Financial Ratio Based Data Envelopment Analysis Approach For Qantas Airways Limited

Detail

Discuss about the Financial Ratio Based Data Envelopment Analysis Approach.

The aim of the report is to make the information available about the company by using ratio analysis as tool for assessment. This report helps in assessment of profitability, liquidity, performance of Qantas Airways Limited for the years 2016 and 2017. The purpose of the report is to help the investment in understanding details about the company in advance so that they can check whether reasonable return can be obtained by investing in Qantas Airways Limited.

In addition to having knowledge about the financial health of the company with ratios, the report explains major strengths and weakness of company which requires management attention. This report also helps in commenting about the future prospects of the Qantas Airways Limited and provide recommendations and suggestions for future growth for different investors who are willing to invest in company.

The report has been prepared using the primary data available in the Annual reports of the company which might have ambiguity in the values shown. Also, other secondary data has been used to frame an opinion about the affairs of the company.

Qantas Airways Limited a company having its head quarters in Mascot, Australia was founded in 1920 as Queensland and Northern Territory Aerial Services Limited (QANTAS). It operates domestic and international airline which provides services to passenger travel, operation of frequent flyer loyalty programme and freight air transportation in Australia and other countries internationally. The company is mainly involved in passenger travel which has been operated under two airlines i.e. Qantas and Jet star. The company is also involved in other business through its subsidiary and special business of catering under brand name of Q Catering. Also, 93% of the employee base of company is having base in Australia only (Qantas Airways Limited, 2017).

Ratio analysis is the tool to understand the performance of the company in terms of the financial and operating matters by using information presented in financial statements of company. It helps in assessment of profitability, liquidity, solvency and efficiency of company (Lin, 2011).

Current ratio helps in evaluation of the current liabilities in relation current assets. It is the indicator which depicts the worthiness of company in payment of its obligations by assets which are generally short term in nature (Ablanedo?Rosas, 2010). In the other words it can be said that current ratio shows that how much short term asset are required to pay of its liabilities which are short term in nature. Current can be arrived by proportioning the Assets which are Current in nature and the Liabilities which are Current in nature. It is said that 2:1 ratio should be consider as benchmark current ratio for any company which indicates that current assets are double in amount as compared to current liability of the company.

Limitations

Current = Assets which are Current in nature / Liabilities which are Current in nature

For Qantas Airways,

Current in 2017 = $ 3119 million / $ 7095 million = 0.44 : 1

Current Ratio in 2016 = $ 3458 million / $ 7028 million = 0.49 : 1

Current Ratio of Qantas shows that the company’s assets which are held for short term(cash and cash equivalents, receivables, inventories) are not sufficient to pay off its short terms liabilities ( Payables, Interest bearing liabilities, financial liabilities). Also, decrease in ratio from 2016 to 2017 shows that the asset base of the company is very low and company is negative working capital for maintenance of its day to day operations.

It is also known as ratio – Acid test which is an indicator of company’s most liquid assets which are available for payment of its liabilities being short term in nature. Quick Ratio is arrived by diving the liquid nature assets of the company which are difference of current assets and inventory by its current liabilities (Ahrendsen,2012). Quick ratio of 1:1 is consider as idle ratio which indicates that company should have liquid assets equivalent to liabilities which are of shorter term.

Quick  = (Short term Assets less Stock) / Current liabilities

For Qantas Airways,

Quick in 2017 = ($ 3119 million – $ 351 million) / $ 7095 million = 0.39 : 1

Quick Ratio in 2016 = ($ 3458 million – $ 336 million) / $ 7028 million = 0.44 : 1

Quick ratio of Qantas shows that liquid assets are not sufficient to pay of its short term liabilities which can create the situation of shortage of readily available finance in the company. On the other decrease in ratio in 2017 indicates the company operations were not working properly enough to generate the ready cash for the daily operations of company.

Gross Margin ratio is the indicator of the trading results of the company which shows that how much profit has been earned in comparison to revenue after considering all the direct costs involved in doing the business operations of the company. Gross profit margin shows the association between the cost and revenue earned by concerned company. Higher the Gross profit margin ratio higher the chances of profit maximization. The figure of margin is arrived by dividing gross profit by total revenue.

Gross Margin = Gross margin / Revenue X 100

Company Overview

For Qantas Airways,

Revenue in 2017 = Net passenger revenue ( $ 13857 million) + Net freight Revenue ( $ 808 million) = $ 14665 million

Gross Profit in 2017 = Revenue ( $ 14665 million ) – Man power and staff costs ( $ 4033  million) – Fuel ( $ 3039 million ) = $ 7593 million

Gross Profit Margin Ratio in 2017 = $ 7593 million / $ 14665 million X 100 = 51.78%

Revenue in 2016 = Net passenger revenue ( $ 13961 million) + Net freight Revenue ( $ 850 million) = $ 14811 million

Gross Profit in 2016 = Revenue ( $ 14811 million ) – Man power and staff costs ( $ 3865  million) – Fuel ( $ 3250 million ) = $ 7696 million

Gross Profit Margin Ratio in 2016 = $ 7696 million / $ 14811 million X 100 = 51.96%

Gross profit of the company is more that 50% of the revenue showing that direct costs involved in business is very low and the company is operating in huge amount of profits which is very lucrative for investors of company. Also, the gross profit margin in both years is almost same showing that company able to maintain its good performance over past years which is sign of growth and stability in company’s operations. 

Return on Equity or ROE means how much is profits earned by company for its equity shareholders or owners. In the other words it can be said how much net income generated by the company and its management by the usage of the money put in by investors or equity shareholders in the company. It also an important indicator for measurement of the profitability of the company. It is arrived by dividing the earnings available for equity shareholders by shareholder’s fund or net worth.

ROE = Income attributable or available for equity shareholders/ Total shareholder’s Equity

For Qantas Airways,

ROE Ratio in 2017 = $ 853 million / $ 3540 million = 24.09%

Return on Equity Ratio in 2016 = $ 1029 million / $ 3260 million = 31.56%

The return on equity ratio of the company shows that the company is earnings profits by putting the money of shareholders in business operations. The profitability position of the company is decreasing from 2016 to 2017 as the ROE has been decreased by 7.47 % which shows that conversion cash into profits is lower as compared to previous year. The company and its management should consider this and should take steps to improve the ratio in future to protect the interest of its equity shareholders (Gibson, 2011).

Accounting Ratio

Return on Assets or ROA is the ratio which is part of profitability ratios showing how much total earnings has been earned by company with the usage of its total assets. It is also an indicator of the efficiency of management which can show how assets of the company has been used in efficient manner to earn higher returns (Fridson, 2011). It can be figured out by dividing total income by total company’s assets.

ROA = Income after Tax / Company’s Assets

For Qantas Airways,

Return on Assets Ratio in 2017 = $ 853 million / $ 17221 million = 4.95%

Return on Assets Ratio in 2016 = $ 1029 million / $ 16705 million = 6.16%

The Return on Assets ratio has been decreasing considerably from 2016 to 2017 showing the inefficiency of the management over the period of time. On one hand the profitability has been increased with increase in profits of the company but on other hand the returns which is available for investors has been decrease creating disinterest for investment in company

Company’s financial performance can be analysis by having inter and intra comparison of the financial details of the company. Inter comparison means comparing the results with industry and intra comparison means comparing the data for two of the same company. For doing inter comparison, the main competitor of Qantas Airways Limited are Virgin Holdings Limited, a company registered in Australia and United Airlines, a company registered in USA.

Comparison with other Two Airlines

 The assets of Qantas and its competitor are increasing but the liquid assets of competitor are increasing fast as compared to Qantas. Qantas company has report high revenue of $ 146665 from its operations in 2017 which is far ahead from Virgin airlines. The expense ratios in virgin airline are higher than in Qantas resulting in very bad year for Virgin airline to maintain its financial performance. In Qantas Airways, positive cash flows from operations and investments activities depicts that the concern is generating revenue out of its business activities which has been reinvested in business in the form assets showing growth perspective for Qantas. Negative cash flow from financing activities shows that the company is investing funds in the form of retained earnings. On the other hand decreasing in flow of cash from all activities except financing has been reported in United Airlines showing the inefficient performance cresting disinterest for investor to put in money in the company.

If the analysis has been made through the below given table for ratio, the following comparison can be made:

• Qantas with Virgin Airlines – The company – Qantas Airways has positive return on asset as 4.95% and 6.16% in the year ending 2017 and 2016 respectively whereas the Virgin Airlines have negative return as -2.92% and -3.72% respectively. Secondly Virgin Airlines have less gross profit margin in comparison to the Qantas Airways. Current ratio for the Virgin airlines is high in comparison to the Qantas Airways which implies that the former company is cash rich in comparison to the latter.
• Qantas with United Airlines – In case of both the companies, the return on equity has been decreased considerably in case of the Qantas Airways as compared to the United Airlines. The decrease has been from 32% to 24% from the year 2017 to 2016 as compared to decrease from 26% to 24%. Secondly, in the similar terms the gross profit of the former company has been decreased considerably from 6.16% to 4.95% as against the latter company’s change from 5.64% to 5.035. Both the companies are not the cash rich company as the standard ratio for the industry is 1.32 but any ratio below that implies cash less company.

On comparing the financial statements of the company for the past two years it has been observed that the decreasing trend has been shown in the net profit of the company. It is because for the year ending 30th of June, 2016 the company has earned the revenue of 16200 million dollar and for the year ending 30th of June 2017 the company has earned the revenue of 16057 million dollar. The corresponding profit for the year has been decreased from 1643 million dollar in 2016 to 1370 million dollar in 2017.  It shows that the company is currently facing the decreasing trend in revenue and if the situation persists then it will be one of the factors for bringing the collapse of business.  The investors will also have the same view and it is recommended not to invest in the particular company.

For getting better and accurate results about the financial position of the company, other factor needs to consider other than financial statements. The factors are-

• Company Operating Environment
• Corporate Culture in Company
• Customer Choices and Trends
• Economic Conditions in which the company is operating

Conclusion and Recommendation

Ratio Analysis and Industry analysis are important tool in assessment of financial performance and financial stability of the company. Qantas Airlines has good indicators which attract the investor to invest in the company by having good profitability and efficiency. To conclude, the company current financial position is fulfil the goal of wealth maximization of stakeholders of company.

It is recommended form the study that the company is a good option to be treated as investment opportunity.

References

Ablanedo?Rosas, J. H,. (2010). A study of the relative efficiency of Chinese ports: a financial ratio?based data envelopment analysis approach. Expert systems, 27(5), 349-362.

Ahrendsen, B. L., (2012). Financial ratio analysis using ARMS data. Agricultural Finance Review, 72(2), 262-272.

Fridson, (2011). Financial statement analysis: a practitioner’s guide (Vol. 597). John Wiley & Sons.

Gibson, C. H. (2011). Financial reporting and analysis. South-Western Cengage Learning.

Lin, F., (2011). Financial ratio selection for business crisis prediction. Expert Systems with Applications, 38(12), 15094-15102.

Qantas Airways Limited, (2017), ” Annual Report -2017″ online available at https://investor.qantas.com/FormBuilder/_Resource/_module/doLLG5ufYkCyEPjF1tpgyw/file /annual-reports/2017AnnualReport.pdf accessed on 03-05-2018.

Order an Essay Now & Get These Features For Free:

Turnitin Report

Formatting

Title Page

Citation

Outline

Place an Order