Ratio Anaylysis On Airport

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Introduction

Ratio analysis is a prominent tool, which examines the financial statements of the company. Furthermore, this data is useful for all the stakeholders especially investors who often make their decision on the basis of net profits, turnovers, liquidity, solvency, and efficiency. However, these are some prominent ratios, which determine the financial position of any company. The report brings out a discussion on financial analysis based on a specific tool named “ratio analysis.” The impact of company performance is not limited to internal influences or change in amounts of items of financial statements. Re-opening of prices has remained a time consuming process because it is questionable. As several changes in materiality in terms of legal and political changes (Zolfani, Yazdani, and Zavadskas, 2018). There is an existence of regulatory and requesting investment, which can help company to cope with pricing. Auckland airport is largest airport, which operates one terminal building for international flights and other for domestic flights. Each major airline, which serve New Zealand`s customer wholly operates in Auckland Airport. It is well connected to rest of the world with the help of domestic flights. The vision to be amongst New Zealand organisation, which has been identified as the world leader while creating modern airports. The organisation is publically registered in Australian and New Zealand, which has more than 50000 shareholders (Walmsley et al., 2018).

Ratio analysis of Auckland airport

Liquidity analysis

Liquidity position states that whether the company is able to pay off current liabilities or not. This comprises of bills payable, bank overdraft and short-term loan and its timely payment. On the other hand, current assets include the bills receivables; cash in hand, cash at bank, and advances.

Source:- (Check the appendix attached)

The ideal ratio for current ratio is 2:1, which indicates that the company should maintain two times of current assets to one current liability (Zolfani, Yazdani, and Zavadskas, 2018).

Auckland airport generates .06 in 2015, .06 in 2016, and 1.32 in 2017, which is not at near to standard ratio of current ratio. There is a greater need to improve the current ratio by increasing current assets so that incurring current liabilities can be repaid in an appropriate way. Furthermore, reasons of lower current ratio includes no sufficient funds while paying current liabilities. The resources concern of business has not been used properly. In order enhance the current ratio; the company can increase the sales, which will increase the pace for inventory as well as result in fast payment (Mei, Fei, Zhilong, and Jinghua, 2018).

Profitability analysis

Profitability ratio indicates that how efficiency the company generates good proportion of profits in relation to total revenues. The standard ratio reflects 20 percent, which is higher ratio to contribute to shareholders.

The prominent ratio includes net profit ratio, gross profit ratio, operating profit ratio, return on total assets, and return on capital employed to examine the profitability situation of the company (Auckland Airport, 2019).

From the above analysis, it is seen that. The ideal ratio for return on total assets 15-20 percent. It interprets the generation of profits by employing total assets. The ratio proportion shows that the company is not able to generate appropriate net profits by employing total assets, which means it is using assets in an efficient way. For 2015, it generates .06 percent, .01 percent in 2016, and .06 percent in 2017. The company should appropriately use the assets by increasing sale because there is no way to save the machines from fixed deprecation each year (Wang, and Wu, 2017).

Operating profit margin can be decreased because of reduction in higher costs of goods sold. The supplier increasingly raise profitability margin. Higher COGS, increase in interest expense, and increase in amount of deprecation negatively affect the profit margin. For 2015, operating profit margin generates 12 percent, which shows it is near to standard ratio. For 2016, the company suffers from a loss of .03 percent and at last, the company suffers from 6 percent of operating profit (Auckland Airport, 2018).

There is a greater need to improve the overall profitability situation of the company so that it can attract the investors. The data shows that direct costs associated with the services of Auckland is quite higher. A lower net profit margin can mean that company uses ineffective cost structuring with poor price strategies (Auckland Airport, 2017). Lower ratio will lead to inefficient management and high costs. Furthermore, there is an opportunity to increase and improve the operating profit by increasing sales. With the increasing profitability, it would be good for the organization to sustain in long run.

The return on equity is the measurement of the performance, which is calculated by considering the net income to the shareholder`s equity. ROE considered to measure how effectively management has been using asset in order to create profits. High ROE indicates that company is quite efficient in employing its capital to generate maximum profits (Auckland Airport, 2016). Auckland airport generates 8 percent of return on equity for 2015, and 1 percent of return on 2016, and finally a return of 7 percent in 2017. The profitability situation of the company is quite poor for the company due to several external and internal risks such as political risks, economic risks, and legal risks. This lead to decrease in profitability situation (Auckland Airport, 2015).

Solvency ratio

Solvency ratio is the indication of how efficiently the company employs its capital structure with appropriate proportion. Furthermore, it ensures that the company is able maintain appropriate amount of debt as well as equity to minimise the long-term risks of the company. Two prominent ratios include debt equity ratio and interest coverage ratio to determine the associated risks to the shareholders (Limbong et al., 2018).

An interest coverage ratio determines the current earning capacity before the insufficient to provide servicing the debt outstanding (Walmsley, Walmsley, Varbanov, and Klemeš, 2018). Lower red flag for the investors where it can a warning for the company as a sign of impending to high bad debts. When interest coverage ratio is nearly 1.5 and lower the capability of the company to accomplish and meet the interest obligations (Auckland Airport, 2018).

On the other hand, a higher ICR indicate that the company is able to pay off its interest expense several times and it ensures that there is no default in paying loans. From the above graphical description, it is seen that for 2015, the company is able to pay six times of interest expense (Csikosova, Janoskova, and Culkova, 2019). For 2016, the company is not able to pay off its interest amount, as its operating profit is also negative. Furthermore, in 201, the company has increased its efficiency in paying its interest amounts, as it is not quite efficient as compared to pay off its interest as regular as in 2015 (Auckland Airport, 2017).

The ideal ratio for 2:1 implies that the company has been maintaining its capital structure in an appropriate way. For the Auckland airport company, it is seen that the company is able to maintain in its both capital structure named as debt as well and equity. For 2015, it has the proportion of .31:1 of debt-equity ratio. For 0.29 of the debt equity ratio for 2016 and finally .32 for 2017 (Auckland Airport, 2017). Furthermore, more long-term loans will lead to high level of interest imposition on profits finally; shareholders will have to bear high financial risks. It can lead to higher risks of bankruptcy. For Auckland, there is a need to increase debt so that total equity holders cannot have higher level of interest in the decision-making (Limbong et al., 2018). Nonetheless, company could easily cover its business interest charges by increasing its profitability.

Efficiency ratio

Efficiency ratio comes up with examination of efficiency of total assets, total inventory, and total cash management to generate maximum value to the company. The concept related to operational efficiency, which are being reflected by the efficiency ratios (Meikandaan, Hemapriya, and Bist, 2018). This ratio is being used as a metric as the efficiency of the profits in regards to the operational costs. It has been influenced by several factors such as administration fees, transactional costs, and management fees. It measures the effectiveness of general business practise such as managing inventory, making payment, and receiving payment (Auckland Airport, 2017).

From the above graph and analysis, cash cycle comes up with calculation of cash flows, which tries to examine the exact time and convert the investment into inventory with other resources into input into cash (Auckland Airport, 2016). It is calculated on the basis of three important parts such as days in inventory, days in payable, and days in receivable. Company`s cash conversion cycle can be negative that could mean, where organisation is able to generate cash from the clients earlier to it is obliged to pay off inventory (Auckland Airport, 2015). For the Auckland international, the company constitute only receivables not creditors. The ratio shows that it`s cash conversion cycle is consists of only bills receivables.

Days in receivables, is an outstanding as the day’s receivables, which has been used by organisation calculating and then estimating size of outstanding B/R (Abdullah, and Malik, 2017). A higher ratio will always indicate that the company will face severe issues and problems in converting sales into cash. This reflects that suppliers are not capable to getting the material neither he is aware of making payment on the regular basis. Therefore, the company can take strict actions, which can help them improve the days in receivables (Abdullah, and Malik, 2017).

Recommendation

As a recommendation, it is seen that as per the current strategies made of the future, there is a higher change of getting higher profits in long term because gradually it will show a sign stable profits after 2017. On the other hand, there is a greater need to improve and enhance the position of the company (Auckland Airport, 2016). It is important to maintain debt-equity ratio as it can increase the risks of the shareholders otherwise highly leveraged organisation can suffer from the probability of bad debts, which reduces the risks of expose and dispersion of power of the shareholders. It will lead to excessive imposition of power in decision-making and there will not any proper planning of strategic goals (Auckland Airport, 2016). Furthermore, company has to maintain its liquidity position of 2:1 so that it will be able to maintain its current assets to an appropriate level by increasing the sales, current receivables, prepaid, advances, cash, and bank. Investing in highly leveraged company is not at all safe (Wang, and Wu, 2017).

There is a greater need to improve the profitability situation by increasing the sales, decreasing direct expenses, and reducing the indirect expenses associated with the loans. On the other hand, return on equity is not all attractive; I think there is a greater need to fund the operations of the company so that it can invest in the company and generate revenues at the same time. The company can build its brand image amongst its suppliers, customers, and lenders by making continuous payments to the whole system (Banerjee, Guha, and Bandyopadhyay, 2016). Top-level management must be committed to CSR strategies where it leads to dedication towards the waste management. As local government already supports by funding and investing in the capital projects where SBC green zone as a vehicle can collaborate with the issues related to waste streams. Furthermore, the company can develop local processing ability to achieve higher costing issues related to waste streams. The company can create a strategic alliance with another company so that it can expand its market share as well its offerings, which can finally increases revenue of the company by using effective resources of another collaborator, the company can continuously lead to offer services to customers of world and create its brand name. Management should make effective e strategies and plans to eradicate the operational issues by employing talented workforce in the company. Management can check the regular performance of the company by employing performance management and balance scorecard to generate maximum efficiency of the workers and motivate them to work well. In order to induce them towards fair work and appropriate code of conduct, the company will conduct meetings and introduce monetary incentives as well (Limbong et al., 2018).

Conclusion

After assessing all the details, it could be inferred that if company is having the strong profitability then it should keep higher financial leverage with a view to lower down the cost of capital. Nonetheless, in the given case, it is found that company is having the good profitability and company could easily increase the debt capital to reduce the cost of capital with the strong ability to cover its interest charges. A higher ratio will always indicate that the company will face severe issues and problems in converting sales into cash. This reflects that suppliers are not capable to getting the material neither he is aware of making payment on the regular basis. The company can create a strategic alliance with another company so that it can expand its market share as well its offerings, which can finally increases revenue and sustain in long run.