Question

Typically, there are signs to indicate a business is failing, forcing the business to claim bankruptcy, seek financial help from the courts to pay debts, or go out of business. Using your knowledge of liquidity and solvency, find an annual report of a company that went out of business and analyze the financial statements to determine if you could tell the business was going to fail.

In your response, discuss your findings and why you think those items lead to the demise of the organization and include any indications to management that changes needed to be made. Examples of high-profile companies that went out of business include Toys-R-Us, Blockbuster, Tower Records, Pan Am, Borders, Pets.com, and Compaq.

150 words please.

Answer 1

The company that we will look at is Virgin Air (Australia)

The company has been having an operating cash flow of approximately $1,000 mn each year for the last 5 years, vs a debt servicing level of $1,600 mn each year.

The company has been riding on massive unsustainable levels of debt, which was going to be a disaster for the firm.

Due to its high levels of debt, the company has not posted a single profitable year in the last 10 years.

Their debt/ Equity ratio touched 7x, which is higher than the industry averages.

Hence I formed a view that as soon as a downcycle hits the aviation sector, Virgin air will be the first one to fall and so it did when the COVID-19 crisis hit the world