AirAsia Financial Analysis Essay
AirAsia Financial Analysis
Corporate governance is commonly known as the policies, practices or procedures a company implements to protect the financial interest of individuals. Publicly held companies are primary users of corporate governance because they sell stock to shareholders, who own the company. Several layers of management exist in these organizations, requiring shareholders to demand a high amount of accountability. A well balanced framework of accountability that is based on clear communication and understanding of roles and responsibilities across the organisation. A robust performance, financial, risk and information management systems. High standards of conduct of members of the organization. Organisations with a consistent corporate governance have the ability to maintain high-quality services and improve their performance as well. Good governance in organisations when based on openness, clarity and honest accountability enhances public trust and civic engagement.
Individuals who do not put the company’s interest ahead of their own self-interest may be subject to dismissal. This ensures that everyone understands that punishments exist for failing to honestly and objectively inform shareholders about the company’s financial health. Before investing in a company it is vital to understand what it does, its market and the industry in which it operates. You should never blindly invest in a company. Financial analysis is a process that evaluates businesses, budgets, projects, and entities for analysis purpose. It is done for the purpose of determining the suitability for investment in a business.
There several mainly focuses on the process used to direct and manage the business and affairs of the company with the objectives of striking a balance on:
The attainment of the company’s objectives.
The alignment of corporate behavior to meet the expectations of shareholders.
Accountability and good stewardship, taking into consideration theinterests of shareholders, stakeholders, corporate participants and society at large.
Financial analysis is to analyze the stability, solvency, liquidity, and profitability of a business.
In order to these, mathematical calculations involving figures extracted from the financial statements are used and known as financial ratios mainly to get an idea of a company’s valuation and financial performance.
3. BACKGROUND OF COMPANY
Air Asia was established in 1993 and commenced operations on 18 November 1996. It was originally founded by a government-owned conglomerate DRB-Hicom. Air Asia Berhad is the only Malaysian-based low cost airline and also a pioneer of low- cost travel in Asia. The main hub is the low-cost carrier terminal (LCCT) at Kuala Lumpur International Airport.
Originally, it was founded by a DRB-HICOM which is the government owned conglomerate. Then, Tony Fernandes’s company which is Tune Air Sdn. Bhd. bought the company on the 8 September 2001 with estimation of RM 40 million debts.
The operations of Air Asia began on 8 December 2001 until now. There are many continuous transformations that Air Asia makes in order to succeed, to achieve its strategic mission and vision and also to sustain in the industry. In Southeast Asia, at that time, Air Asia Malaysia was considered as one of the most well known budget airlines and operating in many Asian countries. Air Asia has considerate advantages over other airlines in many ways. Firstly, its experience of being in this industry for long time contributes to the already established service standard, operational expertise, infrastructure readiness, as well as bargaining power with suppliers.
4. MCCG practices of the company to reduce ageing problem .
The most commonly known financial ratios are :1) Liquidity Ratios 2) Activity / Efficiency Ratios
3) Leverage / Debt Ratios
4) Profitability Ratios
Listed below is Hua Yang Bhd Annual Report for the financial year ended 31 st March 2012 Company Profile:Hua Yang Berhad (Hua Yang) is a national property developer listed on the Main Market of Bursa Malaysia Securities Berhad and started it’s business on December 28th 1978 with a private limited company under the name of Heng Po Sdn Bhd. Later it was changed to Hua Yang Development Sdn Bhd on March 10th, 1979. From there, Hua Yang established a solid reputation as a trustworthy, responsible and reliable developer. After years of significant growth and expansion, the name was changed to simply Hua Yang Sdn Bhd on September
4th, 2001. Very soon after, the company was listed on the Main Board of Bursa Malaysia on November 29th, 2002 . √
Hua Yang’s principal activities consist of investment holding, property development and provision of management services. Its subsidiary companies currently are involved in investment holding, provision of management services, property development and building construction. The property development activities of the Hua Yang Group are currently being undertaken on their land bank which are located mainly in Klang Valley, Perak and Johor and for more than 30 years, Hua Yang have built reputation in providing and delivering quality and passion to the public. The Group intends to continue to focus on affordable segment with innovative packages and to position itself as one of the leading property brands in the market. The targeted market will be towards young adults who are looking to own their first property and our priority is to fulfil their needs and expectations. √ As norm, an investors will look into the possibility of :1)
Measures of Liquidity Ratios
Liquidity ratios are the ratios that measure the ability of a company to meet its short term debt obligations. These ratios measure the ability of a company to pay off its short-term liabilities when they fall due√.
Current ratio indicates a company’s ability to meet short-term debt obligations and whether or not a firm has enough resources to pay its debts over the next 12 months√. Cash ratio (also called cash asset ratio) is the ratio of a company’s cash and cash equivalent assets to its total liabilities and indicates the extent to which readily available funds can pay off current liabilities√. Potential creditors use this ratio as a measure of a company’s liquidity and how easily it can service debt and cover short-term liabilities. The quick ratio is a measure of a company’s ability to meet its short-term obligations using its most liquid assets (near cash or quick assets) and is viewed as a sign of a company’s financial strength or weakness; it gives information about a company’s short term liquidity√. The ratio tells creditors how much of the company’s short term debt can be met by selling all the company’s liquid assets at very short notice. Working capital is the amount by which the value of a company’s current assets exceeds its current liabilities and can be known as net working capital. Working capital is frequently used to measure a firm’s ability to meet current obligations√. It measures how much in liquid assets a company has available to build its business.
1(a) Current ratio = current asset / current liabilities = 204,157,713 / 69,918,017
Appendix B & C = 2.919 #√
1(a)(i) Cash ratio = cash and cash equivalents (Note 18) / Current Liabilities = 25,161,722 / 69,918,017
Appendix E & C = 0.359 #√
1(a)(ii)Quick ratio = (current assets- inventories (Note 20) ) / current liabilities = (204,157,713 – 4,944,598 / 69,918,017
Appendix B & C = 2.849 #√
1(b)Net working capital = current asset – current liabilities = 204,157,713 – 69,918,017
Appendix B & C = 134,239,696 #√
The current ratio indicates Hua Yang Berhad had RM2.9 in short term resources to service every ringgit of current debt which is by most standard would be considered as stable and strong√. The cash ratio of 0.359 is considered acceptable but the company need to monitor the ratio not to go too high as this will results less readily available funds to pay off it’s service debt and cover it’s short term liabilities√. This will end up in poor asset utilization for a company holding a large amount of cash on it’s balance sheet. The quick ratio which is 2.849 shows that the company is in good position and can currently pay back it’s current liabilities and a positive sign for investors and partners√. An amount of RM134,239,696 the balance of net working capital indicates Hua Yang Berhad is able to pay off it’s short term liabilities. In general the company can expand and improve their operations. √
Measures of Activity /Efficiency Ratios
Activity /Efficiency Ratios compare the assets of a company to its sales revenue. Asset management ratios indicate how successfully a company is utilizing its assets to generate revenues√. They indicate the ability of a company to translate its assets into the sales. There are three most widely used activity ratios that is :
Accounts receivable turnover
Total asset turnover
2(a) Accounts receivable turnover
= Annual sales / Accounts receivables
= Revenue (Note 4) / Trade & other receivables (Note
= 306,412,023 / 57,470,676
Appendix A & B
= 5.33 #√
2(b) Inventory turnover
= Annual sales / Inventory
= Revenue (Note 4) / Inventory (Note 20)
= 306,412,023 / 4,944,598
Appendix A & B
= 61.969 #√
2(c) Total asset turnover
= Annual sales / Total asset
= Revenue (Note 4) / Total asset
= 306,412,023 / 447,123,762
Appendix A & B
= 0.685 #√
Analysis:The turnover figure of 5.33 shows how many times, on average, account receivables are collected and this is considered favourable. The company turned it’s receivables over about 5.3 times, in a way each dollar invested in receivables supported RM 5.33 in sales. A figure of 61.96 for Hua Yang Berhad reveals its goods were bought and sold out of inventory about 62 times a year√. Generally, the higher the turnover figure, the less time an item spends in inventory and thus, the better the return the company is able to earn from funds tied up in inventory. A low total asset turnover figure of 0.685 suggests that the corporate resources are not being well managed and that the company is not able to realize a high level of sales from its asset investment.
Measures of Leverage Ratios / Debt Ratios
Financial leverage ratios/debt ratios measure the ability of a company to meet its financial obligations when they fall due and it usually compare the debts of a company to its assets√. This ratio indicate the ability of a company to repay principal amount of its debts, pay interest on its borrowings, and to meet its other financial obligations. They also give insights into the mix of equity and debt a company is using.
3(a) Debt-equity ratio
= long-term debt / stockholders’equity
= Borrowings ( notes to financial statement Note 27 ) / total equity
= 97,279,602 / 268,257,236
Appendix F & C
= 0.362 #
= 36.2 %√
3(b) Times interest earned
= earnings before interest and taxes(EBIT) / interest expenses = profit before tax (Note 8) + finance cost (Note 7) / interest expenses
= (72,503,423 + 762,082) / 762,082
= 96.138 #√
Analysis:The debt equity ratio of this Hua Yang Berhad is reasonably low and shows that the company capital comes from its owner√. It means that there was only 36.2 percent of debt capital structure for every dollar of equity√. If the ratio is increasing , most likely the company will be in dangerous trend and it will not attract investors. Thus, a high debt equity ratio may not be able to attract lending capital too√. Times interest earned or Interest coverage ratio figure shows 96.1 means that the company has RM96.13 to cover every ringgit of interest expense which is very strong and high. On the other hand, a high times interest earned suggest that the company is “too safe” and is neglecting oppurtunities to magnify earnings through leverage. √
Analysis:Net profit margin is 17% means that Hua Yang Berhad has return on sales was 17 sen on the ringgit which is considered quite good√ . Return on asset figure shows 12% which is above the average reveals the company ‘s management effectivenesss in generating profits from assets√ . Return on equity (normally known as ROI or return on investment) figure of 20% shows annual payoff to investor. It is quite a desirable sign and consider stable for the company. √
Hua Yang Berhad was listed in the market of Bursa Malaysia Securities Berhad on 29th November 2002. Through out the years Hua Yang shows a positive growth and develop proggressly .It increasingly gained mileage as a noteable developer . As a brand, Hua Yang slowly but surely gained the confidence of investors . Take a look on the graph below for the past five years group financial highlights.
Investors may consider in seing a modest improvement in the liquidity position. The current ratio remains well above the standard. √ The activity measures indicates that although receivables and inventory turnover are gaining and improving but a low total asset turnover figure of 0.685 suggests that the company resources are not being well managed and that the company is not able to realize a high level of sales from its asset investment.
The leverage position of Hua Yang Berhad seems not so good. The debt equity ratio of this
Commented [U1]: Contradicted with the above analyses
Hua Yang Berhad is reasonably low and shows that the company capital comes from its owner. It is suggested that the company must impove and take a deep look into this matter for future risk debts. The overall profitability pictures a desirable sign and consider stable for the company√.