Financial statement analysis

You are asked to analyse two airline companies namely, British Airways and Virgin Atlantic. Both Companies have their headquarters in the United Kingdom. You will use the 2017 and 2018 Financial Reports in your analysis.

You are working as an intern at McAllen’s Consulting firm and have been engaged by a partner to work on valuating the shares of both companies. You have learned Financial Statement analysis in the Financial Accounting 3 module and decided to put your knowledge to test. You feel that you can help your client on making an informed decision on whether to diversify their investment portfolio by buying shares in either of the airline companies. Your report should include the following (these are just suggestions so you may follow them or come up with a different structure for your report):

REQUIRED (Assessment tasks and criteria): %age of available marks

  1. Purpose and Scope: Who is asking for the analysis?

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 a) What is the purpose of the analysis?

b) What main sources you can use?
c) Any limitations which impact upon your analysis, such as a lack of specific information (such as financial statements from more than two years previously)?
d) Any key issues which need resolving, such as any currency conversion or jurisdictional issues when reviewing competitors?

  1. Background: Start with some history of the industry and the company being analysed.

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a) Overview of the industry, marketplace and product base, including its history and how it got to its current state.
b) Date of incorporation of the company, its ownership pattern and changes to this over time
Key events during its history,
Its structure, i.e. divisions / major component companies if it is a group,
Does it trade domestically, or internationally?
Does it have operations overseas?
From where is the company controlled?
How diversified is its income stream?
Where is the company investing and divesting of business? Where is it expanding and where is its closing down operations?

  1. Critical success factors: Provide a framework for the financial and comparative analyses which will come later, the following prompt questions might be useful; a) How easy is it for new entrants to develop in the industry?
    How powerful are suppliers?
    How diversified is the customer base?
    Can companies differentiate their products? (Does the company being examined achieve differentiation? On what basis?)
    How influenced by economic downturn? Upturn?
    b) Is infrastructure important? Is it costly?
    Is the infrastructure highly specialised?
    Is there a high R&D spend?
    Do companies have a high working capital requirement?
    Are there economies of scale?

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 c) Is the product life cycle long or short? (How does the company’s product portfolio look in terms of product life cycle?) 

Are there any regulation impacts, e.g. on price?
Are companies able to exploit vertical integration advantages within their group?
Are costs primarily fixed or variable?
d) Are there costs subject to significant change?
How seasonal is the business?
What is the ownership pattern of the company?
Is the company able to exploit cost advantages?
Is the company able to differentiate its product positively?
Are there any other key factors for success in the industry?

  1. The Financial Statements:
    Comparisons with another or other companies can be made in this section, but shouldn’t detract from your main analysis of the company under review. Concentrate on points of real difference and try to identify why companies might be performing differently.

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a) Total Income and Profitability
How total revenue has changed over the last few years. Check whether there are any underlying reasons such as acquisition or sale of subsidiary businesses or divisions, and check for varied sales performance by different operating divisions.
How profitability has changed over the last few years.
Net and Gross profit margins and EBITDA margin if your comparison company(s) is based in a different country.

 b) Returns to Investment

What has the company’s dividend policy been?
How does the company perform in terms of key ratios such as ROCE and ROE?
How do the two companies compare to each other?
c) Asset Management
Does the company have high non-current assets? There will probably be some explanation in the Notes to the Accounts as to what these are.
What investments is the company making in capital items (remember to check the cash flow statement in the company’s report to identify the extent of capital expenditure, and these may be more fully explained in the Notes to the Accounts
What is the level of working capital (working capital vs sales)? Has this changed over time?
What is the working capital requirement?
What are inventory days?
What are trade payables days?
What are creditor days?
How do these compare with competitors?

 d) Solvency

How does the current ratio look?
Acid test?
Month’s cover?
Comparisons with competitors?

 e) Debt

Have there been movements in levels of debt in the examined year and in recent years? Remember this will be summarised in the company’s cash flow statement and in the Notes to the Accounts. What is the debt being used for?
What does gearing look like, using an appropriate gearing measure?
How does it compare with competitors?
Is interest cover sufficient?
Look at the detailed note to the accounts which summarises the long term debts which the company has (if it has a lot of debt). Does it face a big cash outflow in a future year? Is debt secured against assets?
The Cash Flow statement will confirm outflows from debt repayment and cash inflows from taking on debt.

 f) Cash Flow

What is the balance of cash flow for the year after dividend payment?

  1. Conclusion: Presentation (see below). Also, seesubmission instructions below. 10

TOTAL
100

Presentation
Your report including all your calculations must be written in a Word file Do not use appendices – all calculations, tables and charts must be fully integrated and embedded within your Word file.

In your report, endeavor to write in proper sentences and paragraphs. Keep the style formal and simple. Before submitting your work, make sure that you proof-read and edit it properly for correct spelling, grammar and syntax.
Your Word file must use the following layout and format: Arial OR Times New Roman, font size 12, single-spaced, with 1 inch (or 2.5cm) margins (left, right, top and bottom). Include a page number in the footer.

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