Adjusted Balance Sheet for MAS.

This article is to illustrate the impact of the off-balance-sheet debt (the operating lease obligation) on MAS financial ratio.

The steps are simple. First, we capitalize those operating lease payments by calculating their present value (using the cost of debt as discount rate). Then we add the same amount of asset and debt onto the balance sheet, and recalculate the financial ratios of MAS.

Here we go.

from its annual report, we get the Operating Lease Arrangements of MAS as at 31-Dec-2007:

• due within one year: RM 1.92 billion
• due between one and two years RM 1.91 billion
• due between two and five years: RM 3.23 billion
• due after five years: RM 1.72 billion

To make things simple, we assume that all the payments are made at the end of each year, the RM3.23 billion is spread evenly over the three years, and the final RM1.72 billion is a one-shot payment at the end of sixth year.

Using a discount rate of 5% (estimated cost of debt for MAS) , we can get the present value of these cashflow -- about RM 7.5 billion. So, we adjust balance sheet of MAS by adding the same amount into both its asset and debt. The following table shows the impact of this operating lease item on MAS's financial ratios. (amounts are in RM billion)

As we can see, the debt and leverage ratio of MAS is much more bigger after the adjustment.

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Comparison to Others.

Since there's only two airlines in Malaysia, we have no choice but to compare MAS to AirAsia. Before we make any comparison, the balance sheet of AirAsia also need some adjustment.

First, to be conservative, I think we'd better exclude the deferred tax asset from AirAsia's balance sheet. Including the deferred tax asset will overstate the asset of AirAsia.

Then, we adjust its balance sheet for operating lease payments. As compared to MAS, the operating lease items of AirAsia are much smaller in amount (only RM 0.23 billion) , and thus had little impact on its balance sheet and financial ratios.

Here's the figures of AirAsia: (amounts are in RM billion)

Many analysts tend to criticize on AirAsia's high leverage ratio, while MAS is normally thought to have a good healthy balance sheet. But if we compare the figures after the adjustment for operating lease, their financial ratios are not much different actually.

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