The main purpose of this assessment is to analyze the business of Quantas Airways which is engaged in providing air travel services to all the customers of the business. The analysis is undertaken so that effective decisions can be taken regarding the financial performance of the business. The report will also be including calculations of key financial ratios which are related to profitability, solvency and efficiency of the company so as to have a basic understanding of the viability of the business.
Qantas Airways is regarded as the largest airline in terms of fleet size of the business and is also considered to be one of the important airlines which operates in Australia. In addition to this, the company goes back and is regarded to be one of the oldest airlines after KLM and Avianca. The airline was setup in 1920 and since the business has effectively served large number of customers. The name of the company Qantas is derived from “Queensland and Northern Territory Aerial Services” and Qantas is just a short form which is used for this name. The company major operations are situated in Sydney and it is estimated that the airlines provide for 65% of all the domestic travels in the country and around 14.9% of all passenger travels in the world (Investor.qantas.com. 2018). The company is known for its policies for providing the best quality of services at the lowest possible costs of the business.
The assessment would be evaluating the changes which takes place in the stock prices of the business during the two years period for which appropriate graphical presentation is also provided in the analysis (Obradovich and Gill 2013). The assessment also evaluates the volatility in the stock prices of the business by considering the all ordinary index and making comparison with the same. The assessment would also be analyzing the capital structure of the business and make discussion relating to the same (Mwangi, Muathe and Kosimbei 2014). The report also includes a recommendation part which provides as to how the company a further improve the performance of the business.
Analysis of Key Financial Ratios
The key financial ratios are computed in order to assess the financial performance of the business for the two years period which is considered. The ratios relating to profitability, efficiency, market values and liquidity is computed for the business for the purpose of analysis of different area of performance of the business. Some of the key financial ratios which are consider for the business of Qantas ltd is shown below in details:
Profitability Ratios
The profitability ratios of a business are mainly concerned with the profit generating ability of the business and the same is to be analyzed on the basis of the annual reports of the business which depicts the financial performance of the business.
|
Particulars` |
2018 |
2017 |
|
|
$M |
$M |
||
|
Profit for the year |
A |
980 |
853 |
|
Revenue |
B |
17,060 |
16,057 |
|
Total Assets |
C |
18,647 |
17,221 |
|
Total Equity |
D |
3,959 |
3,540 |
|
Net Profit Margin |
E= A/B |
5.74% |
5.31% |
|
Return on Equity (ROE) |
F=A/D |
24.75% |
24.10% |
|
Return on Assets |
G=A/C |
5.26% |
4.95% |
The above table shows the profitability ratios of the business and the ratios which are shown in the table are net profit margin, return on equity, and return on assets. The ratios are computed on the basis of the estimates which are provided in the annual reports of the business. The net profit margin which is shown in the above figure shows that the estimate has increased significantly from previous year analysis which suggest that the management of the company has improved the sales during the current year or has effectively reduce the costs which is associated with the operating activities of the business.
The return on assets and return on equity of the business is also shown to have increased significantly which is mainly due to increase in profitability of the business. The management of the company has taken appropriate steps in enhancing the profit generating capacity of the business and the same is appropriately shown in the financial performance of the business. The return on equity and return on assets of the business are considered to be important financial indicators for overall performance of the business.
Liquidity Ratios
The liquidity ratios are associated with the ability of the company to effectively manage the current obligations of the business and the same is computed considering the current assets and current liabilities of the business. The table which is shown below shows some of the liquidity ratios which is computed for the business.
|
Particulars` |
2018 |
2017 |
|
|
$M |
$M |
||
|
Current Assets |
A |
3,712 |
3,119 |
|
Current Liabilities |
B |
7596.0 |
7095.0 |
|
Inventory |
C |
351.0 |
351.0 |
|
Prepayments & Other Assets |
D |
167.0 |
97.0 |
|
Cash & Cash equivalents |
E |
1694.0 |
1775.0 |
|
Current Ratio |
F=A/B |
0.49 |
0.44 |
|
Quick Ratio |
G=(A-C-D)/B |
0.42 |
0.38 |
|
Cash Ratio |
H=E/B |
0.22 |
0.25 |
Source: (Created by the Author)
The above table effectively shows the liquidity ratios of the business for the year 2018 and 2017. The current ratio which is shown in the above table is computed considering the current assets and liabilities of the business and the result is shown to be positive. The overall liquidity position of the business has improved slightly in comparison to previous year analysis which suggest that the management of the company is considering the liquidity aspect of the business critically. The quick ratio of the business also shows similar results as current ratio of the business.
However, it is to be notes that the current assets of the business is below the current liabilities of the business which is a matter of concern for the management of the business. The management needs to improve the liquidity position of the business further in order to make use of the financial projects which are at the disposal of the company. The cash ratio is shown to have decreased which signifies that the cash outflow of the business is more than the cash inflows of the business which is serious matter which should be considered by the management of the company.
Financial Leverage Ratio
The financial leverage ratio are computed considering the debt capital which is used by the business in order to finance the operations and maintain the liquidity status of the business (Ehiedu 2014). The table which is shown below represent the financial leverage ratio of the business and effectively shows the computation of some of the ratio which is to be considered:
|
Particulars` |
2018 |
2017 |
|
|
$m |
$m |
||
|
Total Assets |
A |
18647.0 |
17221.0 |
|
Total Equity |
B |
3959.0 |
3540.0 |
|
Total Liabilities |
C |
14688.0 |
13681.0 |
|
Debt-to-Equity Ratio |
D=C/B |
3.71 |
3.86 |
|
Debt Ratio |
E=C/A |
0.79 |
0.79 |
|
Equity Ratio |
F=B/A |
0.21 |
0.21 |
Figure 3: (Table Showing Financial Leverage Ratios of the Business)
Source: (Created by the Author)
The above table shows the financial leverage ratios of the business and the same shows debt ratio, debt to equity ratio and equity ratios. All the ratios which are shown above represent a certain amount of borrowings which is used by the management of the company for the purpose of financing the activities of the business (Delen, Kuzey and Uyar 2013).
The above ratio shows decrease in debt to equity ratio which suggest that the management has made some changes to the capital structure of the business which has resulted in change in debt to equity ratio of the business. The debt ratio of the business also shows similar results but the estimate is shown to have been unchanged which signifies that no additional debt is taken by the management of the company (Uechi et al. 2015). The equity ratio also shows that the estimate has not changes which shows that the management of the company is trying to achieve a balance between debt and equity ratios of the business.
Efficiency Ratios
The efficiency ratios of the business are computed to understand the overall level of efficiency in the business and practices which are undertaken by the management of the company. The efficiency ratios which are computed are shown in the table below:
|
Particulars` |
2018 |
2017 |
|
|
$m |
$m |
||
|
Total Assets |
A |
18647.0 |
17221.0 |
|
Fixed Assets |
B |
12851.0 |
12253.0 |
|
Revenue |
C |
17060.0 |
16057.0 |
|
Trade & Other Receivables |
D |
908.0 |
784.0 |
|
Total Asset Turnover Ratio |
E=C/A |
0.91 |
0.93 |
|
Fixed Asset Turnover Ratio |
F=C/B |
1.33 |
1.31 |
|
Receivables Turnover Ratio |
G=C/D |
0.05 |
0.05 |
Figure 4: (Table Showing Efficiency Ratios of the Business)
Source: (Created by the Author)
The efficiency ratio of the business is formulated with the intention that the management of the business is trying to improve the overall efficiency of the business (Omar et al. 2014). The total asset turnover ratio of the business is shown to have decreased in comparison to previous year which means that the business has not been able to generate that much amount of sales as the assets is utilized for generating such sales (Vogel 2014). The fixed asset turnover ratio is similar to asset turnover ratio of the business and the same is shown to have increased slightly which is a positive sign for the management of the company. The receivable turnover ratio of the business is shown to have remained the same and this suggest that the business has not made any improvements in the credit term period in comparison to previous year. The estimate for debtor turnover period is shown to be 005.
Market Value Ratios
The market value ratios of the business reflect the market valuation of the shares and these ratios are considered to be important as the investors refer to such ratios before taking any decisions relating to the business.
|
Particulars` |
2018 |
2017 |
|
|
|
|
||
|
Earning per Share |
A |
0.560 |
0.460 |
|
Dividend per Share |
B |
0.1418 |
0.14085 |
|
Market Value per Share |
C |
6.72 |
5.3 |
|
Dividend Payout Raio |
D=B/A |
25.32% |
30.62% |
|
Dividend Yield Rate |
E=B/C |
2.11% |
2.65% |
|
Price-to-Earning Ratio |
F=C/A |
12.00 |
11.57 |
Figure 4: (Table Showing Market Value Ratios of the Business)
Source: (Created by the Author)
The market value ratio which is computed in the above table comprises dividend payout ratio, dividend yield ratio and price to earnings ratios. The dividend payout ratio is shown to have decreased which is mainly due decrease in the dividends which is offered by the business (Bradford, Chen and Zhu 2013). The dividend yield ratio of the business is also shown to have decreased significantly in comparison to previous year. The price earning ratio of the business is shown to have increased in comparison to previous year which is a positive sign for the business.
Graphical Presentation Showing Price Movements
|
Quantas Airways |
All Ord Index |
|||
|
Date |
Stock Prices |
Change % |
Stock Prices |
Change % |
|
31/12/2015 |
3.41 |
5675 |
||
|
31/01/2016 |
3.75 |
9.97% |
5761 |
1.52% |
|
29/02/2016 |
3.89 |
3.73% |
5903.799805 |
2.48% |
|
31/03/2016 |
4.24 |
9.00% |
5947.600098 |
0.74% |
|
30/04/2016 |
5.01 |
18.16% |
5761.299805 |
-3.13% |
|
31/05/2016 |
5.72 |
14.17% |
5764 |
0.05% |
|
30/06/2016 |
5.32 |
-6.99% |
5773.899902 |
0.17% |
|
31/07/2016 |
5.72 |
7.52% |
5776.299805 |
0.04% |
|
31/08/2016 |
5.83 |
1.92% |
5744.899902 |
-0.54% |
|
30/09/2016 |
6.15 |
5.49% |
5976.399902 |
4.03% |
|
31/10/2016 |
5.67 |
-7.80% |
6023.5 |
0.79% |
|
30/11/2016 |
5.04 |
-11.11% |
6167.299805 |
2.39% |
|
31/12/2016 |
5.27 |
4.56% |
6146.5 |
-0.34% |
|
31/01/2017 |
5.89 |
11.76% |
6117.299805 |
-0.48% |
|
28/02/2017 |
5.83 |
-1.02% |
5868.899902 |
-4.06% |
|
31/03/2017 |
5.77 |
-1.03% |
6071.600098 |
3.45% |
|
30/04/2017 |
6.35 |
10.05% |
6123.5 |
0.85% |
|
31/05/2017 |
6.16 |
-2.99% |
6289.700195 |
2.71% |
|
30/06/2017 |
6.72 |
9.09% |
6366.200195 |
1.22% |
|
31/07/2017 |
6.43 |
-4.32% |
6427.799805 |
0.97% |
|
31/08/2017 |
5.9 |
-8.24% |
6325.5 |
-1.59% |
|
30/09/2017 |
5.47 |
-7.29% |
5913.299805 |
-6.52% |
|
31/10/2017 |
5.96 |
8.96% |
5749.299805 |
-2.77% |
|
30/11/2017 |
5.82 |
-2.35% |
5716 |
-0.58% |
|
31/12/2017 |
5.82 |
0.00% |
5716 |
0.00% |
|
5.82 |
The above figures show the fluctuation in the stock prices of the business and the same is to be compared with the All Ordinary Indexes. The table above shows that the fluctuations in the shares prices of Qantas ltd for the year 2018 (Finance.yahoo.com. 2018). The movement in the share price of the business is plotted in the graph above in order to show changes in the shares prices due with respect to changes in the all ordinary index (Au.finance.yahoo.com.2018). The graph portrays that the share price of the company has fluctuated in the two years period which is shown in the graph above.
The graphical movement of stock prices which is depicted in the graph above of Qantas ltd shows that the fluctuation in prices are on a random basis which suggest that the stock is volatile in nature. The line of stock for the business of Qantas ltd is shown to be fluctuation and is sometimes above the all ordinary indexes and sometimes the same is shown to be below the all ordinary indexes.
The share prices of Qantas ltd is affected by the hike in the prices of fuel which has further increased the costs of airline fares of the business and thereby the same has affected the share prices of the business. The business of Qantas airways is also affected by the regulations which are applicable on such companies operating in Australia. The shares prices of the business is also affected by the intense competition which is faced by the business with other companies.
Calculation of Beta and Required Rate of Return under CAPM
Computation of Required Rate of Return for Qantas ltd
|
Particulars |
|
Amount |
|
Beta of the company |
A |
1 |
|
Risk Free Rate |
B |
6% |
|
Market Risk Premium |
C |
7% |
|
Required Rate of Return |
D=B+[AxC] |
13.00% |
Figure 7: (Table Showing Beta of the Business)
Source: (Created by the Author)
The above table shows the computation of required rate of return on the business and for this purpose the beta which represent the level of risks which is associated with the business is shown to be 1 while the risk-free rate of return and market risk premium is shown to be 6% and 7% respectively. The required rate of return for the business is shown to be 13% and the same is computed considering the shares of the business (Brotherson et al. 2015).
Capital structure of the Business
The WACC of the business is considered to be an important tool for estimating the expected cost which is involved in financing the overall resources of the business (Mohammadzadeh et al. 2013). In other words, the WACC of the business represent the overall cost of capital and can be stated as a measure of the expenditure which the business needs to incur for the purpose of raising one added dollar of money.
|
Particulars |
Amount |
Weightage |
Cost |
Return Rate |
Tax Rate |
WACC |
|
Total Long Term Debt |
4,344 |
52.32% |
3.4 |
0.08% |
30.00% |
0.03% |
|
Total Equity |
3959 |
47.68% |
13.00% |
6.20% |
||
|
TOTAL |
8303 |
100% |
|
|
|
6.23% |
Figure 8: (Table Showing Computation of WACC of the Business)
Source: (Created by the Author)
The overall cost of the business is computed considering the total debt capital and total equity of the business (Cheynel 2013). The WACC of the business is shown to be 6.23% and the same is computed considering the debt and equity capital of the business (Danis, Rettl and Whited 2014). The Rate of return which is considered in the above table is shown to be 13%.
Recommendations
The following recommendation can be suggested to the management of Qantas ltd for the purpose of improving the financial performance of the business. The recommendation which can be suggested to the management are listed below:
Conclusion
The above discussion effectively shows the analysis of financial performance of Qantas ltd and the same is shown with the help of key financial ratios of the business. The key ratios are computed considering the financial statements of the business. The assessment also evaluates the volatility in the stock prices of the business by considering the all ordinary index and making comparison with the same. The capital structure of the business is formed in such a way that the maximum portion is covered by equity capital rather than debt capital. The liquidity ratios of the business need to be improved by the management of the company in order to ensure that the management of the company is able to finance any project. In addition to this, the market valuation of the business needs to be improved which can be done by effectively managing the risks of the business.
Reference
Au.finance.yahoo.com. (2018). Yahoo is now a part of Oath. [online] Available at: https://au.finance.yahoo.com/quote/%5EAORD/history?period1=1483122600&period2=1546194600&interval=1mo&filter=history&frequency=1mo [Accessed 31 Dec. 2018].
Bradford, W., Chen, C. and Zhu, S., 2013. Cash dividend policy, corporate pyramids, and ownership structure: Evidence from China. International Review of Economics & Finance, 27, pp.445-464.
Brotherson, W.T., Eades, K.M., Harris, R.S. and Higgins, R.C., 2015. ‘Best Practices’ in Estimating the Cost of Capital: An Update.
Cheynel, E., 2013. A theory of voluntary disclosure and cost of capital. Review of Accounting Studies, 18(4), pp.987-1020.
Danis, A., Rettl, D.A. and Whited, T.M., 2014. Refinancing, profitability, and capital structure. Journal of Financial Economics, 114(3), pp.424-443.
Delen, D., Kuzey, C. and Uyar, A., 2013. Measuring firm performance using financial ratios: A decision tree approach. Expert Systems with Applications, 40(10), pp.3970-3983.
Ehiedu, V.C., 2014. The impact of liquidity on profitability of some selected companies: the financial statement analysis (FSA) approach. Research Journal of Finance and Accounting, 5(5), pp.81-90.
Finance.yahoo.com. (2018). Yahoo is now part of Oath. [online] Available at: https://finance.yahoo.com/quote/QAN.AX/history?period1=1483122600&period2=1546194600&interval=1mo&filter=history&frequency=1mo [Accessed 31 Dec. 2018].
Investor.qantas.com. (2018). [online] Available at: https://investor.qantas.com/FormBuilder/_Resource/_module/doLLG5ufYkCyEPjF1tpgyw/file/annual-reports/2018-Annual-Report-ASX.pdf [Accessed 31 Dec. 2018].
Mohammadzadeh, M., Rahimi, F., Rahimi, F., Aarabi, S.M. and Salamzadeh, J., 2013. The effect of capital structure on the profitability of pharmaceutical companies the case of Iran. Iranian journal of pharmaceutical research: IJPR, 12(3), p.573.
Mwangi, L.W., Muathe, S.M.A. and Kosimbei, G.K., 2014. Relationship between capital structure and performance of non-financial companies listed in the Nairobi Securities Exchange, Kenya.
Obradovich, J. and Gill, A., 2013. The impact of corporate governance and financial leverage on the value of American firms.
Omar, N., Koya, R.K., Sanusi, Z.M. and Shafie, N.A., 2014. Financial statement fraud: A case examination using Beneish Model and ratio analysis. International Journal of Trade, Economics and Finance, 5(2), p.184.
Uechi, L., Akutsu, T., Stanley, H.E., Marcus, A.J. and Kenett, D.Y., 2015. Sector dominance ratio analysis of financial markets. Physica A: Statistical Mechanics and its Applications, 421, pp.488-509.
Vogel, H.L., 2014. Entertainment industry economics: A guide for financial analysis. Cambridge University Press.
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