The previous chapter explained in some detail the individual items in an airline’s profit and loss account, balance sheet and cash flow statement. Some idea can be gained of the airline’s size, capital structure, profitability and the financing of its investments from an examination of these figures and the notes attached to them. However, performance ratios will need to be calculated to be able to assess past trends of a particular airline or to compare different airlines. These could be helpful in evaluating a shareholder’s investment in an airline, or in an assessment by banks or lessors before entering into a loan or lease agreement. The ratios can be categorised under the following headings: • Performance/earnings. • Risk or solvency. • Liquidity. • Market valuation or investment. The first group of ratios are designed to evaluate how the airline is trading, whether in relation to turnover, assets or equity, while the second deal with the risk of the firm being unable to meet its financial commitments overall, and continue trading. The third provides a measure of the airline’s ability to meet its short-term financial commitments. The last group are concerned with value, and are based on the market price of the airline’s shares or bonds and can thus only be calculated for companies that are traded on a stock market.
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