BA 620-GroupProject- PART 3 Only

Running Head: ANALYSIS REPORT 1

ANALYSIS REPORT 5

ANALYSIS REPORT

Name

Institution

Instructor

Date

Analysis Report

Introduction

Carnival Corporation boasts as the most successful leisure travel company in the world. It is a publicly listed company and accrues the largest profits compared to its peers in the cruise and vacation industries. This report evaluates the company’s trends by focusing on profitability, liquidity, efficiency and solvency ratios across two financial years; 2018 and 2019. Where there ratios are seen to be deteriorating, plausible recommendations are provided.

Debt Ratio

This ratio depicts the fraction of a company assets financed by debts owed to creditors (Liang et al., 2016). As such it shows a company’s leverage. Carnival Corporation debt ratio increased from 24.51% in 2018 to 25.95% in 2019. This means that the proportion of the company assets financed by debt increased which indicates a deterioration. However, this is a favorable ratio and does not present financial risks for investors (Myšková & Hájek, 2017).

Gross Profit Margin

This ratio is an indicator of the proportion of revenues realized by a company that is above the cost incurred for goods sold (COGS) (Liang et al., 2016). Carnival Corporation’s gross profit margin decreased from 46.40% in 2018 to 41.79% in 2019. This means that COGS increased in 2019 with revenues failing to reflect that increase. The company’s management should consider improving efficiency in the company to reduce costs of production.

Free Cash Flow

Free cash flow is the amount of money that is left for the company after paying for its operating expenses as well as capital expenditure (Liang et al., 2016). Carnival Corporation’s free cash flow decreased from $3,271 to $3,202 2018 in 2019. This is another indicator of decreased efficiency. The management ought to root out inefficiencies in the company’s operations to raise the free cash flow.

Times Interest Earned

This ratio is an indicator of the number of times that a company can comfortably pay its debts with its earnings before tax (Liang et al., 2016). There was a deterioration for Carnival Corporation from 17.14 in 2018 to 16.38 in 2019. This means that the company’s ability to pay date decreased. Increasing efficiency to increase operating income could be an effective solution for the company.

Accounts Receivable Turnover

This ratio shows a company’s ability to effectively issue credit to its customers and the ability to collect its dues from them (Liang et al., 2016). As such it shows the number of times the company collects debts from its customers. The accounts receivable turnover for Carnival Corporation increased from 0.28 in 2018 to 0.38 in 2019 showing that the company was more effective in collecting debt from credit sales in 2019.

Inventory Turnover Ratio

These are the number of times that the inventory was completely sold in a given year (Liang et al., 2016). The inventory turnover increased from 22.49 in 2018 to 28.39 in 2019 for Carnival Corporation which shows the company was able to sell off its inventory quicker in 2019 than in 2018 (Tian & Yu, 2017).

DuPont Analysis

Return on Sales

This ratio is an indicator of how efficiently a company turns its sales into profits. The ROS for Carnival Corporation decreased from 0.16 in 2018 to 0.14 in 2019. Increasing efficiency in operations would be key for the company to improve its ROS (Liang et al., 2016).

Asset Turnover

ATO measures how efficiently a company uses its assets to generate income. The ATO for Carnival Corporation increased from 0.44 in 2018 to 0.46 in 2019 indicating improved efficiency (Liang et al., 2016).

Return on Assets

ROA measures the profitability of a company relative to its asset (Liang et al., 2016). The ROA for Carnival Corporation decreased from 0.074 in 2016 to 0.066 in 2019 showing deteriorating profitability. Again, more efficient use of company assets could improve the company’s ROA going forward (Tian & Yu, 2017).

Financial Leverage

Financial leverage measures the amount of debt that is used by a company to finance its operations. The financial leverage of the company increased from 0.25 in 2018 to 0.26 in 2019 showing an increase in the amount of assets financed through debt (Liang et al., 2016). As such, this shows an increased risk of inability to pay debt. The company ought to reduce debt financing to ensure that its assets are in a strong position to pay off debts owed to its creditors.

Return on Equity

ROE measures the profitability of a company relative to its equity. Again it indicates how efficiently a company’s management uses the assets to make profits (Liang et al., 2016). The ROE of Carnival Corporation decreased from 0.074 in 2016 to 0.066 in 2019 showing deteriorating profitability in the company’s operations. As such, the company needs to put in place policies that enhance efficient use of corporate assets.

Conclusion

The analysis shows an overall deteriorating trend for Carnival Corporation from 2018 to 2019. The root cause of this deterioration is decreased efficiency. As such, it is up to the company’s management to improve efficiency in operations to reduce costs and to ensure better usage of company assets.

References

Liang, D., Lu, C. C., Tsai, C. F., & Shih, G. A. (2016). Financial ratios and corporate governance indicators in bankruptcy prediction: A comprehensive study. European Journal of Operational Research, 252(2), 561-572. Retrieved from https://www.sciencedirect.com/science/article/pii/S0377221716000412

Myšková, R., & Hájek, P. (2017). Comprehensive assessment of firm financial performance using financial ratios and linguistic analysis of annual reports. Journal of International Studies, volume 10, issue: 4. Retrieved from https://www.ceeol.com/search/article-detail?id=607109

Tian, S., & Yu, Y. (2017). Financial ratios and bankruptcy predictions: An international evidence. International Review of Economics & Finance, 51, 510-526. Retrieved from https://www.sciencedirect.com/science/article/pii/S1059056017305348