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Air New Zealand Simple Analysis

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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. …show more content…

Not only managers must consider risk when making financial decision but also outside parties know about the company’s ability to pay debts. There are two types of financial gearing ratios, which are used to assess how much financial risk the company has taken on, are: Gearing ratio (or Component percentages) and Interest coverage ratio.
For Air New Zealand, we apply ratios as following:
Gearing ratio:
Gearing Ratio=Total LiabilitiesTotal Assets | 2008 | 2009 | 2010 | Gearing ratio | 68.60% | 68.19% | 65.93% |

In general, the gearing ratio of Air New Zealand in three year was higher than 65%. It means proportion of total liabilities in total fund (or total assets) used in Air New Zealand was higher than 2/3 which is a high gearing level. However, gearing level of Air New Zealand in 3 years decreased from 68.60% in 2008 to 68.19% in 2009 and 65.93% in 2010. This is a good sign of using fund in Air New Zealand. In fact, although main trend of both total fund and total liabilities employed in operation of the company were to go down, but value of total liabilities reduced faster than total fund, from 3,446 to 3,031 million dollars after 3 years. This is essential factor that made changes of gearing ratio.
Interest coverage ratio
Interest cover Ratio= Profit before interest and taxationInterest expense | 2008 | 2009 | 2010 | Interest cover ratio (times) | 2.09 | 0.46 | 2.13 |

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