A Three Year Balance Sheet Analysis For Royal Airline Company
QUARTER 1 BALANCE SHEET
Balance is a very important financial tool that indicated the financial position of Royal Airline Company in terms of how the company generates its resources and finances. Royal Airline Company started operating during the first quarter of the accounting year with no cash at hand. Over the same period, the company’s total current assets amounted to $814,138 with its total Fixed Assets valued at $7,646,250, thus representing $8,460,388 as the total value of the company’s assets. By the end of the year (Quarter 4), Royal Airline’s asset strength significantly dropped to $5,851,791 representing 30.83% drop in total assets. However, the company’s value of current assets increased to $2,386,972 while the fixed assets dropped to $3,465,000 following depreciation on fixed assets.
In terms of the liabilities and equity, Royal Airline Company commenced its operations with current liability amounting to $7,297,721 and $294,000 in long-term loans. The firm’s equity was valued at $868,667. Over the accounting year to the fourth quarter, the company’s total liability dropped from $7,591,721 to $6,341,052 representing 16.47% fall in the total liability. The long-term loans of the company also dropped as Royal Airline repaid part of the long-term loans acquired during the first quarter. However, the company’s value for common stock remain unchanged at $1,500,035 over the first four quarters as the firm maintained its common stock position without adding or repayment. The working capital (C.A-C.L) of the Royal Airline declined over the first year of operation. By the end of the fourth quarter, the equity value of Royal was negative, and indication that the firm’s equity prices fell below the par-value, hence the negative value of equity.
BALANCE SHEET FOR YEAR 2 (QUARTER 8)
During the second year, Royal Airline’s current ratio (which is the measure of the liquidity position of the firm) increased from 0.4:1 to 0.5:1 in year 2. This was attributed to the increased in the firm’s liquid cash position and other liquid assets. However, since the current liabilities exceeded the current assets, the company is therefore not in a position to meet its short-term financial obligations when they fall due during the first two years of its operation. The value of the fixed assets further went down because of the accumulated depreciation on the fixed assets. The company settled part of its current liabilities during the second year, hence the $1,822,774 drop. The value of the firm (its equities) further decreased because the share prices of the firm’s equity dropped below the par value of the firm’s shares. However, the firm’s quick ratio increased to 0.23 from 0.18 that was posted in year 1, notably these ratios are below the recommended value that should exceed 1.00.
YEAR 3 (Quarter 12) BALANCE SHEET
During Year 3, the company’s financial position further weakened with the total value of assets falling to $3,735,075 while the firms value for liabilities also declining to $3,020,646. However, like in the previous two years, the debt value of the firm remained unchanged at $1,500,035 as no debts were redeemed by the company. The company’s market value of equity stock increased by more than four times its valuation during the second year. This was because the company issued more equity share to finance the acquisition of the new aircraft value purchased at $3,000,000 in the third year. The retained earnings, like in the past two years, remained negative, and indication of lower profitability index. Royal Airline’s current ratio (current assets/current liabilities) increased from 0.5:1 to 0.6:1 in the third yeas, an indication of an improved ability of the company to settle its short-term financial obligations.
INCOME STATEMENT ANALYSIS
YEAR 2 FINANCIAL STATEMENT
YEAR 3 FINANCIAL INCOME STATEMENT
Income statement of the firm measures the ability of the firm to convert the resources into revenue and other income generating activities. It also an indication of the profitability index of the firm through maximization of the shareholders wealth and value of the firm.
A Three-Year Income Statement Analysis
The income statement of Royal Airline Company showed that the company reported an increasing profitability index in the subsequent years after incurring losses of $819,377 representing 40.3%. During the second year, Royal Airline profitability increased as evidenced by the 6.9% after tax profit (valued at $163,001). The company’s after tax profitability index further increased 10.4% ($361,1772) in the third year. During the first year, the operating expenses of Royal Airline Company accounted to 122.8% of the total revenue generated over the same period, hence the operating loss. The company’s improved profitability performance in the second and third year was attributed to the growth in the firm’s net revenue of $2,165,259 and $3,189,831. Although the operating expanses of also increased in year 2 & 3 following the acquisition of new planes, the percentage increase in revenues were more than those of expenses, hence the profitability growth. At this trend, it is expected that the company will post better profitability performance in the coming years. However, this would be determined by the ability of the financial management team to reduce on the rising operating expenses. Over the three years, the Royal Airline Company did not declare dividends on its stocks and debts. To breakeven in the coming years, Royal Airline is obliged to cut on its operating costs and expenses in order to earn more profit that is sufficient to compensate the firm’s common stock investors in the form of dividends.