National west airline

Question

National west airline
	20Y5	20Y6	20Y7	20Y8	20Y9
Assets
Cash	$76,600	$26,049	$63,490	$66,780	$90,997
Marketable securities	0	0	4,958	12,877	19,705
Accounts receivable (net)	22,060	66,352	44,904	66,360	70,294
Parts and supplies	6,114	14,755	17,857	22,467	30,782
Prepaid expenses	9,933	15,047	15,063	26,940	39,360
Total current assets	114,707	122,203	146,272	195,424	251,138

Net property and equipment	206,583	401,751	470,389	613,789	867,968
Restricted cash	49,018	33,974	7,300	6,640	30,076
Other assets	15,098	14,327	15,516	20,032	16,074
Total assets	$385,406	$572,255	$639,477	$835,885	$1,165,256

Liabilities and equity
Accounts payable	$17,420	$41,104	$37,422	$64,363	$111,974
Accrued wages	3,378	3,661	9,078	11,232	13,119
Accrued interest	4,551	6,798	7,269	12,298	18,346
Accrued taxes	4,867	9,199	12,167	14,718	16,760
Current portion of long-term debt	12,158	19,816	20,717	28,864	50,827
Other	22,156	40,042	67,225	82,833	134,783

Total current liability	64,530	120,620	153,878	214,308	345,809
Long-term debt	263,034	405,856	427,707	534,465	798,397

Net worth	57,842	45,779	57,892	87,112	21,050
Total liabilities and equity	$385,406	$572,255	$639,477	$835,885	$1,165,256

Operating revenues*	$328,926	$575,447	$775,675	$993,409	$1,315,804
Net income	3,027	(45,675)	13,111	29,324	-74,671
* In 20Y6 revenues were $575,447 (not shown above). By 20Y9, revenues had grown to $1,315,804, which is a 3-year annual compound growth rate of 31.7 percent.

National west airline (continued)
	20Y5	20Y6	20Y7	20Y8	20Y9	Ind.**
Liquidity
Current ratio	1.78	1.01	0.95	0.91	0.73	1.36
Receivables/current assets*	19.2%	54.3%	30.7%	33.9%	28.0%	40.7%
Inventory/current assets*	5.3%	12.1%	12.2%	11.5%	12.3%	1.8%
Sales/current assets*	286.8%	470.9%	530.3%	508.3%	523.9%	235.6%

Debt
Debt to net worth	566.3%	1150.0%	1004.6%	859.6%	5435.7%	172.3%
Current debt/net worth	111.6%	263.5%	265.8%	246.0%	1642.7%	91.9%

Profits
ROE	5.2%	(99.8%)	22.6%	33.7%	(354.7%)	9.1%

Causal
Fixed assets/net worth	357.2%	877.6%	812.5%	704.6%	4123.4%	92.9%

Collection period	24.1 days	41.5 days	20.8 days	24.0 days	19.2 days	62.2 days

Inventory turnover	53.8x	39.0x	43.4x	44.2x	42.7x	26.3x

Net sales/net worth	5.68x	12.57x	13.4x	11.4x	62.5x	2.95x

Profit margin	0.9%	(7.9%)	1.7%	3.0%	(5.7%)	3.1%

Misc. assets/net worth	43.3%	64.2%	52.8%	53.9%	263.3%	N/A
* For these three ratios, receivables, inventory, and sales are generally divided by the working capital. However, working capital is negative, so we use current assets in the denominator. The interpretation is very similar. ** Per Dun and Bradstreet.

Analysis

Liquidity – The company’s quantity of liquidity, as measured by the current ratio, has declined over this three-year period and is well below the industry average of 1.36. This pattern can also be seen in the sales to the current asset ratio, which is considerably above the industry average.
Debt – The company’s debt ratios each year are very large and considerably above average.
Profits – The return on equity is very high in 20Y7 and 20Y8. However, a recession hits in 20Y9, and the company loses a lot of money.
Causes – This is a classic case of a company that has grown too quickly. The fixed assets to net worth ratio and the trading ratio are considerably larger than the industry averages.

Accepted Answer

Liquidity – The company’s quantity of liquidity, as measured by the current ratio, has declined over this three-year period and is well below the industry average of 1.36. This pattern can also be seen in the sales to the current asset ratio, which is considerably above the industry average.
Debt – The company’s debt ratios each year are very large and considerably above average.
Profits – The return on equity is very high in 20Y7 and 20Y8. However, a recession hits in 20Y9, and the company loses a lot of money.
Causes – This is a classic case of a company that has grown too quickly. The fixed assets to net worth ratio and the trading ratio are considerably larger than the industry averages.

Question 6.CS.2: National west airline