financial annalysis

Cash Flows

Analyzing a company’s financial is the first step in deciding such an investment decision. In the airline industry, the chosen companies are the top leading companies in the US. Therefore, there are number of methods evaluating the three companies financially such as the followed methods in our analyzing. The first aspect to analyze is the cash activities, which allocated in three main areas, operating, financing, and investing activities. These three areas measure the strength of each company to extend its investments, the ability of each company to meet its obligations, and the financial risks of each company.

From investing point of view, American Airlines tends to be the highest of the three companies in investing. American Airlines spent more the $8.1 billions in short-term investments and about $6.1 billions in capital expenditure and down payment to purchase airplanes. Meanwhile, Delta Airlines in the second place in making investments. The company spent about $2.2 billions in purchasing flight equipment and advance payments. Delta also invest total of $1 billion in short-term investments. The third company is Southwest, which spent more than $2 billions in capital expenditures and $1.9 billions purchasing short-term investments.

From the results of investing activities, American Airlines is considered the only company is growing between the three companies because it is the only company that made new flight purchases and made the highest about of cash in capital expenditures that will have economic value and return in the future. All three companies made a lot of short-term investment, which does not indicate much information about the company’s position because it is not clear how profitable is each investment a company made.

In the financing activities section, Delta Airlines is the highest that used cash because the company paid more than $2.5 billions into long-term debt accounts and capital leases obligations. Delta also spent $2.2 billions repurchasing its common stock. Because American Airline is the highest of the three companies in investments, the company has cash inflow of more than $5 billions from long-term debt. It also repurchased its treasury stock for more than $3.8 billions. Southwest is the lowest of the financing activities and the highest account is that the company repurchased its common stock for more than $1.1 billion.

This section indicates where each company stands in the debts side. This affect investor’s decision especially if the return of a company’s investments is considered low compared to the amount of money spent. Delta Airline used a lot of cash paying off its debt. This can be a good decision to reduce the risks of not meeting the obligation requirement, however, strategically the company could have spent cash on hand making more investments that would have more profits to the company.

The last section of the cash flows is the operating activities. This section provides valuable information about the most important regular operation activities that either provides cash or uses cash. For this study purpose, the attention would be focused at the cash providing items under the operating activities.

American Airline has the most cash provided from the net income for the last three years. Similarly for Southwest where most cash has been provided form the net income. That also applied to Delta Airline. However, Delta Airline’s 10-k shows the highest total cash provided from net income in the last three years. Delta financials shows total of more than $15 billions net income in cash, while American Airline and Southwest have total of about $13 billions net income in cash combined. This actually supports Delta Airline financials and demonstrate a stronger financial position. Depreciation and amortizations are the second highest trend in the operation activities section.

The previous section, the analysis are focused more in the 10-k part. However, cash flow can be evaluated by rations and in fact this method could lead to more valuable and reliable results. Cash flow yield, also referred to cash free ration, is powerful tool in evaluating the efficiency of the company’s performance in generating cash from its current operating activities. In this case, Delta Airline is the highest cash flow yield of 1.75, then Southwest next of 1.48, and the lowest is American Airline’s cash flow yield of 0.82.

Cash flow to sales is also important measures because it demonstrates the ability of a company to convert its sales to cash. In this ration the three companies rations are 19%, 16%, and 15% for Delta Airline, Southwest, and American Airline respectively. Delta Airline is also tends to be the best performance in term of cash. The last important ration in cash is to compare cash to the size of a company’s assets. Even though all three companies rations are relatively low, but Delta is also the highest ration in term of the cash flow to the assets of 15%.

From the cash flow rations, the best conclusion is that Delta Airline is the best company between the three companies from cash flow point of view. Therefore, Delta is considered as the favorable direction for the investment as far as the result from the cash flows. However, there are many different aspects as important as the cash flow to arrive to a reliable decision.

Equity To Earnings

Equity to earnings is area of investors concerns. Therefore, financial analysis must include an overview of this section to evaluate a company’s performance in the equity side of the financials. Starting with percentage of issued stock to the authorized number of shares to each company, the percentages are 53.32%, 40.38%, and 35.7% for Delta, Southwest, and American Airline respectively. Eventually, Delta Airline issued the highest percentage of the legally allowed number of shares, and the same concept applies for the other two companies. There is not a significant difference between the three companies.

For the treasury stock, American Airline has no stock held in the treasury account. Southwest Airline held 19.81% of its issued stock in the treasury stock account. Delta Airline is the least company that held its share into the treasury stock of 2.63% of its total issued shares. The treasury stock is considered as a strategic decision to be taken by management to avoid overwhelming the market with the number of shares, which leads to underprice the shares. These facts do not play a significant role in the decision of the investment.

Because the net incomes vary from each company, the analysis is based in the percentage of cash dividends paid in the recent year of the net income. Southwest Airline paid the highest percentage of its net income as dividends of 8.25%. The second highest is Delta Airline where the company paid 7.93% of its net income, along with American Airline that comes in the last place of 3.66%. However, Delta paid the highest amount as dividends total of $359 millions.

Diluted earnings per share are another method to measure the strength position of a company. There are in fact couple factor that could significantly affect the diluted earnings per share. Diluted earnings per share are calculated by dividing a company’s net income over the weighted average number of shares if all options for preferred stock are exercised and also the convertible security option have been exercised. The first factor and most important one are the revenues of a company. The second important factor is the number of preferred stock and convertible securities. Legal obligation and any type of settlement could also affect the diluted earnings per share. For this case purposes, all three companies are somewhat similar in term of the key factors the drive the earnings per share and diluted earnings per share.

Financial Analysis

The third and last part of the analysis is to cover the basis of each company from different perspectives, such as liquidity, assets management, long-term solvency, profitability, market strength, and cash flow adequacy. In order to implement such analysis, the best method to follow is to calculate number of financial rations, and to apply the horizontal and vertical analysis for each company.

Liquidity is the ability of a company to convert its assets to cash in short notice, a year or less. The higher liquidity ratio indicates better financial position in term of its turnover and cash flow. To measure liquidity, there are three main ratios to calculate, working capital, current ratio, and quick ratio. In term of liquidity, American Airline is the highest between all three companies. The working capital along with current ration is 73%, and 67% for the quick ration.

Asset management is also important tool to evaluate the operation of the company’s efficiency. The most important ratios to evaluate the assets management are account receivable turnover, day’s sales on receivable, inventory turnover, day’s sales on inventory, and assets turnover.

Account receivable turnover calculates the number of times the account receivable has been converted to cash in a period. Southwest Airline is the highest company with large difference in comparison with the other two companies, and its account receivable converted to cash 41.81 times in the last year ended December 31,2015. The second important measure is to assess a company’s management over its receivable using day’s sales in receivable ratio to indicate the number of days that takes the company to collect its receivable. Delta Airline is better than the other two companies in term of managing its account receivables. It takes the company 19.18 days to collect its receivables. The same thing applied to inventory turnover where Delta Airline has the highest inventory turnover because the company has used or sold its inventory for 86.81 times.

For the long-term solvency, it obvious that Southwest Airline is in the best financial position because its fixed assets to long-term liabilities ration is 18.1, which means the company is less dependent on debt to expand its business operation. However, American Airline has the highest profitability rate because the company’s profit margin is 19%, as well as the market strength because American Airline has the highest earning per share. For the cash flow adequacy, apparently Delta Airline in a better position because the company’s cash flow from operation to its sales rate is 19%.

Horizontal & Vertical Analysis

The horizontal analysis illustrates the changes from the previous period to the current period. Mostly, there are no significant changes, but only American Airline cash dropped sharply along with the retained earnings. Meanwhile, Delta’s retained earnings doubled during the current period. Same concept applies for the vertical analysis. Most of the items in the financials seem normal.