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Various groups such as shareholders, governments, employees, communities and creditors use audited financial statements of companies. Financial statements provide the potential users with a narrow insight into the strengths and weaknesses of a business. Reflectively, financial statements do not give an in-depth depiction of performance of an entity (Siddidui, 2005 p.623). Such full view of a business is important since it influences users decisions on whether to continue their association with an entity or not. Ratio analysis is a tool used to carry out financial analysis of companies. It is used to analyze the rights and gives a better understanding of performance of a company (Brigham & Joel, 2009). This paper carries out DuPont analysis of United Airlines. Further, it analyzes the capital structure of the company.
DuPont analysis
DuPont analysis looks at the return on equity of a company. It breaks down the return on equity into three main components. These components are asset turnover, leverage factor and profit margin. Computation of these components is shown below.
Return on Equity = Net Profit Margin (Net profit/sales) * Total Asset Turnover (Sales/Assets) * Equity Multiplier (Assets/Equity)
Return on Assets = Net Income or Net Margin (Net Income/sales) * Total Assets or Total Asset Turnover (Sales/total assets)
Net Income = profit
Revenue = sales
The table below shows a summary of DuPont analysis.
Return on Equity for United Airlines for the past four years ranged between 203.62 % in 2008 to 12.81% in 2007. The average return on equity for the four year period is 53.83 % with an average of 6.58%. The company has an average return on equity of 6.58% across the same period. In a four year period, the company recorded the highest return on equity in 2007. However, in 2008 the company recorded the lowest performance. Return on equity for the year 2008 amounted to 203.62%. The average of the net profit margin amounted to 7.22%. The company recorded negative net profit margin in 2009 and 2008. A positive margin was recorded in 2007. The negative average resulted from the negative margin that was recorded in 2008. Total Asset turnover averages 0.86 with a range from 1.04 in 2008 to 0.7 in 2006. The equity multiplier has been decreasing from 9.19 in 2006 to 7.10 in 2009. The negative ratios indicate deterioration in performance that has been recorded since 2006. The company recorded the worst performance in 2008 where it made a net loss of $5,396.00. Performance of United Airlines is compared to that of Singapore Airlines. Singapore Air lines showed a stable performance over a five year period from 2008 to 2012. The company had an upward trend in performance. Singapore Airline recorded positive performance with net profit margin as high as 54.7%.
Analysis of capital structure
The primary of objective of a company is to maintain a capital structure which has an efficient mix of debt and equity in order to achieve a low cost of capital, while taking into account the desirability of retaining financial flexibility to pursue business opportunities and adequate access to liquidity to mitigate the effect of unforeseen events on cash flows (Brigham & Joel, 2009). The capital structure of United Airline is made up of debt and equity financing. The company has both shares and debt as a mode of financing. Statement of financial position reveals that the company uses a number of financing options; these are accounts payable, short term debt, long term debt, capital lease obligations, deferred tax income, preferred stock, common par, additional paid in capital, retained earnings, treasury stock ,and other sources of financing among others. Some of the instruments used for debt financing include Senior Secured Notes due in 2012, Mortgage financing secured by companys engines, aircraft mortgage financing secured by B777 aircraft, 6% Senior Convertible Notes due in 2009, secured notes, equipment notes, future financing, and several loan agreements among others. The table below summarizes external capital that was raised by the company over the four year period.
From the table above one is clear about the amount of money that the Airline Company raised from external sources decreased over the four year period. In 2006, the company raised $10,364 million. This declined to a low of $8,004 million in 2008. This can be an indication of improved leverage of the company. Apart from debt and equity financing, the company also uses other non traditional sources of financing. Some of the non traditional sources of financing include capital and operating leases, or through vendor financing. In addition, the company also enters long term lease commitments with airports to ensure access to terminal, cargo, maintenance, and other required facilities.
References
Brigham, E. F. & Joel, F. H. (2009). Fundamentals of financial management. USA, South-Western Cengage Learning.
Siddiqui, A. (2005). Managerial economics and financial analysis. New Delhi, New age international (P) limited.
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