LB5212 Accounting and Finance For Managers Assignment

Answer:

Introduction

Financial statement analysis of any business organisation can reap various useful and decision making information. Financial statement of the business organisation is those statements contains financial information i.e. financial performance and financial position during the reporting period. For many stakeholders, especially for investors, financial statement analysis is required, so as to get insight of the business organisation. Information generated from financial statement analysis can be used in decision making process. Financial statements include income statement, statement of financial position, cash flow statement and statement of change in equity. In this report, financial statement analysis of Qantas Airlines Limited has been performed and relevant results have been drawn. In this report, analysis of financial statements has been conducted using horizontal analysis, vertical analysis and ratio analysis techniques. While using horizontal analysis and vertical analysis of financial statement techniques, financial statement of last 4 years i.e. from 2013 to 2016 has been used. On the other hand, for the purpose of ratio analysis, financial statements of last two years i.e. 2015 and 2016 has been used. From these techniques, liquidity, profitability, solvency and efficiency of Qantas Airlines Limited or in business operations has been analysis 

It can be analysed that sales revenue in all the four years is static or have not varied much. In all the four years, there is less than 4 5 variation in revenues of Qantas Airlines Limited. Fuel consumption has been increased in 2016 as compared to other periods, because of increase in operational capacity. There is significant change in Depreciation and amortisation expenses during 2015 and 2016 and this is the significant reason for decline in profitability (Alhabeeb, 2014). Other expense of Qantas Limited has fluctuated at large scale. Another significant change that can be observed from the horizontal analysis of income statement is related to earnings per share that Qantas Airlines Limited has earned for equity shareholders. There are huge ups and downs in earnings per share in the undertaken period (Babackov, et. al, 2014). Therefore this makes Qantas Airlines Limited less attractive for investors. 

From the horizontal analysis of statement of financial statements, it can be observed that current assets of Qantas Airlines Limited are fluctuating at higher level. In 2016, cash and cash equivalents balance has been decreased by 31.91 % as compared to 2015 balance. Another significant reduction in current assets is related to assets held for sale i.e. in 2016 it is reduced by 87.50 % as compared to 2015. Therefore these are some issues that lead to liquidity problem in business operations of Qantas Airlines Limited. There is overall reduction in total current assets during 2016. In case of non-current assets, Qantas Limited has deployed financial resources in huge investments during 2015-2016 financial year. Investment through equity method has been increased by 47.01 % in 2016 as compared to 2015. In other years, there is no significant change in investments (Govindaraj, 2011). On the other hand, current liabilities interest-bearing liabilities and other financial liabilities have been reduced by huge margin. This has, managed the liquidity level in business operations. At last, it can be analysed that there is huge fluctuation in equity capital i.e. treasury shares, retained earnings and reserves. Overall analysis suggests that Qantas Limited’s financial position has been fluctuating and will not attract stakeholders (Riordan & Riordan, 2009).

It can be analysed that in both the years i.e. 2015 and 2016, under consideration, there are three major expenses that Qantas Limited or any other airline organisation would have i.e. manpower and staff related, fuel and aircraft operating variable. Major expenses have been incurred on these items as suggested from the vertical income statement. Therefore management of Qantas Airlines Limited is required to consider techniques for reducing the level of expenditure on these items (Grimm & Blazovich, 2016). Other expenses i.e. administrative expenses also hold significant percentage of total sales revenue. In case of Qantas Airlines Limited, it can be analysed that operating expenses has been overlapping other expenses or expenditure. It can be observed that in 2016 operating expenditure is 89.86 % of sales revenue and in 2015 it is 93.37 % of sales revenue. This is prime reason for Qantas Airlines Limited, in not achieving higher profitability (Soffer & Soffer, 2009).

Analysis

From the vertical analysis of statement of financial position or balance sheet it can be observed that, in total assets, current assets is very less and non - current assets has higher portion. From this analysis, it can be observed that business organisation having lower current assets; will lag in terms of maintaining liquidity or effectively managing working capital (Sinha, 2012). In case of liabilities, major portion is covered by revenue received in advance i.e. unearned income. Qantas Airlines Limited is working on 80:20 working capital basis i.e. debt is 80 % and internal funds or equity is 20 % of overall capital structure. 

Ratio Analysis

(Qantas Airlines Limited, 2016)

Analysis

Profitability ratio

Return on asset

Net Profit / Total Assets * 100

Return on asset shows profitability of the business organisation in terms of their total assets that are used in business operations. Return on asset measure assets ability by considering net profit earning by the business organisation during the reporting period by utilising its available asset base. This ratio is useful for investors to analyse, whether business organisation is capable of generating enough profit from the available assets. Higher the return on asset ratio more effective is the utilisation of assets. In case of Qantas Airways Limited, it can be analysed that, in both the years 2015 and 2016, their assets utilisation capability is not attractive for investors. Since, in both the years, ratio is at lower side and thus represents low profitability and efficiency of asset utilisation. 

Net Profit ratio

Net Profit / Sales Revenue * 100

Net profit ratio or net margin is most common profitability ratio that is used by investors to interpret or analyse level of profitability in the business organisation. Net profit ratio analyses net profit earned during the reporting period by the business organisation as compared to its sales revenue. Net profit ratio reflects savings capacity or profit making capabilities of the business organisation (Cao, et. al, 2011). In present case of Qantas Airways Limited, net profit ratio shows inadequate level of profit achieved in both 2015 and 2016 years. In 2015, their net profit ratio is less than 4 % which is way below industry standards and competitors. In 2016, although their net profit has increased to 6.52 %, it is still not adequate to attract stakeholders.

Solvency ratio

Solvency in the business organisation denotes adequate level of inside and outside funds or capital used in the business operations. Solvency ratio analyses, level of risk that business organisation has in their capital structure. Capital structure consists of debt and equity, therefore solvency ratios analyses adequacy level of debt and equity in the overall capital structure. 

Debt-Equity Ratio

Debt / Equity

Debt – Equity ratio of the business organisation analysis solvency position of the organisation in terms of analysing debt and equity used in business processes. More utilisation of debt leads to more exposure to market risk or risk of failure. On the other hand, risk of utilising more equity involves risk of control and less effective capital utilisation. In case of Qantas Airlines Limited, in both the years i.e. 2015 and 2016, they are more exposed to risk of debt. It can be observed that, in 2015 and 2016, their debt to equity ratio is more than 1 time, which means management has been using higher debt as compared to internal funds. It can be analysed that, their debt and equity ratio is adequate because management is not at much risk they had covered risk through equity (Davies & Crawford, 2011). In 2015 and 2016, Qantas Airlines Limited has 1.36 times and 1.39 times debt – equity ratio respectively that means stakeholders has back up of equity. 

Liquidity ratio

Current Ratio

Current assets / Current Liabilities

Current ratio demonstrates liquidity position or working capital management of the business organisation. Current ratio analysis current assets and current liabilities of the business organisation and establishes relationship between current assets and current liabilities. Higher current ratio denotes more liquidity in the business operations or in working capital and vice-versa. In case of Qantas Airlines Limited, their liquidity position or working capital management is not effective. In both the years, current ratio is less than 1 time, which means Qantas Airlines Limited does not have enough current assets or liquidity to repay their current obligations. This situation may lead to non – payment of short term dues or other obligations.

Quick Ratio

Quick assets / Current Liabilities

Quick asset is calculated by reducing inventories and prepaid expenses from the current assets. Quick ratio is ultimate check point or detailed analysis of liquidity can be done using quick ratio. In case of Qantas Airlines Limited, it can be observed that, liquidity position is not at good side and they had invested less in quick assets as compared to their current liabilities (Mantone, 2013). Quick ratio denotes actual position of working capital and this shows worst situation of Qantas Airlines Limited’s working capital and liquidity position.

Efficiency ratio

From the Efficiency ratios used to analyse efficiency level in business activities, it can be observed that, payable period of Qantas Airlines Limited is at higher side that means they can deferred current obligations. This is positive sign for Qantas Airlines Limited; this will manage their activities in terms of efficiency management. As compared to 2015, Qantas Airlines Limited has improved their payables period in 2016 and has maintained it to 70 days. On the other hand, asset turnover ratio suggests the efficiency of business organisation in utilising assets in generating revenue during the reporting period (Lanza, 2004). In both the years i.e. 2015 and 2016, Qantas Airlines Limited has maintained higher asset turnover ratio i.e. 89 % and 92 % respectively. 

Conclusion

From the analysis of above report, it can be concluded that Qantas Airlines Limited has been conducting business operations with lot of difficulties. Management of Qantas Airlines Limited is requited to manage and maintain appropriate level of business process maintenance while performing business operations. It can be concluded that, Qantas Airlines Limited has concentrated their major business expenditure on only three items and therefore they are required to manage them efficiently. From the analysis of income statement and statement of financial position it can be analysed that there are various ups and downs or fluctuations in various items of business operations. Therefore, management of Qantas Airlines Limited is required to handle them efficiently. From the ratio analysis, it can be concluded that liquidity and solvency are two major factors that is required to be managed by the management. Profitability during last two years is also not good, therefore many stakeholders are not satisfied and investors have deployed their funds from Qantas Airlines Limited. The only positive factor that management of Qantas Airlines Limited has been achieved is related to efficiency of activities that they had performed as the business operations.

References

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Babackov A. N, Naumenko T. S, & Solyanik S. V. (2014). Modern Role of the Report on Financial Results and the Features of its External and Internal Analysis. Polythematic Online Scientific Journal of Kuban State Agrarian University, (101), 2546-2558.

Berislav Bolfek, Milan Stani?, & Sanja Kneževi?. (2012). Vertical and Horizontal Financial Statement Analysis. Ekonomski Vjesnik, (1), 168.

Cao, Y., Myers, L., & Sougiannis, A. (2011). Does earnings acceleration convey information? Review of Accounting Studies, 16(4), 812-842.

Davies, T., & Crawford, I. (2011). Business accounting and finance (3rd ed.). Harlow, England ; New York: Pearson/Financial Times Prentice Hall.

Entwistle, G. (2015). Reflections on Teaching Financial Statement Analysis. Accounting Education, 24(6), 1-4.

Govindaraj, S. (2011). Discussion of “The Importance of Accounting Information in Portfolio Optimization”. Journal of Accounting, Auditing & Finance, 26(1), pp.35-38.

Grimm, S., & Blazovich, J. (2016). Developing student competencies: An integrated approach to a financial statement analysis project. Journal of Accounting Education, 35, 69.

Ildiko Orban. (2014). Role and significance of statement of other comprehensive income– in respect of reporting companies’ performance. Annals of the University of Oradea: Economic Science, 23(1), 649-658.

Lanza, R. (2004, July 01). Improving Financial Statement Analysis Efficiency. The Practicing CPA, pp. 3-4.

Mantone, P. (2013). Using Analytics to Detect Possible Fraud Tools and Techniques (Wiley Corporate F&A). Hoboken: Wiley.

Qantas Airlines Limited. (2014). Annual Reports 2012. Retrieved fromhttps://www.qal.com/investors/annual-reports/

Qantas Airlines Limited. (2016). Annual Reports 2012. Retrieved fromhttps://www.qal.com/investors/annual-reports/

Riordan, Diane A., & Riordan, Michael P. (2009). Inflation and Financial Statement Analysis in the International Accounting Classroom. Journal of Teaching in International Business, 20(2), 174-187.

Sinha, G. (2012). Financial statement analysis. Place of publication not identified: Prentice-Hall Of India.

Soffer, L. C., & Soffer, R. J. (2009). Financial statement analysis: a valuation approach. Taipei: Pearson Education Taiwan Ltd.