Ratio Analysis for Qantas and Virgin Companies - Case Study Example

Ratio Analysis for Qantas and Virgin Companies Name Institution Course Tutor Date Table of Contents Table of Contents 2 1.0 Executive summary 3 2.0 Introduction 4 3.0 Capital structure ratio 4 3.1 Debt to equity ratio 4 3.2 Debt ratio 5 3.3 Equity ratio 6 3.4 Interest coverage ratio 6 3.5 Debt coverage ratio 6 4.0 Market performance ratios 7 4.1 Net tangible asset backing ratio 7 4.2 Earnings per share ratio 8 4.3 Dividend per share ratio 9 4.4 Dividend Payout ratio 9 4.5 Operating Cash flow per share 9 4.6 Price Earnings ratio 10 5.0 Recommendation 10 Ratios are crucial when making financial decisions but the two companies should be aware that each company has its accounting procedures meaning difference in the way they compute their data and thus this may generally lead to difference in the results of the ratios that are computed thus companies across the same industry should adapt a similar mode of keeping their accounting data to that ratio analysis may be fully accurate when comparing ratios across companies (Altman, 1968). 10 6.0 References 10 Peavler R, 2013, What are Dividends Per Share and how are Dividends Per Share Calculated, Retrieved, 2013 May 25th http://bizfinance.about.com/od/financialratios/f/what-are-dividends-per-share-and-calculation.htm 11 VitA,2010,EquityRatio,Retrieved2013May25th 11 1.0 Executive summary Ratio analysis is a method that is used by many companies, in this case Qantas and Virgin companies, to compute and show the trends so as to enable the company to know whether it is making any significant growth or it is making losses. Due to the advancement in technology across the industries, many companies have realized that ratio analysis is a strong tool that has enabled them to easily analyse their financial statements and detect easily the trend in growth, the backwardness or even the improved performance of the company across the past years. The report analyses the capital structure ratios and the market performance ratios of two companies, Qantas and Virgin. The ratios are analysed from the two companies for a period of four years. Each ratio is computed and analysed after the four years and the interpretation is given. 2.0 Introduction Ratio analysis is the method by which financial information is converted and made simple for the purposes of comparison. The financial information to be calculated is extracted from income statements and balance sheets amongst other major financial statements. Ratio analysis allows the use of financial data which is converted into ratios and used by both large and small companies to evaluate of their companies in terms of growth, performance across their line of industry. Ratios provide the means to benchmark and forecast the future of a company and thus dictating the long term steadiness of the company (Nissim & Penman 2001). 3.0 Capital structure ratio Capital Structure ratios are financial ratios that are used by companies to give a comparison of its debt and equity (McIntosh 1999). 3.1 Debt to equity ratio This ratio is used to measure the ability of a firm in handling its obligations, whether long term or short term. Qantas Company Virgin Company 2009 debt to equity ratio=Total liabilities÷ total equity 14,284.00 ÷ 5,765.00 = 2.48 2009 debt to equity ratio=Total liabilities÷ total equity 2,789.80 ÷ 577.10 = 4.83 2010 13929.00 ÷ 5,981.00 = 2.33 2010 2,938.60 ÷ 933.30 = 3.15 2011 14,707.00 ÷ 6,151.00 = 2.40 2011 2915.00 ÷ 926.30 =3.15 2012 15,289.00 ÷ 5,889.00 = 2.60 2012 3065.50 ÷ 929.70 = 3.30 The Virgin Company has a high debt to Equity ratio and this shows that the company carries a high debt. Qantas has a ratio that is close to 1 and this means there is a balance between the company’s debt and its equity (Jensen, 1986). 3.2 Debt ratio Debt ratio is a financial ratio that is used to show the portion of a company’s debts compared to the assets. It helps to show whether a company uses more debt to finance assets (Vit A, 2011). Qantas Company Virgin Company 2009 Debt Ratio = Total liabilities ÷ Total assets 14,284 ÷ 20,049 = 0.71 2009 debt ratio= Total liabilities ÷ Total assets 2789.80 ÷ 3366.90 = 0.83 2010 Debt Ratio 13,929 ÷ 19,910 = 0.70 2010 debt ratio 2938.60 ÷ 3871.90 = 0.76 2011 debt ratio 14,707 ÷ 20,858 = 0.70 2011 debt ratio 2915.00 ÷ 3841.30 = 0.76 2012 debt Ratio 15,289 ÷ 21,178 = 0.72 2012 debt ratio 3065.50 ÷ 3995.20 =0.77 The debt ratio is low for both companies and this shows that they are in a capacity to borrow more using their assets in future at no particular risk (Vit A 2010). 3.3 Equity ratio It is the financial ratio that measures the portion of the company’s equity that is used in financing the assets. Qantas Company Virgin Company 2009 Equity ratio= total Equity ÷ total assets 5,765.00 ÷ 20,049 = 0.29 2009 Equity ratio= total Equity ÷ total assets 577.10 ÷ 3366.90 =0.17 2010 Equity ratio 5,981 ÷ 19,910 = 0.3 2010 Equity ratio 933.30 ÷ 3871.90 = 0.24 2011 Equity ratio 6,151 ÷ 20,858 =0.3 2011 Equity ratio 926.30 ÷ 3841.30 = 0.24 2012 Equity ratio 5,889 ÷ 21,178 = 0.28 2012 Equity ratio 929.70 ÷ 3995.20 = 0.23 The Qantas Company has a higher equity ratio in its trend and this shows that it is at a risk of because it reveals that most of its earnings are used as interests (Vit A 2010). 3.4 Interest coverage ratio This is a capital structure ratio is also known as time earned ratio. It shows the times that a firm is in a position to incur its expenses out of the profits earned in a certain period. This ratio shows the extent to which the company is able to pay for increases in payments and thus it would be a challenge to both companies are to an extent very vulnerable to high interest rates. 3.5 Debt coverage ratio This is a ratio that is used to measure the net cash and the current liabilities of a company. It shows the ability of a company to finance its current liabilities from all its operations. Qantas Company Virgin Company 2009 Debt coverage ratio = net cash from operating activities ÷ average current liabilities Average current liabilities =total liabilities-noncurrent liabilities 14284 -7570 =6714 1149 ÷ 6714 = 0.17 2009 Debt coverage ratio = net cash from operating activities ÷ average current liabilities Average current liabilities =total liabilities-noncurrent liabilities 2789.80 -1630.90 =1158.90 101.10 ÷ 1158.90 =0.09 2010 13,929 -7688 = 6241 1351 ÷ 6241 = 0.22 2010 2938.60 ÷ 1629.70 =1308.90 369.20 ÷ 1308.90 = 0.28 2011 14707 -8472 =6235 1782 ÷ 6235 = 0.29 2011 2915.00 – 1448.30 =1466.70 213.50 ÷ 1466.70 = 0.15 2012 15,289 -8171 = 7118 1810 -7118 = 0.25 2012 3065.50 -1473.90 =1591.60 285.90 ÷ 1591.60 = 0.18 This ratio shows that no company has a better liquidity position as all the ratios from both companies are less than one. A ratio close to 1 thus is most preferred as the company is believed to finance its current liabilities from its own cash flow very easily (Accounting for Management 2012). 4.0 Market performance ratios These are the financial ratios that are used to measure the economic status of the company within its current markets. 4.1 Net tangible asset backing ratio This refers to the measure of how much the company is worth. Qantas Company Virgin Company 2009 = equity-Intangible assets –preference shares/total shares (5721 -664 -0 ) ÷ 2051 = 2.47 2009 equity-Intangible assets –preference shares/total shares (577.10-51.10-0) ÷ 1374.10 = 0.38 2010 (5939- 668-0) ÷ 2265 = 2.34 2010 (933.30-53.30-0) ÷ 2042.30 = 0.43 2011 (6147- 593-0) ÷ 2265 = 2.45 2011 (926.30-81.10- 0) ÷ 2189.60 = 0.37 2012 (5885-610- 0) ÷ 2265 = 2.33 2012 (926.70 -101 -0) ÷ 2190 =0.38 This interpretation shows that Qantas Company is highly worth due to its high ratio as compared to Virgin Company whose ratio is comparatively low. 4.2 Earnings per share ratio This is the ratio that measures the profitability of the firm. It shows the amount of the profits that the company makes and allocated to every common share. Qantas Company Virgin Company 2009 ( Net profit to shareholders - preference dividends) ÷ no. of equity shares 325-0 =325 No. of equity ( Shareholder’s equity ÷ weighted no of ordinary shares on issue at end of year ) 5721 ÷ 2051 = 2.79 325 ÷ 2.79 = 116.5 2009 ( Net profit to shareholders - preference dividends) ÷ no. of equity shares 160 -0 =160 577.10 ÷ 1374.10 = 0.42 160 ÷ 0.42 = 381 2010 213-0 =213 5939 ÷ 2265 = 2.62 213÷ 2.62 = 81.3 2010 21.30- 0 = 21.30 933.30 ÷ 2042.30 = 0.46 21.30 ÷ 0.46 = 46.3 2011 250-0 = 250 6,147 ÷ 2265 = 2.71 250 ÷ 2.71 = 92.3 2011 67.80 – 0 = 67.80 926.30÷ 2189.60 = 0.42 67.80 ÷ 0.42 = 161.4 2012 245 – 0= 245 5885 ÷ 2265 = 2.60 245 ÷ 2.60 = 94.2 2012 22.80- 0 =22.8 926.70 ÷ 2190.0 = 0.42 22.8 ÷ 0.42 = 54.3 Qantas and Virgin companies made growth for its shareholders, after the effects of shares that are issued and thus growth is recorded not only from profits but also from the acquisition. 4.3 Dividend per share ratio This is the total number of dividends that is gotten from the each share of total stock that is issued. By the show of the dividends from Qantas and Virgin companies ,it shows that the dividends were very low and thus could not computed with the shares outstanding thus this being an indicator that the companies are not doing very well in fulfilling their financial performance and growth. 4.4 Dividend Payout ratio This is the ratio that shows the total dividends paid to shareholders in relation to the total profits of the company. Qantas company Virgin company Dividend payout ratio= Dividend ÷net profit 2009 22.00 ÷ 325 = 0.07 Dividend payout ratio= Dividend ÷net profit 2009 dividend received was 0 2010 16.00 ÷ 213 =0.07 2010 2.30 ÷ 21.30 = 0.11 2011 21.00÷ 250 =0.08 Dividend payout ratio is 0 2012 22 ÷ 245 = 0.09 Dividend payout ratio is 0 Qantas is company that has growth as compared to Virgin. This is because the net income is very low for Virgin and thus it’s advisable to invest in Qantas as compared to Virgin Company. 4.5 Operating Cash flow per share This is the ratio that is used as an alternative of price per earnings ratio though it is used when the large companies want to take into consideration the depreciation and amortization are very high and thus affecting the net income. 4.6 Price Earnings ratio This is the ratio that measures whether the company’s share price is either valued correctly or not. It’s computed by dividing the current share price with the earnings per share. This cannot be computed because the table does not indicate the current share price which is normally quoted from the secondary markets. 5.0 Recommendation Ratios are crucial when making financial decisions but the two companies should be aware that each company has its accounting procedures meaning difference in the way they compute their data and thus this may generally lead to difference in the results of the ratios that are computed thus companies across the same industry should adapt a similar mode of keeping their accounting data to that ratio analysis may be fully accurate when comparing ratios across companies (Altman, 1968). 6.0 References Accounting for Management, 2012, Financial statement analysis/ Accounting ratios analysis, Retrieved, 2013 May 25th http://www.accountingformanagement.org/current-cash-debt-coverage-ratio/ Altman, E. I. (1968). Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. The journal of finance, 23(4), 589-609. Nissim, D, & Penman, S, H, (2001). Ratio analysis and equity valuation From research to practice. Review of accounting studies, 6(1), 109-154. Jensen, M, (1986), Agency cost of free cash flow, corporate finance, and takeovers, Corporate Finance and Takeovers. American Economic Review, 76(2). Peavler R, 2013, What are Dividends Per Share and how are Dividends Per Share Calculated, Retrieved, 2013 May 25th http://bizfinance.about.com/od/financialratios/f/what-are-dividends-per-share-and-calculation.htm VitA,2010,EquityRatio,Retrieved2013May25th Read More