A. Compute the value of each the following risk ratios: 2004 2003 2002 2001 2000
(1) Current Ratio(at the end of 2000-2004) 0.607 0.739 0.604 0.557 0.611
(2) CFO to CL Ratio(for 2001-2004) -0.186 0.023 0.035 0.041 N/A
(3) Liabilities to Assets Ratio(at the end of 2000-2004) 125.32% 101.48% 95.32% 82.95% 74.57%
(4) LT Debt to LT Capital Ratio(at the end of 2000-2004) 178.98% 103.60% 89.22% 65.91% 50.97%
(5) CFO to Total Liabilities Ratio(for 2001-2004) -0.042 0.006 0.010 0.013 N/A
(6) Interest Coverage Ratio(for 2000-2004) -3.84 -0.57 -2.01 -2.74 4.81
B. Altman's Z-Score: 2004 2003 2002 2001 2000
T1 (Net Working Capital/Total Assets) -0.107 -0.062 -0.103 -0.120 -0.093
T2 (Retained Earnings/Total Assets) -0.201 0.033 0.066 0.124 0.190
T3 (EBIT/Total Assets) -0.145 -0.017 -0.054 -0.058 0.083
T4 (Market Value of Equity/Book Value of Total Liabilities) 0.038 0.055 0.063 0.184 0.377
T5 (Sales/Total Assets) 0.688 0.543 0.561 0.588 0.714
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This would further imply that the company is having a problem of paying its liabilities, both short-term and long-term as they do not have the ability to generate cash.
(3) Liabilities to Assets Ratio. This ratio shows that a high percentage of the company’s assets are provided by debt, which also means that the firm has a high operating risk. In addition, high debt to assets ratio may indicate a low borrowing capacity of the firm, which in turn will lower the firm's financial flexibility. What is worse is that the ratios of 2003 and 2004 were even higher than 100%. With a negative number of shareholders’ equity, Delta is really facing a serious bankruptcy crisis as these numbers are an indicator that their liabilities are increasing.
(4) Long-term debt to long-term capital ratio. The ratio was not at an intolerable level at the beginning with 51% in 2000, but then it rapidly increased to 178% in 2004. This indicates that the company is using an abnormally high financial leverage, which can be very risky and cause them to go into bankruptcy.
(6) Interest coverage ratio. The ratio shows that Delta is having a big problem with the ability to pay its interest on time as they do not have sufficient funds to cover interest charges.
For Part b:
Since the Altman’s Z-Score of Delta Airlines is always below 1.81, we can come to the conclusion that there is a high probability of bankruptcy as the result of the application of this bankruptcy production model.
Specifically based on the financial data for Delta Air Lines, the most important factors that signaled the likelihood of bankruptcy in 2005 was net income (loss) before interest and taxes, cash flow provided by operations, and long-term debt. The reason why we chose these as important factors is because these factors cause negative retained earnings and shareholders’ equity, which makes it difficult for the company to cover their liabilities. The trends for these specific items were that EBIT and cash flow provided by operations were continually decreasing after 2000, while long-term debt steadily increased from 2000 and onward. Based on the data given and the ratios computed, our analysis based on the information would indicate that the likelihood of bankruptcy is extremely high for Delta Air Lines.