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Business Report Assignment Help 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.
The return on assets of Virgin was 1.98% and 0.51% and that of Qantas was 1.76% and 2.28% in 2010 and 2011. It indicated the operating performance of Qantas was increasing however which of Virgin Australia was decreasing.
There is an increase in the return on equity in Qantas Group from 2010 to2011, which is 2.88% to 4.66%. On the other hand, this figure decrease significantly from 1.93% to -4.28% in Virgin Group. It means virgin failed in management. It cannot use leverage to improve investment return on company’s equity. Therefore, compared with virgin Group, Qantas did much better in this aspect.
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Operating efficiency is the ability of the company to mange its asset and maximizes its return on sales as possible. There are three operating efficiency ratio including inventory turnover, accounts receivable turnover and accounts payable turnover.
As can been seen from the table the inventory turnover for Virgin Australia Limited is 0 days and 0.57 days in 2010 and 2011. This figure of Qantas limited is 8.45 days and 9.12 days. Virgin had very high inventory turnover, which may indicate efficient management, however, it may also means insufficient inventory levels, causing risk stock outs, lost sales and customer relationship. Qantas has relatively higher ratio may indicate that inventory levels were high in relation to sales, which may indicated poor inventory management and there may be obsolete stock that is more difficult to sell.
The debtors turnover for these two company in 2010 and 2011 was 10.72 days to 11.46 days and 21.17 days and 20.60 days respectively. Comparing to normal credit period allocated for debtors, which is 30 days. The ratio of two companies is within the reasonable range.
Virgin used 39.7 days and 44.2 days to pay their debts and in this aspect it takes 46.4 days and 42.6 days for Qantas. This figure for both companies was exceed the normal credit terms allocated for creditor, which is 30 days. Debtors turnover leverage a company whether can afford its debts as soon as possible. Using long time to pay its debts could lead to miss the discounts for early payment and impact the reputation of the company in paying the debts, which may lead to difficulty in gaining credit from suppliers and financial instrument.
Financial stability measures whether a company can pay its debts as soon as possible and accept the level of risk arising from its financial structure. It consists of short-term liquidity and long-term solvency.
As can been seen from the table, Qantas and Virgin Australia both had low current ratio which was 0.88% to 0.85% and 0.76% to 0.64% from 2010 to 2011. If inventory turn over more rapidly than the account payable becomes due, therefore the current ratio will be less than one. Company can borrow to meet current debts with their long-term prospects. According to bizstats (2009), the industry average ratio is 1.54%, which is far beyond the figure of both companies. Indicating liquidity problem that companies have difficulty to meet current obligation.
The quick ratio of Qantas was 0.88% and 0.85% in 2010 and 2011 and that of Virgin was 0.76% and 0.64%. In fact, the industry average was 1.19%. Both companies were lower than the industry average, which indicated the liquidity problem.
The debt assets ratio of Virgin was 75.90% and 75.89% in 2010 and 2011. This figure of Qantas was 69.93% and 70.50%. In addition, the debt equity ratio was 191.56% and 177.04% for Virgin and 95.60% and 98.05% for Qantas. The higher of these ratios indicated company could be difficult to borrow further fund and higher interest charges and higher loan condition. As the leverage increased, the risk increased. Qantas was less risk than Virgin. However Virgin was more beneficial as the additional income that arises from additional fund.
The times interest earned of Virgin were 1.55 times and -0.38 times from 2010 to 2011. The ratio of Qantas was 4.16 times and 3.96 times. Qantas perform better in this ratio that indicated Virgin had high leverage level, then incurring high interest level. Thus, Virgin had difficulty to meet the interest payment from current profit.