Kenya Airways flies deeper into insolvency
By MUNGAI KIHANYA
The Sunday Nation
Nairobi,
31 July 2016
How long will it take
for the authorities to take action on Kenya Airways (KQ)? The first and
most urgent step is to suspend the company from the stock market. This
is necessary in order to protect the general public from buying shares
in an insolvent company.
Kenya Airways has
been operating while insolvent since last year. A solvent business is
one whose assets are worth more than its liabilities. Assets are what
the business owns, including, but not limited to, cash in the bank,
land, buildings, machinery, equipment etc.
Liabilities are what
the business owes, including, but not limited to, loans from financial
institutions, debts owed to suppliers, advance payments from customers
etc. The difference between assets and liabilities is the net worth of
the business. For a solvent business, this value is positive. If
liabilities are more than assets, then the net worth becomes negative
and the business is insolvent.
The net worth is also
called the owners’ equity: it is the value that the shareholders own in
the business. In other words, it is the money that the owners would be
left with if all the assets were sold at fair prices and all the debts
paid off.
From the recently
published financial results of Kenya Airways, the assets are valued at
Sh158.4 billion and the liabilities stand at Sh194 billion. The
difference is negative Sh35.6 billion. That is, if all assets were sold,
the shareholders would still need to put in Sh35.6 billion to clear the
debts!
Last year, the
company reported a net worth of negative Sh6 billion; this has now sunk
deeper to Sh36bn. In other words, it is sinking at the rate of Sh80
million per day. Thus my question: what are the authorities waiting for?
Kenya Airways has
about 1.5 billion shares held by over 77,000 shareholders (as at 31st
March 2015). The book value of per share is determined by dividing the
net worth by the number of shares. The answer is negative Sh24.27 per
share.
Curiously, people are
buying the shares at Sh4 each on the Nairobi Securities Exchange. As for
me; you would have to bribe me with Sh25 per unit for me to accept them!
Anyone buying these shares is either a genius who knows something that
the rest of us don’t or a total fool who doesn’t know what they are
doing.
And that’s not the
end of the story: a business needs adequate working capital to operate
as a going concern. This is the difference between the money expected in
12 months and debts to be paid in the same period.
In 12 months from 31st
March 2016, Kenya Airways expects to receive a total of Sh29.7bn and to
pay out Sh73.5bn. Therefore, it needs to look for Sh43.6bn just to
survive up to 31st March next year. Looking a little deeper,
we find that, if the company shut down, it won’t even have enough cash
to refund customers for tickets sold in advance!
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