Jazeera airways has shown a remarkable growth in net profit with the annual net profit increasing by94% during 2008.Although the net profit percentage in 2005 was a healthy 11.62 it deceased in 2007to 6.59 but then showed a increase in 2008 where it was 9.13.The profit margin for Air Arabia in the same period was 13.50 and then in 2007 was 35.09 and then in 2008 was 24.67%.The main cause of upward swing in Jazeera is the increased in profit by 94% in 2008 compared to 200.However getting too optimistic about the company based solely on increase in profit is misleading as closer analysis on the income statement revels two very interesting facts
- Thought the increase in profit of Jazeera was 94%, its revenue increased by 40.32% while the operating expenses increased by 51.43%
- The second interesting fact is that Jazeera had some gains on sale of its fixed asset that contributed 5564392 K.d which effected the total profit of the airline for that year
So even the profitability of the Airline seems higher in this year does not mean that it is contributed by increase in revenue but also with non operating activities of the airline like gain on other income and fixed asset sale, whereas the increase in gross profit has decreased due to higher operating expense.
Return on Equity =
The Roe of Jazeera airways declined in the year 2006 from 25.58% to 13.3% it showed a renewed growth in 2008 where the returns were 17.44%.For the same period Air Arabia return showed continuous decline from 78.88%in 2006 10.84% in 2007 to 9.79% in 2008.The decrease in 2007 can be attributed to the rights issued during that year which amounted to 9,998,860 which increased the stockholders equity. The increase in ROE can be assigned to the fact that there is a decrease in borrowing and the rate of capital employed is greater than the rate at which the company is borrowing. The growth in ROE of Jazeera with air Arabia shows a healthy trend but the Jazeera's non- operating gain should also be kept in consideration as a considerable profit of the company comes from it to get a holistic idea of company earning capability.
The comaprative analysis of the return on asset of Air Arabia and Jazeera shows that even though in the intial year their was a huge gap between Air Arabia and Jazeera ,with Air Arabia showing a return of 37.20% while Jazeera showed just 9.99% .however in the subsequent year the returns of Air Arabia fell drastically 6.19% the return of Jazeera too fell down however the decline was lesser than that of Air Arabia and then in the following year 2008 Jazeera shows an increment in returns as it incresed to 11.01% while Air Arabia continued to show a downward trend as the return fell in second year running to 5.16%.Even though the gross profit of jazeera has fallen for year 2008 due to increase in operating expenses the increse in return is primarily linked to following:
- its non operating income which increased by 613% and the decrese in asset by 12% which are the main force in driving this ratio so high
- the other force could be the increse in the asset turover ratio for each successive year,while low profit margin contribute in lesser operating profit.
Generally investors would like to see the ROA falling no lesser than 5% (Dobbins, R., 1993) and the fact that Jazeera ROA is at 11.01 % can hardly be satisfying to investors on closer analysis of the financial statement.
Current Ratio 1
The current ratio of Jazeera Airways has consistently been below 1 in the year 2006 it was .22 in 2007 it increased to.33 and in 2008 it was.72 , which are not a good sign and means that compnay has been consistently facing problem of meet its short term liabilities.The the financial analysis is done with Going Concern Concept basis as Board of Directors and the mangment expects the cas flow position to continulally improve and the group to continually improve and the group to continually receive financial support from shareholders and lenders.Even though the current ratio is increasing but still is dangerously below 1:1 ratio.However there is a decrese in current ratio of Air Arabia from 2007 in 10.42 to 2008 in 4.34,but still this ratio remains above a healthy 2:1 ratio.This trend may indicate that the airline industry is facing a liqidity crunch that may be attributed to the current recession .The problem with Jazeera in meeting its cueent liabilities can be attributed to :
- The current asset excluding the non currentasset held for sale in 2008 as the revenue from it can not be attributed to the operation of organization ,has increased by 193.4%, the increase in the current liabilities are also very high to 192.54% compared to 2007
- The low current ratio may be attributed to the high collection perid although the collection time is reducing for Jazeera compared to Air Arabia but still the company has to increse its effectiveness in revenue generation
RECIVABLES RATIO 1
The account receivable of of Jazeera is better than that of Air Arabia for last two years.Jazeera managed to increse its ratio from 5.34 in 2006 to 23.45 in 2007 and it has remain stable in 2008 at 23.38, in the same period these figures have shown erratic behaviour for Air Arabia from 18.89 in 2006 to falling to 11.54 in 2007 and finally incresing to 21 in 2008.The decrese in the ratio from 2006 to 2007 in Jazeera even though there was increse in revenue by 61% is the increse in account receivables which incresed by 213%.In 2008 the account receivable decreased by 17.5% while the revenue incresed by 40%.This increse in ratio suggest that Jazeera credit
policy and collection policies has improved and this decrese in credit sales has given it more liquidity as compared to Air Arabia which conistently has poor ratio which shows that its credit management and collection policy needs to be redefined and improved
Debt to Asset Ratio
Though there is a continuous decrease in the debt asset ratio from 80% in 2006 to 72 % in 2007 and 62% in 2008 the trend still shows that the companies financial health is critical as its assest are overweighed by the liabilities. Air Arabia trend shows that though in 2006 its ratio was very high at 57.6% but it managed to get it down to 5.7% in 2007 it then increased marginally in 2008 by 8.15%.The Air Arabia liability management is better than Jazeera as shown by the trend. This high ratio can be attributed to the decrease in total asset which fell down by 12% in the current fiscal year, and the main cause of concern is the decrease in non-current assets by 49% which mainly comes from the sale of aircraft and engine which was worth 22, 736, 643, which can not only decrease its assets but also affect its revenue generating capabilities. Air Arabia has a better ratio as most companies would prefer a ratio below 50%.Therefore the more debt compared to asset which Jazeera has; the more leveraged it is and the more riskier it is.
Interest Coverage Ratio
Interest Coverage Ratio
The interest coverage ratio shows an interesting fact that EBIT for both the companies has fallen down from 2006 to 2007. While in Air Arabia this fall is more prominent as the ratio fell from a healthy 30.49 in 2006 to -1.75 the fall in Jazeera was significant in the same period from 2.87 to .87 but in the last year 2008 it again showed a increase and reported 3.03% while Air Arabia continues the downward trend by reporting -1.76 interest coverage. The data here suggest that both companies face liquidity crunch and they have major problems in paying out the interest on their loans. The decrease can be due to following factors:
- The EBIT fell by 45% from 2006 to 2007 which caused a sharp decline however it rallied back and the increment in 2008 for EBIT was 249%
- The worrying factor here is the constant increase in the selling, general and administrating expenses which increased by 93% in 2007 and then by 47% in 2008.While the corresponding increase in revenue was 58% in 2007 and 41% in 2008.This continuous increase in these expenses are cutting the profit margin of the company and the company should take concrete steps in curtailing these cost.
- The finance cost bared by the company increased in 2007 by 44% and in 2008 company issued more rights to the market which means higher liabilities to the company in form of dividends as the investors would expect a higher rate of return and this is reflected by the comparison of earnings per share of Jazeera. The continuous decrease in this ratio has two fold effects; first it makes the company a very risky venture to invest in, secondly if the banks offer loans to the organization the interest charged on it would be higher than the market rate to higher risk factor associated with it which further would decrease its ratio until the company starts generating more revenue and decrease its operating expenses.
This organization has shown a continuous increase in its gross profit over the last four years. The increase in gross profit is a good indicator of how well the organization is running and it promises growth. This organization is still in developing stage and its revenues and gross profit can be increased with increase in lucrative investments by which it can fuel growth and can establish domination in its market.
The cost of revenue has been consistent with increase in the revenues except for 2008 where the revenues increased by 157% compared to last year but in the same period the cost of revenue has increased by 182.5%.The organization should try and investigate the reasons behind it and curb any non-value added cost by which the company can help to increase in its profit.
Revenue Gross profit Cost of sales
Jazeera Airways has also shown an increasing trend in major indicators. The increase in revenue shows a promising growth. The growth in cost of sales is in proportion with increase in revenue, however the increase in operating cost has led to fall in gross profit, which shows that Jazeera still need to reduce it operating cost.
While the % change in revenue has fallen from 61% in 2006-2007 to 40% in 2007-2008 the operating expenses have increased from 11% in 2006-07 to 51.43% in 2007-08.this has been the major cause in the reducing the gross profit from 11% in the same period to -9.3% in 2007-08.The increasing debt structure also indicates that they are going into more debt structure .Jazeera must take concrete steps to increase its operating efficiency as this trend will hamper the growth of the company.
Revenue Gross profit Cost of sales
Using the balance sheet it is observed that the total assets of Jazeera reduced by 12% while the total liabilities decreased by 24% which shows a strong factor in the growth of the company. The decrease in asset is mainly contributed due to decrease in non current asset which reduced by 49.2 as compared to last year. This reduction was due to two aircrafts and engines which were a part of lease and buy back agreement which is expected to be completed by July 2009.Another cause of concern for Jazeera is even though the total liabilities of the company has decreased by 24% the current liabilities have increased by 192.5% which indicates that the company might be facing liquidity crunch. This highlights the fact that the management debt management system is not working and the treasurer should take some immediate steps in improving the debt structure.
However on the upside the account receivables for the company has increased by 5275% and the account receivable turnover over the three years has increased and it has managed to decrease its collection time, which indicates that the company credit and collection policy is becoming more effective.
Percentage increase for Jazeera
When looking at the income statement we see there is an increase in sales by 40.32% which indicated that more and more people are using the airlines. However the problem over here is that even though there is a healthy increase in the revenue but the increase in the operating expenses has increased by 52% which is more than the increase in the sales and this translates into a negative gross profit. The analysis of the income statement highlights a very interesting trend that though the gross profit has decreased by 9.3% the net profit of Jazeera has increased by 94%.This figure can be misleading as the total non operational income has increased but this increase is due to the sale of fixed asset and the return on other investing activities has remain same or changed slightly.
While looking at Air Arabia balance sheet the results are comparable to Jazeera Airways. The Total Assets of the organization has increased by 10% however the current asset have reduced by 35.2% the main cause of which is the decrease in bank balance by 40.5% which can be attributed to the expansion of fleet for which they have signed contract with Airbus for 10 more aircrafts, this has lead to increase in the non current asset of the company 72.6%.
As with Jazeera, Air Arabia also is facing the problem of increasing liabilities where the current liabilities have increased by 56.5% the major driver behind which is the payment to trade and other parties which has increased y 177% and total noncurrent liabilities have increase by 56%.This indicates that even air Arabia is facing liquidity crunches.
Percentage increases in Air Arabia
Air Arabia increase in revenue in 2008 has been 157% but same as Jazeera it is facing problem with increase in the operating expenses, which has increased by 182.5% but despite this increase in the cost of sales unlike Jazeera has shown increase in the gross profit by 86% which translated in higher net profit for the year by 81%.This shows a better operations management and cost structure compared to Jazeera.
According to the values,Air Arabia has a higher increase that Jazeera which shows more sales in one year than Jazeera .
When looking at the balance sheet of the both of them, it is easy to realize that Air Arabia is a much larger company dealing with much more money than Jazeera. Even with this fact Air Arabia manages to have larger sales, less bank loans and higher growth within the same span of time.
The larger sales might be due to the fact that Air Arabia has more destinations but the fact as highlighted by the income statement is that though both Air Arabia and Jazeera has shown increased cost of sales but only Air Arabia has managed in having a positive gross profit, while Jazeera shows a loss on gross profit.
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