Financial Statement Analysis Qantas & Virgin Australia Airlines

Question: Explain briefly what is revealed by the ratios and other calculations in the context of the company's profitability, asset efficiency,liquidity,capital structure, and market performance. In particular, any important changes over the period 2013 rto 2014 should be identified, discussed and where possible, explained? Answer: Executive Summary The report has been prepared for general financial analysis comparing Qantas Airline financial position and performance in the financial years Ended 30 June 2013 and 2014 compared to that of Virgin Australia over the same period. Are You Daunted by the Thought of Due Assignments? Avail Our Services and Receive Assignment Help from Experts. Considering the different ratios it can be said that both Qantas and Virgin Australia have similar performance trend over the last two years for the different financial parameters. The overall analysis of the performance of the two companies shows that Virgin Australia has performed better than Qantas. In all the aspects it can be viewed that Virgin Australia has better managed the business and is more likely to recover from the crisis that is prevailing in the company. Qantas on the other hand will have to ensure that the situation does not deteriorate further. Introduction Financial Analysis of the company is very important from the different viewpoint. The report has been prepared for general financial analysis comparing Qantas Airline financial position and performance in the financial years Ended 30 June 2013 and 2014 compared to that of Virgin Australia over the same period. Based on the analysis the performance of the two companies has been evaluated. About the company The brief detail about the companies for which the analysis is being conducted has been provided below. Qantas The company was founded in the year 1920 and is currently the biggest domestic and international airline of Australia. The company has been struggling with the financial aspects since 2011 as the company has been impacted by certain changes in the accounting standards specifically to the impairment of assets. Apart from this the company has also entered into the alliance with UAE based Emirates Airlines. There has been focus on the reducing the fleet size and the jobs in company following the huge loss made by the company in 2014. Virgin Australia Virgin Australia Airlines is also the largest companies in Australia operating in the airlines industry. Started in 2000 with two aircrafts that were operating on single route, the company capitulated its position following the collapse of Ansett Australia in 2001. Although the company has been impacted by the financial crisis, there have been several changes in the way the company has managed and bring in the services for its customers. Financial Statement Analysis Financial Statement analysis is used by analysts for the analysis of the performance of the company. The perspective for which the analysis is being performed may be different. The two key performance indicators that are highlighted from the financial statement analysis are (Helfert, 1996) Evaluation of the performance of the company over a given period Evaluation of the performance of the company in comparison to the industry players The financial statement analysis that has been performed in this report includes the various ratios such as profitability, liquidity, efficiency, leverage and market ratios. Apart from this the general discussion has been performed with respect to the horizontal and vertical analysis. Based on all these ratios the performance of the two companies has been compared. Profitability Ratios The profitability ratios that have been calculated have been analyzed in two parts. These are the profit margin and returns. The profit margin highlights the profitability and interest expense with reference to the sales of the company and the margin that is there (Thompson, 2004). The profitability ratios associated with the return highlights the return that is generated for the equity employed, assets and the equity employed. The various ratios that have been calculated as part of the profitability ratios have been shown below Virgin Australia Qantas Profitability Ratio 2014 2013 2014 2013 Gross Profit /Operational profit -8.81% -2.48% -24.57% 1.25% Net Profit -8.30% -2.46% -18.52% 0.01% Interest to Sales ratio 2.79% 1.77% 1.86% 1.86% Return on Shareholder funds -33.93% -8.91% -99.20% 0.03% return on Assets -5.04% -0.60% -14.76% 1.49% Return on Capital Employed -13.69% -3.62% -38.52% 1.48% Based on the above figures it can be said that the performance of both the companies isnt quite encouraging. Both the companies have made losses in the last two years. This is highlighted by the negative profit margin ratios of the companies. It can be said that the losses made by Qantas have been higher than Virgin Australia in comparison to the sales. Further there is huge variation in the net profit margin in comparison to the gross profit of Qantas. In order to calculate the gross profit the operating profit of the company has been considered. The return ratios are based on the profit margin earned by the company and hence there has been negative return in case of capital employed, total assets and the equity employed by the shareholders. The capital employed is the difference of the total assets and the current liability. Further the return on the capital employed is measured in reference to the gross profit whereas the return on total assets and the shareholders equity is measured in terms of net profit made by the company (Vandyck, 2006). In this case as well there has been huge fall in the returns because of the huge losses made by the company. The situation is quite adverse for Qantas as although the equity employed has reduced the fall in the return has been higher than Virgin Australia. This shows that the company has made higher losses in comparison to Virgin Australia. Overall the profitability ratios highlight that both the companies have made losses in the two years and these losses are increasing substantially. The situation is more adverse of Qantas as not only the profitability has come down but there is drastic fall in the equity that has been employed. Liquidity Ratios The liquidity ratios highlight the ability of the company to meet the short term financial requirements of the company. The liquidity ratios that have been considered for the purpose of analysis have been shown below Virgin Australia Qantas Liquidity Ratio 2014 2013 2014 2013 Current Ratio 0.64 0.54 0.66 0.75 Operating Cash Flow ratio 0.00 0.07 0.14 0.21 Acid Ratio 0.62 0.52 0.61 0.69 The current ratio of both the companies is below one which means that the current assets of the company are lower than the current liabilities. This fall in current assets means that the needs of the current liabilities will be fulfilled by the non-current assets of the company. Further the acid ratio, signifying current assets available without considering the inventory, has been compared. The acid ratio is more dynamic in comparison to the current ratio as it considers more readily available cash and inventory isnt considered in this. There isnt much difference between the current ratio and the acid ratio for both the companies. Finally with respect to the operating cash flow it can be said that the operating cash flow for both the companies highlight the cash flow from operations contributing very little to meet the current liabilities. The liquidity ratios shown above highlight that both Virgin Australia and Qantas have not been able to meet the short term requirements and may be utilizing the non-current assets of the company (Brigham, 2010). The further analysis on this aspect can be highlighted by the horizontal and vertical analysis. This highlights that the non-current assets of Qantas have reduced considerably from 2013 to 2014. Further Virgin Australia has been able to improve on the performance with respect to current ratio over the two year period. As a result of this there isnt much impact on the non-current assets of the company. Lastly the cash availability is a huge concern for both companies. Cash is the major source of current assets of the company and it has the insignificant effect on the performance of the companies. The companies need to improve the liquidity ratios as any further dependency on the non-current assets would mean that the sales of the company may be impacted which would further agg ravate the situation. Efficiency Ratios The efficiency ratios highlight the effective utilization of the assets of the company. The efficiency ratios are measured with respect to the sales made by the company. The total assets that have been considered are the end of the year figures that are there at the end of the year. The various efficiency ratios that have been calculated are as follows Virgin Australia Qantas Efficiency Ratio 2014 2013 2014 2013 Sales Revenue : Capital Employed 1.55 1.46 1.57 1.19 Debtor turnover (Days) 25.79 23.56 28.44 32.96 Creditor turnover (Days) 48.55 51.84 35.33 42.86 Total Asset Turnover 0.92 0.88 0.89 0.79 Inventory Turnover 129.21 137.14 60.33 43.14 The efficiency ratios are quite important as it shows the extent to which assets have been employed and at the same time managed in order meet the cash flow requirements and the expenses of the companies. The sales to capital employed and the total asset turnover of the companies shows that both the companies have ensured that the sales are increased for the given capital that has been employed by the company. In case of Qantas the sales for the capital employed has been higher than Virgin Australia. Although there has been increase in the sales to capital employed has been increased, this increase is higher for Qantas. This means that the company has been quite efficient in generating sales from the capital employed. Further analysis has been made with respect to the debtor and creditor turnover. The analysis of both the ratios for Qantas shows that the there has been fall in both debtor and creditor turnover. There has been greater fall in the creditor turnover as the accounts payable by the company has come down (Vandyck, 2006). On the other hand considering the debtor and creditor turnover ratios of Virgin Australia it can be said that the difference between these ratios is higher than Qantas. Thus Virgin Australia has more efficiently utilized the debtors and the creditors. This must have contributed to the cash flow to a certain level. The inventory turnover ratio highlights that the inventory level of both the companies has been quite low and therefore most of the sales is generated and assets are employed from the effective current assets resources. This aspect has been highlighted the current ratios as well. A very important relation that has to be analyzed is with respect to the efficiency ratio and the liquidity ratio is that the efficiency ratios highlight the efficient utilization of the current assets or the maximizing of the cash flow which will considerably improve the liquidity of the company and thus improve the liquidity ratios (Brigham, 2010). The overall assessment of the efficiency ratios shows that the companies have been quite effectively generated the sales and managed the cash flow to a certain extent. The efficiency ratios for Qantas have been better in comparison to Virgin Australia. Gearing Ratios The gearing ratios highlight the level of leverage or debt that has been employed by the company. The gearing ratios that have been calculated are Virgin Australia Qantas Gearing Ratio 2014 2013 2014 2013 Debt to Equity 163.21% 148.13% 241.70% 129.20% Debt to Total Assets 36.56% 35.88% 40.00% 37.66% Loans: Capital Employed 62.01% 59.70% 70.73% 56.37% Interest Cover -3.16 -1.40 -13.19 0.67 Both the companies are highly leveraged as the debt has the major share in the capital structure of the company. Qantas is more leveraged in comparison to Virgin Australia. Further the debt to total assets ratio shows that the funding of total assets is almost similar for both the companies. This highlights that the debt has been employed to meet the other financial requirements of the company which can be the current liabilities (White, Sondhi Fried, 2002). This is highlighted by the other ratio wherein it has been specified that loans are more than 60% in the capital employed by the company. The interest coverage ratio is quite irrelevant in the present scenario as the companies have made loss. The overall study of the gearing ratios shows that the companies are excessively leveraged. In case of Qantas the debt contribution has almost doubled as a large number of investors withdrew the investment from the company. This excessive leverage of both the companies has impacted the performance of the companies as this not only resulted in additional expense in the form of interest but also resulted in limited scope of further employing debt and increasing the operations (Thompson, 2004). Market Ratios Various market ratios have to be analyzed in order to assess the performance of the company with respect to the viewpoint of the investors. The market ratios that have been considered are price to earnings ratio and the dividend yield. Both the companies have not given any dividend to the shareholders in the last two years. Further the analysis of the price to earnings ratio shows that the market value per share has come down. However the fall in the earnings per share has been higher. In case of Virgin Australia there is marginal increase in the price. Thus Virgin Australia has higher price to earnings ratio in comparison to the Qantas. This signifies that the investors does not consider that Qantas has better prospects in terms of returns than Virgin and thus the faith in Virgin has been maintained which is reflected in the share price. Overall the analysis of the market ratios shows that the Virgin Airlines has been the choice of the investors in comparison to Qantas. This may be due to the factors that have already been discussed and shows that market performance of the company is aligned with the financial performance of the company. From the viewpoint of the market as well it is better to invest in Virgin Airlines than Qantas. Horizontal Vertical Analysis and other considerations The horizontal analysis highlights the changes in the different aspects of the financial statement considering the year 2013 as the base year. The vertical analysis is the contribution of the different aspect in the total assets of the company. The horizontal analysis of Qantas shows that apart from liabilities all the factors such as sales, equity employed and the assets of the company have come down. On the other hand the performance of Virgin Australia in this aspect shows that although the company has made loss, there has been increase in the sales, assets and marginal fall in the equity (White, Sondhi Fried, 2002). Also the liabilities have increased marginally. The performance of Virgin Australia in the current year will be important The vertical analysis highlights that both the companies have similar structure. This is to say that the noncurrent asset of the companies has around 75% share in the total assets of the company. Further the share of inventory has been significantly low and will have no significant impact on the performance of the company. Further it is important to consider that the cash is major contributor to the current assets as the account receivable is also quite low. Thus both the companies have ensured that the cash level is maintained although the current liabilities arent fulfilled by this. Apart from the capital structure the analysis of the expenses of the company shows that the Virgin Australia had the expenses related to labor staff and the fuel expense. In case of Qantas the impairment of cash generating unit is significantly high. Considering this aspect it can be said that Virgin Australia has better scope of increasing the profitability by managing the operational expenses whereas in case of Qantas the accounting standards have impacted the expense and is likely to continue with less control over these aspects. Conclusion The overall analysis of the performance of the two companies shows that Virgin Australia has performed better than Qantas. The profitability ratios highlight that both the companies have made losses in the two years and these losses are increasing substantially. The situation is more adverse of Qantas as not only the profitability has come down but there is drastic fall in the equity that has been employed. The liquidity ratios shown above highlight that both Virgin Australia and Qantas have not been able to meet the short term requirements and may be utilizing the non-current assets of the company. The companies need to improve the liquidity ratios as any further dependency on the non-current assets would mean that the sales of the company may be impacted which would further aggravate the situation. Lastly the overall study of the gearing ratios shows that the companies are excessively leveraged. In case of Qantas the debt contribution has almost doubled as a large number of investors withdrew the investment from the company. Based on the analysis of the income statement it can be said that Virgin Australia has better scope of increasing the profitability by managing the operational expenses whereas in case of Qantas the accounting standards have impacted the expense and is likely to continue with less control over these aspects. The analysis of the market ratios shows that the Virgin Airlines has been the choice of the investors in comparison to Qantas. This may be due to the factors that have already been discussed and shows that market performance of the company is aligned with the financial performance of the company. From the viewpoint of the market as well it is better to invest in Virgin Airlines than Qantas. Overall the performance of the two companies has been quite similar in terms of the profitability, liquidity, efficiency and the gearing ratios. It can be attributed to the industry conditions as both operate in the same industry. However the analysis of the expenses of both the company shows the difference between the two companies. Considering all these factors the performance of the company may be considered below par. However the biggest strength of Qantas is its huge asset base. It is important for the company to ensure that the current asset base is maintained and certain strategic decisions are taken so as to ensure that further effect is not there on the performance of the company and the company is able to sustain. On the other hand Virgin Australia has to ensure that the certain operational changes are made to reduce the expenses that have been mentioned. References Bradshaw K., (2013), Financing your business: choosing between debt and equity, Available At: https://www.royalgazette.com/article/20130319/BUSINESS05/703199999 Charles K. Vandyck, (2006), Financial Ratio Analysis: A Handy Guidebook, Trafford Publishing White G.I., Sondhi A.C. Fried D., (2002), The Analysis and Use of Financial Statements, Wiley; 3 edition Bhattacharya H., (2004), Working Capital Management: Strategies and Techniques Brigham E.F., Ehrhard M.C., (2010), Financial Management: Theory Practice Thompson D.A., (2004), Sources of Business Financing, Available At: https://www.boyneclarke.com/resources/entry/sources-of-business-financing Helfert E.A., (1996), Techniques of Financial Analysis: A Practical Guide to Measuring Business Performance