Financial Statement Analysis of Virgin Australia Holdings Limited - Case Study Example

Finаnсiаl stаtеmеnt аnаlysis of virgin Аustrаliа Holdings limited Class Professor University/Institution City, State Date Contents Contents 2 Executive Summary 3 INTRODUCTION 4 Trend Analysis 5 Ratio Analysis 8 Non-financial Analysis 14 Conclusion 15 References 16 Executive Summary This report is an analysis of the financial reports of Virgin Australia Holding Limited for 2014, 2015 and 2016. The report performs a trend analysis of the income statement, the statement of Financial Position and cash flow statements. The report also carries out a ratio analysis of the financial statements using liquidity, efficiency, market performance and profitability ratios. The report also uses non-financial items such as corporate governance to analysis the financial reports. INTRODUCTION Virgin Australia Holding Limited is a company that deals with Airline operations in Australia. It was founded in 2000 and has its headquarters in Bowen Hills Australia. Virgin Australia Holding aims to achieve its mission by providing a consistent experience across all domestic markets and international (Bloomberg, 2017).’ The company operates through Virgin Australia International, Virgin Australia Domestic, Tiger Air, and Velocity. Virgin Australia’s aircraft fly to destinations within Australia, cargo operations and also regional networks. It also operates international routes which include Pacific Islands, Abu Dhabi, south East Asia, Transpacific, and Trans-Tasman. Virgin Australia Holding’s fleet comprises of Airbus A320 and A330, Boeing 737 and B777, ATR, Fokker F50, F100 and Embraer E190 aircraft (Bloomberg, 2017). The company has corporate, leisure, low cost, government, cargo and regional markets. Virgin Australia Holdings, has strategic Alliances with Delta Airline's inc, Etihad Airways, Singapore Airlines and Air New Zealand Limited. Trend Analysis Income statements Financial Year 2016 AUD (Millions) 2015 AUD (Millions) 2014 AUD (Millions) Sales 5004 4,723 4,303 Sales Growth 5.94% 9.76% - Gross income 741 519 118 Gross income Growth 42.77% 338.72 % - Gross profit margin 14.81% - - Earnings before Interest Tax & Amortization (EBIDTA) 506 415 386 EBIDT Growth 22.12% 7.49% - Balance sheet Financial year 2016 AUD (Millions) 2015 AUD (Millions) 2014 AUD (Millions) Cash and Short term Investments 1,180 1,106 808 Cash and Short-term Investments growth 6.6% 36.89% - Total accounts receivables 232 233 226 Accounts receivables growth -0.47% 2.87% - Total Assets 6,475 6,224 - Total Assets Growth 4.04% 23.77% - Accounts Payable 697 688 609 Accounts payable growth 1.23% 12.98% Total Liabilities 5,576 5,203 3,980 Total Assets/ Total Liabilities 86.12% 83.60% - Common Stock 1,309 1,153 1,167 Common Stock/ Total Assets 14.08% 17.03% - Cash flow statement Financial year 2016 AUD (Thousands ) 2015 AUD (Thousands ) 2014 AUD (Thousands ) Operating activities Net income Before Depreciation Interest Tax and Amortization (224,700) (93,800) (353,800) Net income Growth -139.55% 73.49% - Net Operating Cash flow 198,500 218,100 (7,700) Net Operating cash flow -8.99% 2932.47% - Investing Activities Capital Expenditures (76,200) (637,600) (432,600) Capital expenditure growth -19.23% -47.39 - Net investing Cash flows (387,900) (245,700) (174,700) Net Investing Cash flow growth -57.88% -40.64% - Net financing Cash flows 262,100 253,700 380,300 Net financing cash flow growth -3.31% -33.29% - Free cash flow (514,900) (359,200) (367,900) Free cash flow Growth -43.35% 2.36% - a) There was an increase in Net profit from 2014 to 2015 from -353,800 to -93,800 a percentage increase of 73.49% (Virgin Australia, 2017). b) This is attributed to the consolidation of Tiger Air Australia which contributed to an increase in revenue by $284.l million. c) Intangible assets increased from 2014 to 2015 by $202 million due to an increase of $161millon due to the acquisition of Tiger Air Australia. d) Trade payables and other payables increased from the year 2015 to 2015 by $80.1 million due to the acquisition of tiger Air. e) The total equity reduced by $27.3 million from 2014 to 2015 mainly due to the % 93.8 million loss and a decrease in the foreign currency translation reserve. f) No dividends were declared by Virgin Australia Holding limited group during the financial year ended 2014 hence no dividends were paid during the financial year 2015. g) During 2016 the group reported a loss after tax of $224.7 million which was a decrease of $130.9 a fall of 139.55%. h) The revenue went up from $4,749 million in 2015 to $5,021 million in 2016. i) Net operating expenditure increased from $4802.7 million in 2015 to $5278.7 million in 2016. j) The net operating expenditure entailed $440.5 million that were used for restructuring during the year 2016. k) The year 2016 was a challenging year especially the operating environment that was affected by low customer demand. This was also affected by uncertainty in the economy and political events. l) During the second half of 2016, the company executed its strategy to increase revenue and profits. m) No dividends were declared or paid during the financial year ended 30th June 2016. The equity distributed of $41.9 million were paid for noncontrolling interest during the year ended June 2016. Ratio Analysis a) Profitability ratios Profitability ratios are used to show a company’s ability to foster revenue from its operations. The company’s Investors and creditors use these ratios to ascertain if the company is making enough profits from its assets. Profitability ratios are also important in the concepts of a company’s solvency and going concern. They include profit margin, gross margin ratio, return on assets and return on equity. I. Gross profit margin ratio Gross Profit Margin Ratio is a profitability ratio that is used to compare the gross margin of a business to the net sales. The gross margin ratio is calculated as follows: = Gross Margin/ Net Sales II. Profit Margin This is a profitability ratio that is used to measure the net income earned generated by comparing the net sales and the net income. This ratio indicates the sales percentage that is left after the business pays its expenses. This ratio is used by the company’s creditors and investors to gauge how effectively a firm converts sales into net income. The company’s investors want to be assured that the company’s profits are enough to pay dividends, while creditors want to make sure that they are enough to pay loans. III. Return on Equity (ROE) Return on Equity measures the ability of a business entity to generate profits from its shareholder's investments. Return on Equity is calculated as: Return on Equity (ROE) = Net Income / Shareholders Equity Financial year 2016 2015 2014 Gross profit margin 14.81% - - Return on Equity 22.8 0.3 -7.9 Return on Capital 11 3 0 a) The gross profit margin increased from 0 in 2014 and 2015 to 14.81 %. This indicates an increase in revenue from 2014, 2015 to 2016. b) The return on equity increased from -7.9 in 2014 to 0.3 in 2015 to 22.8 in 2016. This indicates an increase in the equity holders returns on their investment. c) The return in the capital increased from 0 in 2014 to 2 in2015 and 11 in 2016. This indicates a handsome increase in return on capital. d) Efficiency Ratios Efficiency ratios are used to gauge how a business entity utilizes its assets to generate income. The efficiency ratios include accounts receivable turnover, working capital, and assets turnover ratio. I. Accounts receivable turnover This is an efficiency ratio that is used to measure the times a business entity converts its accounts receivables into cash revenue. The ratio is used in measuring how many times a company collects its accounts receivables in a year. It is calculated as: = Net Credit Sales/ Average Accounts receivables II. Working Capital Ratio/Liquidity ratio This ratio gauges a company’s ability to pay off its currents liability using its currents assets. This is important to the company’s creditors as it shows the liquidity position of the company. Working capital ratio = Total Current Assets/ Total Current Liabilities III. Asset Turnover Ratio This ratio gauges a business’s ability to generate sales revenue from its assets. The ratio show’s a company’s efficiency to use its assets for generating sales revenue. Assets Turnover Ratio = Net Sales/ Average Total Assets Financial year 2016 2015 2014 Accounts receivable Turnover 21.48 20.51 20.83 Working Capital -1,066 -713 -6.86 Assets Turnover Ratio 0.84 0.90 0.95 a) The accounts receivables turnover of Virgin Australia Holdings increased from 20.83 in 2014 to 20.51 to 21.48 (Virgin Australia, 2017). b) Is an indicator that the group ability to turn trade receivables into cash is increasing gradually. c) The asset turnover decreased from 0.95 in 2014 to 0.90 in 2015 to 0.84 in 2016. d) This is an indicator that the group’s ability to generate sales from its assets is decreasing. e) Liquidity Ratios Liquidity ratios measure a company’s ability to pay off its current liabilities when they are due and its long-term liabilities as they become current liabilities. They include; liquidity ratios Quick ratio, current ratio, and working capital ratio. I. Quick Ratio This is used for measuring the ability of a company to pay its current liabilities when they become due using its quick assets. Quick Ratio = (cash/cash equivalent+ short-term investments+ current receivables)/ Total current liabilities. II. The current ratio This measures a company’s ability to pay its short-term liabilities using its current assets. Current ratio= Total Current Assets/Total Current Liabilities Financial year 2016 2015 2014 Current Ratio 0.62 0.69 0.64 Quick ratio 0.60 0.67 0.62 Cash Ratio 0.42 0.48 0.42 a) The current ratio increased from 0.64 from 2014 to 2015 but decreased to 0.62 in 2016 ( Virgin Australia, 2017). b) This means that the company’s ability to meet its total current liabilities increased from 2014 to 2015 and decreased from 2015 to 2016. c) The cash ratio increased from 0.42 in 2014 to 0.48 and decreased to 0.42 in 2016. This means that in 2014 the cash and cash equivalents enough to cover current liabilities increased from 2014 to 2015 and decreased from 2015 to 2016. Indicating a decrease in liquidity. a) Market Performance Ratios Market performance ratios are used in comparing a company’s share prices with other financial measures. The main market performance ratios include; earning per share, price-earnings ratio and dividend yield. I. Earnings per share This is a ratio measures the net income earned per share of outstanding stock. Earnings per share (EPS) = Net Income- Preferred Dividends / Weighted Average outstanding common shares II. Price-earnings Ratio(P/E) This ratio compares the market value of a share about its earning Price-earnings ratio (P/E) = Market value price per share / Earnings per share III. Dividends yield Dividends yield gauges some cash dividends that are distributed to the company’s stockholders compared to the market value of the shares. Dividends yield= Cash dividends per share/ market value per share Financial year 2016 2015 2014 Earnings per share(Basic) (0.07) (0.03) (0.11) Earnings per share ( Diluted) (0.07) (0.03) (0.11) Price Earnings Ratio -2.77 - - Dividends yield - - - Book value per share 0.22 0.31 0.30 a) Virgin Australia’s Holding Earning per share increased from 0.11 to -0.03 from 2014 to 2015 but decreased from -0.03 to -007 from 2015 to 2016 ( Virgin Australia, 2017). b) This is due to increase in revenue from 2014 to 2015 and then a decrease in 2016. c) The price-earnings ratio for the year 2014, 2015 was nonexistence as the company posted losses. It was negative in 2016 due to the fact the group did not post profits. Non-financial Analysis a) The corporate governance framework of Virgin Australia Holdings requires that all the directors should have independent judgment by putting the interest of the shareholders before their personal interest. b) The corporate framework of the entity also targets to increase the overall representation of women in the organization to 51%, and by 30th June 2014, it had achieved 50%. c) The group also has a strong commitment towards employing indigenous communities, and for the year 2014, it had employed 100 aboriginals. d) In the financial year ended 30th June 2015, the group had improved the women representation in its board to 20%. e) The group also managed the implementation of a mental health and wellness program as well as awareness training. The group also implemented a partnership with the national disability recruitment coordinator. f) The group targeted to continue to mentor and initiate leadership programs with the objective of improving female representation on the board. Conclusion From the analysis above Virgin Australia holding limited net profits are adverse a for the three years under review, it has reported losses. This has resulted in nonpayment of dividends for its equity shareholder. The management of the group should design measures aimed to make the company profitable. References Virgin Australia. (2017). Virgin Australia. Retrieved 21 March 2017, from https://www.virginaustralia.com/uk/en/about-us/ Bloomberg, V. (2017). Virgin Australia Holdings Limited: Private Company Information - Bloomberg. Bloomberg.com. Retrieved 21 March 2017, from http://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=8424628 Read More