Business Report Qantas Airways Ltd.& Virgin Australia Holdings Ltd. between 2010 and Submitted by Xiaomeng Jin JINXVD1102

Transcription

1 Business Report Qantas Airways Ltd.& Virgin Australia Holdings Ltd. between 2010 and 2011 Submitted by Xiaomeng Jin JINXVD1102 1

2 Executive Summary According to the analysis of the ratio given, there is an obvious reduction in the profitability of Virgin Australia Holding Ltd over the period from 2010 to Although the asset turnover has slight growth, most figures decreased sharply in On the other hand, the performance of Qantas Airways Ltd increased stably. In addition, the operation efficiency of the two companies shows that the accounts payable turnover remained high. However, these figures of Qantas have increased during this period. Finally, there are a few problem of financial stability in the companies as well. The ability of these two companies could not deal with their short-term liquidity. Also virgin had high level of leverage that shows the difficulty in long-term solvency. 2

3 Table of contents 1.0 Introduction Body of the report Profitability Efficiency Financial Stability Additional Information Limitation Recommendation List of Reference Appendices

4 1.0 Introduction This report is prepared for comparing with some financial ratios between Qantas Airways Ltd and Virgin Australia Holdings Ltd. Therefore, this ratio analysis of financial statements will focus on profitability, efficiency and financial stability of these two companies over the period from to In addition, it will identify and discuss limitations regarding the financial analysis. Furthermore, at the end of this report, a few of appropriate recommendations will be suggested for investor which of these two companies is better investment option. 4

5 2.0 Body of the Report 2.1 Profitability Company profitability ratios are used to evaluate how effective a company has been in the perspective of meeting its overall return objective, compared with the resources invested. Profitability ratios include gross profit margin, net profit margin, return on assets, return on equity and asset turnover. As can been seen from the table, the gross profit margin of Virgin Australia Holdings Ltd in 2010 was 9.8% and in 2011 was 6.3% which dropped about 3%. This ratio of Qantas Airways Ltd in 2010 and 2011 was 10.97% and 11.39%. The reason for the gross profit margin of Virgin Australia Ltd dropping down is because of the increasing cost of fuel and their expansion of destination network and the increasing purchase of aircraft (Asian Aviation Magazine, 2011). However the company did not recover the cost by increasing selling price. Qantas has higher gross profit margin ratio than Virgin Australia because Virgin set relatively lower selling price and the cost of inventory increased last year. The net profit margin of Virgin Australia in 2010 and 2011 was 0.60% and %, which indicated the company has profit loss in 2011 as the cost such like increasing fuel price and set new target is higher than earning. This ratio of Qantas in this period was 1.24% and 1.76%. Qantas has higher net profit margin than Virgin Australia, because Virgin Australia as low-cost airline set the lower selling price than Qantas with the expectation of selling more units with less net profit margin. The asset turnover of Virgin Australia in 2010 and 2011 was 76.86% and 85.08%, while this ratio of Qantas was 69.17% and 71.41%. Virgin Australia performed better in asset turnover, because compared to traditional mainline carrier Virgin Australia has lower operation cost structure with lower total asset. The sale of the company offers cheaper tickets to keep the revenue. 5

6 The return on assets of Virgin was 1.98% and 0.51% and that of Qantas was 1.76% and 2.28% in 2010 and It indicated the operating performance of Qantas was increasing however which of Virgin Australia was decreasing. There is an increase in the return on equity in Qantas Group from 2010 to2011, which is 2.88% to 4.66%. On the other hand, this figure decrease significantly from 1.93% to -4.28% in Virgin Group. It means virgin failed in management. It cannot use leverage to improve investment return on company s equity. Therefore, compared with virgin Group, Qantas did much better in this aspect. 2.2 Operating Efficiency Operating efficiency is the ability of the company to mange its asset and maximizes its return on sales as possible. There are three operating efficiency ratio including inventory turnover, accounts receivable turnover and accounts payable turnover. As can been seen from the table the inventory turnover for Virgin Australia Limited is 0 days and 0.57 days in 2010 and This figure of Qantas limited is 8.45 days and 9.12 days. Virgin had very high inventory turnover, which may indicate efficient management, however, it may also means insufficient inventory levels, causing risk stock outs, lost sales and customer relationship. Qantas has relatively higher ratio may indicate that inventory levels were high in relation to sales, which may indicated poor inventory management and there may be obsolete stock that is more difficult to sell. The debtors turnover for these two company in 2010 and 2011 was days to days and days and days respectively. Comparing to normal credit period allocated for debtors, which is 30 days. The ratio of two companies is within the reasonable range. Virgin used 39.7 days and 44.2 days to pay their debts and in this aspect it takes 46.4 days and 42.6 days for Qantas. This figure for both companies was exceed 6

7 the normal credit terms allocated for creditor, which is 30 days. Debtors turnover measures a company whether can afford its debts as soon as possible. Using long time to pay its debts could lead to miss the discounts for early payment and impact the reputation of the company in paying the debts, which may lead to difficulty in gaining credit from suppliers and financial instrument. 2.3 Financial Stability Financial stability measures whether a company can pay its debts as soon as possible and accept the level of risk arising from its financial structure. It consists of short-term liquidity and long-term solvency. As can been seen from the table, Qantas and Virgin Australia both had low current ratio which was 0.88% to 0.85% and 0.76% to 0.64% from 2010 to If inventory turn over more rapidly than the account payable becomes due, therefore the current ratio will be less than one. Company can borrow to meet current debts with their long-term prospects. According to bizstats (2009), the industry average ratio is 1.54%, which is far beyond the figure of both companies. Indicating liquidity problem that companies have difficulty to meet current obligation. The quick ratio of Qantas was 0.88% and 0.85% in 2010 and 2011 and that of Virgin was 0.76% and 0.64%. In fact, the industry average was 1.19%. Both companies were lower than the industry average, which indicated the liquidity problem. The debt assets ratio of Virgin was 75.90% and 75.89% in 2010 and This figure of Qantas was 69.93% and 70.50%. In addition, the debt equity ratio was % and % for Virgin and 95.60% and 98.05% for Qantas. The higher of these ratios indicated company could be difficult to borrow further fund and higher interest charges and higher loan condition. As the leverage increased, the risk increased. Qantas was less risk than Virgin. However Virgin was more beneficial as the additional income that arises from additional fund. 7

8 The times interest earned of Virgin were 1.55 times and times from 2010 to The ratio of Qantas was 4.16 times and 3.96 times. Qantas perform better in this ratio that indicated Virgin had high leverage level, then incurring high interest level. Thus, Virgin had difficulty to meet the interest payment from current profit. 8

9 3.0 Additional Information Financial Ratios are good tool for analysis of a company, but it is has its limitations. The financial ratios, if used as a standalone measure, can mislead the investors. It is always advisable to use additional information and combine it with ratios to make a judgment on the performance of a company. We will use the additional information on the future plans of both the companies and the industry dynamics at current situation to further analyze the companies. (Cowen and Hoffer, 1982) Apart from the ratios that we have analyzed above, if we look at the industry competition and future plans and strategies of both the airlines, one thing is quite clear that they are both planning to expand their operations. The players in the Australian Aviation industry are experiencing tough competition at this point of time (IBISWorld, 2011). In this situation, both, Virgin and Qantas are planning to expand their operations (Reuters, 2011c). Keeping the demand constant (or even with normal growth in demand), the supply will increase with the expansion plans making it difficult to make profits for both the companies out of expanded capacity. In this condition, Qantas may win the battle of expansion as they seem to have more financial power and operations efficiency as we have analyzed in the above part. Qantas is ahead of virgin in terms of Capability and Capacity both. In terms of Capacity, Qantas have better (way better) long term liquidity ratios than Virgin and also their capacity to pay interest is strong with strong times interest earned measure. In terms of Capability, Qantas have better operational efficiency combined with higher profit margins than Virgin. From this analysis, we can say that Qantas are well placed to expand their operations and may easily win the battle against Virgin on the expansion plans. On the strategic front also, it seems that Qantas is having edge over Virgin. Virgin is planning to enter into business class market by way of price competition as reported by Virgin top management (Reuters, 2011a). At this stage of the 9

10 industry rivalry, if the Qantas management is trying to win the battle by way of price competition, then it most probably will face even further losses. If we look at the profit margins of both the companies, it is Qantas which is well placed to have the strategy of price competition and not Virgin. So, it will not be surprising if Virgin faces even more trouble by this strategy. The future will be even brighter for Qantas with the help of wrong strategic move of Virgin (Reuters, 2011b). 10

11 4.0 Limitation Firstly, this report adopts financial ratio analysis to analyze and forecast the further business performance of Qantas Airways Ltd and Virgin Australia Holdings Ltd. The data used to calculate the financial ratio is from 2010 to The research is made by using the financial data based on past event, while the target of the research is to investigate the future investment value of the company. As the result, the conclusion of this report is certain restriction for predictive power on the stock price. Furthermore, the time period may not be typical. For example, if a company pays short-term liability before the end of the year, so that they appear in a better financial position (Cowen and Hoffer, 1982). Secondly, this report mainly using the information base for the analysis. The information from the ratios analysis may lack disclosure and specific detail in published financial reports. In addition, results from the analysis could be distorted by deliberate manipulation of data. Besides that, variation in valuation methods will let the company miss the right valuation. Furthermore, using historical cost accounting information may influence the business (Laurent, 1979). Finally, the analysis uses information from the past. This information cannot be used to evaluate the company in the future. Then, there is no standard for evaluating these figures, whereas the ratios analysis may not be accurate. Ratio relate to past information, which may not be appropriate indicator of the future, such as factors which cause the future to change may invalidate ratio analysis. 11

12 5.0 Recommendation On the financial data, Qantas performed a stable growth in their profitability with net profit margin, the turn on asset and the return on asset slightly increasing. On the other hand, in Virgin Ltd the profitability decreased significantly in Although the revenue and sale increased compared to 2010, Virgin suffered net profit loss, which was 67.8 million dollar with the record of fuel cost and expansion structure in The high debt asset ratio and debt equity ratio of Virgin shows their high level of leverage and high charges of interest. The times interest earned of Virgin remained low from 1.55 times in 2010 to times in 2011 indicating their problem in paying interest with current profit. However, in the aspect of operation efficiency, Virgin did better with short time period of inventory turnover and account receivable turnover. Besides, the managers put effort to identify and eliminate the waste, which could result in a further reduction in cost of operation cost. Also the improvement of service, such like their strategy of reposition and expansion of network would gain the competitiveness and attract customers. The current ratio and quick ratio of the two companies was all under the industry average, which indicated that both companies had high level of leverage did not hold sufficient cash flow to overcome the uncertain economic environment and high fuel price. Besides, these two companies in common did not announce final dividend for shareholders. Based on the analysis above, the recommendation is to invest share to Qantas Airways Ltd between theses two companies. 12

13 6.0 List of Reference Cowen, S.S. and Hoffer, J.A. 1982, Usefulness of financial ratios in a single industry, Journal of Business Research, Vol. 10 No. 1, pp IBISWorld, 2011, Australian Airline Industry: High fuel prices and strong competition keep profit grounded, IBISWorld, retrieved 25 August 2012, < Laurent, C.R. 1979, Improving the efficiency and effectiveness of financial ratio analysis, Journal of Business Finance and Accounting, Vol. 6, No. 3, pp Reuters, 2011a, Virgin Australia beefs up business class, Reuters, retrieved 25 August 2012, < ws&rpc=43> Reuters, 2011b, Virgin Australia to offer business fares at 30% less, Reuters, retrieved 25 August 2012, < &rpc=43> Reuters, 2011c, Virgin Australia says Qantas grounding gave opportunity, Reuters, retrieved 25 August 2012, < &rpc=43> 13