Qantas Fianancial Analysis PDF

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TABLE OF CONTENTS INTRODUCTION:................................................................................................................................... 3 FINANCIAL ANALYSIS:....................................................................................................................... 3 PROFITABILITY..................................................................................................................................................3 Return on Equity (ROE).........................................................................................................................3 Return on Assets (ROA).........................................................................................................................3 LIQUIDITY....................................................................................................................................................... 4 Current Ratio.............................................................................................................................................4 Quick Ratio.................................................................................................................................................4 LEVERAGE....................................................................................................................................................... 4 ASSET UTILIZATION......................................................................................................................................4 VALUATION............................................................................................................................................. 5 DIVIDEND DISCOUNT MODEL (DDM).....................................................................................................5 FREE CASH FLOW TO FIRM MODEL (FCFF).........................................................................................5 SENSITIVITY ANALYSIS..................................................................................................................... 5 DDM............................................................................................................................................................... 5 FCFF...............................................................................................................................................................5 CRITICAL THINKING............................................................................................................................ 5 BIBLIOGRPAHY...................................................................................................................................... 5 APPENDIX............................................................................................................................................... 5

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INTRODUCTION: Qantas, originally registered as Queensland and Northern Territory Aerial Services Limited, is Australia’s largest domestic and international airline. As the world’s second oldest airline, it has maintained a high reputation not only within Australia, but globally. The main focus of the business centres on the transportation of its customers both through Qantas and Jetstar, their lower cost alternative carrier, however the Qantas Group comprises of a range of subsidiary businesses that make up its extensive portfolio (Qantas Investors, 2019).

FINANCIAL ANALYSIS: In order to analyse the financial stability of a company, profitability, liquidity, leverage and asset utilization can be observed through the use of various ratios. Comparing historical data and ratio results provides extensive insight on the well-being of a company and it’s future potential.

Profitability Return on Equity (ROE) Return on Equity provides information on a firm’s ability to produce profits from the investments made by shareholders. Comparing a company’s investment returns to the industry’s average ROE or to historical data can provide insight on a company’s competitive advantage as well as the effectiveness of a company’s management at utilizing equity to stimulate business growth (Return on Equity (ROE), 2019). Qantas’s ROA over the past 5 years has fluctuated moderately but has maintained an averaged of 30.06% reflecting a relatively high profitability. ROE increased by 13.82% from 2018 to 2019, increasing from 28.8% to 32.78%, net profit margin and asset turnover stayed relatively the same however an increase and leverage shows the firm’s recent profitability can be attributed to the use of debt to buy more assets, something that must be watched carefully as it increases the risk of default. Return on Assets (ROA) Return on Assets also provides information on a company’s profitability, this time in relation to assets and the management’s ability to use economic resources to generate profit. Comparing income to assets indicates how much is earned per dollar of assets, which allows us to determine a company’s profitability and efficiency (Return on Assets, 2019). Qantas’s ROA is relatively low, averaging at 9.17% over the past 5 years. However, it is important to note the high cost of property, plant and equipment needed to generate income in the airline industry. This low ROA does not necessarily mean low profitability rather it indicates that Qantas is fairly asset-intensive. According to the Corporate Fincance Institute website, “a return on assets under 5% is considered an asset-intensive business while a return on assets above 20% is considered an asset-light business.” (Return on Assets, 2019). So in fact, Qantas has reasonably high profitability for such an asset-intensive industry.

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Liquidity Analysing the liquidity of a company helps determine its ability in meeting short-term financial obligations. A series of ratios are used in order to measure a companies liquidity. Current Ratio A company’s current ratio helps indicate it’s ability to settle it’s short-term financial obligations due within a year. A rate of over 1 generally indicates a financially healthy company, the maximum rate of the range tends to be dependent on the industry however abnormally high rates often mean the company has unused cash that could be used more beneficially. Qantas’ current ratio is very low, averaging at 0.52 over the past five years generally indicating the company may have difficulty meeting obligations, however it is important to take in to consideration the industry of the company. Qantas would be able to generate cash rapidly through ticket sales and therefore would be able to operate successfully with a low current ratio due to a strong operating cash flow. Quick Ratio Quick Ratio measures a company’s ability to settle obligations immediately. Qantas’ quick ratio is also very low, averaging at 0.47 over the past 5 years. This too, is likely due to the industry in which Qantas operates meaning it’s low quick ratio does not necessarily signify financial instability rather the company just performs with a strong operating cash flow.

Leverage Leverage of a company is calculated through comparing total assets to total equity providing insight on the amount of debt a company uses to finance its assets. Qantas’ leverage decreased from 5.09 in 2015 down to 4.71 in 2018 but increased again in 2019, jumping up to 5.64, increase ROE with it. Using debt to finance a company can be an effective way to boost returns but as previously stated, can increase risk of default and insolvency.

Asset Utilization Asset turnover indicates sales generated by each dollar of assets within a given period of time providing insight on how well a company uses its assets. Qantas’ asset turnover has remained quite stable throughout the past 5 years only fluctuating .07 between its lowest and highest year. The stability of the ratio demonstrates Qantas’ financial security despite a somewhat low 5 year asset turnover average of 0.93. Asset turnover ratio is another industry dependent calculation and would be effected by the asset-intensive nature of the airline industry. Fixed asset turnover also remained steady, further exhibiting financial stability.

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VALUATION Discounted Cash Flow Model (DCF) Using the DCF it looks like QANTAS shares are overvalued. The market price is slightly higher than the intrinsic value. Assumptions: Growth rate: - average growth rate from the past five years was used to predict future earnings CAPM -

risk free rate was calculated from 10-year bond yield July 2019 (World Government Bonds, 2019) 6% market premium was used

CRITICAL THINKING Using the DCF model, the calculated value of QANTAS shares is 4.71, this is less than the market price of 5.40 leading us to believe that the value is overpriced on the market meaning there is strong investment demand. Qantas is probably a good share to be selling because although it is tyupically a fairly reliable stick, recent circumstances should also be taken into consideration when analysing. COVID-19 means that predictions are most likely very inaccurate as airlines would be a business very heavily affected by restrictions. That being said, regularly, Qantas looks like a fairly reliable stock to invest in, however, my final opnion would be to sell/avoid investing in QANTAS shares.

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BIBLIOGRPAHY Qantas Investors. (2019). Qantas.Com. https://investor.qantas.com/home/ Return on Assets. (2019). Corporate Finance Institute. https://corporatefinanceinstitute.com/resources/knowledge/finance/return-on-assetsroa-formula/ Return on Equity (ROE). (2019). Corporate Finance Institute. https://corporatefinanceinstitute.com/resources/knowledge/finance/what-is-return-onequity-roe/ World Government Bonds. (2019). Australia Government Bonds - Yields Curve. World Government Bonds. http://www.worldgovernmentbonds.com/country/australia/

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