Financial Performance Comparison: Qantas vs. Virgin

This assignment presents a comparative analysis of the financial performance of two major Australian airlines: Qantas and Virgin Australia. It delves into various financial ratios to assess their profitability, liquidity, and solvency. Key areas of comparison include net profit margin, current ratio, debt-to-equity ratio, and asset turnover ratio. The analysis aims to identify strengths and weaknesses in each airline's financial position and shed light on their respective performance against industry benchmarks.

ACCOUNTING

TABLE OF CONTENTS
Small Business Analysis 1...............................................................................................................3
(A) Profitability ratios..................................................................................................................3
(B) Extent to which internal sources have been used to finance asset acquisitions....................4
© Find out rapidity with which accounts receivable are collected..............................................4
(D) Measure the ability of the entity to meet unexpected demands for working capital.............4
(E) Compute the length of time taken by the entity to sell its inventories..................................5
Small Business Analysis 2...............................................................................................................5
Small Business Analysis 3: Case Study Analysis............................................................................6
Table 1Calculation of profitability ratio..........................................................................................3
Table 2 Calculation of ROCE..........................................................................................................4
Table 3 Calculation of debtor turnover ratio...................................................................................4
Table 4 Calculation of current ratio.................................................................................................4
Table 5 Calculation of inventory turnover ratio..............................................................................5
Table 6 Ratios of TUST Ply Ltd for 2012 and 2013.......................................................................5
Table 7Ratios of Virgin holding and Quanta’s airlines...................................................................6

Small Business Analysis 1
(A) Profitability ratios
Table 1Calculation of profitability ratio
Ratios Particulars
Gross profit 155000
Sales 462500
Gross profit ratio 34%
Net profit 75000
Sales 462500
Net profit ratio 16%
Net income 75000
Equity 232935
Return on equity 32%
Net income 75000
Average total assets 410387.5
Return on assets 18%
Interpretation
Four ratios that are computed in respect to earning ability (Profitability) of the firm are as
follows.
 Gross profit ratio- It is the ratio which reflects the cost control and profit earning
capacity of the firm. It can be seen that gross profit ratio of company is 34% which
reflects that firm is earning good amount of return on sales. Hence, it can be said that on
this front TEDA Ltd gives better performance.
 Net profit ratio- Net profit ratio is revealing firm capability to control indirect expenses.
Value of the net profit ratio is 16% and it can be said that firm have moderate control on
its indirect expenses (Zhang, Baral and Bakshi, 2010). Due to lack of proper control on
indirect expenses moderate profit is earned by TEDA Ltd.
 Return on equity- It is one of the important ratio which indicate the return that an
investor is earning for making investment in the TEDA Ltd. ROE of the mentioned firm

is 32% and it can be said that it gives good performance in its business. Control on
expenses is one of the main reason that contribute to mentioned sort of performance.
 Return on assets- It is another ratio that is used to measure firm revenue earning
capacity. ROA of the firm is 18% which is low in the business. It can be said that TEDA
Ltd is not making proper use of assets and due to this reason less return is generated on
assets.
(B) Extent to which internal sources have been used to finance asset acquisitions
Table 2 Calculation of ROCE
Internal income 75000
Capital employed 135600
ROCE 55.30%
Interpretation
ROCE reflects the return that is earned on the employed capital. It can be observed from
the table that return on employed capital is 55.30%. It means that firm earn good amount of
return on employed capital (Dhaliwal and et.al., 2011). Effective use of capital in the business is
the main reason due to which such result comes in existence.
© Find out rapidity with which accounts receivable are collected
Table 3 Calculation of debtor turnover ratio
Net credit sales 462500
Average accounts receivable 157500
Debtor turnover ratio 2.94
Interpretation
Debtor turnover ratio measures the number of times in a year receivables are collected by
the firm from its debtors. It can be seen from the table that value of the mentioned ratio is 2.94.
This means that in a year 3 times firm convert its receivables in to sales. Big amount of cash
most of times blocked in sales and this happened because firm credit policy is very weak.
(D) Measure the ability of the entity to meet unexpected demands for working capital
Table 4 Calculation of current ratio
Current assets 297675
Current liability 168840
Current ratio 1.76

Interpretation
Current ratio help managers to measure the liquidity position of the firm. It indicate that
current position of the firm in relation to its capability to meet working capital needs on time.
Current ratio of TEDA Ltd is 1.76 which is below 2. This means that firm is not fully capable to
pay all its current liabilities on time. Hence, in case of occurrence of unexpected situation it will
not have sufficient amount of current assets if same will be entirely used to pay existing short
term liabilities. It can be said that firm is not able to meet unexpected demand of working capital.
(E) Compute the length of time taken by the entity to sell its inventories
Table 5 Calculation of inventory turnover ratio
COGS 307500
Average inventory 118125
Inventory turnover ratio 2.60
Days in a year 365
Inventory turnover ratio 2.60
Days 140
Interpretation
Ratio results are clearly reflecting that firm in a year two times convert its inventory in to
sales. Inventory on average basis remain 140 days in warehouse. Hence, it can be said that at
very slow pace inventory is turned in to sales (Chen, Sun and Wu, 2010).
Small Business Analysis 2
Table 6 Ratios of TUST Ply Ltd for 2012 and 2013
2012 2013
Current ratio 2.1:1 2.6:1
Acid test or quick ratio 1:8 2.2:1
Days inventory on hand 122 127
Days debtors outstanding 30 46
Net Profit margin 10% 12.2%
Interpretation
 Liquidity- Current ratio of the firm is above standard 2:1 in 2013 which is good for the
business. Same trend is observed in the quick ratio. Profit is not earned by the higher
percentage in the business and this revealed that firm is not investing its entire money in
business and keep it idle. This is the reason due to which good performance is observed

in current ratio (Bamber, Jiang and Wang, 2010). Firm must with proper planning must
invest its idle money on productive activities of the business. By doing so firm can
elevate its profitability and can make optimum use of financial resource.
 Asset efficiency- Inventory days in warehouse increases from 122 to 127 and days that
that are taken by the firm to receive payment from debtors also elevate from 30 to 46
days. This reflects that firm sales are generating at slow pace in comparison to previous
year. On other hand, delay is happening on receipt of credit amount that was allotted to
debtor. Hence, firm must make its credit control policy very strict and must give debt to
those who on reasonable time period make payment to the firm (Risthaus and Grimme,
2013). Sales is generating at slow pace and due to this reason it is recommended that
TUST Ply Ltd must buy material in less quantity and produce less units. By doing so
more and more cash will be prevented from blocking in unsold goods.
 Net profit margin- Net profit ratio only increase from 10 to 12.2% which indicate that
firm does not have good control on its expenses. Hence, strict cost control and cash
management strategy must be prepared by TUST Ply Ltd so that more and more money
can be saved in the business product cost can be reduced to maximum possible extent.
Small Business Analysis 3: Case Study Analysis
Table 7Ratios of Virgin holding and Quanta’s airlines
Qantas Airways Limited Virgin Australia Holdings Limited
EBIT margin 1.85% 3.50%
ROE 3.38% 8.40%
ROA 2.12% 3.29%
Debt to Equity 111.21% 180.07%
Current Ratio 0.77 0.65
Net profit margin 1.36% 2.23%
Interpretation
 EBIT margin- Value of the mentioned ratio is 1.85% for Qantas Limited and same for
Virgin airlines is 3.50%. The reason behind former firm poor performance is that every
year it is making heavy investment in order to elevate its fleet size. On other hand, Virgin

airlines as per its annual report observe reduction in its underlying cost per available seat
kilo meter (CASK) by 6.4%. Hence, latter firm is following cost control strategy in its
business and due to this reason its EBIT margin is high.
 ROE- Return on equity for Qantas airlines is 3.38% and same for Virgin holdings is
8.40%. Here, also Virgin is ahead of Qantas airlines. This happened because former firm
is earning good return in its business and its equity is lower than latter firm. Hence, due
to this reason big difference is observed in this ratio between both firms.
 ROA- Return on assets is high for Virgin airlines then Qantas airline. Value of ROA for
former firm is 2.12% and same for latter firm is 3.29%. It can be said that Virgin airlines
is making best use of its assets then Qantas airlines.
 Debt to equity- Percentage of this ratio is high for Virgin airlines which is 180.07% and
same for Qantas airlines is 111.21%. There is equal proportion of debt and equity in the
Qantas capital structure. Whereas, in case of Virgin airlines it is identified that debt is
nearby to equity in term of value in the capital structure. Quanta’s already have big
network all around the world but Virgin is working on commencing number of flights on
new routes (Virgin Australia group annual report 2015, 2015). At same time it is also
focusing on increasing its fleet size. Hence, for this it takes heavy amount of loan
financial institutions. Such kind of decision may prove costly to the firm in upcoming
time period.
 Current ratio – Current ratio of Qantas airlines is 0.77 and same for Virgin holdings is
0.65. This means that former firm is in better condition in terms of payment of current
liability by making use of short term assets (A strong, sustainable future, 2015). This
happened because cash management strategy of former firm is good and it give credit to
only those who can pay same on time in comparison to latter company.
 Net profit margin- Net profit margin of Quanta’s airlines is 1.36% and same of Virgin
holding is 2.23%. Latter firm perform better then rival company because it have strong
control on its expense. This is proved from higher percentage of EBIT margin and firm
annual report.

REFERENCES
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Online
A strong, sustainable future, 2015. [PDF]. Available through :<
https://www.qantas.com.au/infodetail/about/investors/2015AnnualReport.pdf>.[Accessed
on 23rd September 2016].
Virgin Australia group annual report 2015, 2015. [PDF]. Available through :<
https://www.virginaustralia.com/cs/groups/internetcontent/@wc/documents/webcontent/
~edisp/annual-report-2015.pdf>. [Accessed on 23rd September 2016].