MBA901 T3 2018: Financial Analysis of Virgin Australia and SME

This report provides a comprehensive financial analysis of two companies: Virgin Australia Holdings Ltd (VAH), a listed airline company, and SME Prosperous Pty Ltd, an unlisted small to medium enterprise. The report begins with an executive summary outlining the objectives and methodology, which involves in-depth study and analysis using various sources, including the ASX and company websites. Part A focuses on VAH, presenting a detailed financial comparison using comparative income statements and balance sheets over four years (2015-2018). It includes an analysis of revenue, operating expenditure, finance costs, and losses, along with a trend analysis. The report also provides ratio analysis, assessing liquidity, debt management, and asset management. Part B presents a financial summary of SME Prosperous Pty Ltd, offering a similar level of financial analysis. The report concludes with a summary of the accounting position and key findings for both companies, drawing conclusions based on the financial data and ratio analysis. The assignment also references the provided assignment brief which outlines the task and the required scope of work.

1
By student name
Professor
University
Date: 25 April 2018.
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Executive Summary
A professional management report has been prepared on the two companies with the objective
of financial analysis and which will serve as the basis for taking investment decisions and other
decisions by stakeholders. For the purpose of the report, in-depth study and analysis of the two
companies has been done using ASX website and the respective company websites as well. The
historic records, primary, secondary and tertiary sources of information has also been used to
prepare the report. The first case study deals with one of the listed Australian companies
named Virgin Australia Holdings Ltd. The financial analysis with respect to all the financial
statements, the trend analysis and the ratio analysis has been done for past years. The
explanatory notes given by the auditor in the Auditor’s report has also been shown. Finally, the
conclusion and recommendation has been given as to what the company might face in the near
future. Part B of the Assignment also deals with the financial summary of one of the small
unlisted companies SME Prosperous Pty Ltd for which too the financial analysis has been done.-
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Contents
Part A – Virgin Australia Holdings Ltd (VAH)................................................................................................4
Introduction.............................................................................................................................................4
Financial Comparison for the entity - Internal.........................................................................................4
Purpose of financial audit and audit comments....................................................................................12
Conclusion and Accounting Position of company..................................................................................13
Part B - Prosperous Pty Ltd........................................................................................................................13
Introduction...........................................................................................................................................13
Financial Analysis...................................................................................................................................13
Conclusion and Accounting Position of company..................................................................................16
References.................................................................................................................................................17
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Part A – Virgin Australia Holdings Ltd (VAH)
Introduction
In this section of the report, the financial analysis of one of the companies Virgin Australia
Holdings Ltd has been done. It is listed on the Australian Stock Exchange and represented as
VAH. It is an airline company and operates in Australian as Virgin Australia, Virgin Australia
Regional Airlines, Virgin Australia International Airlines and Tigerair Australia. It was previously
being operated by Pacific Blue Airlines and was absorbed into Virgin Group in the year 2011
(Bromwich & Scapens, 2016). The company’s headquarters are based out of Brisbane and
employs nearly 10000 people. It is one of the largest Airline services company in Australia after
Qantas Group and Airline Group.
Financial Comparison for the entity - Internal
The comparative income statement for the last four years 2018, 2017, 2016 and 2015 has been
shown below:
Virgin Australia Group
Consolidated statement of profit or loss
Particulars 2018 2017 2016 2015
$m $m $m $m
Revenue and income
Airline passenger revenue 4,623.
4
4,275.
3
4,194.
8 3,999.0
Other ancillary revenue 793.
8
765.
3
790.
9 707.0
Other income 3.
5
3.
8
18.
2 17.4
Net foreign exchange gains - 2.
9
17.
1 25.8
Revenue and income 5,420.
7
5,047.
3
5,021.
0 4,749.2
Operating expenditure
Aircraft operating lease expenses (389.
0)
(426.
2)
(360.
6)
(290.0
)
Airport charges, navigation and station
operations
(1,060
.7)
(1,023
.8)
(984.
1)
(917.0
)
Contract and other maintenance expenses (246.
4)
(242.
6)
(182.
0)
(155.2
)
Commissions and other marketing and (467. (430. (408. (363.1
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reservations expenses 4) 0) 2) )
Fuel and oil (985.
5)
(898.
4)
(1,018
.8)
(1,191.
6)
Labour and staff related expenses (1,246
.7)
(1,219
.2)
(1,157
.8)
(1,118.
8)
Impairment losses on assets classified as held
for sale - (7.
8)
(107.
3) –
Impairment losses on cash-generating units (120.
8) -
Impairment losses on other assets (47.
8)
(65.
9)
(118.
1) –
Onerous contract expenses (58.
5)
(29.
6)
(100.
2) –
Other expenses from ordinary activities (512.
9)
(516.
9)
(531.
6)
(464.2
)
Depreciation and amortisation (337.
3)
(309.
7)
(282.
2)
(275.4
)
Ineffective cash flow hedges and non-
designated derivatives losses - 0.
7
(27.
8)
(27.4
)
Net operating expenditure (5,473
.0)
(5,169
.4)
(5,278
.7)
(4,802.
7)
Share of net profits/(losses) of equity-
accounted investees
3.
5
2.
1
0.
7
(16.6
)
Loss before net finance costs and tax (48.
8)
(120.
0)
(257.
0)
(70.1
)
Finance income 19.
2
16.
9
11.
4 39.7
Finance costs (171.
8)
(186.
5)
(181.
0)
(132.9
)
Net finance costs (152.
6)
(169.
6)
(169.
6)
(93.2
)
Loss before tax (201.
4)
(289.
6)
(426.
6)
(163.3
)
Income tax benefit (451.
9)
103.
8
201.
9 69.5
Loss (653. (185. (224. (93.8
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3) 8) 7) )
Attributable to:
Owners of the Company (681.
0)
(220.
3)
(260.
9)
(110.8
)
Non-controlling interests 27.
7
34.
5
36.
2 17.0
(653.
3)
(185.
8)
(224.
7)
(93.8
)
Earnings per share Cents Cents Cents Cents
Basic earnings per share (8.
1)
(2.
8)
(7.
4)
(3.2
)
Diluted earnings per share (8.
1)
(2.
8)
(7.
4)
(3.2
)
From the above financial data on income statement and trend analysis over the past 4 years,
we can see that the company has grown in terms of the revenue and the same can be seen
from the record sales in airline passenger division and other auxiliary revenue (Bumgarner &
Vasarhelyi, 2018). Besides revenue, the costs have also multiplied but the increase in operating
costs has not been in proportion of sales and thus, the cost as percentage of sales has dropped.
The major cost heads being the fuel, oil and power charges, the labour and staff related
expenses, commission to the marketing agents and companies, contract maintenance
expenses, airport lease charges and the Airport charges, station and navigations operation
expenses (Kok, Ribando, & Sloan, 2017). The major loss for the company has been the major
impairment expenses on the cash generating units as well as the assets, which were incurred
during the year. Furthermore, it can be seen that the depreciation expenses has been
increasing for the company every year on year. The finance income as well as the finance costs
have been more or less constant during the last 3 years without much change. However, the
loss for the company has been ever increasing which was $ 163.3 Mn in 2015, $ 426.6 Mn in
2016, and $ 289.6 Mn in 2017 and $ 201.4 Mn in 2018. Such has been the extent of loss that
the company never had positive EPS in the last 4 years.
The comparative balance sheet of the company for the last 4 years has been shown below:
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Virgin Australia Group
Consolidated statement of financial position
Particulars 2018 2017 2016 2015
$m $m $m $m
Current assets
Cash and cash equivalents 1,415.5 1,396.1 1,123.8 1,028.5
Receivables 281.6 308.9 313.2 312.2
Inventories 47.6 46.3 42.3 41.1
Derivative financial instruments 220.0 2.4 26.3 43.6
Other financial assets 12.1 25.2 32.2 60.3
Current tax assets – 0.2
Assets classified as held for sale - 4.3 171.6 95.4
Other 2.7 4.3 4.3 4.7
Total current assets 1,979.5 1,787.5 1,713.7 1,586.0
Non-current assets
Receivables 191.6 162.4 129.0 56.6
Derivative financial instruments 64.0 6.6 23.2 6.9
Other financial assets 284.2 292.5 265.0 234.7
Investment accounted for using the
equity method 8.2 4.6 4.0 6.6
Deferred tax assets - 554.2 423.5 216.6
Property, plant and equipment 3,031.0 2,916.6 2,872.8 3,081.9
Intangible assets 617.0 617.2 590.7 564.3
Other 12.9 14.2 18.9 26.0
Total non-current assets 4,208.9 4,568.3 4,327.1 4,193.6
Total assets 6,188.4 6,355.8 6,040.8 5,779.6
Current liabilities
Payables 807.5 679.9 708.9 701.5
Interest-bearing liabilities 295.1 280.9 875.8 440.3
Derivative financial instruments 6.6 57.1 33.4 45.6
Provisions 269.0 234.2 170.9 172.8
Unearned revenue 1,142.1 1,074.2 990.4 939.3
Other 3.6 22.0 0.4 0.3
Total current liabilities 2,523.9 2,348.3 2,779.8 2,299.8
Non-current liabilities
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Payables 5.6 6.3 9.3 6.3
Interest-bearing liabilities 2,273.0 2,152.4 2,124.2 2,321.9
Derivative financial instruments 0.2 6.4 8.0 –
Provisions 277.6 263.5 214.6 122.4
Unearned revenue – 2.0
Other 13.1 5.1 6.1 6.4
Total non-current liabilities 2,569.5 2,433.7 2,362.2 2,459.0
Total liabilities 5,093.4 4,782.0 5,142.0 4,758.8
Net assets 1,095.0 1,573.8 898.8 1,020.8
Equity
Share capital 2,238.9 2,243.7 1,309.0 1,152.9
Reserves 268.3 58.8 117.2 177.3
Retained earnings (1,415.8) (734.8) (514.5) (253.6)
Equity attributable to the owners of the
Company 1,091.4 1,567.7 911.7 1,076.6
Non-controlling interests 3.6 6.1 (12.9) (55.8)
Total equity 1,095.0 1,573.8 898.8 1,020.8
From the comparative balance sheet of the company for the last 4 year, it can be seen that the
current assets have been on the increasing trend, especially the balance of cash and cash
equivalents. This is done to have more liquid cash considering the requirements of growing
business (Choy, 2018). The receivables balance has declined which indicates good collection
measures and the stock or inventory balance has been more or less constant throughout the
years. The company does not hold assets for sale anymore in 2018 and have sold it all. Amongst
the non-current assets, the balance of receivables has increased indicating that the old debtors
are not paying off the dues. The financial assets have remained more or less constant through
these years and the same has been the case with property, plant and equipment and the
intangible assets.
Amongst the current liabilities, the balance of payable has increased (which is due to increase in
business volume). However, the balances of the unearned revenue and the provision has
increased marginally. The non-current liabilities of interest bearing liabilities like debt and the
long term provisions has increased which shows that the company has not being paying off on
time (Jefferson, 2017).
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Amongst the equity section, the balance of the equity share capital has doubled from 2015 to
2018, which shows that the company has been issuing shares on a continuous basis and has
been focusing on internal capital instead of raising capital through debt, which is a positive sign.
Conversely, the situation with the retained earnings has been adverse, as the negative balance
has been piling up year on year due to continuous losses being incurred by the company.
Given below is the ratio analysis which shows the trend over past 4 years, the analysis also
mentions the status of ratio against the industry trend and mentions if it is positive or negative.
1. Liquidity Ratios
Compar
ison
with
Industr
y
Current Ratio = Total current assets/ Total
current liabilities 2018 2017 2016 2015
Total current assets 1,980 1,788 1,714 1,586
Total current liabilities 2,524 2,348 2,780 2,300
Result 0.78 0.76 0.62 0.69
Negativ
e
Liquid ratio /Quick Ratio = (Total current
assets - Inventory - Prepaid expenses)/ Total
current liabilities
2018 2017 2016 2015
Total current assets - Inventory -
Prepaid expenses 1,929 1,737 1,667 1,540
Total current liabilities 2,524 2,348 2,780 2,300
Result 0.76 0.74 0.60 0.67
Negativ
e
2. Debt Management Ratios
Compariso
n with
Industry
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Debt ratio = (Total Debts /
Total Assets) or ((Total assets-
total owners' equity)/total
assets)
2018 2017 2016 2015
Total Debts
2,27
9
2,15
9
2,13
4
2,32
8
Total Assets
6,18
8
6,35
6
6,04
1
5,78
0
Result 37% 34% 35% 40% Positive
Debt to Equity Ratio = (Total
Debt/Total owners' equity) or
((Total assets- total owners'
equity)/total owners' equity)
2018 2017 2016 2015
Total Debts
2,27
9
2,15
9
2,13
4
2,32
8
Total owners'
equity
1,09
5
1,57
4
89
9
1,02
1
Result 208% 137% 237% 228% Negative
3. Asset management Ratios
Compar
ison
with
Industr
y
Receivables Turnover Ratio =
Sales/Accounts Receivable 2018 2017 2016 2015
Sales
5,
421
5,
047
5,
021
4,
749
Accounts Receivable 473 471 442 369
Result 11.46 10.71 11.35 12.88 Positive
Days Receivable = 365/Receivable
turnover 2018 2017 2016 2015
No. of days 365 365 365 365
Receivable turnover 11.46 10.71 11.35 12.88
Result 31.86 34.08 32.15 28.34 Positive
Inventory Turnover = COGS/Inventory 2018 2017 2016 2015
COGS
4,
396
4,
240
4,
112
4,
036
Inventory 48 46 42 41
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Result 92.35 91.58 97.20 98.19
Negativ
e
Days' Inventory = 365/Inventory Turnover 2018 2017 2016 2015
No. of days 365 365 365 365
Inventory turnover 92.35 91.58 97.20 98.19
Result 3.95 3.99 3.76 3.72
Negativ
e
4. Profitability ratios
Compari
son
with
Industry
Profit Margin / Net Profit ratio = Net
income / Sales 2018 2017 2016 2015
Net income
(2
01)
(
290)
(4
27)
(1
63)
Sales
5,
421
5,
047
5,
021
4,
749
Result -3.72% -5.74% -8.50% -3.44%
Negativ
e
Operating Margin ratio = Operating
Profit/Sales 2018 2017 2016 2015
Operating Profit (49)
(
120)
(2
57) (70)
Sales
5,
421
5,
047
5,
021
4,
749
Result -0.90% -2.38% -5.12% -1.48%
Negativ
e
Return on Equity = Net income/total
owners' equity 2018 2017 2016 2015
Net income
(2
01)
(
290)
(4
27)
(1
63)
Total owners' equity
1,
095
1,
574 899
1,
021
Result -18.39%
-
18.40% -47.46% -16.00%
Negativ
e
From the above trend of ratios, we can see that though the current ratio has improved a bit,
but the same is still is way below the industry trend of 2:1 times, similarly the liquid ratio or the
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decisive test ratio has been on the lower end compare to the industry trend of 1:1. Thus, it can
be concluded that tough the company has improved its liquidity in the past couple of years but
it is well below the industry trend and shows that the company does not have adequate current
assets to pay off the short term liabilities (Grenier, 2017).
Amongst solvency or debt management ratios, the debt asset ratio has improved from 40% to
37%, is on the borderline, and thus can be said to be a positive aspect about the industry. On
the other hand, if the debt equity ratios is seen, the same has been more than 200% in most of
the years, which is again a major risk on the company in terms of debt principal and interest
repayment. The ideal ratio in industry is 2:1 times and therefore it can be mentioned that the
company is in risky position despite increase the share capital (Linden & Freeman, 2017).
Amongst the asset management ratios which are the reflection of the operating measures of
the company and how the internal controls are helping it improve its efficiency, it can be seen
that receivables turnover ratio has degraded from 12.88 times to 11.46 times and similarly the
receivables days has increased from 28.34 days to 31.86 days. This shows that the control on
receivables collection has decline but still it can be said to be positive considering the industry
trend which is high (Heminway, 2017). The inventory turnover ratio has however been on the
negative side and is more than 90 days, thus the company needs to improve on this and plan
the inventory well.
Finally, the profitability ratios, it is vindicated that all the ratios be it return on equity, or return
on assets or the net profit margin all have gone worse to worst simply because of the fact that
the company is not earning adequate profits. Thus, it has been marked as negative factor as
against the industry trend and thus the company needs to improve on the same (Mun, 2018).
Purpose of financial audit and audit comments
The auditors of the company have been KPMG and they have expressed a clear opinion on the
financial statement of the group. They have given a reasonable assurance as to the true and fair
status of the financial statements including notes on account, director’s declaration, profit and
loss account, cash flow statement, statement of changes in equity and the balance sheet. They
have mentioned that the company has complied with all the relevant laws and regulation and
have followed Australian Accounting Standards and the Corporation Act 2001 while preparing
the financial statements. The key audit matters shown by auditors in Auditors’ Report include
recognition of deferred tax assets, revenue recognition, fair valuation of velocity reward points
and calculation of recoverable value of non-financial assets of Virgin Airlines (Gerlach, Mora, &
Uysal, 2018).
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Conclusion and Accounting Position of company
From the above in depth analysis and discussion, it can be concluded that though the company
has been a growing one in the last few years but most of the parameters of the company has
been on the negative side including the profitability, debt management, liquidity and
operational efficiency. Furthermore, the auditors of the company have been apprehensive
regarding few of the critical procedures of company and therefore it will not be wise decision to
invest for short term. The company can be suitable from long-term perspective.
Part B - Prosperous Pty Ltd
Introduction
The company is a small-unlisted entity in Australia on which the financial analysis has been
done to find out the viability of investment and to know the progress and growth of the
company. Since the latest audited financial statements of entity are not available, therefore the
same has been analysed basis annual report of 2014, 2015, 2016 and 2017. The name of the
company being analysed is Southern Cross Star Services Pty Limited (Sirois, Bédard, & Bera,
2018).
Financial Analysis
The comparative financial statements are shown below including profit and loss account,
balance sheet analysis.
Southern Cross Star Services Pty Limited
Consolidated statement of profit or loss
Particulars 2017 2016 2015 2014
$ $ $ $
Trading Income
Gross Receipts 1,980,779 2,009,085 1,997,811 2,010,965
Opening Stock 165,789 143,390 134,455 120,000
Purchases 1,506,433 1,444,788 1,398,468 1,307,127
Less Closing Stock (176,890) (165,789) (143,390) (134,455)
Less Cost of Goods Sold (1,495,332) (1,422,389) (1,389,533) (1,292,672)
Trading Income 485,447 586,696 608,278 718,293
Income
Trading Income 485,447 586,696 608,278 718,293
Security Services Income 1,833,159 1,829,218 1,658,903 1,547,680
Installation Income 817,690 756,832 356,478 135,637
Profit/Loss on sale of P,P&Equ. 4,600 (2,360) (13,900) 780
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Other Income 6,792 6,621 - 5,460
Interest Received 2,666 1,265 1,490 875
Total Income 3,150,354 3,178,272 2,611,250 2,408,725
Expenses
Accountancy 23,063 6,650 7,800 6,970
Advertising - 1,363 2,300 4,500
Bank Charges 780 614 1,290 870
Computer Expenses 4,323 475 2,305 1,879
Consultants fees 1,795 6,377 - 5,100
Depreciation 28,352 31,324 15,314 20,963
Donations 3,000 409 500 1,200
Filing Fees 558 243 280 280
General Expenses 5,411 1,101 1,205 437
Gifts to staff 1,145 3,583 2,890 4,970
Hire Equipment 7,375 7,311 7,300 7,290
Insurance 85,487 19,966 21,300 36,870
Interest 11,837 19,524 32,582 37,874
Legal Fees 3,272 6,363 300 1,560
Light & Power 5,371 5,533 3,560 2,504
Materials & Supplies 41,348 41,629 36,570 30,987
Meeting Expenses 6,860 18,300 7,690 4,562
MV Fuel & Oil 8,965 8,838 7,685 6,452
MV Interest 1,031 - - 890
MV rego & insurance 11,766 13,367 12,567 11,532
MV repairs 11,963 4,607 4,650 3,560
Payroll Tax 72,258 71,437 57,044 52,214
Parking & Tolls 1,524 2,219 1,235 1,425
Postage 326 158 325 365
Printing & Stationery 1,075 3,708 2,560 4,900
Protective Clothing 7,819 10,516 8,960 4,250
Rent - office 37,006 45,083 44,600 41,320
Rent - retail 85,020 78,000 95,000 110,000
Repairs and Maintenance 79 3,329 450 1,324
Salaries - retail 315,541 410,687 425,795 502,805
Salaries - associated persons 150,000 158,350 150,000 145,000
Salaries - security 1,283,211 1,188,992 1,078,287 1,005,992
Salaries - installation 327,076 302,733 142,591 54,255
Staff Amenities 8,890 9,198 7,689 8,790
Staff Training 1,365 2,994 5,679 6,720
Subcontractors 13,000 25,000 14,500 9,800
Sundry expenses 6,980 6,795 6,570 2,348
Superannuation 178,139 175,973 152,317 144,582
Superannuation - associated
persons 13,875 25,000 25,000 25,000
Telephone 10,572 9,601 9,700 13,250
Travel 13,090 15,532 2,354 1,287
Total Expenses 2,790,547 2,742,881 2,398,743 2,326,877
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Profit before income tax 359,807 435,391 212,506 81,847
Tax payable 98,947 124,086 63,752 24,554
From the above income statement, it can be seen that the gross receipts of the company has
declined and on the other hand, the cost of goods sold has increased indicating that the gross
profit has declined as can be seen in the drop from $ 718293 in 2014 to $ 485447 in 2017
(Lessambo, 2018). Amongst the other incomes, the security service income and the installation
income has multiplied whereas the trading income has declined. In case the overall income of
the company is being analysed, it has grown by nearly 30% in 3 years from $ 2.4 MN in 2014 to
$ 3.15 Mn in 2017. This is a positive indicator for the company. On the other hand, the total
expenses have also grown year on year and has had a growth of almost 20% from $ 2.3 Mn in
2014 to $ 2.79 Mn in 2017 (Venezia, 2017). The less that proportionate increase in the expenses
has led to increase in profit percentages for the entity and therefore the yearly profit, which
was $ 81847 in 2014, has grown up to $ 359807 in 2017. It can be said that the growth of
company has been monumental and it is still in the growth path.
Southern Cross Star Services Pty Limited
Consolidated statement of financial position
Particulars 2017 2016 2015 2014
$ $ $ $
Assets
Current Assets
Cash Assets 177,729 84,312 99,359 58,342
Inventory 176,890 165,789 143,390 134,455
Other 49,287 51,765 42,994 40,000
Total Current Assets 403,906 301,866 285,743 232,797
Non-Current Assets
Receivables 67,912 48,783 54,639 43,126
Property, plant and equipment 484,525 449,421 475,985 476,992
Other 300,000 300,396 300,792 301,188
Total Non-Current Assets 852,437 798,600 831,416 821,306
Total Assets 1,256,343 1,100,466 1,117,159 1,054,103
Liabilities
Current Liabilities
Payables 85,339 58,528 51,433 49,329
Financial liabilities 148,902 275,181 493,033 570,000
Current tax liabilities 101,239 14,964 45,343 23,685
Total Current Liabilities 335,480 348,673 589,808 643,014
Non-Current Liabilities
Financial liabilities 48,379 50,216 50,000 61,240
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Total Non-Current Liabilities 48,379 50,216 50,000 61,240
Total Liabilities 383,859 398,889 639,808 704,254
Net Assets 872,485 701,577 477,350 349,849
Equity
Issued Capital 2 2 2 2
Retained Profits Current Year 170,908 224,226 127,504 49,108
Retained Profits 701,575 477,348 349,844 300,736
Total Equity 872,485 701,577 477,350 349,846
From the comparative balance sheet of the entity, it can be seen that the liquidity of the
company has increased and thus the cash balance has grown to 3 times from 2014 to 2017.
Inventory and other current assets have remained almost same over the years. Amongst the
non-current assets of the company, the balance of the property, plant and equipment and
other non-current assets has been almost constant whereas the balance of receivables has
increased. Overall, the assets of the company have increased over time (Trieu, 2017).
Amongst the liabilities side of balance sheet, the current payables has increased whereas the
financial liabilities have decreased drastically. The balance of non-current liabilities has again
declined whereas the equity in the form of the retained earnings has grown more than twice
which shows that the company is reliant on equity and own capital rather than on the debt
capital, which is a positive sign for the business (Rimmer, 2017).
Conclusion and Accounting Position of company
From the above analysis of the financial statements, it can be concluded that the company
though not listed on stock exchange and having a very small capital base, has been growing in
business and has been able to multiply profits in the last few years. Given an investor point of
view, the company looks a prospective investment avenue.
References
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