APO004-6: Financial Analysis and Management of Qantas Airways Plc

This report offers a comprehensive financial analysis of Qantas Airways, an Australian aviation industry leader. It begins by outlining Qantas' corporate objectives and the challenges it faces. The analysis delves into the airline's capital structure and dividend policies, examining their impact on performance over the past three years (2016-2018), with data extracted from its financial statements. Key metrics such as debt-to-equity ratio, return on capital employed, interest cover ratio, and dividend payout ratio are scrutinized to evaluate the effectiveness of Qantas' financial strategies. The report also discusses various investment appraisal tools, including Net Present Value (NPV), Accounting Rate of Return (ARR), and Internal Rate of Return (IRR), that Qantas managers can utilize to ensure investment decisions align with corporate objectives. The document is contributed by a student and available on Desklib.

Running head: FINANCIAL ANALYSIS AND MANAGEMENT
Financial Analysis and Management
Name of the Student:
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1FINANCIAL ANALYSIS AND MANAGEMENT
Table of Contents
Introduction:.......................................................................................................................2
Background to Qantas Airways:........................................................................................2
Capital structure and dividend policy:................................................................................3
Investment appraisal tools:................................................................................................7
Conclusion:........................................................................................................................8
References:......................................................................................................................10

2FINANCIAL ANALYSIS AND MANAGEMENT
Introduction:
The current assignment would focus on providing a brief overview of a leading
retail organisation operating in the UK aviation industry, which is Qantas Airways. The
overview of the organisation would be provided in order to identify its key corporate
objectives, which would assist in revealing the type of problems confronted by the
organisation in the recent times. The second section would elaborate the capital
structure policy and dividend policy of Qantas Airways and the ways through which such
policies have affected the performance of the organisation in the past three years.
Finally, the paper would shed light on the tools of investment appraisal used by the
managers for undertaking investment decisions so that assurance could be provided
regarding the fulfilment of the key corporate objectives of the organisation.
Background to Qantas Airways:
Qantas Airways is a leading airline organisation operating in the aviation industry
of Australia. It is mainly engaged in providing passenger services and services related
to freight air transportation in Australia and in other global nations. It provides express
freight and air cargo services to its passengers along with programs related to customer
loyalty. Currently, it has a fleet of 313 aircrafts. The organisation has been established
in 1920 and the headquarter of the airline is located in Mascot, Australia (Qantas.com
2019).
The finance function of Qantas Airways is ascertained as the activities, which
include cash management existing through business. The finance function of the
organisation includes some primary functions, which could support management. Such
finance functions include financial management, financing, capital budgeting and
dividend policy. Firstly, the financing option of Qantas Plc includes raising capital to help
in its operation and investment schemes (Al-Najjar and Kilincarslan 2016). It is termed
as the capital structure, which includes the combination of debt and equity securities for

3FINANCIAL ANALYSIS AND MANAGEMENT
maximising the market value of the organisation. Thus, Qantas needs to maintain
healthy relationship with its shareholders for raising funds through equity.
Secondly, the financial management of Qantas is to assure that the organisation
has adequate funds on hand for assisting in regular operations. This includes supplier
payments, receiving seasonal funding, collections from customers and investment of
surplus cash (Barr and McClellan 2018). The financial activities need technical,
analytical and individual skills. The individual skills assist in maintaining, developing
relationships with the lenders and suppliers.
Thirdly, capital budgeting of Qantas, which is termed as investment function as
well, includes selecting suitable projects so that funds could be invested depending on
expected risk. Owing to the huge capital investment for prospering in a competitive
market, it is a very critical function for Qantas Plc. Therefore, the main issue that the
organisation might encounter is in dividing the level of investment in small scale for
better management. In opposition, the effect would be adverse on the growth and
development of the organisation (Bekaert and Hodrick 2017).
Finally, it is necessary to maintain sustainable dividend cover in future. This is
because if it is too low, there is a chance that the organisation would not be able to pay
out to its shareholders (Baker and Weigand 2015). Therefore, Qantas needs to maintain
high dividend cover for ensuring the interest of its investors.
Capital structure and dividend policy:
In order to analyse the capital structure and dividend policy of Qantas Airways,
the following table is prepared to determine their implications on the performance of the
organisation over the past three years:
Particulars 2016 (in £m) 2017 (in £m) 2018 (in £m)
EBIT 1,643 1,370 1,573
Net Profit 1,029 853
98
0

4FINANCIAL ANALYSIS AND MANAGEMENT
Total assets 16,705 17,221 18,647
Equity 3,260 3,540 3,959
Debt 13,445 13,681 14,688
Interest Paid 227 164
16
1
Dividends Paid 234 261
24
9
Debt-to-equity ratio 4.12 3.86
3.7
1
Return on capital
employed 16.46% 13.05% 13.19%
Dividend payout ratio 14.24% 19.05% 15.83%
Interest cover ratio 7.24 8.35
9.7
7
Table 1: Items listed in the financial statements of Qantas Plc for the years 2016-
2018
(Source: Investor.qantas.com 2019)
Over three years, long-term debt has played a significant role in the financial
strategy of Qantas Plc. In 2016, the long-term debt has been 51.78% of the total debt of
Qantas Airways, which has fallen to 48% in 2017 and the ratio is same in 2018. This
decline in long-term borrowings has minimised fund investment in property, plant and
equipment as well as other revenue generating assets. With the help of long-term
financial strategy, Qantas would be able to have additional flexibility and time for debt
repayment, which could lead to fall in financial risk as well (Danis, Rettl and Whited
2014). However, the decline in long-term debt has restricted the growth of Qantas
Airways in terms of expansion strategy for generation of additional revenue. As a result,
such restricted sales have hampered the expansion of revenue streams of the

5FINANCIAL ANALYSIS AND MANAGEMENT
organisation, which would minimise long-term sustainability and thus, business risk has
increased.
On the other hand, short-term liabilities are observed to be increased over the
years for Qantas Airways owing to increase in trade payables and unearned revenue.
Such rise would reduce financial flexibility coupled with staggering market growth and
tough trading conditions. This policy, if continued, would restrict long-term growth and
flexibility. Therefore, Qantas Airways needs to undertake corrective measures for
improving the debt position over the long-term in order to minimise its financial risk.
In terms of equity, it could be observed that the total equity of the organisation
has increased by 8.59% in 2017 and by 11.84% in 2018 compared to the previous
years. This clearly implies that Qantas Airways has been focusing on raising more funds
through issuing new equity shares in the market rather than undertaking loans from
banks and other financial institutions. However, the debt level of the organisation has
increased over time and recent rise in debt level could be related to funding of new
revenue generating assets like purchase of new fleets as well as other relevant
property, plant and equipment. As such, when these assets reach their entire operating
capacity, there would be decline in debt-to-equity ratio with the progress of time.
On the other hand, it is seen that both EBIT and net profit of Qantas Airways
have fallen from 2016 to 2017 considerably owing to rise in operating expenses;
however, slight improvement could be observed in the year 2018. This would have
adverse impact on return on capital employed, which is not attractive to long-term
investors planning to base their returns on increased dividend yields through raising
capital value (Belo, Collin‐Dufresne and Goldstein 2015). Moreover, with the fall in
return on capital employed in comparison to 2016, both liabilities and equity of the
organisation are observed to increase over three-year period. This implies that Qantas
Plc has not invested additional funds appropriately in revenue generating assets for
maintaining stable return.
In current years, there has been increase in both long-term cost of debt as well
as cost of equity, which has lead to rise in cost of capital (Faccio and Xu 2015).

6FINANCIAL ANALYSIS AND MANAGEMENT
However, stability could be observed owing to the rising costs of maintaining equity,
which is offset by lower cost of debt. On the other hand, these costs might not remain
stable for future as long as debt-to-equity ratio remains stable. In this case, debt-to-
equity ratio is observed to decline from 4.46 in 2016 to 3.71 in 2018 for Qantas Plc,
which is well above the ideal standard of 1. Hence, this has increased the bankruptcy
risk and financial risk along with raising its cost of equity. However, if the debt is made
up of short-term debt, this would free the existing interest rate for greater timeframe.
Hence, Qantas Airways needs to undertake corrective actions as soon as possible
(Finkler, Smith and Calabrese 2019).
In terms of interest cover ratio, the ratio has increased from 7.24 in 2016 to 8.35
in 2017, which has increased further to 9.77 in 2018 for Qantas Airways. This implies
that the existing business model of the organisation has been effective with no
corrective actions required. This has minimised the potential for threats of the
organisation, as it has been highly effective in cover its finance cost with the help of
operating income.
From the above table, it could be seen that the dividend payout ratio of Qantas
Airways has risen from 14.24% in 2016 to 19.05% in 2017; however, it has fallen to
15.83% in 2018. As commented by Fairchild, Guney and Thanatawee (2014), dividend
payout ratio gauges the percentage of net income, which is distributed to the
shareholders of an organisation as dividends during the year. The investors want to
gain information about dividend payout ratio to know if the organisation pays a
reasonable portion of net profit to the investors. It has been identified that Qantas Plc
has been paying increased dividends to its shareholders over the years.
This kind of dividend policy is more appealing for the long-term investors like
pension funds. This is owing to their desire for high dividend paying investments with
little requirements of cash out. Hence, significant changes in stock prices might not be
an overwhelming factor in the process of decision making (McKinney 2015). On the
other hand, short-term investors would not be satisfied with this type of policy, as they
desire for increased capital growth rather than dividend payments. Hence, Qantas
Airways is considering the interests of its long-term investors for raising maximum funds

7FINANCIAL ANALYSIS AND MANAGEMENT
at cheaper cost along with the signalling effects. Based on this evaluation, it could be
stated that Qantas Airways has maintained stable dividend policy by paying increased
dividends to its shareholders with no corrective measures needed.
Investment appraisal tools:
There are various investment appraisal techniques that the managers of Qantas
Plc could use for ensuring that the corporate objectives are met and they are
demonstrated briefly as follows:
Net present value (NPV):
This technique gauges the cash inflow whether shortfall or excess after meeting
the routine finance commitments. All capital investment appraisals have only one
objective, which is driving towards a positive NPV (Andor, Mohanty and Toth 2015). The
managers of Qantas Airways could utilise this technique by involving net cash flow at a
specific present time and a specific discount rate. This implies that there is inverse
association between NPV and discount rate. If the discount rate is high, it could
minimise the NPV of capital for Qantas Plc. An increased interest rate might increase
discount rate over a timeframe and therefore, the managers need to be wary of such
increase in order to ensure the fulfilment of the corporate objectives of the organisation.
Accounting rate of return (ARR):
This method of capital investment appraisal contrasts the profit that could be
made by the concerned project to the initial investment amount, which would be needed
for the project. In case, when the managers have a number of projects for evaluation,
the ones providing increased rate of return would be preferred over ones having lower
rate of return. However, this method is a non-discounted technique of capital budgeting
in that it fails to take into account the time value of money (Daunfeldt and Hartwig
2014). Therefore, the managers of Qantas Airways need to take into consideration the
other factors as well for ensuring that the corporate objectives of the organisation are
met.

8FINANCIAL ANALYSIS AND MANAGEMENT
Internal rate of return (IRR):
Internal rate of return is defined as the rate of discount, which provides no value
to NPV. Among all the techniques of capital investment appraisal, IRR is primarily taken
into account for measuring the efficacy of capital investment (Wang 2014). Therefore, if
the investment related to cost of capital is found to be more than the value of IRR, the
project need not be accepted by the managers of Qantas Airways. On the other hand, a
project having low cost of capital has increased chances of acceptance (De Andrés, De
Fuente and San Martín 2015). Hence, when a positive IRR is found in a project, the
managers of the organisation would accept the project, as it would assist in maximising
the profitability by fulfilling its corporate objectives.
Payback period:
This method is involved in appraising capital investment based on time, which
would be required for regaining initial investment made (Mwangi, Makau and Kosimbei
2014). It is one of the easiest techniques of capital investment appraisal. If the
managers of Qantas Airways find projects with a shorter payback period, they would be
preferred for investment in contrast to the ones having longer payback periods. If the
managers find payback period to be more than the useful life of the project, the project
should be rejected. In opposition, it would minimise the profitability of the organisation,
which would have unfavourable impact on the corporate goals of the organisation
(Rossi 2014).
Profitability index:
This method of capital budgeting is involved in analysing a project depending on
computation of value per unit of investment (Rossi 2015). This method is termed as
profit investment or value investment ratio. This method is a ratio of amount of money
invested to profit or project payoff. At the time of undertaking a project, the managers of
Qantas Airways need to evaluate whether the index is above or below 1. If it is above 1,
the project could be accepted and vice-versa. Thus, this technique would assist the
organisation in fulfilling its corporate objectives (Zietlow et al. 2018).

9FINANCIAL ANALYSIS AND MANAGEMENT
Conclusion:
Based on the above discussion, it could be found that the decline in long-term
debt has restricted the growth of Qantas Airways in global expansion. As a result, such
restricted sales have hampered the expansion of revenue streams of the organisation,
which would minimise long-term sustainability and thus, business risk has increased. In
current years, there has been increase in both long-term cost of debt as well as cost of
equity, which has lead to rise in cost of capital. However, stability could be observed
owing to the rising costs of maintaining equity, which is offset by lower cost of debt. On
the other hand, these costs might not remain stable for future as long as debt-to-equity
ratio remains stable. In this case, debt-to-equity ratio is observed to increase from 1.67
in 2016 to 1.97 in 2018 for Qantas Airways. Hence, this has increased the bankruptcy
risk and financial risk along with raising its cost of equity. However, if the debt is made
up of short-term debt, this would free the existing interest rate for greater timeframe.
Hence, Qantas Airways needs to undertake corrective actions as soon as possible

10FINANCIAL ANALYSIS AND MANAGEMENT
References:
Investor.qantas.com., 2019. Qantas Investors | Investor Centre. [online] Available at:
https://investor.qantas.com/investors/?page=annual-reports [Accessed 13 Jan. 2019].
Qantas.com., 2019. Fly with Australia’s most popular airline | Qantas AU. [online]
Available at: https://www.qantas.com/au/en.html [Accessed 13 Jan. 2019].
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business in society, 16(1), pp.135-161.
Andor, G., Mohanty, S.K. and Toth, T., 2015. Capital budgeting practices: A survey of
Central and Eastern European firms. Emerging Markets Review, 23, pp.148-172.
Baker, H.K. and Weigand, R., 2015. Corporate dividend policy revisited. Managerial
Finance, 41(2), pp.126-144.
Barr, M.J. and McClellan, G.S., 2018. Budgets and financial management in higher
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Bekaert, G. and Hodrick, R., 2017. International financial management. Cambridge
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Belo, F., Collin‐Dufresne, P. and Goldstein, R.S., 2015. Dividend dynamics and the term
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De Andrés, P., De Fuente, G. and San Martín, P., 2015. Capital budgeting practices in
Spain. BRQ Business Research Quarterly, 18(1), pp.37-56.

11FINANCIAL ANALYSIS AND MANAGEMENT
Faccio, M. and Xu, J., 2015. Taxes and capital structure. Journal of Financial and
Quantitative Analysis, 50(3), pp.277-300.
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