30.7.2016: Kenya Airways flies deeper into insolvency

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? PHOTO | FILE

IN SUMMARY

• 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 its shares.
• 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.
• 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!

How long will it take for the authorities to take action on Kenya Airways? 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 its shares.

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.

RECKLESS BEHAVIOUR

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  March 31, 2015). The book value 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 reckless person 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 months and debts to be paid in the same period.

In 12 months from March 31, 2016, Kenya Airways expects to receive a total of Sh29.7 billion and to pay out Sh73.5 billion. Therefore, it needs to look for Sh43.6 billion just to survive up to March 31, next year. Looking a little deeper, we find that, if the company shuts down, it won’t even have enough cash to refund customers for tickets sold in advance!