Accounting for Managers Financial Performance

Question: Discuss about the Accounting for Managers of Financial Performance. Answer: Introduction Interpretation of company financial performance over the years using ratios provides the increase or decrease in overall performance of company. Competitor analysis is also important to measure the relative performance of company in the same industry. The Present report has been undertaken in order to conduct financial analysis of publically listed companies for developing an in insight into its financial performance in year 2014 and 2015. The company selected in the report for the purpose is Qantas Airlines and Virgin Australian Airlines. Company Description Qantas Airlines Qantas Airways Limited is an Australian based company that offers both international and domestic transportation and freight services globally. The company has presence mainly in Australia, New Zealand, Asia, the United States and the United Kingdom. It has a workforce diversity of about 28,000 people belonging to various ethnic backgrounds. The company is headquartered in New South Wales and is publically traded on Australian Securities Exchange (ASX) with the code QAN (Qantas, 2016). It has a fleet of about 299 aircraft that includes about 11 freighters and provides services to domestic as well as international destinations. Qantas is recognized as largest domestic as well as international airline of Australia and thus has attained a strong brand position in the country as well as on a global level. The good brand position of the company is due to its excellent quality customer services in terms of safety, operational reliability, engineering and maintenance (Annual Report 2015: Qa ntas Airlines Limited). The company conducts its transportation services through the use of two airline brands that are Qantas and Jet Star. The main objective of the company is to expand its business operations through continually investing in new aircraft and products for optimizing operational efficiency and become one of the worlds largest airlines. The company is also recognized as one of the topmost airline of Asia-Pacific region (Qantas, 2016). The company aim to compete effectively across all sectors of the aviation marketplace and become one of the strongest global brands in the aviation sector. Virgin Airlines The strongest competitor of Qantas airline is Virgin Australian Airlines Limited in Australia. Virgin Australian is airlines based in New Zealand and is a fully owned subsidiary of Virgin Australian Holdings Limited (Annual Report 2015: Virgin Australia Limited). The company was previously known as Pacific Blue Airlines (NZ) Limited and was renamed as Virgin Australian Airlines (NZ) Ltd in the year 2011 (Virgin Australia Holding Limited, 2016). The company mainly operates its transportation services between Australian and New Zealand and too many other international destinations. The main international destinations of the airline include Brisbane, Gold Coast, Middle East, Pacific Island and South East Asian routes. Virgin airline is emerging as one of the strongest competitor of Qantas airlines having its own Boeing 737 and Boeing 777 aircraft to provide high quality services to the customers. It has also undertaken loyalty program similar to that of Qantas Airline and is also engage d in the operation of both domestic as well as international business (Virgin Australia Holding Limited, 2016). Thus, Virgin airline is also one of the strongest brands in Australia in aviation sector. Financial Analysis of financial report of Qantas Airlines and its competitor Virgin Airlines In this part of section interpretation of financial statements of the Qantas Airlines and its competitor Virgin Airlines will be performed in order to provide complete view of financial performance of the both the companies. The main motive is to evaluate the performance of Qantas Airlines and it is the reason why financial performance of Qantas Airlines is compared with the performance of Virgin Airlines. It will provide the actual performance of Qantas Airlines when compared with the industry average. In order to perform the financial statement interpretation financial data have been extracted from the annual report of both the companies for the years 2014 and 2015. Both the annual reports have been taken from the company websites and necessary details are presented in section of analysis. Financial Ratio Analysis Using ratios analysis as the financial tool to interpret the financial performance of the entity helps investors to gain the insight view of company overall performance in current year as compare to past years. Liquidity Analysis The analysis of liquidity ratios helps to know the company ability to pay the short term liabilities over the one year time period. Short term liabilities means liabilities that have to be paid in the one year span of time. The most common ratios that are used to determine the liquidity position of the company are current ratio and quick ratio. It can be said that higher the values in liquidity ratio means higher safety of margin and it shows the perfect position of company to meet their short term liabilities (Brigham and Ehrhardt, 2011). Items 2014 2015 Qantas Airways Limited Current Assets $ 4,932,000,000.00 $ 5,049,000,000.00 Current Liabilities $ 7,525,000,000.00 $ 7,470,000,000.00 Inventory and Prepaid Expenses $ 317,000,000.00 $ 431,000,000.00 Quick Assets $ 4,615,000,000.00 $ 4,618,000,000.00 Cash and Cash Equivalents Virgin Australia Holdings Ltd Current Assets $ 1,235,000,000.00 $ 1,586,000,000.00 Current Liabilities $ 1,921,000,000.00 $ 2,300,000,000.00 Inventory and Prepaid Expenses $ 113,000,000.00 $ 113,000,000.00 Quick Assets $ 1,122,000,000.00 $ 1,473,000,000.00 Ratios Formula 2014 2015 Liquidity Ratio Current Ratios Current Assets/Current Liabilities Qantas Airways Limited 0.66 0.68 Virgin Australia Holdings Ltd 0.64 0.69 Quick Ratio Quick Assets/Current Liabilities Qantas Airways Limited 0.61 0.62 Virgin Australia Holdings Ltd 0.58 0.64 Current Ratio Current ratio represents ratio of current assets divided by the current liabilities. Current refers to the assets that are convertible into cash and cash equivalents within one year span of period. It is ability of company that how frequently inventory can be converted into cash and cash equivalents. Current liabilities represent the amount that have to reimburse within one year time through using the working capital. On calculating the current ratio of Qantas Airlines for the year 2014 it has been found that results drawn are not satisfactory and it continue the same position in year 2015 through minor increase in proportionate values of current assets. The current ratio of Qantas Airlines in year 2014 was 0.66 and it increased to 0.68 in year 2015 that shows company has no sufficient current assets to pay the current liabilities (Annual Report 2015: Qantas Airlines Limited). On the other hand current ratio of Virgin Airlines was 0.64 in year 2014 and 0.69 in year 2015 (Annual Report 2015: Virgin Australia Limited). It reflects that both companies maintain same level of current assets in both the year. Overall comparison shows that current ratios of both the companies are not satisfactory and they need to put more focus on the level of working capital. Quick Ratio Quick ratio is also called as acid test ratio and it is similar to current ratio as it also measures the liquidity position of the company. The only difference between current ratio and quick ratio is that quick ratio measures the liquidity position in much better way as compare to current ratio. Quick ratio ignores inventory and prepaid expenses they cant be treated as cash and cash equivalents due to time taken by inventory to be turned into cash. Both Qantas Airlines and Virgin Australian Airlines keeps low level of inventory as both companies belong to service sector that requires no inventory or very low inventory depending upon the level of service they provide. Quick ratio of Qantas Airlines was 0.61 and 0.62 in year 2014 and 2015 respectively and on the other hand the quick ratio of Virgin Australian Airlines was 0.58 and 0.64 in year 2014 and 2015 respectively (Annual Report 2015: Qantas Airlines Limited). Looking at values of quick ratio in both the years it can be said that liquidity position of Qantas Airlines and Virgin Australian Airlines was not satisfactory and there is need to maintain good amount of current assets in order to easily render the amount of current liabilities (Annual Report 2015: Virgin Australia Limited). Profitability Analysis Profitability analysis checks the companys ability to earn the revenue through use of capital employed by the owners of the company. It tells the company profitability position over the period of time generally one year through measuring the net profit earned using assets and equity of the company. The two profitability ratios that are used to measure the earning capacity of the company are net profit margin ratio and return on equity (Buckle, Buckle and Thompson, 2004). Items 2014 2015 Qantas Airways Limited Net Revenue $ 15,155,000,000.00 $ 15,532,000,000.00 Gross Profit $ 7,552,000,000.00 $ 8,389,000,000.00 Net Profit $ (2,843,000,000.00) $ 560,000,000.00 Shareholders Equity $ 2,862,000,000.00 $ 3,442,000,000.00 Virgin Australia Holdings Ltd Net Revenue $ 4,303,000,000.00 $ 4,706,000,000.00 Gross Profit $ 3,095,000,000.00 $ 3,514,000,000.00 Net Profit $ (356,000,000.00) $ (111,000,000.00) Shareholders Equity $ 1,048,000,000.00 $ 1,077,000,000.00 Ratios Formula 2014 2015 Profitability Ratios Return on Equity Net Profit/Equity Qantas Airways Limited -99.34% 16.27% Virgin Australia Holdings Ltd -33.97% -10.31% Net Profit Ratio Net Profit/Revenue Qantas Airways Limited -18.76% 3.61% Virgin Australia Holdings Ltd -8.27% -2.36% Net profit margin ratio Net profit Margin ratio tells the profitability position of the company by reflecting the percentage of profits earned by the company from its operations after meeting all the expenses. It is vital to note that positive profit are essential to keep pace with the on going market conditions and to provide tough competition to the competitors. Here net profit ratio of Qantas Airlines and Virgin Australian Airlines was analyzed and it was found that both have poor profitability in both the years. It was Qantas Airlines that has earned positive 3.61% net profit in year 2015. Apart from it, both Qantas Airlines and Virgin Australian Airlines have faced negative returns in both the years. It shows that airlines industry in Australia had faced tough time during year 2014 and 2015. Return on Equity Return on equity is one the most important profitability ratio as it tells profit earned by using the own capital i.e. share capital. It shows the percent of profits earned using the shareholders equity. It has been found that both Qantas Airlines and Virgin Australian Airlines have employed very share capital as compare to debt capital. It shows that both the companies earn maximum part of revenue using the debt capital as the source of finance. Return on equity was -99.34 % in year 2014 and 16.27 % in year 2015 in case of Qantas Airlines whereas in case of Virgin Australian Airlines it was -33.97% in year 2014 and -10.31% in year 2015 (Annual Report 2015: Virgin Australia Limited). Overall analysis shows that profitability position of both the companies had been worst in year 2014. In year 2015, there was some improvement in profitability position in case of Qantas Airlines but no change was recorded in case of Virgin Australian Airlines (Morning Star: Qantas Airlines, 2016 and Vir gin Australia Holding Limited, 2016). Asset Efficiency Analysis Asset efficiency analysis is important as it tells how asset has been exploited by the companies to earn the maximum revenue. It has been noted the airline industry in Australia have faced many downturn due lack of passengers and increase in price of crude oil internationally. It is the reason why airline companies in Australia fail to utilize 100% of its assets and it results in decrease in revenue in year 2014 and 2015 (Houston and Brigham, 2009). Items 2014 2015 Qantas Airways Limited Net Revenue $ 15,155,000,000.00 $ 15,532,000,000.00 Fixed Assets $ 12,386,000,000.00 $ 12,481,000,000.00 Inventory $ 317,000,000.00 $ 431,000,000.00 Virgin Australia Holdings Ltd Net Revenue $ 4,303,000,000.00 $ 4,706,000,000.00 Fixed Assets $ 3,444,000,000.00 $ 4,194,000,000.00 Inventory $ 113,000,000.00 $ 113,000,000.00 Ratios Formula 2014 2015 Asset Efficiency Ratios Fixed Asset Turnover Turnover/Fixed Asset Qantas Airways Limited 1.22 1.24 Virgin Australia Holdings Ltd 1.25 1.12 Sales to inventory Turnover Turnover / Inventory Qantas Airways Limited 47.81 36.04 Virgin Australia Holdings Ltd 38.08 41.65 Fixed assets turnover ratio Fixed asset turnover ratio tells amount of sales earned upon total fixed assets applied by the company in the business. It shows the efficiency of fixed assets and how frequently they provide the revenue through proper use of assets. Larger the ratio will be more will be the efficiency of the fixed assets. In airline industry fixed assets make up the most important part for earning the revenue therefore this ratio is vital for he airline industry. The calculation of fixed asset ratio shows that Qantas Airlines has earned 1.22 times the revenue when compared with fixed assets in year 2014 while Virgin Australian Airlines has earned 1.25 times the revenue using its fixed assets in the same year (Annual Report 2015: Qantas Airlines Limited). It shows that performance of both companies is almost equal in year 2014 (Annual Report 2015: Virgin Australia Limited). Making comparison of ratio in year 2014 with ratio of year 2015, it can be said that performance of Qantas Airlines was almost e qual with ratio of 1.24 times in year 2015 while there was decrease in fixed asset ratio of Virgin Australian Airlines in year 2015 by 10.40%. It reflects that performance of fixed assets was decrease in case of Virgin Australian Airlines in year 2015. Other analysts believe that fixed assets turnover ratio behaves as the vital source for measuring the financial health of the airlines companies. As per the opinion of three party analysts the performance of Qantas Airlines was better when compared with the performance of Virgin Australian Airlines in year 2015 (Yahoo Finance: Qantas Airways Limited, 2016 and Yahoo Finance: Virgin Australia Holdings Limited, 2016). Sales to Inventory Ratio Sales to inventory ratio measures the performance of management through evaluating the use of inventory to make it convert in revenue. This ratio measures the efficiency of inventory for being convertible into revenue. More the ratio will be higher will the efficiency of inventory. In airline industry companies generally keep low level of inventory as main source of income comes from the fixed asset hold by the company. A sale to inventory ratio of Qantas Airlines was 47.81times in year 2014 and that of Virgin Australian Airlines was 38.08 times in the same year. It shows that performance of Qantas Airlines was far better than Virgin Australian Airlines in year 2014 as it was able to utilize maximum inventory to convert them into sales. In year 2015, the performance of Qantas Airlines goes down and it has not able to keep the same pace as in year 2014 (Annual Report 2015: Qantas Airlines Limited). The sale to inventory ratio of Qantas Airlines in year 2015 was 36.04 times showing a d ownfall by 24 %. While the sales to inventory turnover ratio of Virgin Australian Airlines in year 2015 was 41.65 times, reflecting increase in efficiency of inventory being used in year 2015 (Annual Report 2015: Virgin Australia Limited). Capital Structure Analysis Capital structure analysis helps to evaluate the proportion of capital being equity and debt used by the companies as the major source of finance their operation and to purchase the fixed assets. In the airline industry the major expenses occurred on purchase of fixed asset being planes for commercial purposes. Some part of capital is also been used in working capital for smooth working of operations (Bull, 2007). Items 2014 2015 Qantas Airways Limited Debt $ 6,931,000,000.00 $ 6,618,000,000.00 Equity $ 2,862,000,000.00 $ 3,442,000,000.00 Total Assets $ 17,318,000,000.00 $ 17,530,000,000.00 Virgin Australia Holdings Ltd Debt $ 1,711,000,000.00 $ 2,403,000,000.00 Equity $ 1,048,000,000.00 $ 1,077,000,000.00 Total Assets $ 4,679,000,000.00 $ 5,780,000,000.00 Ratios Formula 2014 2015 Capital Structure Ratio Debt Equity Ratio Debt/Equity Qantas Airways Limited 2.42 1.92 Virgin Australia Holdings Ltd 1.63 2.23 Debt Ratio Debt /Total Assets Qantas Airways Limited 0.40 0.38 Virgin Australia Holdings Ltd 0.37 0.42 Debt Equity ratio Debt equity ratio shows the proportionate amount of debt and equity being employed by the company in this business. Company must use equity as the major source of capital as compare to debt capital as it requires paying fixed rate of interest over the years. On the other hand equity is the owner capital and does involve payment of interest at regular intervals. Ratio of below 1.00 represents ideal proportion of capital being employed. Debt equity ratio of Qantas Airlines was 2.42 times I year 2014, while it was 1.63 times in case of Virgin Australian Airlines (Annual Report 2015: Qantas Airlines Limited). Therefore, it shows Qantas Airlines uses more debt capital as compare to Virgin Australian Airlines. In year 2015, the debt equity ratio of Qantas Airlines was 1.92 reflecting the decrease in debt capital when compared with year 2014. On the other hand, there was increase debt equity ratio Virgin Australian Airlines in year 2015 by 36.80% showing that company has raised debt capital to finance either purchase of fixed assets or to provide capital for smooth working of operations. Debt Ratio Debt ratio tells amount of debt the company holds as against the assets. Higher debt ratio represents the sign of leverage firm being charge on the fixed assets of the company. Debt ratio of Qantas Airlines was 0.40 in year 2014 and 0.38 in year 2015. On the other hand, debt ratio of Virgin Australian Airlines was 0.37 in year 2014 and 0.42 in year 2015. It shows that both companies keep more than 35 % of debt capital as the charge against fixed assets. Overall capital structure of both the companies was not sound as they use debt as the major source of capital and there was very less dependency on equity capital as source of finance (Annual Report 2015: Virgin Australia Limited). Market Performance Analysis Market performance analysis provides the vital source of information for the investors as it measures the relative performance of the companies based on market information. Ratios Formula 2014 2015 Market performance Ratio Earning Per Share Net profit for shareholders / Number of Shareholders Qantas Airways Limited $ (1.37) $ 0.27 Virgin Australia Holdings Ltd $ (0.11) $ (0.03) Earning per share Earning per share ratio tells net profit earned by the company over total number of shares issued in the market. It is calculated as net profit attributable to shareholders divided by total number of common shares issued in the market (Sagner, 2010). The EPS of Qantas Airlines was negative $ 1.37 in year 2014 and it got increased to $0.27 in year 2015. While in case of Virgin Australian Airlines the EPS was negative $0.11 in year 2014 and negative $0.03 in year 2015. Market performance of Qantas Airlines was better in year 2015 as compare to market performance of Virgin Australian Airlines in year 2015 (Morning Star: Qantas Airlines, 2016 and Virgin Australia Holding Limited, 2016). Conclusion Financial analysis using ratio helps to get the overall performance of company in the current year as compare to previous year. In his report financial performance of Qantas Airlines was evaluated for year 2014 and 2015 and it was than compared with performance of Virgin Australian Airlines. It was found that overall performance of Qantas Airlines was better than Virgin Australian Airlines in year 2015 and there was scope of increase in financial performance in case Qantas Airlines. It is recommended to investors to hold the shares of Qantas Airlines in order to earn a better return in future period. References Annual Report 2015: Qantas Airlines Limited. Retrieved 14 October, 2016, from https://www.qantas.com.au/infodetail/about/investors/2015AnnualReport.pdf Annual Report 2015: Virgin Australia Limited. Retrieved 14 October, 2016, from https://www.virginaustralia.com/cs/groups/internetcontent/.../annual-report-2015.pdf Brigham, E. F. and Ehrhardt, M. C. 2011. Financial Management: Theory and Practice. Mason: Cengage Learning. Buckle, M.J., Buckle, M. and Thompson, J. 2004 . The UK Financial System. 4th ed. New York: Manchester University Press. Bull, R. 2007. Financial Ratios: How to use financial ratios to maximise value and success for your business'. UK: Elsevier. 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