After Sh26bn loss,
The Sunday Nation
Nairobi,
16 August 2015
Twenty six billion shillings is a lot of money – I can think of very many things that I buy with it! So the question that everybody is NOT asking is this: can a company survive after losing Sh26 billion? According to the audited financial statement released recently, Kenya Airways Limited did exactly that during the year that ended on 31st March 2015.
The actual loss was about Sh30 billion but the company raised an income tax refund claim of Sh4 billion and that brought down the net loss after tax to Sh26 billion. So what did this do to the financial position of Kenya Airways?
The answer is to be found in the so-called balance sheet. These days, accountants call it the “Statement of Financial Position”. This name clearly describes the information contained therein.
In a nutshell, the balance sheet shows the net the financial value of a business by simply balancing out the assets (that is, what the business owns) against the liabilities (what it owes).
Suppose you want to start a business with Sh100,000. You go to you savings account and withdraw this sum and put it in an envelope which you mark “The New Business”.
At that moment, you can write a Statement of Financial Position for The New Business, that is, even before you start buying anything! The balance sheet will show that The New Business owns the Sh100,000 in the envelope and owes (you, the owner) Sh100,000 as capital investment.
Now suppose that you borrow Sh50,000 from your uncle, add it to your Sh100,00 and use the total to buy a certain product for Sh150,000. Then you sell it for Sh175,000. You put all this money back in the envelope. The business has made Sh25,000 profit.
The balance sheet will now show that The New Business has cash assets of Sh175,000 – the money in the envelope. On the liabilities side, it will also show the Sh50,000 owed to your uncle; the Sh100,000 owed to you as capital; and the Sh25,000 profit that belongs to you. The total is also Sh175,000.
Now, the difference between what it owns (Sh175,000 in the envelop) and what it owes outsiders (Sh50,000 from your uncle) is the net worth of The New Business. That is Sh125,000. Now this is good – the business has grown from Sh100,000 to Sh125,000.
Let’s now apply this knowledge to Kenya Airways Ltd. This company owns assets worth Sh182bn but it owes outsiders Sh188bn. That is, its net worth is a NEGATIVE Sh6bn.
In other words, if all its assets were sold at fair market value, the money raised would not be enough to pay off the debts. The shareholders would have to add Sh6 billion to clear the debts! This company is financially insolvent.
For that reason, I cannot understand why its shares are allowed to continue trading at the stock market. Allowing members of the general public to pay Sh5 for a share worth negative Sh4 is plain reckless! Wake up, Capital Markets Authority!
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