Financial Analysis Of Qantas Ltd And Competitor: An Essay.

Ccomplete a written assignment related to the below tasks.

• Download the 2017 annual report for Qantas Airways Limited. You will use this annual report to understand the overall performance of this business
• Refer to other relevant sources such as the company website/media/news announcements, and gather further supporting evidence to gain an overall understanding of the company and micro and macroeconomic factors that impact performance

• Research the industry characteristics of the market that the corporation operates within for both the current year and the prior year

• Perform a ratio analysis of two financial periods (current year and prior year) for the entity
• Perform a ratio analysis of two financial periods (current year and prior year) for a key competitor within the same industry. (The competitor you are to select is Air New Zealand)

1. Industry and financial statement characteristics

• Major elements of the balance sheet focusing on items of interest in your company’s industry

1. Any accounts of particular interest in the balance sheet and whether they are affected by special events occurring in the comparative financial period
2. Major elements of the income statement focusing on items of interest in your company’s industry
3. Any accounts of particular interest in the income statement and whether they are affected by special events occurring in the comparative financial period

• Complete a ratio analysis of the company (current year and prior year), and of the competitor (current year and prior year)
  1. Gross profit margin ratio
  2. Profit margin ratio
  3. Current ratio
  4. Quick ratio
  5. Return on total assets ratio
  6. Accounts receivable turnover ratio
  7. Debt ratio ratio
  8. Earnings per share ratio
• Analyse and discuss the above ratios. (Use trend analysis to support your discussion).

1. Summarise the overall performance of the company and whether you would recommend an investment in the chosen company over their main competitor

Overview of Assessment Tasks

The main purpose of this assessment is to analyze the financial report of Qantas ltd for the year 2017. The analysis would be conducted considering the results which are obtained from computation of key financial ratios of the business. The results of the business of Qantas ltd is to be compared with the results which is computed with one of the competitors of Qantas ltd. The analysis of the financial statements would also be helpful in deciding which business has better performance in order to make investment decisions. The report also shows computations relating to significant financial ratios of both Qantas ltd and Air New Zealand on the basis of which the analysis is to be conducted.

The business of Qantas ltd is regarded as one of the largest fleet carrying airlines in Australia and has the maximum business in the country. The name of Qantas ltd comes from an acronym which is "Queensland and Northern Territory Aerial Services" The airline operates in Australia and also has operations through various acquired airlines and the business can offer lower cost to the customers by such subsidiary airlines (Rosenstein 2013). A market estimate shows that the business of Qantas ltd accounts for 65% of domestic travels in the country and also around 15% of foreign travel in Australia (Investors | Qantas.2018). This shows that the business of Qantas has acquired maximum market shares in airline industry. The airline also covers destination points of 85 points around the world and also has a flight strength of 127 fleets.

The airline industry in Australia is a fast moving and productive industry wherein most of the airlines are undergoing expansion. The industry is also favorable as the number of domestic travel as well as foreign travel in the country is increasing due to the effect of tourism (Williams 2017). The management of Qantas ltd is also undergoing an expansion phase and the annual report for the year 2017 specifies that the management of the company aims to attain sustainable development which would help in efficient utilization of fuel and expand the business operation in Asia. The financial statement of the business is prepared as per the conceptual framework which is followed by most of the businesses in the preparation of the financial statement of the business (David 2013). The financial statement of the business comprises of Income statement, Balance Sheet and Cash flow statement as shown in the annual report of the company for 2017.

Background of Qantas Ltd

The components which are covered in the balance sheet of the business for the year shows items under the head current assets, non-current assets, current liabilities and non-current liabilities of the business. The balance sheet also shows the equity capital balance which is utilized by the business to meet and carry out the operations of the business. The current assets of the business are shown to have slightly fallen in comparison to previous year which also signifies that there is a fall in the liquidity of the business (Morrell 2013). The balance sheet also displays non-current assets such as property, plant and equipment, intangible assets and other assets of the business. The assets also include the air fleets which are under the ownership of the business and also the related inventories of the same which includes spare parts, tires and other tools. The liabilities of the business mainly comprise of interest bearing liabilities and payables of the business. The equity area which is shown in the balance sheet of the business shows retained earnings, equity share capital and reserves of the business.

The balance sheet shows deferred tax items which related to tax which is due from previous years or which arises due to temporary differences. The amount of deferred tax items which are shown in the financial statements are of significant amount and therefore they are capable of affecting the financial statements of the business (Atieh 2014). Therefore, the items must be treated by the management of the company effectively and also according to accounting regulations.

The income statement which is prepared by the business shows all the revenue and expenses which is generated by the company during the period. The income statement is prepared by the business to ascertain the profit which is made during the year. The income statement of Qantas ltd for the year 2017 shows that the main source of revenue for the business is through net passenger revenues and revenue which is generated from freight services. The major expenses which is incurred by the business is through fuel, machinery parts, manpower maintenance. After deducting such expenses, the profit which is generated by the business is computed and the same is shown to be $ 853 million which has significantly fallen in comparison to previous year’s estimate which is shown to be $ 1029 million. The decrease in the profitability of the business in comparison to previous year’s estimates can be attributed to the high costs which are incurred by the business during the period and also low sales which is achieved by the company in current year.

Airline Industry in Australia

The significant item which is shown in the income statement is the operating lease expenses for an aircraft which signifies the payment which is made in respect of leases taken by the management of Qantas ltd. The amount forms a significant part of the expenses of the business and therefore can directly affect the profitability of the business.

		Qantas		Air Newzealand
Particulars		2017	2016	2017	2016
Total Revenue	A	16057	16200	5109	5231
Net Profit	B	853	1029	382	463
Total Current Assets	C	3119	3458	1887	2339
Total Current Liabilities	D	7095	7028	2405	2471
Inventories	E	351	336	86	103
Total Assets	F	17221	16705	7171	7251
Receivables	G	784	795	386	373
Total Liabilities	H	13681	13445	5185	5143
Weighted Average Nos. of Shares	I	1853	2083	1123	1122
Profit Margin	J=B/A	5.31%	6.35%	7.48%	8.85%
Current Ratio	K=C/D	0.44	0.49	0.78	0.95
Quick Ratio	L=(C-E)/D	0.39	0.44	0.75	0.90
Return on Total Assets	M=B/F	4.95%	6.16%	5.33%	6.39%
Average Receivable Turnover	N=A/G	20.48	20.38	13.24	14.02
Debt Ratio	O=H/F	0.79	0.80	0.72	0.71
Earnings per share	P=B/I	$ 0.46	$ 0.49	$ 0.34	$ 0.41

As per the image which is shown above, key financial ratios of Qantas ltd and Air New Zealand is shown which can be used for the analysis of profitability, liquidity and solvency of both the companies. The ratio analysis is shown for a period of two years which is 2017and 2016. The above table shows the ratios which are computed for both the companies in order to make comparative study of these companies much easier in such a way. The profitability ratios of Qantas ltd shows a fall in the profits of the business and the estimate is shown to be 5.31% in 2017 while the same was 6.35 in 2016. The profitability ratio of Air New Zealand is shown to be better than Qantas ltd and the estimate for the year 2017 is shown to be 7.48%. However, it is to be noted that the profitability has slightly fallen (Konchitchki and Patatoukas 2013). The fall in the profitability might be due to increase in the costs of the business or fall in the sales of the airlines.

The current ratio and quick ratio of both the companies which is computed in the above table shows the ability of both the companies to meet the current obligations of the business effectively and therefore is mainly concerned with the capacity of the business to effectively maintain cash resources in the business (Carraher and Van Auken 2013). The current ratio estimates for Qantas ltd for the year 2018 is shown to be 0.44 while the same is shown to be 0.78 for Air New Zealand for the same year. The quick ratio of both the companies is also depicting the same results. It is to be noted that the liquidity estimates for both the companies have fallen in the current year in comparison to previous year (Delen, Kuzey and Uyar 2013). This suggest that the management of both the companies need to improve their liquidity position effectively in order to support the operational activities of the business.

The return on total asset is considered to be one of the financial indicators for overall success of a business and the estimate is shown to be better for Air New Zealand in comparison to Qantas ltd for the year 2017. This shows that the business of Air New Zealand has a better control and management system which effectively maintains the profitability of the business and also meet the expectations of the shareholders of the company. The average receivable turnover ratio portrays the level of efficiency in a business and the estimates which are computed shows that the business of Qantas has a more efficient framework in inventory management and the estimate is shown to be 20.48 for the year 2017and the same shows that the efficiency level in the business has increased. On the other hand, the average receivable turnover estimate which is computed for Air New Zealand is shown to be 13.24 for the year 2017 while the estimate calculated for 2016 is shown to be more which suggest that the efficiency level of the business has fallen slightly.

Financial Statements of Qantas Ltd

The debt ratio of the business forms a part of capital structure ratios and the same is shown to have decreased for Qantas ltd for the year 2017 while on the other hand the ratio is shown to have increased for Air New Zealand. This shows that the business of Qantas ltd is not much dependent on loans for the purpose of financing the projects of the business. The comparison also reveals that the business of Air New Zealand is slightly dependent on debt financing and therefore the level of debts which is used by the business has increased during the period. High level of debts also signifies that the risks of the business would also be higher. The earning per share for both the companies is shown to have fallen which can be due to the fall in the profitability of the business and therefore the profit available to equity shareholders have fallen.

Conclusion

Thus, from the discussion which is shown above, the business of Air New Zealand is shown to be more attractive in terms of profitability and liquidity position from an investor point of view. It is therefore suggested to the management of Qantas ltd that the profitability and liquidity of the business needs to be improved. The profitability of the business can be improved by making improvements in sales of the business and also reducing the costs of the business effectively. On the other hand, the liquidity of the business can be improved by improving the cash flows of the business and also by improving the capital structure of the company.

References

Atieh, S.H., 2014. Liquidity Analysis Using Cash Flow Ratios as Compared to Traditional Ratios in the Pharmaceutical Sector in Jordan. International journal of Financial research, 5(3), p.146.

Carraher, S. and Van Auken, H., 2013. The use of financial statements for decision making by small firms. Journal of Small Business & Entrepreneurship, 26(3), pp.323-336.

David Mc A, B., 2013. Service quality and customer satisfaction in the airline industry: A comparison between legacy airlines and low-cost airlines. American Journal of Tourism Research, 2(1), pp.67-77.

Delen, D., Kuzey, C. and Uyar, A., 2013. Measuring firm performance using financial ratios: A decision tree approach. Expert Systems with Applications, 40(10), pp.3970-3983.

Investors | Qantas. (2018). Qantas.com. Retrieved 31 October 2018, from https://www.qantas.com/travel/airlines/investors/global/en

Konchitchki, Y. and Patatoukas, P.N., 2013. Taking the pulse of the real economy using financial statement analysis: Implications for macro forecasting and stock valuation. The Accounting Review, 89(2), pp.669-694.

Morrell, P.S., 2013. Airline finance. Ashgate Publishing, Ltd..

Rosenstein, D.E., 2013. The changing low-cost airline model: An analysis of spirit airlines.

Williams, G., 2017. The airline industry and the impact of deregulation. Routledge.