You are required to choose two companies operating under the same industry, analyze the fundamental ratios of each company and compare it. Finally, make the recommendation through Report to the investor.
Financial analysis is basically a process of evaluating and measuring the profitability and feasibility of a business. The analysis includes critical examination of annual reports prepared by the companies. The information included in those reports is evaluated by using several techniques. These tools and techniques are used in conducting overall financial analysis of an organization (Lee, Lee and Lee, 2009). The most commonly used methods horizontal and vertical analysis, ratio analysis, cash flow analysis, trend analysis and many more. Results of these analysis are then compared with the industry averages to check the financial position of a company (Bragg, 2012).
In this report, all the fundamental ratios are calculated for analysing the position of two companies named as Qantas Group and Virgin Australia Airlines Holding Limited. Both these companies are operating in Australia and within the same industry. Different category of ratios are been calculated such as profitability, solvency, liquidity and efficiency ratios on the basis of their financial data.
Qantas Group
It is an Australia based second oldest airline company which was founded in 1920. The company was originally registered as Queensland and Northern Territory Aerial Services Limited (QANTAS). It deals in providing transportation services to the Australians. Today, it is the largest domestic and international airline in Australia and leading long distance airline in the world. The main hub of the company is situated in Sydney named as Sydney airport. There are many other subsidiaries also which provides regional and domestic services. They include Jetstar airways, Jetconnect, Qantas freight and many more (Qantas 2018).
The company is listed on Australian Securities Exchange and is traded with a symbol ASX: QAN. Talking about its financial performance last year, the company reported an underlying profit of $1,401 billion before tax. It is said that this was second highest performance in Qantas 97 years’ history. Also domestically, Qantas and Jester had an EBIT of $865 million last year which makes the two the most profitable airlines in Australia.
Furthermore, the company has strengthen its capital structure during the year fiscal year 2016-17. It focuses on reducing the debt, as a result of which net debt fell by $434 million to $5.2 billion as compared to prior years. As of now, more than 60% of Group’s fleet is debt free, making its capital structure the optimal one. In addition to this, the group has also distributed $627 million to its shareholders as returns and declared a dividend of 7 cents per share. Overall its performance has improved in 2017 (Qantas. 2017).
Virgin Australia Holdings Limited
The company is the second largest airline of Australia after QANTAS and was formerly known as Virgin Blue Airlines. Founded in 1999, Virgin Australia started its business in 2000 and is now focused on following the principles of quality, innovation and money. It is a leader in Australia’s aviation market and believes providing quality services to its customers. The company offers its services over 29 cities and has its main hubs in Melbourne, Brisbane and Sydney.
The company is listed on Australian Securities Exchange, having a ticker as ASX: VAH. As per the recent annual report of VAH and its CEO statement, the company has maintained a clear focus on improving its financial performance and providing safe travel experience to its customers. As per the CEO, Virgin Australia has enhanced its cash flow, debt and leverage positions. However, company’s profits were highly impacted by the subdued training conditions and fleet simplification. VAH had a positive free cash flow of $34.3 million and an increase of $272.3 million in its total cash balance. Along with this, Virgin Australia reduces its overall net debt by $839 million, out of which debt repayments were worth $260 million.
The company reported a loss before tax of $3.7 million but its regional and domestic performance has improved last year. However, profitability of VAH international had improved due to the growth in yield and unit revenues. But the reverse was noticed in the domestic operations of Tigerair Australia where the performance and profitability got impacted by Bali operations (Virgin Australia. 2017).
Ratio analysis
Among the various financial analysis techniques, the most commonly used is ratio analysis. It the most appropriate tool used for conducting financial analysis. The ratios helps investors to understand the financial data of a company easily and to observe the trends prevailing in financial performance of an organization (Warren and Jones, 2018).
There are various types of ratios that are included in ratio analysis and are calculated for different purposes. They are been distributed in categories which reflects different financial aspects of a company. With help of such ratios, the financial position of a company can be easily comparable within the industry. The main benefit of ratio analysis is that it provides a snapshot of overall position of the entity (Fraser, Ormiston and Fraser, 2010). For shareholders and owners, ratios are very important as by correctly interpreting them, they can easily understand the viability of their investment in that particular company and can also identify the amount of return which a company is capable of offering (Bragg, 2012).
The categories include liquidity ratios, efficiency and profitability ratio and capital structure ratios. Along with this, another financial metric known as market value ratios are also determined to know about the current stock performance of a company. They are generally comprises of Earning per Share, Dividend per share, price-earnings ratio and many others. (Tracy, 2012).
Analysis of fundamental ratios
The performance and position of two airlines companies operating in Australia is been measured on the basis of such fundamental ratios (Gibson, 2011). These ratios evaluate the position on the basis of following aspects:
Liquidity ratios
These ratios calculate the financial health of a company by measuring their capability of paying their current liabilities with their current and quick assets. They represent the liquidity position of a company (Godwin and Alderman, 2012). The two types of liquidity ratios are:
Qantas Airlines
Referring to Appendix 1, it can be said that the current ratio of Qantas has been reduced over the period of past three years. In 2015, its CR was 0.68 which decreased to 0.44 in 2017. The reason behind this reduction was the decreased amount of cash balance and increased inventory level. Furthermore the ratio was also less than the ideal ratio of 2:1. This implies that company does not have enough current assets to pay its current liabilities.
The same can be seen in the quick ratio of Qantas airlines. It has also been reduced to a great extent over the period of past three years. In 2015, Qantas reported a QR of 0.63 which falls to 0.39 in 2017. Reason being, most of the cash was hold by inventories and receivables of the company. So, overall it can be said that company does not have a stable liquidity position.
Virgin Australia
As per the calculation mentioned in Appendix 1, the current ratio of Virgin Australia has risen over the past three years. In 2015, the ratio was 0.69 which increases to 0.76 in 2017. This means company has improved its liquidity position in the last three years. This can be seen from the increased cash balance and low inventory levels.
The same trend follows in case of Virgin’s quick ratio. It has also increased from 0.67 to 0.74 during the years 2015-17. Reason being the same that company’s most liquid assets has increased as compare to its current liabilities. So, it can be said that the liquidity position of Virgin Australia has improved from the past three years.
These ratios define the overall capital structure of the company and their long term solvency. It measures the degree of financial leverage taken by an organization and the amount of risk, it is exposed to (Jenter and Lewellen, 2015). These ratios generally include the following
Qantas Airlines
According to the calculation made in Appendix 2, it can be said that Qantas airlines’ D/E ratio has decreased in year 2017 as compare to 2016, in which the ratio was highest in the span of three years. This reduction was due to the huge increase in shareholders’ equity and a minor change in company’s total debt. The change in equity was much higher than the change in total liabilities. This improves company’s debt equity ratio and make it less risky.
The same trend is been noticed in the ICR of Qantas airlines. It has increased from 4.05 times in 2015 to 7.25 times. A high ICR is more favourable and having an increased ratio of 7.25 times means that Qantas has enough earnings to pay its interest cost 7 times.
Virgin Australia
Referring to Appendix 2, the D/E ratio of the company is reduced in 2017 which is a good sign. Reason being, company is now more focused on raising funds from equity rather than going for outside debt. It will anyway enhance its profitability situation also. As a result of this, Virgin has shown an increase in its owner’s equity and fall in total liabilities. However, the ratio was highest in 2016 and a significant reduction is been there in the recent past year.
As far as interest coverage ratio is concerned, the company has a negative ICR because of negative EBIT. This implies that Virgin does not have enough earnings to set off its interest or finance costs. It have to work on increasing its earnings.
These ratios comprises of the factors which measures the efficiency of an organization to perform its activities. They help in assessing the efficiency of a company in utilizing its assets. In other words, these ratios shows the efficient management of company’s assets in order to generate more revenue. (Jindal and Jain, 2017). They are as follows:
By looking at Appendix 3, it can be said that ITR of Qantas has reduced from 49.24 times to 46.75 times. This implies that less revenue is generated last year from company’s inventory. The asset turnover ratio remains the same at 0.95 for two years. Reason being, a minor change in company’s total revenue.
Taking about debtor turnover, the ratio has been increased in 18.47 times to 20.34 times. This implies that company collects its accounts receivables effectively and efficiently. Decrease in amount of total debtors increases the ratio. Along with this, its day sales outstanding has reduced by 2 days and day inventory outstanding remains almost same. This make the company more efficient.
The company’s ITR has been reduced from 120.99 times to 114.32 times due to the significant increase in its inventory level. In addition to this, its asset turnover ratio has also shown a decrease from 0.85 to 0.81. However, a reverse trend was there in receivables turnover. It has been increased from 16.07 to 16.23 over the past years. This implies that the efficiency of the company is improved in collecting cash from its debtors and also its day sales outstanding has been reduced. Furthermore it has maintained it inventory days in past three years.
These financial metrics measures the overall profitability of an organization. Having the knowledge about profitability one of the main objective of taking ratio analysis. Following are the profitability ratios:
Appendix 4 shows the calculation of all the profitability ratios of Qantas Airlines. Its NPR has shown an increase of 2% in year 2016 and was reported at 6%. After that the same reduces to 5% in 2017. Reason being the significant decrease in the amount of net profit.
The same trend follows in the return on equity, initially it rises and then it falls. In 2016, it was 32% which was just double of the ROE in 2015. However, the same reduces to 24% in 2017. The return on assets also got doubled in 2016 and then reduces in 2017 and was reported at 5%.
The NPR of Virgin was in negative from the past three years. However the ratio reduces as in 2015 it was -2% and in 2017, it was -4%. This is because the company has made losses during the last three years. The same trend was there in return on assets. It was also negative with -3% in 2017. Due to the loss, company offered negative return on its equity. However, the ratio has been reduced in 2017 and reaches to -12% from -9%.
These ratios measures the company’s stock performance in current market. They help the investors to decide about the company current financial position and the performance of its stock (Zainudin, et. al., 2016). They include:
In Appendix 5, the EPS and P/E ratio is calculated. The EPS of the company has reduced from 49.40 cents to 46 cents in 2017. It was lowest in 2015 with 25.40 cents. However, the reverse trend was there in P/E ratio. It has increased in 2017 and was reported at 0.11. Initially it was 0.06 in 2016.
The company has negative EPS and negative P/E ratio due to the losses incurred in last three years. Generally, negative figures are reported as not applicable. This implies that Virgin’s stocks has performed badly in last years.
|
Qantas Airlines |
Virgin Australia |
|||||
|
2017 |
2016 |
2015 |
2017 |
2016 |
2015 |
|
|
Current ratio |
0.44 |
0.49 |
0.68 |
0.76 |
0.62 |
0.69 |
|
Quick ratio |
0.39 |
0.44 |
0.63 |
0.74 |
0.60 |
0.67 |
|
Debt equity |
3.86 |
4.12 |
4.09 |
3.04 |
5.72 |
4.66 |
|
Interest coverage |
5.83 |
5.79 |
3.00 |
– 0.66 |
– 1.42 |
– 0.53 |
|
Inventory turnover ratio |
46.75 |
49.24 |
114.32 |
120.99 |
||
|
Debtor turnover ratio |
20.34 |
18.47 |
16.23 |
16.07 |
||
|
Asset turnover ratio |
0.95 |
0.95 |
0.81 |
0.85 |
||
|
Day sales outstanding |
17.95 |
19.76 |
22 |
23 |
||
|
Day inventory outstanding |
7.81 |
7.41 |
3 |
3 |
||
|
Net profit margin |
5% |
6% |
4% |
-4% |
-4% |
-2% |
|
Return on equity |
24% |
32% |
16% |
-12% |
-25% |
-9% |
|
Return on assets |
5% |
6% |
3% |
-3% |
-4% |
-2% |
|
EPS |
46.00 |
49.40 |
25.40 |
– 2.80 |
– 7.40 |
– 3.20 |
|
P/E ratio |
0.11 |
0.06 |
0.15 |
– 0.10 |
– 0.03 |
– 0.14 |
From the above table, the two airline companies can be easily compared. It is observed that the current and quick ratio of Virgin Australia is much better than the liquidity ratios of Qantas Group. They have increased in the last three years which implies that the liquidity position of Virgin Australia has improved. Talking about the financial leverage, the debt equity and interest coverage of Qantas is much better than Virgin Australia. Reason being, its debt equity ratio has reduced over the past three years and also its ICR increases, making company less risky. On the other hand, Virgin Australia reported negative interest coverage which reflects that company is not able to pay its interest expenses. However, its debt equity reduces in year 2017.
When the efficiency of both the companies is compared, it is observed that ITR of Virgin Australia is way better than that of Qantas. Reason being, the company has maintained low level of inventories in its business. However, the DTR of Qantas is better than Virgin as in 2017, its ratio was 20.34 as compare to later company’s DTR of 16.23. It means Qantas is good at collecting its receivables timely. Asset turnover ratio of Qantas is also better than that of Virgin Australia. However the days of inventory and receivables of Virgin are more than Qantas, but overall Qantas Airlines is more efficient in utilizing its assets.
As far as profitability is concerned, Qantas Airlines has a way better position than Virgin Australia. The company shows a decrease in its NPR in 2017 but it has a positive ratio unlike the latter company. Also its return on equity are reasonable and higher. It has offered 24% returns in 2017. Its return on assets has also increased during the past three years. Whereas, the profitability of Virgin Australia was very poor during the past three years. The company has made losses, because of which it has negative NPR, ROE and ROA. So overall it can be said that it’s better not to invest in this company. Due to low profitability, the market value ratios of Virgin were also negative and not applicable. On the other hand, Qantas reported appositive EPS of 46 cents and P/E ratio of 0.11. This means company stock has performed better in last three years.
It is recommended that it will be better to choose Qantas Group because it has strong profitability, efficiency and long term solvency position. Apart from its liquidity, it has performed well in past three years and much better than Virgin Australia. Unlike it, Qantas offers positive returns to its shareholders and has increasing and positive P/E Ratio. It is financially less risky and investors can think of investing in it, if compared with Virgin Australia. In addition to this, the interest coverage ratio of Qantas is also good which gives positive indications to the creditors. Therefore, it will be recommended that investors must go for investing in the stock of Qantas airlines rather than Virgin Australia.
Conclusion
From the above analysis, it can be said that ratio analysis is the most suitable technique used for analysing performance of a company from financial perspective. These ratios give greater insights to the managers, investors and owners regarding financial position of a company. With help of this, investors can easily decide about their investments and purchase of a company’s stock. As per the above analysis, it will be concluded that Qantas Airlines is best option for making investment. The company has improved its financial situation in the last three years and will be very beneficial for the investors. By investing in it, they will be getting high and positive returns. Also, Qantas has better profitability position and is able to meet all its debt
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