Bankruptcy Prediction Models Multinorm Analysis – Study On Air New Zealand

Comparative balance sheet with horizontal trend analysis

Discuss about the Bankruptcy Prediction Models Multinorm Analysis.

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.

AIR NEW ZEALAND LTD   BALANCE SHEET Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper				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

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).

Significant ratios

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 Andrés, 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).

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 Andrés, 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.