Air New Zealand Simple Analysis
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
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