Financial Performance Analysis of Qantas Airways

This report performs the analysis of the long term solvency of Qantas Airways over the last three years and also assesses the liquidity position of the company as at the latest financial year. Apart from this the qualitative nature of the company is also discussed in detail.

Running Head: FINANCE 0
Finance

FINANCE 1
Table of Contents
Introduction................................................................................................................................2
Financial Performance Analysis................................................................................................4
Solvency and Liquidity...........................................................................................................5
Solvency ratios.......................................................................................................................5
Debt to equity......................................................................................................................6
Total debt to Total assets....................................................................................................7
Interest coverage Ratio.......................................................................................................8
Return on Financial leverage..............................................................................................9
Liquidity ratios.....................................................................................................................10
Current Ratio.....................................................................................................................11
Quick Ratio.......................................................................................................................11
Working capital.................................................................................................................13
Operating cash flow with the current liabilities................................................................14
Operating cash flow with the capital expenditures...........................................................14
Free cash flow...................................................................................................................14
Quality of the financial statements...........................................................................................15
References................................................................................................................................17

FINANCE 2
Introduction
Qantas is the one of the famous Airline service industry in the Australia. It is one of the
largest airlines in the Australia and the Qantas Airways is the largest company by the fleet
size, flights and the destinations it operates at. The Qantas Airways is the old brand and the
airline and the third largest among the other airlines in the world. The major competitors of
the Qantas are KLMM and Avianca. The total operating income of the company is A$1.59
billion and the revenue of the company is A$16.1 billion in the financial year 2017 (Qantas,
2018). This report performs the analysis of the long term solvency of the company over the
last three years and also assesses the liquidity position of the company as at the latest
financial year. Apart from this the qualitative nature of the company is also discussed in
detail.
Year End (3 years)
Ratios and Other Analysis Measures 2015 2016 2017
ROE and DuPont Ratios
ROE (NI / OEavg) 31.6% 24.1% 24.8%
ROA 6.2% 5.0% 6.2%
Profitability (NI / Sales ) 6.5% 5.4% 5.9%
Efficiency (Turnover = Sales / Assets avg) 1.20 1.15 2.24
Leverage (Leverage = Assets avg / OEavg) 0.44 0.43 0.46
Additional Profitability Ratios
Gross Profit Margin % [(net Rev - COGS) / net Revenue] 58% 59% 59%
Selling General andAdministration % (SGandA expense / net
Revenue)
34% 34% 33%

FINANCE 3
Important Expense Percentage* (Important Expense / net
Revenue)
8% 9% 9%
Additional Efficiency Ratios
AR Turnover (Sales / ARavg) 11.49 11.17 23.69
Days Receivables Outstanding (DRO) [ARavg / (Sales /365)] 18.26 19.69 9.97
Inventory Turnover (COGS / Inventoryavg) 4.81 4.61 9.73
Days Inventory (DI) [Inventoryavg / (COGS/365)] 18.55 19.79 18.76
AP Turnover (Purchases / APavg) 0.82 0.74 1.49
Days Payables Outstanding (DPO) [365 / (Purchases / Accts
Payableavg)]
447.4
7
491.7
8
245.3
6
CASH CONVERSION CYCLE (DI - DPO + DRO)
-
410.6
7
-
452.3
0
-
216.6
4
PPE Turnover (Sales / Net PPEavg) 0.16 0.20 0.65
Additional Leverage Ratios
Debt-to-Equity (total Liabilities / total OE) 0.94 0.89 1.10
Times Interest Earned (Earnings before Interest Expense and
Taxes / Interest Exp)
5.01 5.03 6.05
Return on Financial Leverage (ROE - ROA) 25.5% 19.2% 18.5%
LT Debt-to-Assets (LT Debt, including current portion / total
Assets )
0.60 0.59 0.76
Cash Liquidity and Cash Sources and Uses
Working Capital (CA - CL) - - -

FINANCE 4
35700
00
39760
00
38840
00
Current Ratio (CA / CL) 0.49 0.44 0.49
Quick Ratio [(Ca s h + ST Securities + AR) / CL)] 0.39 0.36 0.34
OCFCL (Operating CF / CL) -0.187 -0.245 -0.181
OCFCX (Opera ting CF / Ca pi ta l Expenditures ) -0.17 -0.23 -0.17
Free Cash Flow (Ca s h from Ops – Net Ca p. Expend.)
87560
00
90280
00
95510
00
Growth
Sales growth [(cy net Rev - py net Rev)/ py net Rev]
-
0.66%
6.05%
NI Growth [(cy NI - py NI )/ py NI ] -17% 15%
Financial Performance Analysis
From the above table it can be analysed that the Qantas Airways performed satisfactorily.
Qantas Airways has faced the high levels of the capacity growth in case of the broader
market. The underlying EBIT is 1424000 and it has a 2% increase in the revenue and the
company continue to diversify the things. The group met all the goals and objectives within
the financial framework set up by the AASB. The Qantas has underpinned this result and the
profitability of the company has also remained stagnant. The selling and the general expenses
have also been constant. The company maintained a leverage of 0.44 to the 0.46 in the year
2017. The return on the equity has also decreased from 31.6% to 24.8% due to the less

FINANCE 5
number of the equity investors (News Corp Australia Network, 2017). The cash decreased by
286000 in the year 2017 in a period of last three years and therefore after the analysis of the
financial statements of the last three years.
Solvency and Liquidity
The long term solvency analysis includes the financial analysis of the Solvency and the
liquidity ratios. Solvency ratio is one of the key metrics that is used to analyse the ability of
the company, whether it can meet the obligations and pay off the current liabilities. The
solvency ratio basically determines the cash flow of the company and decodes whether the
current liabilities are payable or not (Venkatesh and Gugloth, 2017). The basic notation for
the company is that, the lower the solvency ratio of the company, the higher is risk of the
default on the debt obligations. The formula for calculating the ratio is
Solvency Ratio Net income (After tax) + Depreciation
Short term liabilities + Long term
liabilities
Solvency ratios
The solvency ratio is the comprehensive measure of the cash flow rather than its income by
including the depreciation to make the clear assessment of the capacity of the company.
There are different forms of the solvency ratio such as Debt to equity ratio, times earned
ratio, Return on financial leverage and long term debt to assets. The solvency ratio higher
than the 20% is an ideal ratio is considered as the benchmark (Zainudin, Zainudin, Hashim
and Hashim, 2016). This ratio is not assessed in the isolation; rather it is compared with the
other companies operating in the similar industry.

FINANCE 6
Debt-to-Equity (total Liabilities / total OE) 0.94 0.89 1.10
Times Interest Earned (Earnings before Interest Expense and
Taxes / Interest Exp)
5.01 5.03 6.05
Return on Financial Leverage (ROE - ROA)
25.5
%
19.2
%
18.5
%
LT Debt-to-Assets (LT Debt, including current portion / total
Assets )
0.60 0.59 0.76
Debt to equity
Debt to Equity ratio determines the total liabilities by the stakeholders. The Debt to Equity
ratio indicates how much debt the company is maintaining to finance the assets which are
relative to the value of the shareholder’s equity.
Debt to Equity Ratio Debt
Equity
If a lot of the debt option is used is to finance and increase the financial operations. The
major reason for the company is that it could generate more earnings as it would have done
without the help of the company to outsource the finance (Baker, Jabbouri and Dyaz, 2017).
If the earnings are increased by the greater amount than the shareholders will have the most
benefit, on the other hand if the cost of debt is more than the company may also lead to the
bankruptcy. The debt to equity ratio of the Qantas Airways is 0.94 in the year 2012 and it
decreased to the figure to the 0.89. The fall in the debt to equity ratio is that debt is less than
the equity. However, the company has again increased the ratio to 1.10 in the year 2017
(Australian Government, 2018). A high debt to equity ratio suggests that the company has
over utilized debt to support the growth of the company. The interest level of the company

FINANCE 7
has also increased as it can be observed from the income statement. The interest expense
increased from 7532000 to 8023000 in the year 2017. Therefore it is advised to the company
that the interest shall be reduced and the debt to equity shall be revamped.
2015 2016 2017
0.00
0.20
0.40
0.60
0.80
1.00
1.20
Debt-to-Equity (total Liabilities / total
OE)
Debt-to-Equity (total
Liabilities / total OE)
(By Author)
Total debt to Total assets
The total debt to assets ratio refers to the long term and short term liabilities which are being
compared to the total holdings of the company. The major risk to company arise when the
company uses more debt to finance the total assets (Bierman and Smidt, 2014).
Total debt to assets ratio Total debt
Total Assets
The greater risk occurs when the financial risk is from the banks and the creditors. the total
debt to assets of the company is 0.60 and it reduced by hardly 0.1% in the year 2016. The
same ratio is increased to 0.76. Though the company is still under safe zone as the debt is not
utilised much yet the company shall be aware. The degree of the leverage shall be the major

FINANCE 8
concern for the Qantas Airways and therefore the value of the current assets shall be
increased (Gurufocus, 2018).
Interest coverage Ratio
The interest coverage ratio is the metric which keeps the record of the interest payments
which arise parallel with the outstanding debt. The business owner the Earnings before
interest and tax shall be divided by the interest expenses (Borgonovo, 2017).
Interest Coverage Ratio EBIT
Interest Expense
The interest coverage ratio is basically a source to the public which can be a clear indicator of
the fact that how much interest expenses the company is under the fact to pay to the debt
holders. After the payment of the interest and the taxes the final income is given to the
shareholders therefore, the company will be requiring to keep the interest income low so the
income can be distributed to the shareholders (Colloquy, 2015). The lower the interest
coverage ratio, the more its debt expense is going to affect the going concern of the company
and it will create a burden for the company. The company with the interest coverage ratio of
1.5 or less is considered to be unstable (Shapiro, 2008).

FINANCE 9
2015 2016 2017
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
Times Interest Earned (Earnings
before Interest Expense and Taxes /
Interest Exp)
Times Interest Earned
(Earnings before Interest
Expense and Taxes /
Interest Exp)
(By Author)
From the above graph it can be analysed that the times interest ratio of the company is sound
and the company is performing better (Daunfeldt and Hartwig, 2014). The interest coverage
ratio of the company in the year 2015 was 5.01 and it increased to 5.03 and finally increased
to 6.05 in the year 2017. The interest coverage ratio can be improved if the interest expense
can be improved. Moreover the interest coverage ratio below 1 is considered as a highly
danger situation and in comparison to the benchmark the Qantas Airways performed
extremely well (Bragg, 2012).
Return on Financial leverage
When a business realises the financial leverage which means the Qantas Airways will be
earnings more profit. The Return on the financial leverage is the difference between the
return on equity and the return on assets (Gotze, Northcott and Schuster, 2016). The ROA is
the useful ratio and it is used in interpreting the profit. The return on financial leverage of the
company is 25.5% and it reduced to 18.5% in the year 2017. Every investor wants to get a
higher return on the investment and if the return on financial leverage is going to decrease
this will ultimately hamper the performance of the company and the count of the number of

FINANCE 10
the investors is low. Henceforth it is advised to the company that the return on financial
leverage shall be improved (Gibson, 2011).
Return on Financial Leverage ROE-ROA
Liquidity ratios
Liquidity ratios are another type of the financial ratios that are used by the investors and
determine the ability of the debtor to pay off the current debt of the company without taking
the assistance of the external capital. Liquidity ratios are basically the metrics that measures
the current ratio, quick ratio, operating cash flow (Godwin and Alderman, 2012). Current
liabilities are analysed in relation to the liquid assets to assess the time period of the short
term debts. The analysts as well as the mortgage holders use the liquidity ratios more to make
the valuation of the going concern issues. This ratio also helps to indicate the cash flow
positioning of the company. This information is also used to measure the strategic strength of
the company in comparison to its competitors.
The liquidity ratios of the Qantas Airways can be analysed from the following table.
2015 2016 2017
Cash Liquidity and Cash Sources and Uses
Working Capital (CA - CL)
-
3570000
-3976000 -3884000
Current Ratio (CA / CL) 0.49 0.44 0.49
Quick Ratio [(Cash + ST Securities + AR) / CL)] 0.39 0.36 0.34
OCFCL (Operating CF / CL) -0.187 -0.245 -0.181
OCFCX (Opera ting CF / Capital Expenditures ) -0.17 -0.23 -0.17
Free Cash Flow (Cash from Ops – Net Cap. Expend.) 8756000 9028000 9551000

FINANCE 11
Current Ratio
Current ratio is the kind of the liquidity ratio which is used to measure the ability of the
company to pay short term liabilities as well as the long term liabilities. To cover this kind of
the liability the current ratios takes into the consideration that the total assets of the company
and its relation to the current liabilities of the company. From the table below it can be
analysed that the company is maintaining its current ratio from 0.48 to 0.50 consistently or
the past three years (Higgins, 2012). The company shall increase its ratio to 2:1 which is also
considered as the ideal ratio as per the standards of the industry. It is advised to the company
to get rid of the useless assets that are not beneficial to the company, and also the company
shall also control the overhead expenses to which the major cost cutting is possible.
Current Ratio Current Assets
Current Liabilities
Quick Ratio
The quick ratio also known as the liquid ratio or the acid test ratio is used to determine the
ability of the fir to generate the cash to pay back to the current liabilities and the obligations.
The quick ratio is basically the tester that determines the value of how much cash the
company can generate within the stipulated period of the 90 days. The assets and the
marketable securities are the quick generator of the cash and therefore this ratio reflects the
ideology of the quick sources of the cash (Jenter and Lewellen, 2015). The major difference
between the quick ratio and the current ratio is that not all the current assets are convertible
into cash within the given time frame. For example inventories.

FINANCE 12
Quick Ratio
Cash Equivalents
+ marketable
securities+
accounts
receivable
Current Liabilities
From the main table above it can be analysed that the quick ratio is decreasing. The decrease
is from 0.39 to 0.34 in the period of the three years. The decrease in the quick ratio is not a
good sign for the company as there would not be enough cash to generate to pay off the
earlier debts.
2015 2016 2017
0.31
0.32
0.33
0.34
0.35
0.36
0.37
0.38
0.39
0.40
Quick Ratio [(Ca s h + ST Securities +
AR) / CL)]
Quick Ratio [(Ca s h + ST
Securities + AR) / CL)]
(By Author)

FINANCE 13
Working capital
Working capital is the liquidity ratio which measures the ability of the firm to pay off the
short term as well as the long term liabilities. The working capital is the difference between
the current assets and the current liabilities (Kimmel, Weygandt and Kieso, 2010).
Working Capital
Current Assets-Current
Liabilities
From the above table it can be analysed that the working capital of the company that the
company’s working capital is negative in all the three years. The company saw the negative
working capital of -375000 and it rose to -388400 in the year 2017. The current liabilities are
more than the current assets and hence the company is not able to pay the liabilities within
the period of one year.
2015
2016
2017
-4000000 -3800000 -3600000 -3400000 -3200000
Working Capital (CA - CL)
Working Capital (CA - CL)
(By Author)
At times the negative working capital is a good sign as the company’s customers make the
upfront payment rather than keeping large cash on their hands. As can be seen from the
balance sheet the cash is also decreasing.

FINANCE 14
Operating cash flow with the current liabilities
The operating cash flow is the metric that measures how much amount of the money has the
inflow and the outflow from its business activities and that too within a stipulated time. The
profit and loss measures the entire profit of the company; however, the cash flow measures
the change in the money available which the company can use to invest. There can be a
variety of the reasons for the negative cash flow and the ratio with the current liabilities. The
company received a negative cash flow and in the year 2015 the cash flow ratio was -0.187
and increased to -0.245, the ratio than changed to -0.181 in the year 2017 which was a fall.
The changes in the working capital are the reason due to which the cash flow decreases
(Venkatesh and Gugloth, 2017).
Operating cash flow with the capital expenditures
The capital expenditure is basically the expense that cannot be paid off during a period of one
year. However the company treats this expenditure as the benefit expenditure as this
expenditure includes the purchase of the plant and equipment, property, and other capital
assets. These assets give the capital benefit in the near future. This ratio is also known as the
capex ratio. The capital expenditure in the cash flow includes the cash from the investing
activities. The company reflects the negative cash flow in the financial year 2015 to 2017. In
general a high CAPEX is good sign as the capital expenditures are the driver of the growth
and hence it is advised to the company to improve the capex cash flow. The company had -
0.17 in the year 2015 which increased to more negative view in the next year. However, the
company pulled itself back and reduced the ratio from -0.23 to -0.17. Yet the position of the
company is not sound it should work to bring the ratio to the positive (Wall Street, 2016).
Free cash flow
Free cash flow is the cash flow which represents that cash which is used by the company to
generate the cash after all the investments are made by the company and the cash is available

FINANCE 15
to expand the existing business. The free cash flow is further segregated into the cash flow
from firm and equity. The company maintained enough cash flows as it can be observed from
the table above. The cash flows in the year 2015 that were free after all the expenditures were
8756000 and they increased by 4% till the year 2017. The amount of free cash flow in the
year 2017 is 955100 (Gurufocus, 2018).
Quality of the financial statements
The financial statements reflect the financial position of the company. It is basically a record
of the company's financial affairs. Such financial statements help in keeping the record of the
company's income and expenses. Such statements also help in analysing and controlling the
expenses of the company which may result in an increase in the profits of the company. The
financial statements of the company include the balance sheet, profit and loss account,
income statement and cash flow statement. The statements of the company should also be
qualitative, in other words the financial statements of the company should be understandable
where all the information should be presented clearly and such information must of the
relevance of the company’s financial matters (Qantas, 2018).
The statements should be free from all the errors and omission. The information given in the
financial statement should indicate the events which lead to such transaction and such
information must be matched to the financial period where the transaction took place. The
financial reports of the Qantas Airways have provided all the relevant information which are
necessary for a transaction (Wall Street, 2016). The financial statement is not only reliable
but also very relevant. The financial statement of Qantas Airways is very reliable as the
statements and transactions very clear and easy to understand because the statements are
served with all the additional information such as footnotes which describes the transaction.
The incomes and expenses are fairly segregated in the income statement and the footnotes

FINANCE 16
prove its relevancy. Qantas Airways has applied all the accounting rules and standards which
are mentioned in the law. The financial statements were audited by the proper auditing
authorities and are free from errors and mistakes (TCS consultancy, 2017).

FINANCE 17
References
Australian Government, (2018) Airline On Time Performance, 2017-18 Financial Year
Report [Online] Available from https://bitre.gov.au/statistics/aviation/otp_annual.aspx
[Accessed on 1st September 2018]
Baker, H.K., Jabbouri, I. and Dyaz, C. (2017) Corporate finance practices in
Morocco. Managerial Finance, 43(8), pp. 865-880.
Bierman Jr, H. and Smidt, S. (2014) Advanced capital budgeting: Refinements in the
economic analysis of investment projects. Oxon: Routledge.
Borgonovo, E. (2017) Sensitivity Analysis: An Introduction for the Management
Scientist (Vol. 251). Switzerland: Springer.
Bragg, S. M. (2012) Financial analysis: a controller's guide. New Jersy: John Wiley and
Sons.
Colloquy, (2015) [Online] Available from https://www.colloquy.com/latest-news/qantas-
loyalty-boosts-data-analytics-capabilities/ [Accessed on 25th August 2018].
Daunfeldt, S.O. and Hartwig, F. (2014) What determines the use of capital budgeting
methods?: Evidence from Swedish listed companies. Journal of Finance and
Economics, 2(4), pp.101-112.
Gibson, C. H. (2011) Financial reporting and analysis. USA: South-Western Cengage
Learning.
Godwin, N., and Alderman, C. (2012) Financial ACCT2. USA: Cengage Learning.
Gotze, U., Northcott, D. and Schuster, P. (2016) INVESTMENT APPRAISAL. (2nd ed.). New
York: Springer.

FINANCE 18
Guru focus, (2018) Qantas Airways Ltd (OTC)PK:QUBSF) Intangible Assets: $834 Mil (As
of Jun. 2018) [Online] Available from
https://www.gurufocus.com/term/Intangibles/QUBSF/Intangible-Assets/Qantas-Airways-Ltd
[Accessed on 20th August 2018]
Higgins, R. C. (2012) Analysis for financial management. New York: McGraw-Hill/Irwin.
Jenter, D. and Lewellen, K. (2015) CEO preferences and acquisitions. The Journal of
Finance, 70(6), pp.2813-2852.
Kimmel, P. D., Weygandt, J. J., and Kieso, D. E. (2010) Financial accounting: tools for
business decision making. New Jersy: John Wiley and Sons.
News Corp Australia Network, (2017) Qantas announces $852m profit, second best in
airline’s 97-year history [Online] Available from https://www.news.com.au/travel/travel-
updates/qantas-is-losing-money-despite-852m-profit-as-it-announces-buyback/news-story/
d21731fe33e3464ab0e18dbef132c860 [Accessed on 1st September 2018]
Qantas, (2018) QANTAS GROUP FULL YEAR 2017 FINANCIAL RESULT [Online]
Available from https://www.qantasnewsroom.com.au/media-releases/qantas-group-full-year-
2017-financial-result/ [Accessed on 1st September 2018]
Shapiro, A. C. (2008) Capital budgeting and investment analysis. India: Pearson Education.
TCS consultancy, (2017) [Online] Available from https://www.tcs.com/qantas-enhances-
productivity-improves-alignment-of-it-with-business [Accessed on 24th August 2018]
Venkatesh, M., and Gugloth, D. (2017) A Review of Capital Budgeting Techniques. [Online]
Available from http://www.internationaljournalssrg.org/IJEMS/2017/Special-Issues/
ICEEMST/IJEMS-ICEEMST-P102.pdf [Accessed on 24th August 2018]

FINANCE 19
Wall Street, (2016) What are accounting polices? [Online] Available from
https://www.wallstreetmojo.com/accounting-policies/ [Accessed on 20th August 2018]
Zainudin, E.F., Zainudin, E.F., Hashim, H.A. and Hashim, H.A. (2016) Detecting fraudulent
financial reporting using financial ratio. Journal of Financial Reporting and
Accounting, 14(2), pp.266-278.