Finаnсiаl Аnаlysis Аnd Rаtiоs: Abu Dhabi Aviation (Essay Sample)

Financial Management
Student’s Name
Institutional Affiliation
Question 1
Abu Dhabi Aviation is an airline based in Abi Dhabi, UAE which serves the UAE and other Arab states. Currently, it is considered the largest commercial helicopter operator in the middle east with 58 helicopters and 3 fixed-wing aircraft. The company was founded in 1975 with an aim of offering airline services in the UAE. Besides being a profitable airline in the middle east, it has been able to employ over 900 staff which include 150 pilots and 340 aircraft maintenance engineers. However, a financial ratio analysis ought to be performed to determine whether Abu Dhabi Aviation is a viable or worthwhile company to invest in. Below are the financial ratios of Abu Dhabi.
Ratios

2014

2017

Growth in sales

-

-0.32%

Profit margin

15.18%

17.65%

Return on assets

5.68%

6.03%

Return on equity

10.14%

9.40%

Receivable turnover

4.07

3.53

Average collection period

89.60

103.40

Inventory turnover

4.58

3.63

Fixed assets turnover

0.51

0.52

Total assets turnover

0.37

0.34

Current ratio

2.77

4.55

Quick ratio

1.93

3.30

Debt-to-total assets ratio

34%

29%

Times interest earned

9.90

4.09

From the profitability analysis above, it is evident that Abu Dhabi is a profitable company in terms of its net profit and assets. Apparently, this is because Abu Dhabi Aviation was able to realize an incline in its profit margin and return on assets despite its return on equity declining. Second, the efficiency analysis of Abu Dhabi indicates that the company is not an efficient firm in terms of its inventory turnover, receivables turnover, average collection period and total assets turnover. Ideally, this is because these ratios were unfavorable which would imply that the assets of Abu Dhabi are not efficient. Third, the liquidity analysis indicates that Abu Dhabi is a liquid firm since its current and quick ratios increased from 2014 to 2017. Fourth, the solvency analysis of Abu Dhabi shows that the assets of the corporation are funded by a lower debt level. This is because the firm realized a decline in its debt-to-total assets ratio from 34% in 2014 to 29%. However, from the times' interest earned analysis, the ability of Abu Dhabi to pay its interest declined. Overall, a risk taker would be advised to invest in the organization since it has a higher profitability, liquidity, and debt-to-total assets ratio. On the other hand, a risk-averse individual would be discouraged from investing in Abu Dhabi since it is inefficient and has a lower times interest earned ratio.
Question 2
Part A
Liquidity ratios
Current ratio
Current ratio=current assetscurrent liabilities
Jones Corporation
Current ratio=$150,000$100,000=1.5
Smith Corporation
Current ratio=$187,500$75,000=2.5
From the above analysis, I would recommend a credit manager to approve the extension of trade credit to Smith Corporation since it has a higher current ratio. Ideally, a higher current ratio would mean that Smith Corporation has a higher chance of paying its short-term obligations when the need arises than Jones corporation.
Part B
Solvency ratio
Debt-to-equity ratio
Debt-to-equity ratio=DebtEquity×100
Jones Corporation
Debt-to-equity ratio=$80,000$320,000×100=25%
Smith Corporation
Debt-to-equity ratio=$210,000$152,500×100=138%
From the above analysis, I would invest in Jones Corporation since it has a lower debt level when compared to equity. Ideally, a debt-to-equity ratio of over 100% would mean that the firm is financed by a higher debt level when compared to equity while a debt-to-equity ratio of less than 100% would impl...