization stay connected and the customers are also satisfied. Again, the cycle also bring into line the interests of the WestJetters with particularly the business and stresses an appreciation for all the guests (WestJet.com, 2017).

The organizational structure of Westjet involves informal mode of communication, flatter framework, and decentralized decision authority, along with less hierarchical association within diverse levels of management. This in turn illustrates the fact that the personality of the company's is essentially organic as well as effective. The structure of the business concern WestJet is entrepreneurial and there exists very few management levels that in turn keeps the structure of the organization very flat and inspires people to search for solutions to different identified issues (WestJet.com, 2017).

The product mix of WestJet is essentially the average of around 383 flights that operates daily across approximately 66 destinations that includes Canada, USA, Mexico as well as Caribbean (WestJet.com, 2017). The company also offers different direct and limited flights destinations and use fleets of the identical aircraft.

Management of WestJet takes demand and cost into consideration for setting the pricing strategy (WestJet.com, 2017). However, the pricing strategy are established in line with the competition approach and it is largely dependent upon the time of the year and degree of elasticity of the flight.

The management of the firm utilizes different marketing channels and online ticket bookings as the important part of their place element of the marketing mix.

The promotional strategies adopted by the management of WestJet include providing sponsorship of different local festivals, exciting opportunities to acquire flight discounts (WestJet.com, 2017). However, the firm has weak loyalty programs and undertakes no worldwide alliance.

The operations of WestJet exerts immense impact on the environment by means of emissions generated by essentially the burning of different aviation fuel as well along with varied energy sources. Moreover, the company uses certain materials in the business activities that generate waste and at the same time require the usage of different non-renewable resources (WestJet.com, 2017).

The Canadian airline, WestJet is essentially a federally-controlled establishment and consequently is subject to different federal legislation for example the “Canada Labour Code”, “Canadian Human Rights Act” in addition to different related conventions, counting the “Canada Occupational Health and Safety Regulation”. In addition to this, the financial reporting processes complies with the directives stipulated under the International Financial Reporting Standards (IFRS) and International Accounting Standards.

Conclusion

The above mentioned study helps in comprehending the financial condition of the firm WestJet using the financial declarations of the firm for the period 2014 and 2015. The current study utilizes the key financial ration as a tool for analysing the financial condition of the corporation in terms of liquidity, profitability, efficiency, solvency and cash flows. In addition to this, the present segment also elucidates in detail the organizational culture and structure of the WestJet and explains the marketing mix strategies obtained by the firm. Furthermore, the current study also explicates illustratively the regulatory environment of the firm and the resource dependency.

References

Brigham, E. F., & Ehrhardt, M. C. (2013). Financial management: Theory & practice. Cengage Learning.

Clor-Proell, S., Koonce, L., & White, B. (2015). How do financial statement users evaluate hybrid financial instruments?.

Cortesi, A., Tettamanzi, P., Scaccabarozzi, U., Spertini, I., & Castoldi, S. (2015). Advanced Financial Accounting: Financial Statement Analysis–Accounting Issues–Group Accounts. EGEA spa.

DeFusco, R. A., McLeavey, D. W., Pinto, J. E., Runkle, D. E., & Anson, M. J. (2015). Quantitative investment analysis. John Wiley & Sons.

Fabozzi, F. J., & Peterson, P. P. (2013). Analysis of Financial Statements. Wiley.

Gode, D., & Ohlson, J. (2013). Financial Statement Analysis and Valuation. Retrieved December, 28, 2014.

Legoux, R., Leger, P. M., Robert, J., & Boyer, M. (2014). Confirmation biases in the financial analysis of IT investments. Journal of the Association for Information Systems, 15(1), 33.

Luypaert, M., Van Caneghem, T., & Van Uytbergen, S. (2016). Financial statement filing lags: An empirical analysis among small firms. International Small Business Journal, 34(4), 506-531.

Needles, B., Powers, M., & Crosson, S. (2013). Financial and managerial accounting. Nelson Education.

Palepu, K. G., Healy, P. M., & Peek, E. (2013). Business analysis and valuation: IFRS edition. Cengage Learning.

Pierson, K., Hand, M. L., & Thompson, F. (2015). The Government Finance Database: A Common Resource for Quantitative Research in Public Financial Analysis. PloS one, 10(6), e0130119.

Swamy, M. K. (2014). Case studies of corporate misgovernance: A new approach to financial statement analysis. International Journal of Business, 19(1), 99.

Van Horne, J. C., & Wachowicz Jr, J. M. (2014). Financial statement analysis. Fundamentals of Financial Management,(11th edition). India, Pearson, 125-168.

Vogel, H. L. (2014). Entertainment industry economics: A guide for financial analysis. Cambridge University Press.           

Wahlen, J., Baginski, S., & Bradshaw, M. (2014). Financial reporting, financial statement analysis and valuation. Nelson Education.

Warren, C. S., Reeve, J. M., & Duchac, J. (2013). Financial & managerial accounting. Cengage Learning.

WestJet | Book flights and vacation packages | WestJet.com. (2017). Westjet.com. Retrieved 26 March 2017, from https://www.westjet.com

Zack, G. M. (2013). Financial Statement Analysis. Financial Statement Fraud: Strategies for Detection and Investigation, 209-213.

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