Company Background and Operations: Qantas Airways Limited
Qantas Airways is a popular airlines company that is based in Australia and is known for operating domestic as well as international flights. It is one of Australia’s flag carriers and is the largest airline based companies in terms of fleet size. Originated in November of 1920, the company is the third oldest airline company worldwide. The company is presently headquartered in Mascot and is a public limited organisation which is listed on the Australian Stock Exchange. The company is also a constituent of the ASX 200 Component. The main scope of operations of the company include domestic & international travel, freight service provision, and flyer loyalty programs (Forbes, 2022). Qantas has four main operating segments which include the likes of Qantas Domestic, Jetstar Group, Qantas International and Qantas Loyalty. The first three operating segments are concerned with air transportation & cargo services while the fourth segment is concerned with recognition programs concerning customer loyalty (Reuters, 2022). With a total employment of 29,000 employees worldwide, the company tends to predominantly operate in Australia, New Zealand and Asia with some amount of presence in the United Kingdom and United States (Ibisworld.com, 2022).
The main purpose of this report is to analyse the financial performance of the company selected and discussed above using financial ratio analysis alongside making note of other relevant information that can assist a potential investor with the choice of investment decision making considering the present state of affairs.
The financial performance of Qantas over the previous three financial years through 2019-2021 have been analysed with the help of financial ratio analysis. The analytical tool is a quantitative method that extracts relevant financial information from the financial statements of an organisation and with the help of mathematical formulas calculates the end results which helps the stakeholders in gaining an insight into an entity’s position of profitability, efficiency, short-term solvency, long-term solvency and market prospects. All the relevant calculations have been solved in an accompanying excel spreadsheet that has also been provided in the appendices section of this report. The different types of financial ratios have been discussed as follows:
The profitability performance can be evaluated with the help of net profit margin, return on assets and return on equity. The net profit margin ratio is quite common among investors to analyse the ultimate bottom line profit position of an entity. The metric is evaluated as the margin of revenue that is left behind after meeting the total expenses that an entity has incurred for a particular financial period (Fridson and Alvarez 2022). The total expenses include direct expenses, indirect expenses and financial expenses. The metric is analysed to have deteriorated with each year from 4.68% in 2019 to -13.78% in 2020 to -29.12% in 2021. A negative ratio means that the company is loss making which has further increased in 2021 when compared to 2020. This is because of a significant decline in total revenue across all operating segments which is because of the Covid-19 pandemic which has affected the industry. The total declining revenue generated by the company has been graphically represented as follows:
Purpose of Report
(Source: Created by Author)
The company is not in a position to generate revenue to sustain its total expenses. Although the company’s expenses have reduced visibly from reading the income statement, a steep decline in revenue from $14,257 million to $5,934 million cannot cover the costs resulting in a net loss in 2021. Last year, the company’s total operating expenditure was quite high which drastically reduces in 2021 but still could not contribute to a positive margin owing to decline in revenue. The return on assets is another metric that evaluates the firm’s ability to utilize their resources for generating net income (Robinson 2020). The metric stands at a negative -9.81% and -9.66% in 2020 and 2021 which is because of the macro-economic condition resulting in the company not being able to efficiently make use of their total assets. Lastly, the return on equity is another metric which measures the net income which is returned back to the shareholders. The metric has significantly been affected from 28% in 2019 to -129% in 2020 to -335% in 2021 due to negative margins and a decline in total equity because of an increase in accumulated losses.
The operating efficiency of the company will be gauged with the help of the accounts receivable turnover ratio and the inventory turnover metric. The receivable turnover metric is an efficiency ratio that measures the total number of times an entity is able to collect credit from its customers to whom goods or services are provided on credit (Williams and Dobelman 2017). Although most sales of the company are cash sales, there are a certain degree of credit sales extended as well. The metric has visibly deteriorated from 27.42 times in 2020 to 10.25 times in 2021 and is the lowest in the last three financial years. A decline in the metric is because of a significant decline in the total revenue of the company. Likewise, the inventory turnover metric measures the total number of times an organisation is able to sell their average inventory levels during a financial year. Qantas is a service provider and does not necessarily sell goods. However, in order to provide their operating services, there are some inventories required such as engineering expendables and consumable stores. Although not significantly important, the company needs to ensure optimal investment in maintaining inventory levels considering the shelf life as well as a reduction in demand. The metric has improved from 33.14 times in 2020 to 43.53 times in 2021 because of a decline in the average inventory levels which showcases efficiency in predicting demand and reducing stock levels.
The liquidity or the short term solvency position of the company can be gauged with the help of current ratio, quick ratio and the operating cash flow ratio. The current ratio is the availability of cash and other current assets that are readily convertible into cash for meeting the short term debts and current liabilities of the business. The quick ratio is a conservative measure of liquidity as it does not consider inventory to be a quick asset that can be liquidated and realised for which it is excluded from total current assets to meet the short term obligations (Yhip and Alagheband 2020). Ideally an organisation must have a current ratio which is at least 1. However, the current ratio and quick ratio of Qantas at 0.45 times and 0.41 times are the lowest in the last three years which means that the company does not have enough current assets and quick assets for meeting the obligations. This increases the exposure to liquidity risks which is a cause of concern for Qantas. The operating cash flow ratio considers the reliance a company can place upon the cash generated in the course of operating activities for meeting current liabilities. The metric turns out negative at -0.05 times in 2021 when compared to 0.13 times in 2020 and 0.35 times in 2019. This is because the company has generated negative operating cash flows due to a steep decline in operating receipts from customers.
Discussion
The long term solvency position or the gearing position of the company can be evaluated with the help of debt to equity ratio, debt to asset ratio and the interest coverage ratio. Although the debt level of the company has not seen much of a significant change over the last couple of years with the total debts in 2021 actually declining when compared to 2020, the value of shareholder’s equity has declined significantly. A decline in the value of equity as discussed is because of the company’s losses over the years resulting in an increase in the value of accumulated losses causing the equity to decline. This has affected the debt to equity ratio as well as the debt to asset ratio of the company. The debt to equity is the proportion of debt and equity capital in the total capital structure of an organisation. The metric has increased from 5.81 times in 2019 to 12.12 times in 2020 to 33.65 times in 2021. Likewise, the debt to asset ratio evaluates the reliance a company’s asset base is financed by debt funding. This has increased too from 85.32% in 2019 to 92.38% in 2020 to 97.11% in 2021. Hence the company’s gearing levels are high with an even higher exposure to financial leverage. This may result in a risk of default as the company may find it tough to even service the cost of debt. This is further validated from the interest coverage ratio which is a common leverage ratio. The metric evaluates the total number of times a company can meet its interest expense from the available operating profits (Collier 2015). The metric stands at negative results over the three years since the company does not generate enough operating profits to cover the interest expense.
The market based performance can be gauged with the help of price earnings ratio and the dividend yield ratio. Any investor can generate returns from either stock trading or depending upon dividend returns which are paid by the company. The price earnings metric is concerned with stock trading and measures the trading price of a stock relative to its earnings (Dhamija 2015). The metric has decreased from 10.02 in 2019 to a negative -2.92 and -5.08 through 2020-2021 respectively. This showcases the decline in earnings per share and the growth potential which is quite dim considering the present affairs. Furthermore, the dividend yield metric in 2019 was 4.84% which is 0 in 2020 & 2021 as the company has not paid dividend for the past two years suspending dividend payments because of losses.
In 2021, the company has garnered bad press for its ethical issues concerning staff treatment and support during the pandemic phase. The company temporarily idled 2500 employees for a period of at least two months to cope up with the pandemic (Livemint, 2022). Although no job losses were expected, this decision directly impacted domestic pilots, cabin crew staff and airport staff in New South Wales. Another unpopular decision which the company took was to outsource 2000 ground handling jobs which the company believed to be a necessary financial measure which would help in saving the company $100m annually (The Guardian, 2022). This has again resulted in a series of court cases against the company from The Transport Workers Union. In the early months of 2019, the company according to a new study was deemed as the worst major airline when it comes to fuel efficiency and carbon emissions among the list of flights flying across the Pacific. The study blamed the company to use its Boeing 747 and Airbus A380 models which are quite demanding when it comes to fuel consumption and was partly also because of the carrier with its total occupied capacity and freight taking a smaller weight when compared to better performing airlines (Abc.net.au, 2022). In response, the company has announced its intention of net zero emission goals by the year 2050. The company plans on investing $50m over the next 10 years to develop an aviation fuel industry which is sustainable (Simple Flying, 2022). Lastly, another issue with the company that has also been talked about from quite a while is the executive compensations. Although the company has struggled and have had a difficult position over quite a several number of years, the senior management of the company are still making high level of compensation over the years. This however was affected by the pandemic, but secondary research has found issues concerning the inflated compensation packages of senior management.
There are several limitations of financial ratios as a financial statement analysis tool. These are summarised and elucidated as follows:
The financial results are based on historical figures which does not necessarily translate to a similar or is an accurate representation of the future performance of the entity.
In case of any inflationary financial period, the ratios calculated under such periods are not comparable across different periods which are not subject to inflationary effects (McLaney and Atrill 2020).
Accounting policies tend to vary for different transactions which may again affect the comparability of financial ratios across peers to understand competitive strengths and weaknesses.
Financial ratios are not standardised. Formulas and calculations may tend to vary and can have different number of interpretations which is subjective.
Financial statements are projected in such a way which showcases a strong financial performance. Additionally, financial statements are always exposed to the risk of manipulations and earnings management as a result of which ratios may not be accurate.
Lastly, the analytical tool only gives weightage to the financial aspects of performance measurement but does not weigh in non-financial performance which is equally important in today’s context (Salas and Campos 2016).
Based on the analysis of financial performance presented in this report alongside a consideration of other relevant information, a potential investor is not recommended investing in the stocks of Qantas. This is because of the fact that the company is struggling to generate revenue to keep up with its costs resulting in losses over the years. The Covid19 pandemic has also affected the demand for air travel which should take several years to get back to where it originally was. In the meanwhile, the company does not have a sound liquidity position and has a high level of gearing. The company’s debt dependence is alarmingly high resulting in a high financial leverage. Additionally, the company does not generate profits to meet interest. The growth prospects of the company is very shallow and the stock prices have not seen any dramatic growth over the years for the investor to take advantage of capital gains. Furthermore, the company is also not in a position to pay dividend from the past few years making it not worth recommending as the company is going through a rough financial patch.
References
Abc.net.au, 2022. Qantas ‘worst major airline’ for fuel efficiency on trans-Pacific flights. [online] Abc.net.au. Available at: <https://www.abc.net.au/news/2018-01-17/qantas-fuel-efficiency-worst-for-trans-pacific-flights-study/9333616> [Accessed 26 April 2022].
Annualreports.com, 2022. [online] Annualreports.com. Available at: <https://www.annualreports.com/Company/qantas-airways-limited> [Accessed 26 April 2022].
Collier, P.M., 2015. Accounting for managers: Interpreting accounting information for decision making. John Wiley & Sons.
Dhamija, S., 2015. Financial Accounting for Managers, 2/e. Pearson Education India.
Forbes, 2022. Qantas Airways. [online] Forbes. Available at: <https://www.forbes.com/companies/qantas-airways/?sh=3834dc81e7a9> [Accessed 26 April 2022].
Fridson, M.S. and Alvarez, F., 2022. Financial statement analysis: a practitioner’s guide. John Wiley & Sons.
Ibisworld.com, 2022. IBISWorld – Industry Market Research, Reports, and Statistics. [online] Ibisworld.com. Available at: <https://www.ibisworld.com/au/company/qantas-airways-limited/32/> [Accessed 26 April 2022].
Livemint, 2022. Qantas Airways idles 2,500 more staff as COVID-19 cuts domestic flights. [online] Livemint. Available at: <https://www.livemint.com/companies/news/qantas-airways-idles-2-500-more-staff-as-covid-19-cuts-domestic-flights-11627961712032.html> [Accessed 26 April 2022].
McLaney, E. and Atrill, P., 2020. Accounting and Finance. Pearson Education, Limited.
Reuters, 2022. [online] Reuters. Available at: <https://www.reuters.com/markets/companies/QAN.AX> [Accessed 26 April 2022].
Robinson, T.R., 2020. International financial statement analysis. John Wiley & Sons.
Salas, O.A. and Campos, M.J.S., 2016. Finance and Accounting for Managers (Vol. 28). Profit Editorial.
Simple Flying, 2022. Qantas Announces 2050 Net-Zero Emissions Goal. [online] Simple Flying. Available at: <https://simpleflying.com/qantas-net-zero-emissions/> [Accessed 26 April 2022].
The Guardian, 2022. Qantas axed 2,000 ground-handling jobs partly because of union ties, court rules. [online] The Guardian. Available at: <https://www.theguardian.com/business/2021/jul/30/court-to-rule-on-whether-qantas-broke-law-by-outsourcing-2000-jobs> [Accessed 26 April 2022].
Williams, E.E. and Dobelman, J., 2017. Financial statement analysis. Quantitative Financial Analytics. London: World Scientific, pp.109-69.
Yhip, T.M. and Alagheband, B., 2020. Financial Statement Analysis. In The Practice of Lending (pp. 47-94). Palgrave Macmillan, Cham.
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