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Wriete a Report on the evaluation of business performance of either Virgin Australia or Qantas.2015-17
EXECUTIVE SUMMARY
This report has prepared on the basis of general financial analysis compared to the financial year ended 2015 to 2017 for Virgin Australia and Qantas Airways Ltd. The Different financial ratios are thus analyzed and for the last three years it has been seen that Virgin Australia has performed better than any other competitors in aviation industry.
INTRODUCTION
It is very important to analyze the financial health as well as other financial analysis for any company. Virgin Australia and Qantas are considered as the best aviation companies in Australia and from the last decade it has performed well in their aviation business. Although there are some major issues in financial sector, Virgin and Qantas are both now in the way of becoming the leading position in aviation industry in Australia. This study focusses on different financial ratio analysis as well as the horizontal and also the vertical analysis for Virgin Australia as well as the Qantas from the year 2015 to 2017.
PROFITABILITY
This Profitability ratio includes Gross Profit Ratio, Operational profit Ratio, Net Profit Ratio, Return on Shareholder funds, Return on Capital Employed for Virgin Australia.
Those are calculated and analyzed as follows:
The gross profit is calculated as the amount of revenue which the company would bring prior by subtracting the expenses attached with revenue. The gross profit has found to be reported on the classified income statement.
Now,
So, the Gross profit for the year 2015= 4723-4204 AUD million = 519 AUD million
The gross profit for the year 2016= 5004-4263 AUD million= 741 AUD million
The Gross profit for the year 2017= 5044- 4504 AUD million= 540 AUD million
On the other hand, the gross profit margin is:
So, the gross profit for the year 2015= (-163.3)/ 4723= -0.035 or 3% loss
The gross profit for the year 2016 = 102.9/5004= 0.0206 or 2% profit
The gross profit for the year 2017 = 97.9/5044 = 0.019 or 2% profit
Operating Profit Ratio:
This ratio is utilized to check management’s financial capability for running a business.
This formula is:
So, Operating profit ratio for the year 2015 = -93.8/4723 = -0.01986 or 2% loss (Virgin Australia Group, 2015)
Operating profit ratio for the year 2016 = -224.7/5004 = -0.0449 or 5% loss (Virgin australia Group, 2016)
Operating profit ratio for the year 2017= -185.8/5044= -0.03684 or 4% loss (Virgin Australia Group, 2017)
Return on shareholders’ investment ratio
This ratio measures the overall profitability for the organization as well as it is calculated by dividing the overall net income after the interest and tax by the average stockholders’ equity. For that reason, it is called as the return on total equity or ROTE ratio and also return on the net worth ratio. The formula is as follows:
Shareholders’ investment ratio for the year 2015= -111/1077 = -0.10306 or -10.3% (Virgin Australia Group, 2015)
Shareholders’ investment ratio for the year 2016 = -261/912 = -0.28618 or -28.62% (Virgin australia Group, 2016)
Shareholders’ investment ratio for the year 2017= -220/1568= -0.14031 or -14.03% (Virgin Australia Group, 2017)
The return on total equity or (ROE) is thus used for measuring the overall profitability of the organization from the preferences along with the common stakeholders’ aspect. This ratio, on the other and, also indicates the efficiency for the management for using the resources for the business (Vogel, 2014).
For Virgin, it can be seen that ROE has the negative percentage indicates the loss for the company and it has observed greater loss in 2016 other than 2015 or 2017. In 2017, it has less loss which indicates, virgin somehow manage to attract some more investors to achieve less loss or profit.
Return on Capital Employed (ROCE)
This ratio is utilized to measure the proportion for the adjusted earnings where the amount of the capital as well as debt has needed for the organization for its functionality. When the firm is willing to expand the business for long time, there should be a high value of capital employed which is higher than the cost of capital or the operations is thus gradually has reduced the earnings which is available to the stakeholders. It is thus commonly used for the comparing the efficiency for the capital usage for the businesses within the same industry.
ROCE is considered as the better measurement than the return on equity as in case of ROCE it can be better understand how well the company has used both kinds of equity as well as debt for generating the return.
So, for Virgin Australia,
The ROCE for 2015 = 0
The ROCE for 2016 = 224 / (188-2780) = -0.08642 or 8.6 % less
The ROCE for 2017 = 136 / (218-2348) = -0.06385 or 6.4 % less
From the above result, it can be interpreted that, Virgin Australia is now a new company and it has to long way to go, where there will be higher percentage in ROCE. As there is less fixed assets, it indicates there is accelerated depreciation and it is curved to have the depreciation to the straight line.
From the above table, it is cleared that the overall gross profit margin is increasing and thus there is more return is expected for the investments.
Those are calculated and analyzed as follows:
The gross profit is calculated as the amount of revenue which the company would bring prior by subtracting the expenses attached with revenue. The gross profit has found to be reported on the classified income statement.
Now,
So, the Gross profit for the year 2015= 4723-4204 AUD million = 519 AUD million
The gross profit for the year 2016= 5004-4263 AUD million= 741 AUD million
The Gross profit for the year 2017= 5044- 4504 AUD million= 540 AUD million
On the other hand, the gross profit margin is:
So, the gross profit for the year 2015= (-163.3)/ 4723= -0.035 or 3% loss
The gross profit for the year 2016 = 102.9/5004= 0.0206 or 2% profit
The gross profit for the year 2017 = 97.9/5044 = 0.019 or 2% profit
Operating Profit Ratio:
This ratio is utilized to check management’s financial capability for running a business.
This formula is:
So, Operating profit ratio for the year 2015 = -93.8/4723 = -0.01986 or 2% loss (Virgin Australia Group, 2015)
Operating profit ratio for the year 2016 = -224.7/5004 = -0.0449 or 5% loss (Virgin australia Group, 2016)
Operating profit ratio for the year 2017= -185.8/5044= -0.03684 or 4% loss (Virgin Australia Group, 2017)
Return on shareholders’ investment ratio
This ratio measures the overall profitability for the organization as well as it is calculated by dividing the overall net income after the interest and tax by the average stockholders’ equity. For that reason, it is called as the return on total equity or ROTE ratio and also return on the net worth ratio. The formula is as follows:
Shareholders’ investment ratio for the year 2015= -111/1077 = -0.10306 or -10.3% (Virgin Australia Group, 2015)
Shareholders’ investment ratio for the year 2016 = -261/912 = -0.28618 or -28.62% (Virgin australia Group, 2016)
Shareholders’ investment ratio for the year 2017= -220/1568= -0.14031 or -14.03% (Virgin Australia Group, 2017)
The return on total equity or (ROE) is thus used for measuring the overall profitability of the organization from the preferences along with the common stakeholders’ aspect. This ratio, on the other and, also indicates the efficiency for the management for using the resources for the business (Vogel, 2014).
For Virgin, it can be seen that ROE has the negative percentage indicates the loss for the company and it has observed greater loss in 2016 other than 2015 or 2017. In 2017, it has less loss which indicates, virgin somehow manage to attract some more investors to achieve less loss or profit.
Return on Capital Employed (ROCE)
This ratio is utilized to measure the proportion for the adjusted earnings where the amount of the capital as well as debt has needed for the organization for its functionality. When the firm is willing to expand the business for long time, there should be a high value of capital employed which is higher than the cost of capital or the operations is thus gradually has reduced the earnings which is available to the stakeholders. It is thus commonly used for the comparing the efficiency for the capital usage for the businesses within the same industry.
ROCE is considered as the better measurement than the return on equity as in case of ROCE it can be better understand how well the company has used both kinds of equity as well as debt for generating the return.
So, for Virgin Australia,
The ROCE for 2015 = 0
The ROCE for 2016 = 224 / (188-2780) = -0.08642 or 8.6 % less
The ROCE for 2017 = 136 / (218-2348) = -0.06385 or 6.4 % less
From the above result, it can be interpreted that, Virgin Australia is now a new company and it has to long way to go, where there will be higher percentage in ROCE. As there is less fixed assets, it indicates there is accelerated depreciation and it is curved to have the depreciation to the straight line.
From the above table, it is cleared that the overall gross profit margin is increasing and thus there is more return is expected for the investments.
EFFICIENCY
Efficiency ratio is generally used to measure the ability of the organization whether it can use its assets or the liabilities in effective way or not. There are some efficiency ratios which include the inventory turnover or stock turnover ratio, Account payable turnover ratio or creditor turnover ratio, Total asset turnover ratio as well as the receivables turnover ratio or Debtor turnover ratio. Thus, by calculating these ratios it can be understood that how efficiently the organization can use their assets for generating the target revenue and also whether they have the right ability to manage the assets (Chu, Vanderghem, MacLean, & Saville, 2017).
For, Virgin Australia, the receivable turnover ratio and the total asset turnover ratio are applicable and those are calculated as follows:
Receivable or Debtor Turnover Ratio:
This ratio is used for measuring to check the effectiveness of the organization with the extending credit as well as in collections of debts for that credit. The receivable turnover ratio is thus considered as the activity ratio which measures how effectively and efficiently the firm can utilize the assets.
This ratio is obtained from the net value, dividing it with the credit sales in the period by the average accounts receivable for that period only. This average accounts receivable is calculated through the process of addition with the value of the accounts receivable at the prior period to the end of the period of the value and dividing the total by two (Khan, Rahman, Jan, & Khan, 2017).
The formula is given as,
So, for Virgin Australia,
Accounts Receivable or Debtor turnover Ratio for the year 2015= 174/ 4723 = 27.14
Accounts Receivable or Debtor turnover Ratio for the year 2016= 173/ 5004= 28.92
Accounts Receivable or Debtor turnover Ratio for the year 2017= 171/5044= 29.49
The high value of receivable turnover ratio is thus implying with the variety of the things within the company. From the above result, it can be concluded that the company, Virgin Australia operates on the basis of cash only. It is thus indicating the collection of accounts receivable of Virgin Australia is moderately strong or weak and they will pay off their debts at the end of the financial year. This low ratio is thus suggested that Virgin Australia would have the poor collecting processes and there is a bad credit policy. It also indicates that the company can have better credit policies which in turn will help the bottom line of the organization (Pereira Antunes, da Costa, & de Almeida, 2017).
Total asset turnover ratio
This ratio is kind of efficiency ratio which uses to know the ability of the firm for generating sales from the assets through the comparison the net sales with average total assets. Thereby, this ratio is thus calculated as the net sale percentage of the assets which indicates the number of sales are generated per dollar of the company assets (Baruch & Gregoriou, 2017).
Thus, the formula is:
So, for Virgin Australia,
The asset turnover ratio for the year 2015= 4723 / 6224= 0.758
The asset turnover ratio for the year 2016= 5004/ 6475= 0.772
The asset turnover ratio for the year 2017= 5044/ 6819= 0.74
The asset turnover ratio thus measures that how efficiently the firm has used the assets for generating the sales which will have higher ratio with more favorable way. There is the lower turnover ratio and this indicates that the company does not use the assets efficiently. It also indicates that the investors as well as the creditors will have the idea by which the company will manage their assets for producing the products as well as sales (Maina & Sakwa, 2017).
For, Virgin Australia, the receivable turnover ratio and the total asset turnover ratio are applicable and those are calculated as follows:
Receivable or Debtor Turnover Ratio:
This ratio is used for measuring to check the effectiveness of the organization with the extending credit as well as in collections of debts for that credit. The receivable turnover ratio is thus considered as the activity ratio which measures how effectively and efficiently the firm can utilize the assets.
This ratio is obtained from the net value, dividing it with the credit sales in the period by the average accounts receivable for that period only. This average accounts receivable is calculated through the process of addition with the value of the accounts receivable at the prior period to the end of the period of the value and dividing the total by two (Khan, Rahman, Jan, & Khan, 2017).
The formula is given as,
So, for Virgin Australia,
Accounts Receivable or Debtor turnover Ratio for the year 2015= 174/ 4723 = 27.14
Accounts Receivable or Debtor turnover Ratio for the year 2016= 173/ 5004= 28.92
Accounts Receivable or Debtor turnover Ratio for the year 2017= 171/5044= 29.49
The high value of receivable turnover ratio is thus implying with the variety of the things within the company. From the above result, it can be concluded that the company, Virgin Australia operates on the basis of cash only. It is thus indicating the collection of accounts receivable of Virgin Australia is moderately strong or weak and they will pay off their debts at the end of the financial year. This low ratio is thus suggested that Virgin Australia would have the poor collecting processes and there is a bad credit policy. It also indicates that the company can have better credit policies which in turn will help the bottom line of the organization (Pereira Antunes, da Costa, & de Almeida, 2017).
Total asset turnover ratio
This ratio is kind of efficiency ratio which uses to know the ability of the firm for generating sales from the assets through the comparison the net sales with average total assets. Thereby, this ratio is thus calculated as the net sale percentage of the assets which indicates the number of sales are generated per dollar of the company assets (Baruch & Gregoriou, 2017).
Thus, the formula is:
So, for Virgin Australia,
The asset turnover ratio for the year 2015= 4723 / 6224= 0.758
The asset turnover ratio for the year 2016= 5004/ 6475= 0.772
The asset turnover ratio for the year 2017= 5044/ 6819= 0.74
The asset turnover ratio thus measures that how efficiently the firm has used the assets for generating the sales which will have higher ratio with more favorable way. There is the lower turnover ratio and this indicates that the company does not use the assets efficiently. It also indicates that the investors as well as the creditors will have the idea by which the company will manage their assets for producing the products as well as sales (Maina & Sakwa, 2017).
From the above efficiency ratio it has been cleared that Qantas has the better debtor turnover ratio for which it can expected that more number of stakeholders will interest for investing (Qantas Annual Report, 2016).
LIQUIDITY
This ratio has performed for measuring the ability of the company for paying the debt obligations with the margin of safety by calculating the metrics, like current ratio, quick ratio or operating cash flow ratio. The current liabilities is thus analyzed with relation to the liquid assets for evaluating the coverage for the short term debts as the emergency, The Bankruptcy analysts as well as the mortgage originators has thus utilized the liquidity ratios for evaluating the concerned issues as the liquidity measurement ratios which indicates the cash flow positioning.
These ratios are very significant as they are utilized for the comparative study. The analysis is thus performed internally as well as externally. With the internal analysis the liquidity ratios has involved for utilizing the multiple financial periods which are thus reported through same methods of accounting. By comparing the prior time periods with the current operations, this ratio also allows the analysts for tracking the changes in business. In general, the higher liquidity ratio also indicates that the company is more liquid and that has better coverage with outstanding debts (Chu, Vanderghem, MacLean, & Saville, 2017).
Current Ratio
It is utilized to measure the capability of the organization by paying the short term as well as long term obligations. The ratio thus considered has the current assets in the liquid as well as illiquid forms and that is relative with the current liabilities of the company.
So,
Thereby,
The current ratio for Virgin Australia in the year 2015= 1586/2300= 0.689
The current ratio for Virgin Australia in the year 2016= 1714/2780= 0.62
The current ratio for Virgin Australia in the year 2017= 1788/2348= 0.76
From the above result it has been concluded that the ratio is under 1 and this indicates that the liabilities of the company is not greater than that of assets and which suggests that the company is found to unable in paying off the obligations when they has come due this point. It also indicates that the financial health for Virgin Australia is not good and but it may not go for bankruptcy (Titman, Keown, & Martin, 2017).
Quick Ratio or Acid Test Ratio
This ratio is capable of measuring the financial capability of the organization for paying its current liabilities while they are considering with the quick assets. Thus, the quick assets are also the type of current assets which is allowed to converts into cash within 90 days or in case of short term. The cash, cash equivalents, the short –term investments as well as the marketable securities along with the current accounts receivable have considered as the quick assets.
In case of short term investments or the marketable securities has included the trading securities as well as the available for the sale securities which thus can be easily converted in the cash within next 90 days. The marketable securities have been traded with the open market as the known price as well as with available buyers (Rai & Kumar, 2018).
This ratio is sometimes called acid test ratio for the historical usage of acid for the test metals like gold in early miners. When the metal is passed in the acid test it is considered as the pure gold. When the metal fails the test by corroding the acid it is considered as the base metal and it has no value. This test in turn shows the ability of the company for converting the assets into cash in case to pay the order for the current liabilities and this also indicates the level of quick assets with the current liabilities.
The formula is:
So, the quick ratio for Virgin Australia, 2015= 1339/2300 = 0.58
The quick ratio for Virgin Australia, 2016= 1412/2780 =0.51
The quick ratio for Virgin Australia, 2017= 1643/2348= 0.699
The acid test ratio is basically used for measuring the liquidity of the company and that shows the ability for paying off the current liabilities with quick assets. Virgin Australia has moderate quick asset which cannot cover the current liabilities, but somehow manage the extra debts. The favorable for a firm is 1 as it indicates that the quick assets are same and can cover the current assets (Dimitropoulos, Vrondou, & Avgerinou, 2018).
These ratios are very significant as they are utilized for the comparative study. The analysis is thus performed internally as well as externally. With the internal analysis the liquidity ratios has involved for utilizing the multiple financial periods which are thus reported through same methods of accounting. By comparing the prior time periods with the current operations, this ratio also allows the analysts for tracking the changes in business. In general, the higher liquidity ratio also indicates that the company is more liquid and that has better coverage with outstanding debts (Chu, Vanderghem, MacLean, & Saville, 2017).
Current Ratio
It is utilized to measure the capability of the organization by paying the short term as well as long term obligations. The ratio thus considered has the current assets in the liquid as well as illiquid forms and that is relative with the current liabilities of the company.
So,
Thereby,
The current ratio for Virgin Australia in the year 2015= 1586/2300= 0.689
The current ratio for Virgin Australia in the year 2016= 1714/2780= 0.62
The current ratio for Virgin Australia in the year 2017= 1788/2348= 0.76
From the above result it has been concluded that the ratio is under 1 and this indicates that the liabilities of the company is not greater than that of assets and which suggests that the company is found to unable in paying off the obligations when they has come due this point. It also indicates that the financial health for Virgin Australia is not good and but it may not go for bankruptcy (Titman, Keown, & Martin, 2017).
Quick Ratio or Acid Test Ratio
This ratio is capable of measuring the financial capability of the organization for paying its current liabilities while they are considering with the quick assets. Thus, the quick assets are also the type of current assets which is allowed to converts into cash within 90 days or in case of short term. The cash, cash equivalents, the short –term investments as well as the marketable securities along with the current accounts receivable have considered as the quick assets.
In case of short term investments or the marketable securities has included the trading securities as well as the available for the sale securities which thus can be easily converted in the cash within next 90 days. The marketable securities have been traded with the open market as the known price as well as with available buyers (Rai & Kumar, 2018).
This ratio is sometimes called acid test ratio for the historical usage of acid for the test metals like gold in early miners. When the metal is passed in the acid test it is considered as the pure gold. When the metal fails the test by corroding the acid it is considered as the base metal and it has no value. This test in turn shows the ability of the company for converting the assets into cash in case to pay the order for the current liabilities and this also indicates the level of quick assets with the current liabilities.
The formula is:
So, the quick ratio for Virgin Australia, 2015= 1339/2300 = 0.58
The quick ratio for Virgin Australia, 2016= 1412/2780 =0.51
The quick ratio for Virgin Australia, 2017= 1643/2348= 0.699
The acid test ratio is basically used for measuring the liquidity of the company and that shows the ability for paying off the current liabilities with quick assets. Virgin Australia has moderate quick asset which cannot cover the current liabilities, but somehow manage the extra debts. The favorable for a firm is 1 as it indicates that the quick assets are same and can cover the current assets (Dimitropoulos, Vrondou, & Avgerinou, 2018).
From the above results, it can be cleared that, Qantas moderate quick asset and thus it cannot be managed the extra debts in crisis situation (Qantas Annual Report, 2017).
GEARING
The gearing ratio is one type of financial ratios which is utilized to compare the organization’s debt relative with different financial metrics like total equity. The investors or the shareholders use this type of ratios for checking the company’s economic condition, whether it downturn or reverse. Mainly, gearing represents the leverage of the company and that means which business will have the funds from the creditors like (debt holders) or the company owners like stock holders.
The gearing ratios include the debt-to-equity ratio, the debt ratio, the times interest earned as well as the equity ratio (Smith, Betts, & Smith, 2018).
The analysis of gearing ratios has added the value to the financial planning of the company over a certain period of time. It is meaningless to calculate the gearing ratios for one time. Although there is the single ratio has results with some information regarding the financial structure of the company and that is benchmarked against the same ratio with different time period and with similar competitor.
Debt to equity ratio:
The formula is:
For, Virgin Australia,
The debt to equity ratio for the year 2015= 440/ 1021= 0.43
Debt to equity ratio for the year 2016= 876/ 899= 0.97
Debt to equity ratio for the year 2017=281/1574 = 0.18
From the above result it can be interpreted that, the debt to equity ratio is much lesser value for Virgin Australia and that indicates lesser the financial risk for the organization. Moreover, the financial leverage condition can be determined from the gearing ratio when it indicates a benchmark for the figure against another. Virgin Australia has average financial leverage as 0.6 and the competitor of it can have the debt ratio as 0.9 (Chen, Duan, & Zhang, 2018).
Equity Ratio
The equity ratio is the ratio of total equity dividing by the total asset.
For, Virgin Australia,
The equity ratio for the year 2015 = 1021/ 1586= 0.64
The equity ratio for the year 2016 = 899/ 1714= 0.524
The equity ratio for the year 2017 = 1574/ 1788= 0.88
So from the above data it can be concluded that there is an average proportion of equity has been used for financing the asset of the company. On the other hand, equity ratio is the good indicator for the financial leverage which is used by the organization. This ratio thus measures the proportion of the total assets which will be financed through the stockholders or with the opposition of the creditors. As Virgin Australia has low equity ratio, it is indicating that it will produce a good results for the stock holders as the company has earned the rate of return with the assets for which it will have the have the greater value than the interest rate which is paid through the creditors (Norman, 2018).
The gearing ratios include the debt-to-equity ratio, the debt ratio, the times interest earned as well as the equity ratio (Smith, Betts, & Smith, 2018).
The analysis of gearing ratios has added the value to the financial planning of the company over a certain period of time. It is meaningless to calculate the gearing ratios for one time. Although there is the single ratio has results with some information regarding the financial structure of the company and that is benchmarked against the same ratio with different time period and with similar competitor.
Debt to equity ratio:
The formula is:
For, Virgin Australia,
The debt to equity ratio for the year 2015= 440/ 1021= 0.43
Debt to equity ratio for the year 2016= 876/ 899= 0.97
Debt to equity ratio for the year 2017=281/1574 = 0.18
From the above result it can be interpreted that, the debt to equity ratio is much lesser value for Virgin Australia and that indicates lesser the financial risk for the organization. Moreover, the financial leverage condition can be determined from the gearing ratio when it indicates a benchmark for the figure against another. Virgin Australia has average financial leverage as 0.6 and the competitor of it can have the debt ratio as 0.9 (Chen, Duan, & Zhang, 2018).
Equity Ratio
The equity ratio is the ratio of total equity dividing by the total asset.
For, Virgin Australia,
The equity ratio for the year 2015 = 1021/ 1586= 0.64
The equity ratio for the year 2016 = 899/ 1714= 0.524
The equity ratio for the year 2017 = 1574/ 1788= 0.88
So from the above data it can be concluded that there is an average proportion of equity has been used for financing the asset of the company. On the other hand, equity ratio is the good indicator for the financial leverage which is used by the organization. This ratio thus measures the proportion of the total assets which will be financed through the stockholders or with the opposition of the creditors. As Virgin Australia has low equity ratio, it is indicating that it will produce a good results for the stock holders as the company has earned the rate of return with the assets for which it will have the have the greater value than the interest rate which is paid through the creditors (Norman, 2018).
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