Sultan Qaboos University

College of Economics and Political Science

Economics and Finance Department

FINA3361
Working Capital Management
Group Project
"Comparison between Oman Air Company with Benchmark"

‘
Instructor: Dr. Walid Mensi

Student Name: Majed Saif Nasser AlSaadi U108638

Student Name: Saqar Sultan Amur AlHjri U111051
Table of content:

Content Page
Table of content 2

Introduction 3

Objective 3

Description of Aviation Industry in Oman 4

Company Background 5

Data & Methodology 6

Solvency Measures: 7
1) Current Ratio
2) Quick Ratio 8

3) Net Working Capital 10

4) Net Liquid Balance 12

5) Working Capital Requirement 13

6) Cash ratio 15

Liquidity Measures: 17
1) Cash Conversion Efficiency (CCE)
2) Days Inventory Held (DIH) 19

3) Days Sales Outstanding (DSO) 21

4) Days Payables Outstanding (DPO) 22

5) Cash Conversion Period (CCP) 24

Net Present Value of Cash Conversion Period 25

Recommendation 27

Abstract 28
References 29
Introduction:

Working Capital Management refers to the management of short term

financial decisions of firms. Where different strategies is presented, equipped,
applied and evaluated to produce a value for shareholders equity. Working
capital management focus on different areas of financial management where it
manage the cash inflow and outflow, the credit policies, the cash availability
to cover shortages in working capital cycle, the inventory held, the collection
and disbursement policies and more. This strategies is derived from scientific
method developed through years of experiences and it reach the peak when
the world financial crisis hit the firms where many firms has changed its
strategies to go along with the efficient management of working capital.

Objective Statement :
The purpose of this project is to study and examine the short term financial
decision focusing on Solvency and Liquidity ratios as well as the NPV of cash
conversion period and to analyze the financial effect on the operations of
Oman's official carrier "Oman Air" on its profitability and shareholders
wealth. As well as implementing a scenario analysis and forecasting the future
of Oman Air.
Description of Aviation Sector in Oman

The civil aviation sector in Oman has a great developments last years. These
developments are related to multiple projects that provide important and
necessary services to keep abreast with the developments in the aviation
industry. This was conducted by utilizing state-of-the-art technologies that
aiming to connect the Sultanate to the outside world.

The Omani airspace attend a growth of 1,400 flights per day. The number of
aircraft flying through Oman’s airspace up to the end of 2015 reached
4,88,209. This show an increasing up to a 13 percent compared to the
4,39,206 flights during 2014.

Average monthly proceeds of flights in the Sultanate’s airspace exceeded 3

million Omani Rials by the end of 2015.These numbers show the importance
of civil aviation sector in Oman and the rule that play in enhance the growth
of national economy sectors.
Company Background:
Oman Air is the flagship carrier of the Sultanate of Oman and an Official 4 Star
Airline. It was Founded in 1993, Oman Air has since witnessed massive growth
and has played a main role in making Muscat one of most important traffic hub in
the Middle East. In addition, it serve to supports the commercial, industrial and
tourism sectors.

The airline currently operates direct international flights from Muscat to Abu Dhabi,
Jeddah, Bahrain, Dubai, Doha, Riyadh, Madina, Dammam, and Kuwait, in the Gulf
region, as well as Cairo, Tehran, Amman, Najaf, Mashhad, Zanzibar and Dar Es
Salaam within the wider Middle East/Africa region.

In addition, Oman Air flies to eleven destinations in India (Goa, Mumbai, Chennai,
Kochi, Thiruvananthapuram, Hyderabad, Delhi, Lucknow, Bangalore, Kozhikode
and Jaipur); Karachi, Islamabad and Lahore in Pakistan; Kathmandu in Nepal; and
Colombo in Sri Lanka. The airline also flies to Bangkok, Kuala Lumpur, Manila,
Jakarta in the Far East, Guangzhou in China and Nairobi in Kenya. Its European
destinations are London, Manchester, Milan, Munich, Frankfurt, Paris and Zurich.

Oman Air’s domestic destinations are Duqum, Salalah and Khasab and. It also
serves 5 additional domestic points for The Duqm Special Economic Zone
Authority (SEZAD), Petroleum Development Oman (PDO) and Occidental, which
are JNJ (Duqm), OMM (Marmul), RNM (Qarn AlAlam), UKH (Mukhaizinah) and
FAU (Fahud)

Currently Oman Air’s fleet consists of four Boeing 787-8, three 787-9 Dreamliners,
six Airbus 330-300s, four Airbus 330-200s, five Boeing 737-900s, 21 Boeing 737-
800, four Embraer 175s and two 737 MAX.

By the end of 2018 Oman Air will have taken delivery of five new MAX aircraft
and three 787-9s. By 2022, Oman Air’s total fleet size is expected to be around 66.
Data & Methodology

This report involve financial analysis of 4 companies from aviation sector in GCC
countries and European Union. The companies are: Oman Air, Lufthansa, Fly
Emirates, and Air France. We decided to select them to make a comparison between
different markets. The data used in this report are gathered from firms websites and
annual reports as sources from financial statements and other financial data. We
selected the periods of 5 years from 2012 to 2016 depending on availability of
annual reports. Then we use solvency ratios that we have studied in Working
Capital course to evaluate the health and liquidity of these firms. The five ratios that
we have use are: Current Ratio, Quick Ratio, Net Working Capital, Net Liquid
Balance and Working Capital Requirement. In addition we have used Cash Flow
from Operations (OCF) to calculate Cash Conversion Efficiency(CCE). More ever
we used days inventories hold (DIH), days sales outstanding (DSO) and days
payable outstanding (DSO) to calculate and Cash Conversion Period(CCP).

The main formulas that used in report are below :

1. Current Ratio = Current Assets / Current Liabilities

2. Quick Ratio = (Cash + Cash Equivalents + Marketable Securities +
Accounts Receivable) / Current Liabilities
3. Net Working Capital (NWC) = (Current Assets) – (Current Liabilities)
4. Net Liquid Balance (NLB) = (Cash & Cash Equivalents + Short-Term
Investments) - Notes Payable
5. Working Capital Requirements (WCR) = Non-Cash Current Operating
Assets – Current Operating Liabilities
6. Operating Cash Flow (OCF)= Net income + Depreciation +/- Change in
Working Capital accounts
7. Cash Conversion Efficiency (CCE)= Cash Flow from Operation / Sales
8. Days Inventory Held (DIH) = (Inventory / (COGS/365))
9. Days Sales Outstanding (DSO) = (Account Receivables / (Sales/365))
10. Days Payable Outstanding (DPO) = (Account Payables / (COGS/365))
11. Cash Conversion Period (CCP)= (Days Inventory Held + Days Sales
Outstanding) – (Days Payables Outstanding)
Solvency Measures

Current Ratio:

The current ratio measures the ability of a firm to use its current assets to
cover its short-term liabilities. Investors should be understand the types of
current assets the company has and how these assets are quickly converted
into cash to cover current liabilities. The current ratio of 1.0 or greater is
indicates to that the company is in good states to cover its current or short-
term liabilities. While, current ratio of less than 1.0 could be indicates to a
trouble if the company face financial difficulty. The formula used for
calculating a company’s current ratio is current assets divided by current
liabilities.

The formula is:

Current Ratio = Current Assets / Current Liabilities

Current Ratio
2012 2013 2014 2015 2016
Oman Air 0.7186 0.3302 0.2958 0.4042 0.4340

The table above shows the current ratios of Oman Air company between the
period 2012 and 2016.The current ratios overall the period are positive but
less than 1 which means the firm has financial difficulties. In addition, it can
use current liability to finance long term assets as save strategy.

We can observe that the firm’s ratio decreased from 0.7186 in 2012 to 0.3302
in 2013.In addition, it was keeping declining to 0.2958 in 2014.However the
firm’s current ratios starting to increase in 2015 and 2016 until it reached to
0.4340 in 2016. As we can see firm’s current ratio is positive but not exceed 1
which means it has the difficulties to cover its obligations. For example,
Oman Air company has 0.4310 Omani Rial form current asset for each 1
Omani Rial of current liabilities.

Current
Ratio
2012 2013 2014 2015 2016
Oman Air 0.7186 0.3302 0.2958 0.4042 0.4340
Lufthansa 1.1940 0.9153 0.4974 0.4230 0.5015
Fly Emirates 0.9777 1.1158 0.8435 0.8044 0.8158
Air France 0.7712 0.7312 0.3007 0.6288 0.7501

The chart and table a above are showing a comparison between Oman Air
company’s current ratios and other three companies over the period of (2012-
2016).The other three companies are Lufthansa, Fly Emirates and Air France.
We observe that all four companies have a positive current ratio over this
period. In addition, Oman Air company has the lowest current ratio compare
to the other three companies.

Quick Ratio

The quick ratio or in the other word the acid-test ratio, is a liquidity measure
that has a better measure than the current ratio. It used to measure the level of
the most liquid current assets available that the firm has to cover its current
liabilities. In addition, it is more conservative than the current ratio because it
eliminates inventory and other current assets, which are more difficult to
convert them into cash. A higher quick ratio indicates to a more liquid current
status. The general rule is that a quick ratio greater than 1.0 means that a
company is sufficiently able to meet its short-term obligations. The formula
for calculating a company’s quick ratio is:

Quick Ratio = (Cash equivalents + marketable securities + accounts

receivables) divided by current liabilities

Quick Ratio
2012 2013 2014 2015 2016
Oman Air 0.6273 0.2634 0.2478 0.3439 0.3796

The table above shows the quick ratios of Oman Air company during the
period between 2012 to 2016. We notice that there is volatility of quick ratio
values in this period. Firm’s quick ratio decreased from 0.6273 in 2012 to
0.2634 in the next year and it continues decreasing until it reached 0.2478 in
2014. However it starting to increase last two years and it reached 0.3796 in
2016. For example, in last year Oman Air Company has 0.3796 Omani Rial
of Cash equivalents, marketable securities and accounts receivables for each
1 Omani Rial of current liabilities.

Quick Ratio
2012 2013 2014 2015 2016
Oman Air 0.6273 0.2634 0.2478 0.3439 0.3796
Lufthansa 1.1804 0.9026 0.4791 0.4087 0.4900
Fly 0.9207 1.0659 0.7909 0.7487 0.7611
Emirates
Air France 0.7182 0.6841 0.2782 0.5845 0.6943
The chart and table a above are showing a comparison between Oman Air
company’s quick ratios and other three companies over the period of (2012-
2016). All the four firms has a positive quick ratio. We notice that all quick
ratio of all firms are deceased in the period (2012-2014) excludes Fly
Emirates company. In addition, we observe that Oman Air company has the
lowest quick ratio among other companies over this period.

Net Working Capital ratio (NWC)

Working capital, also known as net working capital it used to measure both a
company's operational efficiency and its short-term financial health. It
calculated by the difference between a company’s current assets. If a
company's current assets do not exceed its current liabilities, then it may have
trouble paying back creditors or go bankrupt.

The formula for calculating a company’s net working capital is:

NWC Ratio = Current assets – current liabilities

NWC Ratio
2012 2013 2014 2015 2016
Oman Air -0.1249 -0.4022 -0.5971 -0.3281 -0.4063
This table above shows Oman Air company’s net working capital over the
period between 2012 to 2016. We observe that all net working capital ratios
over the period are negative. This means the firm has trouble paying back
creditors or go bankrupt. This is due to exceed in current liabilities. The net
working capital values of Oman Air company was decreasing during the
period (2012-2014) which means the company had faced more financial
difficulties. While in 2015 the net working capital value increased until it
reached – 0.3281 and this the best value during the period. In 2016 net
working capital value deceased again to -0.4063.

NWC
Ratio
2012 2013 2014 2015 2016
Oman Air -0.1249 -0.4022 -0.5971 -0.3281 -0.4063
Lufthansa 0.0549 -0.0284 -0.1753 -0.2278 -0.2193
Fly Emirates -0.0092 0.0496 -0.0614 -0.0760 -0.0835
Air France -0.0877 -0.1143 -0.6698 -0.1734 -0.1020

The chart and table a above are showing a comparison between Oman Air
company’s net working capital and other three companies over the period of
(2012-2016). We observe that all companies have negative net working
capital values in last three years. In addition, Oman Air company has the
 lowest net working capital value during the period (20-2013) and (2015-
2016). While Fly Emirates company has the best value of net working capital
compare the other firms during the period (2013-2016)

Net Liquid Balance (NLB)

The Net Liquid Balance is measure solvency of companies which subtracts

currents financial liabilities ( short-term debts) from current financial assets
(cash and short-term investments). Net liquid balance less than zero indicates
that firm dependence on outside financing and it has financial difficulties. The
formula for calculating a company’s net liquid balance is:

NLB = (cash + short-term investments) – notes payables

NLB Ratio
2012 2013 2014 2015 2016
Oman Air 0.0416 -0.2372 -0.4340 -0.2005 -0.3187

This table above shows Oman Air company’s net liquid balance over the
period between 2012 to 2016. We notice that all ratios during the period are
negative except the first year which is 2012.This means Firms may face
difficulties in covering its short-term financial obligations. The net liquid
balance was positive in the first year the starts to decline during the period of
(2012-2013) until it reached -0.4340 at the end of 2014. The next year which
is 2015 it increase to -0.2005 the decreased again to -0.3187 in 2016.

NLB Ratio
2012 2013 2014 2015 2016
Oman Air 0.0416 -0.2372 -0.4340 -0.2005 -0.3187
Lufthansa 0.0662 0.0130 -0.0435 -0.0568 0.0412
Fly Emirates 0.1209 0.0892 0.0945 0.0945 0.1430
Air France 0.1334 0.1444 0.1268 0.1208 0.1585
The chart and table a above are showing a comparison between Oman Air
company’s net liquid balance ratios and other three companies over the period
of (2012-2016).We observe that only Air France company and Fly Emirates
have a positive net liquid balance over whole the period. Oman Air company
has the lowest net liquid balance over whole the period comparing to other
companies.

Working Capital Requirements (WCR)

The working capital requirement ratio use to calculate the amount of finance a
business needed to carry out this day to day trading activity. In addition, it
varies from industry to industry depending on the amount of time the business
takes to pay suppliers, the amount of inventory held, and the time it takes to
collect cash from customers. Increased working capital requirement ratio
implies that the working capital costs requires additional funding. However
working capital requirement ratio less than Zero indicates to that working
capital costs provides financing for the long term assets. The formula for
calculating a company’s working capital requirement ratio is:

Net working capital requirement = Inventory + Accounts receivable –

Accounts payable
 WCR Ratio
2012 2013 2014 2015 2016
Oman Air -0.1665 -0.1650 -0.1631 -0.1333 -0.0876

This table above shows Oman Air company’s net working capital requirement
over the period between 2012 to 2016.We observe that Oman Air company
has negative net working capital requirement over whole the period. This
indicates that Oman Air company use working capital costs to finance the
long term assets working .

WCR Ratio
2012 2013 2014 2015 2016
Oman Air -0.1665 -0.1650 -0.1631 -0.1333 -0.0876
Lufthansa -0.0113 -0.0414 -0.1318 -0.1710 -0.2605
Fly Emirates -0.1767 -0.2011 -0.1973 -0.1944 -0.1836
Air France 0.0063 -0.0033 -0.0071 -0.0025 0.0030

The chart and table a above are showing a comparison between Oman Air
company’s net working capital requirement and other three companies over
the period of (2012-2016). There are three companies that have negative net
working capital requirement over whole the period which are
Cash ratio:

Cash ratio is one of the ratios that indicates a company’s available liquid
assets. It differ than all other liquidity ratios that it capture the amount of cash
and cash equivalent in the company’s hand. Where no consideration of A/R or
inventory or any other current asset account that is not in cash. Cash ratio is
an indication of company’s investment in securities whether it is marketable
or not. Cash ratio is too important and useful to creditors who wants to make
sure that all trade credits will be paid in timely manner without any delays in
payment that could cost the company by affecting the investors equity to
decline. Not only short term creditors but, also the company’s internal
managers should know the cash ratio in order to relief some amount of
securities by cashing them in period of decline in sales or period of increase in
costs same as what happened in our study with Oman Air when all revenues
has been wiped out.

Cash ratio is calculated through this formula:

We examined and calculated Oman Air cash ratio by extracting all

information from the financial statements for the fiscal year period 2012-
2016.
Oman Air
2012 2013 2014 2015 2016
cash ratio 0.3464 0.0562 0.0585 0.0411 0.0280

First observation we can withdraw from Oman Air cash ratios from the above
schedule is that all results are low than 1. When cash ratio is low than 1 this
indicates that the firm faces financial difficulties can be assessed that it cannot
pay it short term obligation. From the above schedule we can say that that
Oman Air is in critical situation where cash in hands did not exceeds 35% in
best case of its total current liabilities as in year 2012. Add to that, it may be a
company’s strategy to maintain lower cash ratio in this industry but we cannot
give final opinion unless we compare it with industry average or benchmark
the cash ratio with other firms. Moreover lower cash ratio may indicates that
the company is efficient in handling lower cash than excess cash that may
stay idle. Comparing these ratios with the benchmark can give us a useful
conclusion.

We can notice that the firm cash ratio has declined over the horizon from
34.64% in 2012 to 2.80% in 2016 and this is because of the Oil crisis in the
region where airline industry and transportation as well as oil industry firms
were affected strongly. We can say that Oman Air handled 0.3464 biza as
cash for every 1 OMR of current liabilities in 2012 as it provide around 35%
of coverage to its current liabilities. In 2013 cash ratio declined steadily to
reach 0.0562 biza for every 1 OMR of current liabilities. 2014 cash ratio
increased little bit to 0.0585 biza fi=or every 1 OMR of CL and in 2015 it go
back to decline to 0.0411 to every 1 OMR of current liabilities. But in 2016 it
reach the underneath expected value of 0.0280 biza as coverage for each 1
OMR of current liabilities.

Cash ratio
2012 2013 2014 2015 2016
Oman Air 0.3464 0.0562 0.0585 0.0411 0.0280
Lufthansa 0.4920 0.3964 0.0725 0.1054 0.2161
Fly emirates 0.2923 0.2083 0.2407 0.2435 0.3158
Air France 0.3480 0.3394 0.1324 0.2587 0.3883
Industry Average 0.3697 0.2501 0.1260 0.1622 0.2371

Now we can say that Oman Air cash ratios can be observed and compared
with other firms. It’s clear that Oman’s Air cash ratio is below the industry’s
average over the horizon. In 2012 Oman Air current ratio was 0.3464 lower
than the industry’s average little bit which was 0.3697. Then starting from
2013 a huge decline hit the cash ratio of Oman’s Air same thing happened to
Industry’s Average but its effect was lower than the decline in cash ratio with
Oman Air. 2013 Oman’s Air cash ratio indicated 0.0562 biza for every 1
OMR of current liabilities way lower than the next lower cash ratio of the
peer group which was for Fly emirates by 0.2083 $ for every 1 $ of current
liabilities. In 2014 Oman Air cash ratio keep on the same level by adjusting
upward little bit to reach 0.0585 while Lufthansa was the next above cash
ratio of 0.0725 while the industry average was 0.1260. After that in year 2015
Oman Air cash ratio continue to decline all the way down to 0.0411 while
benchmark ratio was 0.1622 and to 0.0280 while the benchmark ratio adjust
upward to reach 0.2371. Here at 2016 we can conclude that all other firms
cash ratio increases Lufthansa was 0.2161, fly emirates was 0.3158 and Air
France was 0.3883. With this ratio we can say that Oman Air has stuck with a
financial difficulties that should be solved before it continue the downturn
while the competitors moving upward.

Cash Conversion Efficiency (CCE):

Cash Conversion Efficiency is the proportion of sales that yields operating

cash flow, where the operation cash flow OCF is the amount that works to
maximize shareholders wealth and firms financial health. CCE is critical for
those firms that seeks long term viability. A good percentage of CCE means a
healthy working capital cycle that manage and monitor the financial supply to
the operating cycle including costs and operating working capital. CCE would
reveled many information regarding any problems. To illustrate, a negative
CCE indicates that there is a problem in converting sales into cash flows and
at that point managers can inspect which policy needs to be change either
credit policy that is generous, efficient management of working capital, profit
margin, suppliers discount or credit period given to the firm, marketing
system that is employed or so on. On the other hand, a positive CCE means
that the firm operating cycle is adding value to the company by the amount
that is generated from sales that represent OCF and further improvements can
be done.

CCE is calculated through this formula:

 Cash Conversion Efficiency
2012 2013 2014 2015 2016
Oman Air -0.2428 -0.2639 -0.2360 -0.1426 -0.2542

As we can see in the above schedule the CCE is negative for each year which
suggests problems in converting sales into cash flow. This appears either
because of large inventory holdings or generous credit policy. We observe
that there is a fluctuation in the CCE over the horizon but it still in negative
which means that no efficiency in converting cash into cash flows which will
results in decline in shareholders wealth and firm value. In 2016 Oman Air
CCE hit -25.42% where efficiency was negative.

Cash Conversion Efficiency

2012 2013 2014 2015 2016
Oman Air -0.2428 -0.2639 -0.2360 -0.1426 -0.2542
Lufthansa -0.0233 0.0016 -0.0679 0.0392 0.0558
Fly Emirates 0.1302 0.1753 0.1531 0.1493 0.1659
Air France 0.0332 0.0580 0.0406 0.0738 0.0901
Industry -0.0257 -0.0073 -0.0276 0.0299 0.0144
Average

A comparison between the CCE of Oman Air with other firms will give a
clear cutoff point to which is good CCE. In 2012, Oman Air CCE was the
worst as it was – 0.2428 followed by Lufthansa -0.0233 but still , the industry
average still in minus by -0.0257 Afterward Air France by 0.0332, then Fly
Emirates 0.1302 as positive CCE it indicate a healthy policies in credit and
inventory holdings. In 2013, Oman Air CCE was -0.2639 decline more than
the previous year where the benchmark average was -0.0073 affected by the
deep decline in Oman Air CCE we can see that all other firms CCE improves
to positive. Then to year 2014, where Oman Air CCE was -0.2360 less than
the benchmark CCE which was -0.0276. In 2015, Oman Air CCE improved
little bit to -0.1426 and the benchmark CCE was 0.0299. In 2016, It is clear
that Oman Air CCE has been locked to be negative where it was -0.2542
where all other firms CCE was positive as 0.0558 in Lufthansa, 0.1659 in Fly
Emirates, 0.0901 in Air France and 0.0144 in the industry average CCE. We
can say here that all CCE ratio of Oman Air during the period was too less
than the industry average and less than all other firms this is resulted from
generous credit policies given to customer that lead to more delays in
collection of cash and inefficient management of working capital cycle.

Days Inventory Held (DIH):

Days Inventory Held defined as the ending inventory scaled by daily cost of
goods sold. It represents the delay time between the acquisition of inventory
and selling the inventory to a customer and it is represented as the average
number of days inventory sits idle. Moreover DIH capture the company’s
strategy in handling the inventory either by low DIH ratio while applying JIT
system or by maintaining a good amount of stock to satisfy the demand. High
DIH means that the operating cycle is higher and the company may take a
long time to collect sale from customers. The denominator of the DIH
formula represent Inventory turnover which capture the frequency of turning
inventory to sales this give us analysis of how efficient is the inventory
management system in the company.

DIH is calculated through this formula:

Days Inventory Held

2012 2013 2014 2015 2016
Oman Air 11.891 11.584 11.974 10.598 11.362

To clarify Oman Air situation from the above table, we have calculated the
DIH in the balance sheet of Oman Air and we found low numbers of DIH this
happens because the aviation industry is a service industry not product
oriented industry so, the amount of inventory held will be too much less than
manufacturing industry. What is important to us is to put this information in
mind while looking at such numbers because low DIH in the aviation industry
does not mean that the company is efficient in managing its inventory but it
may mean that this industry is characterized by low DIH.

As we can see Oman Air DIH was fluctuating over the horizon from 11.89
days in 2012, to 11.58 in 2013, then up to 11.97 in 2014, afterward 10.59 in
2015 and lastly to 11.36 in 2016. It is clear that Oman Air keeps the DIH on
the same level as it goes with the time.

Days Inventory Held

2012 2013 2014 2015 2016
Oman Air 11.891 11.584 11.974 10.598 11.362
Lufthansa 1.888 2.096 2.953 3.091 2.874
Fly Emirates 8.866 8.123 7.945 8.447 10.020
Air France 7.893 7.944 8.498 8.358 9.504
Industry 7.635 7.437 7.843 7.623 8.440
Average

As it is shown in the above table the Industry average of the DIH in the
aviation industry was moving between 7.437 in 2013 as lowest number of
days to 8.440 in 2016 as highest number of days. But Oman Air DIH is
exceeding these numbers for example in 2016 the inventory was held around
11.36 days while the benchmark inventory was held around 8.44 days. Oman
Air should review its purchasing, production and distribution policies and it
should minimize the inventory required to generate 1 OMR of sales this
would result in more frequent turnover and low DIH as what we can see with
Lufthansa DIH where it is capable to lower it to that extent which is healthy
and good to the firm.
Days Sales Outstanding (DSO):

Days sales outstanding is a measure of the average number of days that it

takes a company to collect payment after sale has been made. DSO is an
element of Cash conversion cycle and it capture the customers behavior of
payment. The good thing that DSO represent a data base for the firm where it
can use such information to evaluate the customer response and thereby to
expect when the payment will be.

DSO is calculated through this formula:

Days Sales Outstanding

2012 2013 2014 2015 2016
Oman Air 41.805 40.803 53.478 52.896 86.531

The above table shows Oman Air DSO where it was fluctuating till 2015 and
in 2016 it peaks to 86.5 days where Oman Air take more time to collect
money from its credit sales to customers , add to that, this increase in DSO
would increase the Operating cycle and this may lead to problems within the
cash flow so the company should make a quick adjustment regarding this
issue before it get stuck Due to this increase in DSO Oman Air may extend
its Days Payables Outstanding later on.
 Days Sales Outstanding
2012 2013 2014 2015 2016
Oman Air 41.805 40.803 53.478 52.896 86.531
Lufthansa 11.256 11.680 14.816 9.923 10.752
Fly Emirates 47.618 43.652 40.053 35.296 40.005
Air France 26.471 25.387 25.318 25.575 27.444
Industry 31.788 30.381 33.416 30.923 41.183
Average

From the above table, we can see that Oman Air 2012 DSO 41.8 days was
above the industry average which was 31.78 days so, the company was
receiving its revenue after 41.8 days. But in 2012 Oman Air situation was
better than fly emirates which has 47.6 days. In 2013 Oman Air maintained
the same level of about 40.8 days to collect money from credit sales while the
industry average was around 30.38 days. In 2014 Oman Air DSO starts to
deviate than the benchmark and increased to reach 53.47 days while the
industry average was 33.41. And in 2015 it keeps with same level of DSO.
But an incident happened in 2016 has changed the DSO extremely, we will
pay attention to the peak in DSO of Oman Air in 2016. It seems to us that
Oman Air was only the one company which has that huge peak in DSO.
Comparing it to 10.7 days in Lufthansa, 40 days in Fly Emirates, 27.4 days in
Air France and industry average of 41.1 days Oman Air increase in DSO
reflect that the credit and collection department is not efficient in dealing with
customers or in taking policies that has affected the DSO negatively.
Moreover it seems that the economic situation in the country is affecting the
customer payment behavior and making money tight from being received
quickly from customers.

Days Payables Outstanding (DPO):

DPO is the time between receipt of input and raw materials and when
payments are made to suppliers. DPO measure how long it take the company
to pay for its invoices from trade creditors and suppliers. Firms must maintain
a good DPO, a higher DPO means that the company take longer time to pay
its creditors which mean more money is on hand and that is good for working
capital and free cash flow. But, in the other hand such behavior is not
satisfying the suppliers who may not agree to extend credit in future time.
DPO is calculated through this formula:

Days Payables Outstanding

2012 2013 2014 2015 2016
Oman Air 91.237 87.767 97.007 96.238 100.507

Oman Air DPO was decreasing from 2012 to 2013. After that it started
increasing and moving upward until it reaches 100.5 Days in 2016.

Days Payables Outstanding

2012 2013 2014 2015 2016
Oman Air 91.237 87.767 97.007 96.238 100.507
Lufthansa 13.128 16.024 14.207 12.713 15.973
Fly Emirates 124.340 129.916 126.108 122.230 128.640
Air France 33.618 36.828 38.606 37.628 39.611
Industry 65.581 67.634 68.982 67.202 71.183
Average

Comparing Oman Air with the benchmark, Oman Air number of days was
above the benchmark as it shows that the company extending its payables
period to maximum which is good for the company but it may be viewed
unaccepted by suppliers so they may not agree to give more extension in the
credit period. In 2016 the industry average was around 71.1 days while Oman
Air DPO was 100.5 days reaching maximum days through the 5 year period.
Cash Conversion Period (CCP):

It is the length of time that it takes to convert 1 OMR of disbursement

(Inventoried product) into 1 OMR of cash receipt (sales). CCP typically
quantifies liquidity from a going concern perspective by blending data from
the balance sheet and income statement. CCP represent the length of time in
which the management must arrange for nonspontaneous financing. A longer
Cash Conversion Period (CCP) requires increased financial resources and
reducing firm liquidity. While a negative Cash Conversion Period (CCP)
implies that the suppliers provide financing for the firm’s working capital
cycle( through extending payables terms in trade credit) and for non-operating
working capital assets.

CCP is calculated through this formula:

Cash Conversion Period

2012 2013 2014 2015 2016
Oman Air -37.541 -35.380 -31.555 -32.744 -2.614

Oman Air CCP results showed that the firm took advantage from the
opportunity of Negative CCP where the suppliers were providing the
financing for the firm working capital cycle. But Because the huge peak in the
DSO in 2016 the CCP of Oman Air in 2016 increased to reach -2.6 Days
and it is clear from CCP negative values that the suppliers are affording
generous trade credit terms.
 Cash Conversion Period
2012 2013 2014 2015 2016
Oman Air -37.541 -35.380 -31.555 -32.744 -2.614
Lufthansa 0.017 -2.248 3.563 0.301 -2.348
Fly Emirates -67.856 -78.141 -78.110 -78.487 -78.615
Air France 0.746 -3.497 -4.789 -3.695 -2.663
Industry Average -26.158 -29.816 -27.723 -28.656 -21.560

From the above table we notice that Oman Air CCP strategy was to benefit
from the financing provided by the suppliers that is shown in generous credit
terms in maximum DPO same strategy is implied by Fly Emirates. The
comparison between Oman Air and industry average yield that Oman Air
CCP is always lower than the industry average except in 2016 where Oman
Air CCP was -2.61 and industry average was -21.56 and that is because Oman
Air DSO has increased yield a decrease in the CCP.

Net Present Value of Cash Conversion Period (NPVCCP) :

The net present value of cash conversion period is based on the idea that we
accept the project that yield NPV of zero or more and we reject the projects
that give us a negative NPV. NPVCCP work as vital information to the credit
and collection department where it capture the effect of proposed credit terms
on the shareholders wealth and equity.

NPVCCP is calculated through this formula:

( ) ( )

NPV CCP
2012 2013 2014 2015 2016
Oman Air $ -30,122,560 $ -36,273,081 $-30,689,118 $ -23,181,852 $ -44,710,316

As the table show it is clear to us that the NPV of CCP of Oman Air yield a
negative NPV which means a losses that wiped out all investors wealth. So,
 the firm should review its overall policies regarding the inventory held on the
balance sheet and the its turn over as well as review to the generous credit
policies that it gave to customers. Moreover it should evaluate the customers
and their ability to pay in timely manner. To us all Net Present Values seems
negative because the left part of NPVCCP resulted in negative values and the
right part cannot cover the expenses of the left part (purchase). Due to all of
this, Oman Air should review its DSO and DIH as well as DPO to make sure
that all its investment in working capital cycle yields a positive NPV.

NPV CCP
2012 2013 2014 2015 2016
Oman Air $ -30,122,560 $ -36,273,081 $ -30,689,118 $ -23,181,852 $ -44,710,316
Lufthansa $ 5,039,572,929 $ 4,833,051,284 $ 3,878,938,904 $ 6,484,726,134 $6,676,395,466
Fly $ 841,011,516 $ 1,236,876,296 $ 1,674,086,630 $ 2,148,317,526 $2,755,019,500
Emirates
Air France $1,880,684,274 $ 2,516,235,416 $ 2,233,997,475 $ 3,025,696,921 $3,812,066,461
Industry $ 1,932,786,540 $ 2,137,472,479 $ 1,939,083,473 $ 2,908,889,682 $3,299,692,778
Average

The table above is comparing between Oman Air NPV of cash conversion
period and its benchmark the benchmark average was positive over the horizon
starting from above 1 billion dollar 2012 to around 3 billion in 2016. But Oman
Air was the only one firm that net a present value of negative amounts during
the horizon from 2012 to 2016. This negative results shows how weak is the
short term financial decision making in Oman Air and it is clear to us that no
scientific method is applied when it comes to making a clear evaluation at the
end of each year. All things considered resulted in a catastrophic losses on the
shareholders wealth.
Recommendations

According to results of solvency ratios and comparison between companies

we notice that Oman Air company has liquidity problems and default risks .
We recommend Oman Air company to increase the investments in current
ratios to educate level that help company cover its current liabilities. In
addition it should use safety strategy through use long term capital
(permanent capital) to finance current assets investments.

Moreover, regarding the liquidity measures Oman Air was benefitting from
the suppliers financing which is a good strategy since it’s the only company
that leads the competition in Oman so suppliers are giving the firm a generous
credit terms but, the firm should look for ways to finance its working capital
cycle if it continues the increase in CCP as this way. Add to that, the NPV
CCP of the firm is negative which is an indication of massive loss for the
shareholders wealth in each working capital cycle and this maybe resulted
from lower sales that cannot cover the purchases. On DIH Oman Air should
review its purchasing, production and distribution policies and it should
minimize the inventory required to generate 1 OMR of sales this would result
in more frequent turnover and low DIH. Applying JIT strategy to the
inventory holding would lower the Inventory (Numerator) and thereby
lowering the DIH resulting in quick turnover to sales. In DSO, If the sales is
not collected as quick as possible it will take more time to collect the money
and any delays would negatively impact the shareholders’ amount of
investment to decline in market value so, one of the solutions is to speed up
the payments or to recalculate the NPV of given credit terms another solution
is to sell receivables to a third party looking for quick liquidity by applying
factoring principle.
Abstract:
As part of the “Working Capital” course requirement this project is about
Oman Air and its benchmark. Here we put all of our efforts to produce a good
study to the last 5 years financial history of Oman Air. . The five ratios that
we have use are: Current Ratio, Quick Ratio, Net Working Capital, Net
Liquid Balance and Working Capital Requirement. In addition we have used
Cash Flow from Operations (OCF) to calculate Cash Conversion
Efficiency(CCE). More ever we used days inventories hold (DIH), days sales
outstanding (DSO) and days payable outstanding (DSO) to calculate and
Cash Conversion Period(CCP).
References
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Chakraborty, T., & Mai Al Abri. (2017, April 04). The growth of civil
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Air, O. (n.d.). Welcome to the new gateway of Oman. Retrieved from

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Our new 777 is a Game Changer. (n.d.). Retrieved from

https://www.emirates.com/om/english/

Continue to the Air France website. (n.d.). Retrieved from

https://www.airfrance.com/indexCom_en.html

(n.d.). Retrieved from https://www.lufthansa.com/om/en/Homepage

Zietlow, J. T., Hill, M. D., Maness, T. S., & Maness, T. S. (2014). Short-term
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