Financial Ratio Analysis Qantas Airways Limited

Question: Discuss about the Financial Ratio Analysis for Qantas Airways Limited. Answer: Introduction: Currently Qantas looks in good financial shape courtesy of two good financial years starting from June 2014 and continuing till to date. As per their annual report 2016, they registered healthy profits of 1.53 billion AUD for the year 2016, reported EPS of 49.4 cents per share. Both of these were huge improvements over the 2015 figures in excess of 50%, the figures in 2015 themselves being an improvement over 2014 figures. Their total debt stands at 5.6 billion AUD well within their target range of 4.8 to 6 billion AUD. The operating cash flow stands at a healthy 2.8 billion AUD. ROIC increased to 23% as well.(Qantas, 2016) However, alls not rosy. At the time of writing this report their stocks current market price is 3.15 AUD as per ASX website. One would imagine that in wake of the recent performance this airline stock would have seen a fair appreciation in its market price. But actually thats not the case as the stock has in fact seen a decline in its price almost upto 26% from last year as chronicled in details in an earlier section of this paper.(King, 2016) Dividing that by the EPS it gives the P/E ratio as 6.5. Thats fairly low for an economy like Australia where its normal to have companies with PE ratio above 15 with some ratios in mid-30s to 40s as well. By that measure one can say that right now Qantas is perceived as a cheap stock and not one which instils a lot of confidence among share-holders in spite of excellent financial results for two years in a row. (Gottwald, 2012) The book value per share is $1.7 which is approximately 0.55 times of the market value. Hence in that sense it doesnt look overpriced as a book-market value of 1 indicates at a stock being overpriced. In this regard Qantas might look at achieving parity between the two measures so it looks a more balanced buy to potential investors. That can be achieved by reducing the dividend payments and adding on the retained earnings. What it would do is increase the book value of the stock. One more problematic ratio for Qantas is that their current ratio currently stands at approximately 0.5 which is a fall from their 2015 figure of 0.7 and this is one area where Qantas can seek improvement.(Bajkowsi, 1999) The current ratio is obtained by dividing the current liabilities with the current assets. One way of doing that can be keeping some cash reserves which currently are a 1000 million AUD less than the corresponding figure of 2015. A current ratio of less than 1 for any industry might be problematic because very simply it indicates that the current assets and liquidity positions are not even enough to take care of the current liabilities. What they wouldnt want is to become so cash deprived that it might disrupt their normal day to day operations. References Bajkowsi, J. (1999). Financial Ratio Analysis: Putting The Numbers To Work. AAII. Gottwald, R. (2012). The Use of the P/E Ratio to Stock Valuation. European Grant Projects | Results | Research Development | Science. King, M. (2016, June 2). 3 reasons why the Qantas Airways Limited share price has dropped 26% this year. Retrieved from Fool: https://www.fool.com.au/2016/06/02/3-reasons-why-the-qantas-airways-limited-share-price-has-dropped-26-this-year/ Qantas. (2016). Annaul Report. Qantas.