December 18, 2016 at 8:47 pm
@mayanisa: The problem with most students is that they don’t really have real life experience of ratio analysis so they approach it by using a text book and think that all they have to do is calculate and compare lots of ratios. This is NOT how it works at all in the real world of business and commerce! Businesses use Key Performance Indicators to measure how they are doing (alongside financial data) and these differ according to the industry sector.
The RAP should be a study of the business environment and how this impacts on financial performance. KPIs invaluable in assisting with this – aircraft utilisation for example is an efficiency ratio (airlines don’t make much money unless the aircraft is in the air and the seat occupied) and therefore a high utilisation rate is likely to correlate with higher operational profit. It may however take many complicated calculations and adjustments to work out operational profit but load factors are readily available by the day, week or month (as well as average for the year) for every route the airline operates and therefore will also influence decisions: whether to introduce more seat capacity per route/ discontinue a route, whether to invest in new aircraft etc. Normal accounting ratios are not so useful in this respect and so KPIs in many respects are more important for overall strategy formulation.
So your comment “Just curious because they don’t exactly come under financial ratios” is a typical student type of reaction because you have no experience of actually working in the airline business which operate in a very complex and dynamic environment.
PS Please if doing an airline (or a RAP on Telecommunications) DON’T bother mentioning the Quick Ratio / Acid Test. If you don’t immediately understand why, you should think about this sensibly and ask yourself a few basic questions:
Do these companies make or sell a physical product?
How much stock do they therefore have?
Now do you understand why it is pointless?December 19, 2016 at 2:18 pm
The KPI’s given on financial statements of the airlines, we need to be included in the Excel as well or just mentioned the reference of the annual report in the project and then analysed them further?
Also, do they need to compare the kPI’s of one airline to the other?
What do you suggest?
Thank you!December 20, 2016 at 8:48 am
Thank you so much @ehsan and @trephena for your response. I understand what you mean Trephena and that’s why i asked for clarity purposes. Yes i understand that Quick Ratio and all the Debtor and Inventory Days should be neglected. Thanks to this forum.
My next question is again to ask you more clearly which is :
so for Load Factors and Yield and all these statistics, i should talk about them under their own label/heading or i should discuss them under Sales growth and Profit?December 20, 2016 at 10:03 am
These statistics drive revenue, so should be used to explain revenue and profit.December 25, 2016 at 11:35 am
Merry Xmas to everyone!
I want to ask about the Excel document where the ratios will be done.
The ratios that i will be used need to take them from some academic sources? or i can do ratios that i think are most useful and do the formula in order for the examiner to find out how i calculated them?
Also, the KPI’s given in FS of the companies that i used, do i need to show them in Excel?December 27, 2016 at 12:09 pm
is EPS of QAN and VAH even discuss worthy under investor ratio even if VAH is at loss for the last three years?December 31, 2016 at 8:37 am
@pete28 – The ratios derive from the financial statements and yes you need to show the calculation formulas.
KPIs relating to load factors and ASK (available seat per kilometre) come from the company’s annual report so cite the page in your report but there is no need to put them in the spreadsheet unless you are producing a graph of them yourself.
All sources need to be referenced in your report – see the Open Tuition Ultimate Guide to Referencing on our homepage http://www.opentuition.com/obuJanuary 1, 2017 at 9:14 am
i’d appreciate if someone reply my above asked question, thank you.
I also have some other questions:
1. is it necessary to do operating statistics analysis of the comparator as well? like if i do a detailed revenue analysis of my main company including ask, rpk etc, and see the company’s progress over the years, do i need to do the same for my comparator? do i have to do as detailed analysis of my findings as that of my comparator?
2. when i emailed obu, they told me we are basically doing “comparator analysis” instead of competitor analysis. so can i mention the word “comparator” in my research when i’m making a reference to my other company?January 2, 2017 at 12:02 pm
You need to do sufficient analysis for the comparative too, maybe not much in detail, but pretty much. Many people fail because they haven’t analysed in detail with their comparator too.January 2, 2017 at 2:16 pm
Operating KPIs are used in the industry and therefore comparing companies’ KPIs is always a good idea. If you just state throughout your analysis that the main company (or comparator) out performed the other company without backing it up with reasons why this happened in relation to SWOT / PEST / operational factors you are unlikely to pass Evaluation & Analysis.
Comparator / competitor are virtually interchangeable and therefore do not worry about the terminology here as I doubt the marker will either – it is the detail behind the analysis they will mark you on 🙂January 12, 2017 at 8:49 am
January 13, 2017 at 10:45 am
Yes you could. It may be worth looking at gearing and whether the companies lease or buy their aircraft (read the notes to the accounts) as this will impact. Although depreciation will affect operating profit remember it is not a cash flow whereas lease payments have to be made (however the company may have financed the purchase through long term loans which similarly have to be repaid). Another alternative is that share issues can be used to finance assets and dividends are only ‘discretionary’ – so you need to read the notes (possibly also CEO and directors’ reports) and look at the figures to get the full picture !January 14, 2017 at 3:44 pm
I have some questions to ask:
1.The ratios that i will be used to do the Excel calculations and graphs needs to derive from the books and need to referenced them? and if yes where? in excel or word?
2. for the graphs do i need to write in the word like ‘ Figure 1: Operating and net profit margin (Appendix 2)” and need to do a list of figures after the contents of page? (that’s many words if this is a must to do)
3. Some of my ratios calculations are quite different from some websites i found that have calculated the same ratios? Is this gonna have an effect to my project? (such as ROCE, gearing ratio and trade payables)
Thank you !January 17, 2017 at 8:19 am
@trephena i will be using gearing ratios and explain all that you said however, i wasn’t able to find enough information to give details on current ratio as mostly, the airline is talking about their cash flows and operating cash flows under the liquidity heading so i was wondering if i could add along the operating cash flow ratio with current ratio to give details.January 17, 2017 at 9:03 am
@mayanisa – it does not surprise me that there is little information about the current ratio and that more focus is on cash flows. (The airline working capital model is very complex as I try to explain in the Topic 15 forum and why not to choose an airline for that topic). So yes go with operating cash flows but explain why you are taking this approachJanuary 17, 2017 at 9:11 am
@ trephena right, thank you for the advice!January 17, 2017 at 9:17 am
1. See the Ultimate Guide to Referencing. Graphs normally derive from figures from the financial statements
2. First part see the UGR ; second part – not mandatory
3. They should either be from the annual report or your own. Differences should not be material – if they are, go with the annual report (as explained above and in T15 – airline cash models are complex – read my post on this on T15 if you want to know why). It is stability in some of these ratios that is important. As long as you explain why you are taking a specific approach that should be acceptable.
The Open Tuition Ultimate Guide to Referencing is found on our homepage http://www.opentuition.com/obuJanuary 17, 2017 at 4:15 pm
I am using Flybe as my main Airline and am having difficulty in producing CASK and RASK figures.
Available Km are not quoted in any of the financial reports.
Luckily in the FY16 result presentation they quote RASK & CASK figures in the small print, but nothing for FY14.
I have searched many sources trying to find these figures or at least the available km for FY14 to no avail.
Would it be acceptable to only include the FY15 and FY16 figures in my analysis and note the lack of availability in the section on problems encountered?
ThanksJanuary 18, 2017 at 9:38 am
1) Revenue analysis with Yield ASK and Load factor
2) Operating profit
3) Net profit
@ehsan i wanted to know how you dealt with finding information on gearing ratio (specifically debt to equity ratio). Information on debt to equity is available for Qantas in annual reports 2013 and 2014 however 2015 onward, they don’t mention gearing ratio at all. In my appendices, i took out gearing ratio as total debt / total equity which is not how Qantas takes out. They take it out on net debt and include some other complicated things. My mentor said that i should not calculate the debt to equity ratio the way i have done it but instead use the gearing ratio given in annual report. is that a right approach? also, even if i use the gearing ratio given in annual report, they stop providing that from 2015 annual report onward. how do i analyse the debt to equity ratio? should i separately look for information on debt and equity and combine that together? i am not able to find accurate information on debt to equity ratio.
Please help.January 18, 2017 at 1:21 pm
@mark11 – yes include 2025 &2016 figures and explain they did not announce the 2014 KPIs pubically for these (there is no legal obligation for them to do so). These figures help strengthen the analysis and if you can, make comparisons with the competitor. Look for reasons why load factors have changed and what has also influenced a ny changes in CASK and RASKJanuary 18, 2017 at 1:24 pm
@mayanisa – I don’t know if you are asking a question here and if so what. Please state it without the back quote then I may understand what your particular query is.January 18, 2017 at 4:18 pm
Sorry for not being clear. I was quoting @ehsan as he was discussing ratios with another student. I wasn’t able to do that correctly. Anyways, my question was that i wanted to know how to find information on gearing ratio (specifically debt to equity ratio) for Qantas and Virgin Australia. Debt to equity ratio has been calculated in Qantas’s annual report 2013 and 2014 however 2015 onward, they don’t mention it at all. In my appendices, i took out gearing ratio as total debt / total equity which is not how Qantas takes out in their annual report. They take it out on net debt and include some other complicated things including operating lease etc and do not discuss it. My mentor said that i should not calculate the debt to equity ratio the way i have done it but instead use the gearing ratio given in annual report. is that the right approach? also, even if i use the gearing ratio given in annual report, they stop providing that from 2015 annual report onward. how do i analyse the debt to equity ratio? should i separately look for information on debt and equity and combine that together? i am not able to find accurate information on debt to equity ratio. I have searched on google but all i find is other people’s financial analysis who have either calculated debt to equity ratio in different ways or i find articles quoting the debt to equity the way they find in annual reports or don’t mention it.
I did however find some general information on Qantas’s capital structure .Its all general information. But i need reasons to analyse my ups and downs in the ratios. Now I am confused for all the ratios, whether to use ratios given in annual reports (which are usually just stated and no calculations are given) or i should calculate my own ratios. And how to reason them. So i need your advice on this. My mentor also said to just make assumptions of why the ratios might be the way they are. Is that a correct approach?
Also, i noticed that alot of financial analysis contradict between annual reports. For instance in 2014’s annual report, Qantas talks about net debt/equity ratio. In the next year’s annual report, they ditch that ratio and add up net debt/ebitda instead. Alot of times i found the information was not steady and i had to not talk about that ratio because they completely remove that from the following year. Please help.January 19, 2017 at 11:00 am
You will have to work with the figures you can get and the airline’s own calculations would be best when there are major differences.
What I try to get over to students is that a good report looks at the bigger picture -it is not a case of just calculating ratios or doing a routine application of the models – it is about using all the relevant information you can find and integrating it into a ’rounded’ analysis. The business and financial analyses are connected and similarly you should try to show strong links between the two.
So to get back to your question and how the above and the following all fit together:
Gearing is obviously linked to loan capital and loan capital in the airline business is usually connected to the need to acquire aircraft and maintain a modern fleet. The attached article is very interesting as it specifically deals with this and Qantas.
So instead of fretting about not having all the gearing ratios begin your gearing section with the reliable company numbers you do have, mention the limitation of not having the latest. Then extend the discussion to the context -I haven’t had time to read all of this article (I do have a job and helping on OT has to be fitted in round it!) but I suspect that Quantas may be changing to leasing aircraft and try then to link back to the SWOT weakness that this article hints at (did it purchase the wrong aircraft?).
Consider also that perhaps the latest gearing ratio (you could try estimating it from your figures provided you mention that this is your attempt not the official company figure) if it shows a great reduction could be down to a change in policy on purchasing aircraft. Perhaps too it might be misleading if it has decreased considerably for the company to highlight it as it would be simply due to the change in policy not necessarily improved performance. Also this example stresses the need to follow ‘leads’ – what are the finance costs now looking like? What do the notes say about leases? Has leasing aircraft materially affected depreciation (after the 2014 write-down). And of course the 2014 loss was aggravated by the write-down so you can comment on that.
I hope you are now starting to grasp the bigger picture both in terms of Qantas and in relation to how all the numbers in the accounts are interdependent and a good research report recognises this factJanuary 19, 2017 at 5:19 pm
Oh. I understand. This is very helpful. Thank You. But can i ask one more annoying question? (sorry). So, even if i use the financials provided my Qantas. What if those financials aren’t available for the comparator? I leave that out then? for instance i figured that Qantas is using debt / ebitda instead of debt / equity but there is no sign of debt / ebitda by VAH. i don’t talk about this from VAH’s point of view?January 19, 2017 at 7:25 pm
“one more annoying question?” – haha!! You can only make comparisons if you have the numbers. Instead of debt/ebitda you may have to talk about Virgin Australia’s long term loans in a different way (again explaining why you have taken this approach). Do you have sufficient to discuss and compare interest cover? Or can you discuss the lease or purchase issue for both companies? It is a case of selecting relevant information and producing a coherent report – sometimes you have to stand outside ?the box’ a bit and focus on what is really significant in the industry sector and not following a tick sheet of prescribed ratios.
Try to take a more ‘creative’ rather than routine approach – cover the main ratios as best you can but show your research skills and critical thinking and you are more likely to get a good grade.
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