WORLD OF FIGURES: Clarifying whether Kenya Airways made profit or loss

The financial report says that sales during the period were Sh52 billion while the expenses were Sh56 billion. Obviously, the result is a loss of Sh4 billion. PHOTO | FOTOSEARCH

What you need to know:

  • A reduction of loss from Sh5.6 billion to Sh4 billion is an improvement.

Last week I mentioned how someone claimed that Kenya Airways had made a profit even though the financial report clearly showed a loss.

The [flawed] argument went like this: since the company reduced the loss from Sh5.6 billion to Sh4 billion, this means that it made a profit of Sh1.6 billion.

As explained in the previous article, this argument is totally mistaken. The financial report says that sales during the period were Sh52 billion while the expenses were Sh56 billion. Obviously, the result is a loss of Sh4 billion.

Still, a reduction of loss from Sh5.6 billion to Sh4 billion is an improvement. So, what is the percentage improvement?

To answer that question, we must go back to basic principles. When calculating percentage change, we subtract the final value from the starting one; then divide the result by the starting value and multiply by 100.

For example; if something changes from 10 to 12; we do 12 — 10 = 2. Then we divide 2 by 10 (the starting value) and multiply 100. That is, 0.2 x 100 = 20. So, the answer is 20 per cent.

In the case of Kenya Airways, the starting value is -5.6 and the final one is -4 (notice the negative signs in these values). The difference is (-5.6) — (-4). I have added the brackets for clarity.

The answer is -1.6. This is also a negative value. In the next step, we divide this difference (-1.6) by the starting value (-5.6).

Whenever a negative number is divided by another negative number, the result is positive. In this case, it is +0.29 or +29 per cent.

So, Kenya Airways reported a 29 per cent increase in profit. Now that might sound confusing: we are talking about an increase in profit yet we have established that the company made a loss. Isn’t that a contradictory statement?

To be clear: let me emphasise that the company reported a profit of negative Sh5.6 billion. This can also be stated as a loss of positive Sh5.6 billion.

I discussed this issue at some length in May 2016 and explained that what we call a loss is actually a negative profit.

Conversely, a negative loss is really a positive profit. If you are still confused, dig out the article of May 1, 2016.

Therefore, if the financial report calls the result “loss”, then the amount should be indicated as a positive quantity.

I took a look at what Kenya Airway published and found that the bottom line of the income statement reads: “Loss for the period: (Sh4,035 million)”. The brackets are the conventional way to indicate that it is a negative quantity.

This is inaccurate and misleading. A loss of negative Sh4,035 million is equivalent to a profit of that amount!

What the directors of Kenya Airways should have stated is: “(Loss) for the period: (Sh4,035 million)”.

That is, both the word “loss” and the amount of money should be in brackets. Indeed, common practice is to write: “Profit/ (Loss) for the period”.

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