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Contents
Net Tangible Asset Backing per Share. 10
Profitability Calculations. 16
Efficiency Ratio Calculations. 17
Liquidity Ratio Calculations. 19
Financial Gearing Ratio Calculations. 20
Investing and Market Ratio Calculations. 21
List of Figures
Figure 1. Gross Profit Margin Ratio. 7
Figure 2. Cash Flow to Sales Ratio. 8
Figure 3. Asset Turnover Ratio. 9
Figure 4. Inventory Turnover Ratio. 10
Figure 7. Debt to Equity Ratio. 13
Figure 8. Debt Coverage Ratio. 14
Figure 9. Net Tangible Asset Backing Per Share. 15
Figure 10. Price Earning Ratio. 16
List of Tables
Table 1. Gross Profit Margin Ratio Calcualations. 22
Table 2. Cash Flow Ratio Calculations. 22
Table 3. Qube Asset Turnover Ratio Calculation. 23
Table 4. Aurizon Asset Turnover Ratio Calculation. 23
Table 5. Qube Inventory Ratio Calculation. 23
Table 6. Aurizon Inventory Turnover Ratio Calculation. 23
Table 7. Qube COGS Calculation. 24
Table 8. Aurizon COGS Calculation. 24
Table 9. Qube Liquidity Ratios Calculation. 25
Table 10. Aurizon Liquidity Ratios Calculation. 25
Table 11. Aurizon Debt to Equity Ratio Calculation. 26
Table 12. Qube Debt to Equity Ratio Calculation. 26
Table 13. Aurizon Debt Coverage Ratio Calcualtion. 26
Table 14. Qube Debt Coverage Ratio Calcualtion. 26
Table 15. Qube Net tangible asset backing per share Calculation. 27
Table 16. Aurizon Net tangible asset backing per share Calculation. 27
Table 17. Qube Price Earning Ratio Calculation. 27
Table 18. Aurizon Price Earning Ratio Calculation. 27
Introduction
Australia’s heavy haul train network is sixth largest in the world and moves over 1 billion tonnes per year. Aurizon and Qube are two of the leading rail companies that provide integrated freight and logistics solutions for local and international markets.
Aurizon
Aurizon Holding Limited is an Australian heavy rail freight operator dedicated to transport bulk cargo. It has a nationwide network which moves a large range of commodities in industries such as mining, agricultural, industrial, and retail.
Aurizon offers integrated supply chain solutions to deliver coal, iron, and ore from mines in Queensland, New South Wales and Western Australia to final customers and to ports for international exports. Retail goods and groceries are delivered across towns and cities.
Qube
Qube has three business units: Ports, Bulk and Logistics; Infrastructure and Property and Strategic Assets. It recently acquired 50 percent of Patrick Terminals, the container terminal operator.
Ports, bulk and logistics operates services covering road and rail transport, warehousing and distribution, container parks and related services, and intermodal logistics hubs including rail terminals and international freight forwarding.
The Infrastructure and Property business unit is responsible for key expansion projects and investments, including the development of the 243-hectare site at Moorebank Logistics Park, the largest intermodal freight precinct in Australia.
Strategic Assets is responsible for joint venture projects, such as the Quattro grain-loading facility and the bulk liquids facility in Port Kembla.
On what day of the year does its current financial year end?
The Australian financial year goes from July 1st to June 30th of the following year. Both companies, QUBE and Aurizon are based locally, therefore their accounting period adheres to this.
Why does it publish more than the current year’s data?
The financial data for Aurizon and QUBE holdings publish only up to the current year since they need to be audited to ascertain the accuracy of the information. The annual reports include the previous year, and previous financial reports are also made avaliable to investors so that analysis of company trends can be perfomed.
Are its financial statements audited by independent auditors? If so, by whom?
According to Australian Securities and Investments Commission (ASIC), “An auditor is required to be independent from the entity it audits and the independence requirements applying to auditors are legally enforceable” (ASIC, 2020). Therefore, both Qube and Aurizon are audited by the multinational Pricewaterhouse Coopers (PWC).
Ratio Analysis
The following ratio & fundamental analysis of QUBE and Aurizon are compared to provide insite into the performance, risk and return of the two companies withing the transportation sector. The analysis is considered across 5 categories: profitability, efficiency, liquidty, financial gearing and market performance. These calculation and consideration of the company’s corporate governance and ethical standards allow fundematal anlaysis comparison to determine the favorableness of investment (Birt et al., 2014).
When evaluating companies comparitivley consideration must also be given to company estimating techniques. Both QUBE and Aurizon use a straight-line method of depreciation except for plant and motor vehicles for which Aurizon use the diminishing value method. Inventory for both companies is calculated on an average cost basis. Impairment, residual value, and useful life of assets are reviewed annually for both companies and values are rounded off to the nearest hundred thousand for Aurizon and nearest thousand for QUBE in accordance with ASIC guidelines. The commonalities between the two entity’s estimations suggest rational comparison of the ratio analysis.
Profitability Ratios
Gross Profit margin
Cashflow to Sales Ratio
According to Hargreave (2019), the cash flow ratio in service is the calculation of the number of times a business will pay current obligations with the cash created during the same period. A value greater than one means that the company can produced more timely payment than required to meet its current obligations.
Reported in the 2017 annual report of QUBE, the gross profit margin ratio has increased to 14.45% (Annual Report and Notice of AGM, 2017). In 2018 annual report, the company has shown positive results of the year by increased in gross profit margin ratio from 14.45% to 16.44% (Annual Report and Notice of AGM, 2018). The increase due to the growth of the revenue from 1418 AUD Million to 1600AUD Million (Annual Report and Notice of AGM, 2018) in 2019 annual report has shown growth in gross profit margin ratio by 16.30% (Annual Report and Notice of AGM, 2019). And cash flow ratio in 2017 was 13.20% (Annual Report and Notice of AGM, 2017). But in 2018 has dropped to 12.98%, in 2019 the rate increased to 16.57% (Annual Report and Notice of AGM, 2019).
While AZJ in the 2017 growth of revenue declined, the gross profit margin achieves an increase of 28.71% (AZJ Annual Report. 2017). The company can get a positive result in profit ratio because COGS was low compared to total revenue. In 2018 the GPM increased to 31.83% (AZJ Annual Report. 2018). Also, in 2019 the ratio increased to 28.77%(AZJ Annual Report. 2019). And cash flow ratio in AZJ company shows positive result during the years in 2017 was 35.87% and in 2018 increased to 40.34% (AZJ Annual Report. 2018). In 2019 the ratio increased to 44.39(AZJ Annual Report. 2019).
The corporate ratios show AZJ excess over Qube in this ratio. Segal (2020) states that Increasing revenue and lowering costs will increase the profit margin. In this ratio, also AZJ showed a positive result, better than Qube. In general, Aurizon has shown a better outcome, in the last three years, than Qube.
| Figure 1. Gross Profit Margin Ratio |
Efficiency Ratios
Efficiency ratios evaluate the capability of an organization to manage their assets and liabilities (Giacomino & Mielke, 1993). For Qube and Aurizon, Asset turnover ratio and Inventory turnover ratio for the years 2017, 2018, and 2019 are calculated and elaborated below.
Asset Turnover Ratio
The asset turnover ratio compares sales of the company in a year with their average assets to evaluate in what extent they could use their assets to generate revenue from sales (Jansen, Ramnath & Yohn. 2012).
For Qube, the percentage of asset turnover ratio decreased 5% over three years, this decline is happening constantly. Therefore, this is not an optimistic sign for an investor. Similarly, Aurizon’s asset turnover ratio decreased by 3% and this decline is relatively slighter lower than Qube. However, from an investing point of view, this decline is also not a good sign.
Inventory Turnover
This Ratio indicates the number of times that the inventories are sold during the year (Gaur, Fisher & Raman, 2005). The higher the number of turnovers is, the better the company uses its inventories to make profit (Gaur, Fisher & Raman, 2005).
For Qube, the turnover is relatively high, but it has a 31% decline from 2018 to 2019 and it reflects an issue in the management of inventory and production. For Aurizon, the inventory turnover ratio is less than Qube and there is a slight decline from 2017 to 2018. However, the ratio indicates a stable pattern with slight fluctuations which could be a positive sign for investment. Nevertheless, investors who are after high returns are willing to take risks but the stability of inventory ratio for Aurizon does not follow their desire.
| Figure 3. Asset Turnover Ratio | Figure 4. Inventory Turnover Ratio |
Liquidity Ratios
Liquidity is a critical financial metric used to assess whether those companies can pay debtors at the agreed time (Saputra 2019). The current and quick ratio is one examined between two companies for the past three years.
Current Ratio
The current ratio is a financial metric used to measure how the company can meet short-term obligation with its cash, inventories and account receivables.
The current ratio of QUBE Holdings limited is greater than 100% which denotes that the company can meet current debts with available cash and inventory, unlike Aurizon holding Limited which has a current ratio lower than 100%.
Quick Ratio
The quick ratio, also know as the acid test ratio indicates how the company can meet short-term obligations with available cash and receivables.
Similar to the current ratio, analysis of the quick ratio indicates that QUBE Holdings Limited is the company that has a ratio above one, hence can meet its debt obligation unlike Aurizon holding Limited.
| Figure 5. Current Ratio | Figure 6. Quick Ratio |
Financial Gearing Ratios
Capital structure ratios, also known as gearing ratios, depict the portion of debt to equity funding and are used to assess an entity’s long-term viability. The use of debt financing, known as leveraging, can achieve higher ROE, however the cost of servicing the debt must be less than the revenue generated by the investment (Boyte-White, 2020).
Debt to Equity Ratio
The Debt to Equity ratio reflects the ability of shareholders equity to cover all outstanding debts in the event of a business downturn (Birt et al., 2014).
Debt Coverage Ratio
The debt coverage ratio asseses the company’s ability to remain solvent and indicates the time it would take to repay existing non-current liabilities at the current operating levels (Hayes, 2020).
The debt to equity ratio suggests QUBE is far less leveraged than Aurizon; with QUBE’s debt to equity ratio between 2017 and 2018 equating to half that of Aurizon. The debt coverage ratio however demonstrates that Aurizon has greater capacity to service its loans. The diverging chart shows QUBE’s has increased from approximately 4 to 6 times between 2017 and 2019 suggesting approximately 6 years to repay long term liabilities at current operating levels, whereas Aurizon’s is trending downward due to increased cash from operating activities.
| Figure 7. Debt to Equity Ratio | Figure 8. Debt Coverage Ratio |
Investing & Market Ratios
Interest and market performance ratios are used to measure the performance of companies listed on the Australian Securities Exchange (ASX); It is based on the financial information published in the reports and compares the earnings and dividends per share to the listed number of issued shares during a determined financial year. The ratios provide investors with enough data to compare and identify market trends.
Net Tangible Asset Backing per Share
The net tangible asset backing (NTAB) per share provides a clear indication of the company’s tangible assets value per share, removing from the equation all intangible assets:
Investors and shareholders compare this ratio with the market price per share each year, to determine the growth projection of a company.
QUBE’s trend, in the difference between the price share and the NTAB, indicates continuous growth along 2017 to 2019. Aurizon’s ratio indicates larger market growth projections, even though in 2018 its market share price went down, but it recovered in 2019.
Price Earnings Ratio
This calculation gives investors an idea of the market value of a company and identify if it is undervalued or overvalued; the range value should ideally be between 10 and 15.
QUBE PER ratio indicates that an investor should pay, in average, 4 years to acquire a share. This value indicates that QUBE shares are undervalued. On the other hand, Aurizon shares are way over the media price and this indicates the shares are overpriced and investors will have to wait longer to acquire a share, but they can expect higher returns on the long run.
| Figure 9. Net Tangible Asset Backing Per Share | Figure 10. Price Earning Ratio |
Fundamental Analysis
Investing in a company for a long-term requires investigation into not only the financial capacity and performance of the organization, but their vision and mission statements, corporate governance, and codes of conduct as these criteria will garuntee or threat future prosperity of the company (Strine, 2010).
The ratios depict the current stability of the company based on the activities it performs in an effort to meet their objectives, while the concept of corporate governance will measure the stability of the company through its processes and ability to balance liabilities and assets in pursuit of market opportunities while maintaning accountability and the ethical integrity (Rezaee.et.al.2019). The ethical framework that the company operates under will determine either the success or failure of the corporate governance.
QUBE Analysis
Qube asset turnover ratio and inventory turnover ratio indicate a slight decrease in asset efficiency; however, it is crucial to compare such ratios with profitability ratios which show a relatively steady upward trend in gross profit margin and cashflow to sales ratios despite a slowdown in container volumes due to operations in drought stricken areas (QUBE 2019).
QUBE’s current ratio and financial gearing ratios demonstrate an increase in long term debt as QUBE focuses on achiving further long term growth. The capacity for the company to capitalize on increasing liabilities is evident considering the group underlying revenue has increased more than $300 million since 2017.
Considering corporate governance, sustainability and community Qube demonstartes the triple bottom line theory is well-considered in the organistion (Elkington, 1997). Regarding community, Qube has a significant presence where they “educate and drive awareness around safety and to engage at a local level through a series of programs that connect with communities at various levels.” (Qube-Sustainability-Document, 2019). In respect to the environment, carbon intensity has decreased for more than 10 tCO2 per $m from 2017 (Qube-Sustainability-Document, 2019).
Aurizon Analysis
Aurizon asset turnover and inventory turnover ratios are not positive signs for investment, but considering profitability ratios, the Aurizon company has shown progress over the last three years. Aurizon currently demonstrates an upward trend in profit margin, although in 2019 this trend reduced as overall profit decreased in response to reduced railings from industrial action and sever weather in Queensland (Aurizon 2019). Cashflow to sales however maintained an upward trend as cashflow from operations remained steady despite an increase in operating costs due to maintenance (Aurizon, 2019).
While Aurizon’s debt exceeds equity, more than 72% of the current operating contracts exceed seven years (Aurizon 2019) and the current cash from operating activities shows an increasing capacity to service the non-current liabilities. This increase in serviceable leverage allows Aurizon to achive a higher return on equity as Aurizon intend to increase debt capacity by $1.2 Billion without impacting credit rating (Aurizon, 2019).
The price earnings ratio currently suggests Aurizon is overvalued, however 100% of the underlying net profit after tax is paid in dividend to shareholders and the NTAB per share in combination with increasing debt capacity suggests Aurizon may expect market growth.
Furthermore, triple bottom line analysis indicates sustainability (Elkington, 1997). Aurizon has recruited a double number of women in its workforce compared to 2012. They also have an active presence in the regional area and their mission is to develop these areas with employment (Aurizon-Sustainability-Report, 2019). Besides, As outlined in 2018 Sustainability Report, Aurizon is committed to Code of Practice for Management of Locomotive Exhaust Emissions (CoP) by the National Rail Safety and Standards Board which obligate the company to reduce its emissions and increase the use of clean energy within 10 years (Aurizon-Sustainability-Report, 2019).
Recommendations
Evaluation of both companies shows Aurizon has much greater capacity to generate revenue from sales where as QUBE’s significantly higher turnover ratio suggests a better use of inventory to generate profit. Both companies’ liabilities are increasing in comparison to their assets; QUBE has greater capacity to meet its short-term obligations due to a greater percentage of assests, however Aurizon’s higher cash from operating activities suggests greater ability to service long term obligations.
As both companies increase their debt, their current and quick ratios have been a decreasing for three consecutive years. While a higher ratio suggets stablity and capacity to meet the ethical standards and corporate governance the observed decreasing ratio suggests both companies are becoming less capable of paying their obligations. This raises concern as these companies may reach a point in which they fail to pay their debts due to insufficient assest. For this to be normalized various functional units have to come together and discuss the best way to utilize the available scarce resources and redeem the financial state of the company. These ratios indicate a downfall in the company workmanship hence there is need to apply corporate governance to bring together various departments in the company to work with a common objective. Inability to do so may result in investors shying away from the company as well as the company receiving a bad reputation from the public (Mees & Smith 2019). This and other ethical issues are key considerations when managing any production companies since customers tend to work with a company that is more trustworthy and upholds their level of integrity in the sector of financial management.
Currently the share price of QUBE shows a bullish trend between 2017 and 2019, however the share price fell significantly in 2020 due to the impact of covid-19 on Australia’s four major ports. The impact of Covid-19 on QUBE was far greater than that of Aurizon suggesting QUBE is subject to greater market risk. As both companies are primarily involved in mineral exports the effects of Covid-19 results in expected market volatility.
WhileQube’s and Aurizon’s leverage raises concern both have proven to be profitable investments over the past 10 years and demonstrate transparency and accountability in their corperate governance. However investors must continue to monitor the decreasing current ratio of both companies to ensure long term sustainability.
QUBE’s increasing share price and continued expansion makes the company a viable growth stock for investors seeking long term capital gains while being subject to greater short-term risk provided the debt coverage ratio does not continue to inrcease. For more risk averse investors seeking to increase their income the higher dividend and reduced influence of market volatility makes Aurizon the preferred investment, provided Aurizon can improve its ability to service the short-term obligations as the high leverage financial structure of the company while remaining solvent provides greater return on equity.
References
