Financial statement s can be used to measure the level of profitability, efficiency and liquidity ratios. Quanta’s Airline Company has been in financial difficulties in the last five years and thus there is need to analyse the accounts and make recommendations on the way forward. This will assist shareholders in making various decisions about their company.
International financial reporting standards require companies to make periodical financial statements that can be utilized by a company’s stakeholders in making various decisions. Shareholders need to know the profitability and liquidity of their company which is influenced by its management efficiency level (Anthony, Hawkins, & Merchant, 1999). This report will undertake an analysis of Quanta’s Airline Company financial ratios, to determine profitability level, liquidity and management efficiency of Quanta’s Airlines; this will assist shareholders in decision making.
This report will be written from analysis of Quanta’s Airlines financial analysis for the past five years. Concentration will be on ratio analysis which gives a reflection of the company’s profitability, liquidity and efficiency of the management.
Profitability ratios analysis
Return on Equity
This is the ratio that measures the rate of profit that a company makes from its shareholders equity. In Quanta’s the rates are as follows;
The company rate of return on equity is lower than the industries rate save for year 2008 and 2009. This shows that the company is not generating standard profits from its internal activities.
Return on assets
This is a ratio that analysis the rate of profit that a company derives from it assets; the higher the rate the better for a company.
the company has a lower rate of returns on assets than the industry. This shows that its assets are not effectively utilized. This is a show of inefficient management (Atrill & Jenner, 2009).
Asset Turn over
This ratio measures the amount of sale that is derived from a unit measure of assets in the company. A higher rate shows effectively utilized assets.
The company falls below the industry rate. This shows a company that is managed ineffectively. It assets are not well utilised.
Liquidity test ratio
These ratios gauge how well a company can meet its short term financial obligations as they fall due. They include;
Generally a company with a current ratio more than two is considered a health company. However in the case of Quanta’s, the ratio is less than two and less than the industries rate. This shows a company that cannot effectively meet its short term liabilities. Actually according to the analysis the company cannot meet its obligations as they fall due (LIBBY, 1975).
The ratio is similar to current ratio, however this excludes stocks from assets. This is to remain with those current assets that are more certain can be realised.
The company falls below the industry rate and thus it is a company that cannot meet its short term financial obligations as they fall due.
The ratio analysis the rate at which the company is financed by borrowed capital versus owner’s capital.
Quanta and the industry in general are highly geared where the loan capital is more that 50% of owner’s capital. On the other hand among the players in the industry, Quanta airline is highly geared than others. This is a show of a risky business.
Management efficiency ratios
Management efficiency is demonstrated by the whole performance of the company. It cuts across all sections. However we will consider day to day management by the following ratios;
This measures how fast stocks are sold and replaced.
The company has a high turnover than the industry’s rate. This is a show of a company with a strong sales than those of other companies.
This is a measure of credit policy and qualities of its debtors. It gives the mean number of days for a debt to be paid.
Quanta’s day’s receivables are higher than the industry’s rate. This is a show of a company with a reluctant credit policy and unreliable debtors (Quanta’s Airline Company Official website, 2010).
From the analysis above, Quanta’s management has portrayed inefficiency in the way they conduct their affairs. Despite the company having a high sales rate than the industry average, its rate of profitability lags behind; this shows that operating expenses are not proportionate to the sales. This is a show of inefficiency. Secondly, the company has a high sales but it has strained working capital. It cannot meet its short term obligations as they fall due.
The company is highly indebted since over 50% of its capital is financed from borrowed capital. This shows a company with high financial obligations which may affect its operations negatively. The rate of return on assets lags behind the industries rate. This is a show of inefficiency in the way assets are managed.
The company should take advantage of its high stock turn over. It should embrace efficiency in its processes. Adopting a total quality management (TQM) system will ensure that the company recognises it s areas of inefficiency and rectify them. It can also adopt a Six Sigma management tools to look for areas of defects within the system.
There should be an increased investment in short term assets to ensure that the company can cure its quick and current ratio deficits. It should also ensure that it keeps off short term borrowings. Credit policy of the company gives debtors many days to repay their debts. This is risky to the company and thus should consider revising the policy (Taylor, 2008).
Management qualifications should be checked and those who do not qualify for their posts should be trained further or replaced. When recruiting the human resources department should ensure that it recruits quality personnel who are well versed with the industry and have relevant experience.
Anthony, R., Hawkins, D. & Merchant, K. (1999) Accounting: text and cases. 10 the ed. Boston: McGraw Hill.
Atrill, M. H. and Jenner. (2009). An Introduction: Accounting 4. Pearson.
LIBBY, R. (1975). Accounting Ratios and the Prediction of Failure: Some Behavioral Evidence. Journal of Accounting Research, 13(1), 150-161.
Taylor, G. (2008). Lean Six Sigma Service Excellence: A Guide to Green Belt Certification and Bottom Line Improvement. New York, NY: J. Ross Publishing.
Quanta’s Airline Company Official website. (2010). Annual Reports. Web.