Financial Analysis for Lufthansa Research Paper

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Financial Analysis for Lufthansa

Financial Analysis of Lufthansa

Company Information

Lufthansa was established in 1926, went through a process of corporate restructuring in 1954 and is currently headquartered in Cologne, Germany. It represents one of the largest airline organizations in Europe, offering flight services to a wide array of destinations. Lufthansa has generically differentiated itself through the offering of high quality products and services, striving to maximize customer utility and satisfaction. The fleet totals up to 500 aircrafts and the staff members worldwide come up to 105,261. Throughout the years, the organization has set the basis for numerous strategic partnerships, which supported its growth and development. Today, with the aid of its partners, the German airline offers flights to 408 destinations (Flight International, 2007).

2005 and 2007 Trends as Compared to 2006 most efficient analysis of a company's financial status is given by the comparison of its results throughout the years. The table below reveals the most important financial highlights of Lufthansa throughout fiscal years 2005, 2006 and 2007 (in million euros; the change column reveals the change in the year analyzed compared to the previous year):

Change

Revenues

Traffic revenue

Operating Result

1984-88

1984-1998

Net Profit

Cash flow from Operations

Capital Expenditure

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The revenues highlights reveal a growth trend in both 2006 and 2007; the growth rate has been stronger manifested throughout 2007, in comparison to the revenues increase of 2006. The same is true in terms of the income generated by flight operations: an ascendant trend, manifested stronger in 2007 relative to 2006, as compared to a lower growth rate in 2006 relative to 2005.

Research Paper on Financial Analysis for Lufthansa Assignment

The operating result and the net profits also reveal sustainable ascendant trends. Both values were met with increases throughout 2006 and 2007, but in both cases, the increases occurred at more rapid paces in 2007 relative to 2006 as compared to 2006 relative to 2005. The cash flow from operations is also revealing an increasing trend, with a higher growth rate in 2007 than in 2006.

The final row of the table reveals the capital expenditures, the sole indicator registering decreasing values. This however indicates that the organization is extremely powerful and efficient and is able to increase its revenues while reducing its resource consumption. This conclusion is backed by non-financial indicators, such as flights undergone by the organization, passengers served or the number of individuals it employs. The most relevant example in this instance is given by the significant increases in flights and customers served in 2007, while the Lufthansa staff grew at an inferior rate. Compared to 2006, 2007 revealed a 17.7% increase in the numbers of served passengers, a 12.8% increase in the numbers of flights and only a 7.7% increase in the numbers of individuals employed.

3. 2005 and 2007 Trends Relative to Assets

Aside the financial highlights, a company's performance can also be assessed in terms of its assets. The table below reveals how these have modified for Lufthansa in 2006 compared to 2005 and in 2007 compared to 2006 (in million of euros):

Change

Total Assets

The assets refer to the totality of money, equipment, buildings and so on owned by a company and which are of value. Lufthansa reveals an ascendant trend of their assets, but similar to most of its financial achievements, the increase in 2006 reported to 2005 is lower than the increase from 2007 relative to 2006.

The basic desire is for the assets to rise as they allow the company to increase its profits. This desiderate is however conditioned by a managerial ability to properly utilize the assets. If the value of the assets is high but the profits are reduced, it means that the company officials are unable to capitalize the assets. The business community generally searches for an equilibrium between assets and profits.

The assets' ability to reveal performance is also given through the calculation of the Return on Assets. This is a ratio of managerial effectiveness and its value is desired to be high. Lufthansa's ROA is of 2.78, compared to an industry average of 0.09 (Reuters, 2009). This means that the German airline organization is highly skilled in capitalizing on their assets and its performances and strength are high.

4. Lufthansa's Liquidity

The liquidity ratios are calculated to reveal a company's ability to honour its short-term debts. This ability is crucial for sustainable operations and it has often saved companies from financial challenges in difficult times. It is generally desired for the liquidity ratios to register high values, meaning that the organization is able to rapidly transform its assets into liquidities and pay its debts. The two most common liquidity ratios are the quick ratio and the current ratio (Investopedia, 2009).

Lufthansa's quick ratio is of 0.85, with an industry average of.79. Their current ratio is of 0.91, equal to the industry's average (Reuters, 2009). In terms of the quick ratio, the superior value is an indicator of a high ability to rapidly transform assets into liquidities and pay up the stringent debts. The equal value to the industry average of the current ratio reveals that Lufthansa is just as able to pay its short-term debts as is any other company in the industry. In both cases, the liquidity is acceptable, but improvement could be made to increase the airline organization's ability to pay its short-term debts.

5. Long-Term Debt Paying Ability

However Lufthansa is able to pay its short-term debts, an analysis of its financial strength must also asses the company's ability to pay its long-term debts. This is generally achieved through the calculation of the long-term-debt-to-equity ratio. Lufthansa's LT Debt to Equity Ratio is of 44.54, compared to an industry average of 245.62 (Reuters, 2009). The difference between the two values should however not worry the airline company's management, as it is a sign of stability and well founded growth. Otherwise put, the higher the debt-to-equity ratio is, the more of the company's growth has been based on long-term debt. This then means that the organization is likely unable to pay back its long-term liabilities. Given that Lufthansa's ratio is significantly lower that the industry's average (more than five times lower), it means that their growth has only limitedly been based on debt and that the German organization is able to pay its debt. Foremost, the 44.54 LT Debt to Equity Ratio represents a balance between the debt involved and the amounts of additional income it generates.

6. Profitability Analysis

The final part of the hereby analysis refers to a look at the profitability ratios. They represent the company's ability to generate incomes that cover the incurred costs and also ensure net profits. The most common profitability ratios are the gross margin, the EBITD margin, the operating margin, the pre-tax margin, the net profit margin and the effective tax rate. The table below reveals these rations for Lufthansa and also for the industry, as the average of the past five years:

Lufthansa

Industry Average

Gross Margin

EBITD Margin

Operating Margin

Pre-tax Margin

Net Profit Margin

Effective Tax Rate

Information retrieved from Reuters, 2009

With the exception of the pre-tax margin, all ratios of Lufthansa are superior to the industry; and even for the pre-tax margin, the difference is insignificant (of only 0.11). Overall, this means that the German airline company registers high levels of profits. A more professional analysis however needs to go deeper than that and identify each ratio actually reveals.

Gross Margin - the percentage of total sale revenues the company is left with after the deduction of the direct costs; Lufthansa's superior gross margin means that the company retains more money than other companies in the industry, implying consequently higher levels of profitability

EBITD Margin - acronym for Earnings Before Interest, Tax and Depreciation; the fact that Lufthansa's EBITD is higher than the… [END OF PREVIEW] . . . READ MORE

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