If another business posted a profit like that on a revenue of $13 billion one would have to seriously consider its viablity and its management's business acumen.
The popular press agrees
The headlines from Dow Jones don’t sound too bad, “Qantas Airways FY Net Profit -4.3% at A$112M” and “1H FY11 Pre-tax Profit May Be Materially Stronger On Year”.
But just as a newly polished car may look good on the outside, it’s only when you look under the bonnet that you can see what’s really going on. In the case of Qantas, forget the net profit amount and the forecast for the first half of the 2011 financial year, that’s just the lovely polished finish. If you want to look at the engine you need to look at the company’s cash flow.
And that’s where you can see the engine has almost seized up. You see, while Qantas reports a $112 million profit, if it wasn’t for proceeds from borrowings of $1.352 billion, Qantas would have had negative cash flow for the year to the tune of $1.265 billion.
In other words, just like the Aussie battler who needs to go to a payday lender in order to cover the cost of a gas or electricity bill, Qantas has had to go to its payday lender and draw down from a debt facility in order to pay its bills.
This is despite supposedly having $3.7 billion of cash in the bank.
But you can see why Qantas went down the road of increasing its borrowings rather than drawing down on cash. Minus the borrowings, Qantas’ cash holdings would have decreased by around a third. Doubtless the analysts wouldn’t have liked that as it would have played havoc with a bunch of cash based ratios.
Much better to go further into debt instead. Just like the rest of the population. Debt is all the rage after all - $1 trillion of household debt can’t be wrong!
The rotten state of the company’s cash flow is evident elsewhere too, such as the decision not to pay a dividend for the third half-year in a row.
Which is hardly surprising considering on a per-share basis Qantas earned just 4.9 cents per share, or earnings of 1.9% of the share price.
When a company’s earnings are that low, and it needs to borrow money in order to be cash flow positive it’s not hard to figure out that the company is in terrible shape.