FIN 2224 University of Malaya Financial Health of Air Asia Berhad Analysis Paper

FIN 2224

University of Malaya


Question Description

I don’t know how to handle this Economics question and need guidance.

The assignment will be in a report format of not more than 2500 words.

the company choose : Airasia

FIN 2224 University of Malaya Financial Health of Air Asia Berhad Analysis Paper
FIN 2224 University of Malaya Financial Health of Air Asia Berhad Analysis Paper
FIN 2224 University of Malaya Financial Health of Air Asia Berhad Analysis Paper

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BAC/BAF FIN 2224 FINANCIAL ACCOUNTING 2 Financial Statements – Ratio Analysis 1 Learning Objective (s) • Highlights on the calculation of ratios, how they can be analysed and interpreted and how results should be presented to the management. 2 Learning Outcome (s) • Students must be able to interpret an entity’s financial statements to give advice from the perspectives of different stakeholders. 3 TOPICS Comparative analysis Tools used in financial statement analysis Horizontal analysis Vertical analysis Liquidity, profitability, solvency & efficiency ratios Financial statements analysis A process of selecting, evaluating, and interpreting financial statements data in order to formulate an assessment of a company’s financial condition and performance. These analysis may be used in decision making. COMPARATIVE ANALYSIS ANALYSIS TOOLS •HORIZONTAL (TREND) ANALYSIS evaluates a series of financial statements data over a period of time. •VERTICAL ANALYSIS expresses each item in a financial statements as a percent of a base amount. •RATIO ANALYSIS expresses the relationship among selected items of financial statements data. HORIZONTAL ANALYSIS Changes are measured against a base year with the following formula. Change since base period Current year amount — Base year amount ——————————————————————— Base year amount VERTICAL ANALYSIS Financial statement elements are measured as a percent of the total. Balance Sheet Income Statement Elements are a percent of total assets Elements are a percent of total sales VERTICAL ANALYSIS 10 Ratio Analysis - Definition and Concept • Financial ratio is mathematical explanation of the relationship between two items and is used to interpret the business account. • A tool to provide unique picture and understanding of a company’s financial position such as the strengths and weaknesses of a company. • To make a ratio meaningful, both figures used must have a logical or cause and effect relationship. 11 Ratios Comparison To make it more valuable, ratios are analysed through a comparison process such as: ▫ ▫ ▫ ▫ Comparison with the standard Comparison with predetermined result Comparison with the direct competitor Comparison with the previous period performance / results 12 Importance Of Ratio Analysis Absolute figures are often misleading. They are meaningful and useful only when they are compared with – a. Past performance of the same company b. Performance of competitors c. Budgeted figures d. Averages of the industry e. Standards developed by analyst A ratio shows arithmetical relationship between two figures. With the help of financial ratios, make decision, assessment and judgement can be reached about the financial health and performance of a company. Common type of Ratio Analysis Liquidity Ratio Current ratio • Used to test the overall liquidity of a company and short term debt-paying liability. • Measures ability to pay current liabilities from current assets • The higher, the better. • Formula: Current assets Current ratio = Current liabilities 15 Liquidity Ratio cont. Acid test ratio (Quick ratio) • To show the ability of the business to pay all its current liabilities from liquid resources. • Indicates ability to pay current liabilities if they become due immediately • The higher, the better. • Formula: Current assets – Inventory Quick ratio = Current liabilities 16 Activity / Efficiency Ratio Inventory turnover • The number of times the average inventory have been replaced during a given accounting period. • Indicate how aggressive the company is trading • The higher, the better. • Formula: Inventory turnover = Cost of goods sold Average inventory • But, how to find average inventory?? Average inventory = Opening inventory + Closing inventory • OR in days, 2 Inventory Turnover days = closing inventory cost of sales/purchase/sales x 365 days 17 Activity / Efficiency Ratio cont. Receivables collection period • Measure effectiveness of its credit control and collection policies. • Reflects how long customers take to pay • The shorter, the better. • Formula: Account receivable x 365 days ACP = Net credit sales • In case information about credit sales is not available total sales may be assumed to be credit sales. 18 Activity / Efficiency Ratio cont. Payables payment period • Days it takes for the company to pay its suppliers • The longer, the better. • Formula: APP = Account payable x 365 days Net credit purchases • In case information about credit purchase is not available total purchase may be assumed to be credit purchase. 19 Activity / Efficiency Ratio cont. Net Assets Turnover • Measure effectiveness of its assets to generate income • The higher, the better • Formula: NAT = Revenue Capital employed • Note: Capital employed • -> Equity + long term liabilities; or • -> Total Assets – Current liabilities 20 Profitability Ratio Gross profit margin • Measuring what proportion of revenue is converted into gross profit. • The higher, the better. • Formula: GP ratio = Gross Profit x 100 Net sales 21 Profitability Ratio cont. Net profit margin • It represents the proportion of sales that is left over after all relevant expenses have been adjusted. • The higher, the better. • Formula: NP ratio = Net profit x 100 Net sales 22 Profitability Ratio cont. Return on capital employed. • Measures how efficient the capital has been used or employed by the business to generate income. • The higher, the better. • Formula: PBIT x 100 ROCE = Capital employed • Note: the ROCE can be significantly affected by an entity’s accounting policies. Eg: Revaluation surplus in equity-> result in lower ROCE 23 Profitability Ratio cont. Return on assets • Measures efficiency of the business in using its assets to generate net income. • The higher, the better. • Formula: ROA = Net profit Total assets 24 Profitability Ratio cont. Return on equity • Ratio of net income of a business during a year to its stockholders' equity during that year. • It is a measure of profitability of stockholders' investments. • The higher, the better. • Formula: Net profit/PAT ROE = Shareholders’ Equity 25 Solvency Ratio Gearing/Debt to equity ratio Total debt! Gearing/Debt−to−equity ratio = Total shareholders′ equity • It compares a company's total debt to total equity • A method of comparing how much long term capital of the business is provided by Equity and Debt • The degree of risk attached to the company • The lower, the better 26 Solvency Ratio Interest cover - Measures the ability to meet interest payments out of profits generated - Formula: • Profit before Income Taxes and Interest Expense •Interest Expense 27 Other Ratios Earnings per share is net income, restated on a per share basis: Net income available to common shareholders Earnings per share = Number of common shares outstanding Basic earnings per share is net income after preferred dividends, divided by the average number of common shares outstanding. Book value per share is book value of equity divided by number of shares. Price-to-earnings ratio (PE or P/E) is the ratio of the price per share of equity to the earnings per share. 28 Other Ratios Measures of Dividend Payment: Dividend Yield = Dividend per share Current share price • Measures the return on capital investment as a % of market prices Dividend Cover = PAT Dividends • Ability to pay dividends • The higher the better 29 Example: Shareholder ratios Calculate the book value per share, P/E, dividends per share and dividend payout based on the following financial information: Book value of equity $100 million Market value of equity $500 million Net income $30 million Dividends $12 million Number of shares 100 million 30 Example: Shareholder Ratios Book value per share $1.00 There is $1 of equity, per the books, for every share of stock. P/E 16.67 The market price of the stock is 16.67 times earnings per share. Dividends per share $0.12 The dividends paid per share of stock. Dividend payout ratio 40% The proportion of earnings paid out in the form of dividends. 31 Limitations of Ratio Analysis • Not very useful in determining future prospects as performed based on historical data • Ratios can be distorted due to inflation, different bases for valuing assets, etc • Different accounting practices and policies between 2 companies may lead to incorrect ratio analysis • Financial accounting information is affected by estimates and assumptions. Accounting standards allow different accounting policies, which impairs comparability and hence ratio analysis is less useful in such situations. 32 Limitations of Ratio Analysis • Entities sometimes apply creative accounting to show good financial performance, this distorts ratios • Useful to compare with industry averages however, sometimes this information is not available •Ratio analysis is very subjective – you can earn marks if you explain your point correctly 33 THE END 34 ...
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Final Answer



Financial Accounting




Evaluating the financial health of a company, its market value, capital structure, and
dividend policy are vital for any investor since it helps in understanding the overall health of the
company, the industry, and the overall market in the economy. In this assignment, we evaluate
the financial statement of AirAsia Berhad, a Malaysian low-cost airline company.
AirAsia is the largest airline company in Malaysia by destinations and its fleet size. The
airline operates scheduled domestic and international flights to more than 165 destinations and
covers about 25 countries. The airline works with the world's lowest unit cost and has been
consistently named the world’s best low-cost carrier for eleven years, including 2019.
The airline was founded in 1993 but started its operations in 1996. Initially governmentowned, the company was later bought by Tune Air Sdn Bhd in 2001 due to heavy losses and
debts. Over the years, the company has made tremendous growth. Apart from the parent hub in
Kuala Lumpur International Airport, the company has since added four secondary centers.
Currently, the company has eight affiliate airlines. The affiliates include AirAsia China, AirAsia
Vietnam, AirAsia India, AirAsia Japan, AirAsia X, Indonesia AirAsia & Indonesia AirAsia X,
Philippines AirAsia, Thai AirAsia & Thai AirAsia X.
Although the airline has been on steady growth over the years, the recent Coronavirus
pandemic has had a significant impact on the airline. The airline has announced it will suspend
its operations due to the growing border restrictions imposed by countries amid the Coronavirus
pandemic. The airline has therefore projected a two-month total shutdown on international
flights, a move that will significantly affect the company's profit margin. To be able to sustain its
domestic operations, the airline has directed the senior management to take pay cuts, with some
workers losing their job temporarily until the coronavirus pandemic is contained in most of its



Evaluating AirAsia Berhad’s financial wealth

AirAsia Berhad financial statement as of June 2018 and 2019


Total Assets



Current Asset



Current Liability



























Long term debt






Interest expense



Retained earnings



Working capital



Net income



Share’s equity





Retention ratio






Bankruptcy risk




Short term debt



Total capitalization



Total liability



Number of shares



Market price



MV of Equity



Deposits, cash, and bank

Financial r...

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