Qantas takes a financial flight of fancy on accounting winds
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.
Frequently Asked Questions about this Article…
Qantas’ reported "underlying profit" before tax was $192 million — a figure the company highlights in presentation materials. Statutory profit before tax, prepared under binding accounting standards, was only $17 million. "Underlying" profit strips out certain items (impairments, restructuring costs, one-off gains and accounting policy changes) that the company considers non‑core, whereas statutory profit follows International Financial Reporting Standards and shows the legally required bottom line.
The market reacted positively because Qantas’ $192 million underlying profit looked materially stronger than the statutory $17 million result. Much of that improvement came from an accounting policy change that brought $134 million forward into the reporting period and other adjustments, so investors cheered the headline number despite the statutory figures being much weaker.
Qantas’ underlying profit included several adjustments: it brought $134 million forward via an accounting policy change, excluded $86 million of asset impairments, $118 million for redundancies and restructuring, and a $24 million write-down in intangibles, and it added back a $30 million profit from the sale of an investment. Without that $30 million sale, the company would have shown a pre‑tax loss of $13 million.
On a statutory basis Qantas had profit before tax of $17 million and a tax charge of $11 million, implying an effective tax rate of about 65%. That high statutory tax rate highlights the difference between the headline underlying number and the taxable profit shown under accounting standards.
On the face of it Qantas has a negative current ratio: current liabilities ($6.37 billion) exceed current assets ($5.25 billion), which can indicate potential short‑term cash pressure. However, the company has $2.8 billion cash on hand and $3 billion of revenue received in advance (a current liability), and when you add cash plus current receivables you get $4.3 billion available. After accounting for current payables of $1.9 billion, Qantas appears $2.4 billion ahead for the next 12 months — but that cushion is largely funded by revenue received in advance, so the company needs to keep collecting customer payments.
"Revenue in advance" is money Qantas has received for future flights and is recorded as a current liability. It boosts short‑term cash receipts (Qantas had about $3 billion), but because it’s a liability, it isn’t the same as earned revenue. The article notes that although Qantas is ahead by about $2.4 billion for the next 12 months when comparing receivables/cash to payables, that position is funded 125% by revenues received in advance — meaning the airline must keep collecting those advance payments to avoid cash strain.
Qantas’ headline debt:equity metrics look reasonable at first — debt 36% and equity 64% — and capitalising operating leases makes it 39:61. But when off‑balance‑sheet lease obligations are included the picture changes: the article cites debt representing 57% of equity, rising to 85.5% of equity with off‑balance‑sheet items added. If you also include current payables and revenue received in advance as debt-like items, the company’s debt ratios can be pushed much higher (the author suggests illustrative ratios up to roughly 140–170%). The takeaway: different treatments of leases and payables materially alter leverage metrics.
Everyday investors should look beyond a company’s headline "underlying" numbers and check the statutory accounts and notes. Qantas’ underlying profit was boosted by accounting policy changes, a one‑off investment sale and several exclusions. Statutory profit, current‑ratio details, cash on hand and off‑balance‑sheet items (like operating leases and revenue in advance) can tell a very different story about profitability and financial strength.
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