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Who Is Who Case

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Submitted By IuliaC
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AIRLINES Company A is the former national company. Due to its history, the company owns an important amount of PP&E. Therefore, the proportion of PP&E from its balance sheet is considerable – 77.1% of total assets. In contrast, company B, which is the new entrant, holds almost 50% of its assets in PP&E and the rest in current assets. However, a considerable portion of it s assets are held in cash (47%). This can be due to the fact that, being a new entrant the company didn’t yet invest so much in airplanes to expand its business (it only flies in Europe). The high level of cash and the very low amount of receivables can be explained by the strategy of the company to sell direcly to customers. That is why Company B has a higher receivables turnover than company A (34.8 compared to 9.4), being very effective in collecting the receivables. Customers might be paying immediately in cash or credit card, resulting also in low receivables (only 0.9% of the total assets). The new entrant’s strategy was very profitable, yielding a sales growth of 30% over the last fiscal year. Hence the healthy net income of company B - 24% of sales. In contrast, Company A, which faced a decline in sales due to an industry crisis, had a negative net income (-1.7%). Apparently, Company B knew how to take advantage of this crisis by offering low fares and cutting costs of the service onboard. Also, company B chose cheaper airports with lower fees. That is why the accounts payable of company B are just 2.5%. Because it has been on the market for a long time and it’s a former national company, it is likely that company A raised a lot of debt over the years (and also due to its reputation is able to raise debt easily). Therefore, the long term debt to equity ratio for company A is approximately 6 times higher than the one of company B. Having a lot of debt is also more risky, fact reflected in the

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