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Analyze Financial Performance Air Asia Five Most Popular Ratios Finance Essay 1.

Introduction
Air Asia Berhad is one of Malaysia's most famous companies. It is the country's first low cost carrier and it uses a business model that was initially unheard of in the region but is now being adopted by rivals. For a relatively new company, AirAsia has come very far , especially considering the problematic airlines industry. It has won numerous awards and accolades and the company has sustained strong passenger growth in spite of all odds. AirAsia operates along a business model that eliminates all frills and unnecessary costs. Yet it has not been all that rosy for 2008 was a bad year for the company that saw massive losses in spite of passenger growth. Ratio analysis is a useful tool in evaluating the financial performance of a company. Different ratios are used for different purposes but the overall objective is to find out more information that can be gleaned from the annual reports to help the uses make decisions. The purpose of this report is to analyze the financial performance of AirAsia using five of the most popular classes of ratios to determine whether there are any weaknesses in the company and how they could be remedied.

2. Analysis
2.1 Liquidity Ratios The liquidity of a company is measured by the degree to which it can meet its short term obligations. Liquidity implies the ready ability to convert assests into cash or to obtain cash. A lack of liquidity may mean that the company is unable to meet its current debts and obligations. The liquidity rations for AirAsia are as follows: YEAR 2005 2006 2007 2008 2009 CURRENT 5.60 1.82 1.64 1.09 1.30 ACID TEST 5.57 1.81 1.62 1.08 1.29 CASH 2.11 0.67 0.65 0.25 0.09

The current ratios measures the degree to which current assets cover current liabilities. The higher the amount of current assets in relation to current liabilities, the greater the assurance that these liabilities can be paid out of such assets. The current ration of AirAsia declined steadily from 2005 to 2008 and it is 1.3 times in 2009. This might indicate that the company has some short term cash flow problems, though we cannot jump to conclusions because this might be the industrial norm for airlines. The acid test ratio is a refinement of the current ration in that it excludes inventories in its measure of liquidity. Because AirAsia does not hold significant amounts of inventory, its acid test ratios are marginally lower that its current ratios. The most liquid of current assests is cash. The cash ratio is the proportion that cash and cash equivalents constitute of the total current assets group. The higher the ratio, the more liquid is the currents asset gropu. This in turn, means that there is minimal danger of loss in value in case of liquidation as there is no declining over the years. This is a bit worrisome as the company may be strapped for cash should there be unanticipated rises

in short term obligations. 2.2 Activity Ratios The return of total asset depends on getting the largest profit out of each ringgit of sales and obtaining the highest possible amount of sales per dollar of invested capital. The following are the activity ratio of AirAsia: YEAR ASSET TURNOVER 2005 2006 2007 2008 2009 0.69 0.55 0.41 0.37 0.32 DEBTOR COLLECTION PERIOD 153 94 124 88 84 SALES TO CASH 2.02 2.51 2.69 6.72 20.34 SALES TO FIXED ASSETS 2.67 0.76 0.48 0.38 0.34 NET WORKING CAPITAL 0.93 2.04 2.74 17.52 6.13

The intensity with which assets are utilized is measured by means of assets turnover ratios. The assets turnover ration of AirAsia is not that high and in fact, it has been declining over the years. This means that the asset utilization has deteriorated. The debtor collection period indicates the length of time it takes for average debts to be collected. The debtor collection period of AirAsia has gone down in the past three years, meaning that the company is able to collect its debts faster. The sales to cash ratio measures the amount of sales relative to cash. Too high a rate turnover may be due to cash shortage that can ultimately result in a liquidity crisis if the enterprise has no other ready sources of funds available to it. Too low a rate of turnover may be due to the holding of idle an unnecessary cash balances. AirAisia's sales to cash ratio has been increasing dramatically in recent years and this further illustrates the cash flow problems it might experience if this trend continues.

The sales to fixed assets ratio measures the sales generated by fixed assets. While the relationship between fixed assets is a logical one on a long term basis, there are many short term factors that may upset this relationship such as excess capacity or inefficiency. The sales to fixed assets ratio for AirAsia have been declining over the years. The net working capital ratio shows the amount of sales generated for each ringgit of working capital. Ideally, this should be as high as possible. AirAsia's net working capital ratio was low from 205 to 2008 before increasing sharply in 2008 and then falling to 6.13 times. This shows wide fluctuations in working capital management. 2.3 Stock Markets Ratio Stock market ratios are important because they demonstrate the effectiveness of the company to investors. The stock market ratios for AirAsia are as follows: YEAR 2005 2006 2007 2008 2009 EARNINGS PER SHARE 0.05 0.18 0.21 -0.21 0.21 PRICE/EARNINGS RATIO 30.00 9.17 7.24 -7.43 4.19 NET TANGIBLE ASSETS 0.41 0.49 0.89 0.67 0.95

The earnings per share (EPS) ratio show how much investors could potentially earn for each unit of stock. The EPS for AirAsia showed a good increase from 2005 to 2007 but 2008 was a bad year for the company. In 2009, the EPS was the same as for 2007. However, these do not translate into actual dividends for shareholders because AirAsia's policy is not to pay out dividends. This is because the company would like to reinvest its earnings and it may pay dividends once the company has matured. The price/earnings ratio demonstrates the earnings potential of a company. Higher price earnings ratios benefit a company in many ways for example being able to raise capital inexpensively and in its ability to use common stock to pay for acquisitions. The downside is that stock price is largely dictated by emotions so bad news could wipe out

potential gains. AirAsia's P/E ratio has been declining over the years and with the exception of 2008, 2009 saw the lowest P/E ratio yet. The net tangible asset (NTA) ratio shows the amount of net tangible assets there are for every unit of ordinary shares. The NTA ratio of AirAsia increased from 2005 to 2007 and fell in 2008 before picking up in 2009. 2.4 Leverage Ratios Leverage ratio show the amount of leveraging employed by a company and gives more information about its capital structures. The leverage ratios for AirAsia are as follows: YEAR DEBT TO EQUITY 2005 2006 2007 2008 2009 0.00 0.92 1.63 4.11 2.90 LONG TERM DEBT TO EQUITY 0.00 0.69 1.50 3.78 2.70 INTEREST COVER 2.53 Nil Nil -0.64 2.43

The debt to equity ratio means the amount of debt the company has for every ringgit of equity. Higher debt to equity means that the owners have a smaller stake in the enterprise than do all creditors. In 2005, AirAsia had no debt but its debt to equity ratio rose significantly after that. In 2008, it was 4.11 times, meaning that the company had RM4.11 debt for every RM1 of equity. Clearly, this is a very dangerous situation, which is why the company took steps to lower its debt to equity ratio in 2009. The long term debt to equity ratio measures the relationship of long term debt to equity capital. A ratio in excess of 1 : 1 indicates a higher long term debt participation compared to equity capital. From 2007 onwards, this was the situation at AirAsia indicating that the raises more funds through debts rather than equity. This may be due to its lackluster share performance which makes it less attractive to investors.

The interest cover shows the margin the company has in terms of profit compared with its interest payments. The ratio is important for creditors as its indicates whether the form is able to settle its interest payments easily. The interest cover of AirAsia in 2005 was 2.53 which is average. In the next two years, it had no interest payments but in 2008, it had problems due to its net loss. The next year, the interest cover was 2.43 times.

3. Sales Revenue Trends

YEAR 2005 2006 2007 2008 2009

SALES (RM Mil) 666 1,071 1,603 2,855 3,133

YEAR ON YEAR INCREASE (RM Mil) 0 60.81 49.67 78.10 9.74

% INCREASE FROM 2005 (RM Mil) 0 60.81 140.69 328.68 370.42

AirAsia has been experiencing constant growth in sales and customers since its inception. Year on year growth was highest in 2008, but 2009 saw the lowest sales growth. This may be due to increased competition from other low cost carriers and the spillover effects from the global recession.

4. Profit Margins Trends

YEAR 2005 2006 2007 2008 2009

Operating Profit (%) 33.03 6.91 17.40 -12.33 29.14

Net Profit (%) 16.76 18.77 31.07 -17.41 16.15

The operating profit margin is shown instead of the gross profit margin. The net profit margin is shown as well. Normally, the operating margin of a company should be higher than its net profit margin. However, AirAsia has other sources of income which is why its net profit margin was higher than its operating profit margin in 2006 and 2007. Overall, the profit margin of the company fluctuate.

5. Cash Flow Statements


Cash flow statements are prepared to show the receipts and payments of cash and cash equivalents. There are three sources of cash flow which are through operating activities, investing activities and financing activities. Operating cash flows should ideally be inflows but AirAsia had operating cash outflows in 2005 and 2008. In 2006 and 2008, the company had massive investing activities outflow as it purchased assets like planes and upgraded facilities so it had to resort to raising new funds from its financing activities. 2009 saw its best cash flow position to date.

6. Non-Financial Performance
There are a host of non-financial performance indicators that might interest various stakeholders of AirAsia. Employees want to learn more about the initiatives made in building the careers and providing them with a good working environment. Passenger would like to see measures taken to ensure their safety and comfort during flights. The government and non-governmental organizations would like to see how the company acts as a good corporate citizen in its initiatives at giving back to the society. These are but a few of the many non-financial performance indicators that would interest stakeholders.

7. Conclusion and Recommendations


It can be concluded that AirAsia is in fairly good financial position for a relatively new company but it can do much better. Perhaps it would be better benchmark it against more

successful low cost carriers like Ireland's Ryanair, or with an excellent national carrier like SIA. One area that must be singled out for criticism is its poor working capital management which is subject to wide fluctuations. The company also needs to pay closer attention to its precarious cash position and to do more in building up shareholder value. This is critical so that it will be able to gain funds through the capital market in future instead of having to rely on borrowings to sustain growth. It is anticipated that the future would be challenging for AirAsia and he aviation industry as a whole. However, there is reason to be cautiously optimistic about the company long term prospects because it has a good business model and a workforce that is committed to its success.