FBL 5030 Fundamentals of Value Creation in Business Assignment Sample

Executive Summary

Qantas Airways Limited it is one of the leading company in the airline and aviation sector. It is continuously leading the market share by providing quality in the industry. Identify a company's current position 3 analysis have to be conducted which include profitability, liquidity and solvency analysis. With the help of all the three analysis certain ratios have to be calculated and therefore comparing those ratios with the industry and competitors of the company, the company's current position can be identified.

Contents

Executive summary.

Introduction.

1. Profitability analysis.

Return on equity.

Net profit margin Ratio.

2. Liquidity analysis.

Current ratio.

Acid Test ratio.

3. Solvency analysis.

Debt equity ratio.

Net Interest coverage ratio.

Conclusion.

References.

Introduction

Qantas Airways Limited is one of the oldest airline companies which were founded in the year 1920 in Queensland. Initially the company used to corporate taxi services and pleasure flights. The known as the top most brands in Australia for providing long distance Airline services. Customer satisfaction and operational reliability is the prime criteria that the company focuses on. It has two famous brands jetstar and Qantas through which the transportation of customers from one place to another begins. The company used to provide regional and domestic services initially and from the 21st century the company has begin International Services as well (Morningstar, 2020).

1. Profitability Analysis

The analysis of the cost incurred by the company and the revenue earned during the financial year has to be calculated so as to identify whether the company is a profit making is called as profitability analysis. With the help of Pareto principle, that is the 80/20 rule the profitability analysis can be conducted in any organisation. Applying the 80/20 principle in an organisation results in identifying that 80% of the profits that the company is earning a derived from 20% customers. As per Sherdan should be 80/20/30, which means that 80% of the profits comes from 20% customers and 30% of the profit is used to manage those 80% customers which are non profitable to the organisation. With the help of certain ratios that return on equity and net profit margin some analysis can be derived.

In millions AUD	2015	2016	2017	2018	2019
Total equity	3152	3349	3396	3746	3694
Net income	557	1,029	852	980	891
ROE%	17.67	31	25.09	26.16	24
Total Sales	15532	15,784	15680	16628	17,597
Net Margin %	3.59	7	5.43	5.89	5

Return on equity

 It is measuring the financial stability and performance of a company by dividing the net income of the company with the shareholders equity. In other words it can be called as return on net assets because the shareholders equity is nothing but total assets minus company’s debt. With the help of return on equity the efficiency of the management of the company can be measured as how the shareholders fund for the net assets are used by the company so as to arrive towards achieving profits.

In case of an airline industry 15 to 20% is considered as good return on equity. Considering the financials of Qantas airways Limited, it can be observed that the company's ROE rose from 17.67% to 30.73% from financial year 2015 to 2016 respectively. Also in the years 2017, 2018 and 2019 the company has over all earned good net income and therefore benefiting the equity shareholders. The company has shown in Enormous growth prospects in the upcoming years as it is continuously growing and earning profit. The major competitors of the company are virgin Australia, Malaysian Airlines etc. On observing their financial statements it was observed that Qantas Airways Limited has shown better results than these companies worldwide. The return on equity for the company is much better than its competitors and the company attracts the stakeholders and investors to enter the company on the basis of the increasing net income and return on equity. (xplaind, 2016)

Net profit margin Ratio

The comparison of net income to total sales is called as net profit margin ratio. With the help of net profit margin shareholders can identify the percentage of profit left behind us to pay the share holders and the reserves left for the companies to invest in the future. The higher the net profit margin ratio the better the company has ability to turn its sales into profits for the current financial year. The net profit margin of every industry differs from each other and if an industry is having a lower profit margin it doesn't make sense to identify that company as less profitable, since before making any such choices the industry averages should be checked.

In case of an airline industry 82 15% is considered as good net profit margin ratio. On considering the financials of Qantas airways Limited, it has been observed that the company's net profit margin ratio has been increased from 3.5 to 7% from the years 2015 and 2016 respectively. Also show the percentage of net profit margin is around 5 for the year 2017, 2018 and 3 2019. The company’s net profit margin has considerably reduced over the years and also so it is below the industry average. The major competitor of the airline industry is Emirates and Malaysian airlines. Observing their financial statements it was observed that in comparison to Qantas Airways Limited their net profit margin is higher. These companies have shown better results than the Australian giant. (Ramos, 2018)

2. Liquidity Analysis

The financial metrics that is used to identify the debtors current position so as to way of the current application without raising any external debt that is called as liquidity ratios. With the help of current ratio, quick ratio and operating cash flow ratio a company can identify its current liquidity ratio of paying its debt obligations. With the help of converting assets into quick cash and to use this cash has to pay off the date application is the liquidity of the company. This is also called as internal analysis of the company's liquidity ratio. There can be an external liquidity ratio comparison with different company of the same industry so as to identify whose position is better request to pay off their debt obligations on time. We will need to calculate quick ratio also known as acid ratio and current asset ratio.

In millions AUD	2015	2016	2017	2018	2019
Current Assets	5049	3458	3119	3712	4193
Current Liabilities	7470	7028	7028	7596	8576
Current Ratio	0.68	0.49	0.44	0.49	0.49
Cash+ Receivables	3884	2741	2530	3114	3602
Quick Ratio	0.52	0.39	0.36	0.41	0.42

Current ratio

Current ratio is a type of liquidity ratio which provides the company by measuring the ability of company to pay off its short term obligation which is due in the upcoming year. With the help of current ratio it can be identified that the investors and analyst that how the company can maximize its current assets so as to pay off its short term current liabilities for the current financial year. Calculate the current ratio current assets have to be divided with current liabilities of the company. The current ratio in comparison to industry average should be equal or slightly above is acceptable. In any case where the current ratio is below the industry average it means that its ability to pay off short term liabilities is getting difficult.

In the case of an Airline industry current ratio of 1.2 to 2 is considered as good. While considering the financial statements of Qantas airways Limited it can be observed that the company's current ratio has reduced from .68 times to less than half percent in the subsequent years. The company has maintained the current ratio of around of .49 in the last two years. That means the company's current position so as to pay off its debt obligation of short term that is less than 1 year is very poor. The company has to maintain a current ratio of at least 1. The major competitors of Qantas airways Limited are Air Asia, emirates and Singapore Airlines. On considering their financial statements it was observed that these companies have a better current ratio in comparison to Qantas. The company therefore should improve their current ratio by adding more liquid assets in their balance sheet show that the investors can rely on the company's position and believe that the company at the time of crisis can pay of its short term liabilities on time. (Quantas, 2020)

Acid Test ratio

The ratio which is used to provide financial stability towards companies liquid it is called as quick ratio also called by the name of acid test ratio. Quick ratio is calculated by comparing cash and cash equivalents+ marketable securities+ account receivables with current liability. Quick ratio of 1 is considered as good for the company as in that his company has given liquid fund to pay of its short term liabilities which are about to come in the next one year.

In the case of an Airline industry quick ratio of 1 is considered as good. While considering the financial statements of Qantas airways Limited it can be observed that the company's quick ratio has reduced from .52 times to less than forty percent in the subsequent years. The company has maintained the quick ratio of around of .4 in the last two years. That means the company's current position so as to pay off its debt obligation of short term that is less than 1 year is very poor. The company has to maintain a quick ratio of at least 1. The major competitors of Qantas airways Limited are Air Asia, emirates and Singapore Airlines.

On considering their financial statements it was observed that these companies have a better quick ratio in comparison to Qantas. The company therefore should improve their quick ratio by adding more liquid assets in their balance sheet show that the investors can rely on the company's position and believe that the company at the time of crisis can pay of its short term liabilities on time. Also these sciences are not good for investors and owners of the company and therefore the management should focus towards increasing the current assets of the company in the upcoming future years. (Morningstar, 2020)

3. Solvency Analysis

With the ability of the company has to pay off its long-term debt when they become due who is provided by the solvency ratios to the various internal and external stakeholders of the company. Examination of long term and short term cash flows of an entity can be conducted with the help of it. There are two types of ratios to identify the solvency all the company and that are debt ratio and net interest coverage ratio.

In millions AUD	2015	2016	2017	2018	2019
Total Debt	4791.	4421.	4405.	4344.	4589.
Shareholder's equity	3,447	3,260	3,540	3,959	3,436
Debt Ratio	1.39	1.36	1.25	1.10	1.34
EBIT	904	1083	1031	1161	868
Interest Expense	277	180	171	165	135
Net interest coverage	3.26	6.01	6.03	7.05	6.45

Debt equity ratio

When the company's total debt is compared with the shareholders equity it is called as debt ratio. All these numbers was to calculate the ratio is available on the company's balance sheet for the current financial year. The solvency analysis of a company can be conducted with the help of this ratio as it provides the user with information that the company is running its operations branch by the debt vs. equity. In case validate of the company is higher than the wholly owned funds then there a situation where the management has to think about increasing the equity shareholding in the company.

In case of an airline industry debt ratio of 1 to 1.5 is considered to be good. While considering the financial statement of Qantas airways Limited it can be observed that the companies that ratio 1.39 for the year 2015 and is in between the prescribed limit of 1 to 1.5 and therefore the company's current position in this context is normal. From this it can also be concluded that the company does not have taken unnecessary that and has sufficient wholly owned funds in the company. Main comparison is made with its competitors air Asia, the company Qantas airways Limited is better and has a good debt ratio. (Morningstar, 2020)

Net Interest coverage ratio

Interest coverage ratio is a debt ratio and profitability ratio which help in providing information on how easily a company can pay of its interest on its debts. It can be calculated by dividing company’s earnings before interest and Taxes (EBIT) with the interest payments that the company has made in the current financial year. With the help of interest coverage ratio a company can identify how many times it can cover the interest payment from its current year earnings. Also in other words it helps in calculating the margin of safety that a company has for paying its interest payments during the current year.

In case of an airline industry interest coverage ratio of more than 2 is considered as good. While considering the financial statement of Qantas airways Limited it can be observed that the company has considerably increase its interest coverage ratio from 3 to 7 from 2015 to 2019. Therefore it can be observed that the company's current position to pay of its integers expenses on the outstanding that for the current year if financially viable. (Bhasin, 2018)

Conclusion

It can be concluded that Qantas Airways Limited adds as a good profitability and solvency ratios for their current financial year. Both these analyses were conducted on the company and it was identified that the company's current position is good. Also so when liquidity analysis was made by calculating current ratio and acid test ratio it was observed that the company needs to increase its current assets over its current liabilities source to pay off its short term liabilities in the upcoming years. Overall the company in the airline industry seems to be sound.

References

Bhasin, H. (2018, Februray 13). Profitability Analysis. Retrieved from https://www.marketing91.com: https://www.marketing91.com/profitability-analysis/

Morningstar. (2020). Balance Sheet. Retrieved from https://www.morningstar.com: https://www.morningstar.com/stocks/xber/qan/financials

Morningstar. (2020). Qantas Airways Ltd Financils. Retrieved from https://financials.morningstar.com: https://financials.morningstar.com/ratios/r.html?t=0P00006WUB&culture=en&platform=sal

My Accounting Course. (2018). Net Profit Margin. Retrieved from myaccountingcourse.com: https://www.myaccountingcourse.com/financial-ratios/net-profit-margin-ratio

Quantas. (2020). About. Retrieved from https://www.qantas.com: https://www.qantas.com/in/en/about-us.html

Ramos, T. (2018). What is profitability analysis in the first place? Retrieved from https://blog.runrun.it: https://blog.runrun.it/en/profitability-analysis/

xplaind. (2016). Quick Ratio. Retrieved from https://xplaind.com: https://xplaind.com/763983/quick-ratio

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