Financial Performance of Virgin and Qantas-Samples for Students

Question: Analyse and interpret the financial performance of two airlines from Australia. Answer: Introduction The main objective of the report is to analyse and interpret the financial performance of two airlines from Australia that is Virgin Australia and Qantas Airlines. The analysis and interpretation will be based on various ratio calculations like profitability ratio, liquidity ratio and efficiency ratio. Finally, based on the analysis some recommendation will be provided for increasing the revenue target. Qantas Airline was established in the year 1920 in Queensland and became the largest international and domestic airline in Australia. They are well known for excellence in operational reliability, safety, maintenance, engineering and the service provided to the customers. Main business of the company is to provide transportation service to the customers through 2 complementary brands of airlines that is, Jetstar and Qantas. The company also operate subsidiary business that includes other airlines and the businesses under specialist markets like Q Catering (Flights | Qantas AU, 2018). It operates international, domestic and regional services and employs more than 30,000 employees out of which near about 93% are based in Australia. On the other hand, Virgin Australia entered into the aviation market of Australia in the year 2000 and brought the real competition in the markets leisure sector. The main objective of the company is to revolutionise the air travel through all the market seg ments. The objectives will be achieved through delivering seamless experience all over the international and domestic market in addition to retaining same level of excellent services (Virgin Australia | Home, 2018). Ratio analysis Formula Qantas Airline Virgin Airline 2016 2015 2014 2016 2015 2014 Current assets/Current liabilities 0.49 0.68 0.66 0.62 0.69 0.64 Current assets less inventories/current liabilities 0.44 0.63 0.61 0.60 0.67 0.62 Net sales/Average account receivables 18.47 14.68 11.66 16.06 15.44 15.37 365/account receivable turnover 19.76 24.87 31.31 22.73 23.64 23.75 Total liabilities/shareholder's equity 4.12 4.09 5.04 5.72 4.66 3.45 EBIT/interest expenses 5.79 3.00 -13.01 -1.42 -0.53 -3.16 Net profit/Total assets 0.06 0.03 -0.16 -0.04 -0.02 -0.08 Net profit/Total equity 0.32 0.16 -0.99 -0.25 -0.09 -0.34 Given in the annual report (in cents) 49.4 25.4 -128.5 -7.4 -3.2 -11.4 Ratio analysis is the quantitative analysis with regard to the information included in the financial statement of the company. It is used for evaluating different aspects of the financial as well as operating performances like liquidity, efficiency, solvency and profitability (Grant, 2016). Most of the investors are familiar with various key ratios like current ratio, debt-equity ratio, return on equity ratio and return on asset ratio. Ratio analysis can be segregated into various groups like Liquidity Ratio it measures the ability of the company to pay off the short-term obligations as they become due and are met through the quick assets or current assets. Various ratios through which the liquidity of the company is measured are the current ratio and quick ratio. Current ratio it is the liquidity ratio that computes the ability of the company for paying off the long term and short term obligations. To measure the ability current ratio tales into consideration the total current assets of the company against the total current liabilities (Heikal, Khaddafi Ummah, 2014). It is calculated through dividing the current assets by current liabilities. It is called current ratio as as it incorporates all the current liabilities and current assets. Generally the ratio less than 1 represent that the current assets of the company are lower than its current liabilities. Looking into the annual report of Qantas airline and Virgin Australia airline and the calculation from the above table that the current ratio of Qantas airline reduced from 0.66 to 0.49 and for Virgin Australia it is reduced from 0.64 to 0.62 over the years from 2014 to 2016. Therefore, it presents that the financial health of both the companies are not good (Hevert, 2013). However, it do es not mean that the company will become bankrupt and various ways are there for the company to access finance if it has realistic expectation regarding the future earnings to pay-off the borrowings. Further, these ratios of below 1 will be acceptable to the investors if the companies are able for negotiating long term credit periods with the suppliers and at the same time offering lower credit terms to the customers. These companies will be able to maintain the minimum levels of the inventory under the balance sheet if the operations are carried out efficiently. Quick ratio the quick ratio that is also known as the acid-test ratio measure the efficiency of the company to meet its short-term financial obligations. It is calculated through dividing the current assets of the company reducing the inventories of the company by the current liabilities. Through the quick ratio of the company is similar to the current ratio, the quick ratio provides more precise analysis of the ability of company for paying off the current obligations (Jones Kulish, 2013). Looking into the quick ratio of both the companies it is identified that the quick ratio of Qantas airline are reduced from 0.61 to 0.44 and for Virgin Australia it is reduced from 0.62 to 0.60 over the years from 2014 to 2016. Therefore, taking into consideration both the liquidity ratios, it is observed that the liquidity position of Virgin Australia airline is better as compared to Qantas airline. However, the liquidity ratios assumed that the company will liquidate the current assets for paying the current liabilities that is not realistic always taking into consideration the thing that the company is required to maintain the same level of working capital for the operation management. Solvency ratios it is also called as he financial leverage ratio and it compares the debt levels of the company with the earnings, equity and assets for evaluating whether the company can sustain in the market for long-term period through paying off its long term borrowings and interests on that (Sunder, 2016). Various solvency ratios include interest coverage ratio or number of times interest earned and debt to equity ratio. Number of times interest earned it is used for determining the efficiency of the company to pay off their interest expenses on the outstanding borrowings. It is calculated through dividing the operating profit of the company by the interest expenses for the period (Brooks, 2015). The lower ratio represents that the company is burdened with debt expenses. While the interest coverage ratio of the company is 2 or lower than that the ability of the company to meet the interest expenses can be questionable. It measures the times that the company can pay the outstanding borrowings using the earnings of the company. It is considered as the margin of safety for the creditors of the company that can run into the financial difficulty for the company. The ability of paying off the debt obligations is major factor for determining the solvency of the company and it is a crucial statistic for the shareholders and potential investors (Drehmann Nikolaou, 2013). Looking into the calculation table i t is found that the Interest coverage ratio of Virgin airline for all the three years are in negative as the company was not able to earn any positive operating income throughout all 3 years. On the other hand, the interest coverage ratio for Qantas airline improved in 2016 as compared to the year 2014 and 2015. Debt to equity ratio the debt to equity ratio is calculated through dividing the total liabilities of the company by the shareholders equity. It is used for measuring the financial leverage of the company. This ratio indicates the amount of debt used by the company to finance the assets as compared to the amount of equity. If the company use higher amount of debts for increasing finance for its operations the company can generate higher level of earnings as compared to the amount that would have been earned if it did not opt for outside finance (Nobes, 2014). It can be identified from the annual report and calculation table that the debt to equity ratio of both companies is quite high. It represents that the total liabilities of both the companies are significantly high as compared to the total equities of the company. However, the debt to equity ratio of Qantas airline is better as compared to Virgin Australia as its debt to equity ratio is slightly lower than Virgin Australia. Profitability ratio it measures the companys ability to ear the profit and create return for its shareholders. While the solvency ratios and liquidity ratios states the companys financial position the profitability ratio and efficiency ratio states the financial performance of the company. Major profitability ratios are the return on assets, return on equity and earnings per share. Return on assets this ratio is the calculation of net income as compared to the total assets of the business during the financial year. It is used to measure the efficiency of business through using the assets for generating net income. It indicates the cents earned with each dollar of the asset. Therefore, the higher return indicates that the business is more profitable. However, this ratio shall be used to compare the companies under same industry. Increasing of ROA indicates that profitability for the company is improving (Luez Wysocki, 2016). Looking into the ROA of both the companies it is found that the ROA for Qantas airline for the year 2014 was in negative as the net income of the company was negative. However, for 2015 and 2016 the ROA of the company is in positive. However, the ratio is significantly low for Qantas airline. On the other hand, for Virgin Australia ROA, for all the three years are in negative as the net income of the company for all the 3 years are in nega tive. Return on equity - this ratio is the calculation of net income as compared to the total shareholders equity of the business during the financial year. It is used to measure the profitability on shareholders investment. It is the important measure for the companys profitability. Higher ratio represent that the company is efficient for creating income on the shareholders investment. When the capital is raised through debt for reducing the share capital the ROE will increase even if the income is constant (Kettunen, 2017). Looking into the ROE of both the companies it is observed that ROE of Qantas airline for the year 2014 was in negative as the net income of the company was negative. However, for 2015 and 2016 the ROE of the company is in positive. On the other hand, for Virgin Australia, ROA for all the three years are in negative as the net income of the company for all the 3 years are in negative. Earnings per share EPS are defined as the attributable net income to each of the companys common stock. It is the profitability ratio that indicates the income earned per share by the company in specific period. It is calculated through dividing the net income of the company by weighted average number of outstanding shares. While analysing the companys profitability the net income amount alone is not much useful as it is dependent on the size of business (Hill, Jones Schilling, 2014). Looking into the EPS of both the companies it is observed that EPS of Qantas airline for the year 2014 was in negative as the net income of the company was negative. However, for 2015 and 2016 the EPS of the company is in positive. On the other hand, for Virgin Australia, EPS for all the three years are in negative as the net income of the company for all the 3 years are in negative (Prasetyorini, 2013). Therefore, taking into consideration all the above mentioned profitability and efficiency ratios it is recognized that the profitability position of Qantas airline is considerable better as compared to Virgin Australia as Virgin Australia was not able to earn positive earning for all the three years under consideration. Activity ratios These ratios assesses the operational efficiency of the business. It attempts to find out the efficiency of the business to convert the inventories in sales and the sales into cash. In other words, it is the efficiency in using the working capital and fixed assets. Key activity ratios taken into consideration for the analysis of Qantas airline and Virgin Australia are account receivable turnover ratio and number of days the sales in receivables. Account receivable turnover it is the ratio of net credit sales of business to the average accounts receivables during the particular period, generally the accounting year (Ch, Patel White, 2015). It measures the efficiency of business in collecting the credit sales. High ratio represents the favourable condition and lower figure represent the inefficiency. It can be identified from the calculation that for 2014 and 2015 the receivable ratio of Virgin Australia is better as compared to Qantas. However, for the year 2016 the receivable position of Qantas airline is better. NO.of days sales in receivables it is used for measuring average number of days the business takes for collecting the trade receivables after the sales made (Acito, Hogan Imdieke, 2015). As it is the time taken to convert the sales into cash, lower days represent as favourable and the higher days are represented as unfavourable. It can be identified from the calculation that for 2014 and 2015 the days outstanding of Virgin Australia is better as compared to Qantas. However, for the year 2016 the receivable position of Qantas airline is better ?ermk, 2015). Revenue management As the nature of the airline business is of challenging type and requires continuous investment for updated and new technologies, the particular area for focussing is the revenue management (RM). The RM systems are used for determining optimum price for selling the seat at any given point of the time (Graf Kimms, 2013). The required information will be able to make the decision based on various factors. For increasing the revenue The company shall adapt to the conditions of changing market in the real time for the improves procedure Leverage the demand of customers across the revenue streams for increasing the revenue. Improve the forecast accuracy and analyst productivity through enhancing the decision making procedures (Board Skrzypacz, 2016). Enable the integration of unmatched business planning for enhancing the decision making. Conclusion It is concluded from the above discussion that if the financial position and financial performance of Qantas airline and Virgin Australia airline is taken into consideration it can be identified that Qantas is better investment as compared to Virgin Australia. The reason behind this is that Virgin Australia was not able to earn positive income for all the three years under consideration. Further, if the solvency ratios and activity ratios are considered, it is identified that Interest coverage ratio of Virgin airline for all the three years are in negative as the company was not able to earn any positive operating income throughout all 3 years. On the other hand, the interest coverage ratio for Qantas airline improved in 2016 as compared to the year 2014 and 2015. The debt to equity ratio of Qantas airline is better as compared to Virgin Australia as its debt to equity ratio is slightly lower than Virgin Australia. 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