Financial analysis is a key procedure for an organization and the stakeholders of the organization to identify evaluate and measure the financial performance of an organization. Financial analysis study is performed by the professional such as financial manager, financial analyst and the investors to identify the performance of the company and the changes into the financial performance of an organization. Financial analysis study evaluates all the financial and non financial factors of an organization and identify that what is the current position of the company in terms of financial factors (Saunders and Cornett, 2014).
The study of financial analysis could be done through various factors such as trend analysis, horizontal analysis, capital structure, weighted average cost of capital, ratio analysis etc. All of this study offers the different base to the related party to evaluate the performance of the company. In the given report, Qantas limited has been taken into the concern. The fundamental position of the company has been measured on the basis of financial ratios and the performance of the company has been compared with the Virgin Australia limited.
Qantas airway limited has been founded in 1920 at Australian market. The company has been grown as one of the largest domestic airline as well as international airline. The company has been registered as Queensland and Northern Territory Aerial Services Limited (QANTAS). The company is widely known as one the leading airline company in concern of long distance destination at worldwide. It is amongst the strongest brand of Australia. The company has employed around 30,000 people to manage and evaluate the performance of the company (Our Company, 2018). Annual report (2017) explains that the company has reported all the financial transactions on the basis of the accounting standards and the financial performance of the company is quite better.
In the report, Qantas airway limited has been chosen as the main company and for performing the competitor’s analysis, Virgin Australia limited has been chosen.
Virgin Australia limited is second largest airline firm in Australian market after Qantas. The company has been founded in 1999 and it has been commenced its business on 31st August 2000. The company is currently covering 52 destinations and the fleet size of the company is 101 which are highest in Australian market. Headquarter of the company is in Brisbane. Total revenue of the company has been enhanced from last year and the performance of the company has been improved by a great level in last few years.
The performance of Virgin Australia Holdings limited has been measured with the Qantas airways limited to identify the performance and the position of Qantas airway limited in the market.
Financial analysis:
Financial analysis study has been performed on Qantas airway limited and Virgin Australia limited to measure the performance of the company and identify that how the company is performing and is the company a right choice for the investment. The financial analysis study explains about the changes into the financial performance of the company and the current position of the company (Lee, 2006). In the report, financial analysis study has been performed through using the ratio analysis techniques.
Fundamental ratios are one of the most common and most used techniques among all the financial analysis techniques to measure the fundamental position of the company. Fundamental ratios evaluate the financial statement of the company into several categories such as liquidity ratio, solvency ratio, market ratios, efficiency ratios, profitability ratios etc. Ratio analysis is a great way to measure and access the financial health of an organization through evaluating all the main items of final financial statement of the company (Laux and Leuz, 2009). The fundamental ratios study of the company is as follows:
Short term solvency:
Short term solvency ratios are also known as liquidity ratios. It measures the total ability of an organization to meet and pay all the short term debt obligation of the company. This ratio measures the level of the company to repay its short term debts on the basis of the current assets of the company. In the report, for identifying the liquidity ratio of the company, current liquidity ratio and quick liquidity ratio has been calculated.
Current liquidity ratio measures the assets of short term of an organization with the liabilities of short term. It takes the concern of entire assets and liabilities of an organization and measures the performance of the company. The current ratio of Qantas limited briefs that the liquidity position of the company has been lower from 0.49 to 0.44.
|
Current Ratio |
|||
|
Current Assets / |
3,458 |
3,119 |
|
|
Current liabilities |
7,028 |
7,095 |
|
|
Answer: |
0.49 |
0.44 |
(Morningstar, 2018)
Further, the current ratio of Virgin Australia limited has been measured and it has been found that the current ratio of virgin Australia limited has been enhanced from 0.62 to 0.76.
|
Current Ratio |
2016 |
2017 |
|
|
Current Assets / |
1,714 |
1,788 |
|
|
Current liabilities |
2,780 |
2,348 |
|
|
Answer: |
0.62 |
0.76 |
(Morningstar, 2018)
It explains that the performance of the Qantas limited is not better in terms of managing and meeting the short term debt obligations of the company.
Quick ratio:
Quick liquidity ratio measures the assets of short term of an organization which could be liquidated and covert into cash at any time with the liabilities of short term. It takes the concern of only those assets which could be liquidated immediately and liabilities of an organization and measures the performance of the company (Glajnaric, 2016). The quick ratio of Qantas limited briefs that the liquidity position of the company has been lower from 0.44 to 0.39.
|
Acid test ratio |
2016 |
2017 |
|
|
Current Assets – Inventory / |
3,122 |
2,768 |
|
|
Current Liabilities |
7,028 |
7,095 |
|
|
Answer: |
0.44 |
0.39 |
Further, the quick ratio of Virgin Australia limited has been measured and it has been found that the quick ratio of virgin Australia limited has been enhanced from 0.60 to 0.74.
|
Acid test ratio |
2016 |
2017 |
|
|
Current Assets – Inventory / |
1,672 |
1,742 |
|
|
Current Liabilities |
2,780 |
2,348 |
|
|
Answer: |
0.60 |
0.74 |
(Morningstar, 2018)
It explains that the performance of the Qantas limited is not better in terms of managing and meeting the short term debt obligations of the company. The current ratio as well as quick liquidity ratio of the company briefs that company should enhance the level of the current assets so that the performance and sort term debt of the company could be met easily.
Long term solvency ratios are also known as capital structure ratios. It measures the total ability of an organization to meet and pay all the long term debt obligation of the company. This ratio measures the level of the company to repay its long term debts on the basis of the total equity and the total capital of the company. In the report, for identifying the long term solvency ratio of the company, gearing ratio and interest coverage ratio have been calculated.
Gearing ratio:
Gearing ratio measures the total liabilities of a business of long term along with the total capital of the organization. It takes the concern of entire long term liabilities and capital employed of an organization and measures the debt payment capability of the company. The gearing ratio of Qantas limited briefs that the long term liabilities position of the company has been higher from 0.664 to 0.651.
|
Gearing ratio |
2016 |
2017 |
|
|
Long term liabilities / |
6,422 |
6,589 |
|
|
Capital employed |
9,677 |
10,126 |
|
|
Answer: |
% |
0.664 |
0.651 |
Further, the gearing ratio of Virgin Australia limited has been measured and it has been found that the gearing ratio of virgin Australia limited has been lowered from 0.72 to 0.61.
|
Gearing ratio |
2016 |
2017 |
|
|
Long term liabilities / |
2,349 |
2,440 |
|
|
Capital employed |
3,261 |
4,008 |
|
|
Answer: |
% |
0.720 |
0.609 |
It explains that the performance of the Qantas limited is quite better in terms of managing and meeting the long term debt obligations of the company.
Interest coverage ratio measures the Earnings before interest and taxes amount of an organization with the total interest expenses of the company. It takes the concern of debt interest amount and measures that whether the company is able to pay the interest amount to the debt holders of the company. The interest gearing ratio of Qantas limited briefs that the long term solvency position of the company has been lowered from 2016 in 2017. The interest coverage ratio of the company was 6.78 in 2016 and 5.37 in 2017.
|
Interest Coverage Ratio |
2016 |
2017 |
|
|
EBIT / |
1,227 |
993 |
|
|
Net Finance Costs (used net interest expense) |
181 |
185 |
|
|
Answer: |
times p.a |
6.78 |
5.37 |
(Morningstar, 2018)
Further, the interest coverage ratio of Virgin Australia limited has been measured and it has been found that the interest coverage ratio of virgin Australia limited has been enhanced from 19.88 to 20.77 (annual report, 2016).
|
Interest Coverage Ratio |
2016 |
2017 |
|
|
EBIT / |
3,598 |
3,842 |
|
|
Net Finance Costs (used net interest expense) |
181 |
185 |
|
|
Answer: |
times p.a |
19.88 |
20.77 |
It explains that the performance of the Qantas limited is better in terms of managing and meeting the long term debt obligations of the company. However, the performance of Virgin Australia limited is way better than Qantas limited. The gearing ratio as well as interest coverage ratio of the company briefs that company should enhance the level of the equity so that the performance and long term debt of the company could be met easily.
Asset utilization ratios measure the efficiency level of the company to manage, run and administer the business as well as it also shows its concern about the working capital management of the company. This ratio measures the level of the efficiency and working capital management on the basis of payment payable turnover days, receivable turnover day and inventory turnover days.
Trade payable payment ratio measures the accounts payable amount in context with the cost of sales to measure the total time period in which the amount would be paid by the company to its creditor in one year. The payable payment ratio of Qantas limited has been higher from 109 days to 116 days.
|
Trade payable payment period ratio |
2016 |
2017 |
|
|
Accounts payable/ |
1,986 |
2,067 |
|
|
Cost of sales |
6,612 |
6,475 |
|
|
Answer: (note the above needs to be x 365) |
109.63 |
116.52 |
(Morningstar, 2018)
Further, the payment payable ratio of Virgin Australia limited has been measured and it has been found that the payable ratio of virgin Australia limited has also been higher.
|
Trade payable payment period ratio |
2016 |
2017 |
|
|
Accounts payable/ |
697 |
665 |
|
|
Cost of sales |
1,019 |
867 |
|
|
Answer: (note the above needs to be x 365) |
249.66 |
279.96 |
It explains that the performance of both the companies has been improved. Hovered, the efficiency level of Virgin is better than Qantas.
Inventory turnover day’s ratio measures the inventory amount in context with the cost of sales to measure the total time period in which the amount would be order back by the company. The inventory turnover ratio of Qantas limited has been higher from 2.32 days to 2.59 days.
|
Inventory Turnover (days) |
2016 |
2017 |
|
|
Average Inventory / |
42 |
46 |
|
|
Cost of Sales |
# days |
6,612 |
6,475 |
|
Answer: (note the above needs to be x 365) |
2.32 |
2.59 |
Further, the inventory turnover days of Virgin Australia limited has been enhanced from 15.04 to 19.37.
|
Inventory Turnover (days) |
2016 |
2017 |
|
|
Average Inventory / |
42 |
46 |
|
|
Cost of Sales |
# days |
1,019 |
867 |
|
Answer: (note the above needs to be x 365) |
15.04 |
19.37 |
(Morningstar, 2018)
It explains that the performance of the Qantas limited is better in terms of managing the working capital management of the company.
Receivable turnover day’s ratio measures the receivable amount in context with the sales to measure the total time period in which the amount would be got back by the company from its debtors. The receivable turnover ratio of Qantas limited has been lower from 18.38 days to 18.25 days.
|
Receivables Turnover (days) |
2016 |
2017 |
|
|
Average trade debtors / |
795 |
784 |
|
|
Sales revenue (note used operating revenue) |
# days |
15,784 |
15,680 |
|
Answer: (note the above needs to be x 365) |
18.38 |
18.25 |
Further, the receivable turnover days of Virgin Australia limited has also been lowered from 16.98 days to 16 days.
|
Receivables Turnover (days) |
2016 |
2017 |
|
|
Average trade debtors / |
232 |
221 |
|
|
Sales revenue (note used operating revenue) |
# days |
4,986 |
5,041 |
|
Answer: (note the above needs to be x 365) |
16.98 |
16.00 |
It explains that the performance of the Qantas limited is better in terms of managing the working capital management of the company. However, the performance of Virgin Australia limited is way better than Qantas limited.
Profitability ratios:
Profitability ratios measure the total capability of an organization to generate the profit on the basis of the revenues, profits and the resources of the company. This ratio measures the level of the profitability on the basis of total assets, capital structure, sales revenue etc of the company (Elliott and Elliott, 2007).
Return on capital employed ratio measures the operating profit amount in context with the capital employed to measure the profit generation capabilities of an organization. The return on capital employed ratio of Qantas limited has been lower from 1268% to 9.81%.
|
Return on Capital employed |
2016 |
2017 |
|
|
Operating profit / |
1227 |
993 |
|
|
Capital employed (total assets – current liabilities) |
9,677 |
10,126 |
|
|
Answer: |
% |
12.68% |
9.81% |
(Morningstar, 2018)
Further, the ROCE of virgin Australia limited has also been lowered from 110% to 95.86% in 2017.
|
Return on Capital employed |
2016 |
2017 |
|
|
Operating profit / |
3598 |
3842 |
|
|
Capital employed (total assets – current liabilities) |
3,261 |
4,008 |
|
|
Answer: |
% |
110.33% |
95.86% |
It explains that the performance of both the companies has been lowered.
Gross profit margin ratio measures the gross profit amount in context with the total sales to measure the profitability level of the company. The gross profit margin ratio of Qantas limited has been higher from 58.1% to 58.7%.
|
Gross Profit Margin |
2016 |
2017 |
|
|
Gross profit / |
9,172 |
9,205 |
|
|
Sales Revenue (note used operating revenue) |
15,784 |
15,680 |
|
|
Answer: |
58.1% |
58.7% |
Further, the gross profit margin of Virgin Australia limited has been enhanced from 79.6% to 82.8%.
|
Gross Profit Margin |
2016 |
2017 |
|
|
Gross profit / |
3,967 |
4,174 |
|
|
Sales Revenue (note used operating revenue) |
4,986 |
5,041 |
|
|
Answer: |
79.6% |
82.8% |
(annual report, 2016)
It explains that the performance of the both the companies are better.
Operating profit margin ratio measures the operating profit amount in context with the total sales to measure the profitability level of the company. The operating profit margin ratio of Qantas limited has been decreased from 7.77% to 6.33%.
|
Operating profit margin |
2016 |
2017 |
|
|
Operating profit / |
1,227 |
993 |
|
|
Sales Revenue |
% |
15,784 |
15,680 |
|
Answer: |
7.77% |
6.33% |
Further, the operating profit margin of Virgin Australia limited has been enhanced from 72.16% to 76.22%.
|
Operating profit margin |
2016 |
2017 |
|
|
Operating profit / |
3,598 |
3,842 |
|
|
Sales Revenue |
% |
4,986 |
5,041 |
|
Answer: |
72.16% |
76.22% |
It explains that the performance of the Qantas limited is not at all competitive in the market to generate the profit.
Lastly, the market value ratios measure the total capability of an organization to manage the better performance in the market on the basis of the net income, outstanding stock, dividend paid to shareholders etc of the company. This ratio measures the level of the market values on the basis of net profit and the investors’ position etc of the company.
Earnings per share ratio:
Earnings per share ratio measure the net profit amount in context with the outstanding stock to measure the earnings capabilities of stockholder of the company. (Deegan, 2013) The earnings per share ratio of Qantas limited have been lower from 0.49 to 0.46.
|
Earnings per share |
2016 |
2017 |
|
|
Net income |
1,029 |
852 |
|
|
Weighted average shares outstanding |
2,083 |
1,853 |
|
|
Answer: |
0.494 |
0.460 |
(Reuters, 2018)
Further, the earnings per share of virgin Australia limited has also been lowered from 0.074 to 0.028 in 2017.
|
Earnings per share |
2016 |
2017 |
|
|
Net income |
-261 |
-220 |
|
|
Weighted average shares outstanding |
3,531 |
7,988 |
|
|
Answer: |
-0.074 |
-0.028 |
It explains that the performance of Qantas airways is far better than Virgin Australia.
Dividend coverage ratio measures the net income of the company in context with the divided paid to shareholders of the company to measure market level of the company. The dividend coverage ratio of Qantas limited has been lower from 3.89 to 3.28.
|
Dividend coverage ratio |
2016 |
2017 |
|
|
Net income / |
1,029 |
852 |
|
|
Dividend paid to shareholders |
264 |
264 |
|
|
Answer: |
3.89 |
3.227 |
Further, the dividend coverage ratio of Virgin Australia limited has been lowered by a great level.
|
Dividend coverage ratio |
2016 |
2017 |
|
|
Net income / |
-261 |
-220 |
|
|
Dividend paid to shareholders |
42 |
38 |
|
|
Answer: |
-6.21 |
-5.79 |
(ANNUAL REPORT, 2017)
It explains that the performance of the Qantas limited is way better and competitive in the market (Euro Monitor, 2018).
Conclusion:
On the basis of the above study on Qantas limited and Virgin Australia limited, it has been found that both the companies are performing well in the market. However, the liquidity level and the efficiency level of virgin Australia limited is better as well as the profitability, long term solvency and market position of Qantas limited is better in the market.
Further it has been found that the liquidity position and the efficiency position are the internal operations of the company which does not affect the market position and the investment position of the company. However, profitability, long term solvency and market position affects the investors position and the return of the company directly.
It leads to a recommendation that the Qantas limited is a better choice for the purpose of the investment. The investors should invest into the company for long term to get higher returns from the stock and the dividends of the company.
References:
Annual report. 2017. Qantas airways limited. (Online). Available at: https://investor.qantas.com/FormBuilder/_Resource/_module/doLLG5ufYkCyEPjF1tpgyw/file/annual-reports/2017AnnualReport.pdf (Accessed 18/05/2018).
Annual report. 2017. Virgin Australia Holdings limited. (Online). Available at: https://www.virginaustralia.com/cs/groups/internetcontent/@wc/documents/webcontent/~edisp/2017-annual-report.pdf (Accessed 18/05/2018).
Deegan, C. 2013. Financial accounting theory. McGraw-Hill Education Australia.
Elliott, B., and Elliott, J. 2007. Financial accounting and reporting. Pearson Education.
Euro Monitor. 2018. Ranked: Top 20 Global Airline Brands by Market Share. (Online). Available at: https://blog.euromonitor.com/2017/11/top-20-global-airline-brands-market-share.html (Accessed 18/05/2018).
Glajnaric, M., 2016. The importance of dividend paying stocks. Equity, 30(2), p.6.
Laux, C. and Leuz, C., 2009. The crisis of fair-value accounting: Making sense of the recent debate. Accounting, organizations and society, 34(6), pp.826-834.
Lee, T.A., 2006. The FASB and accounting for economic reality. Accounting and the Public Interest, 6(1), pp.1-21.
Morningstar. 2018. Competitors. (Online). Available at: https://financials.morningstar.com/competitors/industry-peer.action?t=QUBSF®ion=usa&culture=en-US (Accessed 18/05/2018).
Our company. 2018. Qantas airways limited. (Online). Available at: https://www.qantas.com/travel/airlines/company/global/en (Accessed 18/05/2018).
Reuters. 2018. Qantas airways limited. (Online). Available at: https://www.reuters.com/finance/stocks/companyProfile/QAN.AX (Accessed 18/05/2018).
Saunders, A., and Cornett, M. M. 2014. Financial institutions management. McGraw-Hill Education,.
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