Emirates’ profitability
declined sharply when compared to previous years. The net profit margin (NPM)
and return on assets (ROA) were used to analyse the firm’s performance. NPM
concerns a company’s ability to generate earnings after taxes relative to its
revenue. This fell from 8.76% in 2016 to 1.73% in 2017. The reason for the
large decline in NPM is due to the significant increase in operating costs. One
of the main contributors were Emirates’ funding 23 new aircrafts on operating lease,
increasing operating costs by just under 6 billion AED (The Emirates Group ,2017).  Revenue increased marginally and as such did not
match the substantial rise in costs. The airlines ROA has fallen over the last
4 years. When comparing 2016 and 2017 figures, we see a 4.95 percentage point decrease
in ROA. The decline in ROA symbolises that Emirates are not using their assets
to generate their profit as effectively as before.

Furthermore,
Emirates’ ROE decreased significantly this financial year. The ROE portrays how
much profit the airline generated with shareholders’ investments. This is
important to investors as net profit adds value to shareholders. The ROE fell
from 22.72% in 2016 to 4.26% in 2017 (Appendix A). These figures tell us that
for every 1 AED the owner invested, the business made a profit of 0.23 AED in
2016 however in 2017 this was only 0.04 AED. A lower ROE could make Emirates’
look less attractive from a shareholder’s point of view.

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The firm’s
liquidity position weakened as shown by the decrease in the current ratio and
quick ratio. A company’s liquidity is central as it gives them the ability to
meet unexpected changes in financial requirements. The current ratio decreased
from 0.82 in 2016 to 0.73 in 2017 (Appendix C). This occurred because of the
significant decline in assets, with the decline in cash being the biggest contributor
to this. Cash held decreased by 3.2 billion AED (The Emirates Group ,2017). This reduction could be a problem for
Emirates if faced with a tough financial period, as they may not have enough
cash to cover their operations and be more at risk paying back their short-term
liabilities.

Efficiency is
another area in which the firm struggled this year. The asset turnover decreased
by 0.2 (Appendix B). The main contributor to the decline is the increase in equity,
this decline is a problem as it suggests that the company’s assets aren’t
generating as much revenue as they should, especially with the increase in
assets from the previous year.

Despite all
this, Emirates’ long term financial structure is improving. The gearing ratio,
which compares the company’s borrowings to their equity, has been decreasing
over the past couple years, as seen in Appendix D where the gearing value decreased
from 155% in 2016 to 145% in 2017. Even though the airline increased their
borrowing in the past year, the gearing ratio reduced because of the growth in
equity. This shows that although Emirates struggled with profitability, they
have reduced their leverage which will make long term growth more sustainable.  

 

 

Part B

Emirates are
one of the world leaders in the aviation industry. They have had constant
growth over the years which has lead them to be one of the dominant figures in
their sector. The wide range of destinations which they fly to (141 destinations)
has increased their customer basis and strengthened revenue. (The Emirates Group ,2017). Another strength of Emirates is
their strong advertising and sponsorship list, especially in sport (Emirates 2017). which
gives them a platform to increase brand awareness and build a connection with
their consumers. Other strengths include, excellent customer service and a
strong workforce of 64,768 employees (The Emirates Group ,2017).

A weakness of Emirates
is their loss in profits in the 2016/2017 financial year. Their profits
significantly dropped by just under 6 billion AED (The Emirates Group ,2017). This
emphasises the poor management in finances as they should have been prepared for
change. Another weakness is the exclusion of customers which cannot afford the
ticket price of an international airline which stops the airline from
increasing revenue.

Emirates have
many opportunities to raise their status and boost their brand identity in the
industry. The Dubai world expo which takes place in 2020 is great opportunity, with
millions of tourists visiting Dubai. With Emirates being one of the main
sponsors of this event, the expo last 6 months bringing people from around the
world to showcase their new discoveries (Expo2020Dubai ,2017). Furthermore,
improvements in technology and the use of big data in the future will improve
customer experience during air travel, this analysis of customer behaviour and will
allow Emirates to make improvements in these areas.   

An increase in
fuel prices is a threat for Emirates, as the rise in fuel costs reduces the
amount of profit attainable. In addition to this, the government are putting in
place projects, such as tree planting, in order to reduce CO2 emissions (Harrabin ,2016). This
threatens the airline industry as these projects will increase their costs. There
has also been an increase in strong competition due to the relatively low
barriers to entry the industry (Cederholm, 2014). This is visible through
their decline in the world best airline rankings, they have fallen from first
place in the year before to fourth place in 2017. (Top 100 Airlines, 2017).  

 

 

 

 

 

 

 

 

 

 

Part C

Financial
reporting and analysis has limitations to its use. One issue is the lack of
qualitative information which financial analysis provides. The ratios calculated
ignore how the non-financial factors could affect the way the business
functions. For example the reason for the decline in the Emirates’ net profit
margin from 8.82% to 1.78% could have been affected by non-financial factors
which we are unaware of. Factors such as , poor management skills and decline
in customer satisfaction are some possible contributors to the outcome of these
ratios, as they effect the amount of revenue the airline receives and
ultimately the amount of profit they make. This is an issue as it doesn’t provide
us with the full scope of information, so we ae not able to make effective
decisions to improve as we are not taking into account all the causes.

The different
accounting practices businesses use causes limitations to arise when analysing
their performance. For example, there are several different techniques when
calculating deprecation in financial reporting such as, straight line
depreciation and reducing balance deprecation (Lodhia K, 2017). The different methods provide
different values when calculated. For example Emirates and their competitors
may use opposing methods which causes the deprecation value in their financial
statements to differ. This affects stakeholders when analysing their statements
as the comparisons would not be accurate.

Finally, financial
reporting allows firms to manipulate their statements to make their performance
look better than it is. When a firm manipulates it affects the economy as the
relative stakeholders which have invested in the firm which they believe are performing
lose out on a lot money if the company becomes bankrupt. For example, if the
Emirates lied about their revenue in order to window dress their finical
failure this tear this could have detrimental effects in the future on the
staff within the firm as they could suddenly lose their jobs if they became bankrupt.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Appendix
A

Profitability
Ratios

 

Ratio

2014

2015

2016

2017
 

Return on Equity
(profit after tax)
 

3,417×100=13.42%
   25,471
 

4,728×100=16.71%
  28,286
 

7,318×100=22.58%
  32,405
 

1,450×100=4.13%
   35,094
 

Net profit margin
 

3,417×100= 4.23%
  80,717
 

4,728×100=5.45%
   86,278
 

7,318×100
= 8.76%
 83,500
 

1,450×100=1.73%
  83,739
 

Return on assets
 

3,417×100= 3.36%
 101,604
 

4,728×100=4.25%
 111,362
 

7,318×100=6.14%
 119,179
 

1,450×100=1.19%
 121,558
 

 

 

 

Ratio

Formula

Return
on Equity
(profit
after tax)
 

 ROE = Net Profit After Tax  x100 
   
                    Total Equity
 

Net
profit margin
 

 NPV = Net Profit After Tax  x100  
                    Revenue
 

Return
on assets
 

ROA
= Net Profit After Tax  x100   
                 Total Assets 
 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Appendix B

Efficiency
ratios

 

Ratio

2014

2015

2016

2017
 

Asset turnover
 

80,717 
 = 3.2
25,471
 

86,728 
 = 3.1
28,286
 

83,500 
 = 2.6
32,405
 

83,739 
 = 2.4
35,094
 

Average debtors’ collection period
 

9086
x365 = 41days
80,717

8589
x365 =36 days
86,728

9321
x365 =41 days
83,500

9922
x365 =43 days
83,739

 

 

Ratio

Formula

Asset
turnover
 

 Asset Turnover = Revenue      
                               Equity
 

Average
debtors’ collection period
 

 Average debtor’s collection period
=
Trade Receivables  x365   
            Revenue
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Appendix C

Liquidity
Ratios

 

Ratio

2014

2015

2016

2017
 

Current Ratio
 

27,354
= 0.84
32,428
 

27,735
= 0.80
34,481
 

31,427
= 0.82
38,524
 

27,836 = 0.73
38,382
 

Quick Ratio
 

27,354
– 1706 =0.79
    
32,428
 

27,735
– 1919 =0.75
     
34,481
 

31,427
-2106 =0.77
     
38,324
 

27,836
-2238 =0.67
    
38,382
 

 

 

Ratio

Formula

Current
Ratio
 

 Current Ratio = Current Assets      
                         Current Liabilities
 

Quick
Ratio
 

 Quick Ratio = Current Assets –
Inventory      
                              Current
Liabilities
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Appendix
D

Long
term financial structure Ratios

Ratio

2014

2015

2016

2017
 

Gearing
Ratio
 

42,431
x100 =167%
      25,471
 

47,808
x100=169%
     28,286
 

50,105
x100=155%
     32,405
 

51,002
x100=145%
     35,094
 

Total
Borrowings (short + long)
 

38,500+3931=42431

42,426+5382=
47808
 

40845+9260=50105

40171+10831=51002

 

 

Ratio

Formula

Gearing
Ratio
 

 Gearing Ratio = Total Borrowings      
                                Total Equity
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

References

1)    The
Emirates Group (2017), 2016-17 annual
report, Available at: https://cdn.ek.aero/downloads/ek/pdfs/report/annual_report_2017.pdf  (Accessed: 1 December 2017)

2)    Emirates (2017), Emirates Sponsorships | Our
Company | Emirates. Available at: https://www.emirates.com/english/about/emirates-sponsorships/sponsorships.aspx
(Accessed 11 December 2017)

 

3)    Expo2020Dubai (2017),
Available at: https://www.expo2020dubai.ae/#partners
(Accessed: 1 December 2017)

 

4)    Top 100 Airlines
(2017), ‘The World’s Top 100 Airlines in 2017’ Skytrax  Available at: http://www.worldairlineawards.com/Awards/world_airline_rating.html
Accessed: 11 December 2017.

 

5)    Harrabin.R (2016), ‘Aviation industry agrees deal to cut CO2 emissions’, BBC News, Available at: http://www.bbc.co.uk/news/science-environment-37573434
(Accessed: 29 November 2017)

 

6)    Lodhia, K. 2017
(3 October): Foundations of Financial Reports Analysis, Lecture 1. University
of Leicester.

 

7)    Cederholm.T
(2014), ‘Low-entry barriers intensify competition
in airline industry’ Available at:
https://beta.marketrealist.com/2014/12/low-entry-barriers-intensify-competition-airline-industry?utm_source=redirect5&utm_medium=auto
(Accessed: 8 December
2017)