Financial Statement Analysis

Financial statement analysis

1. Introduction

       This paper seeks to decide which of the companies --- Qantas or Virgin Blue -- is the better investment option by doing an analysis of their stability- both short term and long term. The paper will also include appropriate justification based on the analysis and limitation of the analysis that the investor should consider.

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2.  Financial stability analysis

     To conduct a financial stability analysis of the companies there is a need to compare their relevant ratios as shown in Table A below.

Comparative Ratios[1]

          Financial stability may be viewed in terms of liquidity and solvency. Liquidity connotes being able to meet a company’s currently maturing obligations. It is measured using the current ratio and the quick asset ratio.  The current ratio gets computed by dividing current assets current liabilities while quick assets ratio assumes almost the same computation except that the inventory and prepaid expenses are being removed from the current assets to have a new numerator called quick assets and then dividing this figure to the same the denominator as in the current ratio computation. On the other,  solvency refers to the company’s long-term capacity to keep up its stability over the long term. It can be measured by the debt to asset ratio with the formula of having the total debt of the company divided by its total assets.[2]

           As applied to both companies, Qantas is less liquid than  Virgin blue because had lower current ratios of 0.87 and 0.74  for the years  2007 and 2008 respectively, or an average of 0.81 as against Virgin  Blue’s 1.1 and 0.88  for the years  2007 and 2008 respectively or an average of 0.99.  The same liquidity position may be said in terms of quick ratios for Qantas with 0.84 and 0.71 or an average of 0.78, and Virgin Blue’s 1.1 and0.87 or an average of 0.99.   The higher the current ratio and quick ratio, the better it would be for a company. Hence,  Virgin Blue is more liquid See Table A above. The debt to the asset of Qantas is 71.1% and 70.9%, or the years 2007 and 2008 respectively, or an average of 71.0%. on the other hand, Virgin Blue’s debt to asset ratios is 72.3% and 67.8% or the years 2007 and 2008 respectively, or an average of 70.0%. The lower the debt asset ratio, the better it would be for a company, hence Virgin Blue is still more solvent than Qantas. See Table A above. Combining better liquidity and solvency ratios of the two,  Virgin Blue is more financially stable.

3. Limitation, Conclusions, and Recommendations

          The limitation of the analysis made based on financial ratios to evaluate financial stability is the assumption that happened in the past may not necessarily happen in the future. There is no 100% guarantee that past records will continue in the future. The best example as found above is the sudden decrease in the interest coverage for the two companies. For Qantas the decrease was from positive to negative ratio and for Virgin Blue, the decrease was about a  difference of more than 10%. Generally, however, it is easier to believe a presently stable company would still be stable next year than one that does not have any information on the matter.[3]

         Given such limitation, therefore, there is still a basis to choose Virgin Blue as the more financially stable company between the two because of higher liquidity and solvency position than Qantas. This finding is supported in terms of higher current ratio and quick ratio both on a per-year basis for 2007 and 2008 and even on their averages for two years.  The higher solvency is proven by the lower debt to asset ratio since a lower ratio means lower risks to bankruptcy. Based on the above conclusion and given the limitation as presented, this paper recommends investing with the stock of Virgin Blue if a choice between the two is to be made. At the rate the economy is going, however, the present ROE for Qantas may still qualify for good investment but its liquidity is becoming uncertain because of the decrease in 2008 from 2007 and that both liquidity ratios are below 1.0.

Reference

1. Helfert, E. Techniques for Financial Analysis, IRWIN, Sydney, Australia, 1994
2. http://www.qantas.com.au/info/about/investors/annualReports, Accessed May 5, 2009
3. http://www.virginblue.com.au/AboutUs/Virginbluecorporateinformation/Investorinformation/AnnualReports/index.htm,  Accessed May 5, 2009
4. http://www.virginblue.com.au/AboutUs/Virginbluecorporateinformation/Investorinformation/Annualeports/index.htm
5. http://www.qantas.com.au/info/about/investors/annualReports, Accessed May 5, 2009
6. [2] Helfert, E. Techniques for Financial Analysis, IRWIN, Sydney, Australia, 1994
   [3] Helfert, E. Techniques for Financial Analysis, IRWIN, Sydney, Australia, 1994

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