Air New Zealand Simple Analysis

Topics: Balance sheet, Asset, Generally Accepted Accounting Principles Pages: 5 (1507 words) Published: May 7, 2013
2. Short-term liquidity
Liquidity reflects the ability of a firm to meet its short-term obligations using assets that are most readily converted to cash. Short-term is usually considered as in 12 months or an operating cycle of a business. Assets that may be converted into cash in a short period of time are referred to liquid assets, which are recognised as current assets in financial statements. They are used to satisfy short-term obligations, or current liabilities. Liquidity is important because of changing business operation. A business must be able to pay its financial obligations when needed. Otherwise, it will go bankrupt. We can assess the liquidity of a business by calculating these ratios: Current ratio, Quick asset ratio. Besides, we also study Average settlement period for Accounts receivable to know more about a source to pay short-term liabilities. For Air New Zealand, we apply ratios as following:

Current ratio
Currnet ratio= Currnet AssetsCurrent Liabilities
| 2008| 2009| 2010|
Current ratio (times)| 1.25| 1.29| 1.05|

Normally, the higher current ratio, the more liquid the company is considered to be. In the case of Air New Zealand, it was just only higher a little than 1.0. Meanwhile, although the ratio slightly increased from 2008 to 2009, but over 3 years it reduced by 16%, which is equivalent to 0.2 times, from 1.25 to 1.05 times. The main reason was the decrease of current assets from 2,127 million dollars in 2008 to 1,688 million dollars in 2010. This means that ability of the company to pay its immediate financial obligations was low and generally decreasing. Quick asset ratio

Quick asset ratio= Currnet Assets-InventoriesCurrent Liabilities | 2008| 2009| 2010|
Quick asset ratio (times)| 1.17| 1.21| 0.95|

In the case of Air New Zealand, quick asset ratio is more suitable than current ratio to evaluate liquidity of the company because its main business type is supplying service, not manufacturing or trading therefore it does not have much value of inventories. The biggest proportion in current assets of the company is “Bank and short-term deposit” because its strong cash flows. Quick asset ratio in 2008 and 2009 showed that Air New Zealand’s liquid assets could cover well current liabilities because it was higher than 1.0. However, it fell down considerably in 2010 and was less than 1.0. This indicates that the company had a liquidity problem in 2010. Not only due to reason as in changes of current ratio, but also consistent increase of inventories at the end of each year affected changes of quick asset ratio. However, both current ratio and quick asset ratio are just relevant to figures on the balance sheet. Therefore, they only assess liquidity of Air New Zealand at a point of time. In order to understand more about the ability to clear short-term debt, we consider the average settlement period for Accounts receivable. Average settlement period for Accounts receivable (debtors)

Average settlement period= 365 daysAccounts receivable turn over | 2008| 2009| 2010|
Average settlement period (days)| 37.15| 31.36| 32.48|

This figure shows that the average length of time Air New Zealand collected debtors is a quite short time, just only more than 1 month. It is due to the company’s field of business operation that is airlines transport and majority customers are individual consumers paying immediately when using the company’s services. Moreover, the average settlement period shortened quickly from 37.15 days in 2008 to 31.36 days in 2009 then only lengthened a little to 32.48 days in 2010. Thereby, the company could use collection of debtors to pay immediate obligation quicker and quicker. 3. Long-term financial stability

Long-term financial stability of a business is also referred to the gearing or leverage. It is an important issue which both managers and outside parties, suppliers for example, always concern. Gearing occurs when a business is financed from...
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