MBAA 518 - Comparative Financial Ratio Analysis of Airlines

This report provides a financial analysis of American Airlines and British Airways, focusing on Return on Equity (ROE) and market value ratios. The ROE is analyzed using DuPont analysis, breaking it down into net profit margin, asset turnover, and equity ratio. The analysis reveals that American Airlines has a higher ROE than British Airways due to its lower equity ratio, despite British Airways having a higher net profit margin. The report also examines earnings per share (EPS) and price-to-earnings (P/E) ratios to assess market valuation, concluding that American Airlines' stock may offer more value opportunity based on these ratios. Overall, the report suggests that American Airlines is a potentially better investment option based on the analyzed financial metrics. Desklib offers a variety of similar solved assignments and past papers to aid students in their studies.

Running head: MANAGERIAL FINANCE
Managerial finance
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Table of Contents
Introduction................................................................................................................................2
Return on equity (ROE).............................................................................................................2
Market value ratio......................................................................................................................3
Conclusion..................................................................................................................................4
Reference....................................................................................................................................5

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Introduction
ROE is a financial performance metric used to measure rate of return that owners of
the common stock of any entity receive on the shareholding. On the other hand, market value
ratios are used for analysing the current share price of the company. These ratios are
generally used by the potential investor for determining whether the share of a company is
overpriced or underpriced (Lee et al., 2015).
Return on equity (ROE)
ROE signifies how good the entity is in context of generating the returns on
investment received by it from its shareholders. It is calculated through dividing net earnings
by the shareholder’s equity. DuPont analysis is the extended form of ROE of any entity that
analyses the net profit margin, assets turnover and equity ratio that is financial leverage. To
be more specific the DuPont analysis breaks down ROE for analyzing how the company can
enhance the return for its shareholders (Benjamin, Mohamed & Marathamuthu, 2018). It
provides broader view regarding the strengths of the company and highlights the area where
improvement scope is there. It is calculated as follows –
ROE = Net profit margin * Asset turnover / equity ratio
Or, = (Earnings to owners / revenues) * (Revenues / assets) / (Common equity / assets)
Or, = Earnings to owners / common equity
ROE for American Airlines

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ROE for British airways
From the above table it can be identified that the ROE for American Airlines is 0.49
whereas the same for British Airways is only 0.23. ROE can be higher if the company has
high net profit margin, uses the assets efficiently for generating income and has high financial
leverage. From the above it can be identified that though British airways have higher net
profit margin, as it has significantly high equity ratio as compared to American Airlines, its
ROE is significantly lower than American Airlines. Hence, to improve the ROE British
Airways is suggested to increase its financial leverage that is to raise funds through debts
instead of equity for financing the assets.
Market value ratio
Earning per share is used to analyse the earning generated by the company from its
revenue for its shareholders. Though this ratio does not reflect market price of the company’s
share but is used by the potential investors to know the earnings generated on each share.

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From the above table it can be identified that the EPS for American Airways is $ 3.92
whereas the same for British Airways is £ 7.61 (Americanairlines.gcs-web.com, 2019). On
the other hand, PE ratio is computed through dividing the market price per share by EPS. It is
used for comparing the entities in the same industry. It can be identified from above table that
the PE ratio of American Airways is 13.39 whereas the same for British Airways is 38.26
(Finance.yahoo.com, 2019). Hence, if only PE ratio is considered it can be stated that the
shares of British Airways are overpriced as American Airline’s share has more value
opportunity that may provided by its stock (Britishairways.com, 2019).
Conclusion
From the above analysis it is concluded that if the overall analysis is made between
the 2 companies it can be stated that the stock of American Airline shall be chosen for
investment as it provides higher return on equity (ROE) and stock of the company has more
value opportunity.

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Reference
Americanairlines.gcs-web.com. (2019). Retrieved 15 January 2019, from
https://americanairlines.gcs-web.com/static-files/17cae9f4-55b0-4a05-a2dc-
33fcc0a01985
Benjamin, S. J., Mohamed, Z. B., & Marathamuthu, M. S. (2018). DuPont analysis and
dividend policy: empirical evidence from Malaysia. Pacific Accounting
Review, 30(1), 52-72.
Britishairways.com. (2019). Book Flights, Holidays & Check In Online | British Airways.
Retrieved 15 January 2019, from https://www.britishairways.com/en-us/home#/
Finance.yahoo.com. (2019). Yahoo is now part of Oath. Retrieved 15 January 2019, from
https://finance.yahoo.com/quote/BA/history?
period1=1514485800&period2=1515954600&interval=1d&filter=history&frequency
=1d
Lee, B. S., Paek, M., Ha, Y., & Ko, K. (2015). The dynamics of market volatility, market
return, and equity fund flow: International evidence. International Review of
Economics & Finance, 35, 214-227.