Running Head: ANALYZING FINANCIAL STATEMENTS
Analyzing Financial Statements
Singapore Air vs. Emirates Airlines
Team Four Consultants
Colin Boddy, Hana Matsui, Jake Lynch, Krista Alec, and Patrick Twinn
Royal Roads University
Mahesh Kumar
International Hotel Management 320: Hospitality Finance
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ANALYZING FINANCIAL STATEMENTS
Introduction
Emirates Airlines and Singapore Air are two of the largest and most
successful global air transit companies operating in today’s market. Both operate
flights to six continents daily and carried over 15 million passengers in
2012(Emirates Group, 2012) (Singapore Airlines, 2012). Singapore Air operated a
fleet of 102 aircrafts in 62 destinations in 2012 (Singapore Airlines, 2012), while
Emirates Airlines utilized a fleet of 186 in 127 destinations (Emirates Group,
2012). The two companies have similarly ambitious plans for expansion, and are
well positioned to maximize their business potential in emerging markets. Their
products are upper-mid range and luxury air-travel, which they market to a similar
population of traveling professionals and upper-income leisure travelers (O’Reilly,
2012). Though both companies are typically highly profitable, they are certainly
not immune to the financial volatility that has traditionally plagued the airline
industry.
Warren Buffet is arguably the most successful investor of all time. In a
career that has spanned over four decades, his successful investments have earned
him a personal net worth of over $46 billion in 2012, making him the third richest
individual in the world (Forbes, 2012). The consistent return on his investments is
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ANALYZING FINANCIAL STATEMENTS
undisputable, “a $10,000 investment in Berkshire Hathaway in 1965, the year
Warren Buffett took control of it, would grow to be worth nearly $30 million by
2005” (Investopedia, 2005). Buffet is a follower of the “value investing” model, and
focuses on twelve tenets to guide his investing decisions. The tenets are all focused
in the following areas: business, management, financial measures, and the intrinsic
value of the company that he is considering (Harper, 2011). Team Four
Consultants will be utilizing his distinct investing philosophy and methodology to
analyze the financial position of Emirates Airlines and Singapore Air, and assess
which is a more desirable investment. Furthermore, Singapore Air will serve as our
primary company, and it is important to note that Emirates Airlines is not located
on any stock exchanges, but is available for private investment. Several of the key
considerations that Buffet takes into account are the company’s level of debt, their
return on investment, and their current and potential profitability (Investopedia,
2005).
Financial Analysis
Debt Analysis
Current Ratio (CR). CR examines the company’s current assets to current
liabilities. Singapore Airlines had a CA/CL score of 1.1 in 2012, averaging 1.2
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ANALYZING FINANCIAL STATEMENTS
between 2009 and 2012. Emirates Airlines had a CR of 0.98 in 2012, averaging
1.004 over the last three fiscal years. It is considered industry best practice to have
a CR of 2 or higher. In 2012 they actually have a ratio score of less than 1:1,
meaning their current liabilities are greater than their current assets.
Debt/ Equity. Buffett prefers companies that have a lower ratio in this
regard as high debt can lead to volatile earnings and large interest expenses
(Investopedia, 2005). Emirates displays a high level of debt to shareholders equity,
with a ratio of 2.6 in 2012, averaging 2.3 for the past three years. Singapore has an
extremely low ratio: 1.2 for 2012, as well as the yearly average since 2009.
Debt Ratio. It is considered ideal for a business to have a debt ratio of less
than 50%, meaning that they would be able to pay off their total debt twice using
their assets. Emirates Airlines is carrying an excess amount of debt, with a 72%
debt ratio in 2012, and a three-year average of 70%. Singapore Airlines, is on the
opposite end of the debt spectrum, carrying 40% debt in 2012, averaging 39%
since 2009.
Return on Investment (ROI). When analyzing ROI, we used two
calculations of ‘Return on Equity’ (ROE) and ‘Earnings per Share’ (EPS). After
analysis, it was determined that Emirates Airlines provides investors with a
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ANALYZING FINANCIAL STATEMENTS
greater ROI, as their three-year EPS average was $4.00 and their three-year ROE
average was 16.9%; compared to Singapore Airline’s three average EPS average of
$0.31 and their three-year ROE average of 4.4%.
Profitability. Looking at profitability, two analysis were used, ‘Profit
Margin’ (PM) and ‘Interest Coverage Ratio’ (ICR). Comparing these two
organizations, Emirates Airlines provides investors with greater profitability.
Emirate’s three-year average PM is 6.7%, compared to Singapore’s three-year
average of 5.3%; however, it’s important to note that Singapore’s PM for 2012 was
3.2%, compared to Emirate’s 2012 PM of 2.0%. Comparing the ICR of these
companies, Emirate’s three-year average was 7.85 compared to Singapore’s threeyear average of 5.46; which demonstrates that Emirates Airlines will be less likely
to be burdened by a debt expense.
Additional Considerations
Longevity. Another key consideration of Buffet’s when considering an
investment is how long the companies have been publically traded. He will
generally not consider companies until they have had their IPO filings in the last
decade; citing longevity and historical performance as key indicators of future
potential (Investopedia, 2005). Singapore Airlines was incorporated in 1972
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ANALYZING FINANCIAL STATEMENTS
(Mergent, 2011), while the Emirates Group went public in 1985 (Funding
Universe, 2001). Both companies have been public for a long enough period of time
to be considered acceptable by Buffett, however Singapore has a longer history to
draw from, and more proven longevity.
Commodity Reliance. Typically Buffet stays away from companies that
rely solely on a commodity to operate. Obviously, in this case both airlines rely on
the availability of affordable oil to operate. Though both companies claim to be
seeking ways to reduce their dependence on oil and become more sustainable, in
2012 Emirates Airlines actually saved 500,000 gallons of fuel by utilizing highly
efficient engines on their A380 fleet (Emirates Group, 2012).
Competitive Advantage. The concept of an “economic moat” or
competitive advantage is extremely important to the value investing strategy. The
concept holds that the more differentiation that the business has over its
competitors, the wider the “economic moat” they have to protect their market
share (Investopidia, 2005). Emirates flights make up more than 40% of total
aircraft movement in and out of Dubai (Emirates Airlines, 2012). Encroachment on
their hub territory is highly unlikely as the UAE’s government and royal family are
the majority owners of the Emirates Group (Funding Universe, 2001). Singapore
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ANALYZING FINANCIAL STATEMENTS
Airlines, on the other hand, have a vastly diminishing role in Singapore’s Changi
Airport, and are currently facing competition in the destination from luxury
middle-eastern brands such as Emirates and Qatar Airways as well as discount
providers like AirAsia and JetStar (Fickling, 2012). Emirates Airline’s virtual
stranglehold over travel to a profitable destination – specifically to expanding
markets Dubai and Abu Dhabi- provides them with a very significant point of
differentiation in the market.
Intrinsic Value. This tenet of Buffett’s investing philosophy holds that a
company’s “intrinsic” or “real” value is usually higher than its liquidation value
(Investopedia, 2005). Intangible factors such as brand recognition, goodwill, and
customer loyalty make the value of the business more than the sum of its tangible
parts. As there is no set method to determine Intrinsic Value, we have developed
the formula: Liquidation value + Intangibles = Intrinsic Value. Using this
measurement tool, Emirates Airlines Intrinsic Value is $3,235,360,000, compared
with Singapore Airline’s valuation of $6,461,900,000.
Buffett’s strategy when considering investment is based on how much
higher their Intrinsic Value is than their Liquidation Value. Typically, Buffet invests
in companies with a 25% higher real value than their current market
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ANALYZING FINANCIAL STATEMENTS
capitalization. Using the formula Intangible Assets/ Liquidation Value x 100,
Emirates Airlines is thought to be 8.2% undervalued, compared with 1.7% for
Singapore Air.
The market currently undervalues neither of these companies significantly enough
to warrant meet Buffett’s investment standards, as they are both well-regarded
and established global business conglomerates. However, Emirates Airlines has a
far higher differential between its Intrinsic and Liquidation Values.
Investment Recommendation
Neither airline would likely pass Buffett’s investment feasibility test.
Comparing levels of debt, Singapore Airlines provides a much safer approach
contrasted to Emirates Airlines. Buffet prefers advocates investing in companies
with lower levels of debt. Singapore Airlines achieves low levels of debt through
issuing great sums of shares; contradictory to Singapore Airlines, Emirates issues
fewer shares for investors, instead opting for other methods of financing. As a
result of incorporating greater levels of debt, Emirates is able to provide investors
with greater EPS, ROE, PM, and ICR but with also greater risk. Emirates delivers a
higher ROI for shareholders than Singapore Airlines does; they have also achieved
a consistently greater profitability margin. Emirates demonstrates commitment to
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lowering their dependence on the industries greatest expense: oil. Moreover, the
carrier has a virtual monopoly of travel to the UAE, giving them a wide “economic
moat” of differentiation to protect them competitor encroachment, especially as
the destination is developing into a major world centre. Finally, their Intrinsic
Value is far higher than that of Singapore Air, meaning that they are currently
somewhat undervalued by the market, and have potential to generate great profit
margins in the long-term. For an investor not averse to risk, who looking for a
large return in the long-term, Team Four Consultants believes that Emirates
Airlines is a far superior investment option than Singapore Air.
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10
References
---(2001): The Emirates Group History, Funding Universe, Retrieved From:
http://www.fundinguniverse.com/company-histories/the-emiratesgroup-history/
---(2011): Singapore Airlines LTD., Mergent Online, Retrieved From:
http://www.mergentonline.com.ezproxy.royalroads.ca/companyexecuti
ves.php?compnumber=15661
Fickling, David (2012, May 17): Singapore Airlines’ Competition Rises, Bloomberg
Business Week, Retrieved From:
http://www.businessweek.com/articles/2012-05-17/singapore-airlinescompetition-rises
O’Reilly, Laura (2012, March 12): Emirates introduces new brand positioning,
Marketing Week. Retrieved From:
http://www.marketingweek.co.uk/news/emirates-introduces-newbrand-positioning/4000869.article
Singapore Airlines (2012): Annual Report 2011-2012, Singapore Airlines, Retrieved
From: http://www.singaporeair.com/pdf/Investor-Relations/AnnualReport/annualreport1112.pdf
ANALYZING FINANCIAL STATEMENTS
11
Singapore Airlines (2011): Annual Report 2010-2011, Singapore Airlines, Retrieved
From: http://www.singaporeair.com/pdf/Investor-Relations/AnnualReport/annualreport1011.pdf
The Emirates Group (2012): Annual Report 2011-2012, Emirates Group, Retrieved
From: http://content.emirates.com/english/images/EK-AR-1011_tcm233-750566.pdf
The Emirates Group (2011): Annual Report 2010-2011, Emirates Group, Retrieved
From: http://www.theemiratesgroup.com/english/factsfigures/archive/2010-2011.aspx
ANALYZING FINANCIAL STATEMENTS
12
Appendix A
Income statement and Balance sheet of Singapore Airlines
Singapore Airlines
Income Statement (in $ million)
The year ended March 31, 2012, 2011, 2010
Revenue
Expenditure
Operating profit/loss
Finance charges
Other income and loss
Profit before taxation
Income tax expense
Profit after taxation
2012-2011 2011-2010 2010-2009
12,070.10
11,739.10
10,145.00
11,889.50
10,887.80
10,183.60
180.60
851.30
-38.60
-65.90
-59.10
-51.30
298.60
401.80
323.20
413.30
1,194.00
233.30
-23.10
-182.80
46.50
390.20
1,011.20
279.80
Singapore Airlines
Balance Sheet (in $ million)
March 31, 2012, 2011, 2010
Current Assets
Intangible Assets
Other Non-Current Assets
Total Assets
Current Liabilities
Non-Current Liabilities
Total Liabilities
Share Capital
Treasury Shares
Other Reserves
Total Equity
2012
2011
2010
6,461.90
9,105.30
5,873.40
111.20
90.80
55.00
15,111.20 14,987.30 16,020.10
21,684.30 24,183.40 21,948.50
5,875.70
6,938.10
2,961.70
3,110.20
8,837.40 10,048.30
5,042.60
3,422.60
8,465.20
1,856.10
1,832.40
1,750.60
-258.40
-43.00
-0.90
11,246.20 12,345.70 11,733.60
12,846.90 14,135.10 13,483.30
ANALYZING FINANCIAL STATEMENTS
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Appendix B
Income statement of Emirates Airlines
Emirates Airlines
Income Statement (in AED million and in USD million)
The years ended March 31, 2012, 2011, 2010
Revenue
Other operating
income
Operating costs
Operating profit
Finance costs
Other income and
loss
Profit before income
tax
Income tax expense
Profit after taxation
(in AED)
2012-2011
61,508.00
(in USD)
(in AED)
2011-2010
16,748.01 52,945.00
(in USD)
(in AED)
2010-2009
14,416.39 42,477.00
(in USD)
11,566.06
779.00
212.11
1,286.00
350.16
978.00
266.30
-60,474.00
1,813.00
-657.00
-164,592.23
493.66
-178.89
-48,788.00
5,443.00
-506.00
-13,284.48
1,482.07
-138.78
-39,800.00
3,565.00
-355.00
-10,837.14
970.71
-96.66
517.00
140.77
608.00
166.56
455.00
123.89
1,673.00
455.54
5,545.00
1,509.85
3,665.00
997.94
-53.00
1,620.00
-14.43
441.11
-78.00
5,467.00
-21.24
1,488.61
-50.00
3,615.00
-13.61
984.33
As of exchange rate on November 11, 2012
USD/AED=0.27229
1AED=0.27229USD
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ANALYZING FINANCIAL STATEMENTS
Appendix C
Balance sheet of Emirates Airlines
Emirates Airlines
Balance Sheet
March 31, 2012, 2011, 2010
Current Assets
Intangible Assets
Other Non-Current Assets
Total Assets
(in AED)
(in USD)
(in AED)
(in USD)
(in AED)
(in USD)
2012-2011
2011-2010
2010-2009
25,190.00
6,858.99 21,867.00
5,954.17 18,677.00
5,085.56
902.00
245.61
901.00
245.33
927.00
252.41
50,994.00 13,885.16 42,322.00 11,523.86 35,943.00
9,786.92
77,086.00 20,989.76 65,090.00 17,723.36 55,547.00 15,124.89
Current Liabilities
Non-Current Liabilities
Total Liabilities
25,765.00
29,855.00
55,620.00
7,015.56 21,290.00
8,129.22 22,987.00
15,144.78 44,277.00
5,797.05 18,520.00
6,259.13 19,552.00
12,056.18 38,072.00
5,042.81
5,323.81
10,366.62
Share Capital
Retained Earning
Other Reserves
Non-controlling interests
Total Equity
801.00
21,256.00
-833.00
242.00
21,466.00
218.11
801.00
5,787.80 20,370.00
-226.82
-565.00
65.89
207.00
5,844.98 20,813.00
218.10
801.00
5,546.55 16,794.00
-153.84
-321.00
56.36
201.00
5,667.17 17,475.00
218.10
4,572.84
-87.41
54.73
4,758.26
As of exchange rate on November 11, 2012
USD/AED=0.27229
1AED=0.27229USD
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Appendix D
Ratios
Current Ratio: CA/CL
2012-2011
25,190/25,765
0.977682903
2011-2010
21,867/21,290
1.027101926
2010-2009
18,677/18,520
1.008477322
6461.9/5,875.7
1.099766836
9,105.3/6,938.1
1.312362174
5,873.4/5,042.6
1.164756277
EBIT interest coverage: EBIT/Int
2012-2011
Emirates
1,813/657
2.759512938
2011-2010
5,441/506
10.75296443
2010-2009
3,565/355
10.04225352
180.6/65.9
2.740515933
851.3/59.1
14.40439932
(38.6)/51.3
-0.752436647
2012-2011
55,620/77,086
0.721531796
2011-2010
44,277/65,090
0.680242741
2010-2009
38,072/55,547
0.685401552
7655.4/19229.2
0.398098794
8777.8/21771.3
0.403182171
7381.0/19586.0
0.376850812
Emirates
Singapore
Singapore
Debt Ratio: TD/TA
Emirates
Singapore
Return on Equity: Net Income/ Shareholder Equity
2012-2011
2011-2010
Emirates
Shareholders
21,466.00
20,813.00
Equity
Net Income
1,236.00
5,166.00
5.8%
24.8%
2010-2009
17,475.00
3,495.00
20.0%
Singapore
Shareholders Equity
Net Income
13,247.90
14,174.30
13,420.00
390.20
1,132.00
321.70
2.9%
8.0%
2.4%
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ANALYZING FINANCIAL STATEMENTS
Profit Margin: NI/Rev
Emirates
Net Income
Revenues
Singapore
Net Income
Revenues
2012-2011
2011-2010
2010-2009
1,236.00
61,508.00
2.0%
5,166.00
52,945.00
9.8%
3,495.00
42,477.00
8.2%
390.20
12,070.10
3.2%
1,132.00
11,739.10
9.6%
321.70
10,145.00
3.2%
2011-2010
2010-2009
44,277
38,072
20,813
17,475
2.13
2.18
15,808.6
17,245.3
16,905.9
13,247.9
14,174.3
13,420
1.19
1.22
1.26
2011-2010
2010-2009
5,074
3,418
801
801
6.33
4.27
390.2
1,011.2
297.8
1,856.1
1,832.4
1,750.6
0.21
0.55
0.17
Debt/ Shareholder Equity
2012-2011
Emirates
Total Debt
55,620
Shareholders
21,466
Equity
TD/SE
2.59
Singapore
Total Debt
Shareholders
Equity
TD/SE
Earnings Per Share: NI/AO shares
2012-2011
Emirates
Net income-Dividends
1,118
on Preferred Shares
Average Outstanding
801
Shares
1.40
Singapore
Net income-Dividends
on Preferred Shares
Average Outstanding
Shares