GB518 Unit 10 Company Financial Analysis Report Example

Sign, With Shorter Terms and a Review Clause: A Unit 10 Company Financial Analysis of an Airline Customer

[Student Name]

Purdue University Global

GB518: Financial Accounting Principles and Analysis

Unit 10 Company Financial Analysis

[Instructor Name]

[Date]

The airline, the catering firm and every figure are composite and illustrative; the methods and standards cited are real.

Executive Summary

SkyGalley Catering should sign the five-year contract to supply Cascadia Air's meals and snacks at its two hub airports, worth about $38 million a year, on two conditions: payment terms of 15 days instead of the 45 Cascadia requested, and a clause allowing either party to renegotiate if Cascadia's interest coverage falls below 1.5 for two consecutive quarters. Cascadia is an efficient airline whose revenue has grown 18 percent in two years, but operating margin has dropped from 8.4 to 3.7 percent while borrowing climbed. The risk is not that Cascadia stops flying soon, but that a downturn late in the contract could strain its ability to pay suppliers on time.

Company Overview

Cascadia Air operates a fleet of roughly 140 jets from two hub airports. It carried about 21 million passengers last year. Its revenue grew from $4,820 million to $5,690 million over three years. SkyGalley would become its exclusive caterer at both hubs.

Horizontal Analysis

Over two years, revenue rose 18.0 percent. Fuel expense rose 40.0 percent, from $1,150 million to $1,610 million, and salaries and benefits rose 25.2 percent, from $1,390 million to $1,740 million, after a new pilot agreement. Operating income fell 47.9 percent, from $405 million to $211 million, and net income fell 66.1 percent, from $251 million to $85 million.

On the balance sheet, total assets rose 12.6 percent, from $5,880 million to $6,620 million, mostly aircraft. Debt including lease liabilities rose about 24 percent, from about $2,460 million to $3,060 million, while shareholders' equity fell about 15 percent, from about $1,705 million to $1,456 million, after share repurchases and lower earnings.

K. R. Subramanyam recommends horizontal analysis to show which lines are driving change (Subramanyam, 2014). Here, costs that rose faster than revenue explain almost all of the decline in profit.

Vertical Analysis

As a share of revenue, fuel rose from 23.9 percent to 28.3 percent and salaries from 28.8 percent to 30.6 percent, while operating income fell from 8.4 percent to 3.7 percent. On the balance sheet, equity fell from 29 percent of total assets to 22 percent, and total liabilities rose from 71 to 78 percent.

Fuel and labor now take nearly 59 cents of every revenue dollar, up from under 53 cents two years ago, leaving Cascadia far less room to absorb a bad year.

Ratios

The Unit 9 analysis condenses into four findings. Liquidity is weakening, with the current ratio down to 0.61 against an industry median of 0.78. Borrowing relative to equity is up by half, to 2.1, and operating income now covers interest only 1.9 times, well short of the industry's 3.5. And asset use is strong, with asset turnover of 0.86, above the median of 0.80.

Cash Flows

Operating cash flow fell from about $720 million to $510 million over the two years, still positive and still more than enough to cover a catering bill of $38 million. Investing activities used about $680 million a year for new aircraft, and financing activities show new borrowing of about $400 million a year alongside share repurchases. Cascadia is funding growth partly with debt while returning cash to shareholders, which a supplier should notice: in a downturn, a carrier in this position might slow payments to suppliers before it cuts aircraft orders.

Risks From the Filing

Cascadia's risk disclosures name three exposures. Fuel: Cascadia hedges only about 20 percent of next year's fuel, so a sustained price rise would hit margins directly. Labor: the flight attendants' contract opens for negotiation next year, after pilots won a 14 percent increase. And leases: operating lease commitments, carried as liabilities under ASC 842 (Financial Accounting Standards Board, 2016), total about $1.4 million per aircraft per year for 38 leased aircraft, a fixed cost that cannot be cut quickly.

The Libby, Libby and Hodge text advises that suppliers extending credit should read the notes and risk factors as closely as the statements, since they reveal commitments the ratios do not (Libby et al., 2023).

What the Contract Means for SkyGalley

The contract would make Cascadia SkyGalley's largest customer, about 31 percent of its expected revenue. That concentration is itself a risk: if Cascadia cut flights or paid late, SkyGalley's own cash flow would suffer quickly, since its food and labor costs are paid weekly. Beyond concentration, the contract requires SkyGalley to lease a second kitchen near the larger hub, at roughly $1.1 million in rent each year of the term. Those facts raise the stakes of the credit analysis, because SkyGalley would carry both the receivable and the lease whether or not Cascadia's fortunes held. Its own lender, a regional bank, has also asked to see how the contract's payment terms would affect SkyGalley's working capital. A supplier with many customers could accept looser terms; one that would depend on Cascadia for nearly a third of its business cannot.

Conclusion and Conditions

Cascadia is likely to remain a paying customer over the contract. It is profitable, its operating cash flow far exceeds what it owes SkyGalley, and its efficient use of aircraft gives it a cost advantage. But its thin margins and rising debt mean a fuel spike or labor settlement could push it into losses within the contract's life.

SkyGalley should therefore sign, with 15-day payment terms, which limit its exposure to about half a month of billing, roughly $1.6 million, instead of a month and a half, about $4.7 million. The review clause tied to interest coverage gives SkyGalley a defined point to renegotiate before payment problems begin. If Cascadia refuses both conditions, SkyGalley should ask for a parent guarantee or a letter of credit covering one month of billing.

What Would Change the Position

Three developments would change this recommendation. A fall in Cascadia's interest coverage below 1.0 would suggest it could not service its debt from operations. A downgrade of its debt rating would raise its borrowing costs and signal lenders' concern. And a labor dispute leading to cancellations would cut revenue suddenly. SkyGalley's finance team should check Cascadia's quarterly filings for each of these, and report the coverage ratio to SkyGalley's owners every quarter alongside the receivable balance, so that a slowdown in Cascadia's payments is seen against its financial condition rather than discovered as a surprise.

References

Financial Accounting Standards Board. (2016). Leases (Topic 842) (Accounting Standards Update No. 2016-02).

Libby, R., Libby, P. A., & Hodge, F. (2023). Financial accounting (11th ed.). McGraw Hill.

Subramanyam, K. R. (2014). Financial statement analysis (11th ed.). McGraw-Hill Education.