Accounting Assignment Report study writing analysis review help: Financial performance of Virgin Australia Holdings and Quantas Airways

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Accounting for decision making of Virgin Australia Holdings and Quantas Airways ltd.

Report Review analysis the Topic Frame is:

Introduction

            The presented report is aimed to present understanding and interpretation of different financial ratios in the context of judging the financial performance of an organization. The financial ratio revealed on the basis of different financial records and figures for a particular organization, indicates the existing status of the company. In addition to this, there are a number of different types of financial ratios for a company which are aimed to show different aspects of financial performance of the organization namely profitability, Efficiency, and financial stability of the organization for a long term. From the perspective of an investor or a share holder, it is quite crucial to have proper information regarding existing financial ratio of the company before making worthy investment within an organization (Gitman, and McDaniel 2008).

            In context to this, the paper shade some intensive lights over thorough interpretation of different ratios of two prominent airlines companies namely Virgin Australia Holdings Ltd, QANTAS Airways Ltd. The primary objective of the paper is to reflect financial performance of both the organizations for last two financial years (i.e. 2010 and 2011) on the basis of the interpretation and review of financial ratio of both the organizations.

Analysis of financial performance  

            The analysis of financial performance of both the companies can be taken into under different categories discussed as below:

Profitability

            Profitability ratios show the existing performance of the organization in terms of its profitability over a certain period of time. The determination of profitability of both the organization can be undertaken on the basis of interpretation of different ratios, which is listed as below:

Gross Profit Margin:

            Gross profit margin ratio demonstrates the level of gross profits earned by the company over a certain period of time. This ratio indicates the profitability of the organization after paying cost of goods sold. The Gross profit margin should be high as it provides a leverage to the organization for achieving adequate amount of net profits after deducting heavy tax and high cost of capital (Lee 2007).

            In the context of Virgin Australia Holdings Ltd, the gross profits margin has shown a negative growth in last two years. For instance, in the year 2010, Gross profit margin for the company was 9.8%, which has been reached to 6.3% in 2011. This is showing that during the period, the operating expenses of the organization, in terms of high cost of raw material, high labor cost and a bad product mix of the organization, have been enhanced.

            In comparison to this, QANTAS Airways ltd is showing a favorable position of the organization during the period of 2010 and 2011. The company has registered a positive growth in terms of Gross profit margin during the period as it was 10.97% in the year 2010, which has been enhanced and reached to 11.39% in 2011. This shows the company has been succeeded to keep its operational expenses under control.

Net profit margin

            Net profit margin ratio demonstrates final profits of the firm in the form of percentage of its total sales. It is the most crucial ratio which indicates the ultimate profitability of the organization after paying all the liabilities. High profitability ratios are required for attaining positive position within the market (Koen and Oberholster 1999).

In the case of Virgin Australia Holdings Ltd. net profit margin ratio was not quite up to the mark since last two years. The value of Net Profit Margin was 0.6% in 2010 which has been converted into loss and reached to -1.21% in the year 2011. This is showing that in terms of profitability the existing performance of the organization is not giving positive sign for an investor.

            In the context of QANTAS Airways ltd, Net profits margin has shown a positive growth as in the years 2010, net profit percentage for the company was 1.24%, which has been recorded 1.76% in 2011. This situation is demonstrating a slight growth in profitability of the organization which is an encouraging sign for investors.   

Return on equity

            Return on equity ratio indicates profits and returns earned by the organization for equity employed by owners of the organization. The ratio shows a clearer picture regarding financial performance of the organization from the perspectives of equity share holders of the organization (Gitman, and McDaniel 2008).

              Virgin Australia Holdings Ltd has also registered a negative growth in terms of Return on Equity. In the year 2010 the ROE (Return on Equity) for the company was 1.93% which decreased significantly during the period and reached to -4.28% in 2011. This is showing that owners of the organization are not able to cultivate adequate profits on their investment in the company.

            In relation to this, the status of QANTAS Airways ltd in the context of return of equity is positive as it has shown a positive growth. In the year 2010, ROE for the company was 2.88%, which became 4.26% in the year 2011. This is showing that investors and equity share holders of the company are enjoying good return on their investments in the company.

Return on asset

            Return on Asset ratio indicts the profitability of the company against the total asset owned by the company. The ratio shows the performance of existing assets of the company in terms of profits.

            In the context of ROA (Return on Asset), the existing position of Virgin Australia Holdings Ltd. is not positive. The ROA of the company has been decreased in the year 2011 from the last one. For instance, ROA for the company in the year 2010 was 1.98%. It decreased and reached to 0.51% in year 2011.

            In compare to this, position of QANTAS Airways ltd is slightly better as it has shown a positive growth. The ROA for the company is 1.76% which has reached to 2.28% in the year 2011. It shows that performance of assets employed by QANTAS Airways ltd is better and encouraging in comparison to that of Virgin Australia Holdings Ltd.

Efficiency

            Efficiency ratios reveal the efficiency of different business activities undertaken by a business organization. For an organization it is quite crucial to have efficient business operations so that it can be able to earn significant amount of profits in the long run (Gitman, and McDaniel 2008). The efficiency of the organization can be judged on the basis different ratios discussed as below:

Asset turnover ratios

            Asset turnover ratio demonstrates the efficiency of the organization to put its assets to work. For a firm it is crucial to utilize its assets quite efficiently as it has to make some intensive investments in its assets. The asset turnover shows the usability of different assets such as inventories, receivables, plants and equipments, in order to earn profits (Koen and Oberholster 1999).

            In the context of Virgin Australia Holdings Ltd, turnover of asset has been enhanced in last two years. The asset turnover for the company in the year 2010 was 76.86%, which increased and reached to 85.08% in 2011. This increment has shown that the company has started to use its assets more efficiently. High asset turnover also indicates the company has less unproductive assets.

            The growth in asset turnover has also been shown by QANTAS Airways ltd. For the company, the asset turnover is 69.17% which has reached to 71.41% in the year 2011. However, in comparison to Virgin Australia Holdings Ltd, this growth is quite low. Again the lower asset turnover shows that in comparison to Virgin Australia Holdings Ltd, QANTAS Airways ltd is having more unproductive assets, which can be utilized in future.

Inventory turnover ratio

            Turnover of inventory shows the frequency of having inventory in the stock. High inventory turnover shows that company is turning its inventory quite frequently, which is an indication of high sales of the company (Gibson 2008).

            In the context of inventory turnover ratio, the existing position of Virgin Australia Holdings Ltd. is not quite satisfactory as the ratio has been increased slightly. Where in the year 2010 inventory turnover was 0 days, in 2011 it has been reached to 0.57 days. This situation shows the company’s efficiency of turning inventories has been decreased. However, this ratio is still slightly low in comparison to the industry.

            In similar to this, a slight decline in the ratio for QANTAS Airways ltd has been registered. In the year 2010, the inventory turnover for the company was 8.45 times, which reached to 9.12 times 2011. This shows the negative sign from the perspective of selling efficiency of the organization.

Debtor turnover ratio

            The ratio demonstrates the efficiency of the organization to collect its debts form the market.  It denotes the velocity of collection of debt from the market (Koen and Oberholster 1999).

            Virgin Australia Holdings Ltd. is having negative growth in terms of debtor’s turnover ratio, for instance, in the year 2010, the value of the ratio was 10.72 days which became 11.46 days. This is showing the liquidity and debt collection efficiency of the business organization has been decreased during the period (Gibson 2008).

            QANTAS Airways ltd has shown positive efficiency in the context of debt collection from the market. In the year 2010, this ratio for the company was 21.17 days which decreased and reached to 20.6 days, in a year this is showing efficiency of the organization in collection of debts from the market.

Creditor turnover ratio

            This ration shows the tendency of the company to pay its creditors. This ratio is the measure of creditability of the organization in the eyes of creditors (Gibson 2008).

            For Virgin Australia Holdings Ltd, the value of the ratio in the year 2010 was 39.7 days, which has increased to 44.2 days in the year 2011. This shows the company is delaying in paying creditors, which is not good for the company in long term. In context to QANTAS Airways ltd, the ratio has shown positive growth as in the year 2010, it was 46.4 days, which has decreased to 42.6 days, which is a increasing sign for the organization.

Financial Stability

The financial stability of the organization can be retrieved on the basis of two prominent ratios:

Current ratio

            Current ratio of the organization demonstrates the liquidity position of the company. In the context of Virgin Australia Holdings Ltd, the value of current ratio is 0.76 and 0.65 in the year 2010 and 2011. These both the values are less than one, which is showing less liquidity and instability of business organization.

            In similar to this, QANTAS Airways ltd has also having less than one value of current ratio for last two years. For instance, the value of this ratio for the year 2011 and 2010 is 0.90 and 0.93. Although, this value is also less than one, yet in comparison to Virgin Australia Holdings Ltd, the company is having more stability.

Quick ratio 

            Quick ratio for an organization also shows more liquidly of the organization without considering inventory of the company. In this context, value of quick ratio is 0.76 and 0.64 in the year 2010 and 2011 for Virgin Australia Holdings Ltd. which shows the decrease in cash and other liquid assets for the company. In the case of QANTAS Airways ltd, the value of this ratio for the year 2011 and 2010 is 0.85 and 0.88. In comparison to Virgin Australia Holdings Ltd. the position of the company is slightly better.

Shareholder’s ratio

            Shareholder’s ratio represents the financial structure of the company from the perspective of shareholders (Koen and Oberholster 1999).

Debt asset ratio

            The ratio shows the ratio between debt and assets within the capital structure of the organization. For Virgin Australia Holdings Ltd, the value of debt to asset ratio for year 2010 is 75.90%, which remained almost same i.e. 75.89% in the year 2011 also. This value shows that about 76% of total assets of the company are financed through external debt.

            In relation to this, the debt asset ratio for QANTAS Airways ltd is showing increasing trend. For instance, in 2010, debt to asset is 69.93%, which enhanced and became 70.50% in 2011.

Debt equity ratio

            Debt equity ratio denotes the ratio of debt and equity capital in the overall capital structure of the organization (Koen and Oberholster 1999). As per this ratio, Virgin Australia Holdings Ltd, the ratio of debt in the total equity of the company has been decreased in last two years. In 2010, the value of the ratio was 191.56% which decreased and became 177.04% in 2010.

            For QANTAS Airways ltd, the situation is quite contrasting as debt equity for the company was 95.60% in 2010 and 98.05% in 2011.

Times interest earned

            This ratio demonstrates the number of times interest earned by an investor by investing in an organization. In this context, Virgin Australia Holdings Ltd is presenting that Times of interest earned is decreasing as it was 1.55 times in 2010 which decreased and became -0.38% in 2011. This is presenting that company’s effectiveness in servicing the debt of creditors is decreasing (Peterson, and Fabozzi 1999).

            In similar to this, QANTAS Airways ltd the situation is quite similar as in 2010, the value of the ratio was 4.16 times which decreased and became 3.96 times in 2011. In comparison to Virgin Australia Holdings Ltd, this decline is quite negligible.

Analysis of other financial information of both the companies

            Along with financial ratios, other financial records of both the companies can also be analyzed for the purpose of revealing investment opportunities in both the companies. In this context annual reports of both the companies can be analyzed. As per the financial reports analysis, the Net Income of Virgin Australia Holdings Ltd in 2011 has been enhanced and become almost double than that of the last year. In 2010, Net Income for the company is 23.8 m$ which reached to 51 m$, which is good sign (Annual report: Virgin Australia Holdings Ltd. 2011). However, profitability ratios are reflecting contrasting report. In the same manner, for QANTAS Airways ltd, the income statement is showing that in the year 2011 the net income of the company is 216 m$ which is 1 m$ less than that of the previous year (Annual report: QANTAS Airways ltd 2011). These contrasting results are indicating that the external environmental factors such as political environment, economy and technological advancement are affecting the profitability of the company (Wahlen, Stickney, Baginski, and Bradshaw 2011).

            In addition to this, for the year 2011, the value of totals current assets owned by Virgin Australia Holdings Ltd has been enhanced as in the year 2010, the total current assets of the company was 935.9 m$, which enhanced up to 1011 m$ in 2011(Annual report: Virgin Australia Holdings Ltd. 2011). In contrast to this, for QANTAS Airways ltd the situation was different. The total current asset of the company in 2010 was 5832 m$ which has been decreased and become 5641m$ (Annual report: QANTAS Airways ltd 2011). However, still the total amount of current assets for QANTAS Airways ltd is higher than that of Virgin Australia Holdings Ltd. This is showing that that QANTAS Airways ltd is operating at a large scale. Owing to this reason, it is quite easy for the organization to avail the advantage of Economies of scale and become successful among its close competitors (Denny 1999).

Limitations

            Although the comparison of financial performance of both the companies has provided some crucial insights about the opportunities in both the company for investors yet still there are some limitations associated with this analysis. There are a number of different other factors related with external business environment of the organization which can affect the performance of the company. Among such factors, external and internal environment of the organization is an influencing factor (Gibson 2008). The report omits the analysis of strategic external and internal environment of the organization, which is the factor that limits the scope of the report. In addition to this, lack of the analysis of past performance of the organization is also a limiting factor for this report. Past performance of the organization shows the efficiency of the organization to get out from negative situations. The lack of past performance and trend analysis is limiting the span of analysis and anticipation from the side of an investor (Chitkara 2002).

Recommendations

            On the basis of thorough analysis of the entire report, it can be recommended to the investors that from the perspective of profitability, efficiency and financial stability, QANTAS Airways ltd is having more potential than that of Virgin Australia Holdings Ltd. As the presented ratio analysis is reflecting that in present conditions, QANTAS Airways ltd’s financial performance is quite better than that of Virgin Australia Holdings Ltd, from the perspective of investors, investment in QANTAS Airways ltd will be more beneficial and worthy. The profitability and financial stability of QANTAS Airways ltd is quite positive and growing which is giving positive signs to investors. In this way, on the basis of the comparison between financial performances of both the organizations, it can be recommended that investments in QANTAS Airways ltd will be more suitable and profitable for the investors. In addition to this, for an investor it can also be recommended that different other non financial factors such as analysis of existing management teams, product offerings, corporate social responsibilities, past performances, and so on should also be taken into account in the research before making investment in a particular company (Peterson, and Fabozzi 1999).

Conclusion

On the basis of the analysis of discussion made in the report, it can be concluded that financial performance of an organization is one of the major factor on the basis of which an investor can evaluate the potential of a company before making investment in that company. In context to this fact, the paper has reviewed the financial performance of two prominent companies namely Virgin Australia Holdings Ltd and QANTAS Airways ltd for last two year (i.e. 2010 and 2011). The ratio analysis is showing that in comparison to Virgin Australia Holdings Ltd, the performance of QANTAS Airways ltd is quite better in terms of profitability, financial stability, and efficiency of business operations. This denotes that investment made within QANTAS Airways ltd will be feasible for investors. However analysis of financial reports of both the company is favoring the existing position of Virgin Australia Holdings Ltd, which showed the impact of external environment over performance of an organization.

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