Financial Performance Analysis Of Alliance Aviation Service Limited

Nature of the Company and the Industry

Introduction

Alliance Aviation Service Limited is the ASX listed company that provides aviations services and operates as air charter in Australia. The company also provides various other services like corporate, tourism, entertainment, and media, educational and sporting. The objective of this report is to analyse the financial performance and financial position of Alliance Aviation Service Limited through focussing on various key ratios like net profit ratio, asset utilization ratio, liquidity ratio and leverage ratio. The ratios will be calculated for the last 3 years to analyse the changes in the performance of the company. The report will further calculate the materiality and will identify the material items from the financial statement of the company. After identifying the material items the assertions involved with the items will be evaluated and based on that the recommendations will be provided to deal with them (Allianceaviationservices.com 2018).

Nature of the company and the industry

Alliance aviation service provided its 1^st service with 6 employees in the year 1989 and for 18 months it provided temporary facilities. The company is the only airline service with fixed base operator. Along with the airline services it provides other services like concierge services, fuelling, transient and military aircraft and amenities to the corporate. The company assures that the staff members are delivered with proper training to carry on the operations related to ramp function. Each of the staff member from the operations sector are provided with the training programmes that include on job training, class orientation, online safety, re-occurring training and training related to customer service. The company’s main objective is to offer world class services to the customers through exceeding and anticipating each customer’s expectations in timely manner. To make the difference in Australian aviation industry the company assures that the customers receive exceptional experience that is different from other aviation companies. Further, the company is subscribed to the mission, goal, philosophy and exceptionally good staffs who are focussed on the customer service (Allianceaviationservices.com 2018).

The company invested significant amount in last 1 year that are expected to improve the operating cash flow of the company. The company entered into the contract with the Australian Airlines for acquiring Fokker fleet to use the aircraft for sale and as the part of maintenance program of alliance operation. Further, the company invested in some plant, property and equipment. The financing activities of the company include the receipts and repayments of borrowings. The company prepares its general purpose financial statement as per the AAS and the interpretations released by the AASB and Corporations Act 2001. The financial statement of the company also complied with IFRS as released by IASB. The company prepares 4 major financial statements. Those are – consolidated income statement, consolidated statement for comprehensive income, consolidated balance sheet and consolidated statement for changes in equity (Allianceaviationservices.com 2018).

Analytical Procedures of Financial Statement

Analytical procedures of financial statement

Ratio	Formula	2017	2016	2015
Short-term solvency
Current ratio	Current assets/current liabilities	1.80	1.72	1.32
Long term solvency
Debt equity ratio	Total liabilities/shareholder’s equity	0.73	0.86	1.08
Asset utilization ratio
Asset turnover ratio	Net sales/total assets	0.81	0.77	0.90
Profitability ratio
Net profit ratio	Net profit/net sales *100	9.14	7.39	-18.34

Analysis –

Ratio	Analysis
Net profit ratio	Net profitability ratio is the most popular profit measuring metric that reveals the net profit after paying all the expenses as compared to its sales revenues. The net profit ratio is used for measuring the company’s overall profit from the business and therefore, the high ratio indicates efficient management of the business. However, no particular rule is there to interpret this ratio and to analyse the profitability the analyst shall compare the profitability of the company with the previous year and the industry average to identify the improvement. The net profit margin indicates how efficient the company is to convert the sales into net profit. Looking into the calculation table it can be identified that the net profit margin of the company have been increased from 7.39% to 9.14% over the years from 2016 to 2017 and therefore, it is in increasing trend. However, for the year 2015 as the company was not able to convert its sales into positive net income the net profit ratio for the year was in negative and the ratio was -18.34% (Schönbohm 2013).
Asset turnover ratio	It compares the company’s sales with the total asset. The analysts and accountants use this ratio for measuring the company’s health as compared to its performance in the past years and against the industry average. Company that has higher ratio of asset turnover are regarded as better for earning income through efficient use of the assets. While calculating the ratio is takes into consideration the total assets and compares it to the total sales. Higher ratio considered as better as it indicates that the company is earning more with the every dollar of asset. Looking into the calculation table it can be identified that the asset turnover ratio of the company have been reduced from 0.90 to 0.77 over the years from 2015 to 2016 and therefore, it is in decreasing trend. However, for the year 2017 the company was able to increase the ratio from 0.77 to 0.81. Therefore, it can be stated that the company’s earning generation capacity from the asset has been increased over the year from 2016 to 2017 (Ongore and Kusa 2013).
Debt equity ratio	Debt equity ratio is used to measure the relative contribution of shareholders and creditors in capital employed under the business. It is calculated through comparing the total liabilities with the shareholder’s equity. It measures the ability of the company for repaying the obligations. While analysing the company’s financial health it is important to consider the debt equity ratio. If the ratio is in increasing trend it signifies that the company uses higher proportion of borrowed capital as compared to owner’s equity. The investors and lenders generally prefer to have low debt equity ratio as their interests are protected if the company has lower amount of borrowed capital. Looking into the calculation table it can be identified that the debt equity ratio of the company have been reduced from 1.08 to 0.86 over the years from 2015 to 2016 and further, decreased from 0.86 to 0.73 over the years from 2016 to 2017. Therefore, the debt equity ratio of the company is in decreasing trend. Therefore, it can be stated that the company’s leverage position has been improved over the year from 2015 to 2017 (Mousa 2015).
Current ratio	Current ratio is the liquidity measure and used to measure the ability of the company to pay off the short term obligations with the short term assets. It assists the analyst to measure the liquidity position of the company through providing the insights with the short-term assets and liabilities of the company. If the current ratio of the company is high that is more than 1, it indicates that the company is efficient in paying its short term obligations efficiently. On the contrary if the current ratio of the company is lower than 1 it indicates that the company is not able to pay off the sort-term obligations efficiently. Looking into the calculation table it can be identified that the current ratio of the company have been increased from 1.32 to 1.72 over the years from 2015 to 2016 and further, increased from 1.72 to 1.80 over the years from 2016 to 2017. Therefore, the current ratio of the company is in increasing trend. Therefore, it can be stated that the company’s liquidity position has been improved over the years from 2015 to 2017 (Schönbohm 2013).

Materiality computation

Audit materiality is the most crucial concepts for the auditors. The misstatement that includes the omissions will be considered as material if it is individually or in combination with some other item will have an influence on the user’s economic decisions based on financial statement. Materiality includes both qualitative as well as quantitative aspects (Edgley 2014). While the quantitative aspects are taken into account it considers the followings steps –

Preliminary judgements are set at the preliminary stage of audit
General rule of considering the materiality is 5% to 10% of net income or 0.5% to 2% of total assets, whichever is higher.

On the other hand, if the qualitative factors are considered the factors those are taken into consideration are related party disclosures and contingent liabilities for example. Further, inaccurate description of the accounting policy can also be considered as material if it has impact on the decision of the decision makers (Arens et al. 2016).

From the above the materiality amount computation will be as follows –

7% of net income will be considered as material. Net income = $ 18,547 thousand * 7.5% = $ 1391.025 thousand
1% of total assets will be considered as material. Total assets = $ 250,115 thousand * 1% = $ 2501.15
Higher amount among the above 2 is $ 2501.15 and therefore, this amount will be considered as material.

Items that will be considered as material are as follows –

Items	Amounts ($’000)
Direct flight cots	(67,041)
Parts and inventory costs	(18,691)
Labour and staff related costs	(56,560)
Accommodation and utility costs	(3,205)
Other administrative costs	(3,834)
Finance costs	(4,019)
Depreciation	(26,364)
Cash and cash equivalent	3,462
Receivables	30,408
Inventories	43,012
Property, plant and equipment	173,169
Trade and other payables	22,360
Short –term Borrowings	14,244
Long – term Borrowings	60,477
Contributed equity	181,035
Reserves	(112,333)
Retained earnings	75,660

Material account balances from assets and liabilities –

Items	Amounts ($)
Cash and cash equivalent	3,462
Receivables	30,408
Inventories	43,012
Property, plant and equipment	173,169
Trade and other payables	22,360
Short –term Borrowings	14,244
Long – term Borrowings	60,477
Contributed equity	181,035
Reserves	(112,333)

Relevant financial report assertions

Items	Assertions
Assets
Cash and cash equivalent	Cash is a major item that is always susceptible to various risks like theft, embezzlement and misstatement. Assertions that may involve with cash balances are that the all the receipts may not have been deposited into the bank. Further, there may be any outstanding or missing amount that may lead to overstatement or understatement of cash balance.
Receivables	Most relevant assertions associated with the receivables are the valuation and existence. These assertions are important as they need high quality and more relevant audit evidences particularly when the client gets some incentives for misstatement. Audit evidence associated with valuation of sales and credit sales also provides some evidences on valuation and existence of the account receivables. Further, the risk of misstating the balance of receivables is high and early identification helps to reduce the risk. The existence assertions related to receivables is that the balance of receivables shown in the balance sheet is not the actual balance of receivables from debtors on the closing date of the account (Edgley, Jones and Atkins 2015).
Inventories	The completeness assertion involved with inventories is that all the stocks have not been included in the accounts. The existence assertion is that all the stock included in the accounts are not actually in existence. The valuation assertion involved with the inventories is that the inventories are not valued at cost or realisable amount whichever is lower.
Property, plant and equipment (PPE)	The assertion risk of occurrence and existence associated with PPE is that the PPE balance shown in the balance sheet actually exists and all the purchases, constructions, leases and disposals are taken into account. Assertion associated with ownership is that the company has legal or equivalent rights or ownership to the PPE and the recognition of leased assets for capitalization has been taken into consideration (Eilifsen and Messier 2014).
Liabilities
Trade and other payables	Most relevant assertions associated with the payables are the valuation and existence. These assertions are important as they need high quality and more relevant audit evidences particularly when the client gets some incentives for misstatement. Audit evidence associated with valuation of purchases and credit purchases also provides some evidences on valuation and existence of the account receivables. Further, the risks of misstating the balance of payables are high and early identification helps to reduce the risk. The existence assertions related to payables are that the balance of payables shown in the balance sheet is not the actual balance of payables to the creditors on the closing date of the account (Johnstone, Gramling and Rittenberg 2013).
Short –term Borrowings	Audit assertions associated with short-term borrowings are the classification and completeness. The debt is susceptible to completeness and correct classification. The short-term debt may be classified as long-term debt
Long – term Borrowings	Audit assertions associated with long-term borrowings are the classification and completeness. The debt is susceptible to completeness and correct classification. The long-term debt may be classified as short-term debt
Contributed equity	The valuation assertions associated with the equity is that the amount of equity can be recorded at higher amount as compared to the amount at which the shares have been issued. Further, the partly paid up shares may have been recorded as fully paid up shares.
Reserves	The existence assertion involved with the reserve balance is that the reserve is related to the period to which the balance sheet has been prepared. Further, the valuation assertion involved with the reserves is the balance of reserves shown in the balance sheet actually exists (Czerney, Schmidt and Thompson 2014).

Comprehensive set for audit work steps

Items
Assets
Cash and cash equivalent	The auditor shall obtain the cut-off statement directly from the bank to determine whether the reconciliation has been made at the year end to adjust all the closing balances. Further, the entries made in the cash journal shall be matched with the associated vouchers, general ledger for determining that the cash balance shown in the balance sheet are accurate. Apart from this, the cash on hand shall be counted to ensure that the cash has not been included in the balance more than once.
Receivables	The auditor shall ask for the account receivable ageing report from the client from which the total of account receivables can be matched with the general ledger. Further, the invoices related to account receivable shall be matched with the account balance. Amount received from the debtors with the cash account and bank account shall be verified. Further, some invoices shall be checked on sample basis
Inventories	The auditor shall check the inventory purchase register sequentially and match it with the ledger accounts to ensure that no entries have been missing and none has been counted twice. It will also ensure that no purchases are there. Inventory receipt and issue shall be traced with the perpetual inventory records and the cut-off date must be carried out at the date of inventory observation and date of balance sheet. Further, the analytics shall be performed on COGS for determining that the significant fluctuations will require investigation, performing the test turnover procedures and comparing the gross profit margin with the previous year.
Property, plant and equipment	The auditor shall reconcile the PPE summary and analyse the amount of accumulated depreciation with the ledger balance. Additions or disposal authorization shall be checked with proper authority. The legal ownership shall be checked with the deeds, insurance policy, transfer certificates, lease contracts, purchase invoices and sales deeds.
Liabilities
Trade and other payables	The auditor shall ask for the account payables ageing report from the client from which the total of account payables can be matched with the general ledger. Further, the invoices related to account payables shall be matched with the account balance. Amount paid to the creditors with the cash account and bank account shall be verified. Further, some invoices shall be checked on sample basis
Short –term Borrowings	The short-term debt shall be checked thoroughly to identify the control weaknesses. Further, the debt classification into short term and long term shall be checked properly. The need for debt, authorization letter proper authority, interest rate, and credit limit and payment schedule shall be checked properly.
Long – term Borrowings	The short-term debt shall be checked thoroughly to identify the control weaknesses. Further, the debt classification into short term and long term shall be checked properly. The need for debt, authorization letter proper authority, interest rate, and credit limit and payment schedule shall be checked properly.
Contributed equity	Number of share issued shall be confirmed with the share register. Further, the name of shareholders, amount at which the shares issued shall be confirmed with the equity balance.
Reserves	All the reserve balances from each account shall be recognised and matched with the account balance individually. Further, the method of recognition and recording the reserve balances

Conclusion

From the above analysis and discussion it can be recognised and concluded that the net profit margin of the company have been in increasing trend over the years from 2016 to 2017. However, for the year 2015 as the company was not able to convert its sales into positive net income the net profit ratio for the year was in negative. The asset turnover ratio of the company has been reduced over the year from 2015 to 2016 and therefore, it is in decreasing trend. However, for the year 2017 the company was able to increase the ratio from 0.77 to 0.81. Therefore, it can be stated that the company’s earning generation capacity from the asset has been increased over the year from 2016 to 2017. Further, the debt equity ratio of the company is in decreasing trend and it can be stated that the company’s leverage position has been improved over the year from 2015 to 2017. If the liquidity position is taken into consideration it can be identified that the current ratio of the company is in increasing trend and therefore, it can be stated that the company’s liquidity position has been improved over the years from 2015 to 2017. Therefore, if the overall financial position of the company is considered, it can be stated that the company’s position is stable and strong.

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