Bankruptcy Prediction Models Multinorm Analysis Essay

Question:

Discuss about the Bankruptcy Prediction Models Multinorm Analysis.

Answer:

Introduction

The current study critically evaluates the financial as well as non-financial performance of a firm with special reference to the operations of Air New Zealand. Air New Zealand is essentially a big passenger and flag carrier airline company with operations based in Auckland. Essentially, this airline runs scheduled passenger flights to nearly 21 domestic as well as 31 transnational destinations in around 19 nations. Essentially, this report stressing on analytical evaluation of performance of the company using non-financial measures refers to quantitative measures/dimensions of performance that are not reflected in monetary terms. Again, critical analysis of the corporation Air New Zealand using financial dimensions namely horizontal trend analysis can help in assessment of different components of financial assertions that in turn can assist in gaining better understanding of the position and performance of the corporation.

The current section carries out horizontal trend analysis of the financial statements of Air New Zealand that reflects the changes in the overall amounts of corresponding items of financial assertions over a specific time period. Essentially, this can be considered to be an important tool that can be used for analysis of trend analysis.

In this, the financial assertions for two periods are utilized in horizontal trend analysis. Essentially, the earliest period is normally referred to as the base period and diverse items on the pecuniary pronouncements for later period can be compared with different other items of the base period.

Comparative balance sheet with horizontal trend analysis:

AIR NEW ZEALAND LTD BALANCE SHEET

Increase

Fiscal year ends in June. NZD in millions except per share data.

2016-06

2015-06

Amount

Percentage

Assets

Current assets

Cash

Cash and cash equivalents

1594

1321

273

20.666162

Short-term investments

92

103

-11

-10.67961165

Total cash

1686

1424

262

18.3988764

Receivables

300

298

2

0.67114094

Inventories

103

120

-17

-14.16666667

Prepaid expenses

73

71

2

2.816901408

Other current assets

177

69

108

156.5217391

Total current assets

2339

1982

357

18.01210898

Non-current assets

Property, plant and equipment

Gross property, plant and equipment

6314

6845

-531

-7.757487217

Accumulated Depreciation

-2253

-2360

107

-4.533898305

Net property, plant and equipment

4061

4485

-424

-9.453734671

Equity and other investments

428

230

198

86.08695652

Goodwill

0

Intangible assets

102

127

-25

-19.68503937

Other long-term assets

202

70

132

188.5714286

Total non-current assets

4793

4912

-119

-2.422638436

Total assets

6775

7251

-476

-6.564611778

Liabilities and stockholders' equity

0

Liabilities

0

Current liabilities

0

Short-term debt

46

239

-193

-80.75313808

Capital leases

207

225

-18

-8

Accounts payable

448

453

-5

-1.103752759

Deferred income taxes

20

54

-34

-62.96296296

Deferred revenues

1055

1111

-56

-5.04050405

Other current liabilities

352

389

-37

-9.511568123

Total current liabilities

2128

2471

-343

-13.88101983

Non-current liabilities

0

Long-term debt

616

841

-225

-26.75386445

Capital leases

1453

1262

191

15.13470681

Deferred taxes liabilities

228

164

64

39.02439024

Other long-term liabilities

385

405

-20

-4.938271605

Total non-current liabilities

2682

2672

10

0.374251497

Total liabilities

4810

5143

-333

-6.474820144

Stockholders' equity

0

Common stock

2286

2252

34

1.509769094

Retained earnings

-351

-351

Accumulated other comprehensive income

30

-144

174

-120.8333333

Total stockholders' equity

1965

2108

-143

-6.783681214

Total liabilities and stockholders' equity

6775

7251

-476

-6.564611778

Significant ratios

The ratios that are essential in estimating the trends of business that is the situation in which the entity is currently in and the ways in which the business will react to the upcoming future events are called significant ratios. The ratios that are analysed below are the Quick ratio, Debt Equity ratio and the Net Profit ratio (Bodie, 2013).

Quick Ratio

Current Liabilities ($M)

Current Assets ($M)

Inventory ($M)

Current Assets - Inventory

Ratio

FY 2012

1683

1700

170

1530

0.909

FY 2013

1710

1858

155

1703

0.996

FY 2014

1872

1827

169

1658

0.886

FY 2015

2128

1982

120

1862

0.875

FY 2016

2471

2339

103

2236

0.905

Quick ratio = Total Current Assets - Inventories/Total Current Liabilities

The quick ratio represents the entity’s liquidity on a short term basis. An entity has both short term and long term obligations. The short term obligations are those that are needed to be paid within the current financial year. Essentially the quick ratio measures the capability of the liquid assets of the entity in order to pay off the short term obligations. For instance a quick ratio of 1.8 reveals that $1.80 of liquid assets that is available for the purpose of covering the $1 worth of current liabilities. Therefore higher the liquidity or quick ratio of an entity better is its liquidity position (Healy & Palepu, 2012).

In the above table the quick ratio of Air New Zealand has been calculated for the past five financial years. The total current assets have been identified from the annual reports of the respective financial years and according to the formula the inventories have been subtracted from it and then divided by total current liabilities. Therefore the quick ratio that has been arrived at show the liquidity position of the company. In the financial year of 2012 the liquidity position of the group seems to be fine. In the financial year of 2013 the quick ratio even improves more lifting the entity to a much better liquidity position. Though the liquidity position of Air New Zealand worsens in the following two financial years but the entity seems to improve in the financial year of 2016 thus stabilizing the liquidity position of the entity (de Andr?s, Landajo & Lorca, 2012).

Debt Equity Ratio

Total Liabilities ($M)

Shareholder's Equity ($M)

Ratio

FY 2012

3771

1688

2.2340

FY 2013

3796

1816

2.0903

FY 2014

3978

1872

2.1250

FY 2015

4810

1965

2.4478

FY 2016

5143

2108

2.4398

Debt Equity Ratio = Total Liabilities/ Shareholder's Equity

Shareholder's Equity = Total assets - Total liabilities

The Debt Equity ratio essentially measures the financial leverage of the entity. The debt equity ratio is measured by dividing the total liabilities of an entity by its share holder’s equity. The specific forecast or indication that is measured by the debt equity ratio is that the amount of debt that a company has been utilizing in order to finance its assets in relation to the value that is there in the shareholder’s equity. The debt equity ratio is also known as risk or gearing ratio. In case of a debt equity ratio the total liabilities is compared to the shareholder’s equity because this will specifically show the extent till which the entity is utilizing debts or borrowed sources of money in order to fund the projects of the company. Aggressive practices related to financial leveraging are often not recommended. This is because such activities are associated with high levels of risk. The earnings that are incurred by the entity may result in volatile earnings due to additional interest expense (Li, 2015).

The above table shows a more or less constant debt equity ratio. But such a value is high enough to indicate that the entity heavily indulges in financing from outside sources. The ratio though decreases in the financial year of 2013 but it increases in the following financial years. The entity indulging in financing from outside sources may continue such operations associated with high levels of risk, if and only if the returns from the project offset the cost of financing loans from outside. But if this is not the case then the group runs the risk of going bankrupt. Therefore initiative on the part of the management should be taken to look into the current situation and lower the rate of financial leverage of the entity (Weygandt, Kimmel & Kieso, 2015).

Net Profit Ratio

Net Revenue ($M)

Net Profit ($M)

Ratio

FY 2012

715

71

10.0704

FY 2013

898

182

4.9341

FY 2014

1013

262

3.8664

FY 2015

1161

327

3.5505

FY 2016

1542

463

3.3305

Net Profit ratio = Net Revenue / Net Profit

The net profit ratio is calculated by dividing the net revenue that is incurred by the entity and is arrived at by deducting the operating expenses from the gross revenue, by the net profit that is incurred by the firm. The net profit ratio indicates the profitability of the entity and is always prepared for a row of past years in order to measure the performance of the entity on a continuous basis (Needles, Powers & Crosson, 2013).

In the above table as it can be observed the net profit ratio of the entity in the financial year of 2012 reaches great heights and obtains a value of 10.074, thus signifying a strong profitability position of the entity. But after 2013 the profitability falls steeply and becomes stable from the financial year of 2014. Therefore there should be much investigation into the fact that as to why the entity had incurred such high levels of profit in the financial year of 2013 and why the profitability abnormally did decrease after 2013. A major issue that should be noted while analysing the net profit ratio is that this ratio estimates or measures the performance of the firm on a short term basis and does not provide insight into the long term possibilities of the entity (Weil, Schipper & Francis, 2013).

Non-financial analysis (Attrition rate)

Employees on (2016)

No of employees left

No of employees joined

Current employees

9897

270

900

10527

Attrition rate

=(270/100)/((9897+900))/100=2.45

From the above table, it can be inferred that the attrition rate of the organization is on the lower side, which is a positive sign for the organization.

Conclusion

Air New Zealand as a group has reached a stabilized position in the past three financial years. The liquidity position of the group is strong. But there are concerns regarding financing resources from outside. The over indulgence of the entity in financial leveraging activity should be looked into. The entity should try to finance its projects out of its retained earnings. The management of the firm should look into the operating activities of the firm and if required chalk out a turnaround plan to increase the profitability of the entity.

References

Bodie, Z. (2013). Investments. McGraw-Hill.

de Andr?s, J., Landajo, M., & Lorca, P. (2012). Bankruptcy prediction models based on multinorm analysis: An alternative to accounting ratios. Knowledge-Based Systems, 30, 67-77.

Healy, P. M., & Palepu, K. G. (2012). Business analysis valuation: Using financial statements. Cengage Learning.

Li, X. (2015). Accounting conservatism and the cost of capital: An international analysis. Journal of Business Finance & Accounting, 42(5-6), 555-582.

Needles, B. E., Powers, M., & Crosson, S. V. (2013). Principles of accounting. Cengage Learning.

Weil, R. L., Schipper, K., & Francis, J. (2013). Financial accounting: an introduction to concepts, methods and uses. Cengage Learning.

Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Financial & Managerial Accounting. John Wiley & Sons.

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