Background of AMERICAN AIRLINES GROUP INC

Dsicuss about the Financial management accounting in public sector.

Financial statements of an organization explain about the financial strength, financial position and financial performance of an organization. These statements are prepared by the organization periodically to evaluate the performance of the company in context with the accounting and finance. Financial statement includes statement of financial income, statement of cash flows, and balance sheet and changes in equity statement. For evaluating and analyzing the financial statement of an organization, financial analysis techniques are used. Financial analysis techniques make it simple for the management of the comapny and the stakeholders of the company to evaluate the financial statement and make a proper analysis on the basis of it. Financial analysis techniques include ratio analysis, vertical analysis, horizontal analysis etc. these methods evaluates the financial statements on the various basis (Shapiro, 2005).

The report has been prepared to evaluate and analyze the financial performance and position of AMERICAN AIRLINES GROUP INC. For evaluating and identifying the position of the company, ratio analysis, vertical analysis and horizontal analysis techniques have been used. The report makes it simple for the company and stakeholders of the corporation to evaluate the financial performance of the company and make a conclusion about the investment in the company.

AMERICAN AIRLINES GROUP INC is an American company which publicly businesses in the airline holding company. Headquarter of the company is at Fort Worth, Texas. The company is the outcome of a merger among AMR Corporation and US airways group. The company is one of the biggest airline firms in the international market. The company is operating its business under aviation industry. Currently, it is serving its services at 350 destinations. Total revenue of the company is US $ 42.207 billion according to the latest annual report. 1,18,500 employees are working in the company. the main competitive company of AMERICAN AIRLINES GROUP INC is southwest airline group. Currently, the company is diversifying its market and focusing on the new destinations to enhance the market base of the company so that more market could be captured (Customer service, 2018).

The main mission and vision of the company is to serve the best quality services to its clients as well as expand the market through focusing on the new destinations. The current stock position of the comapny has been evaluated and it has been found that the current stock price of the company is USD 50.90 which is quite higher than its book value (Yahoo finance, 2018). The stock position and the market position of the company are quite competitive and it explains about the better changes in the organization. The future prediction about the stock price of the company explains about the higher stock price from now (History, 2018). Various other competitors are also available in the market for the company such as Delta airlines, JetBlue airways, United continental holdings etc. the current financial trend of the business explains about the few alterations and the company’s performance.

Mission and Vision of AMERICAN AIRLINES GROUP INC

Aviation industry of America has also been evaluated and it has been recognized that the industry is operating its business at a significant level. The performance of the company is also better. The porter’s 5 forces model of aviation industry of America is as follows:

The competition among the already existing players is quite higher as many large and small companies are offering the services at domestic as well as international level. Thus, the threat of the company is quite higher. 

Risk from new entrants is quite lower for aviation industry. As huge investments are required to enter into the industry as well as various regulations is also there. Though, the threat of the company is quite lower.

Risk from alternative products is moderate for aviation business. As there is various transportation options are available for the customers. Though, for long travel people relies on the aviation industry (Gitman and Zutter, 2012).

There are a large number of suppliers which caters to the airline industry. The suppliers of America hardly have any bargaining power. Overall, the bargaining power of suppliers is quite low (Annual report, 2017).

There is a great integer of customers which takes services from the airline industry. The customers of America usually take the help of airlines to travel from one place to other. Overall, the bargaining power of customers is quite low.

Financial analysis is a process which evaluates the financial reports of the company to generate an idea about the position of the company at internal as well as external level. Financial analysis techniques make it easier for the management of the comapny to appraise the historical data and the stakeholders of the business to evaluate the financial statement and make a proper analysis on the basis of it (Brigham and Ehrhardt, 2013). Financial analysis techniques include ratio analysis, vertical analysis, horizontal analysis etc. these methods evaluates the financial statements on the various basis. Following is the study of financial analysis of AMERICAN AIRLINES GROUP INC:

Ratio analysis is a quantitative evaluation technique which takes the concern of financial statement and other financial activities of the company to analyze the operating and financial level of the company. The ratio analysis evaluates the liquidity, efficiency, solvency and profitability level. Following is the calculations and the analysis of AMERICAN AIRLINES GROUP INC:

	Year (____2017____)	Year (______2016__)	Year (____2015____)
Current ratio	0.61	0.74	0.73
Acid test ratio	0.52	0.67	0.67
Cash ratio	0.02	0.02	0.03
Accruals ratio	0.06	0.04	0.16
Cash Flow Yield	-0.05	0.03	0.00
Cash Flow to Sales	-0.03	0.02	0.00
Cash Flow to Assets	-0.02	0.02	0.00
Current Cash Debt Coverage Ratio	0.32	0.47	0.46
Free Cash Flow	-1227000	793000	98000
Accounts receivable turnover	15.15	14.48	12.69
Days’ sales outstanding	115635.62	110082.19	112301.37
Accounts payable turnover	34.94	36.49	33.40
Days’ payable outstanding	48317.81	43627.40	46791.78
Inventory turnover	11.75	9.94	7.68
Days’ sales in inventory	115635.62	110082.19	112301.37
Cash Turnover	143.07	124.78	105.10
Fixed Asset Turnover	365.37	371.99	342.20
Total Asset Turnover	444.47	465.78	431.12
Cash Conversion Cycle	-8.03	-12.07	-13.03
Basic Defence Interval	26.40	28.66	23.39
Expense Coverage Days	124068	119142	118247
Debt	25009000	25775000	21725000
Equity	3926000	3785000	5635000
Debt to Equity	6.37	6.81	3.86
Times Interest Earned	N/A	5.33	7.05
Cash Interest Coverage	0.00	3.08	2.26
Cash Debt Coverage	0.32	0.47	0.46
Interest Expense to Total Debt	0.00	0.04	0.04
Financial Leverage	1.32	1.23	1.34
Gross Profit Margin	0.58	0.60	0.58
Operating Profit Margin	0.10	0.13	0.15
Pre-Tax Profit Margin	0.07	0.11	0.11
Net Profit Margin	0.05	0.07	0.19
Return on Total Assets	0.04	0.05	0.16
Return on Common Equity	383.80	535.20	1268.33
Book Value for Common Share	35.00	36.00	37.00
Market Capitalization	25368045.04	28642692.88	34662860.98
Effective Tax Rate	0.30	1.30	2.30
Basic Earnings per Share	3.92	4.85	11.39
Price-Earnings	13.23	10.69	4.55
Price-Sales	0.96	0.96	0.96
Price-Book	1.48	1.48	1.48
Dividend Payout	0.10	0.08	0.04
Dividend Yield	0.01	0.01	0.01
Dividend Coverage	1.18	1.45	3.42
Current liability ratio	0.35	0.35	0.33
Inventory to Sales Ratio	0.03	0.03	0.02
Cash to Current Assets Ratio	0.03	0.03	0.04
Current Assets to Total Debt Ratio	0.37	0.40	0.46
Current Liabilities to Inventory Ratio	11.01	12.68	15.76
Top compensation to sales	42207000	40180000	40990000

(Annual Report, 2018)

The above table expresses about the ratios of the company.

Competitive Landscape

Liquidity ratios are calculated to evaluate the internal position of the corporation. It measures the capability of business to reimburse its short term debt against the current assets of the company. Various ratios are calculated under the liquid ratio to generate a conclusion about the liquid position of the company. The current ratio and acid test ratio has been evaluated in this case to identify the liquid position of the company.

Current ratio is measured to evaluate the total short term debt level of the company. Current ratio of AMERICAN AIRLINES GROUP INC explains that the liquid place of the organization has been lower from last 2 years. The current ratio of the business is 0.61 which explains that it is required for the company to improve the level as the Southwest airline level is also better (Morningstar, 2018). Further, acid test ratio of the organization has been measured and it has been found that the organization is also required to improve the level of quick assets so that a good position of liquidity could be maintained by the company in the industry as the level of Southwest airline level is quite better.

Financing ratios are calculated to evaluate the internal position of the company. It measures the capability of the company to pay its long term debt against the fixed assets and equity of the company. Various ratios are calculated under the financing ratio to generate a conclusion about the financing and capital structure position. The debt to equity ratio and times interest earned ratio has been evaluated in this case to identify the financing position of the company (Brigham and Ehrhardt, 2013).

The ratio of Debt to equity is measured to estimate the total long term debt level of the business against the whole equity of the concern. It explains about the capital structure position of AMERICAN AIRLINES GROUP INC. The ratio explains that the long term debt payment capability of the company is quite higher in the industry. The debt equity ratio of the company is 6.37 which explain that it is required for the company to reduce the level of equity to manage the risk and return as the Southwest airline level is also lower (Deegan, 2013). Further, times interest earned ratio of the business has been measured and it has also been evaluated that interest amount of the business has been lowered from most recent years and it briefs about the inferior cost of capital of the business.

Porter’s 5 Forces Model of the Aviation Industry in America

Further, activity ratios are calculated to appraise the efficiency spot of the business. It measures the capability of the troupe to manage its assets and the working capital for the daily operations. Various ratios are calculated under the activity ratio to generate a conclusion about the working capital position of the company. The receivable turnover ratio, payable turnover ratio and inventory turnover ratio has been evaluated in this case to identify the activity and efficiency position of the company.

Receivable turnover ratio is measured to evaluate the total time in which the debtors pay the amount to the company. It explains about the efficiency position of AMERICAN AIRLINES GROUP INC. The ratio explains that the debtors’ turnover ratio of the company is 15.15 days. Further, the accounts payable days and inventory turnover days have been calculated to identify the efficient position of the company (Romney et al, 2006). The accounts payable turnover days of the company are 34.94 days and inventory turnover days are 11.75 days which explains that the efficiency position of the company is quite competitive and it has been better from last year. It has also been found that the level of the company is also better then the Southwest airline level.

Further, the profitability ratios of the company have also been evaluated to identify the capability of the company to generate the profit (Grinblatt and Titman, 2016). Gross profit % and return on shareholder’s equity has been evaluated to identify the profitability position of American Airlines group. The gross profit margin of the company is 58% which has been lower from last year. Though, the position of the company is quite better. Further, ROCE has been evaluated and it has been found that the ROCE of the company is 383.8 which have also been lower from last year. Though, the position of the company is quite competitive (Morningstar, 2018).

Lastly, the stock ratios of the company have been evaluated to identify the capability of the company to manage the market position. Earnings per share, price earnings ratio and dividend yield has been evaluated to identity the stock position of American Airlines group (Kiran and Singh, 2014). The earnings per share of the company are 3.92 which have been lower from last year. Further, price earnings ratio and dividend yield of the company has been evaluated and it has been found that the position of the corporation has been improved and it is quite competitive in the industry.

Financial Analysis of AMERICAN AIRLINES GROUP INC

The above ratio analysis calculations of the business brief that the superior spot and performance of the company.

Further, the horizontal statement of the organization has been evaluated to identify the changes in the organization and the financial statement of the organization from last year. Through the evaluation, it has been analyzed that the cash and company’s total current assets have been lowered from last year. Further, the total assets and total current liabilities have been enhanced and the total liabilities of the company have not been changed. Further, evaluation briefs that diverse alterations have taken position into the financial performance of the business from most recent years (Kaplan and Atkinson, 2015). The revenue position and gross margin position of the company expresses about the positive changes in the organization. Through the evaluation, it has been evaluated that the corporation’s position has been improved from most recent years. And it would be much better in next few years.

Horizontal changes statement
	2017	2016	2015
Cash	-8.4%	-17.4%	-60.8%
Total current assets	-11.4%	3.4%	-17.6%
total assets	0.2%	5.9%	10.6%
Total current liabilities	7.9%	2.0%	1.3%
Total liabilities	0.0%	11.0%	2.5%
Retained earnings	104.9%	-233.3%	-85.6%
Total stockholder’s equity	3.7%	-32.8%	178.8%
Number of shares outstanding	-11.4%	-17.4%	-6.8%
Net sales/ Revenue	5.0%	-2.0%	-3.9%
Cost of goods sold	10.8%	-6.8%	-22.8%
Gross margin	1.3%	1.4%	16.6%
Operating expenses	8.1%	7.1%	8.9%
Operating margin	-23.2%	-14.8%	46.0%
Interest expenses	-100.0%	12.6%	-0.8%
Net income	-28.3%	-64.8%	164.1%
Earnings per share	-19.2%	-57.4%	183.3%

(Deegan, 2013)

Further, the vertical statement of the organization has been evaluated to recognize the position of each item of the financial statement of the business. According to the evaluation, it has been measured that the cash level and level of total current assets of the business against the total current and noncurrent assets have been lowered from last year. Further, the total current liabilities level has been enhanced against the total liabilities and equity of the company (Du and Girma, 2009). The revenue position and gross margin position of the company expresses about the positive changes in the organization. Through the evaluation, it has been found that the company’s position has been better from last year. And it would be much better in next few years.

Vertical changes statement
	2017	2016	2015
Cash	0.57%	0.63%	0.81%
Total current assets	17.80%	20.13%	20.62%
total assets	100.00%	100.00%	100.00%
Total current liabilities	29.12%	27.05%	28.10%
Total liabilities	92.36%	92.62%	88.36%
Retained earnings	6.54%	3.20%	-2.54%
Total stockholder’s equity	7.64%	7.38%	11.64%
Number of shares outstanding	1.16%	1.37%	1.63%
Net sales/ Revenue	100.00%	100.00%	100.00%
Cost of goods sold	41.78%	39.63%	41.67%
Gross margin	58.22%	60.37%	58.33%
Operating expenses	48.60%	47.22%	43.20%
Operating margin	9.61%	13.15%	15.14%
Interest expenses	0.00%	2.47%	2.15%
Net income	4.55%	6.66%	18.57%
Earnings per share	0.00%	0.00%	0.00%

(Bandy, 2013)

Through the evaluation on the financial presentation and the changes of the business, it has been measured that the financial presentation of the business is quite moderate. Though, it has been found that the entire industry has been affected in the recent year and due to which the performance of the business has also been lowered. Otherwise, the financial presentation and the place of the business are quite enhanced and it explains that the future performance of the company would be much better. It further briefs that the company’s place is quite better in terms of finance (Bierman and Smidt, 2012). In terms of investment, the company is one of the best choices for the investors to invest and get the higher return. The strength, weakness, porter’s 5 forces model, financial position of the business briefs that the investors should invest into the company to manage and enhance the return level.

To conclude, the financial performance and position of the company is quite better and it is a good choice for the investors to make an investment. The company would offer long term as well as short term profit to the investors and on the other hand, the future position and financial strength of the company would be better. Thus, it could be concluded that the investors should invest into the company to manage and enhance the return level.

References:

Annual Report. 2017. AMERICAN AIRLINES GROUP. [Online]. Available at: https://americanairlines.gcs-web.com/static-files/17cae9f4-55b0-4a05-a2dc-33fcc0a01985 [Accessed as on 28th Mar 2018].

Bandy, G. 2013. Financial management and accounting in the public sector. Oxon: Routledge.

Bierman Jr, H. and Smidt, S., 2012. The capital budgeting decision: economic analysis of investment projects. Routledge.

Brigham, E.F. and Ehrhardt, M.C., 2013. Financial management: Theory & practice. Cengage Learning.

 Customer services. 2018. AMERICAN AIRLINES GROUP. [Online]. Available at: https://www.aa.com/i18n/customer-service/about-us/american-airlines-group.jsp [Accessed as on 28th Mar 2018].

Deegan, C., 2013. Financial accounting theory. McGraw-Hill Education Australia.

Du, J. and Girma, S., 2009. Source of finance, growth and firm size: evidence from China (No. 2009.03). Research paper/UNU-WIDER.

Fernandes, D., Lynch Jr, J.G. and Netemeyer, R.G., 2014. Financial literacy, financial education, and downstream financial behaviors. Management Science, 60(8), pp.1861-1883.

Gitman, L.J. and Zutter, C.J., 2012. Principles of managerial finance. Prentice Hall.

Grinblatt, M. and Titman, S., 2016. Financial markets & corporate strategy. Prentice Hall.

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Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.

Kiran, R. S., & Singh, V. K. 2014. How to make the financial analysis an easy task – A comparative analysis between the traditional and the modern approach? International Journal of Engineering Research and Applications, 4(8), 61-66.

Morningstar. 2018. AMERICAN AIRLINES GROUP. [Online]. Available at: https://financials.morningstar.com/income-statement/is.html?t=AAL&region=usa&culture=en-US [Accessed as on 28th Mar 2018].

Morningstar. 2018.. Southwest AIRLINES GROUP. [Online]. Available at: https://financials.morningstar.com/income-statement/is.html?t=LUV&region=USA [Accessed as on 28th Mar 2018].

Romney, M.B., Steinbart, P.J., Zhang, R. and Xu, G., 2006. Accounting information systems. Pearson Education.

Shapiro, A.C., 2005. Capital budgeting and investment analysis. Prentice Hall.

Yahoo finance. 2018.. AMERICAN AIRLINES GROUP. [Online]. Available at: https://finance.yahoo.com/quote/AAL/ [Accessed as on 28th Mar 2018].