Fundamentals of Value Creation in Business - Desklib

This assessment analyzes the financial statements of Flight Center Travel Group Ltd. and includes computation and analysis of key financial ratios related to profitability, solvency, and liquidity aspects of the business. A comparative analysis with Webjet is also included.

Running head: FUNDAMENTALS OF VALUE CREATION IN BUSINESS
Fundamentals of value creation in business
Name of the Student:
Name of the University:
Author’s Note:

FUNDAMENTALS OF VALUE CREATION OF BUSINESS
Executive Summary
The main purpose of this assessment is to analyze the financial statement of Flight Center Travel
Group Ltd. The analysis includes analysis of the financial statements for a period of five years
considering the performance of the business on the basis of the five years as shown in the annual
report of the business. The report considers key financial ratios computation and analysis for the
same. The analysis of key financial ratios of the business includes profitability ratios, solvency
ratios and liquidity ratios in relation to five years period considering the financial statements of
the company. In addition to this, the report also includes graphs and tables showing calculations
of some key ratios which are included in the profitability analysis, solvency analysis and
liquidity analysis.

FUNDAMENTALS OF VALUE CREATION OF BUSINESS
Table of Contents
Introduction......................................................................................................................................3
Profitability Analysis.......................................................................................................................4
Liquidity Analysis...........................................................................................................................9
Solvency Ratios.............................................................................................................................13
Conclusion.....................................................................................................................................18
References:....................................................................................................................................19

FUNDAMENTALS OF VALUE CREATION OF BUSINESS
Introduction
The main purpose of this assessment is to analyze the financial statements of Flight
Center Travel Group Ltd which is engaged in providing flight services to the customers. The
report will be considering the financial information of the business which are taken for the
annual report of the company for a period of five years. The assessment will also be including
computation of key financial ratios of the business which are related to profitability, solvency
and liquidity aspects of the business. The report will also focus on analyzing the key financial
ratios of the company in order to interpret the performance of the company over the last five
years considering from 2014 to 2018.
Flight Center Travel Group Ltd is regarded as one of the largest outlets of retail travel
services which is provided in Australia. The company is known for its swift and smooth travel
services. The company was established in 1982 and has its headquarters in Brisbane, Australia.
As per recent estimates, the company has a turnover of 20 billion and contributes to the
employment needs of the economy by hiring and retaining more than 20000 employees around
its different areas of operations in total. The company has operations in around 23 countries and
has a travel management network which is over 90 countries around the Globe.
The assessment can be sub-divided into two parts which is calculation part where key
financial ratios are to be computed for the company and the analysis part which will be
explaining the position of the business in the market among the close competitors. The analysis
of ratios will also be determining the performance and growth of the business during the year.
The assessment will also be considering another company for the purpose of conducting a
comparative analysis which is known as Webjet. It is a significant competitor of FLT.The ratios

FUNDAMENTALS OF VALUE CREATION OF BUSINESS
will be computed which are related to solvency, liquidity and profitability of the business which
are analyzed for five years The purpose of this comparative analysis is to assess the financial
position of both businesses
Profitability Analysis
The profitability of the business considers the revenue generating capability of the
business from operational activities of the business. The profitability of the business is to be
determined with the help of key financial ratios which are net profit margin, return on assets,
return on equity and return on investments of the business(Lawrence, 2013). The ratios which are
considered for the analysis are considered to be key financial ratios of the business and are
indicators whether the business are in right tracks judging from the goals and objectives of the
business.
Particulars 2013(%) 2014(%) 2015(%) 2016(%) 2017(%) 2018(%)
net profit margin 12.65 9.37 10.86 9.32 9.07 9
return on equity 26.13 19.48 21.67 18.7 16.63 17.66
return on assets 10.95 8.65 9.87 8.45 7.45 7.97
return on invested capital 23.9 18.73 20.8 18.09 15.96 17.14

FUNDAMENTALS OF VALUE CREATION OF BUSINESS
9
17.66
7.97
17.14
2018
net profit margin return on equity
return on assets return on invested capital
Figure 1- pie chart portaying profitability ratios of FLT for 2018
Source:(created by author)
The above table shows the calculation of net profit margin of a business, return on assets
and equity and return on invested capital of the business which are considered to be key financial
ratios of the business. The pie chart reflects profitability ratios of the business for the year 2018.
The net profit margin as shown over the table has been more or less steady as reflected in the pie
chart. The net profit margin has increased from 9.37 in the year 2014 to 10.86 in the year 2015 .
Thereafter the profit margin has slightly diminished since 2015 and currently it stands at 9% in
the year 2015.this suggests that the costs of the business has increased and the sales has not
increased to that extent(Delen, Kuzey & Uyar, 2013).. The return on equity and return on equity
of a business are considered to be important financial indicators for the success of the business.
The return on equity has also shown fluctuating return over the years. In the year 2015 the
company had the maximum return on equity at 21.67. This suggests that the company is earning
fluctuating returns on its equity. The company needs to take steps to make sure it can improve

FUNDAMENTALS OF VALUE CREATION OF BUSINESS
that. The return on assets has also shown a similar trend , with the company making maximum
return on equity in the year 2015 at 21.67%( Kim, Kraft, & Ryan, 2013). thereafter it has slightly
diminished which suggests that the company is not making enough return on its assets. This
corroborates to the fall in profits of the company(Tayeh, Al-Jarrah & Tarhini, 2015). The return
on invested capital of the business is shown to be a similar trend as well with an inconsistent
pattern. The company made most return on 2015 and thereafter it has slightly diminished
because of the fall in profits of the business. The return on investment is computed to be 18.09%
in the year 2016, and thereafter slightly diminished .It further diminished in the year 2017
because of fall in profits. Thereafter it made a slight recovery in the year 2018 , owing to the fact
that the company improved its profits.
2014 2015 2016 2017 2018
0
5
10
15
20
25 Profi tability Analysis
net profit margin
return on equity
return on asset
return on invested capital
Figure 2- (graph showing profitability ratios of FLT)
Source-( created by author)
The above graphs portrays the profitability ratios of FLT for a period of five yers
between 2013 to 2018.

FUNDAMENTALS OF VALUE CREATION OF BUSINESS
The profitability ratios of Webjet is computed by considering the estimates that are
provided in the annual reports of the business. the key financial ratios relating to profitability of
Webjet is shown below:
particulars 2013 2014 2015 2016 2017 2018
Net profit margin 15.7 22.14 19.84 19.81 30.92 7.79
Return on equity 14.06 29.59 23.07 18.99 28.5 12.58
Return on assets 7.01 14.61 10.54 7.65 12.04 5.26
return on invested
capital 12.28 28.76 17.6 14.33 22.2 10.95
2014 2015 2016 2017 2018
0
5
10
15
20
25
30
35
Profitability analysis
net profit margin return on equity
return on assets return on invested capital
Figure 3- ( Graph showing profitability ratios of Webjet)
Source- ( Created by author)
The above table and graph shows the key financial ratios of Webjt which is computed by
considering the key financial ratios of the business which are net profit margin, return on equity ,
return on assets and return on investment of a business. The net profit margin in the business
shows an estimate of 7.79% in the current year 2018 . It has reduced significantly from the

FUNDAMENTALS OF VALUE CREATION OF BUSINESS
previous year . which was shown at 30.92% .The reasons for this is due to the fact that the costs
have gone up significantly or the sales have been reduced significantly. The return on equity has
increased significantly in the year 2014, with its maximum of 29.59% achieved by that year. In
the coming years it has shown that it has an inconsistent pattern with the significant reduction in
the year 2018 from 2017. It reduced from 28.5 % to 12.58% in the year from 2017 to 2018. the
return on assets has shown an increasing trend followed by a decreasing trend in the five years.
This is due to a fall in the profits of a company(Elshandidy, T., Fraser & Hussainey, 2013) .
Comparative Analysis
Net profit margin
7
7.5
8
8.5
9
9.5
Net profit margin
WEBJET FTL
Figure 4- ( graph showing comparative analysis of net profit margin of both companies)
Source: ( created by author)
As shown in the graph above, the net profit margin of FTL is slightly higher than Webjet.
The net profit margin is the most important indicator of profitability and the same is shown for

FUNDAMENTALS OF VALUE CREATION OF BUSINESS
Webjet as well. By comparing the profitability of the business , it suggests that the operational
structure of the FTL is better than Webjet . Thus the profitability of FTL is better than Webjet .
Hence the management of Webjet needs to think about the profitability aspect of the business.
Liquidity Analysis
The liquidity of the business refers to the ability of the company to effectively meet the
current obligations of the business(Ball, Li & Shivakumar, (2015). The ratios which will be
computed and considered in this section are current ratio and quick ratio which are discussed in
details in coming paragraphs. The liquidity position of Flight Center Travel Group Ltd is to be
judged from the analysis of current and quick ratio of the business. The liquidity ratios of the
business consist of quick ratio and current ratio which are considered to be an important
indicator for the success of the business(. In the case of FLT. the liquidity ratios of the business
is computed to considering the financial statements of the business for five yaer and the same is
presented in the table below.
Particulars 2013 2014 2015 2016 2017 2018
Current ratio 1.39 1.5 1.48 1.44 1.43 1.45
Quick ratio 1.35 1.47 1.45 1.41 1.37 1.38

FUNDAMENTALS OF VALUE CREATION OF BUSINESS
1.45
1.38
2018
Current ratio
Figure 5: (Pie chart portraying profitability ratios for 2018)
Source: ( created by author)
The above pie chart depicts the liquidity ratios of the business for the year 2018na and the
various components that are included below. The liquidity ratios of the business are shown in the
above figures and the same shows current ratio and quick ratio. The current ratio of the business
is shown to be 1.45 in the year 2018. This suggests that the liquidity ratio of the firm is
favorable. The current ratio has shown an increasing trend over the years which suggests that the
cash position of the firm is favorable and that the firm is in a good position to pay off its
debts(Dontoh, Ronen & Sarath, 2013). The quick ratios of the business is shown to be at 1.38 in
the year 2018 which further shows that the liquidity position of the business is appropriate.

FUNDAMENTALS OF VALUE CREATION OF BUSINESS
2014 2015 2016 2017 2018
1.3
1.35
1.4
1.45
1.5
1.55
1.5
1.48
1.44 1.43
1.45
1.47
1.45
1.41
1.37 1.38
Liquidity analysis
Current ratio Quick ratio
Figure 6- ( Graph showing liquidity ratios for FTL)
Source:( created by author)
The liquidity graph is shown in the above figure during the five years period. the liquidity
ratios are depicted in the above figures shows that the management of FTL is more than capable
of meeting the current obligations of the business effectively. the liquidity measure is an
important estimate which is considered by all the stakeholders that are involved in the
business(Hoberg & Maksimovic, 2014). the management must make attempts to maintain and
further improve the liquidity of the business. In the case of Webjet, the liquidity ratios are
computed and is illustrated in the following table
Particulars 2013 2014 2015 2016 2017 2018
Current ratio 1.27 1.59 1.34 1.05 1.46 0.93
Quick ratio 1.2 1.46 1.27 1 1.37 0.91

FUNDAMENTALS OF VALUE CREATION OF BUSINESS
2014 2015 2016 2017 2018
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
liquidity ratio
current ratio quick ratio
Figure 7- graph showing liquidity ratios of Webjet
Source:( created by author)
The liquidity ratio which is computed for Webjet Ltd is shown in the above graph and
table. The current ratio of the business is shown to have been positive , except it dipped
remarkably in the last year and is shown in the table below. The current ratio of the business is
shown to be 0.93 in the year 2018. While in 2017 it was 1.46. This suggests that the firm is not in
a good financial position at the present moment. Thus the current ratios of the business are not
appropriate and this shows that the firm is not in a good position to pay off its debts to
creditors(Behr, Norden and Noth, 2013). The quick ratios of the business also shows the liquidity
position of the business and the same is shown to be 0.91, which also suggests that the firm is not
in a good position financially and pay off their debts in due time.

FUNDAMENTALS OF VALUE CREATION OF BUSINESS
Webjet FTL
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
Current ratio Quick ratio
Figure 8- ( graph showing comparative analysis of current and quick ratios of both
companies)
Source:( created by author)
The following table shows the liquidity position of FPL with the help of Webjet. Both
companies have a similar liquidity structure in that both companies have a sound financial
position. With a current ratio of 0.93 and 0.91 for Webjet and FTL , This suggests that both
companies are sound enough to pay off its debts.
Solvency Ratios
The solvency ratios of a business refer to the capital structure which is used by the
business for the purpose of financing different activities of the business and also meeting the day
to day expenses of the business(Geng, Bose & Chen, 2015). The significant ratios which are
computed under this head are debt equity ratios. Net gearing Ratio which can analyze the capital

FUNDAMENTALS OF VALUE CREATION OF BUSINESS
structure which is used by the business and how the same has changed over the five years period.
A table showing computation of key ratios falling under the solvency category is shown below:
particulars 2013 2014 2015 2016 2017 2018
Financial leverage 2.31 2.2 2.19 2.23 2.24 2.2
Debt equity ratio 0.07 0.12 0.09 0.18 0.21 0.2
Interest coverage ratio 12.08 10.82 15.03 13.06 12.42 15.25
15.25
2018
Financial leverage Debt equity ratio Interest coverage ratio
figure 9- ( pie chart portraying solvency ratios for the year 2018)
source: ( created by the author)
The pie chart shown above relates to solvency ratios of the business for the year 2018.
The above table shows computation of key solvency ratios of the business during the year. The
ratio which is shown below in the above figure are financial leverage, debt equity ratio and
interest coverage ratio. The financial leverage reflects the borrowings of the company and the
estimate is shown to be 2.2 for the current year. The debt equity ratio is shown to be at 0.2 and
15.25 in the year 2018. The financial leverage has largely remained constant throughout the five
years , which suggests that the borrowings of the company has largely remained constant. The

FUNDAMENTALS OF VALUE CREATION OF BUSINESS
company has financed its borrowings by twice the amount that it has used to finance its assets.
This suggests a degree of financial risk for the company. The debt equity ratio is a long term
solvency ratio that indicates the soundness of long term financial policies of a company. It shows
the relation between the assets that are financed by the creditors and the assets financed by
shareholders. The company has a debt equity ratio of 0.2, which indicates that the business is in a
good solvency position. Interest coverage ratio did exhibit a declining pattern , however it
showed a considerable growth in the last year, 2018. The interest coverage ratio is a measure of
a company’s ability to meet its interest payments . It measures how easily a company can pay
interest expenses on outstanding debt. The interest coverage ratio of this company is very high
which suggest that the company has a lot of financial obligations due in respect of the loans it
took.It is an adverse position of the firm whivh is considerably risky for the firm. Also this ratio
is steadily increasing and showing a positive trend.
2014 2015 2016 2017 2018
0
2
4
6
8
10
12
14
16
18
solvency analysis
Financial leverage Debt equity ratio Interest coverage ratio
Figure 10- graph showing solvency ratios of FLT
Source: ( created by the author)

FUNDAMENTALS OF VALUE CREATION OF BUSINESS
The above graphs shows the solvency ratios of the business in relation to the capital
structure used by businesses for meeting all expenses of the business. The decisions which are
related to capital decisions are considered to be important for decision making process of the
management and also for the overall development and growth of the business(Loughran &
McDonald, 2016).
In the case of Webjet, the solvency ratios are computed in the table which is shown below.
2013 2014 2015 2016 2017 2018
financial leverage 2.2 1.86 2.46 2.49 2.28 2.45
debt equity ratio 0.21 0.24 0.26 0.11 0.17 0.2
interest coverage ratio 13.19 20.84 23.47 24.78 19.19 9.75
2014 2015 2016 2017 2018
0
5
10
15
20
25
30
solvency ratio
financial leverage debt equty ratio interest coverage ratio
Figure 11: ( Graph showing solvency ratios of Webjet
source:(created by author)

FUNDAMENTALS OF VALUE CREATION OF BUSINESS
The financial leverage of this company is stated to be 2.45 at the year 2018. and has
significantly progressed from 2014 onwards. The debt equity ratio has shown an increasing
trend in the early years and then later decreased in the later years. This suggests that the firm has
borrowed money from outsiders and that it has borrowed money at a steady rate. The interest
coverage ratio has showed an increasing trend in the early years , and then showing a decreasing
trend in the following years. This ratio suggests that the company is due significant interest
obligations and need to find ways how to reduce it.
Comparative analysis:
webjet FTL
0
0.05
0.1
0.15
0.2
0.25
debt equity ratio
Figure 12- Graph showing comparative analysis of debt equity ratio of both companies
source: ( created by author)
The above graph indicates that the debt equity ratio for the year 2018 of both companies Webjet
and FLT. It is similar for both companies. The capital structure for both companies is equally
financed by debt capital .The level of risk is the same in both companies.

FUNDAMENTALS OF VALUE CREATION OF BUSINESS
Conclusion
The company FLT is engaged in the operations of providing retail flight services in
Australia and is one of the leading airline companies in Australia. The discussion which is shown
for FLT shows that the financial performance of the business is appropriate and the business,
although had a difficult period between the years 2014-2016 is now slowly but steadily gaining
momentum and is heading towards growth and development. The profitability, solvency and
liquidity ratios reflect the improvement in the financial position of the business.
In this report a critical analysis of the three important statements which are included in
the financial statements are analysed in a detailed process. The profit and loss statement shows
different elements which are included in the statement and the different activities which are
undertaken by the management for generating revenues and profits of the business. Although the
revenue has increased , yet the profit margin has fallen as shown in the profit and loss statement.
The significant financial ratios are computed and analyzed accordingly inn order to identify the
financial performance of the business. The analysis shows that the profitability ratios and
liquidity ratio of FLT is better than Webjet and hence it needs to come up with a situation to
tackle it. The analysis confirms that both the businesses is in a growth phase and that there is
more scope for development in the future.

FUNDAMENTALS OF VALUE CREATION OF BUSINESS
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