Financial analysis of the company

“Aeroflot”

Southeast University

Faculty of Economics

Rinchina Zugdurova

ID: 223185551

2018
OUTLINE

ABSTRACT…………………………………………………….3

1. INTRODUCTION………………………………………..4
1.1 History of the company……………………………4
2. RATIO ANALYSIS……………………………………...8
2.1 Liquidity ratios…………………………………….8
2.2 Activity ratios……………………………………...9
2.3 Financial ratios…………………………………...10
2.4 Profitability ratios………………………………...11
2.5 Market ratios……………………………………...12
3. CONCLUSIONS………………………………………..13

REFERENCES……………………………………………………………14

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 ABSTRACT

This report is concerned with a financial analysis of russia's largest airline and
national airline operating domestic and international flights from airports located
around the world and one of the oldest airlines in the world “Aeroflot”. The paper
has the purpose of collecting, calculating and analyzing ratios computed by values
given in balance sheet and income statement. This report is based on the data from
2016 and 2017. First part of report describes the history of the company from
foundation till present days. The second chapter contains the calculations of liquidity,
activity, financial, profitability and market ratios. The last part is conclusion where
given all the findings from computing the ratios. The last page of this report is
references.

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 1. INTRODUCTION

1.1 History of the company

Aeroflot, literally "air fleet," is the common name for the state airline of
the Soviet Union. It was operated under the jurisdiction of the Ministry of Civil
Aviation. The airline was founded in 1928 as Dobroflot and was reorganized into
Aeroflot in 1932.1 Dobroflot, or Dobrovolny Flot, grew out of two former airlines:
Dobrolyot, founded in 1923, and Ukvozdukhput, or Ukrainian Airways, founded in
1925. These airlines together connected such cities as Moscow, Gorky (Nizhny
Novgorod), Kiev, Kharkov and Odessa. After Dobroflot was reorganized as
Aeroflot in 1932, progress was rapid; by 1935 its routes spanned the Soviet Union
from Leningrad (St. Petersburg) to Vladivostok, with a network also extending
southward to the Black Sea, the Caucasus, and Central Asia. By the end of the 1930s,
Aeroflot became the largest airline in the world. From the day of its foundation, the
Dobrolet aircraft fleet consisted mainly of German Junkers. By 1933, it consisted of
90% of domestic production aircraft. In the 1930s, the country's aircraft industry was
already a large and complex complex of industrial enterprises, design offices,
research institutes, etc. The aircraft fleet included Tupolev, Ilyushin, Antonov
aircraft. In 1936, the air network of the USSR reached 116 thousand km, thus
becoming the longest in the world. The Union also came in first place in terms of
traffic. In the 1930s, more and more attention was paid to service on the sides of the
aircraft: buffets, carpets, and seat covers appeared. Calls to contribute to the
development of civil aviation are replaced by calls to use air transport as often as
possible. At the same time, a new position appears in the crew team - a flight
attendant. They should have been a woman, unmarried, with medical education,
weighing no more than 52 kg and rising to 162 cm. Gradually, the list of professional
requirements included cookery and psychology. By the beginning of World War II,
Aeroflot was mainly a domestic freight career. In World War II, Aeroflot was placed

1
Aeroflot: Russian International Airlines. (2003). Available at <http://www.aeroflot.org>

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under the State Defense Committee, and its whole organization was devoted
principally to war objectives. Not only were Aeroflot aircraft and personnel
organized into large military formations, but even before the war, SAAF took over
much of the Civil Air Fleet and its training system for combat training of SAAF
personnel. Some Aeroflot planes were used for critical supply of defense plants.
Much of civil aviation was under SAAF operational control and was used as needed
for airborne troop lift, search and rescue work, troop air resupply and bombardment
missions. During World War II, Soviet civil aviation was infused with new
technology, consisting of transport airplanes, such as the American DC-3 and DC-4,
supplied under the lend-lease agreement. As a result, Aeroflot experienced rapid
growth in the postwar years. Between 1950 and 1955, a major route expansion
occurred when the capitals of the constituent republics and major administrative
centers were interconnected by air service.2 After the war, international air traffic
began to actively resume and expand. There are new more advanced aircraft IL-12
and IL-14. In 1980, Aeroflot was appointed general carrier of the participants in the
XXII Olympic Games held in Moscow. In order to accept athletes and guests of the
capital from all over the world, a new international terminal of Sheremetyevo-2
airport was built, which can simultaneously serve 31 aircraft of any type. May 6, it
was officially opened. In 1991, after the collapse of the Soviet Union, in the former
Soviet republics and regions of the Russian Federation, their own airlines were
created. The Russian company became the assignee of the name "Aeroflot" and the
trademark of the international carrier of the former USSR.

In early 2010, it was decided to merge all of the country's state-owned airlines
with Aeroflot. It was originally planned to transfer state-owned shares of such
airlines as Vladivostok Avia, Sakhalin Airways, Saratov Airlines and fully state-
owned Orenburg Airlines, Kavminvodyavia and Russia State Transport Company.
As a result of this merger, it was planned that the combined airline would transport
more than 17.5 million passengers annually and occupy 35% of the domestic market.

2
https://www.globalsecurity.org/military/world/russia/aeroflot-1.htm
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However, Aeroflot refused from Saratov Airlines, and 51% of the company's shares
were sold to private investors. On October 29, 2010, Aeroflot entered into a two-
year sponsorship agreement with the American basketball club New Jersey Nets.
The Aeroflot logo was placed on the site of New Jersey Nets in the places that hit
the television frame, as well as in the screensavers of the broadcast of guest games
of the team. In October 2013, the company registered its new low-cost airline,
Dobrolet. But because of Western sanctions, the low-cost airline forcedly suspended
its operations due to flights to Simferopol. In October 2014, Aeroflot announced the
launch of a new budget carrier that operates under the new name “Pobeda”. In 2000,
Aeroflot invited a group of British consultants to rebrand. Work on this lasted for
quite some time. And in 2003, Aeroflot introduced a new version of the coloring of
their aircraft and crew uniforms. A large advertising campaign was launched.
Special mention deserves the symbols of "Aeroflot". The winged sickle and hammer,
which has been an integral symbol of the airline since its inception, did not suit the
rebranding team. Moreover, it was informally believed that customers from Western
countries would be “uncomfortable” to use the airline, whose symbols remind them
of the Soviet era. But experience has shown that the hammer and sickle is the most
recognizable symbol of the company, and it was decided to leave it. April 14, 2006
Aeroflot officially became the tenth member of the global aviation alliance SkyTeam.
On May 6 of the same year, Aeroflot received the IOSA operator certificate from
the World Air Transport Association (IATA) and had become the first Russian
airline to pass an IATA Operational Safety Audit.

The net profit of the Aeroflot group of companies at the end of 2012 was $ 166
million, which is 66% lower than the result of 2011. The main causes of the
difference between the results of 2011 and 2012. in terms of net profit, they served
as: receiving in 2011 significant revenues from the sale of stakes in subsidiaries and
affiliates, as well as the inclusion of aviation companies acquired in 2011, which had
not yet reached the break-even level, in the Group’s result for 2012. The net profit
of Aeroflot according to RAS for 2013 increased 3.6 times as compared with the
previous year and amounted to 11,097 million rubles. Revenue amounted to 206,277
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million rubles, which is 16.8% more than last year.3 The revenue of Aeroflot Group
according to International Financial Reporting Standards (IFRS) in 2012 amounted
to 253,039.0 million Russian rubles, which is 60% higher than the result of 2011.
Revenues from transportation amounted to 221,327.4 million rubles. The value of
the indicator of operating profit at the end of 2012 amounted to 11,118.4 million
Russian rubles. The net profit of Aeroflot Group amounted to 5169.5 million
Russian rubles. The revenue of Aeroflot Group in United States dollars according to
International Financial Reporting Standards (IFRS) increased by 51% to $ 8138
million. The revenue from transportation increased by 59% to $ 7118 million. The
increase in revenue was due to a significant increase in the volume of work
performed by the Group in 2012 . The value of EBITDA was $ 671 million.
Operating profit for 2012 was $ 358 million.

3
http://economic-definition.com/Russian_companies/Aeroflot_Aeroflot__eto.html#h3-18
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 2. RATIO ANALYSIS
2.1 Liquidity ratios

Current ratio = 1,19 for 2017

Current ratio = 1,07 for 2016

A higher current ratio is always more favorable than a lower current ratio
because it shows the company can more easily make current debt payments. Banks
or investors would prefer a current ratio of at least 1 or 2, so that all the current
liabilities would be covered by the current assets. Thereby the ratio from 2016 and
2017 is considered as a beneficial.

Quick ratio = 1,10 for 2017

Quick ratio = 0,99 for 2016

The quick ratio is more conservative than the current ratio because it excludes
inventories from current assets. The ratio derives its name presumably from the fact
that assets such as cash and marketable securities are quick sources of cash.
Inventories generally take time to be converted into cash, and if they have to be sold
quickly, the company may have to accept a lower price than book value of these
inventories. As a result, they are justifiably excluded from assets that are ready
sources of immediate cash. In 2016 Aeroflot has a quick ratio of 0,99, It indicates
that the company cannot currently fully pay back its current liabilities. In 2017 the
company has higher the quick ratio which is the better for the company's liquidity
position.

Cash ratio = 0,32 (2017)

Cash ratio = 0,26 (2016)

The ratios for both years is lower than 1 which means that there are more current
liabilities than cash and cash equivalents. In this situation, there is insufficient cash
on hand to pay off short-term debt.

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 2.2 Activity ratios

Inventory turnover ratio = 40,87 (2017)

Inventory turnover ratio = 36,13 (2016)

Inventory Turnover measures how fast the company turns over its inventory
within a year. A higher inventory turnover means the company has light inventory.
Therefore the company spends less money on storage, write downs, and obsolete
inventory. If the inventory is too light, it may affect sales because the company may
not have enough to meet demand. The ratios is very high for 2016 as well as 2017
years.

Days in inventory = 8,93 (2017)

Days in inventory = 10,10 (2016)

Accounts Receivable Turnover Ratio = 8,54 (2017)

Accounts Receivable Turnover Ratio = 10,54 (2016)

The receivables turnover ratio indicates the efficiency with which a firm
collects on the credit it issues to customers. The higher it is, the better which
indicates the company had a more favorable ratio in 2016.

Average Collection Period = 42,74 (2017)

Average Collection Period = 36,13 (2016)

This indicates that it takes just over 43 days to collect an account receivable
for 2017 and 36 days for 2016 years.

Total Assets turnover ratio = 1,78 (2017)

Total Assets turnover ratio = 1,65 (2016)

The higher the asset turnover ratio, the better the company is performing, since
higher ratios imply that the company is generating more revenue per dollar of assets.
In 2017 the company was using its assets more efficiently.
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 Owner’s Equity Turnover Ratio = 8 (2017)

Owner’s Equity Turnover Ratio = 11,68 (2016)

If take a general perspective, an increase proportion provides a positive

indication and a decrease proportion indicates a negative connotation so we can
observe a negative one concerning calculated ratios.

Fixed Assets Turnover Ratio = 5,44 – 2017

Fixed Assets Turnover Ratio = 4,72 – 2016

In general, a higher fixed-asset turnover ratio indicates that a company has

more effectively utilized investment in fixed assets to generate revenue. As we can
see, in 2017 the company had increased indicators.

ROA = 7,51 (2017)

ROA = 12,32 (2016)

The higher the ROA number, the better, because the company is earning more
money on less investment.

ROE = 37,44 - 2017

ROE = 88,20 -2016

Return on Equity (ROE) measures the rate of return on the ownership interest
(shareholder's equity) of the common stock owners. It measures a firm's efficiency
at generating profits from every unit of shareholders' equity. ROE shows how well
a company uses investment funds to generate earnings growth. ROEs between 15%
and 20% are considered desirable. Indicators are not preferable for the company.

2.3 Financial ratios

Financial leverage Ratio = 0,79 – 2017

Financial leverage Ratio = 0,86 – 2016

A lower debt ratio usually implies a more stable business with the potential of
longevity because a company with lower ratio also has lower overall debt. Aeroflot
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company’s liabilities are 79 percent of its total assets in 2017 which indicates good
moving from 2016.

Owner’s Equity Ratio = 0,20 - 2017

Owner’s Equity Ratio = 0,14 -2016

The higher equity ratios are typically favorable for companies which means
according to calculations the company performed better in 2017.

STL/ TL = 0,02 – 2016

The lower, the better, hence, the company had more favorable ratio in 2016.

LTL/TL = 0,01 (2017)

LTL/TL = 0,04 (2016)

2.4 Profitability ratios

Gross Profit Margin = 0,11

Gross Profit Margin = 0,16

The ratio was more favorable for the company in 2016 as it has higher gross
profit margin.

Operating Profit Margin = 0,07 - 2017

Operating Profit Margin = 0,12 – 2016

It is important to see a company maintains its operating margin over time.

Aeroflot company has a higher operating margin in 2016 which is more efficient in
its operation. It is also more stable during industry slowdown or recessions.

Net Profit Margin = 0,04 or 4,3% (2017)

Net Profit Margin = 0,07 or 7,5% (2016)

Based on calculations company seem to be more profitable in 2016 than in

2017.

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 2.5 Market ratios

EPS = 0,32 (2017)

EPS = 0,52 (2016)

Book Value per Share = 1,08

Book Value per Share = 0,67

The book value per share may be used by some investors to determine the
equity in a company relative to the market value of the company, which is the price
of its stock.

P/E = 4,32 - 2016

P/E = 6,50 – 2017

A company with a high P/E ratio indicated positive future performance

resulting in incentive for investors to pay more for this company’s shares. In 2017
the company performed better than in 2016.

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 Conclusion

In accordance with the data obtained during the calculation of liquidity ratios,
activity, financial, profitability and market ratios the company had increased some
indicators from 2016.

Current ratio for 2017 is 1,19 which is higher than in the previous year. This
means that the firm can meet its current short-term debt obligations 1,19 times over.
In order to stay solvent, the firm must have a current ratio of at least 1.0, which
means it can exactly meet its current debt obligations. The firm improved its liquidity
in 2017 which, in this case, is good as it is operating with relatively low liquidity.
On the other hand, Activity Ratios show that 2017 year for the company was
generally worse compare to 2016. According to Financial Leverage Ratios the
company had beneficial year in 2016 as well as in 2017, indicators for 2017 slightly
increased in a positive way.

Although, there has been a contraction in Aeroflot – Russian Airlines’s margin

over the past five years, as a result of 18.33% in average revenue growth outstripping
average net income growth of 10.43%, which suggests that a smaller percentage of
revenue falls to the bottom line despite the fact revenue has increased over the
previous 5 years. The current 4.3% margin seems to continue this movement, which
could imply that increasing revenue has driven earnings growth rather than enhanced
cost management. In Aeroflot – Russian Airlines’s case, it is expected that profit
margins will expand simultaneously with Airlines industry margins, and at the same
time, the forecasted ROE of Aeroflot – Russian Airlines is greater than the industry
at 41.84% and 19.64% respectively, although it must not be forgotten than this result
is influenced by the company’s debt levels. 4 Market Ratios from 2016 and 2017
showed that the company had more profits to distribute to its shareholders in the
latter year.

4
https://simplywall.st/stocks/ru/transportation/mcx-aflt/aeroflot-russian-airlines-shares/news/what-
should-investors-know-about-public-joint-stock-company-aeroflot-russian-airliness-mcxaflt-future-margins/
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References

1. Aeroflot: Russian International Airlines. (2003). Available at

<http://www.aeroflot.org>

2. Aeroflot Early Developments 1917-1945, https://www.globalsecurity.org/

(29.05.2016)

3. Aeroflot, http://economic-definition.com/

4. What Should Investors Know About Public Joint Stock Company Aeroflot
– Russian Airlines’s Future Margins?

https://simplywall.st/stocks/ru/

5. Aeroflot: Development priority, https://ir.aeroflot.ru/

6. Aeroflot History, https://www.aeroflot.ru/

7. Aeroflot--Russian International Airlines History,

http://www.fundinguniverse.com/company-histories/aeroflot-russian-
international-airlines-history/

8. Aeroflot: Russian airlines, https://www.britannica.com/topic/Aeroflot

9. Investopedia, https://www.investopedia.com/terms/a/activityratio.asp

10. Aeroflot, https://en.wikipedia.org/wiki/Aeroflot

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