FM1 Assignment - AirAsia

BA205 Financial Management 1
Sept 2014
Table of Contents
Introduction..........................................................................................................................2
Contents.................................................................................................................................
Financial Ratio for year 2011...........................................................................................4
Financial Ratio for year 2012...........................................................................................8
Financial Ratio for year 2013.........................................................................................11
Interpretation of AirAsia Financial Ratio Analysis........................................................14
Financial performance....................................................................................................16
Conclusion.........................................................................................................................17
Reference...........................................................................................................................19
Appendixes........................................................................................................................20
Sept 2014
Introduction
Air Asia Berhad was being established in 1993 with commenced operations in
1996. In 2001, Tune Air Sdn Bhd which was Tony Fernandess company at that time,
purchased this airline from DRB-Hicom and Air Asia never look back after that.
Air Asias first and main base is the Low Cost Carrier Terminal (LCCT) at Kuala Lumpur
International Airport. Air Asia is widely known as Malaysian low cost airline and even
Asias largest low fare, no frills airline. Air Asia slogan is Now Everyone Can Fly.
LCCT is said to be carried about 10 million passengers a year. The growth of AirAsia is
closely associated with the entrepreneurial effort of Tony Fernandes. Tony was sent to
boarding school in Britain by following in his fathers footsteps into the medical
profession. (The History of AirAsia) During accounting degree at the London School of
Economics, he had other ideas and went into music publishing, first with Virgin, then
Time Warner. He had his mind-set to start airline when he was watching the telly in a pub
about EasyJet running down the national carrier, British Airways. The idea of a low cost
carrier was attracting to him. He had no idea what a low cost carrier was but he still
wanted to start an airline that flew long flight with low fares. He get amazed on how
people were flying to Barcelona and Paris for less than 10 pounds, then he decided to
start a low cost airline. He met with Conor McCarthy, former operations director of
Ryanair and then they developed a plan to form a budget airline serving the South-East
Asia market. Former Prime Minister Mahathir Mohammad encouraged Fernandes to
acquire a struggling government-owned airline, AirAsia. They acquired AirAsia that
carrying debts of RM40million with only RM1 with their own capital and support from a
group of investors. In January 2002, AirAsia was re-launched with just three planes and a
business model from McCarthy which are, Ryanair operational strategy, a Southwest
people strategy, and an EasyJet branding strategy. Fuelled by rising prosperity in
Malaysia and a large potential market for leisure and business travellers seeking
inexpensive domestic transportation, AirAsias domestic business expanded rapidly. In
January 2004, AirAsia began its first international service from KL to Phuket in Thailand
and tap into Singapore market in February 2004 and then began flights to Indonesia in
2
Sept 2014
2005. And now AirAsia become one of the successful airlines in the world. Fernandes
had set his sights on long-haul travel from the beginning. However, this risked his good
relations with the Malaysian government because it put AirAsia into direct competition
with the national airline, Malaysian Airlines. Hence, Fernandes established a new
separate company, AirAsia X to run its long haul business separately. (Corporate Profile)
Sept 2014
Financial Ratio for year 2011

Liquidity Ratios
Current ratio =
Total Current Assets

Total Current Liabilities
RM 3,538,400,000
RM 2,194,100,000
= 1.61
Quick ratio
Total Current AssetsInventory

Total Current Liabilities
RM 3,538,400,000RM 19,700,000
RM =2190000000 2,194,100,000
= 1.60
Activity Ratios
Inventory Turnover
Cost of Good Sold

Inventory
RM 2,798,300,000
RM 19,700,000
= 142
Average Age of Inventory
365
Inventory Turnover
365
142
Sept 2014
= 2.6 days
Average Collection Period
Account Receivable
Net Sales/365
RM 121,800,000
RM 4,495,100,000/365
= 9.9 days
Average Payment Period
Accounts Payable
Annual Purchases/365
RM 81,300,000
RM 2,798,300,000/365
= 10.6 days
Total Asset Turnover =
Net Sales
Total Assets
RM 4,495,100,000
RM 13,905,700,000
= 0.32
Financial Leverage Ratio
Debt Ratio
Total Liabilities
Total Assets
RM 9,869,300,000
RM 13,905,700,000
= 70.97%
Times Interest Earned =
Sept 2014
EBIT
Interest
RM 995,900,000
RM 342,300,000
= 2.91
Profitability Ratio
Gross Profit Margin =
Gross Profit
Net Sales
RM 1,696,900,000
RM 4,495,100,000
= 37.75%
Operating Profit Margin =
EBIT
Net Sales
RM 995,900,000
RM 4,495,100,000
= 22.15%
Net Profit Margin
Earnings Available
= Common Stockholders
Sales
RM 555,300,000
RM 4,495,100,000
= 12.35%
Earnings per Share
Sept 2014
Earnings Available
Number of Shares Outstanding
RM 555,300,000
2,780,000,000
= RM0.20
Earnings Available
Return on Total Assets = Common Stockholders

Total Assets
RM 555,300,000
RM 13,905,700,000
= 4%
Return on Equity
Earnings Available
Total Equity
RM 555,300,000
RM 4,036,400,000
= 13.76%
Market Ratio
Price Earnings Ratio =
Market Price Per Share of Common Stock

Earnings Per Share
7
Sept 2014
RM 3.31
RM 0.20
= 16.55
Market/Book Ratio
Market Price Per Share of Common Stock

Book Value Per Share of Commonc Stock
RM 3.31
RM 1.45
= 2.28
Sept 2014

Liquidity Ratios
Current ratio =
RM 3,397,200,000
RM 2,391,600,000
= 1.42
Quick ratio
RM 3,397,200,000RM 23,700,000
RM 2,391,600,000
= 1.41
Activity Ratios
Inventory Turnover
RM 3,216,000,000
RM 23,700,000
= 135.7
365
135.7
= 2.7 days
RM 96,300,000
RM 4,946,100,000/365
= 7.1 days
RM 65,100,000
RM 3,216,000,000 /365
= 7.4 days
Sept 2014
RM 4,946,100,000
RM 15,728,800,000
= 0.31

Debt Ratio
RM 10,868,400,000
RM 15,728,800,000
= 69.10%
RM 1,103,800,000
RM 377,300,000
= 2.92
Profitability Ratio
RM 1,730,000,000
RM 4,946,100,000
= 34.98%
RM 1,103,800,000
RM 4,946,100,000
= 22.32%
Net Profit Margin
RM 789,600,000
RM 4,946,100,000
= 15.96%
10
Earnings per Share
Sept 2014
RM 789,600,000
2,780,000,000
= RM0.28
Return on Total Assets =
RM 789,600,000
RM 15,728,800,000
= 5.02%
Return on Equity
RM 789,600,000
RM 4,860,400,000
= 16.24%
Market Ratio
RM 3.26
RM 0.28
= 11.64
Market/Book Ratio
RM 3.26
RM 1.75
= 1.86
11
Sept 2014

Liquidity Ratios
Current ratio =
RM 2,923,200,000
RM 2,573,200,000
= 1.14
Quick ratio
RM 2,923,200,000RM 29,500,000
RM 2,573,200,000
= 1.12
Activity Ratios
Inventory Turnover
RM 3,641,100,000
RM 29,500,000
= 123.4
365
123.4
= 3 days
RM 126,000,000
RM 5,111,800,000/365
= 9 days
RM 71,900,000
RM 3,641,100,000 /365
= 7.2 days
12
Sept 2014
RM 5,111,800,000
RM 17,856,100,000
= 0.29

Debt Ratio
RM 12,855,200,000
RM 17,856,100,000
= 72%
RM 892,800,000
RM 426,800,000
= 2.09
Profitability Ratio
RM 1,470,700,000
RM 5,111,800,000
= 28.77%
RM 892,800,000
RM 5,111,800,000
= 17.46%
Net Profit Margin
RM 362,100,000
RM 5,111,800,000
= 7.08%
13
Earnings per Share
Sept 2014
RM 362,100,000
2,780,000,000
= RM0.13
RM 362,100,000
RM 17,856,100,000
Return on Total Assets =
= 2.03%
Return on Equity
RM 362,100,000
RM 5,000,900,000
= 7.24%
Market Ratio
RM 2.73
RM 0.13
= 21
Market/Book Ratio
RM 2.73
RM 1.80
= 1.52
14
Sept 2014
Interpretation of AirAsia Financial Ratio Analysis

Liquidity ratios provide information about the firms ability to meet its maturing
obligations. A greater liquidity ratio represents less risk for creditors. Shareholders prefer
lower liquidity ratio so that assets can used to expand the company (Financial Ratio
Analysis). The current ratio and quick ratio of AirAsia for the three years period is more
than 1, which mean it has sufficient current asset to cover debt. The range between
current ratio and quick is not big because AirAsia is a service industry which have small
amount of inventories that provide low liquidity values.
Activity ratio also name as asset turnover ratio. It used to show how efficient a
firm utilizes its assets. The average age of inventory for AirAsia in three years period is
around three days. This shows that the outflow of inventories happens quickly in AirAsia,
reducing the amount of stagnant assets in its company. The average payment and
collection period of AirAsia happens between seven to eleven days, which indicates that
the inflow and outflow of cash with these debtors and creditors are relatively flexible and
fast. Total asset turnover ratio of AirAsia throughout these three years is around 0.3. This
means that every ringgit of assets generates 30 cent of sales and shows that it is not very
efficient in its use of assets.
Financial leverage ratio such as debt ratio indicates the solvency of firm to its
long term obligation. The debt ratio of AirAsia is around 70% so the firm has enough
assets to cover the debt. However the times interest earned ratio for year 2011 and 2012 is
around 2.9 while it is 2.1 for year 2013. In other words, AirAsia afford to pay its interest
expenses but year 2013 is more risky compare to the previous years because it has a
lower ratio.
Profitability ratio shows the firms ability to generate profits on sales, assets and
stockholders investment. Gross profit margin and operating profit margin of AirAsia are
around 30% and 20% respectively, which means that it had high value of cost of goods
sold and operating costs to run the business. However the net profit margin is between
7% and 16%. Since the average net profit margin in the major airline is 5.6%, then
AirAsia is exceeding the industry standard (Industry Summary). The earning per share is
15
Sept 2014
dependent to the net profit. On the other hand, the return on total assets show the net
income produced by the total assets. Then the return on equity measure the profit
generated from the shareholders investment. These returns on asset and equity are all
positively related to the net profit.
Market-based ratio indicates the markets perceptions of a firms performance and
risk. The price earnings ratio of AirAsia is between 11 and 21. This means the stock is
trading at multiple from 11 to 21. Market/Book ratio measures how much a company is
worth in comparison of capital invested by the shareholders. The M/B ratio for year 2011,
2012 and 2013 are 2.28, 1.86 and 1.52 respectively. (Yahoo Finance)
16
Sept 2014
Financial performance
Throughout the years of 2011 to 2013, AirAsia had many changes and challenges.
Having a current ratio of 1.61 in year 2011 and 1.14 in year 2013, it indicates its liquidity
has decreased along with its quick ratio from 1.60 to 1.12. AirAsia cannot meet its
intermediate obligation as efficiently as before.
In addition, its inventory turnover rate has decreased from 142 to 123.4 in year
2013. There was a period in year 2013 when AirAsia had a very quick average collection
period which was 7.4, but it eventually went back to a reading of 9 in year 2013.
However, the average payment period for AirAsia has decreased from 10.6 in year 2011
to 7.2 in year 2013, which means that it has the ability to pay its debt quicker.
The AirAsias debt ratio has not changed much in the years, ranging around 70%,
but its times interest earned has decreased drastically from 2.91 to 2.09, showing a poorer
performance in this aspect. Moreover, AirAsias gross profit margin in year 2011 was
37.75% but dropped to a mere 28.77% in year 2013. Even with other factors included, we
can see its net profit margin has also been lowered from 12.55% to 7.08% in year 2013.
These unfortunate changes can be seen from its earning per share Rm0.20 in year 2011 to
Rm0.13 in year 2013. Though, AirAsia has had notably a very positive performance in
year 2012 as its net profit margin once rose up to 15.96% and its earning per share of
RM0.28.
AirAsias price earnings ratio was 16.55 in year 2011, despite some of its bad
performance, its price earnings ratio went up to 21.00 in year 2013. This might be a
scenario where investors are expecting AirAsia to be doing well near in the future as the
average market price earnings ratio is 20-25 times.
Overall, AirAsia has its liquidity, activity ratio and profitability dropped after
these 3 years but its leverage and market ratio has improved a lot. Apparently, investors
are still expecting a bright future for AirAsia.
17
Sept 2014
18
Sept 2014
Conclusion
Years
Evaluatio
n
Time Series
2011-2013
Ratio
2011
2012
2013
Overall
Liquidity
Current ratio
1.61
1.42
1.14
Ok
Ok
Quick ratio
1.6
1.41
1.12
Ok
Ok
Inventory
turnover
Average
collection period
Average payment
period
Total assets
turnover
Debt
142
135.7
123.4
Ok
Ok
9.9 days
7.1 days
9 days
Ok
Ok
10.6 days
7.4 days
7.2 days
Ok
Ok
0.32
0.31
0.29
Ok
Ok
Debt ratio
70.97%
69.10%
72%
Poor
Poor
Times interest
earned ratio
Profitability
2.91
2.92
2.09
Ok
Ok
Gross profit
37.75%
margin
Operating profit 22.15%
margin
Net profit margin 12.35%
34.98%
28.77%
Ok
Ok
22.32%
17.46%
Ok
Ok
15.96%
7.08%
Ok
Ok
Earning per
share(EPS)
Return on total
assets(ROA)
Return on
common
equity(ROE)
Market
Price/earnings
(P/E) ratio
Market/book
RM0.20
RM0.28
RM0.13
Ok
Ok
4%
5.02%
2.03%
Ok
Ok
13.76%
16.24%
7.24%
Ok
Ok
16.55
11.64
21
Good
Good
2.28
1.86
1.52
Ok
Ok
Activity
19
Sept 2014
(M/B) ratio
According to the table, an overall result of financial ratio is good. Other than that,
the data shows the liquidities are not flows good, because the ratio is decreasing from
years 2012 to year 2013. Next, the profitability of the company is also decreasing at year
2013. It may be the problem of the management, and it effect the wealth of the
shareholders is reducing. Price / earnings ratio shows in the table is increasing. The ratio
increasing mean the management have expecting high earning growth in future and the
amount of investor willing to pay per ringgit of earnings. After that, the debt ratio of the
company is increasing. It is not a good sign for a company. Follow with the debt ratio is
increasing, the profit of the shareholder and investor are reducing.
Based on all of above, investors should buy stock because in the table has shown
that price/ earnings ratio is increasing which mean the management have expecting
higher earnings growth in future. Therefore, investors should trust that the stock price
will increase in the future and willing to invest into the business. Hence, the liquidity of
the company will increase and company has more funds to expand their business. After
expand the business, the profit of the company will also increase and lead to increasing of
shareholders profit.
20
Sept 2014
Reference
(n.d.). Retrieved October 2, 2014, from Yahoo Finance:
http://finance.yahoo.com/q/hp?
s=5099.KL&a=11&b=31&c=2010&d=11&e=31&f=2013&g=m
Corporate Profile. (n.d.). Retrieved October 5, 2014, from AirAsia:
http://www.airasia.com/my/en/about-us/corporate-profile.page
Financial Ratio Analysis. (n.d.). Retrieved October 2, 2014, from
myaccountingcourse.com accounting training for the rest of us:
http://www.myaccountingcourse.com/financial-ratios/
Industry Summary. (n.d.). Retrieved October 2, 2014, from
https://biz.yahoo.com/p/sum_qpmd.html
The History of AirAsia. (n.d.). Retrieved October 3, 2014, from inkling:
https://www.inkling.com/read/contemporary-strategy-analysis-grant7th/case-9/the-history-of-airasia
21
Sept 2014
Appendixes
22

FM1 Assignment - AirAsia

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

FM1 Assignment - AirAsia

Uploaded by

Copyright:

Available Formats

BA205 Financial Management 1

BA205 Financial Management 1

BA205 Financial Management 1

BA205 Financial Management 1

Financial Ratio for year 2011

Total Current Assets

Total Current AssetsInventory

Cost of Good Sold

BA205 Financial Management 1

BA205 Financial Management 1

Times Interest Earned =

Operating Profit Margin =

Net Profit Margin

BA205 Financial Management 1

Earnings per Share

Return on Total Assets = Common Stockholders

Market Price Per Share of Common Stock

BA205 Financial Management 1

Market Price Per Share of Common Stock

BA205 Financial Management 1

Financial Ratio for year 2012

BA205 Financial Management 1

Total Asset Turnover =

Financial Leverage Ratio

BA205 Financial Management 1

Earnings per Share

BA205 Financial Management 1

Financial Ratio for year 2013

BA205 Financial Management 1

Total Asset Turnover =

Financial Leverage Ratio

BA205 Financial Management 1

Earnings per Share

Return on Total Assets =

BA205 Financial Management 1

Interpretation of AirAsia Financial Ratio Analysis

BA205 Financial Management 1

BA205 Financial Management 1

BA205 Financial Management 1

BA205 Financial Management 1

BA205 Financial Management 1

BA205 Financial Management 1

BA205 Financial Management 1

You might also like