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Qantas Financial Analysis - Case Study Example

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Summary
Qantas is one of the largest airlines companies in Australia and has been involved in providing national and international transportation and freight services. The company has three major business operations viz. flying businesses, flying services, and associated businesses…
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Qantas Financial Analysis

Download file to see previous pages... An analysis of Qantas' financial position and business risk has been done with different profitability, liquidity and gearing ratios. Belkaoui (1998, p11) illuminates that "the profitability ratios portray ability of the firm to efficiently use the capital committed by stockholders and lenders to generate revenues in excess of expenses". The following profitability ratios provide an insight into the profit generating capacity and performance of the company over the last two financial years:
The rate of return on total assets ratio expounds the ability of a firm in utilizing its various assets towards profit generation. Qantas' rate of return on total assets ratio has declined by about 25% in the year 2006 as compared to 2005. It suggests that the company's profitability has tumbled down significantly over the last two financial years. The net profit ratio evaluates a company's profitability position after considering all the operating costs and interest expense etc (Mcmenamin Jim, 1999). The net profit margin of Qantas again indicates a serious decline in the company's ability to generate profit out of its sales revenue. This ratio has also decreased by about 25% in the year 2006. The worth noting point is that the company's sales revenue, as suggested by its financial statements for the year 2006, has increased by about 8% in 2006. ...
The company's short term financial position and business risks can be analyzed with the help of the following liquidity ratios:
Liquidity Ratios
2005
2006
Current Ratio

0.74

0.93

Quick Ratio (Acid Test)

0.67

0.87

Average Receivables Collection Period

25.69

25.24


The current ratio measures a company's ability to liquidate its short-term liabilities out of its various current assets (Meigs & Meigs, 1993). The above table shows that Qantas' current ratio has increased by about 20% in the year 2006 as compared to 2005. It suggests and improvement in the company's ability to pay of its short term liabilities. The quick ratio examines the short-term solvency of a company after deducting its stock from the current assets (Mcmenamin Jim, 1999). The quick ratio for Qantas for the year 2006 further shows an increasing trend. This ratio has risen by about 23% in the year 2006 as compared to 2005. It illuminates that the company has acquired more capacity to pay off its short term debt after keeping aside its stock from the current assets. However, the company bears significant short term solvency risks, because it still possesses about $0.93 worth of current assets and $0.87 worth of quick current assets to pay of its $1 worth of current liabilities. The average receivables collection ratio suggests that it takes the company about 25 days to collect cash from its debtors. This ratio shows a sign of stability in the company's collection policies.

Qantas' long term financial position and business risk have been analyzed with the help of the following gearing ratios which illustrate the company's capital structure and its ability to meet its interest ...Download file to see next pagesRead More
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