Fly by Night International

Fly By Night International was founded by Douglas C. Mather in mid 1970’s with primary focus on pilot training school. Soon after the incorporation the company expanded to government contracting. FBN used to provide rent-an-enemy fleet to the Navy and Air Force for use in fighter-pilot training. The company experienced huge success during the first five years of its operations and the stock price almost doubled. However in year 14 the company realized that there have been some issues with the financial statements already published and those under publication. After analyzing the financial statements of the company we have summarized some of the key evidences which indicate the cash flow problems:

• One of the most important factors indicating the liquidity position of any organization is by analyzing the change in current ratio and quick ratio over a period of time. From the chart below we can see that the liquidity position of the company has declined significantly over a period of time. We believe year 13 was a big indicator when the management should have analyzed the operations as there is huge decline in the liquidity position.

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• The second most important indicator to analyze the performance of any company is to compute the operating results of the company. Some of the key indicators of operating performance is gross margin, operating margin and net income margin. An analysis of trend in all the three will help summarize the performance of the company.

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From the above chart we can see that all the operating matrix have shown a declining trend. The situation started getting worse from year 13 onwards. The management should have taken adequate steps to revive operations when the financial conditions started getting worse in year 13.

• On analyzing the cash flow statement of the company we can see that there has been significant increase in cash flows from operations but the primary contributor is increase in accounts payable. In the given condition although the cash flow from operations is increasing but it is not because of improved operations rather the increase is on account of company’s inability to pay back to its creditors. Also by analyzing the cash flows from investing activities we can see that the company have made huge investments in property, plant and equipments but the amount have not come from cash flows from operations. Also on analyzing the financing activities we can see that the repayment on account of borrowings has been financed by either another loan or by issue of share capital which is not a good sign. Summarized below is comparison of some of the key performance of cash flow statements over a period of last 5 years.

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From the above chart we can see that the cash flow situation started detoriating from end of year 12 which gave enough indication to the management that immediate steps must be taken to revive the financial position of the company.

In additional to the above there are few indications available from the notes to the financial statements which raises concern on the operations of the company which must have been addressed immediately to avoid the company falling into the situation where it was:

• Under the corporate form of business organization there is a clear distinction between the people who take critical decision (Board of Directors) and the people who actually execute the decisions (managers). However, in case of FBM, many managers were also part of the Board which arises conflict of interest and therefore should have been avoided.
• The company always relied on orders from the US Government and did not take steps to expand its operations to other areas. The orders available from the government were scheduled to expire soon and the company should have taken steps for expansion.
• There have been instances when the company entered into transactions with related organization or there were transactions which did not seem to be at arm’s length. In order to avoid the cash flow problems the company should have avoided such transactions.
• The leverage of the company has increased substantially over the period. Total debt increased from $22.8 million in year 10 to $60.6 in year 14. Similarly, there was huge increase in interest expense from $2.6 million to $5.8 million.
• FBM was formed by Douglas Mather and he held 75% in the company in year 10. Over a period of time his ownership declined to 42%, which implies that he was able to foresee the financial difficulties of the company and therefore sold off his holdings over the period.

From all the above discussion we can conclude that there were enough indication about the financial difficulties of the company and the management should have taken adequate steps to control such lapses.

Explanation of position:

Analysis of any company’s financial position requires in-depth knowledge about the operations of the company along with the industry knowledge. In the given situation FBN’s financial performance has been declining significantly over the period. Profit margin for ROA has declined from 5.6% in year 10 to -0.1% in year 14, which shows a significant decline. Asset turnover has also declined which implies that the total dollar revenue generated for every dollar invested in assets has gone worse over the period.