Air France Fsa

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The net profit margin gives the amount of profits generated per Euro earned as revenue. The company has not been profitable in 2014 and for the first time since inception has achieved profitability.

The Gross profit margin of the company gives the assess a company's financial health and business model by revealing the proportion of money left over from revenues after accounting for the COGS. The company has recorded a good health and this can be attributed to the environment in the industry where the general trend has been good owing to the lower prices of oil. Year on year Air France KLM SA grew revenues 4.54% from 24.91bn to 26.06bn while net income improved from a loss of 225m to a gain of 118m. It’s current GPM remains at 39.8%

Analysis of the asset turnover ratio

The Asset Turnover ratio is the total sales or revenues on total assets. This ratio is really important and relevant for the financial analysis of company. Actually, it indicates the performance of a company in using its assets in order to generate revenues.

Thus, the higher is this ratio, the better is the performance of the company since that proves that it is generating good revenues. On the contrary, a low asset turnover ratio demonstrates that the company is not generating good sales compared the euros invested in asset.

For the year 2014, the asset turnover ratio of AirFrance was about 1.06. That means that for each for every euro invested in assets, the company gets 1.06 euros of sales which shows us that the company is making money which is good for the business.

For the year 2015, the asset turnover ratio increased a little bit, it is about 1.12.Thus, AirFrance has been generating 1.12 euros for each euros which has been invested in assets.

Now let’s compare the company with another competitor in the same sector in order to know if AirFrance is performing bad or if it is the case for all the companies of the sector. The competitor we choose is Lufthansa

€m

2014

2015

Lufthansa

AirFrance

Lufthansa

AirFrance

Sales

30,011

24,912

32,056

26,059

Total assets

30,474

23,241

32,462

23,335

Asset turnover ratio

2014

2015

Lufthansa

0.98

0.987

AirFrance

1.06

1.12

We notice that Air France’s asset turnover ratio is higher than its closes competitor for 2 consecutive years. Also, while this ratio has remained static for Lufthansa, Air France have managed to improve it in 1 year. The airline industry average for airlines in Europe is close to 1.1 which shows that Air France is doing quite good. For the other Profitability ratios including ROE disintegration, please check the attached excel file

Return on Equity Ratio

The return on equity is the amount of net income returned as a percentage of shareholder’s equity. Moreover, the return on equity estimates the profitability of a corporation by revealing the amount of profit generated by a company with the money invested by the shareholders. Also, the return on equity ratio is expressed as a percentage and is computed as: Net Income/Shareholder's Equity. For the Airline Industry average the ratio is 21.46% (Damodaran – NYU Stern). Air France has a Return on Equity 43.22% which is way above the industry average. This states that Air France provides more value per dollar of equity than the average airline company. It’s direct peer Lufthansa has a Return on Equity ratio of 30.4% for the year 2015. Partly Air France also has a high ratio because of its heavy total liabilities and debt which decreases the total equity and causes the ratio to inflate.

Net Operating Asset Turnover

This ratio gives the efficiency of the company to able to use their assets for generating revenue. This directly gives a measure of how profitable the assets are and of the company is utilizing them to the optimum level. This ratio indicates that the company needs to improve the efficiency of their operations. In particular, for the airline industry, this ratio is very important as the planes form a huge part of the company’s assets and if the asset are not generating enough return, it is much profitable to scale down and reduce the level of debt to improve earnings.

The following table gives us the NOAT for some airlines compared to Air France KLM.

Air France KLM

Lufthansa

ICA Group

Aeroflot

Turkish Airlines

Delta Airlines

5.93

3.44

2.14

1.74

0.95

2.59

As Air France KLM has very high operating liabilities, the value of net operating assets is lower and thereby, the operational efficiency is much higher than comparable companies. This comes from reduction of assets that the company did in 2014 to reduce some debt and optimize spending on inventory.

Solvency Analysis

Analysis and interpretation in detail of the firm’s solvency position (i.e. its credit risk).

As Airline industry is a CAPEX based industry and that the margins on operations are