Assignment – Financial Ratio Analysis of an ASX-Listed Airline

Introduction

Financial ratio analysis converts general purpose financial statements into standardised indicators that allow performance to be compared over time and against industry peers (Birt et al. 2023). This assignment analyses the two-year financial performance of Southern Cross Airways Limited (Southern Cross), a hypothetical full-service carrier listed on the Australian Securities Exchange (ASX), for the financial years ended 30 June 2024 (FY2024) and 30 June 2025 (FY2025). The assignment extracts the key financial data, calculates and interprets profitability, liquidity, solvency and efficiency ratios with full workings, decomposes return on equity through the DuPont framework, and evaluates the limitations of the method and the relevant Australian Accounting Standards Board (AASB) and going-concern considerations, before closing with an investment recommendation. Interpretation is grounded in the Australian aviation context, where a concentrated domestic market, recovering passenger demand and volatile jet fuel prices are the dominant earnings drivers (ACCC 2024; BITRE 2025). All amounts are in millions of Australian dollars (A$m); ratios use closing balances for consistency.

Company Background and Data Extraction

Southern Cross operates approximately 70 aircraft across domestic trunk routes, regional services and short-haul international routes to New Zealand and South East Asia. Its consolidated financial statements are prepared under the Corporations Act 2001 (Cth) and Australian Accounting Standards, and were audited without qualification in both years. The operating backdrop was favourable: domestic passenger volumes continued recovering towards pre-pandemic levels, with load factors above 80% on major city pairs (BITRE 2025), and the Australian Competition and Consumer Commission has observed that the market’s concentrated structure supports elevated fare yields for incumbents (ACCC 2024). Table 1 presents the data extracted from the FY2025 annual report and used in all calculations below.

Table 1: Selected financial statement data, Southern Cross Airways Limited, FY2024 and FY2025 (A$m)

Note: Southern Cross Airways is a hypothetical case company; figures are illustrative and internally consistent, not drawn from any actual entity.

Two features of Table 1 frame the analysis. First, revenue grew 12.2% while EBIT grew 40.5% and NPAT rose 61.6%, a pattern consistent with the high operating leverage of airlines: once the largely fixed costs of fleet, crew and airport access are covered, incremental revenue converts to profit at a disproportionately high rate (Palepu et al. 2021). Second, the balance sheet remains liability-heavy, with A$5,670m of liabilities against A$1,610m of equity, examined further below.

Ratio Analysis

Table 2 summarises eleven ratios across the four conventional categories, with indicative benchmark ranges for established full-service carriers compiled from published industry analysis (IATA 2024; Qantas 2024). The benchmarks are context rather than precise targets: no two carriers share an identical network, fleet age or hedging position. Worked calculations follow for FY2025, with FY2024 results in parentheses.

Table 2: Ratio summary, Southern Cross Airways Limited, FY2024 and FY2025

Profitability

EBIT margin = EBIT / Revenue = 406 / 5,410 = 7.5% (FY2024: 289 / 4,820 = 6.0%). Net profit margin = NPAT / Revenue = 223 / 5,410 = 4.1% (FY2024: 138 / 4,820 = 2.9%). Return on assets = NPAT / Total assets = 223 / 7,280 = 3.1% (FY2024: 138 / 6,940 = 2.0%). Return on equity = NPAT / Total equity = 223 / 1,610 = 13.9% (FY2024: 138 / 1,430 = 9.7%).

Airline margins are structurally thin, with global net margins averaging only around 3% of revenue (IATA 2024), so the improvement from 2.9% to 4.1% moves Southern Cross from below-average to above-average profitability. Three forces explain the expansion: capacity discipline in the concentrated domestic market held fare yields high (ACCC 2024); the 12.2% revenue increase was largely absorbed by fixed costs; and net finance costs declined as debt was repaid. The rise in return on assets confirms the gain is operational rather than cosmetic, because it is measured against the full asset base, including right-of-use aircraft recognised under AASB 16 (AASB 2019). Nevertheless, the EBIT margin of 7.5% still sits marginally below the 8% benchmark, and margins remain exposed to labour outcomes under enterprise agreements made within the Fair Work Act 2009 (Cth) framework and to jet fuel priced in United States dollars, which a weaker Australian dollar makes dearer in local terms (RBA 2025).

Liquidity

Current ratio = Current assets / Current liabilities = 1,890 / 2,430 = 0.78 (FY2024: 1,610 / 2,300 = 0.70). Quick ratio = (Current assets – Inventories) / Current liabilities = (1,890 – 48) / 2,430 = 1,842 / 2,430 = 0.76 (FY2024: 1,565 / 2,300 = 0.68).

In most industries a current ratio persistently below 1.0 would signal liquidity stress (Atrill et al. 2021). For airlines the interpretation must be adjusted for the working capital model: passengers pay before they fly, so a large share of current liabilities is revenue received in advance, an obligation extinguished by providing flights rather than by paying cash. In FY2025 this balance was A$1,380m, or 57% of current liabilities. Excluding it, the adjusted current ratio = 1,890 / (2,430 – 1,380) = 1,890 / 1,050 = 1.80 (FY2024: 1,610 / 1,060 = 1.52), indicating comfortable cover of the obligations that genuinely require cash settlement (Loftus et al. 2023). Cash also strengthened from A$820m to A$1,050m, roughly 71 days of revenue, a buffer sized with pandemic-era demand shocks in mind. The sub-1.0 headline ratios therefore reflect industry structure rather than distress, a distinction central to the going-concern discussion below.

Solvency and Gearing

Debt-to-equity = Total liabilities / Total equity = 5,670 / 1,610 = 3.52 (FY2024: 5,510 / 1,430 = 3.85). Interest cover = EBIT / Net finance costs = 406 / 88 = 4.6 times (FY2024: 289 / 92 = 3.1 times). Net gearing = Net debt / (Net debt + Equity), where net debt = interest-bearing liabilities less cash = 2,760 – 1,050 = 1,710; therefore net gearing = 1,710 / (1,710 + 1,610) = 1,710 / 3,320 = 51.5% (FY2024: 2,070 / 3,500 = 59.1%).

Southern Cross is highly geared by economy-wide standards, but such leverage is structural in aviation: aircraft are financed with debt and leases, and AASB 16 capitalises operating leases, grossing up both sides of the balance sheet (AASB 2019; Loftus et al. 2023). What matters analytically is direction and serviceability: interest-bearing debt fell A$130m, net gearing declined almost eight percentage points, and interest cover improved from 3.1 to 4.6 times, clearing the 3.0 times threshold commonly written into debt covenants (Ross et al. 2021). With the Reserve Bank of Australia holding borrowing costs well above pandemic lows (RBA 2025), the improving cover materially reduces refinancing risk, though the capital structure would still amplify losses in a downturn.

Efficiency

Total asset turnover = Revenue / Total assets = 5,410 / 7,280 = 0.74 times (FY2024: 4,820 / 6,940 = 0.69 times). Receivables collection period = (Receivables / Revenue) × 365 = (345 / 5,410) × 365 = 23.3 days (FY2024: (310 / 4,820) × 365 = 23.5 days).

Asset turnover below 1.0 is typical of capital-intensive industries. The improvement from 0.69 to 0.74 indicates that revenue grew faster than the asset base, consistent with higher aircraft utilisation and load factors rather than fleet expansion (BITRE 2025). The receivables cycle is short and stable because most consumer fares are prepaid; the residual balance largely comprises agency, corporate and interline settlements. Efficiency therefore reinforces the profitability finding: FY2025 was driven by working existing assets harder, not by adding capacity (Palepu et al. 2021).

DuPont Decomposition of Return on Equity

The DuPont framework separates operating performance from the effect of financial leverage by expressing return on equity as the product of net profit margin, total asset turnover and the equity multiplier (Ross et al. 2021). Figure 1 illustrates the decomposition, and Table 3 reports the components for both years.

Table 3: DuPont components, FY2024 and FY2025

Multiplying the FY2025 components confirms internal consistency: ROE = 4.1% × 0.74 × 4.52 = 13.9% (FY2024: 2.9% × 0.69 × 4.85 = 9.7%). As Figure 1 illustrates, the 4.2 percentage point improvement in ROE was achieved entirely through operating channels: margin contributed most, asset turnover moderately, and the equity multiplier actually fell as retained earnings rebuilt equity faster than assets grew. This is a high-quality improvement. Had the multiplier risen while margin stagnated, the same headline ROE would have signalled greater financial risk rather than better performance, the distinction DuPont analysis exists to expose (Palepu et al. 2021).

Limitations of the Analysis

The conclusions above carry the standard limitations of ratio analysis, several of which bite with particular force in aviation:

• Closing balances. Ratios on closing rather than average balances misstate returns when balances move during the year (Birt et al. 2023).
• Accounting policy effects. AASB 16 capitalisation means comparisons with carriers that own different proportions of their fleets, or with pre-2019 data, are not like for like (AASB 2019).
• Valuation judgement. Aircraft carrying amounts rest on judgemental impairment testing; every asset-based ratio inherits those judgements (ASIC 2024).
• A two-year window. Airline earnings are strongly cyclical; two years cannot separate structural improvement from a favourable point in the cycle.
• Indicative benchmarks. Sector ranges blend carriers with different networks, fleet ages and hedge books (IATA 2024).
• Omitted operating drivers. Ratios ignore available seat kilometres, unit revenue and cost, load factor and punctuality, which typically lead the financial results.
• Balance date effects. A 30 June balance date sits between peak travel seasons, and window dressing near balance date cannot be excluded (Atrill et al. 2021).

Going Concern and AASB Reporting Considerations

AASB 101 requires directors to assess the entity’s ability to continue as a going concern for at least twelve months from the reporting date and to disclose any material uncertainty (AASB 2020). A mechanical reading of the sub-1.0 current ratio might suggest such uncertainty, but the assessment must incorporate the earlier analysis: 57% of current liabilities are settled by delivering flights rather than cash, cash covers roughly 71 days of revenue, and interest cover of 4.6 times indicates comfortable serviceability. On that evidence the going-concern basis is clearly supportable, and the directors can make the solvency declaration required by section 295(4) of the Corporations Act 2001 (Cth) on reasonable grounds.

Three reporting matters nonetheless warrant disclosure attention. First, the Australian Securities and Investments Commission has repeatedly nominated impairment and going-concern disclosure as surveillance focus areas, and the aircraft and goodwill balances rest on value-in-use assumptions about fuel, yields and discount rates that warrant sensitivity disclosure (ASIC 2024). Second, under AASB 15 ticket revenue is recognised only when flights are flown, so the A$1,380m contract liability defers revenue into future periods, and any change in breakage assumptions for unused tickets flows directly to profit (Loftus et al. 2023). Third, AASB 16 inflates both leverage and EBIT-based metrics relative to the pre-2019 presentation, so long time series must be normalised for the standard’s adoption (AASB 2019).

Investment Recommendation

On the evidence of FY2024 and FY2025, Southern Cross presents as an improving business rather than a merely recovering one: margins expanded while leverage fell, ROE of 13.9% sits within the 12-15% benchmark range, liquidity buffers strengthened, and the DuPont decomposition attributes the gains to operations rather than gearing. For investors tolerant of cyclical risk, the analysis supports an accumulate (moderate buy) position. The recommendation is explicitly conditional: the company remains a thin-margin, high-fixed-cost, highly geared business exposed to United States dollar fuel prices, industrial relations outcomes and the capacity behaviour of its principal domestic competitor (ACCC 2024; IATA 2024). Three indicators merit monitoring in FY2026 interim reporting: interest cover above 4 times, net gearing below 55%, and growth in revenue received in advance, the earliest available signal of forward demand. Risk-averse income investors would be better served elsewhere on the ASX: dividend capacity, while restored, remains modest at a payout of approximately 19% of earnings (A$43m declared in FY2025).

Conclusion

This assignment applied ratio analysis to two years of financial data for an ASX-listed airline. Profitability improved on all four measures, and the DuPont decomposition attributed the lift in ROE from 9.7% to 13.9% to operating improvement achieved alongside reduced leverage. Headline liquidity ratios below 1.0 proved an artefact of the prepaid ticket model rather than distress once the A$1,380m contract liability was isolated, giving an adjusted current ratio of 1.80. Gearing, while structurally high under AASB 16, declined and became more serviceable. Acknowledging the limits of closing-balance, two-year analysis and the disclosure considerations under AASB 101, AASB 15 and ASIC surveillance priorities, the assignment closes with a conditional accumulate recommendation grounded in improving earnings quality within a favourable but concentrated Australian aviation market.

References

Atrill, P, McLaney, E, Harvey, D & Cong, L 2021, Accounting: an introduction, 8th edn, Pearson Australia, Melbourne.

Australian Accounting Standards Board (AASB) 2019, AASB 16 Leases, AASB, Melbourne.

Australian Accounting Standards Board (AASB) 2020, AASB 101 Presentation of Financial Statements, AASB, Melbourne.

Australian Competition and Consumer Commission (ACCC) 2024, Domestic airline competition in Australia, ACCC, Canberra.

Australian Securities and Investments Commission (ASIC) 2024, Financial reporting and audit: focus areas, ASIC, Sydney.

Birt, J, Chalmers, K, Maloney, S, Brooks, A, Oliver, J & Bond, D 2023, Accounting: business reporting for decision making, 8th edn, John Wiley & Sons Australia, Milton.

Bureau of Infrastructure and Transport Research Economics (BITRE) 2025, Domestic aviation activity: annual report 2024-25, BITRE, Canberra.

International Air Transport Association (IATA) 2024, Airline industry economic performance, IATA, Montreal.

Loftus, J, Leo, K, Daniliuc, S, Luke, B, Ang, HN & Bradbury, M 2023, Financial reporting, 4th edn, John Wiley & Sons Australia, Milton.

Palepu, KG, Healy, PM, Wright, S, Bradbury, M & Coulton, J 2021, Business analysis and valuation: using financial statements, 3rd Asia-Pacific edn, Cengage Learning Australia, South Melbourne.

Qantas Airways Limited 2024, Annual report 2024, Qantas Airways Limited, Mascot.

Reserve Bank of Australia (RBA) 2025, Statement on monetary policy, May 2025, RBA, Sydney.

Ross, SA, Trayler, R, Hambusch, G, Koh, C, Glover, K, Westerfield, RW & Jordan, BD 2021, Fundamentals of corporate finance, 8th edn, McGraw-Hill Education Australia, Sydney.