Assignment Objective: The objective for this assignment is for you to perform and interpret financial ratios, that is, provide ratio analysis of financial statements over a two year period (2010 through 2011) and together with all other relevant information, advise on these organisations as investment opportunities. The companies to be analysed are:
1. Virgin Australia Holdings Ltd. 2. Qantas Airways Ltd.
Business Report – Qantas Airways Ltd.& Virgin Australia Holdings Ltd.
This report is prepared for comparing with some financial ratios between Qantas Airways Ltd and Virgin Australia Holdings Ltd. Therefore, this ratio analysis of financial statements will focus on profitability, efficiency and financial stability of these two companies over the period from 20010 to 2011. In addition, it will identify and discuss limitations regarding the financial analysis. Furthermore, at the end of this report, a few of appropriate recommendations will be suggested for investor which of these two companies is better investment option.
2.0 Body of the Report
Company profitability ratios are used to evaluate how effective a company has been in the perspective of meeting its overall return objective, compared with the resources invested. Profitability ratios include gross profit margin, net profit margin, return on assets, return on equity and asset turnover.
As can been seen from the table, the gross profit margin of Virgin Australia Holdings Ltd in 2010 was 9.8% and in 2011 was 6.3% which dropped about 3%. This ratio of Qantas Airways Ltd in 2010 and 2011 was 10.97% and 11.39%. The reason for the gross profit margin of Virgin Australia Ltd dropping down is because of the increasing cost of fuel and their expansion of destination network and the increasing purchase of aircraft (Asian Aviation Magazine, 2011). However the company did not recover the cost by increasing selling price. Qantas has higher gross profit margin ratio than Virgin Australia because Virgin set relatively lower selling price and the cost of inventory increased last year.
The net profit margin of Virgin Australia in 2010 and 2011 was 0.60% and -1.21%, which indicated the company has profit loss in 2011 as the cost such like increasing fuel price and set new target is higher than earning. This ratio of Qantas in this period was 1.24% and 1.76%. Qantas has higher net profit margin than Virgin Australia, because Virgin Australia as low-cost airline set the lower selling price than Qantas with the expectation of selling more units with less net profit margin.
The asset turnover of Virgin Australia in 2010 and 2011 was 76.86% and 85.08%, while this ratio of Qantas was 69.17% and 71.41%. Virgin Australia performed better in asset turnover, because compared to traditional mainline carrier Virgin Australia has lower operation cost structure with lower total asset. The sale of the company offers cheaper tickets to keep the revenue.