Financial analysis contains the overall evaluation and measurement of company’s performance. It includes various factors and uses several techniques to evaluate the financial performance of a company. This report contains an overall analysis of Virgin Australia Holdings Limited. It includes a brief overview of the company, calculation of key performance ratios, debt ratio analysis and estimation of WACC. Furthermore, the report also concentrates on dividend policy of the company, its beta factor and the movements in stock prices compared with the ordinaries indices. Lastly a conclusion and recommendation is provided suggesting the overall position of Virgin Australia.
Virgin Australia Holdings Limited is an Australia based holding company which operates Virgin Australia and Tigerair Australia. The company deals with providing domestic and international airline services in Australia. It has various segments named as Virgin Australia Domestic, Virgin Australia International, Velocity, and Tigerair Australia. It was formerly known as Virgin Blue Airlines and is regarded as second largest airline of Australia, after Qantas (Bloomberg.com. 2018). Founded in 1999, the organization started its business in 2000. The airline provides its services over 29 cities in Australia and it has its main hubs in Melbourne, Brisbane and Sydney. Virgin Australia mainly has its airports operating in cities like Perth, Adelaide and Gold coast (Reuters. 2018).
The vision of the company is to revolutionise the air travel across all its segments. In order to do this, Virgin Australia is focused on providing seamless experience across all domestic and international markets. The company is listed on Australian Securities Exchange and is traded with a symbol ASX: VAH (Virgin Australia. 2018).
Main substantial shareholders
Main people involved in firm governance
Neither of these members are involved in more than 20% shareholding nor is any shareholder of more than 5% holding involved in firm governance.
It is one of the liquidity ratio which measure the short term solvency of a company. It identifies the capability of an organisation to pay its current liabilities by properly utilizing its current assets. The ideal current ratio is 2:1 which implies that a company must have its current assets doubled of its liabilities (Vogel, 2014).
|
Liquidity ratio |
Years |
|
|
2017 |
2016 |
|
|
Current ratio |
0.76 |
0.62 |
|
Quick ratio |
0.74 |
0.60 |
(Virginaustralia.com. 2017).
The above table shows the liquidity ratios of Virgin Australia for the years 2016 and 2017. It includes current ratio which has been increased over the years. In 2016 it was 0.62 and the same was reported at 0.76 in 2017. However, the ratio is less than the ideal one but it shows the enhanced capability of Virgin Australia. The ratio rises due to increase in cash balance of the company and less portion of inventory.
It is another liquidity ratio which reflects the same thing as current ratio. The only difference is that it takes into account the quick assets of company which are the most liquid assets that can be easily converted into cash. The ideal ratio is 1:1.
Looking at the above table, Virgin Australia’s quick ratio has also shows the same trend as the current ratio. In 2016, it was 0.60 which increases to 0.74 in 2017. Reason being the increased cash balance of the company.
It is a financial leverage ratio which measure the long term solvency of the firm. Debt equity ratio shows the portion of company’s assets that are financed through debt and the portion of assets which is financed through equity. Higher the portion if debt, high will be the financial risk (Jenter and Lewellen, 2015).
|
Financial leverage ratio |
Years |
|
|
2017 |
2016 |
|
|
Debt- equity |
1.55 |
3.34 |
|
Interest coverage ratio |
– 0.66 |
– 1.42 |
From the above table, it can be seen that the D/E ratio of Virgin Australia Holdings Limited had reduced to a great extent in year 2017. In 2016, the ratio was 3.34 which falls to 1.55 in last year. Thus making the company less risky. This reduction was due to a significant decrease in the short term debt of Virgin Australia as well as a huge increase in its shareholder’s equity.
This ratio shows the number of times a company can make its interest payments from its earnings before income and tax. This ratio measures the financial capability of a company of paying its interest amounts. It check the credit worthiness for the creditors and financial viability of the organization for the investors. Higher the ICR, more favourable it will be (Parrino, Kidwell and Bates, 2011).
The above table shows a negative ICR of Virgin Australia Holdings Limited. In 2016, the ratio was -1.42 which reduces to -0.66 in 2017. Reason being, company has reported an operating loss in both the years. Moreover, its interest expense has increased from $181 million to $185 million in 2017. This implies that Virgin Australia does not have enough earnings to pay its interest expense.
It is one of the efficiency ratio that measure the potential of an organization for converting its inventory into cash. It reflects how quickly a company can generate sales by properly utilizing its inventory in the business. A high ITR is considered to be more favourable for the companies.
|
Efficiency ratio |
Years |
|
|
2017 |
2016 |
|
|
Inventory turnover ratio |
114.32 |
120.99 |
|
Asset turnover ratio |
0.81 |
0.85 |
|
Receivable turnover ratio |
16.23 |
16.14 |
|
Days’ sales in inventory |
3 |
3 |
|
Days’ sales in receivables |
22 |
23 |
(Virginaustralia.com. 2017).
The above table shows the efficiency ratios of Virgin Australia. Its ITR has been reduced over the past two years. In 2016, it was 120.99 times which falls to 114.32 times in 2017. This reduction is due to the increase in amount of company’s inventory from $42 million to $46 million. It implies that the efficiency of Virgin Australia for making turnover from its inventory has reduced in 2017.
It measure the value of company’s revenue generated from the value of its total assets. The calculation of this ratio takes into account the value of company’s average total assets.
In case of Virgin Australia Holdings Limited, the ATR shows the same trend as the company’s ITR. It has been reduced from 0.85 to 0.81 in 2017. This shows that very less portion of revenue is generated from company’s average total assets. Moreover, Virgin Australia’s assets has also increased to a great extent as compare to the change in company’s total sales.
This ratio indicates the efficiency of the company in collecting its debtors. In other words, it reflects how quickly a company can convert its receivables into sales. A high DTR is more favourable for the organization as it shows that the firm is capable enough to collect its debtors timely and efficiently.
The DTR of Virgin Australia has not shown a huge change in the past two years. Though it has increased from 16.14 to 16.23 in 2017. This implies that company’s efficiency in making sales from its receivables is still the same and has increased to some extent.
This metric is used to measure the time or days taken by a firm to convert its inventory into cash. Lower the time period, more efficient the company will be. Looking at Virgin Australia’s days sales in inventory, it can be seen that there is no change in number of days. They remain the over the past two years. This is because of minor increase in the inventory level, but still company manages to keep the number same.
This ratio figure out the number of days taken by a company to collect its receivables. Just like days sales in inventory, it should also be low for making an organization efficient. The same can be seen in case of Virgin Australia Holdings Limited. In 2016, there were 23 days which reduces to 22 days in 2017. This implies that the company is efficient in collecting its debtors and such impact can be seen from the reduced amount of its receivables.
It shows the amount of net profit earned by a company during a fiscal year. The value is represented as a percentage of total revenue. In other words, net profit ratio reflects the overall profitability of the company (Saleem and Rehman, 2011).
|
Profitability Ratios |
Years |
|
|
2017 |
2016 |
|
|
Net profit margin |
-4% |
-4% |
|
Return on Assets |
-3% |
-4% |
|
Return on Equity |
-12% |
-25% |
The above table shows all the profitability ratios of Virgin Australia. It can be seen that the company has made a loss in the past two years which had made its ratio negative. The reason for having a loss was the operating expenditure of Virgin Australia that increases over the time and the company’s revenue were not enough to set them off.
This ratios shows the percentage of profit earned by a company in relation to its overall assets. It again reflected the profitability in terms of company’s assets (Tracy, 2012).
Due to the loss, the ROA of Virgin Australia was also negative. However, the ratio reduces from -4% to -3% in 2017 due to the overall reduction in the loss made and increase in the assets. Nevertheless, the figure still remain negative.
It reflects the amount of return provided by the company to its shareholders. This ratio is mostly used by the investors to check the profitability position of an organization and the feasibility of their investment in that company. Generally, firms offering high returns are more attractive than the ones which offers less return to its shareholders and investors (Bragg, 2012).
ROE of Virgin Australia was also in negative due to the loss incurred by the company. However the ratio increases from -25% to -12% because of the sudden increase in the shareholders’ equity.
It is the portion of company’s profit that are allocated to each outstanding share issued by a company. It is the indicator of company’s profitability (Bragg, 2012).
|
Market Value ratios |
Years |
|
|
2017 |
2016 |
|
|
Earnings per share |
– 2.80 |
– 7.40 |
|
P/E ratio |
– |
– |
|
Dividend pay-out ratio |
– |
– |
The EPS of Virgin Australia Holdings Limited is negative because of the loss incurred by the company in last two years. Negative EPS is usually reported as not applicable and it implies that company is losing money.
It measures company’s current share price in relation to it’s per share earnings. Sometimes, it is also known as price multiple which means the amount an investor is willing to pay for each dollar if earnings (Gibson, 2011).
The P/E ratio of Virgin Australia is negative in last two years because of the negative EPS of the company. It is reported as not applicable and it shows virgin is losing money per share of its stock. Hence, the company is not much attractive to the investors.
It shows the amount of dividend paid by the company out of its total income. As it can be seen from the table that the ratio is zero and also as per Virgin Australia’s annual reports, the company has not declared any dividend from the past two years. Reason being, no profits and weak profitability.
The above two figures shows the graphical representation of average return on company’s share price and on market index. As the share prices of Virgin Australia and All ordinaries index are not comparable because of the huge difference in the scale. This is why average return of both are been taken. Many fluctuations can be seen in the market return whereas return provided by Virgin Australia remains almost same from 2016-17. It is observed that, from May 2016 the company’s share prices give a negative return till March 2017. Whereas, in the same period the market return has shown many ups and downs and eventually it falls in March 2017.
After that, the company’s returns shows a positive trend and the highest was reported at 0.57 in October 2017. Post that, a sudden fall was there in average returns of Virgin Australia and currently its share price offer 0.05 return. However the reverse can be seen in the market returns. After March 2017, they falls to a great extent and became negative. After that some fluctuations were there and currently it is at 0.02. So, it can be said that company’s stock is slightly dependent on the market because changes in ordinaries index affected the share price of Virgin Australia.
|
CAPM model |
|
|
Risk free rate (A) |
4% |
|
Risk Premium (B) |
6% |
|
Beta (C) |
0.68 |
|
Required rate of return [A+(C*B)] |
8% |
A conservative investment is the one which has low risk and low return. Generally, investors who are not looking for higher risk make conservative investments. In case of Virgin Australia Holdings Limited, the standard deviation is 0.14 and also the company has negative ROE for the past two years. However, from the standpoint of S.D. it can be a conservative investment but it has negative returns from the past two years. So, it can be said that, it will be better to avoid making investment in this company (Huffman, 2016).
|
Amount |
Weights |
|
|
Debt |
2,433 |
0.60719 |
|
Equity |
1,574 |
0.39281 |
|
Total |
4,007 |
1 |
|
Cost of equity |
8% |
0.39281 |
3.2% |
|
Cost of debt |
2% |
0.60719 |
1.4% |
|
WACC |
4.6% |
A higher WACC can have great implication on the decision taken by management regarding the evaluation of investment projects. A WACC increases as and when beta rises which indicates high financial risk. Such rise in risk will make the investors to demand high return. So, if WACC keeps on rising it will make the investment more risky and can force the management to rethink their decision regarding the evaluation. Hence, increase in WACC do impact management’s decision (Pratt and Grabowski, 2010).
|
Debt ratio |
2017 |
2016 |
|
Total Liabilities (A) |
4,781 |
5,142 |
|
Total Assets (B) |
6,356 |
6,041 |
|
Debt ratio (A/B) |
75% |
85% |
It can be said that company’s debt ratio has reduced in year 2017 as compare to 2016. There was 10% reduction in the ratio because of the reduced liabilities of the company. However, it reflect that company does not have a stable debt ratio but its debt was reduced last years. This implies that Virgin Australia is focused on maintaining a preferred optimal capital structure by reducing and managing its debt portion (Demmel, 2012).
The policy of dividend is framed for paying out a certain amount to the shareholders in form of dividends, out of company’s profit. Deriving the information from Virgin’s latest annual reports, it can be said that the company follows a no dividend policy. Reason being, it has not declared any dividend from the past years due to the losses incurred by it in the past. Also company does not have enough earnings to pay dividends to its shareholders (Gitman, Juchau and Flanagan, 2015).
After conducting the above analysis, it will be advisable not to include this company in an investment portfolio because of its poor financial performance in past years. Starting from the fundamental ratios, Virgin Australia has a weak profitability and efficiency from the past two years. It offers negative returns to its shareholders. After that its share prices has also offered negative returns and is dependent on the market index. Considering the debt ratio of the company, it has decreased and company is focusing on improving its position. Furthermore it has not paid dividends in the past. So, it will be recommended not to invest in Virgin Australia Holdings Limited. However, the company is now focused on improving its financial position.
Conclusion
From the above report, it can be concluded that a whole analysis of the financial position is necessary before making an investment in a company. The investor must analyse all the aspects of a company related to its profitability position, market overview, capital structure and many more while taking a decision of making investment in it. Thus, an overall financial analysis is must for evaluating company’s performance.
References
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Asx.com.au. (2018). Air New Zealand and Virgin Australia to end trans-Tasman alliance. [Online] Available at: https://www.asx.com.au/asxpdf/20180404/pdf/43syjd9br76chk.pdf [Accessed 19 May 2018].
Asx.com.au. (2018). Virgin Australia Holdings Limited (ASX: VAH) announces change of director. [Online] Available at: https://www.asx.com.au/asxpdf/20180430/pdf/43tmmxyxlcdhr4.pdf [Accessed 19 May 2018].
Au.finance.yahoo.com. (2018). ^AXJO Historical prices | S&P/ASX 200 Stock – Yahoo Finance. [online] Available at: https://au.finance.yahoo.com/quote/%5EAXJO/history?period1=1463509800&period2=1526581800&interval=1mo&filter=history&frequency=1mo [Accessed 19 May 2018].
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Huffman, B. (2016). Assessing the Risk of Conservative Investments. Journal of Applied Financial Research, 1, p.42.
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Reuters. (2018). Virgin Australia Holdings Ltd (VAH.AX). [Online] Available at: https://www.reuters.com/finance/stocks/overview/VAH.AX [Accessed 19 May 2018].
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Virgin Australia. (2018). About Virgin Australia. [Online] Available at: https://www.virginaustralia.com/nz/en/about-us/ [Accessed 19 May 2018].
Virgin Australia. (2018). Virgin Australia Board of Directors. [Online] Available at: https://www.virginaustralia.com/nz/en/about-us/company-overview/virgin-australia-board-of-directors/ [Accessed 19 May 2018].
Virginaustralia.com. (2017). Annual Report 2017. [Online] Available at: https://www.virginaustralia.com/cs/groups/internetcontent/@wc/documents/webcontent/~edisp/2017-annual-report.pdf [Accessed 19 May 2018].
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