Financial Analysis of Qantas Airways Limited and Virgin Australia Limited

This report provides a financial analysis of Qantas Airways Limited and Virgin Australia Limited using ratio analysis techniques. The report evaluates the liquidity, solvency, and asset utilization of both companies and provides recommendations for investors.

Running Head: Business Finance
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Project Report: Business Finance

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Contents
Introduction.......................................................................................................................3
Company overview...........................................................................................................3
Competitor’s overview.....................................................................................................3
Financial analysis..............................................................................................................4
Fundamental ratios............................................................................................................4
Short term solvency......................................................................................................4
Long term solvency......................................................................................................6
Asset utilization............................................................................................................7
Profitability ratios.......................................................................................................10
Market value ratios.....................................................................................................11
Recommendation and Conclusion..................................................................................13
References.......................................................................................................................14

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Introduction:
Financial analysis is a key procedure for an organization and the stakeholders of the
organization to identify evaluate and measure the financial performance of an organization.
Financial analysis study is performed by the professional such as financial manager, financial
analyst and the investors to identify the performance of the company and the changes into the
financial performance of an organization. Financial analysis study evaluates all the financial
and non financial factors of an organization and identify that what is the current position of
the company in terms of financial factors (Saunders and Cornett, 2014).
The study of financial analysis could be done through various factors such as trend
analysis, horizontal analysis, capital structure, weighted average cost of capital, ratio analysis
etc. All of this study offers the different base to the related party to evaluate the performance
of the company. In the given report, Qantas limited has been taken into the concern. The
fundamental position of the company has been measured on the basis of financial ratios and
the performance of the company has been compared with the Virgin Australia limited.
Company overview:
Qantas airway limited has been founded in 1920 at Australian market. The company
has been grown as one of the largest domestic airline as well as international airline. The
company has been registered as Queensland and Northern Territory Aerial Services Limited
(QANTAS). The company is widely known as one the leading airline company in concern of
long distance destination at worldwide. It is amongst the strongest brand of Australia. The
company has employed around 30,000 people to manage and evaluate the performance of the
company (Our Company, 2018). Annual report (2017) explains that the company has
reported all the financial transactions on the basis of the accounting standards and the
financial performance of the company is quite better.
In the report, Qantas airway limited has been chosen as the main company and for
performing the competitor’s analysis, Virgin Australia limited has been chosen.
Competitor’s overview:
Virgin Australia limited is second largest airline firm in Australian market after
Qantas. The company has been founded in 1999 and it has been commenced its business on
31st August 2000. The company is currently covering 52 destinations and the fleet size of the

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company is 101 which are highest in Australian market. Headquarter of the company is in
Brisbane. Total revenue of the company has been enhanced from last year and the
performance of the company has been improved by a great level in last few years.
The performance of Virgin Australia Holdings limited has been measured with the
Qantas airways limited to identify the performance and the position of Qantas airway limited
in the market.
Financial analysis:
Financial analysis study has been performed on Qantas airway limited and Virgin
Australia limited to measure the performance of the company and identify that how the
company is performing and is the company a right choice for the investment. The financial
analysis study explains about the changes into the financial performance of the company and
the current position of the company (Lee, 2006). In the report, financial analysis study has
been performed through using the ratio analysis techniques.
Fundamental ratios:
Fundamental ratios are one of the most common and most used techniques among all
the financial analysis techniques to measure the fundamental position of the company.
Fundamental ratios evaluate the financial statement of the company into several categories
such as liquidity ratio, solvency ratio, market ratios, efficiency ratios, profitability ratios etc.
Ratio analysis is a great way to measure and access the financial health of an organization
through evaluating all the main items of final financial statement of the company (Laux and
Leuz, 2009). The fundamental ratios study of the company is as follows:
Short term solvency:
Short term solvency ratios are also known as liquidity ratios. It measures the total
ability of an organization to meet and pay all the short term debt obligation of the company.
This ratio measures the level of the company to repay its short term debts on the basis of the
current assets of the company. In the report, for identifying the liquidity ratio of the company,
current liquidity ratio and quick liquidity ratio has been calculated.
Current ratio:
Current liquidity ratio measures the assets of short term of an organization with the
liabilities of short term. It takes the concern of entire assets and liabilities of an organization

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and measures the performance of the company. The current ratio of Qantas limited briefs that
the liquidity position of the company has been lower from 0.49 to 0.44.
Current Ratio
Current Assets / 3,458 3,119
Current liabilities 7,028 7,095
Answer: 0.49 0.44
(Morningstar, 2018)
Further, the current ratio of Virgin Australia limited has been measured and it has
been found that the current ratio of virgin Australia limited has been enhanced from 0.62 to
0.76.
Current Ratio 2016 2017
Current Assets / 1,714 1,788
Current liabilities 2,780 2,348
Answer: 0.62 0.76
(Morningstar, 2018)
It explains that the performance of the Qantas limited is not better in terms of
managing and meeting the short term debt obligations of the company.
Quick ratio:
Quick liquidity ratio measures the assets of short term of an organization which could
be liquidated and covert into cash at any time with the liabilities of short term. It takes the
concern of only those assets which could be liquidated immediately and liabilities of an
organization and measures the performance of the company (Glajnaric, 2016). The quick
ratio of Qantas limited briefs that the liquidity position of the company has been lower from
0.44 to 0.39.
Acid test ratio 2016 2017
Current Assets -
Inventory /
3,122 2,768
Current Liabilities 7,028 7,095
Answer: 0.44 0.39
Further, the quick ratio of Virgin Australia limited has been measured and it has been
found that the quick ratio of virgin Australia limited has been enhanced from 0.60 to 0.74.
Acid test ratio 2016 2017
Current Assets
- Inventory /
1,672 1,742

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Current
Liabilities
2,780 2,348
Answer: 0.60 0.74
(Morningstar, 2018)
It explains that the performance of the Qantas limited is not better in terms of
managing and meeting the short term debt obligations of the company. The current ratio as
well as quick liquidity ratio of the company briefs that company should enhance the level of
the current assets so that the performance and sort term debt of the company could be met
easily.
Long term solvency:
Long term solvency ratios are also known as capital structure ratios. It measures the
total ability of an organization to meet and pay all the long term debt obligation of the
company. This ratio measures the level of the company to repay its long term debts on the
basis of the total equity and the total capital of the company. In the report, for identifying the
long term solvency ratio of the company, gearing ratio and interest coverage ratio have been
calculated.
Gearing ratio:
Gearing ratio measures the total liabilities of a business of long term along with the
total capital of the organization. It takes the concern of entire long term liabilities and capital
employed of an organization and measures the debt payment capability of the company. The
gearing ratio of Qantas limited briefs that the long term liabilities position of the company
has been higher from 0.664 to 0.651.
Gearing ratio 2016 2017
Long term liabilities / 6,422 6,589
Capital employed 9,677 10,126
Answer: % 0.664 0.651
Further, the gearing ratio of Virgin Australia limited has been measured and it has
been found that the gearing ratio of virgin Australia limited has been lowered from 0.72 to
0.61.
Gearing ratio 2016 2017
Long term liabilities / 2,349 2,440
Capital employed 3,261 4,008

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Answer: % 0.720 0.609
It explains that the performance of the Qantas limited is quite better in terms of
managing and meeting the long term debt obligations of the company.
Interest coverage ratio:
Interest coverage ratio measures the Earnings before interest and taxes amount of an
organization with the total interest expenses of the company. It takes the concern of debt
interest amount and measures that whether the company is able to pay the interest amount to
the debt holders of the company. The interest gearing ratio of Qantas limited briefs that the
long term solvency position of the company has been lowered from 2016 in 2017. The
interest coverage ratio of the company was 6.78 in 2016 and 5.37 in 2017.
Interest Coverage Ratio 2016 2017
EBIT / 1,227 993
Net Finance Costs (used net
interest expense)
181 185
Answer: times
p.a
6
.78
5.37
(Morningstar, 2018)
Further, the interest coverage ratio of Virgin Australia limited has been measured and
it has been found that the interest coverage ratio of virgin Australia limited has been
enhanced from 19.88 to 20.77 (annual report, 2016).
Interest Coverage Ratio 2016 2017
EBIT / 3,598 3,842
Net Finance Costs (used net
interest expense)
181 185
Answer: times
p.a
1
9.88 20.77
It explains that the performance of the Qantas limited is better in terms of managing
and meeting the long term debt obligations of the company. However, the performance of
Virgin Australia limited is way better than Qantas limited. The gearing ratio as well as
interest coverage ratio of the company briefs that company should enhance the level of the
equity so that the performance and long term debt of the company could be met easily.
Asset utilization:

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Asset utilization ratios measure the efficiency level of the company to manage, run
and administer the business as well as it also shows its concern about the working capital
management of the company. This ratio measures the level of the efficiency and working
capital management on the basis of payment payable turnover days, receivable turnover day
and inventory turnover days.
Trade payable payment ratio:
Trade payable payment ratio measures the accounts payable amount in context with
the cost of sales to measure the total time period in which the amount would be paid by the
company to its creditor in one year. The payable payment ratio of Qantas limited has been
higher from 109 days to 116 days.
Trade payable payment
period ratio
2016 2017
Accounts payable/ 1,986 2,067
Cost of sales 6,612 6,475
Answer: (note the above
needs to be x 365)
109.63 116.52
(Morningstar, 2018)
Further, the payment payable ratio of Virgin Australia limited has been measured and
it has been found that the payable ratio of virgin Australia limited has also been higher.
Trade payable payment
period ratio
2016 2017
Accounts payable/ 697 665
Cost of sales 1,019 867
Answer: (note the above
needs to be x 365)
249.66 279.96
It explains that the performance of both the companies has been improved. Hovered,
the efficiency level of Virgin is better than Qantas.
Inventory turnover days:
Inventory turnover day’s ratio measures the inventory amount in context with the cost
of sales to measure the total time period in which the amount would be order back by the
company. The inventory turnover ratio of Qantas limited has been higher from 2.32 days to
2.59 days.
Inventory Turnover (days) 2016 2017
Average Inventory / 42 46

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Cost of Sales #
days
6,612 6,475
Answer: (note the above needs
to be x 365)
2.32 2.59
Further, the inventory turnover days of Virgin Australia limited has been enhanced
from 15.04 to 19.37.
Inventory Turnover (days) 2016 2017
Average Inventory / 42 46
Cost of Sales # days 1,019 867
Answer: (note the above
needs to be x 365)
15.04 19.37
(Morningstar, 2018)
It explains that the performance of the Qantas limited is better in terms of managing
the working capital management of the company.
Receivable turnover ratio:
Receivable turnover day’s ratio measures the receivable amount in context with the
sales to measure the total time period in which the amount would be got back by the company
from its debtors. The receivable turnover ratio of Qantas limited has been lower from 18.38
days to 18.25 days.
Receivables Turnover
(days)
2016 2017
Average trade debtors /
795 784
Sales revenue (note
used operating revenue)
# days
15,784
1
5,680
Answer: (note the above
needs to be x 365)
18.38 18.25
Further, the receivable turnover days of Virgin Australia limited has also been
lowered from 16.98 days to 16 days.
Receivables Turnover (days) 2016 2017
Average trade debtors /
232 221
Sales revenue (note used operating
revenue)
#
days 4,986
5,
041
Answer: (note the above needs to be x
365)
16.98 16.00

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It explains that the performance of the Qantas limited is better in terms of managing
the working capital management of the company. However, the performance of Virgin
Australia limited is way better than Qantas limited.
Profitability ratios:
Profitability ratios measure the total capability of an organization to generate the
profit on the basis of the revenues, profits and the resources of the company. This ratio
measures the level of the profitability on the basis of total assets, capital structure, sales
revenue etc of the company (Elliott and Elliott, 2007).
Return on capital employed ratio:
Return on capital employed ratio measures the operating profit amount in context with
the capital employed to measure the profit generation capabilities of an organization. The
return on capital employed ratio of Qantas limited has been lower from 1268% to 9.81%.
Return on Capital
employed
2016 2017
Operating profit / 1227 993
Capital employed (total
assets - current
liabilities)
9,
677
1
0,126
Answer: % 12.68% 9.81%
(Morningstar, 2018)
Further, the ROCE of virgin Australia limited has also been lowered from 110% to
95.86% in 2017.
Return on Capital
employed
2016 2017
Operating profit / 3598 3842
Capital employed
(total assets -
current liabilities)
3,26
1
4,008
Answer: % 110.33% 95.86%
It explains that the performance of both the companies has been lowered.
Gross profit margin:
Gross profit margin ratio measures the gross profit amount in context with the total
sales to measure the profitability level of the company. The gross profit margin ratio of
Qantas limited has been higher from 58.1% to 58.7%.

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Gross Profit Margin 2016 2017
Gross profit /
9,172
9,205
Sales Revenue (note used
operating revenue) 15,784 15,680
Answer: 58.1% 58.7%
Further, the gross profit margin of Virgin Australia limited has been enhanced from
79.6% to 82.8%.
Gross Profit Margin 2016 2017
Gross profit /
3,967
4,174
Sales Revenue (note used
operating revenue) 4,986
5,041
Answer: 79.6% 82.8%
(annual report, 2016)
It explains that the performance of the both the companies are better.
Operating profit margin:
Operating profit margin ratio measures the operating profit amount in context with the
total sales to measure the profitability level of the company. The operating profit margin ratio
of Qantas limited has been decreased from 7.77% to 6.33%.
Operating profit margin 2016 2017
Operating profit / 1,227 993
Sales Revenue % 15,784 15,680
Answer: 7.77% 6.33%
Further, the operating profit margin of Virgin Australia limited has been enhanced
from 72.16% to 76.22%.
Operating profit
margin
2016 2017
Operating profit / 3,598 3,842
Sales Revenue % 4,986 5,041
Answer: 72.16% 76.22%
It explains that the performance of the Qantas limited is not at all competitive in the
market to generate the profit.
Market value ratios:

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Lastly, the market value ratios measure the total capability of an organization to
manage the better performance in the market on the basis of the net income, outstanding
stock, dividend paid to shareholders etc of the company. This ratio measures the level of the
market values on the basis of net profit and the investors’ position etc of the company.
Earnings per share ratio:
Earnings per share ratio measure the net profit amount in context with the outstanding
stock to measure the earnings capabilities of stockholder of the company. (Deegan, 2013)
The earnings per share ratio of Qantas limited have been lower from 0.49 to 0.46.
Earnings per share 2016 2017
Net income 1,029 852
Weighted average shares
outstanding
2,083 1,853
Answer:
0.494
0.460
(Reuters, 2018)
Further, the earnings per share of virgin Australia limited has also been lowered from
0.074 to 0.028 in 2017.
Earnings per share 2016 2017
Net income -261 -220
Weighted average shares
outstanding
3,531 7,988
Answer: -
0.074
-0.028
It explains that the performance of Qantas airways is far better than Virgin Australia.
Dividend coverage ratio:
Dividend coverage ratio measures the net income of the company in context with the
divided paid to shareholders of the company to measure market level of the company. The
dividend coverage ratio of Qantas limited has been lower from 3.89 to 3.28.
Dividend coverage ratio 2016 2017
Net income / 1,029 852
Dividend paid to
shareholders
264 264
Answer: 3.89 3.227

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Further, the dividend coverage ratio of Virgin Australia limited has been lowered by a
great level.
Dividend coverage ratio 2016 2017
Net income / -261 -220
Dividend paid to
shareholders
42 38
Answer: -6.21 -5.79
(ANNUAL REPORT, 2017)
It explains that the performance of the Qantas limited is way better and competitive in
the market (Euro Monitor, 2018).
Recommendation and Conclusion:
On the basis of the above study on Qantas limited and Virgin Australia limited, it has
been found that both the companies are performing well in the market. However, the liquidity
level and the efficiency level of virgin Australia limited is better as well as the profitability,
long term solvency and market position of Qantas limited is better in the market.
Further it has been found that the liquidity position and the efficiency position are the
internal operations of the company which does not affect the market position and the
investment position of the company. However, profitability, long term solvency and market
position affects the investors position and the return of the company directly.
It leads to a recommendation that the Qantas limited is a better choice for the purpose
of the investment. The investors should invest into the company for long term to get higher
returns from the stock and the dividends of the company.

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References:
Annual report. 2017. Qantas airways limited. (Online). Available at:
http://investor.qantas.com/FormBuilder/_Resource/_module/doLLG5ufYkCyEPjF1tpgyw/
file/annual-reports/2017AnnualReport.pdf (Accessed 18/05/2018).
Annual report. 2017. Virgin Australia Holdings limited. (Online). Available at:
https://www.virginaustralia.com/cs/groups/internetcontent/@wc/documents/webcontent/
~edisp/2017-annual-report.pdf (Accessed 18/05/2018).
Deegan, C. 2013. Financial accounting theory. McGraw-Hill Education Australia.
Elliott, B., and Elliott, J. 2007. Financial accounting and reporting. Pearson Education.
Euro Monitor. 2018. Ranked: Top 20 Global Airline Brands by Market Share. (Online).
Available at: https://blog.euromonitor.com/2017/11/top-20-global-airline-brands-market-
share.html (Accessed 18/05/2018).
Glajnaric, M., 2016. The importance of dividend paying stocks. Equity, 30(2), p.6.
Laux, C. and Leuz, C., 2009. The crisis of fair-value accounting: Making sense of the recent
debate. Accounting, organizations and society, 34(6), pp.826-834.
Lee, T.A., 2006. The FASB and accounting for economic reality. Accounting and the Public
Interest, 6(1), pp.1-21.
Morningstar. 2018. Competitors. (Online). Available at:
http://financials.morningstar.com/competitors/industry-peer.action?
t=QUBSF&region=usa&culture=en-US (Accessed 18/05/2018).
Our company. 2018. Qantas airways limited. (Online). Available at:
https://www.qantas.com/travel/airlines/company/global/en (Accessed 18/05/2018).
Reuters. 2018. Qantas airways limited. (Online). Available at:
https://www.reuters.com/finance/stocks/companyProfile/QAN.AX (Accessed 18/05/2018).
Saunders, A., and Cornett, M. M. 2014. Financial institutions management. McGraw-Hill
Education,.

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