Vertical and Horizontal Analysis on Qantas Group Financial Statements - Example

Executive summary Financial statements analysis involves review and analysis of a company’s financial reports aimed at helping the users make informed economic decisions. There are many methods of conducting financial statements analysis ranging from financial ratios analysis, vertical and horizontal analysis among other techniques. Financial statements analysis is deemed important as it helps various users make informed financial and investment decisions as they help one understand whether the company is sound financially and whether it can be expected to continue performing well financially. This paper performs financial statements analysis for Qantas group with an aim of gauging whether the welfare of the shareholders as well as creditors is well taken care of. In so doing, the paper starts by explaining the various financial statements of a company on which the financial statements analysis is carried out. The paper also explains the various forms of financial analysis. The paper then performs a vertical and horizontal analysis on Qantas group financial statements before performing a financial ratios analysis in a bid to gauge whether various stakeholder groups’ welfare is well taken care of. It is hoped that the report would be helpful to everyone wanting to make various financial related decisions. Contents: Table of Contents Executive summary 1 Contents: 2 Financial analysis 3 Comparative financial statements 4 Common size statements 9 Financial ratios 14 Conclusion 16 References: 17 Financial analysis 1. The various financial statements of the company The company’s financial statements are twofold and include the statement of the company’s financial position or the balance sheet as well as the income statement or the company’s profit and loss account. However, accounting principles classify the company’s financial statements to include; i) The balance sheet ii) The income statement iii) The statements of changes in equity iv) The cashflow statement 2. The various methods of financial statements analysis Companies perform financial statements analysis using various techniques as have been explained below; a) Ratio Analysis – the technique expresses the relationship between two or more financial statement totals and compares them to budgets and industry benchmarks. There are a number of categories of ratios used in ratio analysis and they include liquidity radios, asset turnover ratios, leverage ratios, profitability and solvency ratios. The essence of financial ratios analysis is to help the financial statements users recognize strengths and weaknesses of the company. b) Trend analysis – the technique reviews two or more financial statement periods with the base year representing the earliest year in the data being compared. In this regard, analysts use percentages for the purpose of comparability. The statements are reviewed for incremental change representing changes in the business. c) Horizontal analysis –the analysis compares datasets for two periods. Analysts look for such trends as growth in revenue, net assets and income, reduction in expenses as well as liabilities. In this case, the base figure is subtracted from the current figure. d) Vertical analysis – in this case, every item on the income statement is expressed as a percentage of net sales. On the other hand, every item on the balance sheet is expressed as a percentage of total liabilities or total assets. 3. a) Prepare and interpret financial statements in i) Comparative form Comparative financial statements Qantas Airways Comparative Income statements For the years ended 30th June 2015 2014 Increase / % $M $M Decrease Change REVENUE AND OTHER INCOME Net passenger revenue 13,667 13,242 425 3.21 Net freight revenue 936 955 -19 -1.99 Other 1,213 1,155 58 5.02 Revenue and other income 15,816 15,352 464 3.02 Expenditure Manpower and staff related 3,604 3,770 -166 -4.40 Fuel 3,937 4,461 -524 -11.75 Aircraft operating variable 3,206 3,303 -97 - 2.94 Depreciation and amortization 1,096 1,422 -326 -22.93 Impairment of cash generating unit - 2,560 -2,560 -100 Impairment of specific assets 28 387 -359 -92.64 Non-cancellable aircraft operating lease rentals 495 520 -25 -4.81 Share of net loss of investments accounted for Under equity method 40 66 -26 -39.39 Other 2,362 2,635 -273 -10.36 Expenditure 14,768 19,124 - 4,356 -22.78 Statutory profit / (loss) before income tax expense and Net finance costs 1,048 (3,772) 4,820 127.78 Finance income 90 82 8 9.77 Finance costs (349) (286 ) 63 22.03 Net finance costs (259) (204) 55 26.96 Statutory profit /(loss) for the year 560 (2,843) 3,403 119.70 Attributable to: Members of Qantas 557 (2,843) 3400 119.59 Non-controlling interests 3 - 3 - Statutory profit/(loss) for the year 560 (2,843) 3,403 119.70 Qantas Airways Comparative Balance Sheet As at 30th June 2015 2014 Increase/ % $M $M Decrease Change CURRENT ASSETS Cash and cash equivalents 2,908 3,001 -93 -3.1 Receivables 959 1,196 -237 -19.82 Other financial assets 613 172 441 256.4 Inventories 322 317 5 1.58 Other 111 112 1 -0.89 Total current assets 5,049 4,932 117 2.37 NON-CURRENT ASSETS Receivables 134 158 -24 -15.19 Other financial assets 10,715 10,500 215 2.05 Intangible assets 803 741 62 8.37 Deferred tax assets 333 548 - 215 -39.23 Other 313 262 51 19.47 Total non-current assets 12,481 12,386 95 0.77 Total assets 17,530 17,318 212 1.22 CURRENT LIABILITIES Payables 1,881 1,851 30 1.62 Revenue received in advance 3,584 3,406 178 5.23 Interest bearing liabilities 771 1,210 -439 - 36.28 Other financial liabilities 416 182 234 128.57 Provisions 818 876 -58 - 6.62 Total current liabilities 7,470 7,525 -55 -0.73 NON CURRENT LIABILITIES Revenue received in advance 1,359 1,183 176 14.88 Interest bearing liabilities 4,791 5,273 - 482 -9.14 Other financial liabilities 68 66 2 2.94 Provisions 395 405 -10 -2.47 Total non-current liabilities 6,613 6,927 -314 -4.53 Total liabilities 14,083 14,452 -369 -2.55 Net assets 3,447 2,866 581 20.27 EQUITY Issued capital 4,630 4,630 0 0 Treasury shares (7) (16) 9 56.25 Reserves (66) (81) 15 18.52 Retained earnings (1,115) (1,671) 556 33.27 Equity attributable to the members of Qantas 3,442 2,862 580 20.27 Non-controlling interests 5 4 1 25 Total equity 3,447 2,866 581 20.27 Interpretation of the comparative financial statements a) Income statements The comparative income statements show an improving financial performance by the company as far as revenue generation is concerned. Overall, there was a 3.02% increase in total revenue from $15,352 million in 2014 to $15,816 million in 2015. This improvement is desirable as it can only mean increasing returns for shareholders all other factors held constant. On the other hand, the comparative statements show declining level of expenses with there being a 22.78 decline in the company’s overall expenditure from $19,124 million in 2014 to $14,768 million in 2015. The decline is desirable since it leads to improvement in the company’s profitability in 2015. Resulting from the increase in revenue and decline in expenditure, the company records a turnaround from making a loss amounting to $2,843 million in 2014 to a $560 million profit in 2015 which is a 119.7% improvement in profitability. This is desirable for the company’s stakeholders. b) Balance sheet The company’s total current assets slightly increased by $117 million which is 2.37% increase from the 2014 levels. Similarly, the company’s fixed assets also increased by $95 million in 2015 in comparison to 2014 which was a 0.77% increase. As such, the company’s total assets increased by 1.22% or $212 million in 2015 from the 2014 levels. On the other hand, the company’s current liabilities declined by $55 million or 0.73% from the 2014 levels. Similarly the company’s non-current assets declined in 2015 by 4.53% or $314 million from the 2014 levels. Resulting from the company’s increased profitability, the decline in liabilities and the increase in the company’s assets, the company owner’s equity improved from $2,866 million in 2014 to $ 3,447 million in 2015. This is a 20.27% increase which is desirable for the company’s shareholders. Common size statements ii) Common size statements Qantas Airways Common size Income statements For the years ended 30th June 2015 % of 2014 % of $M sales $M sales REVENUE AND OTHER INCOME Net passenger revenue 13,667 86.41 13,242 86.25 Net freight revenue 936 5.92 955 6.22 Other 1,213 7.67 1,155 7.52 Revenue and other income 15,816 100 15,352 100 Expenditure Manpower and staff related 3,604 22.79 3,770 24.56 Fuel 3,937 24.89 4,461 29.06 Aircraft operating variable 3,206 20.27 3,303 21.52 Depreciation and amortization 1,096 6.93 1,422 9.26 Impairment of cash generating unit - - 2,560 16.68 Impairment of specific assets 28 0.18 387 2.52 Non-cancellable aircraft operating lease rentals 495 3.13 520 3.39 Share of net loss of investments accounted for Under equity method 40 0.25 66 0.43 Other 2,362 14.93 2,635 17.16 Expenditure 14,768 93.93 19,124 124.57 Statutory profit / (loss) before income tax expense and Net finance costs 1,048 6.62 (3,772) -24.57 Finance income 90 0.57 82 0.53 Finance costs (349) -2.21 (286) -1.86 Net finance costs (259) 1.64 (204) -1.33 Statutory profit /(loss) for the year 560 3.54 (2,843) -18.52 Attributable to: Members of Qantas 557 3.52 (2,843) -18.52 Non-controlling interests 3 0.19 - Statutory profit/(loss) for the year 560 3.54 (2,843) -18.52 Qantas Airways Common size Balance Sheet As at 30th June 2015 2014 $M % $M % CURRENT ASSETS Cash and cash equivalents 2,908 16.59 3,001 17.33 Receivables 959 5.47 1,196 6.90 Other financial assets 613 3.5 172 0.99 Inventories 322 1.84 317 1.83 Other 111 0.63 112 0.65 Total current assets 5,049 28.80 4,932 28.48 NON-CURRENT ASSETS Receivables 134 0.76 158 0.91 Other financial assets 10,715 61.12 10,500 60.63 Intangible assets 803 4.58 741 4.28 Deferred tax assets 333 1.90 548 3.16 Other 313 1.79 262 1.51 Total non-current assets 12,481 71.20 12,386 71.52 Total assets 17,530 100 17,318 100 CURRENT LIABILITIES Payables 1,881 10.73 1,851 10.69 Revenue received in advance 3,584 20.44 3,406 19.67 Interest bearing liabilities 771 4.40 1,210 6.99 Other financial liabilities 416 2.37 182 1.05 Provisions 818 4.67 876 5.06 Total current liabilities 7,470 42.61 7,525 43.45 NON-CURRENT LIABILITIES Revenue received in advance 1,359 7.75 1,183 6.83 Interest bearing liabilities 4,791 27.33 5,273 30.45 Other financial liabilities 68 0.39 66 0.38 Provisions 395 2.25 405 2.34 Total non-current liabilities 6,613 37.72 6,927 40.00 Total liabilities 14,083 80.33 14,452 83.45 Net assets 3,447 19.66 2,866 16.55 EQUITY Issued capital 4,630 26.41 4,630 26.74 Treasury shares (7) 0.04 (16) 0.09 Reserves (66) 0.38 (81) 0.47 Retained earnings (1,115) 6.36 (1,671) 9.65 Equity attributable to the members of Qantas 3,442 19.63 2,862 16.53 Non-controlling interests 5 0.03 4 0.02 Total equity 3,447 19.66 2,866 16.55 Total equity and liabilities 17,530 100 17,318 100.00 Interpretation of common size financial statements a) The common size income statement The common size income statement shows that the company’s expenditures as a percentage of the company’s revenues greatly declined from 124.57% in 2014 to 93.93% in 2015. This decline is desirable since as a result, the company records a great improvement in its profitability from -18.52% of the company’s revenue in 2014 to 3.54% of the company’s revenue in 2015. This is desirable for the shareholders. b) The common size balance sheet The common size balance sheet shows a slight increase in the company’s current assets as a percentage of the total assets from 28.48% in 2014 to 28.80% in 2015. On the other hand, the company’s non-current assets as a proportion of the total assets declined slightly from 71.52% in 2014 to 71.20% in 2015. The company’s current liabilities as a proportion of total liabilities and owners’ equity declined from 43.45% in 2014 to 42.61% in 2015 while the non-current liabilities declined from 40% in 2014 to 37.72% in 2015. As a result, the owners’ equity greatly improved from 16.55% in 2014 to 19.66% in 2015. This is desirable for the shareholders. Financial ratios 3b) financial ratios used to measure common stockholders welfare i) Earnings per share = income attributable to common stockholders/ number of shares 2015 = $557,000,000/2,196,000,000 =25.4 cents 2014 (2,843,000,000)/2,196,000,000 =-$1.29 ii) Returns on equity = Net income/ Average stockholders’ equity 2015 = ($557,000,000/3,447,000,000)*100 =16.16% 2014 = ((2,843,000,000)/2,866,000,000)*100 =-99.2% iii) Dividend per share 2014 – no dividends declared and paid 2015 – no dividend declared and paid Interpretation of the ratios The company’s earnings per share greatly improved from -$1.29 in 2014 to 25.4 cents in 2015 owing to the improvement in the company’s profitability during the year. Similarly, the company’s return on equity greatly improved from -99.2% in 2014 to 16.16% in 2015 owing to the company’s improving financial performance. Despite the improved performance however, the company did not give any dividends to the shareholders. it should however be noted that the shareholders welfare improved in 2015 compared to 2014 and if the trend continues, the shareholders can expect better returns from their investments in future. 3c) financial ratios used to measure short term creditors welfare i) Current ratio = current assets/current liabilities 2015 = $5,049,000,000/7,470,000,000 = 67.59% 2014 =$4,932,000,000/$7,525,000,000 = 65.54% ii) Quick ratio = (Current assets-Inventories)/Current liabilities 2015 = ($5,049,000,000-322,000,000)/7,470,000,000 =63.28% 2014 = ($4,932,000,000-317,000,000)/7,525,000,000 =61.33% Interpretation of the ratios It is worth noting that the short term lenders ratios are very low implying that their welfare may be at stake unless the company puts in measures to improve it. The company’s current ratio improved from 65.54% in 2014 to 67.59% in 2015. On the other hand, the company’s quick ratio improved from 61.33% in 2014 to 63.28% in 2015. Thought this implies improvement in the short term creditors welfare, the momentum ought to be maintained to avoid putting their money at risk. 3d) financial ratios used to measure long term creditors welfare i) Gearing ratio =Common stockholder’s equity/ Fixed interest bearing funds 2015 =$3,447,000,000/4,791,000,000 =0.72 2014 =$2,866,000,000/5,273,000,000 =0.54 ii) Debt to equity ratio =total debt /equity 2015 = $14,083,000,000/3,447,000,000 =4.09 times 2014 =$14,452,000,000/2,866,000,000 =5.04 times iii) Times interest earned ratio = Income before interest and tax/Interest expenses 2015 =$1,048,000,000/349,000,000 =3.00 times 2014 =-$3,772,000,000/286,000,000 =-13.19 times Interpretation of the ratios The company’s gearing ratio greatly improved from 0.54 in 2014 to 0.72 in 2015 owing to reduction in interest bearing funds. On the other hand, the company’s debt to equity ratio declined from 5.04 times in 2014 to 4.09 times in 2015 owing to reduction in the company’s overall liability levels. There was also a great improvement in the company’s times interest earned ratio from – 13.19 times in 2014 to 3.0 times in 2015 owing to the improvement in the company’s profitability and signifying improved ability to pay interest. Overall, the long-term lenders welfare improved over the two years period but the momentum needs to be maintained to avoid putting their funds at risk. Conclusion This report has outlined the various financial statements prepared by companies. The report has also revealed the various financial statement analysis techniques used by companies. The report has also presented the financial analysis for Qantas Group income statement and balance sheet for the years 2014 and 2015. In conclusion, the report has indicated that the company’s financial position improved in 2015 in comparison to 2014. However, much needs to be done to ensure that the creditors and stockholders welfare is improved. References: Qantas, 2015, Qantas annual report 2015 Jared, B2010, Financial accounting, London, Rutledge. Hubpages.com, 2014, Shareholders investment ratios: Guide to share investing, Retrieved on 4th January 2016, from http://hubpages.com/money/SHAREHOLDERS-INVESTMENT-RATIOS Read More