SriLankan Airlines is one of the prestigious brand names functioning in airlines industry since a very long time. But in past few years its conditions, especially economic conditions have weakened due to various aspects. It is due to this reason that SriLankan Airlines has asked for assistance in certain domains in order to make sure that various operations could be rectified. For this purpose an in-depth financial analysis of this organization is performed in this report that will present clear picture of the company and its financial position.
Profitability
Return on capital employed= net profit before tax & interest/ (share capital+ reserves+ long- term debt)
Net profit/ (loss) before tax & interest (2010) = Rs. (2,673.91)
Net profit before tax & interest (2009) = Rs. (9,269.15)
Share capital (2010) = Rs. 5,146.35
Share capital (2009) = Rs. 5,146.35
Reserves (2010) = Rs. 1,168.34
Reserves (2009) = Rs. 1,101.77
Long-term debt (2010) = Rs. 7,155.76
Long-term debt (2009) = Rs. 476.31
Return on capital employed (2010) = (2,673.91) / (5,146.35 + 1,168.34 + 7,155.76)
= (0.2)
Return on capital employed (2009) = (9,269.15) / (5,146.35 + 1,101.77 + 476.31)
= (1.38)
When we look at the return over capital employed, we come across a fact that returns have increased in 2010 as compared to 2009. This can be said from the figures calculated above, i.e. 0.2 in 2010 and 1.38 in 2009. When only numerical values are observed 2009 returns are greater, but in both these years returns had been negative thus less loss is better which in year 2010.
Profit Margin
Profit Margin = net profit before tax & interest / revenue (turnover)
Net profit/ (loss) before tax & interest (2010) = Rs. (2,673.91)
Net profit before tax & interest (2009) = Rs. (9,269.15)
Revenue (2010) = Rs. 62,363.58
Revenue (2009) = Rs. 73,307.77
Profit/ (loss) margin (2010) = (2,673.91)/ 62,363.58
= (0.043)
Profit/ (loss) margin (2009) = (9,269.15)/ 73,307.77
= (0.126)
Profit/ (loss) margin are calculated by comparing profit or loss after tax with total revenue generated in that year. Similar to previous case, here also SriLankan Airlines is making loss and not profit. But the loss margin made in year 2010 is less as compared to loss margin made in year 2009 which can be considered to be as appositive sign for the organization as its conditions are improving.
Asset utilization ratio
Asset utilization ratio= revenue/ (share capital+ reserves+ long-term debts)
Revenue (2010) = Rs. 62,363.58
Revenue (2009) = Rs. 73,307.77
Share capital (2010) = Rs. 5,146.35
Share capital (2009) = Rs. 5,146.35
Reserves (2010) = Rs. 1,168.34
Reserves (2009) = Rs. 1,101.77
Long-term debt (2010) = Rs. 7,155.76
Long-term debt (2009) = Rs. 476.31
Asset utilization ratio (2010) = 62,363.58/ (5,146.35 + 1,168.34 + 7,155.76)
= 4.63
Asset utilization ratio (2009) = 73,307.77/ (5,146.35 + 1,101.77 + 476.31)
= 10.9
Asset utilization ratio depicts the efficiency that how company is able to use the assets that it posses. Asset utilization ratio has decreased deliberately from year 2009 to 2010. In 2009 it was 10.9 while in 2010 it dropped down to 4.63. This signifies that there is a reduction in appropriate utilization of assets possessed by the organization from 2009 to 2010.
Efficiency
Stock (inventory) turnover period
Stock (inventory) turnover period = stocks (inventories)/ cost of sales *365
Inventories (2010) = Rs. 3,709.03
Inventories (2009) = Rs. 4,029.26
Cost of Sales (2010) = Rs. 62,044.06
Cost of Sales (2009) = Rs. 76,606.48
Stock (inventory) turnover period (2010) = (3,709.03 / 62,044.06) * 365
= 22 days
Stock (inventory) turnover period (2009) = 4,029.26 / 76,606.48
= 19 days
Stock turnover period represents the stocks that an organization possesses over the cost of sales. This period should be optimum in order to make sure that company have enough time before its stocks could be termed as empty. There had also been an increment in number of days, i.e. stock turnover period by 3 days which is a positive sign for the organization.
Debtors turnover period
Debtors turnover period= debtors (trade receivables)/ credit sales * 365
Debtors (trade receivables, 2010) = Rs. 7,952.33
Debtors (trade receivables, 2009) = Rs. 7,142.18
Sales (2010) = Rs. 62,363.58
Sales (2009) = Rs. 73,307.77
Debtors turnover period (2010) = (7,952.33 / 62,363.58) * 365
= 47 days
Debtors turnover period (2009) = (7,142.18 / 73,307.77) * 365
= 36 days
Debtor's turnover period is the time in which debtors will be returning the money to the company. Thus this period should be as short as possible. But in case of SriLankan Airlines, this period has increased deliberately. Thus there should be certain measures that this organization should take in order to make sure that it could reduce this period.
Creditors turnover period
Creditors turnover period= creditors (trade payables)/ account purchases * 365
Creditors (trade payables, 2010) = Rs. 21,068.71
Creditors (trade payables, 2009) = Rs. 24,360.55
Purchases (2010) = Rs. 62,044.06
Purchases (2009) = Rs. 76,606.48
Creditors turnover period (2010) = (21,068.71 / 62,044.06) * 365
= 124 days
Creditors turnover period (2009) = (24,360.55 / 76,606.48) * 365
= 117 days
Creditor's turnover period is the time in which company is going to pay to its suppliers. One of the best aspects in this respect is that there is an increment in this period which gives more time to SriLankan Airlines to make outflow of cash. Another considerable beneficial aspect for the organization is that this company's debtor's turnover period is considerably less than creditor's turnover period which is a basic need for the company.
Liquidity
Current ratio
Current ratio= current assets/ current liabilities
Current asset (2010) = Rs. 15,910.82
Current asset (2009) = Rs. 15,008.38
Current liabilities (2010) = Rs. 28,399.92
Current liabilities (2009) = Rs. 25,012.31
Current ratio (2010) = 15,910.82/ 28,399.92
= 0.56
Current ratio (2009) = 15,008.38/ 25,012.31
= 0.6
There should be a balance that has to be retained between current assets and current liabilities of the organization. This is depicted through current ratio. This ratio has also decreased minutely which is not a good sign for the company. Company should make efforts in order to retain this ratio as ideal ratio is close to 1. This shows that balance between current assets and current liabilities is distorted during 2010. (Liquidity Ratios)
Quick ratio
Quick ratio= (current assets - inventories)/ current liabilities
Inventories (2010) = Rs. 3,709.03
Inventories (2009) = Rs. 4029.26
Quick ratio (2010) = (15,910.82 - 3,709.03)/ 28,399.92
= 0.43
Quick ratio (2009) = (15,008.38 - 4,029.26)/ 25,012.31
= 0.44
Quick ratio is the ratio that represents quick assets as compared to current liabilities. This ratio had been maintained not exactly but in approximately. this ratio is also one of the important ratios that organizations look after in term of their liquidity such that in case of emergency SriLankan Airlines is not forced to take any unwanted steps and sell its non-current assets against its will. (Liraz)
Gearing
Gearing Ratio = Debt / Equity
Debt (2010) = Rs. 7,155.76
Debt (2009) = Rs. 476.31
Equity (2010) = Rs. 3,598.43
Equity (2009) = Rs. 6,230.06
Gearing Ratio (2010) = 7,155.76 / 3,598.43
= 1.99
Gearing Ratio (2009) = 476.31 / 6,230.06
= 0.076
Gearing represents debt: equity ratio which has to be retained at a desired position in order to make sure that financial position of the company is retained in the market in order to make sure that it could further raise funds whenever required. If company is in too much debt, it is not providing optimum returns to its shareholders, while if it has too much equity, its shareholders are exposed to high level of risk. Thus there is a need to maintain optimum ratio in this regard. When conditions in year 2009 and 2010 are analyzed, we come across the fact that in 2009, its shareholder's are exposed to too much of the risk as its gearing is 0.076, while in 2010, it's gearing has increased remarkably and making gearing ratio almost 2. Here returns to shareholders have decreased below certain limit.
Horizontal Analysis
2009
2008
Change
% Change
Non - Current Assets
Property, plant & equipment
Major overhauls & upgrade
Aircraft maintenance reserve
Intangible asset
Investments
2488.94
9,988.61
4,704.73
212.86
93.92
2,821.49
9,109.53
3,509.99
193.52
95.9
-332.55
879.08
1,194.74
19.25
-1.98
-11.79%
9.65%
34.04%
10%
-2.06%
Current Assets
Inventories
Trade & other receivables
Aircraft maintenance reserve
Investments
Cash & bank balances
4,029.26
8,986.30
1,194.24
-
2,642.70
3,804.13
11,738.55
2,768.51
6,856.41
7,042.07
225.13
-2,752.25
-1,574.27
-
-4,399.37
5.92%
-23.4%
-56.86%
-
-62.47%
Total Assets
34,341.56
47,940.10
-13,598.54
-28.4%
Equity & Liabilities
Stated Capital
Reserves
Accumulated profit/(loss)
5146.35
1,101.77
(18.06)
5146.35
1,101.77
9,287.88
0
0
-9,305.94
0%
0%
-100.2%
Non-Current liabilities
Interest bearing liabilities
Other deferred liabilities
4.44
3,094.75
20.14
3,249.07
-15.7
-154.32
-77.95%
-4.75%
Current Liabilities
Trade & other payables
Income tax payables
Interest bearing liabilities
24,360.55
175.45
476.31
28,026.01
175.45
933.43
-3,665.46
0
-457.12
-13.1%
0%
-48.97%
Total Equity & Liabilities
34,341.56
47,940.10
-13,598.54
-28.36%
Revenue
73,298.45
79,128.56
-5,830.11
-7.4%
Cost of Sales
76,606.48
72,119.34
4,487.14
6.22%
Gross Profit/ (loss)
(3,308.03)
7,009.22
-10,317.25
-147.2%
Other incomes & gains
2,044.08
7,020.57
-4,976.49
-70.9%
Sales & Marketing cost
5,791.39
7,811.50
-2020.11
-25.9%
Administrative Expenses
2,396.99
2,223.17
173.82
7.8%
Finance Cost
128.40
41.96
86.44
206%
Finance Income
311.58
501.60
-190.02
-37.9%
Profit/ (loss) before tax
(9,269.15)
4,454.76
-13,723.91
-308.1%
Income tax expense
36.79
26.53
10.26
38.7%
Profit/ (loss) for the year
(9,305.94)
4,428.23
-13,734.17
-310.15%
For horizontal analysis, we took 2008 as the base year and changes over the period of one year had been depicted in absolute as well as percentage format.
When total assets are analyzed in this period, there is a drop of 28.4% from year 2008 to 2009. At the same time there is also a decrease in total equity & liabilities possessed by the organization with a factor of 28.36%, which could also be considered to be as the base reason for slight decrease in current as well as quick ratio.
This discussion when focused over revenue generation, we observe that there is a decrease of 7.4% in the total revenue that are being generated by the organization, also at the same time its cost of sales had also risen by 6.22%. Also there had been massive decrease in Gross profit/ loss and other income and gains with stats showing 147.2% and 71% respectively.
There are certain other costs involved with the organizational functioning, like sales & marketing cost, administrative cost, and finance cost. Changes in these entities are quite uneven in nature like in case of sales & marketing cost; there had been a reduction pattern, while at the same time other costs like administrative cost and finance cost have increased by 7.8% and 206% respectively. Also when finance income is scrutinized, we come across the fact that it is lowered by a factor of 38%.
Finally when overall profits are taken into account, distinct figures come into consideration, i.e. profits of SriLankan Airlines have reduced by a factor of over 300% which is significantly bad for any organization. If these conditions prevail for longer time, it existence would definitely become difficult. (Horizontal Analysis or Trend Analysis, 2009)
Vertical Analysis
2010
2009
Revenue
62,363.58
73,307.77
Operating Expenditure
69,026.74
84,794.86
Loss before tax
2,673.91
9,269.15
Net loss for the year
2,698.20
9,305.94
Total assets
44,442.57
34,341.56
Shareholders' Funds
3,598.43
6,230.06
Vertical analysis is performed taking total assets as base unit.
Revenue has certainly come down from previous year despite of the fact that there is an increase in assets that are owned by SriLankan Airlines. This could be due to improper use of assets that has resulted into lower returns from market point of view.
Similar is the case with expenditure also, but as it is outflow of money, reduction in this factor is considered to be as good for the Airlines.
An important aspect that is considered to be as remarkably good for the organization is reduction in losses. Losses before tax have come down from Rs. 9305.94 million to Rs. 2698.2 million. This justifies appropriate usage of resources or assets present within the organization. On a similar basis, there had also been a decline observed in the net loses of the Airlines which is a good sign for the company.
Finally there had been a decrease in shareholder's funds also, which means that company had utilized a large portion of the fund to acquire more assets and change gearing of the company according to their need. This has raised the assets of the company at cost of shareholder's fund which could be justified from the decline observed in losses incurred to the SriLankan Airlines. (Vertical Analysis and Common Size Statements, 2009)
Assumptions
Some of the assumptions that are made in order to avoid discrepancies while performing the calculations include,
There in no clear data available regarding credit purchase, thus all the purchases are categorized in this segment to carry out calculations of credit turnover period.
There is also a lack of information about sales that is done on debit, thus similar assumption is also done for using this figure to calculate debit turnover period.
Recommendations
Following are some of the recommendations that are highly required by SriLankan Airlines in order to make sure that worsening of its conditions could be restricted.
It should take initiatives in concern to its liquidity ratio (especially current ratio) in order to make sure that it does not faces short term liquidity crises as it is one of the basic reasons that can bring even highly profitable companies down.
It should look after utilization of its assets in a better manner as there had been a dip observed in the assets possessed by the Airlines in 2009 as compared to 2008 which is not a good sign for a company competing in international market.
SriLankan Airlines should also take care of its accumulated loss as it has increased deliberately. If it is not controlled, it could cause Airlines to face problems in coming time period.
Despite of reduction in assets, there was a depreciation observed in revenue generated by the Airlines, which is not an optimum result.
There is also an increase observed in debit turnover period from 2008 to 2009, which SriLankan Airlines should try to reduce as it will directly help in shrinking its liquidity problem.
Its credit turnover period is quite appreciable and it should take required measures to retain that period as it is beneficial for the company to hold money as long as possible to maintain its liquidity position.
Conclusion
When situation of SriLankan Airlines is analyzed in a brief manner, it is realized that its conditions has improved as compared to previous years, but when an in-depth analysis of the situation is performed, we come to know a fact that there are only few domains in which its conditions have improved. SriLankan Airlines has not been able to recover from losses on a complete basis that it had faced in past few years. Like in terms of overall loss incurred to the Airlines had reduced from 2008 on a consequent basis, but there are certain other parameters that have also degraded along with time which rather should had been retained if their augment was not possible.
With the support that is provided by Etihad Airlines, it has to make sure that it is able to revive in minimum possible time as the fierceness of competition is increasing on a regular basis with any exception in this particular sector. Also the scope of more revenue generation is developing with market opening up after a long time, which has to be utilized by the Airlines. But first SriLankan Airlines has to take of its liquidity problems that it is facing in present scenario due to continuously decreasing assets. If rate at which its assets are decreasing is not brought under control, it will be highly difficult for the company to tackle the level of competition pertaining in the market.
Also its profits are negative (i.e. loss) since 2008, which should be rectified as it is not possible for any organization to survive for longer period without generating any profits through its operations and also functioning in international market.
