Principal of Financial Markets Crucial Investment Decisions

Question: Describe about the Principal of Financial Markets for Crucial Investment Decisions . Answer: Introduction It is most important to evaluate the economical environment of the undertaken companies in order to make important investment decisions. The fundamental analysis is most crucial as it provide the macro as well as micro environment of the companies, which help in detecting the factors that influence the performance of the company or the performance of the share of the company (Connor, Goldberg and Korajczyk, 2010). There are several factors that influence the performance of the company the external or macro factors are the interest rate parity, fluctuation of FX rate, the political as well as legal condition of the country, where the companies performing their major business activities etc. The micro factors are internal factors, which are financial strength, management skill, emplacement strength etc (Edmonds, 2007). These entire factors play important role in the overall performance of the company. The fundamental analysis provides important knowledge and information about the compa nies that help in predicting the future performance of the company. For this particular assignment there are two eminent companies subsequently Virgin, Qantas has been undertaken, and the report will be proceeding by analyzing and comparing the financial performance of the two companies (O'Regan, 2001). Top-Down Analysis The top-down analysis of the Qantas Airways is seemed to be providing analysis with the financial analysis with the creation of earnings for the appropriate industry analysis. The financial analysis is seemed to be conducted with slowing down the Australian economy. It thereby helps in the increment of inflation rates of Australia and also the elasticity is judged on the basis of the supplies. Foundation consists of the Qantas linked with the Imperial Airways (Breyer et al., 2013). The Qantas employs approximately 35000 staff across the network that spans the destinations that includes Australia, Africa, America and the UK and Europe. The company expands in a rapid manner with the creation of appropriate administration in the Australia. The Qantas Airplane fly abroad with the creation of rapid development and thereby the initial journey started from Brisbane to Singapore which becomes the 1st flight. Later on the privatization of company takes place with considering the overcapacity of the organization. The strong requirement is seemed to be considered in the case of the utmost capacity and thereby the serious time affecting the aviation of the business. The breakdown drift is seemed to be taking place with pointing the economical point to point journey (Burgelman, Maidique and Wheelwright, 2001). Qantas airways determine the full-scale distribution of the network groups with considering the views with creating global geographic distribution of the network. Alliance members are seemed to be established in the way with creating more values for enlisting the variety of the services and the products provided. A frequency in the group is maintained in order to gain stability in the airline with the creation of appropriate external market. Top down analysis of an industry is important as it plays vital role in evaluating the potentiality of the undertaken companies thus help in taking efficient decision for the further investment to the investors. A trader use top d own analysis as it provides the overall picture of the economy as well as afterwards breaking down the factors as per the requirement of the investment (Dobson, Starkey and Richards, 2004). The method of top down analysis associates with a big picture initially and after that it examines the details of the scenarios and the small components of the big pictures. At first, evaluating the big picture like the macroeconomic trends, an investor can begin lessening potentials firms to analyze. Top down analysis may be performed by the traders, who invest money in share and equity as a part of the trading system and it is a part of the technical analysis. It is important to analysis the daily chart along with the weekly chart in order to decide the long term trend with strong support as well as resistance level (Kapferer, 2008). The next task is to smaller time frame chart in order to decide the point of a good entry into the market with the respective share or equity. In order to perform a top down analysis there are two important companies Virgin and Qantas undertaken. The virgin Australia airways provides the chief rate of the transportation system with the consideration of lowering the price rates and thereby it also helps in considering the reviews which helps in connecting the checked baggages with providing the carry on facility of the baggage. With the consideration of the business of virgin Australia, the routes are seemed to be included with appropriate mapping process and thereby the Angeles route is also followed by the organization which becomes the first route for virgin Airways (Laurenz, 2010). The probable consideration that is made represents the appropriate customer satisfaction with the creation of luxury and comfort. This thereby helps in the creation of enhancement for the company and will thereby helps in bringing flourishment in the country. Henceforth the satisfaction also helps in creating satisfaction with thereby helps in creating customer attraction and also forms the appropriate bonding between the company (Marc et al., 2 007). The current interest rate is seem to be lowered in the case of Qantas airways and thereby it also helps in the weakening the global demand. This in case also helps in the creation of the compensation claims which seems to be reduced to 1.5 % in the case of Qantas Airways and thereby it helps in considering the process improvements are essential for stabilizing the company. It thereby also helps in the enhancement of the economic conditions and thereby it helps in focusing on the materials of the factors considered. It also focuses on the drastic changes that are adapted by the company in the context of the economic conditions and henceforth the overview is represented (Scholz and Zentes, 2006). The contravention is creation with the consideration of the claims that are made for the virgin airways which seems to b receiving profit from the economic conditions and thereby it also helps in representing the earning loss for the company. With the consideration of the present review of the considerations, the performance of the Qantas airways seems to be in a stabilized condition than the virgin airways and thereby the considerations helps in recovering the wide body with enlarging the global demand. Bottom Up analysis The financial statement of a company shows the financial performance and actual value of a company in an accounting period. The financial ratios are calculated with the help of financial statements. The financial ratios are considered as one of the most useful indictor of the performance as well as financial position of the company (Berk and DeMarzo, 2007). The financial ratios of Qantas airways and Virgin Australia will help to determine and evaluate the financial performance of the companies. The profitability ratio helps to determine the profit margin of the company, liquidity ratio helps to determine the debt level of the company and efficiency ratio helps to determine the operational efficiency of the company. Income statement The income statement helps to determine and analyse the financial position of the company from the year 2014 to 2016. It helps to determine and evaluate the profit, expense, revenue earned by the company over the period (Helbk, Lindest and McLellan, 2010). QANTAS AIRWAYS LTD (QUBSF) CashFlowFlag INCOME STATEMENT Fiscal year ends in June. AUD in millions except per share data. 2014-06 2015-06 2016-06 Revenue 15155 15532 15784 Cost of revenue 7603 7143 6612 Gross profit 7552 8389 9172 Operating expenses Sales, General and administrative 4929 4779 5255 Other operating expenses 6592 2846 2690 Total operating expenses 11521 7625 7945 Operating income -3969 764 1227 Interest Expense 286 349 284 Other income (expense) 279 374 481 Income before income taxes -3976 789 1424 Provision for income taxes -1133 229 395 Net income from continuing ops -2843 560 1029 Other -3 Net income -2843 557 1029 Net income available to common shareholders -2843 557 1029 Earnings per share Basic -1.37 0.27 0.49 Diluted -1.37 0.27 0.49 Weighted average shares outstanding Basic 2062 2059 2062 Diluted 2062 2059 2062 EBITDA -2268 2234 2932 Analysis The net income of Qantas Airways has increased from the year 2014 to 2016 shoeing positive results of the company (Holton, 2012). The net profit margin has also increased which is beneficial for the shareholders. VIRGIN AUSTRALIA HOLDINGS LTD (VAH) CashFlowFlag INCOME STATEMENT Fiscal year ends in June. AUD in millions except per share data. 2014-06 2015-06 2016-06 Revenue 4303 4706 4986 Cost of revenue 1209 1192 1019 Gross profit 3094 3514 3967 Operating expenses Sales, General and administrative 1372 1482 1566 Other operating expenses 2104 2146 2693 Total operating expenses 3476 3628 4259 Operating income -381 -113 -292 Interest Expense 120 133 181 Other income (expense) 17 83 47 Income before income taxes -484 -163 -427 Provision for income taxes -128 -70 -202 Net income from continuing ops -356 -94 -225 Other -17 -36 Net income -356 -111 -261 Net income available to common shareholders -356 -111 -261 Earnings per share Basic -0.11 -0.03 -0.07 Diluted -0.11 -0.03 -0.07 Weighted average shares outstanding Basic 3107 3515 3526 Diluted 3107 3515 3526 EBITDA -97 245 37 Analysis: The net income Virgin Australia has decreased from the year 2014 to 2016 showing negative results for the company. The net income has decreased which means the performance of the company has also decreased from the year 2014 to 2016 (Horngren, 2013). Financial Ratios Profitability Ratios The profitability ratios help to measure the ability of the company to generate earnings in comparison to its costs and expense during a specific period of time. The profitability ratio of Qantas Airways and Virgin Australia will help to show the profitability of the company (Kew and Watson, 2012). Qantas Airways Profitability 2014-06 2015-06 2016-06 Tax Rate % 29.02 27.74 Net Margin % -18.76 3.59 6.52 Asset Turnover (Average) 0.81 0.89 0.92 Return on Assets % -15.16 3.2 6.01 Financial Leverage (Average) 6.05 5.09 5.13 Return on Equity % -64.53 17.67 30.73 Return on Invested Capital % -25.24 8.07 13.87 Interest Coverage -12.9 3.26 6.01 Analysis: Net profit margin is the revenue amount remaining after all interest, taxes, preferred stock dividend and operating expenses. The net margin of Qantas Airways has increased from the year 2014 to 2016. The net margin of the company was -18.76% in the year 2014, 3.59% in the year 2015 and 6.52 in the year 2016. The profit margin has increased over the period. The asset turnover of the company has also increased from 0.81 to 0.92 from the year 2014 to 2016. The return on assets of the company has also increased from -15.16 to 6.01 from the year 2014 to 2016 (Kieso, Weygandt and Warfield, 2007). Therefore, it shows that the company is efficiently utilizing its assets. The return on equity has increased from -64.53 to 30.73 from the year 2014 to 2016. The company is generating maximum returns from the investment amount of the shareholders. The return on invested capital has increased from -25.24 to 13.87. Therefore, overall the financial performance of the company has increased from the 2 014 to 2016 which shows positive results for the company. Virgin Australia Profitability 2014-06 2015-06 2016-06 Tax Rate % Net Margin % -8.26 -2.35 -5.23 Asset Turnover (Average) 0.95 0.9 0.84 Return on Assets % -7.81 -2.12 -4.41 Financial Leverage (Average) 4.46 5.37 6.63 Return on Equity % -34.06 -10.43 -26.24 Return on Invested Capital % -9.36 -1.33 -2.36 Interest Coverage -3.04 -0.23 -1.36 Analysis: The net margin of Virgin Australia has decreased and shows negative result from -8.26 to -5.23 from the year 2014 to 2016. The profitability of the company has decreased from the year 2014 to 2016. The asset turnover of the company has decreased from 0.95 to 0.84 and return on assets also shows negative results (Kieso, Weygandt and Warfield, 2010). Therefore, the company is not efficiently utilizing its assets. The return on equity and return on invested capital of the company has decreased from the year 2014 to 2016 showing negative result of the company. Therefore, overall the performance of the company has decreased from the year 2014 to 2016. Liquidity Ratios The liquidity ratios help to determine and evaluate the debt level of the company and ability of the companies to pay off its obligations. Therefore, it helps to measures the ability of the company to pay both long term and short term obligations (Libby, Libby and Short, 2014). Qantas Airways Liquidity/Financial Health 2014-06 2015-06 2016-06 Current Ratio 0.66 0.68 0.49 Quick Ratio 0.58 0.6 0.43 Financial Leverage 6.05 5.09 5.13 Debt/Equity 1.84 1.39 1.36 Analysis: Current ratio helps to measure the ability of the company to pay off its debts or obligations. The current ratio of Qantas Airways has decreased from 0.66 to 0.49 from the year 2014 to 2016. Therefore, it is not good for the company as because the value is below one. The current ratio has decreased which shows that it is difficult for the company to pay off its obligations. The quick ratio has also decreased over the period (Moles, 2011). The debt equity ratio has decreased from 1.84 to 1.36 which means debt level of the company has decreased from the year 2014 to 2016. The liquidity ratios show the debt level has increased over the period. Liquidity/Financial Health 2014-06 2015-06 2016-06 Current Ratio 0.64 0.69 0.62 Quick Ratio Financial Leverage 4.46 5.37 6.63 Debt/Equity 1.52 2.16 2.33 Analysis: The current ratio of Virgin Australia has decreased from 0.64 to 0.62 from the year 2014 to 2016. The current ratio is below one which means that it is difficult for the company to pay off its obligations (Smart, Megginson and Gitman, 2007). The debt equity ratio and financial leverage of the company has also increased from the year 2014 to 2015. Therefore, liquidity ratio shows that the debt level of the company has increased. Efficiency Ratios Qantas Airways Key Ratios - Efficiency Ratios Efficiency 2014-06 2015-06 2016-06 Days Sales Outstanding 31.7 25.32 20.28 Days Inventory 16.35 16.33 18.16 Payables Period 30.44 29.71 69.99 Cash Conversion Cycle 17.61 11.93 -31.55 Receivables Turnover 11.52 14.41 18 Inventory Turnover 22.33 22.36 20.1 Fixed Assets Turnover 1.25 1.46 1.41 Asset Turnover 0.81 0.89 0.92 Analysis The days sales outstanding of the company have decreased from 31.7 to 20.28 and the days inventory has increased from 16.35 to 18.16. It shows that the company is collecting its debt amount efficiently. The payable period has decreased from 17.61 to -31.55 from the year 2014 to 2016. The company is paying late to its suppliers. The receivable turnover ratios show the effectiveness of the company in collecting the debt amounts (Spiceland, 2009). The receivable turnover of the company has increased which shows that the company is efficient in collecting debt amount. The receivable turnover has increased from 11.52 to 18 from the year 2014 to 2016. The inventory turnover has decreased from 22.33 to 20.1 from the year 2014 to 2016. Virgin Australia Key Ratios - Efficiency Ratios Efficiency 2014-06 2015-06 2016-06 Days Sales Outstanding 17.52 17.8 19.98 Days Inventory 9.95 11.82 14.94 Payables Period 179.81 200.42 250.28 Cash Conversion Cycle -152.34 -170.8 -215.37 Receivables Turnover 20.83 20.51 18.27 Inventory Turnover 36.68 30.87 24.43 Fixed Assets Turnover 1.51 1.63 1.67 Asset Turnover 0.95 0.9 0.84 Analysis: The days sales outstanding of Virgin Australia have increased from 17.52 to 19.98 from the year 2014 to 2016. It shows that the company is not efficient in collecting its debt amount. The payable period has increased from 179.81 to 250.28 from the year 2014 to 2016. The receivable turnover has decreased from 20.83 to 18.27 from the year 2014 to 2016 (Wolf, 2008). It shows that the company is not efficient on managing its assets. Summary The report consist of top down analysis of the undertaken companies Virgin and Qantas both are from same aviation industry and performing well throughout the years as well as lucrative investment option for the investors. The top down analysis firstly shows the big pictures of the financial environment of the companies and then subsequently it broken down to the small part (Realdon, 2013). It provides the knowledge of the macroeconomic variable like the GDP, Trade balance, movement of the currency, inflation rate, interest rate as well as other aspects of the economy. The bottom up analysis involves with the analysis of the financial ratios, which provides the potentiality of the companies. The future of the companies, the financial performance as well as investment potentiality of the company can be decided by the fundamental analysis of the company. It help in forecasting the future performance of the company (Standfield, 2005). Recommendations The analysis provides important knowledge about the financial condition about the undertaken two companies Virgin and Qantas. The economical environment of the companies provide requisite ideas that the Qantas is potential company and the investment in this company will be a wise decision as the performance of the company is favorable and it is predictable that in the future the performance of the company will be continued to the upward direction thus the investment decision in this company will be a good decision (O'Regan, 2001). On the other hand, the Virgin Company is not a good choice of the investors the companys financial performance is continually deteriorated by the financial ratio analysis it is clearly understandable that the company cannot perform well in the near future thus investment in this company will be a bad investment decision. References Breyer, C., Birkner, C., Meiss, J., Goldschmidt, J. and Riede, M. (2013). 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