American Airlines Financial Analysis

Introduction

The aim of this paper is to analyze the Return on Equity (ROE) of two airlines and address the reasons why one companies has a high ROE, why one companies has a low ROE and what could be done to improve the lower performing firm based on ROE and the market value ratios.

I have selected the American Airlines Group Inc (ALL) and Latam Airlines Group SA (LTM) to compare.

Analyzing the companies American Airlines Group Inc., was founded in 1934 and is headquartered in Fort Worth, Texas, through its subsidiaries. It operates as a network air carrier, providing scheduled air transportation services for passengers and cargo. Latam Airlines Group S.A., was founded in 1929 and is based in Santiago, Chile. together with its subsidiaries,

The higher the ratio percentage, the more efficient management is in utilizing its equity base and the better return is to investors. The American Airlines Group Inc’s ROE of 70.7% over the past year stood above the peer average of 20.88%. Even the American Airlines Group Inc’s ROE is higher than and LATAM Airlines Group SA (1.69%), are other aspects to consider before drawing a conclusion. DuPont analysis helps significantly broaden understanding of ROE, according to Investopedia (n.d.) in DuPont analysis “ROE is affected by three things: operating efficiency, which is measured by profit margin; asset use efficiency, which is measured by total asset turnover; and financial leverage, which is measured by the equity multiplier.”

By looking at each of these inputs individually, net profit margin, asset turnover and equity ratio, its possible discover the source of a company's return on equity and compare it to its

Latam with less than 1% net profit margins has less room for execution failure than AAL with 6,66% profit margins considering small miscalculations or mistakes can be amplified in a way that leads to tremendous losses for shareholders.

Once the margins reflect the firm’s production function, if margins are low, some actions such as reduce expenses, review the prices and identify the most profitable items to concentrate on achieving higher sales targets for them, could be done to improve the net profit.

Asset turnover: This ratio is calculated indicates how efficiently management is able to drive sales from company assets in other words how effectively a company converts its assets into sales. The asset turnover ratio tends to be inversely related to the net profit margin as shown