INTRODUCTION

Organization definitely is the backbone of the management and without its proper care at the
higher, middle and lower level of administration, it would be practically impossible for any
management to run the show smoothly. It is a means by which problems of the enterprise
connected with policies, operations and administrations can effectively be solved. Sound
organization can contribute greatly to continuity and success to the enterprise.
Financial distress is a generic term, which denotes deteriorating or debilitating financial
condition of an entity. Terms such as 'industrial sickness’, 'corporate failures', 'insolvency‟
are also used to convey almost similar, though not identical idea. But for analyzing financial
distress, sickness, or weakness, the process of analysis is almost the same.

The term 'financial distress' may be easy to understand but a bit difficult to define. Distress is
relative. One can hardly find in real world an absolutely distressed unit. Again distress is not
revealed just at a particular point in time. It is revealed in several forms, and these forms may
not provide clear-cut signals. This is why financial distress is understood, measured and
interpreted differently by scholars and statutory authorities. But in simple way of speaking,
an enterprise will not be considered in distress if it can earn reasonable rate of return on its
employed capital and it can create enough reserve after making appropriate provision for
depreciation.

Interests of various parties are directly or indirectly related to the success of an

enterprise. Their interests will suffer when the enterprise becomes victim of financial distress.
This is why the parties are eager to foresee indications about imminent corporate failure.
Although the concept is simple, the process of getting the right balance can be quite a
complex and time consuming task without the right tools and technique. Hence, study on
financial distress analysis undertaken at Air India has greater importance

Air India is the flag carrier airline of India

headquartered at New Delhi. It is owned by Air India Limited, a government-owned
enterprise, and operates a fleet of Airbus and Boeing aircraft serving 94 domestic and
international destinations. The airline has its hub at Indira Gandhi International Airport, New
Delhi, alongside several focus cities across India. Air India is the largest international carrier
out of India with an 18.6% market share. Over 60 international destinations are served by Air
India across four continents. Additionally, the carrier is the third largest domestic airline in
India in terms of passengers carried with a market share of 13.5% as of July 2017. The airline
became the 27th member of Star Alliance on 11 July 2014.
The airline was founded by J. R. D. Tata as Tata Airlines in 1932. After World War II, it
became a public limited company and was renamed as Air India. On 21 February 1960, it
took delivery of its first Boeing 707 named Gauri Shankar and became the first Asian airline
to induct a jet aircraft in its fleet. In 2000–01, attempts were made to privatise Air India and
from 2006 onwards, it suffered losses after its merger with Indian Airlines.
Air India also operates flights to domestic and Asian destinations through its subsidiaries
Alliance Air and Air India Express.
THEORETICAL BACKGROUND

Financial distress is a generic term, which denotes deteriorating or debilitating financial

condition of an entity. Terms such as 'industrial sickness, 'corporate failures', 'insolvency‟ are
also used to convey almost similar, though not identical idea. But for analyzing financial
distress, sickness, or weakness, the process of analysis is almost the same. Financial distress
is defined as a condition where a company cannot meet or has difficulty paying off its
financial obligations to its creditors. The chance of financial distress increases when a firm
has high fixed costs, illiquid assets, or revenues that are sensitive to economic downturns and
also reduce return on investment. The term 'financial distress' may be easy to understand but
a bit difficult to define. Distress is relative. One can hardly find in real world an absolutely
distressed unit. Again distress is not revealed just at a particular point in time. It is revealed in
several forms, and these forms may not provide clear-cut signals. This is why financial
distress is understood, measured and interpreted differently by scholars and statutory
authorities. But in simple way of speaking, an enterprise will not be considered in distress if it
can earn reasonable rate of return on its employed capital and it can create enough reserve
after making appropriate provision for depreciation.

SYNTHESIS OF RESEARCH FINDINGS ON DISTRESS ANALYSIS

Factors responsible for financial distress as revealed through various research studies can be
synthesized and grouped into three following classes.

1. Operating factors
2. Investing factors
3. Financing factors

Operating Factors

Profitability: The primary cause of financial distress of affirm is its lack of sufficient profit generating
capacity. This capacity depends on the scale and nature of its normal operating activities. All normal
activities ultimately culminate into sales. Profit is generated from such sales. Researchers have
demonstrated that distress initiates with poor operating performances and this is revealed through
the following profitability ratios:

1. Net income / Sales

2. EBIT / Total assets
3. Cash flows from operating activities / Total assets

The last ratio is very sensitive to financial distress because it is not affected by accrual
system of accounting. It is usually said that, “cash pays the bills, not earnings”.

Variability of operations
Another major factor affecting the operating factors is variability of operations. Firms
experiencing variations in their operations, e.g.: cyclical sales pattern, are more prone
 to financial distress than firms with low variation. During downward times of cycle
such firms are required to arrange for additional financing for meeting financial
commitments and maintaining existing level of operations.

Investing Factors

Operating activities generate profit, but efficiency of such operations depends on the
effective use of the investments made in the assets. Financial distress develops from
the inefficiency in the management of investment. Such inefficiency can be examined
from two angles

 Maintenance of relative liquidity in assets composition

 Intensity in the use of assets

Maintenance of relative liquidity in assets composition

It has been observed from researchers that with the decrease in relative liquidity in firm’s assets,
the probability of financial distress increases. Greater asset liquidity means the company will have or
will generate soon the necessary cash to meet its obligations. But expected return from liquidity is
less than the expected return from fixed assets. There should be a balance between this liquidity and
the rate of return. A balanced mix of current and fixed assets serves this purpose, following ratios
are usually suggested by researchers for measuring relative liquidity:

(a) Cash / Total asset

The higher the ratio, it is assumed, the higher is the loan paying capacity, i.e. the lower is the
probability of financial distress. A lower value of this measure indicates that the firm is
proceeding towards technical insolvency.

(b) Current assets / Total assets

The higher the ratio, the lower it is assumed to be the probability of financial distress. It is
expected that a firm with a high value of this ratio will be able to meet its commitments
proceeding towards technical insolvency.

(c) Fixed assets / Total assets

When this ratio is very high, it is assumed that the firm’s fixed assets are under-utilized. But
in this age of capital-intensive industries, the above proposition does not always hold good.
Hence, individual situation should be considered for distress evaluation.
Intensity in the use of assets

A firm proceeds to face financial distress when it fails to use its investments in assets
intensively. Fixed assets are acquired to produce goods or services to be sold or rendered to
customers. Actually investment of funds in an asset ultimately ends up in cash through
realization of sales into cash. The faster the assets turnover, the more quickly the invested
fund proceeds towards cash. If this rate of movement becomes slow, then the firm proceeds
to suffer from financial distress. Following ratios are commonly used for measuring such rate
of movement.

a) Sales / Total assets

The higher the assets turnover, the more quickly the funds blocked in
production are proceeding towards cash and the lower is the probability of the
firm to face financial crisis.
b) Sales / Accounts receivable
The higher the accounts receivable turnover, the more quickly the customers
meet their dues. The situation may be viewed from two angles. The firm is
tightening its credit policy signifying financial crisis the firm is facing. But it
may also be a sign of debt collection efficiency. The situation should be
compared with the nature of the business and the practice in the industry.
c) Sales / Working capital
Higher the value of this ratio indicates efficient use of working capital as well
as shortage of working capital. The latter is not welcome, since that may force
the firm to sale the products or services at lower margin. The issue should be
cleared through examining specific situation of the business.
d) Sales / Fixed assets
This ratio indicates the rate of intensive use of fixed assets. The higher the fixed assets
turnover, the faster the invested funds move towards cash, because a portion of the
same will be realized ultimately in cash through sales. The higher the ratio, the lower
is the probability of financial distress from long-term perspective.

Financing Factors

Operating and investing activities cannot be carried on unless fund is provided by owners and
debtholders. Debtholders are entitled to interest and return of their principal at stipulated
time. But a firm experiences financial distress when it fails to meet its commitments to
debtholder in time. Financial distress arising from debt holdings may be analysed through
examining two factors:

a. Relative proportion of long-term debt in capital structure

b. Relative proportion of short-term debt in the capital structure
Long-term capital structure

The higher the portion of long-term debt in the capital structure, the higher the
probability that the firm will be in financial crisis. Firms with low debt / equity ratio
have the scope of raising further fund through using unused borrowing capacity.
Following ratios are usually used for analyzing financial distress arising from
financial activities:

(a) Long-term debt / Total assets

(b) Debt / Shareholders equity

While the former ratio speaks of long-term debtholders contribution to financing

the whole business, the later helps to reveal relative proportion of debt capital and
own capital in business. The higher the value of debt / equity, the higher the
probability the firm will experience financial distress in times of lower rate of return
on investment.

Short-term debt in capital structure

The nearer the due dates of short-term debt, the higher the risk of financial distress. Firms
depending on short-term financing through bank loan instead of depending on long-term debt
are likely to have greater risk of financial distress since they are to meet their commitments at
an early date. That apart, these liabilities are directly related to operating activities such as
purchase of goods. The terms of buying may decrease the profit margin. Usually, the
following ratio is computed to measure such risk.

Current liabilities / Total assets

The higher the value of the ratio, the higher the probability that the firm will experience
financial crisis since the dependence on short-term debtholders is high and such suppliers of
fund will dictate the terms of trade, in such cases, firms proceed to technical insolvency.
RESEARCH METHODOLOGY

Research methodology is a detailed process of arriving to dependable solution through

planned and systematic collection, analysis and interpretation of data.

Research Design

“A research design is a framework or blueprint for conducting the marketing research

project. It details the procedures necessary for obtaining the information needed to structure
or solve marketing research problems.”
The research design applicable for the proposed study is analytical. Here, facts and
information are available as a secondary detail. In this study, financial details of past few
years‟ records are taken into consideration to make analysis and to obtain the result.

Sources of data
The study uses only secondary sources of data.

Secondary Sources of Data

Secondary sources are any published or unpublished sources which are referred by the
researcher. Secondary data emphasize collected from some purpose other than one
confronting the researcher at a given point of time. Here majority of the data was collected
with the help of the annual reports provided by the company.

The secondary data used are:-

 Official records
 Company website
 Company journals
 Internal publications
 Annual report
Synthesis of research on distress analysis

1 OPERATING FACTOR

1. Net income / Sales

YEAR RATIO
2013 -0.342539
2014 -0.3418221
2015 -0.2959295
2016 -0.1919126
2017 -0.2637362

Chart Title
0
2013 2014 2015 2016 2017
-0.05

-0.1

-0.15

-0.2

-0.25

-0.3

-0.35

-0.4

RATIO
Interpretation

2. EBIT / Total asset

YEAR EBIT TOTAL RATIO

ASSETS
2013 -16,212.00 4,70,324.30 -0.03446983
2014 -22,082.60 4,76,043.50 -0.04638778
2015 -18,316.30 4,81,640.90 -0.03802895
2016 6,372.20 5,06,514.70 0.01258048
2017 -15,293.00 4,59,152.10 -0.03330705

Interpretation
The ratio shows the relation between operating profit and the total assets of the company. This
depicts how effectively the assets have been used in the operating process. The ratio is seen to
depicting a downward trend till 2016. And slightly increases.

3. Cash flows from operating activities / Total assets

YEAR CASH TOTAL RATIO

FLOW ASSET
2013 -66,911.50 4,70,324.30 -0.1422667
2014 -26,782.60 4,76,043.50 -0.0562608
2015 5,175.00 4,81,640.90 0.01074452
2016 24,972.20 5,06,514.70 0.04930202
2017 14,681.60 4,59,152.10 0.03197546

Interpretation
This ratio is very sensitive to financial distress because it is not affected by accrual system of
accounting and is a true measure of liquidity of the company which is more important than
profitability.
INVESTING FACTORS

I. Maintenance of relative liquidity in asset composition

a) Cash / Total Assets

YEAR CASH TOTAL RATIO

ASSET
2013 5,161.30 4,70,324.30 0.01097392
2014 6,565.60 4,76,043.50 0.01379202
2015 6,231.10 4,81,640.90 0.01293723
2016 8,054.90 5,06,514.70 0.0159026
2017 7,351.40 4,59,152.10 0.01601082

Interpretation
The higher the ratio, it is assumed, the higher is the loan paying capacity, i.e. the lower is the
probability of financial distress. A lower value of this measure indicates that the firm is
proceeding towards technical insolvency. This table shows low ratio it reveals that the company
is highly insolvent. That means the company is not able to meet its financial obligations.

b) Current Assets / Total Assets

CURRENT TOTAL RATIO

YEAR ASSET ASSET

2013 55,310.70 4,70,324.30 0.1176012

2014 61,172.90 4,76,043.50 0.12850275

2015 52,976.80 4,81,640.90 0.10999232

2016 1,26,414.90 5,06,514.70 0.24957795

2017 63,902.50 4,59,152.10 0.13917501

Interpretation
The higher the ratio, the lower it is assumed to be the probability of financial distress. It is
expected that a firm with a high value of this ratio will be able to meet its commitments
proceeding towards technical insolvency. This table shows low ratios, it indicates the firm is
insolvent. It means the firm is not able to meet its financial distress.
C) Fixed Assets / Total Assets

YEAR FIXED TOTAL RATIO

ASSET ASSET
2013 3,49,687.30 4,70,324.30 0.74350252
2014 3,34,284.10 4,76,043.50 0.70221335
2015 3,46,949.30 4,81,640.90 0.7203485
2016 2,91,269.70 5,06,514.70 0.57504688
2017 2,97,926.30 4,59,152.10 0.64886189

Interpretation
When this ratio is very high, it is assumed that the firm's fixed assets are under-utilized. But in
this age of capital-intensive industries, the above proposition does not always hold good. Hence,
individual situation should be considered for distress evaluation. The table shows low ratio of
fixed assets, it means that the firm is holding its fixed assets in normal way.

Intensity in the use of assets

Sale / Total assets

YEAR SALES TOTAL RATIO

ASSET
2013 1,60,278.40 4,70,324.30 0.34078273
2014 1,83,709.60 4,76,043.50 0.38590927
2015 1,98,017.10 4,81,640.90 0.41113016
2016 1,99,923.30 5,06,514.70 0.39470385
2017 2,18,596.10 4,59,152.10 0.47608646

Interpretation
The sales to total assets ratio of the company is showing a negative
Sales / Accounts Receivables

SALES ACCOUNTS RATIO

YEAR RECEIVABLE
2013 1,60,278.40 20,280.40 7.90311828
2014 1,83,709.60 20,662.80 8.89083764
2015 1,98,017.10 20,889.50 9.4792647
2016 1,99,923.30 19,030.10 10.5056358
2017 2,18,596.10 18,572.30 11.7700069

Interpretation
The de

Sales / Working Capital

SALES WC RATIO
YEAR
2013 1,60,278.40 -1,77,044.50 -0.90530008
2014 1,83,709.60 -2,02,706.10 -0.9062855
2015 1,98,017.10 -2,27,702.10 -0.8696323
2016 1,99,923.30 -1,77,995.20 -1.1231949
2017 2,18,596.10 -2,46,638.10 -0.88630305

Interpretation
The working capital turnover ratio of the company is seen to be in a downward trend. A reduction
in the working capital ratio indicates shortage of working capital, thereby forcing the firm to sell
the products or services at lower margin. Lower working capital reveals that it’s difficult to meet
the day to day expenditure.

d) Sales / Fixed assets

SALES FIXED RATIO

YEAR ASSET
2013 1,60,278.40 3,49,687.30 0.45834779
2014 1,83,709.60 3,34,284.10 0.54956129
2015 1,98,017.10 3,46,949.30 0.57073786
2016 1,99,923.30 2,91,269.70 0.6863855
2017 2,18,596.10 2,97,926.30 0.73372542
Interpretation
This ratio indicates the rate of intensive use of fixed asset. The table shows lower rate of fixed
asset it shows ineffective utilization of fixed asset.

FINANCING FACTOR

LONG TERM CAPITAL STUCTURE

LONG TERM DEBT/ TOTAL ASSTES

YEAR LONG TERM TOTAL RATIO

DEBT ASSET
2013 3,97,358.10 4,70,324.30 0.84485981
2014 3,78,630.40 4,76,043.50 0.79536933
2015 3,63,568.70 4,81,640.90 0.75485429
2016 3,70,124.10 5,06,514.70 0.73072726
2017 3,47,756.60 4,59,152.10 0.75738867

Interpretation

DEBT / SHAREHOLDERS EQUITY

YEAR DEBT SHARE RATIO

HOLDERS
EQUITY
2013 6,29,713.30 93,450.00 6.73850508
2014 6,42,509.40 1,43,450.00 4.47897804
2015 6,44,247.60 1,71,780.00 3.75042263
2016 6,74,534.20 2,14,960.00 3.13795218
2017 6,58,297.20 2,67,530.00 2.46064815
SHORT TERM CAPITAL STRUCTURE
CURRENT LIABILITIES / TOTAL ASSTES

CURRENT TOTAL RATIO

YEAR LIABILITY ASSET
2013 2,32,355.20 4,70,324.30 0.49403188
2014 2,63,879.00 4,76,043.50 0.55431699
2015 2,80,678.90 4,81,640.90 0.58275553
2016 3,04,410.10 5,06,514.70 0.60098967
2017 3,10,540.60 4,59,152.10 0.67633492

Interpretation
The higher the value of ratio, the higher the probability that the firm will experience financial
crisis since the dependence on short term debt holders is high and such suppliers of fund will
dictate the terms of trade. In such case, firms proceed to technical insolvency