# Bankruptcy Prediction Models Multinorm Analysis Essay

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## Question:

Discuss about the Bankruptcy Prediction Models Multinorm Analysis.

### 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.