6 Financial Analysis
6.3 Risk Analysis
6.3.1 Liquidity Risk Analysis
Short-Term Risk Ratios 2013 2014 2015 2016 2017
Current Ratio 0.88 0.75 0.72 0.93 0.87
Quick Ratio 0.83 0.69 0.66 0.85 0.80
CFO to Short-Term Debt Ratio 0.30 0.19 0.28 0.27 0.30
Table 21 - Lufthansa's Short-Term Risk Ratios, Own Calculations Based on Annual Reports
6.3.1.1.1 Current Ratio and Quick Ratio
The Current Ratio measures how well a company is able to pay off Current Liabilities with Current Assets if liquidated. Similarly, the Quick Ratio excludes Inventory, presenting a more conservative measure for Lufthansa to meet current liabilities. Consequently, the quick ratio is generally lower than the current ratio as presented in the Tables 22 and 23 below.
Current Ratio 2013 2014 2015 2016 2017 Average
Lufthansa 0.88 0.75 0.72 0.93 0.87 0.83
Air France-KLM 0.73 0.61 0.63 0.75 0.82 0.71
easyJet 0.84 0.91 0.72 0.90 1.31 0.94
IAG 0.72 0.76 0.80 1.05 1.05 0.88
Ryanair 1.97 1.51 1.72 1.43 1.56 1.64
SAS 0.61 0.79 0.86 0.78 0.81 0.77
Average 0.96 0.89 0.91 0.97 1.07 0.96
Table 22 - Current Ratios for Lufthansa and its Peers, Own Calculations Based on Annual Reports
Quick Ratio 2013 2014 2015 2016 2017 Average
Lufthansa 0.83 0.69 0.66 0.85 0.80 0.76
Air France-KLM 0.69 0.56 0.58 0.69 0.77 0.66
easyJet 0.84 0.91 0.72 0.90 1.31 0.94
IAG 0.67 0.71 0.75 1.00 1.01 0.83
Ryanair 1.97 1.51 1.72 1.43 1.56 1.64
SAS 0.59 0.76 0.84 0.76 0.79 0.75
Average 0.93 0.86 0.88 0.94 1.04 0.93
Table 23 - Quick Ratios for Lufthansa and its Peers, Own Calculations Based on Annual Reports
High ratios above 1 are associated with high liquidity. For Lufthansa, the Current Ratio fell from 0.88 in 2013 to 0.72 in 2015. Looking at Lufthansa’s analytical balance sheet, this decrease is associated with a reduction in Current Assets, particularly in Securities as well as Cash and Cash Equivalents. However, those accounts equivalently grew in 2016 and 2017 along with Accounts Receivable, positively impacting Lufthansa’s ability to payoff Current Liabilities and consequently leading to higher Current and Quick Ratios in those years.
Overall, the industry is characterized by low Current and Quick Ratios below 1, indicating that the companies are not able to meet all short term financial obligations with its Current Assets.
However, an increasing trend for Current Ratio and Quick Ratio for the industry is observed,
which can be traced back to changes in financial items, including growth in Short-Term Investments and Cash and Cash Equivalents as well as decreases in Derivative Securities. Those developments indicate the airlines’ increased control of financial investments and debts.
6.3.1.1.2 Cash Flow from Operations to Short-Term Debt
Another way to assess Lufthansa’s liquidity risk is to measure the company’s ability to pay off current liabilities through Cash Flows from Operations (CFO). Similarly to previous ratios, a high CFO to Short-Term Debt Ratio indicates low liquidity risk. Moreover, Cash Flows from Operations are the actual cash flow Lufthansa generated during the year, rather than potential cash flows, and thus measures Lufthansa’s ability to meet Current Liabilities on an ongoing basis. Table 24 shows rather low ratios for Lufthansa as the ratio of 0.30 in 2017 reveals that the company can only pay off 30% of its Current Liabilities annually from its Operating Cash Flows (Petersen & Plenborg, 2012). This means it would take Lufthansa 3.3 years to payoff Current Liabilities of only one single year. The decline in the CFO to Short-Term Debt Ratio in 2014 is associated with the low NOPAT result that year as seen in the analytical income statement. However, a rise in the following years is a sign of the company’s strengthened liquidity position. Compared to its peers, Lufthansa appears to have lower fluctuations in the ratio, and a stronger liquidity position overall, indicated by higher ratios than the one’s of its peers.
CFO to Short-Term
Debt Ratio 2013 2014 2015 2016 2017 Average
Lufthansa 0.30 0.19 0.28 0.27 0.30 0.27
Air France-KLM -0.24 -0.44 -0.03 0.13 -0.17 -0.15
easyJet 0.19 0.39 0.37 0.32 0.02 0.26
IAG 0.20 0.21 0.23 0.47 0.35 0.29
Ryanair 0.14 0.08 -0.01 0.06 0.12 0.08
SAS 0.35 0.12 0.22 0.20 0.33 0.25
Average 0.16 0.09 0.18 0.24 0.16 0.17
Table 24 - CFO to Short-Term Debt Ratios for Lufthansa and its Peers, Own Calculations Based on Annual Reports
6.3.1.2 Long-Term Liquidity Risk
Furthermore, Table 25 shows ratios measuring Lufthansa’s long-term liquidity risk.
Long-Term Liquidity Risk 2013 2014 2015 2016 2017
Financial Leverage 3.77 6.56 4.55 3.85 2.78
Solvency Ratio 0.21 0.13 0.18 0.21 0.26
Interest Coverage Ratio 4.48 3.11 -4.16 -126.15 2,119.13 Interest Coverage Ratio (Cash) 16.95 8.41 -9.04 -165.56 2,539.44
CFO to Debt Ratio 0.14 0.08 0.13 0.11 0.14
Table 25 - Long Term Liquidity Risk Ratios for Lufthansa and its Peers, Own Calculations Based on Annual Reports
Following formulations presented by (Petersen & Plenborg, 2012) are applied:
𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒 = 𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 𝐵𝑜𝑜𝑘 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦
𝑆𝑜𝑙𝑣𝑒𝑛𝑐𝑦 𝑅𝑎𝑡𝑖𝑜 = 𝐵𝑜𝑜𝑘 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦
𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 + 𝐵𝑜𝑜𝑘 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐶𝑜𝑣𝑒𝑟𝑎𝑔𝑒 𝑅𝑎𝑡𝑖𝑜 =𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑃𝑟𝑜𝑓𝑖𝑡 (𝐸𝐵𝐼𝑇) 𝑁𝑒𝑡 𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐶𝑜𝑣𝑒𝑟𝑎𝑔𝑒 𝑅𝑎𝑡𝑖𝑜 (𝐶𝑎𝑠ℎ) =𝐶𝑎𝑠ℎ 𝐹𝑙𝑜𝑤 𝑓𝑟𝑜𝑚 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑜𝑛𝑠 𝑁𝑒𝑡 𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠
𝐶𝐹𝑂 𝑡𝑜 𝐷𝑒𝑏𝑡 𝑅𝑎𝑡𝑖𝑜 =𝐶𝑎𝑠ℎ 𝐹𝑙𝑜𝑤 𝑓𝑟𝑜𝑚 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑜𝑛𝑠 𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 6.3.1.2.1 Financial Leverage and Solvency Ratio
Lufthansa’s Financial Leverage shows the company’s Total Liabilities in relation to its Equity.
Table 26 reveals a declining trend from 6.56 in 2014 to 2.78 in 2017 for Lufthansa.
Consequently, as seen in Table 27, Lufthansa’s Solvency Ratio is growing from 0.13 in 2014 to 0.26 in 2017, both indicating an increase in equity relative to liabilities.
Financial Leverage 2013 2014 2015 2016 2017 Average
Lufthansa 3.77 6.56 4.55 3.85 2.78 4.30
Air France-KLM 14.57 -55.09 130.72 26.57 11.34 25.62
easyJet 1.91 1.68 1.62 1.52 1.59 1.66
IAG 5.47 7.28 5.71 5.68 4.10 5.65
Ryanair 2.10 2.07 2.36 2.40 1.94 2.17
SAS 15.07 11.19 9.05 10.35 7.59 10.65
Average 7.15 -4.38 25.67 8.40 4.89 8.34
Table 26 - Financial Leverage Ratios for Lufthansa and its Peers, Own Calculations Based on Annual Reports
Solvency Ratio 2013 2014 2015 2016 2017 Average
Lufthansa 0.21 0.13 0.18 0.21 0.26 0.20
Air France-KLM 0.06 -0.02 0.01 0.04 0.08 0.03
easyJet 0.34 0.37 0.38 0.40 0.39 0.38
IAG 0.15 0.12 0.15 0.15 0.20 0.15
Ryanair 0.32 0.33 0.30 0.29 0.34 0.32
SAS 0.06 0.08 0.10 0.09 0.12 0.09
Average 0.19 0.17 0.19 0.20 0.23 0.20
Table 27 - Solvency Ratios for Lufthansa and its Peers, Own Calculations Based on Annual Reports
These trends can be interpreted as reductions in long-term liquidity risk for Lufthansa, as the company is accumulating more equity to pay off its financial obligations. Similar trends are observed for Lufthansa’s peers as shown in Tables 26 and 27, indicating an industry-wide strong growth in equity relative to liabilities, driven by positive net income numbers in most years by most companies.
6.3.1.2.2 Interest Coverage Ratio
Two different calculations of Interest Coverage Ratios are applied to measure Lufthansa’s ability to pay off its Net Financial Expenses (NFE) by EBIT and Cash Flow from Operations.
Consequently, high ratios indicate low liquidity risk in terms of covering NFE. However, Tables 28 and 29 show fluctuating ratios for Lufthansa and most of its peers.
Interest Coverage
Ratio 2013 2014 2015 2016 2017 Average
Lufthansa 4.48 3.11 -4.16 -126.15 2,119.13 399.28 Air France-KLM 0.07 -0.46 1.46 3.30 0.09 0.89
easyJet 3.53 4.06 4.41 3.32 2.96 3.66
IAG 2.15 2.27 3.91 8.52 7.36 4.84
Ryanair 106.47 102.15 143.01 -59.63 146.10 87.62
SAS 2.31 0.73 2.54 1.97 2.99 2.11
Average 19.84 18.64 25.20 -28.11 379.77 83.07
Table 28 - Interest Coverage Ratios for Lufthansa and its Peers, Own Calculations Based on Annual Reports
Interest Coverage
Ratio (Cash) 2013 2014 2015 2016 2017 Average Lufthansa 16.95 8.41 -9.04 -165.56 2,539.44 478.04 Air France-KLM -1.39 2.01 -0.32 2.82 -5.97 -0.57
easyJet 1.57 2.56 3.03 2.21 0.13 1.90
IAG 4.79 3.58 4.02 13.45 8.34 6.84
Ryanair 2.80 1.81 -0.31 -1.04 4.16 1.48
SAS 3.14 1.03 2.27 1.99 4.31 2.55
Average 4.64 3.24 -0.06 -24.36 425.07 81.71
Table 29 - Interest Coverage Ratio (Cash) for Lufthansa and its Peers, Own Calculations Based on Annual reports
Negative ratios in 2015 and 2016 indicate that financial income was higher than expenses in the given years, while the high ratio of 2,119.13 in 2017 is caused by a very low Net Financial Expense together with high operating performance results, consequently, disclosing low liquidity risk for Lufthansa in relation to Net Financial Expenses. This indicates that Lufthansa had a very strong position in terms of operating income compared to financial expenses in 2017.
Moreover, it is shown that airlines are generally able to pay off their Net Financial Expenses with their operating profit and Cash Flow from Operations, as indicated by the ratios lying above 1.
6.3.1.2.3 Cash flow from Operations to Debt Ratio
Similar to the short term risk analysis before, it is relevant to measure Lufthansa’s ability to cover long term liabilities with Cash Flows from Operations:
CFO to Debt Ratio 2013 2014 2015 2016 2017 Average
Lufthansa 0.14 0.08 0.13 0.11 0.14 0.12
Air France-KLM -0.08 -0.14 -0.01 0.04 -0.05 -0.05
easyJet 0.08 0.15 0.18 0.13 0.01 0.11
IAG 0.07 0.07 0.08 0.14 0.11 0.10
Ryanair 0.04 0.03 0.00 0.02 0.04 0.03
SAS 0.10 0.03 0.05 0.05 0.08 0.06
Average 0.06 0.04 0.07 0.08 0.06 0.06
Table 30 - CFO to Debt Ratios for Lufthansa and its Peers, Own Calculations Based on Annual Reports
The decline from 0.14 in 2013 to 0.08 in 2014 and the following incline to 0.14 in 2017 is linked to weaker financial performance in 2014, which increased since. Nevertheless, the ratio fluctuates around the mean of 0.12, disclosing that Lufthansa is able to payoff 12% of its long-term debt on an on-going basis. Compared to its peers, Lufthansa on average has the highest CFO to Debt Ratio, indicating the airline’s low risk of becoming illiquid in an industry in which the CFO to Debt Ratios generally lie between 0.03 and 0.10.