Financial Analysis of Qantas Airlines and Virgin Australia Airlines

This report contains a significant valuation of the financial performance and position of two airlines companies situated in Australia. The companies are Qantas Group and Virgin Australia Airlines Holding Pty Ltd. Different ratios are been calculated on the basis of their financial data and are used for taking investment decisions.

Running Head: HOTEL FINANCE
Financial analysis

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Executive Summary
This report contains a detail information about performing a financial analysis of a company. It
explains about the data required for the analysis and the tools and techniques used for performing
it. The report starts with a brief introduction about financial analysis and its importance. The
introduction part also includes a brief summary of tools used in the analysis. The second part of
it follows up with an overview of the companies chosen. The two Australian companies from
airlines sector has been taken for performing the analysis which are Qantas Airlines and Virgin
Australia Airlines. A brief description about various tools is been provided in the third part of the
report and a detailed ratio analysis of the both companies is done later in the report, followed
with the conclusion and recommendation, which includes the results of the analysis and the
decision regarding which company is performing better. The objective of this report is to find out
which company’ stock has investing potential and which is doing financially better from
investors’ point of view.

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Contents
Introduction.................................................................................................................................................3
Ratio Analysis.............................................................................................................................................4
Recommendation.........................................................................................................................................9
Conclusion...................................................................................................................................................9
References.................................................................................................................................................10

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Introduction
The process of measuring profitability and feasibility of a business is known as financial
analysis. The analysis consists of critical examination of financial reports of the company.
Financial analysis is done with the help of financial information, standards for comparison and
analysis tools. The information and data is obtained from the financial statements and at the time
of conducting analysis, a benchmark for comparison is been set (Lee, Lee & Lee, 2009). The
most commonly used standard are intra company comparison, inter - company comparison and
industry standards. The tools used for analysis are horizontal, vertical and ratio analysis. This
report contains a significant valuation of the financial performance and position of two airlines
companies situated in Australia. The companies are Qantas Group and Virgin Australia Airlines
Holding Pty Ltd. Different ratios are been calculated on the basis of their financial data and are
used for taking investment decisions (Vogel, 2014).
Qantas Group is the second oldest airline company in the world which was founded in
Queensland back in 1920. The company was originally registered as Queensland and Northern
Territory Aerial Services Limited (QANTS). In present times, it is considered as the largest
domestic and international airline in Australia and leading long distance airline in the world. The
Qantas is mainly engaged in providing transportation services to the customers under two brands
named as Qantas and Jester. The main hub of the company is Sydney Airport situated in Sydney
and many other subsidiaries of Qantas like Jetstar airways, Jetconnect, Qantas freight and others
provide their services regionally and domestically. Qantas Airlines is listed on Australian
Securities Exchange with a ticker ASX: QAN (Qantas, 2018).
Virgin Australia Airlines was formerly known as Virgin Blue Airlines and is regarded as second
largest airline of Australia, after Qantas. It was founded in 1999 and commenced its business in
2000. The company is performing well in aviation market of Australia and the group mainly
focuses on making a difference and follows the principles of value for quality, innovation,
money. It also believes in being competent and providing good quality services to its customers.
Virgin Australia mainly has its airports operating in cities like Perth, Adelaide and Gold coast
(Virgin Australia, 2018).

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Ratio Analysis
It is the most appropriate and commonly used tool for conducting an analysis of company’s
financial statements. Most of the investors rely on the key ratios calculated as per the financial
data provided in the annual reports (Warren & Jones, 2018).Ratio analysis uses different types of
ratios and measures the financial position of the company by comparing it with the competitor or
industry average. The main advantage of using this technique is that it provides a snapshot of
overall functioning of the organization, which ultimately helps the potential investors to take
their decisions regarding making their investment (Fraser, Ormiston & Fraser, 2010).The ratios
are also very useful for the shareholders of the company as by correctly interpreting them, they
can understand what is the company doing with their investment plus how it is using it and how
much return is been available to them.
There are various categories of ratios known as liquidity ratios, efficiency and profitability ratio
and capital structure ratios. They also include calculation of financial metrics like Earning per
Share, Dividend per share and many others. Because of all these advantages, this method is
considered more desirable than any other tool for evaluating the financial reports of the business
(Tracy, 2012).
Ratio Formula Qantas Airlines Virgin Australia
2016 2016
Current ratio Current assets/Current liabilities 0.49 0.62
Quick ratio
Quick Assets/current liabilities
Quick Assets = current Assets –
(Inventories + prepaid expenses)
0.44 0.60
Accounts receivable
turnover Revenue/ Average debtors 20.52 16.14
No. of days sales in
receivables 365/Debtors Turnover Ratio 18 23
Debt to equity ratio Total liabilities/Owners’ equity 4.12 5.73
No. of times interest
earned EBIT /interest expenses 7.50 1.52
Return on assets Net income /Total assets 0.06 -0.04
Return on Equity
Net income available for equity
shareholders /Total equity 0.32 -0.25
Earnings per share
Given in the annual report (in
cents) 49.40 -7.40

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Current ratio
Quick ratio
Accounts receivable turnover
No. of days sales in receivables
Debt to equity ratio
No. of times interest earned
Return on assets
Return on Equity
Earnings per share
0
20
40
60
80
100
120
140
Qantas Airlines 2016 Virgin Australia 2016
Liquidity ratios
They determines how faster a company can transform its current assets into cash or in any liquid
form. They represent the liquidity of a company and measure the potential to pay off its short
term obligations (Zainudin & Hashim, 2016). Among the two ratio calculated, current ratio is
more generous than quick ratio. There are basically two types of liquidity ratios:
 Current Ratio: it shows the proportion of the current assets with the current liabilities. In
other words, it determines the capability of the company to set off its short term liabilities
with its current assets. Firm’s cash and cash equivalents, marketable securities,
inventories, all these comprises of the current assets which can be easily converted into
cash. On the other hand, items like creditors are included in current liabilities which are
to be paid within a year (Krantz & Johnson, 2014). The ideal current ratio is 2:1 and
having a ratio more than that is considered to be more desirable. However, a simple
imputation of a ratio does not reflect the position of liquidity, but other factors like
economic conditions, industry structure also affect the liquidity of a company (Godwin &
Alderman, 2012). The CR of Qantas Airlines in 2016 was 0.49, which was less than the
CR of Virgin Australia of 0.60. This means that the Virgin Australia is more capable to
pay off its financial obligations with its current assets than Qantas Airlines. The latter
company has a better liquidity position.

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 Quick Ratio: Same like current ratio, it measures company’s ability to pay its liabilities
with its quick assets. Quick assets include all current assets excluding inventory and
prepaid expenses (Warren, Reeve & Duchac, 2011). It is slightly different from current
ratio as it does not takes into account the value of inventory and prepaid expenses. The
ideal ratio is 1:1 and obviously a higher ratio is favourable for the companies (Saleem &
Rehman, 2011). In 2016, the QR of Qantas was 0.44 and of Virgin Australia was 0.60.
This implies that, as compare to Qantas, Virgin is much more capable in maintain its
liquidity position.
Efficiency ratios
They comprises the factors which measures organization’s efficiency to perform its activities.
They indicate how proficiently, a company utilizes all its resources to pay off its debts. This
includes determination of debtor’s collection ratio, receivable collection days and many others
(Jindal & Jain, 2017). It shows the management of assets done by the company in order to utilize
them in setting of their liabilities. These ratios are:
 Receivables turnover ratio: it shows that whether company collects its debtors timely or
not. The efficient collection of receivables can be determined with this ratio. A high DTR
is desirable as it shows the timely collection of accounts receivables (Salunke & Bagad,
2009). The DTR of Qantas has been increased in year 2016 to 20.52%. This implies that
company is very effective in collecting its accounts receivables. A reduction in the total
debtors of the company can be seen which boosted up the ratio. On the other hand, the
DTR of Virgin Australia was very much low as compare to Qantas. In 2016, it was
reported at 16.14%. This implies that the company is not very much efficient in collecting
the cash from its debtors. The effect of which can be seen in its value of debtors which
has increased in 2016 as compare to 2015.
 Days’ sales in receivables: This ratio measures the average number of days taken by an
organization to collect the payment from its debtors. A company having low number of
receivables is regarded as more effective than the one who takes longer time in collecting
its debtors (Gibson, 2011). Qantas took 18 days to collect cash from its debtors, which
make it even more efficient in performing its functions. In 2015, organization took 20
days for collecting cash from its debtors and the number has been reduced to 18 days in

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2016. So it can be concluded that Qantas is efficient enough in managing its resources
and operations. On the other hand, Virgin Australia takes 23 days to collect its accounts
receivables. This implies that, as compare to Qantas, the company is taking very much
time in cash collection from its debtors. Qantas is much more efficient than Virgin.
Profitability Ratios
Knowing about the profitability of a business is taken as one of the main motive of conducting
ratio analysis. The analysis allows the company to calculate profitability ratios which reflect the
profit making capacity of the organization (Jenter & Lewellen, 2015). The two ratios discussed
here are:
 Return on Assets: This ratio shows how capable management is at using its assets for
generating earnings. It is calculated by dividing net income earned with total assets. In
other words, it reflects how effectively and efficiently, an organization can convert the
amount used for purchasing the asset into net profit or income. A higher ROA is
considered to be more favorable for investors (Higgins, 2012). Comparing Qantas with
Virgin Australia, the ROA of former company is much better than the latter company and
even it is positive. The reason behind having an increased ROA of 6% is, the high profits
and reduced total assets. Qantas’ ROA has risen in 2016 as compare to past years. On the
other hand, due to huge loss in same year, Virgin Australia reported its ROA at -4%. This
means that company is not properly utilizing its assets in generating profits. Moreover, in
2016, the amount of total assets was the highest, that shows company is not using its
assets for making income.
 Return on Equity: it indicates the appropriate use of shareholder’s investments done by
the company, with a motive to generate profits. The ratio shows the trend in the return
provided to the shareholders on their investment. A high ROE is more desirable (Penman,
Reggiani, Richardson & Tuna, 2017). In 2016, the profits of Qantas Airlines were $1029
million, which boosted up its ROE to 0.32 as compared to previous years. This shows
that company is performing pretty well and is able to generate more profits, which in
return provides more and positive returns to its shareholders. On the contrary, Virgin
Australia was incurring losses from the past three years and the highest loss incurred was
in 2016 amounted $225 million. This can be seen from the annual reports of the

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company. Due to this, company was not able to generate positive returns to its
shareholders which makes its ROE negative and in 2016 it was -0.25. The ratio was in
negative and even less than Qantas’s ROE. This reflects that unlike Qantas, Virgin
Australia is not performing well from the point of view of earnings profits. Also it will be
more risky to invest in such company.
 Earnings Per share: It is calculated by dividing net income available for equity
shareholders with the number of ordinary shares issued. Generally, EPS is used by the
investors and the people who deals in the stock market. It shows the earning made by
each ordinary share (Kimmel, Weygandt & Kieso, 2010). The basic EPS of Qantas is
49.40 cents in 2016 which was more than the EPS in 2017. Due to high profits, the
company was capable enough to offer positive and appropriate returns to its shareholders
on their investment. Whereas, the EPS of Virgin Australia was negative because of losses
made. So it can be said that company is not performing well from investors’ point of
view.
Comparing the overall profitability, it can be concluded that profitability position of Qantas is
better as compared to Virgin Australia. The company has made high profits in 2016 and also
offered high returns on its shareholders’ investment.
Solvency ratio
These ratios measured the company’s ability for paying off its long term liabilities. They also
tells about the income retained in the business after paying the tax and all expenses. The ratios
calculated are Debt-equity and interest coverage ratio, which appropriately measures the
solvency of a company. (Bragg, 2012).
 Debt-equity ratio: It shows the proportion of total debt to the total equity of the firm.
Having a high ratio means company has large portion of debt financing. It also indicates
how stable company’s financial policies are (Bragg, 2012). It measure the percentage of
assets which are financed through owner’s equity and percentage of assets financed
through debt. Having a ratio of 1:1 means that both have equal contribution, if it is less
than 1 then it means that the company’s assets are less financed by debt and if the ratio is
more than one, it means company has more borrowing as compare to its equity (Higgins,

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2012). The D/E ratio of Qantas is 4.12 which is less than the ratio of Virgin Australia.
This means that, as compare to the latter company, the former company has less
borrowings and most of its assets are financed through equity. On the other side, Virgin’s
high D/E ratio shows that, it has more of its assets through debt rather than equity.
 Interest coverage ratio: It also known as time interest earned ratio which measures the
ability of company to pay off its interest expense. It shows the proportionate amount of
earnings used for making interest payments (Nikolai, Bazley & Jones, 2009). It shows
both the risk and profitability of the company and is very useful ratio for creditors and
investors. Creditors generally use this ratio to measure the credit worthiness of the
company that whether the company is able to pay the interest time to time or not. (Bragg,
2012). Looking at the comparison, it can be said that the ICR of Qantas is better than
Virgin Airlines. Having a ratio of 7.5 means company can pay its interest more than 7
times. So it can be concluded that the solvency of Qantas Airlines is much better than
Virgin Australia Airlines.
Recommendation
It will be better to invest in the common stock of Qantas Group. Reasons being, except the
liquidity factor, the company is performing well and much better than Virgin Australia Airlines
Unlike the latter company, it provides positive returns to its owners, less risky, has positive EPS
and is more efficient in managing its accounts receivables and collecting them timely. The ICR
maintained by the company is also good from creditors’ point of view. So it will be
recommended to choose Qantas Group of airlines for the purpose of making investments.
Qantas’s common stock has more investing potential than Virgin Australia
Conclusion
From the above analysis, it can be concluded that ratio analysis is the most appropriate technique
used for analyzing a financial performance of a company. The ratios clearly portrays the trend
followed by the company and also provides a brief summary about the management, operations
and financials of the company. As per the above analysis, it can be said that Qantas Airlines is
has performed better in the past three years, as compare to Virgin Australia.

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Jersy: John Wiley & Sons.
Bragg, S. M. (2012). Financial analysis: a controller's guide. New Jersy: John Wiley & Sons.
Gibson, C. H. (2011). Financial reporting and analysis. USA: South-Western Cengage Learning.
Godwin, N., & Alderman, C. (2012). Financial ACCT2. USA: Cengage Learning.
Higgins, R. C. (2012). Analysis for financial management. New York: McGraw-Hill/Irwin.
Jenter, D. & Lewellen, K. (2015). CEO preferences and acquisitions. The Journal of
Finance, 70(6), pp.2813-2852.
Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2010). Financial accounting: tools for business
decision making. New Jersy: John Wiley & Sons.
Krantz, M., & Johnson, R. R. (2014). Investment Banking for Dummies. New Jersy: John Wiley
& Sons.
Lee, A. C., Lee, J. C., & Lee, C. F. (2009). Financial analysis, planning and forecasting: Theory
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Nikolai, L. A., Bazley, J. D., & Jones, J. P. (2009). Intermediate Accounting. USA: Cengage
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Qantas (2018). Our Company. Retrieved 13 February 2018, from
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