Bankruptcy Both companies have generated less cash than

Bankruptcy
is defined as a legal process where a business/property owned by an individual
undergoes liquidation as they are unable to pay off debts from their current
assets. There are both qualitative and quantitative methods/theories in anticipating
the future of a business. A recognised quantitative method by Beaver (1966) is the
Uni-variate discriminant modelling which is the analysis of a single variable
at a time. Beaver developed a simple cash flow
model of the probability of corporate failure where he selected six ratios on
the basis of their ‘predictive
ability’ from conducted research. Using this
theory, two companies within the real estate industry will be analysed in terms
of their performance over the years and in comparison to the industry average. These
ratios and calculations help determine and distinguish the survival and failure of firms.

 

Current ratio
is used in the assessment of an entity’s short-term liquidity. Companies with a
ratio above two are classed to be better as they are able to pay back their
liabilities with its assets. Findings suggest that Granger PLC has an incomparable
current ratio with highs of 8.208:1 where they are well above the industry average as well as its
competitors –  Land PLC, who have
consistent finances throughout the years. However, this can also suggest poor
use of its ‘current assets or short-term financing facilities efficiently’ (1).

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!


order now

The cash flow
ratio for Land PLC is negative for both 2014/15 but had a steady overall cash
flow in comparison to the variation for Grainger PLC. This does not necessarily
mean a loss for the business but may indicate ineffective credit management.

Both companies have generated less cash than needed in order to pay off
short-term liabilities. This is evident as the operating cash flow over the
years is less than one.

Working capital
is a much more effective current ratio calculation. Both Grainger and Land PLC
have working capital ratios below 1, this is a strong indication of future
liquidity problems. Negative figures for Land PLC in 2013/14 do not suggest the
business is failing but neither doing well. There is a significant drop in the
figures for both companies in 2017 this may be due to the working capital management being poor across the sector
itself.

 

Beavers model
can be criticised in terms of the idea that each of these ratios may be
considered to be ranked in consistency and importance, this depends on the
analysis and interpretation of the ratios. However, a sufficient number of
ratios for Beaver’s theory have suggested that Land PLC is performing well when
compared to Grainger. Overall, it can be concluded that Land PLC has a stronger
financial health and Grainger is more likely to be at risk of bankruptcy.

Beaver’s model
is Uni-variate but financial distress could arouse from a number of causes and the
six ratio’s are only one aspect of measuring performance and predicting the
future of a company.  

 

A
multivariate distress prediction model is Altman’s Z score model (1968). This
is a combination of five weighted business ratios used to estimate the
likelihood of financial distress. When analysing both companies, it is clearly
evident that Land PLC have better Z-scores throughout the five years. Grainger
PLC have Z-scores below 1.80 throughout most of the years which suggest serious
credit problems and a very high probability of financial bankruptcy. However,
in 2016, the z-score value for Grainger is 2.1203 this is an indication of
better security but still at risk and that the company has a good chance of the company going bankrupt
within 2 years of operations. Land PLC have a range of Z-scores, but when
concluding Land PLC are at a lower risk of bankruptcy with their 2016 score
reaching 2.9604 which suggests the company is working towards being
safe. 

x

Hi!
I'm Barry!

Would you like to get a custom essay? How about receiving a customized one?

Check it out