Qantas takes a financial flight of fancy on accounting winds
The revenue in advance, however, is a current liability; it becomes clear that Qantas needs to keep collecting all its money in advance.
In declaring "underlying profit" of $192 million last week - to borrow crudely from Charles Kingsley - it killed this cat by choking it with cream. The market gulped down that cream, though, too. Qantas shares shot up 14 per cent on the day.
Among the myriad filings to the ASX - press releases, investor presentations and supplemental filings - a dogged pursuer will eventually unearth the Qantas Airways statutory accounts.
These are the ones mandated by legally binding accounting standards approved by the Australian Accounting Standards Board, signed off by Parliament (the standards are laid before Parliament so that Parliament can knock them back if they're wrong). These accounts are also identical to the International Financial Reporting Standards used all around the world except in the US (where they are permitted but not required).
It is here that we find that Qantas Airways' profit before tax was $17 million. This carried an $11 million tax charge; that is, an effective tax rate of 65 per cent.
In its presentation materials, Qantas preferred to focus on its own special measure for evaluating profit, its "underlying" profit before tax of $192 million. This $192 million was largely achieved thanks to a change in accounting policy that brought $134 million forward into the reporting period.
It got there by slicing off $86 million for asset impairments, $118 million for redundancies and restructuring, a $24 million write-down in intangibles - and by adding back a $30 million profit on the sale of an investment.
Without the sale of that investment, it would have shown a pre-tax loss of $13 million.
The Qantas balance sheet is every bit as vivacious as its profit-and-loss statement. The "current ratio" is negative: that is, current liabilities, at $6.37 billion, exceed current assets, at $5.25 billion. The current ratio is a good indicator there might be a cash squeeze afoot, that money may need to be raised.
Let's not panic just yet though. Qantas has $2.8 billion cash on hand. It has received revenue in advance of $3 billion - more than its cash on hand. It is a good thing that people pay before they fly. If you add the cash and current receivables (which should be collected over the next 12 months) you get $4.3 billion in readies.
Current payables (those due to be paid in the next 12 months) amount to $1.9 billion. In terms of available cash therefore, as per the balance sheet for the next 12 months, Qantas is $2.4 billion ahead. Again, this is funded 125 per cent by revenues received in advance.
The revenue in advance, however, is a current liability. If you subtract this from the available $2.4 billion, it becomes clear that Qantas needs to keep collecting all its money in advance.
On the face of it, Qantas' debt-to-equity ratio looks OK. And Qantas gets brownie points for showing the effect of capitalising its operating leases - even though this information didn't manage to scrape into the annual report.
But wait - the ratio is debt: (debt + equity). Debt is 36 per cent, equity 64 per cent. When they bring the off-balance sheet leases on, it becomes 39 per cent debt: equity 61 per cent. Actually, the debt represents 57 per cent of equity, and when you add in the off-balance sheet stuff, debt is 85.5 per cent of equity. Phew, no wonder Qantas prefers its own ratios. They are far more glamorous.
But wait again. What is debt? Let's see, it includes only the interest-bearing debt shown on the balance sheet. That covers only $853 million of current liabilities. The $1.9 billion current payable and the $3 billion of revenue in advance are not counted as debt.
If just those two amounts are added in, the preferred ratio would become 59:41 - and 63:37 with the off-balance sheet added in. If you were playing about with a plain old debt-to-equity ratio, you could get to 140 per cent, or roughly 170 per cent when adding in the off-balance-sheet stuff.
So, there is much that lies under the "underlying profit" and often a good deal more underlying the statutory disclosures too.
InvestSMART FORUM: Come and meet the team
We're loading up the van and going on tour from April to June, with events on the NSW central & north coast, the QLD mid-north coast and in Perth, Adelaide, Melbourne, Sydney and Canberra. Come and meet the team and take home simple strategies that you can use to build an investment portfolio to weather any storm. Book your spot here.
Want access to our latest research and new buy ideas?
Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.Sign up for free