Financial Analysis of Qantas Airways: Capital Structure, Liquidity, Non-Current Assets, Scenario Analysis, and Share Price Movement

This report provides a financial analysis of Qantas Airways, including its capital structure, liquidity, non-current assets, scenario analysis, and share price movement. The report includes a ratio analysis, scenario analysis, and analysis of the issuance of bonds.

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Abstract
Qantas airway is selected as the company for this report and in that there is the analysis of the
performed which has been undertaken. The proper identification of the service that is provided
by the company has been made and with that, the other aspects are involved which helps in
proper analysis. There is the calculation of the ratios and by that capital structure of the company
and liquidity is ascertained. There are non-current assets and analysis of them is made in which
the changes which are adopted have been considered. The scenario analysis is performed and the
most sensitive element is determined with the help of that. There is the issue of shares which is
made in the company and the same has been identified and discussed. The share price movement
is considered and with the help of the movement of the PE ratio is also covered.
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Abstract............................................................................................................................................4
Introduction......................................................................................................................................6
Financial analysis.............................................................................................................................6
2.1 Main service of company.......................................................................................................6
2.2 Ratio analysis.........................................................................................................................6
2.3 Non-current asset analysis.....................................................................................................9
2.4 Scenario analysis.................................................................................................................10
2.5 Issuance of bonds.................................................................................................................12
2.6 Comparison of share price and PE ratio..............................................................................12
Recommendations..........................................................................................................................14
Conclusion.....................................................................................................................................15
References......................................................................................................................................16
Appendix........................................................................................................................................18
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Introduction
The company has undertaken various operations and services and in that there are many changes
which are also incorporated. The proper evaluation of them is required to be made and for that,
there will be the inclusion of various information and techniques. The report is based on the
Qantas airway and in that complete information about it will be incorporated. The non-current
asset analysis will be performed in which the change in them will be ascertained with the method
used for the depreciation. The ratios will be taken into use and with that the position and
performance of the company will be accounted for. There will be the identification of the net
present value and then by considering the changes in various variables, there will be scenario
analysis which will be performed. With the consideration of the same, the most sensitive element
will be ascertained which will be helpful for the company to make decisions. The movement in
the share price will be identified and by taking the earnings in account there will be the
calculation of the PE ratio. The amount involved in the share issue will be identified and
recorded in the report.
Financial analysis
2.1 Main service of company
Qantas is the old airline which is operating in Queensland and is providing the services to the
passengers in relation to the aircraft. The company is carrying various operations through the
main segments which are made in this. There is the Qantas international which is involved and in
that the largest carrier services are provided. The customers are provided with the most luxurious
services in this which are of premium-level (Qantas airways, 2019). The company is reshaping
its cost structure and also the network is spread in various areas by which the achievement of the
targets will be made possible. There are new innovations which are involved and also the fleet
changes have been made in this. There are the international services which are provided in this
and by that several opportunities are made available for it.
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2.2 Ratio analysis
The company undertakes various activities and by that impact is made on the final results which
are obtained. They will be helping the company to run in the long run and maintain the position
in the market. In order to retain this condition, it will be required that there shall be undertaking
of the proper analysis in which all of the areas will be covered and for that data collection will be
considered (Carraher and Van Auken, 2013). The ratio analysis will be performed and in that
there will be ascertainment of the various ratios which are involved. The comparison is made and
by that the position which is maintained is taken into account. The main categories which will be
evaluated for the company will be involving the capital structure and liquidity.
Liquidity analysis
A company is required to deal with various circumstances and in that there are many obligations
and liabilities which are to be faced. There will be an identification of all the liabilities so that
proper steps for the same can be taken and maintenance of the liquidity is made possible. If this
will be done then the company will be able to make the payments on time and there will be no
default which will be made (Ongore and Kusa, 2013). For the ascertainment of the liquidity,
there is the consideration of current assets and current liabilities and they will be helping in the
making of the proper calculations which are shown below.
Particulars 2017 2018 2019
Quick assets 2756 3243 3828
Current
liabilities
7095 7596 8576
Current assets 3119 3712 4193
Total liabilities 13681 14688 15941
Total equity 3540 3959 3436
Total assets 17221 18647 19377
Particulars Formula 2017 2018 2019
Quick ratio Quick assets/Current
liabilities
2756/70
95
0.39 3243/75
96
0.43 3828/85
76
0.45
Current
ratio
Current assets/current
liabilities
3119/70
95
0.44 3712/75
96
0.49 4193/85
76
0.49
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2017 2018 2019
0.00
0.10
0.20
0.30
0.40
0.50
0.60
Quick ratio
Linear (Quick ratio)
Current ratio
Linear (Current ratio)
The determination of the liquidity position has been made and in that it is identified that there is
the increment which is involved and the business is improving its liquidity. In spite of this, the
ratio is at a low level and will not be able to meet with all of the obligations which are involved
in the business (Qantas airways, 2018). There are many liabilities which will be involved and
with such low ratio, they will not be fulfilled adequately. The increase will have to be made and
for that current asset of the company will be increased.
Capital structure ratios
The company will be managed in an adequate manner when it will be carrying the processes in a
proper manner. This will be done if the funds will be available with the company. There are
various sources which are available and all of them are required to be considered and evaluated
in an effective manner (Gode and Ohlson, 2013). The advantages of them will be considered and
then the decision in relation to them will be made. The debts and equities which are maintained
will be identified and there will be ascertainment of the ratio which exists among them. Various
ratios will be calculated in them and they are shown below.
Particular
s
Formula 2017 2018 2019
Debt ratio Total 13681/1722 0.79 14688/1864 0.79 15941/1937 0.82
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liabilities/total
assets
1 7 7
Debt to
equity
Total
liabilities/total
equity
13681/3540 3.86 14688/3959 3.71 15941/3436 4.64
2017 2018 2019
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
Debt ratio
Linear (Debt ratio)
Debt to equity
Linear (Debt to equity)
The debts of the company are high in comparison to the equity which is maintained. Due to this,
it can be said that there is a need for modification in the capital structure of the company. There
is further rise which is noted and by that it can be said that company will have huge expenses
which will be made in this regard and all will have to be met by the company in an adequate
manner (Qantas airways, 2019). For this the repayment of the loan will be made and also there
will be the issuance of the shares by which the balance of the equity will be raised in the
company.
2.3 Non-current asset analysis
The Qantas airway provides the airline facilities to its passengers and in that it will be required
that there are adequate noncurrent assets which are maintained and in that the investment will
have to be made by the company. An analysis of the same is undertaken by which the company
will be maintaining its position and further decision making will be made in an adequate manner.
If the assets will be managed then the issues will not be faced in an undertaking of the activities
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and operations (Gebhardt, 2012). There are various changes which take place because of the
disposal and purchase of the shares and all of them needs to be taken into account.
The identification of the non-current assets has been made and in that is determined that there is
an increase and the upward trend is involved in the business. The balance of the assets was at
$14102 million in 2017 and then it increased to $14935 million in 2018. This has taken a further
rise and reached to $15184 million (Qantas airways, 2019). This shows that the company is
making continuous increment in the same and there is an investment which is made. It will be
improving the productivity of the business. The company is also providing the depreciation for
the required assets and in that there is the use of the straight-line method. With the help of this,
the carrying amount of the assets are identified and recording is made in an appropriate manner.
There will be the determination of the correct value and by that, the true position of the business
will be reflected.
2.4 Scenario analysis
The company is to make the investments and in that there will be consideration of the various
options which are available and there will be consideration of the one which will be proving the
company with the maximum amount of the returns. In the project, there are various costs which
are included and with that, the profitability is ascertained. All of the elements which are involved
are of two types and they are the variable and fixed and it will be required to evaluate them in an
adequate manner so that the further decision making is made in the most appropriate manner (Hu
and Mahadevan, 2016). There is the identification of the variable portions and they are the ones
in which there will be maximum changes which will be occurring and are required to be taken
into account.
It can be said that there are various scenarios which are available and in that evaluation is to be
made. This will be done with the help of the scenario analysis in which all of the available
options will be considered and the final result will be obtained. The calculation will be made and
in that there will be an identification of the net present value which is earned by the company. It
will be taken into account and then all the changes which are assumed or expected will be
involved in the same (Bianchi, Degano and Fornasiero, 2014). This will provide with the NPV at
various levels and comparison of them will be made in an adequate manner. The changes which
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are taking place will be identified and will be considered with the change in the variable which
helps in determining the level of the sensitivity of each variable. The one which will be highly
sensitive will be determined and on the basis of them, it will be focused in the future to take
adequate decisions regarding it.
The calculations are made and have been represented in the appendix. The results and the
comparison which is made is represented in the table below.
Best case options
Particulars Original Option
1
Option 2 Option 3 Option 4
NPV 6592661 8506191 11376487 9462956 6805275.76
% of Change in NPV (A) 29.0252 72.56288 43.5377 3.2250171
A variable which is
changing
Sales
units
selling
price
variable
cost
fixed cost
% of the change in Input
(B)
20 20 20 22.22
Sensitivity (A/B) 1.4513 3.6281 2.1769 0.1451
Worst case options:
Particulars Original Option
1
Option 2 Option 3 Option
4
NPV 6592661 4679131 1808836 3722366 6380047
% of Change in NPV
(A)
-29.025 -72.563 -43.538 -3.225
A variable which is
changing
Sales
units
selling
price
variable
cost
fixed
cost
% of the change in
Input (B)
20 20 20 22.22
Sensitivity (A/B) -1.4513 -3.6281 -2.1769 -0.1451
The undertaking of the scenario analysis is made and in that there is the calculation of the
various results which are made in respect of the available options. The best-case and worst-case
scenarios are considered and the calculation is made by taking the changes into account (Razavi
and Gupta, 2015). All of the variances which are involved have been determined and proper
comparison of the same is made possible. In this, it is identified and for the best case such
changes are made by which the NPV is increasing and in the worst case, the changes will be
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reducing the NPV. The elements are considered and out of them selling price is determined to be
the most sensitive one and will be affecting all of the decisions and results which are obtained by
the company with the help of the undertaken project.
2.5 Issuance of bonds
The company has undertaken various activities and there is also the issue of the bonds which has
been made by it on 30 September 2016 and they were made for the $175 million. They are the
corporate bonds which have been issued and will be maturing on 12 October 2026. The rate of
the interest which is provided on this is fixed and will not be affected by various factors which
are involved. It is an annual rate of 4.75% and this will be involving the semiannual frequency.
The price at which the issue has been made is 99.764 and will be maturing for 100 (Investopoli,
2018). The issue of the bonds will be making the funds available with the company which would
have been received and will be used for the undertaking of the business operations in an effective
manner. This will be increasing the liability of the company as the repayment will be made on
maturity in 2026. Till that Time Company can use the funds and will be paying the interest on
the same.
2.6 Comparison of share price and PE ratio
The company makes the earnings in the business with the help of the undertaking of the various
operations. In that, it is required that the same shall be evaluated with the share price which is
maintained as the earnings will have to be provided to the investors. This will be made possible
with the help of the calculation of the PE ratio in which both elements will be considered. There
is the ascertainment of the various share prices which are maintained by the company in pasts
(Williams and Dobelman, 2017). There are changes which are made in them as the situation in
the market does not remain the same and that affects the position of the company too. There will
be the identification of the same and with that appropriate calculation will be made. The value of
the business depends on the market price of the shares as that adds to the value of the business
and due to this, they are required to be maintained in the most adequate manner. All of the
calculations and the movement which is taking place in the share price and PE ratio are reflected
below with the help of the table and graph.
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Share price movement
(Source: Market index, 2019)
Particulars 2017 2018 2019
MPS 5.72 6.16 5.4
EPS 0.46 0.56 0.546
Price-earnings
ratio
12.43 11.00 9.89
2017 2018 2019
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
Price earnings ratio
Price earnings ratio
Linear (Price earnings
ratio)
The calculation of the price earnings ratio is made and also the share prices have been
determined. It has been identified that there is a continuous decline which is faced in the PE ratio
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and this is because of the fluctuations which are taking place in the share price and the earnings.
The share price is fluctuating in a different manner and in that both the ups and downs are
involved. The increase is made in 2018 but then again a slight decline has been faced. With that,
the movements which are taking place have been presented on the graph which provides with a
better understanding (Qantas airways, 2019). There is the different manner in which both the PE
ratio and share price are moving as in PE ratio there is continuous decline which is not there in
the share price movements. Due to this, it will be said that both of them involve the divergent
relation and are not moving in the same directions. They will not be affected in a direct manner
and inverse relation will be made.
Recommendations
To,
Qantas airway
Subject: Recommendation for improvement
The complete analysis is performed and in that there has been consideration of the various
factors. The coverage is made for all the important areas and the results have been obtained. It is
identified that the non-current assets are increasing and that is a good factor for the company and
company will have to maintain the same.
After this, the company is required to make the investment in the current assets also as by that
the liquidity position of the business will be improved which is not at an adequate level in the
current situation. It is identified that there is less amount of current asset which will not be
sufficient for the payment of the liabilities.
The Capital structure also requires improvement and there will be a reduction in the debt position
and the shares will be required to be issued by the company for the same. The issue which is
made in relation to the bond has been considered and that will also be adding to the debt of the
company and so control is to be made on the same by which the capital structure can be
maintained at an optimal level.
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Conclusion
The performance evaluation of the Qantas airway is made in the report and in that main service
is provided by the company has been identified. There is the determination of the various
features and also the investments which are made by the company in non-current assets are
identified. The ratios which are required for the evaluation of the capital structure and the
liquidity position have been calculated and the trend which is involved in them has also been
considered. There is the undertaking of the scenario analysis and by that, the company will be
able to take the proper decisions for the selling price in the coming period as that is detrained to
be the most sensitive element. The bonds have been issued and that is identified and will be
considered for the calculation of the liabilities. The share price and its movements are recorded
with the help of the graph and that provided the proper information about the changes. This has
been used for the ascertainment of the PE ratios and also the changes which are made are taken
into account in relation to both of them.
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References
Bianchi, N., Degano, M. and Fornasiero, E. (2014) Sensitivity analysis of torque ripple reduction
of synchronous reluctance and interior PM motors. IEEE Transactions on Industry
Applications, 51(1), pp.187-195.
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.
Gebhardt, G. (2012) Financial instruments in non-financial firms: what do we
know?. Accounting and business research, 42(3), pp.267-289.
Gode, D. and Ohlson, J. (2013) Financial Statement Analysis and Valuation. Retrieved
December, 28, p.2014.
Hu, Z. and Mahadevan, S. (2016) Global sensitivity analysis-enhanced surrogate (GSAS)
modeling for reliability analysis. Structural and Multidisciplinary Optimization, 53(3), pp.501-
521.
Investopoli. (2018) Qantas Airways 4.75% 2026-10 AUD. [Online] Available at:
https://www.investopoli.com/en/bonds/qantas-airways-au3cb0240109/ [Accessed 26 September
2019]
Market index. (2019) Qantas Airways (QAN). [Online] Available at:
https://www.marketindex.com.au/asx/qan [Accessed 26 September 2019]
Ongore, V.O. and Kusa, G.B. (2013) Determinants of financial performance of commercial
banks in Kenya. International journal of economics and financial issues, 3(1), pp.237-252.
Qantas airways. (2018) Annual report. [Online] Available at:
https://investor.qantas.com/FormBuilder/_Resource/_module/doLLG5ufYkCyEPjF1tpgyw/file/
annual-reports/2018-Annual-Report-ASX.pdf [Accessed 26 September 2019]
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Qantas airways. (2019) Annual report. [Online] Available at:
https://investor.qantas.com/FormBuilder/_Resource/_module/doLLG5ufYkCyEPjF1tpgyw/file/
annual-reports/2019-Annual-Report-ASX.pdf [Accessed 26 September 2019]
Qantas airways. (2019) Company Overview. [Online] Available at:
https://investor.qantas.com/home/?page=about-the-qantas-group [Accessed 26 September 2019]
Razavi, S. and Gupta, H.V. (2015) What do we mean by sensitivity analysis? The need for
comprehensive characterization of “global” sensitivity in E arth and E nvironmental systems
models. Water Resources Research, 51(5), pp.3070-3092.
Williams, E.E. and Dobelman, J.A. (2017) Financial statement analysis. World Scientific Book
Chapters, pp.109-169.
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Appendix
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