Qantas Airways Ltd, founded in the year 1920 is primarily an Australian company that operates both international and domestic airline services. It is a leader in the Asia-Pacific region and connects Australia to more than 81 destinations in more than 40 countries worldwide. Further, it is also involved in the operation of domestic and international transportation services, frequent flyer loyalty program, and provision of freight services. It is considered one of the ten largest airlines in the entire world and second largest after KLM. Qantas together with its regional subsidiaries carries more than thirty million passengers every year (Qantas, 2016). The company functions its business through several segments like the Qantas freight segment comprising of express freight and air cargo business of its brands, Qantas domestic segment operating in the passenger flying business, etc. It maintains several numbers of code sharing arrangements and alliances and is a member of the one world alliance of global airlines that is led by British Airways Plc and American Airlines (Qantas, 2016).
Virgin Australia Holdings Ltd is a public company formed in the year 1999 that is rated number 77 out of the top 2000 Australian companies. Moreover, it is the second largest Australian airline after Qantas. It generates most of its revenues from the Air and Space transport in the industry of Australia. The company employs more than 9500 Australian employees that include employees from every subsidiary under its control. Further, it is primarily involved in the operation of both international and domestic airline business, and frequent flyer program. The company operates a fleet of around 75 Embraer E-Jets, Airbus 320, and Boeing 737 that assists it in serving more than thirty destinations. It also engages in selling tourism packages and cargo services to its customers (Virgin, 2016). The company’s segments comprise of Virgin Australia Domestic, Virgin Australia International, and Tigerair Australia.
Liquidity ratio highlights the ability of the company in meeting the obligations. It is a potent ratio when it comes to discharging of obligations. The future scenario and movement of the company can be asses through this ratio. A firm having a strong liquidity position will be better placed because it can repay the debts (Northington, 2011). Moreover, it projects the current assets being higher than the current liabilities.
The current ratio is that ratio that helps in determination of the fund’s rotation through the business so that inventories, as well as debtors, can be converted into cash so that payment can be made to creditors. It is used to ascertain the liquidity of Qantas and Virgin and even helps in the examination of the transformation that has happened in the past two years of the business (Northington, 2011).
Quick Ratio is the arrangement of insecure stock that cannot be converted into cash and uttered as a fraction. It is computed by dividing current minus stocks by the current liabilities.
|
Liquidity Ratios of Qantas |
2016 |
2015 |
|
Current Ratio (Current Assets/Current Liabilities) |
0.492032 |
0.675904 |
|
Acid Test [(Current Assets-Inventory)/Current Liabilities)] |
0.444223 |
0.632798 |
|
Liquidity Ratio Virgin |
2016 |
2015 |
|
Current Ratio (Current Assets/Current Liabilities) |
0.616483 |
0.689625 |
|
Acid Test [(Current Assets-Inventory)/Current Liabilities)] |
0.601266 |
0.671754 |
As per the computation, it can be observed that the current ratio of the company has declined and is far below the standard ratio. This means the company is facing a liquidity crisis. Further, a fall is observed as compared to 2015 stressing on the need for liquid funds. Even the acid test ratio is below .50 and not near to the standard ratio 1:1. Therefore, the liquidity of the company is battered and the management needs to rebalance the equation so that the company gets an influx of funds (Kaplan, 2011). The low liquidity ratio reflects that there will be a high level of risk when it comes to encountering payment obligations. Paying the current debt will be difficult for Qantas.
As per the table of comparison, the current ratio of Qantas and Virgin in the past two years (2015-2016) both companies has projected a decline in the ratio. The fall in the liquidity position of Qantas is more as compared to Virgin. As per the comparison, it can say that the current assets of Virgin has a good risk cover as compared to Qantas.
Profitability ratio sheds light on an organization return on investment in stocks and other asset classes. Profitability ratios indicate how efficiently the company can ensure profits through the operations. In short, such ratios enable to judge whether the company is in a strong position to reap enough profit from the assets (Titman et. al, 2016). Hence, profitability ratio links to efficiency ratios because it projects the manner in which the companies are utilizing the assets to generate profits. Here the major profitability ratios are considered for Qantas that is the Return on Assets, net profit margin and the return on equity.
The return on equity can be stated as a ratio that assesses the ability of the organization in reaping profits from the funds provided by the shareholder. It denotes the profit that is generated from one dollar of common stockholder equity (Titman et. al, 2016). An investor always vouches for a higher return on equity because it indicates the solidity of the company. For Qantas, the ROE jumped from 16% in 2015 to 31.5% in 2016.
As per the ROE of Qantas, it can be seen that each dollar of stockholder equity generates 31$ of net income. It projects that the management has utilized the concept of financing of equity in an efficient manner that has enabled a strong growth in the year 2016. However, the return on equity for Virgin is negative in nature implying the solvency of the company is in danger and the funds of the shareholder are in danger.
The net profit margin is a clear indication of the profitability made by the company. This ratio indicates the manner in which the company manages the expenses in contrast to the sales. It is the sole reason why the company vouches to attain a higher ratio. This can be done by greater sales or keeping the revenue constant and lowering the expenses (Spiceland et. al, 2011). The same has been noted for Qantas. It has done reasonably well in enhancing the sales and this is why the net profit increased from 4.12% in 2015 to 7.37% in 2016 (Qantas, 2016). A higher net profit is the main concern for every stakeholder. On the other hand, Virgin is operating under losses and extended further loss in 2016 as compared to the loss in 2015. Hence, it is unattractive as it fails to reap a profit.
ROA evaluates the manner in which the company utilizes the company’s assets to generate profit. The main aim of the company assets is to generate sales and lead to greater profits, this ratio is of vital importance to both management, as well as an investor because they can look into the prospect of the company through this ratio (Titman et. al, 2016). This ratio delivers an answer how efficiently the company can convert the assets investments into profit. The ROA for Qantas has increased in comparison to the year 2015 indicating a better utilization of the assets.
On the contrary, the ROA for Virgin is in a negative state indicating the misutilization of the company’s asset. The ratio worsened more in 2016 indicating a poor performance of the management in utilizing the assets of the company (Parrino et. al, 2012).
|
Profitability Qantas |
||
|
2016 |
2015 |
|
|
ROE =(Net income/ Shareholder equity)*100 |
31.56442 |
16.24601102 |
|
Net Profit Margin |
10.21118 |
9.535146252 |
|
Return on Assets |
7.370532 |
4.116436342 |
|
Profitability Ratios Virgin |
||
|
ROE Virgin =(Net income/ Shareholder equity)*100 |
-25 |
-9.18887 |
|
Net Profit Margin (Virgin) [(Net Profit after tax/Sales Revenue)*100] |
-4.4752 |
-1.97507 |
|
Return on Assets |
-3.8019 |
-1.79369 |
As per the profitability ratios computation, it can be commented that Qantas has stabilized as compared to 2015. This can be justified by the increment in the Return on Equity indicating a better utilization of the shareholder fund. The net income has enhanced significantly thereby ascertaining that the expenses are tamed and more sales were achieved. The Return on Assets too witnessed a growth (Spiceland et. al, 2011). Cash flow of the company looks positive and the business is viable. The above ratio is a clear cut indication of the effectiveness in which Qantas is operating.
ROE = NPM * Asset Turnover *Equity multiplier
(1029/13961)*(13961/16705)* (16705/3260)
=0.0737 * 0.835 * 5.12
= 0.32
After utilizing the entire three ratios, the DuPont analysis provides an insight into the health of Qantas. The ROE of the company enhanced by dint of an enhanced net profit margin that is (net income/sales) and enhanced asset turnover that is (sales/assets) which projects a healthy sign. This indicates that Qantas is using its assets to generate revenue which is a very healthy sign (Brigham & Daves, 2012).
Capital structure ratio helps in evaluating the solvency structure, as well as liquidation of the firm. The ratio helps in shedding light on the way in which firm finances the total operations, as well as growth by various sources of funds that are the debt and equity (Brigham & Ehrhardt, 2011).
The debt-equity ratio can be termed as a measure of the link that exists between the capital provided by the creditors and the shareholders. A high debt-equity ratio indicates that the company will struggle to meet the obligations of the debt while lower debt equity means the company is unable to take advantage of the enhanced profit that financial leverage might bring (Brigham & Ehrhardt, 2011). The Debt equity ratio of Qantas As per the computation, it can be seen that debt equity of Qantas stands very high (412%). It indicates that the reliance of Qantas on debt is very high and a huge percent of the funds will towards payment of interest. A similar trend is noticed in the case of Virgin where the debt-equity ratio increased sharply signifying more use of debt in the year 2016.
The debt ratio can be defined as the ratio of total debt to the total assets. It can be forecasted as the proportion of the assets of the company that is financed by debt. From the computation, it is observed that 80% of the assets are funded by debt which puts Qantas in high risk (Davies & Crawford, 2012). The same trend is noticed in the case of Virgin where the debt ratio increased from 82% in 2015 to 85% in 2016. Both the companies utilize the debt to a paramount level.
Equity ratio assesses a number of the assets that are funded by the owner investment by comparing with the total assets. A weak equity ratio is of high risk to the company as it projects frailties in the solvency position. The equity ratio of the company stands at 19% which is lower as compared to the industry standards. Since the equity ratio is weak, further loan procurement will be difficult for the company (Deegan, 2011). On the other hand, there is a drop in the equity ratio of Virgin indicating debt financing will be very high and more debt services cost. Qantas ranks better in equity ratio as compared to Virgin.
|
Capital Structure Qantas |
||
|
2016 |
2015 |
|
|
Debt equity ratio Qantas= total debt/ total equity |
412.4233 |
408.5582 |
|
Debt Ratio Qantas = Total liabilities/ total assets |
80.48488 |
80.33657 |
|
Equity Ratio = Total Equity / Total Assets |
19.51512 |
19.66343 |
|
Capital Structure Virgin |
||
|
2016 |
2015 |
|
|
Debt equity ratio Virgin = total debt/ total equity |
572.0961 |
466.1834 |
|
Debt Ratio Virgin = Total liabilities/ total assets |
85.12118 |
82.33788 |
|
Equity Ratio Virgin = Total Equity / Total Assets |
14.87882 |
17.66212 |
As per the capital structure of Qantas, the loan procurement process will be difficult for the company as the debt-equity ratio ranks very high. This denotes a higher level of debt is already into the system (412%) and exposed to higher level of risk in terms of solvency and interest payment. Therefore, going by this ratio the loan proposal is bound to be rejected. Secondly, the debt ratio indicates that more than 80% of the assets is supported by debt. Therefore, Qantas is highly leveraged and will be a risky venture for the lenders. Considering, this situation the loan application will be rejected because the lenders are not willing to invest in a company that has a high level of risk. Further, the lower equity ratio is a constraint that will make a difference in the loan request (Horngren, 2013). A lower equity makes it impossible for a firm to procure a loan. However, even if Qantas manage to get approval for the loan it will be done at a very high rate of interest.
Based on the overall analysis, it can be commented that if the company needs to procure loan it needs to do at a higher rate of interest otherwise the business will fail to procure loans owing to an unhealthy capital structure. Further, the company can gain an access to other modes of finance.
Ratio analysis has been used to compare between Qantas and Virgin. The ratio analysis suffers from various defects and hence, the same limitation applies in this study too. Qantas and Virgin emerge from the same industry however, the accounting policies might be a point of contradiction that influences the result. This difference in practice affects the smooth flow of the study. The depreciation and inventory might get unbalanced owing to different policies (Fields, 2011). Secondly, ratio analysis only provides the source or figure and is not related to the steps that can be taken to correct the prevailing condition.
Equity share capital – ‘It is the main source when it comes to long-term finance because it is directly linked with the process of raising capital. A marginal decrease of 3% is witnessed in the case of share capital but still remain the prominent one for raising long-term capital
Loans – For Qantas, the long term sources comprise of loans that are the bank loans of secured, as well as unsecured in nature. Other loans even formed a part of the loan. Further lease and hire purchase liabilities were even included. The loan procurement in the year 2016 was $4862 million as compared to $5562 million in 2015.
Payables – The payables consist of the short term source and have shown an increment in the year 2016 by 3%. It was $1881 million in the year 2015 that increased to $1986 million in 2016.
|
Value of Bond |
100 |
|
|
Rate of coupon |
8% |
|
|
Maturity Yield |
||
|
Rating (A+) |
3.5 |
|
|
Rating (B+) |
4 |
|
|
Qantas Airways Ltd |
Virgin Australia Holdings Ltd |
|
|
Number of payments made through coupon |
5 |
10 |
|
Value of payments made through coupon (%) |
8 |
4 |
|
Percentage (%) Yield |
3.5 |
2 |
|
Value of Bond through Annuity method |
120.32 |
117.97 |
It can be observed from the previously mentioned computation that the bond prices of Qantas and Virgin Australia are greater than its value. This is because the bonds are being sold at a premium rate, and the yield requirement is lesser than the rate of coupon. Such premium bond refers to the present value of the amount of maturity minus the undiscounted amount of maturity, and payment of future interest as a whole (Titman et. al, 2016). Overall, this depicts that the bond is beneficial.
Credit rating is a highly strenuous industry with the three big bond rating agencies controlling around 95% of the rating business. These three big agencies are Fitch, Standard and Poor (S&P), and Moody’s Investor Service. Credit ratings offer both institutional and individual investors with proper details that assist them in ascertaining whether issuers of fixed-income securities and debt obligations are capable of meeting their obligations in relation to such securities (Graham & Smart, 2012). These agencies offer investors with independent valuations and objective assessments of countries and companies that issue securities. Moreover, globalization admixed with diversification in kinds and quantities of securities issued presents an issue to both individual and institutional investors who must evaluate the risks related to domestic and global investments (Parrino et. al, 2012). Furthermore, many companies main their credit rating in order to maintain worthiness and goodwill in the market. It depicts their potential and credibility in the market. Moreover, investors are more attracted to companies that have higher stability and goodwill. Credit rating determines the risks associated with investments, thereby assisting the companies to sustain ratings for a more uniform economic environment. Nevertheless, since it is related to the companies’ exposure, it will result in an effective presentation when it is strong and vice-versa.
Conclusion
As per the computation of various ratios, it can be commented that the financial position of Qantas is better as compared to Virgin. Qantas lacks on the front of the liquidity ratio that can be enhanced if the company manages the liquid assets in an effective manner. However, apart from the liquid ratio, Qantas is better placed in all other ratios. It beats Virgin in profitability ratio indicating that the company is a profitable one. However, the capital structure of both the companies are in the doldrums and hence, it is advisable to stay away from the company. Therefore, it is essential for the investors not to pick the stocks currently. Another year will add better analytical highlight and then a decision can be made.
References
Bodie, Z., Kane, A. & Marcus, A. J 2014, Investments, McGraw Hill
Brigham, E. & Daves, P 2012, Intermediate Financial Management , USA: Cengage
Brigham, E.F. & Ehrhardt, M.C 2011, Financial Management: Theory and Practice, USA: Cengage Learning.
Davies, T. & Crawford, I 2012, Financial accounting, Harlow, England: Pearson.
Deegan, C. M 2011, In Financial accounting theory, North Ryde, N.S.W: McGraw-Hill.
Fields, E 2011, The essentials of finance and accounting for nonfinancial managers, New York: American Management Association.
Gibson, C 2012, Financial statement analysis, Mason, Ohio: South-Western.
Graham, J. & Smart, S 2012, Introduction to corporate finance, Australia: South-Western Cengage Learning.
Horngren, C 2013, Financial accounting, Frenchs Forest, N.S.W: Pearson Australia Group.
Kaplan, R.S 2011, ‘Accounting scholarship that advances professional knowledge and practice’, The Accounting Review, vol. 86, no.2, pp. 367–383.
Northington, S 2011, Finance, New York, NY: Ferguson’s. NY: Springer.
Parrino, R, Kidwell, D. & Bates, T 2012, Fundamentals of corporate finance, Hoboken, NJ: Wiley
Qantas 2016, Qantas 2016 Annual report & accounts, viewed 10 April 2017, https://www.qantas.com.au/infodetail/about/corporateGovernance/2016AnnualReport.pdf
Spiceland, J., Thomas, W. & Herrmann, D 2011, Financial accounting, New York: McGraw-Hill/Irwin,University Press
Titman, S, Martin, T, Keown, AJ & Martin, JD 2016, Financial management: principles and applications, 7th edn, Pearson Australia, Vic.
Virgin 2016, Virgin 2016 Annual report & Accounts, viewed 12 April 2017, https://www.virginaustralia.com/cs/groups/internetcontent/@wc/documents/webcontent/~edisp/2016-asx-financial-report.pdf
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