GB518 Unit 9 Financial Ratio Analysis Example

Strong Use of Aircraft, Weakening Cover: A Unit 9 Ratio Analysis of a Mid-Size Airline

[Student Name]

Purdue University Global

GB518: Financial Accounting Principles and Analysis

Unit 9 Ratio Analysis

[Instructor Name]

[Date]

The airline, its competitor, the industry figures and every ratio are composite and illustrative; the methods and standards cited are real.

The Company and the Source

Cascadia Air is a composite mid-size airline flying about 140 aircraft on domestic and near-international routes. The figures below come from its annual reports for its three most recent fiscal years, built to resemble the patterns in airline filings. The industry medians and the competitor, a larger national carrier, are composite benchmarks for comparison. Formulas follow standard definitions (Subramanyam, 2014).

The Ratio Table

Liquidity. Current ratio: 0.72, 0.68, 0.61; industry median 0.78; competitor 0.85. Quick ratio: 0.58, 0.55, 0.49; median 0.66; competitor 0.74. Operating cash flow to current liabilities: 0.31, 0.27, 0.19; median 0.28; competitor 0.34.

Borrowing. Debt, including lease liabilities, to equity: 1.4, 1.7, 2.1; median 1.6; competitor 1.1. Total liabilities to total assets: 0.71, 0.74, 0.78; median 0.73; competitor 0.66. Times interest earned: 4.8, 3.1, 1.9; median 3.5; competitor 5.2.

Returns. Operating margin: 8.4, 6.1 and 3.7 percent; median 6.8; competitor 9.6. Net margin: 5.2, 3.4 and 1.5 percent; median 4.1; competitor 6.3. Return on equity: 14.7, 11.0 and 5.8 percent; median 12.0; competitor 13.5.

Asset use. Total asset turnover: 0.82, 0.84, 0.86; median 0.80; competitor 0.78. Fixed asset turnover: 1.21, 1.18, 1.15; median 1.10; competitor 1.06. Receivables turnover: 31.5, 30.8, 29.9; median 28.0; competitor 33.2.

Liquidity

All three liquidity ratios fell each year and now sit below the median. Airlines usually run current ratios below 1.0 because the air traffic liability, cash collected for tickets not yet flown, is a large current liability. Even allowing for that, Cascadia's decline is real: operating cash flow fell relative to current liabilities from 0.31 to 0.19, as unrestricted cash fell and short-term debt maturities rose. Verdict: liquidity is weakening and below peers, a concern if fuel prices rise or bookings soften.

Borrowing

Debt to equity rose from 1.4 to 2.1, above the median and nearly twice the competitor's. Part of the rise reflects aircraft operating leases recorded on the balance sheet under ASC 842, which brought lease liabilities onto the balance sheet for all airlines (Financial Accounting Standards Board, 2016), but Cascadia also financed eleven new aircraft with debt in the last two years. Times interest earned fell from 4.8 to 1.9, below the median of 3.5: operating income now covers interest less than twice.

The airline is earning less and owing more at the same time, so its interest cover has fallen by more than half in two years.

Verdict: borrowing is high and coverage is thin, the most serious weakness in the analysis.

Returns

Operating margin fell from 8.4 to 3.7 percent and net margin from 5.2 to 1.5 percent, both now below the median. The statements trace the fall to two lines: fuel expense rose faster than revenue, and a new pilot labor agreement raised salaries and benefits by about 14 percent. Return on equity fell from 14.7 to 5.8 percent; it remains positive partly because high borrowing magnifies returns on a small equity base. Verdict: profitability has declined sharply and is now below peers.

Asset Use

This is Cascadia's strength. Total asset turnover rose to 0.86 and fixed asset turnover stayed above both median and competitor, reflecting high aircraft utilization, about 11.6 block hours a day, and a young fleet. Receivables turnover near 30 reflects that most revenue is paid by card at booking. Verdict: Cascadia uses its aircraft more intensively than peers.

How the Groups Connect

The four groups are not separate stories. High asset use is what keeps return on equity positive despite thin margins, because Cascadia earns its small margin on more revenue per dollar of aircraft. High borrowing is what turns a 1.5 percent net margin into a 5.8 percent return on equity, which looks healthier than the underlying business. And falling liquidity is the cash consequence of lower margins and rising debt service. Reading the groups together shows that Cascadia's strongest ratio, asset turnover, is holding up a structure that its weakest ratios, coverage and margin, are slowly undermining.

What Would Improve the Ratios

Three changes would move the ratios most. A fuel hedging program, or new aircraft with better fuel burn as older ones retire, would protect operating margin. Using cash flow to repay debt rather than to add aircraft would raise interest coverage. And slowing growth for a year would let liquidity rebuild. None of these is visible in the ratios themselves, which is why the next step is reading management's discussion and the notes.

Overall Judgment and What Ratios Cannot Show

On the ratio evidence, Cascadia is an efficient operator whose financial position has weakened: it flies its aircraft hard but earns less on each flight and carries more debt to do it. Ratios cannot show what comes next. They do not reveal fuel hedges, the terms of debt maturing next year, the strength of forward bookings or the outcome of labor talks, all of which appear in the notes and risk disclosures. Robert Libby, Patricia Libby and Frank Hodge caution that ratios describe the past and should be read with the qualitative information in the filing (Libby et al., 2023).

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.