Financial analysis is the is the evaluation processes of businesses and projects to its performance suitability. Through financial analysis, it is possible to determine whether a business if liquid, profitable, or solvent enough to be worth investing in (Byrd, Hickman, & McPherson, 2013). Financial analysis is used to identify projects and companies to invest, set financial policies, build long-term business plans, as well as evaluation of economic trends through the synthesis of financial data and numbers. Investors can be able to understand and determine strengths, profitability, liability, weaknesses, and potential earnings of business in future (Samonas, 2015). Some of the methods used to carry out financial analysis include vertical analysis, ratio analysis, and horizontal analysis. This paper presents the financial statement review, liquidity, profitability, asset management, financial leverage, and market value analysis of Delta Airlines to determine if it is worthwhile investment.
The U.S publicly traded company that was selected is Delta Air Lines (DAL). The rationale for the selection was based on a wide range of financial and industrial strengths that the company portrays. One reason that an investor would be encouraged to invest in the company would be the fact that DAL’s passenger capacity has been on the rise. The company’s debt-to-equity ratio is lower than the industry at 1.11 implying that more money would be going to investors. The company has a strong cash flow, and besides that, the airline business is promising as evidenced by the falling oil prices and the increasing demand for air travel. Delta Air Lines (DAL) has been the global leader in the US stock market even as other companies plummeted over the great recession. Despite a slight slump in the stocks over the past few months, Delta airlines still remains the favorable spot for anyone who seeks to invest in a fast thriving business. Other than its profitability, the company has maintained a competitive edge in its stock prices up and above its two major competitors American Airlines (AAL) and United Continental (UAL) (New York Stock Exchange, 2015).
The profile of a suitable investor for Delta Airlines is one of a moderate aggressive risk taker. Here, an investor is willing to take on more risk to realize higher returns. The investor is okay with the higher downside than the market but expects to be substantially compensated when the market goes up. The investor has a goal of accumulating a vast amount of returns in the near future and is willing to wait for that time to come. He focuses on growth and momentum stocks that have high beta with minimal emphasis on value of stocks. The return on investments on these stocks is minimal which explains the reduction of the annual debt of the firm. This also shows how the investors are poorly rewarded.
Delta Airlines has consistently set the pace in profitability among its major competitors American Airlines and United Continental. According to NYSE (2015), Delta airlines amassed a staggering pre-tax profit of $1.9 billion on revenue amounting $19.5 billion in the first half of 2014 translating to a 9.7% pre-tax margin. Although DAL’s closest competitor American Airlines also recorded $1.9 billion pre-tax profit over a similar duration, the company had invested a whole $21.4 billion representing a lower profit margin at 8.7%. The third competitor UCL trailed at $0.43 billion with at 2.3% margin. Moreover, DAL still maintains a significant lead in cash flow well above its competitors. Despite a relatively smaller size, DAL spent $2.46 billion on capital investments (NYSE, 2015). a company’s free cash flow reflects its superior ability to reduce debt levels at a more expeditious rate while converting more capital to shares through share repurchase, thus making DAL a worthwhile investment opportunity.
For the last years, DAL stocks have quadrupled raising the expectations of the investors in seeing a similar performance over the next two years (NYSE, 2015). However, while Delta’s stock isn’t undervalued as it was in 2012, it still seems quite cheap in light of the company’s recent earnings growth and adequate cash flow. With long term investment, the investors can sit tight and enjoy benefits of DAL’s strong cash flow. The strength in cash flow would enable DAL to pay down the bulk of its debt, fund most of its pension liabilities and also maintain 1% dividend yield in the next few years. By so doing, DAL will be in a position to devote more cash to shareholder-friendly uses. Long-term DAL’s shareholders thus have a lot to look forward to in the next five to ten years
Today’s investors want to know the truth about a company. Is it facing any litigation? Is its revenue increasing? Does it have any difficulties? What is its EPS and Price/ Earnings ratio? Investors would also want to know how Delta Airlines manages its expectations. If the company and the investors are, clear about Delta’s objectives, budget, scope of work, and timelines it will build trust between the two. This will also eliminate the fear, uncertainty and doubt which also mitigates the investor’s perception of risk. I would also engage multiple shareholders in order to maximize the perception of risk of Delta Airlines. I would talk to various shareholders to get their perception on the company’s risk. This will maximize the perception of risk of Delta Airlines and thus improve the decision-making process.
Strong fundamentals will actually favor the company’s investment portfolios, as they are likely to generate more profits. Delta Airlines is a blue chip company since it is one of the best-traded companies in the New York Stock Exchange. It is also the second largest airline, which implies that every year the company is likely to get increased revenue from its operations favoring investors of the Airlines. According to World Airline News, Delta Airlines is likely to expand its territories in 2016, as it will launch seasonal services to Iceland’s Keflavik International Airport from its Twin Cities hub. This will greatly favor investors due to the expansion of its operations. The company product ranges from in-flight baggage, to special services, to special catering meals, to check-in options and the like and it is expected that the company will give a dividend yield of 1.08 percent to its shareholders at the end of the year.
The term moderate aggressive investing refers to an investment style where an investor chooses investments with high risks. These high-risk investments are like the stock exchange and the penny stock market where the shares or stocks are volatile and gain value over a short-term basis but are likely to lose value rapidly. The investment type chosen by moderate aggressive investors are those that gain high profits over a short period and are subject to greater losses within that period
It is a comprehensive assessment of financial statements of a company quantitatively. Often, it is applied to performance evaluation of financial standing and operation of the company through assessing parameters like profitability, liquidity, solvency and efficiency (Subramanyam, 2014). The Benefits of this form of analysis includes the importance in analyzing the financial position of a particular entity and this aids other financial institutions in making decisions on lending and investment opportunities (Byrd et al., 2013). the form of analysis also helps in simplifying the understanding of the financial figures from the books of a company hence making the assessment process an easy one.
Leverage ratios also known as Debt/Equity ratio measures the long-term solvency of a business and to what extent a company debt to finance its operations and activities (Sengupta & Hogue, 2014). Bankers focus on leverage ratios to determine how businesses finance their assets either whether by investments or credit (Samonas, 2015). A high Debt/Equity ratio implies that business finances its operations majorly through credit and debts. According to Goel (2016), aggressive leverage practices of a company are associated with high levels of risk (Goel, 2016). Consequently, increased expenses in a company may result in volatile earnings. Delta airline recorded a financial leverage of 0.49, 0.42, and 0.34 in the financial years that ended in December 2016, 2017, and 2018 respectively. Hence the company does not finance its activities heavily on debt.
The ratio indicates how a company runs on debt finance instead of equity. Total shareholders’ equity / total debts = debt-Equity Ratio (Wahlen, Baginski, & Bradshaw, 2018). The ratio measures the stability of a company (Byrd et al., 2013). When the ratio is high, then the debt is high as in comparison to equity debt of each shareholder (Subramanyam, 2014). DAL recorded a debt to equity ratio of 0.5, 0.47, and 0.60 in the financial years that ended in December 2016, 2017, and 2018 respectively. Hence the company’s debt is increasing.
The ratio is important for companies that sale physical products and shows how a company effectively manages its inventory by comparing inventory and cost of goods sold (Wahlen et al., 2018). Thus, the ratio shows the sales of inventory during a given period. The ratio is essential because it depend on stock purchasing and sales of a company (Marinšek et al., 2016). Therefore, companies need to sale a huge amount of its inventory to increase turnover meaning that there is no overspending in inventory utilization. DAL recorded a inventory turnover of 36.51, 28.01, and 29.79 in the financial years that ended in December 2016, 2017, and 2018 respectively.
On the other hand, fixed asset turnover measures the operating performance of a company. A high fixed asset turnover ratio shows that utilize its fixed assets effectively to generate income (Tennent, 2014). A high turnover shows that a company utilizes its assets efficiently or can also mean that a company has sold its equipment and is outsourcing its operations (Sengupta & Hogue, 2014). However, low turnover indicated that a company is not utilizing its asset to the fullest thus insinuating that a company produces goods that people are not willing to buy or a company overestimates the demand of its products (Marinšek et al., 2016). Moreover, bottlenecks in the value chin can also be associated with low fixed asset turnover. DAL recorded a fixed asset turnover of 1.67, 1.62, and 1.62 in the financial years that ended in December 2016, 2017, and 2018 respectively.
ROA is a good measure of the net earnings to total assets in a business. Sengupta and Hogue (2014) adds that ROA is used to determine the amount of revenue a company can generate after paying taxes and how well they are utilizing the assets available. According to Penman (2013), a company becomes more asset-intensive when it records a lower profit per dollar (Tennent, 2014). As a consequence, companies that are asset-intensive require huge investments to acquire equipment and machinery to generate income. DAL recorded a ROA of 8.38%, 6.84%, and 6.93% in the financial years that ended in December 2016, 2017, and 2018 respectively.
Delta’s future seems to be bright despite recent hurdles that it has faced compared to its competitors. The company has been innovative in a number of aspects and despite its bankruptcy, it has maintained its route structure, its strategy, and other business practices. While the labor cost and fuel prices are rising, the entire industry is affected, and thus Delta should continue with its differentiating strategies to maintaining its legacy through exemplary customer services at affordable rates. Also, the management vision is likely to lead the company to a potential growth in the future and the anticipated acquisition of the Northwest seems to bring hope to the industry. Moreover, despite the fact that Delta was recently cleared to take off to black, investors should expect the worst since the move is likely to be challenging.
I would advise investors to strongly-buy shares from Delta Airlines Inc. The following is the recommendation according to Zack Investment Research. Also, because Delta has stand out to prove that international opportunity is a more profitable venture, it should embrace this market. Likewise, Delta should get back to its initial Marketing promotion that was developed back in 1924. With customer satisfaction as its priority and strength, Delta should come up with a business class and develop a regular coach as a shot term promotional investment. However, the processes need more of employee etiquette training which will ensure that customer expectations are in line with their travel experience.
Delta Airlines has been faced with various commodity price risks like the reduction of oil prices, which have resulted in the reduction of the cost of aeroplane fuel. This is good news for Delta Airlines as travelers hope that the reduction in aeroplane fuel will result in reduction of travel costs and other expenditures of the airline. Delta Airlines has found itself facing higher than usual hedging costs. It will lose $1.2 billion on hedging in 2015 but overall it still expects to see a $1.7 benefit from lower fuel prices. Delta holds investments in various equity securities and bonds with adjusted earnings per share of 20% increase every year despite the decline in revenue and a loss of $600 million on hedging fuel. This increase implies than the company is likely to experience high earnings on shareholders’ equity.
The airline has undergone radical changes on its operations. This has not come easy, as it has been faced with various risks. There are various key strategies that I would use to maximize Delta Airlines perceived risks: One, I would use the leverage quantitative data of the company. The more data I can acquire about Delta Airlines the better. I could use both internal and external data like case studies, analysts’ reports, assessment, studies, et cetera. I would also ensure transparency of Delta Airlines operations (Bhaskar, 2014).
In order for the company to maximize the perceived risks, there are some strategies that it needs to put in place to counteract the risks it is facing. The main strategy that DAL needs to put in place is the generic strategy referred to as differentiation. DAL is known worldwide for its unique brand legacy and extensive flight services, and as a result, many publicly known companies would easily take on the name Delta. In contrary, the company made some miscalculations in it differentiation strategy where many of its announced services are yet to be implemented, routes eliminations, and a low-cost airline brand. Despite the negative publicity caused by its bankruptcy, its brand image has still remained to be recognized (Kaufman, 2013).
Customer satisfaction and reward strategies.
Bhaskar, R. (January 01, 2014). Data Analysis for Dynamic Pricing in Airline: The Role of Tactical Pricing. Journal of Cases on Information Technology (jcit), 16, 1, 14-22.
Broderick, S. (January 01, 2018). Fleet simplified, Aeromexico eyes Delta joint-venture opportunities. Aviation Week & Space Technology, 26.
Heizer, J. H., & Render, B. (2014). Operations management: Sustainability and supply chain management. Boston: Prentice Hall.
New York Stock Exchange, (2015)
Reynolds-Feighan, A. (November 01, 2018). US feeder airlines: Industry structure, networks and performance. Transportation Research Part A, 117, 142-157.
Silk, R. (January 01, 2018). Delta, WestJet eye joint venture; are United, Air Canada next?. Travel Weekly.
Wahlen, J. M., Baginski, S. P., & Bradshaw, M. T. (2018). Financial reporting, financial statement analysis, and valuation: A strategic perspective.
DAL’s Financial Ratios
|Tax Rate %||34.10||37.26||23.61||23.43|
|Net Margin %||11.03||8.67||8.86||9.14|
|Asset Turnover (Average)||0.76||0.79||0.78||0.78|
|Return on Assets %||8.38||6.84||6.93||7.09|
|Financial Leverage (Average)||4.17||3.83||4.40||4.40|
|Return on Equity %||37.80||27.31||28.52||32.26|
|Return on Invested Capital %||23.86||18.06||18.06||19.34|
|Liquidity/Financial Health||2016-12||2017-12||2018-12||Latest Qtr|
|Days Sales Outstanding||18.80||19.65||19.27||23.24|
|Cash Conversion Cycle||-4.66||-3.98||-2.66||1.08|
|Fixed Assets Turnover||1.67||1.62||1.62||1.60|
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