Profitability Ratios
If we analyze the profitability of both the companies and compare them based on return on assets then the return on assets for both the companies have increased by 2% however, WestJet have higher return on assets, which shows much stronger asset efficiency despite few planes. Similarly, the return on equity is negative for Air Canada because of negative stock equity whereas the ROE for WestJet has increased by 3% to 20% in 2015, which is quite impressive and beneficial for the shareholders of the company since, the company pays dividends.
In terms of the profitability ratios, the profit margin, gross profit margin and operating margin ratios have increased for both the companies however, they are significantly higher than for WestJet than the ratios of Air Canada. This comparison shows that WestJet is more profitable as compare to Air Canada. The low cost model is working in the favor of WestJet. These ratio calculations are shown below:
Illustration of Profitability Ratios | |||||
Formulas | Air Canada | WestJet | |||
Â | 2015 | 2014 | 2015 | 2014 | |
Return on Assets | Net Income/(Average TA) | 3% | 1% | 8% | 6% |
Return on Shareholdersâ€™ Funds | Net Income/Average Equity | -51% | -8% | 20% | 17% |
NP Margin | Net Income/Sales Revenue | 2% | 1% | 9% | 7% |
GP Margin | Gross Profit/Sales Revenue | 68% | 59% | 76% | 43% |
OP Margin | Operating Income/Sales Revenue | 25% | 6% | 62% | 31% |
Efficiency Ratios
If we compare the asset efficiency based on the total assets of each company, then we can see that the total asset turnover ratio has decreased in 2015 for both the airline companies and this is not a good sign of asset management. However, the asset turnover for Air Canada is higher in 2015 than WestJet. Similar is the case with the fixed asset turnover ratio of both the companies and both have declined in 2015. Finally, payables and receivables turnover suggest a low cash conversion cycle for WestJet as compared to Air Canada. This shows poor asset efficiency of both the companies. This is alarming for the management of both the companies. These ratios are shown below:
Illustration of Efficiency Ratios | |||||
Formulas | Air Canada | WestJet | |||
Â | 2015 | 2014 | 2015 | 2014 | |
Total Asset Turnover | Sales/TA | 1.06 | 1.25 | 0.79 | 0.86 |
Receivables Turnover | Sales/Receivables | 17.40 | 20.23 | 49.13 | 72.31 |
Payables Turnover | COGS/payables | – | – | 2.18 | – |
FA Turnover | Sales/FA | 1.97 | 2.21 | 1.16 | 1.42 |
Liquidity and Solvency Ratios
The liquidity and solvency ratios have been also computed for both the airline companies. Based on the current ratio, we can see that Air Canadaâ€™s performance is much better as compared to WestJet although, the average ratios for both the companies are lower than the industry averages which is 2 times. Similar is the case with the acid test ratio. This suggests that Air Canada has a strong grip on its working capital policies and current assets. Moreover, WestJet has fewer current assets in 2015 as compared to its current liabilities, which is alarming for the company………….
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