Hanjin Bankruptcy Case Study

Hanjin Bankruptcy Case Study Abstract Over the past five years, Hanjin Shipping Co Ltd has maintained its ranking among the top 10 shipping companies in the world making it in 8th position in 2015 (JOC 2016), however, on 31st of August 2016, Hanjin Shipping declared bankruptcy. It was clearly leading to bankruptcy as company was showing low profitability and Hanjin vainly attempted to increase liquidity but it was too late. It is also said that Hanjins breakdown was the largest and the most significant bankruptcy in the container transport industry (Paris and Nam 2016). 1. Introduction The purpose of this report is to examine and look at factors that led to the bankruptcy of Hanjin. This report is divided into two parts. In the first part the Business Report published by the company will be used to identify 4 factors which led to the Hajin Shipping collapse to give and analyse the image of liquidity and profitability. The second part will focus on cash budget went in 2014 and et sequitur. 2. Factors that resulted in Hanjin Shipping crash Four outputs were chosen from Hanjin Shipping Co Ltd financial results two from Balance Sheet and two from Profit and Loss account in order to explain the bankruptcy. Those outputs are Current Assets (comparing to the Current Liabilities), Borrowings, reduction of Profitability and Profit from Discontinued Operations. 2.1 Factors in Balance Sheet Liquidity, according to Subramanyam and Wild (2009), is companys capacity to rapidly convert the current assets into cash or to derive cash to cover its short-term obligations. The companys activity may be affected seriously if there is a lack of liquidity. Therefore, liquidity expresses the capacity of the company to comply with its short-term obligations, for instance, to meet expenses with sufficient cash inflows or to accumulate a security reserve for any incalculable situation such as payments growth. Consequently, liquidity may be defined as the factor that designates the ability of the company to transform assets into cash or to obtain cash to keep up with the short-term obligations. 2.1.1 Current Assets and Current Liabilities Current Assets are assets that are expected to be converted into cash, sold or consumed within short period of time, usually one year (Subramanyam and Wild 2009). Current assets generally include cash, trade receivable, inventories and prepaid expenses. Current Liabilities are obligations expected to be satisfied usually within one year (Subramanyam and Wild 2009). Current liabilities in balance sheet accounts ordinarily include trade payable, short-term bank borrowings, taxes and accrued expenses. First of all, the key point in the Balance Sheet (B/S) is the difference in size amongst Current Assets and Current Liabilities (960 billion and 4 036 billion of won respectively in 2015). It is also important to mention that Current Assets built up only 13% of Total Assets in 2015. Besides, the short-term Borrowings was the main output which drove the Current Liabilities so high (3 171 billion of won in 2015 what is 78,6% of Current Liabilities and 60 times more than Total Comprehensive Income that year). Furthermore, the distance in percentage between Current Assets and Current Liabilities was enlarging since 2013. In particular, Current Assets went down by 35% in 2015 since 2014 and by 47% since 2013, while Current Liabilities declined only by 18% in 2015 since 2014 and by 32% since 2013. This is the root cause of insolvency, as Current Assets were not sufficient to come over Current Liabilities. 2.1.2 Long-term Borrowings Non-current (or long-term) liabilities are obligations that come due in more than one year (or the operating cycle) and include borrowings, bonds and debentures (Subramanyam and Wild 2009). Long-term Borrowings are type of debt and financial obligations issued for the duration of several (3-5 or more) years (Matassa 2011). Any financial liabilities or bonds included in long-term loan are expected to be reimbursed in a longer than 12-month period. In the Hanjins report (2015), long-term Borrowings grew up by 20% in 2015 since 2014 what means that previous long-term loans were not sufficient in order to run adequately. Moreover, Borrowings were composing over 95% of total Non-Current Liabilities in 2015, and 45% of total borrowings during the same year what comparing to the previous year (2014) grew by 13%. The situation was aggravating due to lack of liquidity and consequently, the ability to repay the loans. Too much of Borrowings finally resulted in loss of confidence by banks who refused future debt services. 2.2 Factors in Profit and Loss account 2.2.1 Reduction of Gross Profit Reduction in profitability may be another cause which triggered a reject for further accrediting by banks or other investors causing erosion of equity what consequently ended with the actual collapse of Hanjin. In the Profit and Loss account (P/L), Sales went down by 9% in 2015 from 2014 comparing to Gross Profit which reduced by 14% in 2015 from 2014. This means that in the possible future, company could become less profitable (if the trend will continue) and go into losses again, as it was in 2013, where Gross Loss was accounted for 260 billion of won and Total Comprehensive Loss for 670 billion of won. Regarding to all listed outputs, it may be additionally supposed that the company was losing its paying capacity what may be another factor of bankruptcy. 2.2.2 Profit from Discontinued Operation What is more, looking at the P/L, the Profit from Discontinued Operations suggested the slippage (141 billion of won in 2014 and 0 in 2015) joined together with losses accumulated over the past years (2 251 billion of won in 2015) had ruined the companys equity. 2.3 Evaluation of the effect on the financial result All in all, it can be said that the Liquidity was low due to incapability of Current Assets to overcome Current Liabilities and continuous Long-Term Borrowings. Profitability was also hardly struggled because of reduced Gross Profit and sudden losses from Discontinued Operations. Combining all afore-mentioned factors and taking into consideration the amount of accumulated losses, the size of total remained Equity was smaller than share capital by 34% in 2015 (the situation, however, was better than in 2014 where the distance was accounted for 38% but unfortunately for Hanjin not enough to solve the issue). As a result, the outcome of stated factors became the rapid decline of Hanjins financial sustainability which consequently led to companys insolvency and crash. 3. Budgeting P/L account (Y0) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Sales revenues 52 55 59 65 55 53 57 59 64 67 70 74 Cost of sales -29 -31 -34 -36 -31 -29 -33 -34 -35 -36 -37 -39 Salaries -10 -10 -10 -10 -10 -10 -10 -10 -10 -10 -10 -10 Electricity -3 -4 -5 -5 -2 -2 -2 -3 -3 -5 -6 -7 Depreciation -2 -2 -2 -2 -2 -2 -2 -2 -2 -2 -2 -2 Other overheads -3 -3 -3 -3 -3 -3 -3 -3 -3 -3 -3 -3 Total expenses -47 -50 -54 -56 -48 -46 -50 -52 -53 -56 -58 -61 Profit 5 5 5 9 7 7 7 7 11 11 12 13 Legend: From previous Year Reduced inventories Increased sales Electricity policy Payables policy 3.1 Cash Budget for Y0 (2014) Cash Budget (Y0) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Trade Receivables 65 52 55 59 65 55 53 57 59 64 67 70 Trade Payables -35 -29 -31 0 -34 -36 -28 -26 -30 -31 -35 -36 Salaries -10 -10 -10 -10 -10 -10 -10 -10 -10 -10 -10 -10 Electricity -3 -4 -5 0 0 -6 0 0 -5 0 0 -15 Overheads -3 -3 -3 -3 -3 -3 -3 -3 -3 -3 -3 -3 Total payments -51 -46 -49 -13 -47 -55 -41 -39 -48 -44 -48 -64 Cash Surplus 14 6 6 46 18 0 12 18 11 20 19 6 Opening Balance 50 64 70 76 122 140 140 152 170 181 201 220 Closing Balance 64 70 76 122 140 140 152 170 181 201 220 226 Legend: From previous Year Reduced inventories Increased sales Electricity policy Payables policy 3.2 P/L Forecast for Y+1 (2015) P/L forecast (Y+1) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Sales revenues 55 58 62 68 58 56 60 62 65 68 71 75 Cost of sales -29 -31 -34 -36 -28 -26 -30 -31 -35 -36 -37 -39 Salaries wages -10 -10 -10 -10 -10 -10 -10 -10 -10 -10 -10 -10 Electricity -9 -6 -5 -15 Other overheads -3 -3 -3 -3 -3 -3 -3 -3 -3 -3 -3 -3 Total expenses -42 -44 -56 -49 -41 -45 -43 -44 -53 -49 -50 -67 Profit 13 14 6 19 17 11 17 18 12 19 21 8 3.3 Cash Budget for Y+1 (2015) Cash Budget (Y+1) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Trade Receivables 74 55 58 62 68 58 56 60 62 65 68 71 Trade Payables -37 -39 -29 -31 -34 -36 -28 -26 -30 -31 -35 -36 Salaries wages -10 -10 -10 -10 -10 -10 -10 -10 -10 -10 -10 -10 Overheads -3 -3 -3 -3 -3 -3 -3 -3 -3 -3 -3 -3 Electricity 0 0 -9 0 0 -6 0 0 -5 0 0 -15 Total payments -50 -52 -51 -44 -47 -55 -41 -39 -48 -44 -48 -64 Cash Surplus 24 3 7 18 21 3 15 21 14 21 20 7 Opening balance 226 250 253 260 278 299 302 317 338 352 373 393 Closing Balance 250 253 260 278 299 302 317 338 352 373 393 400 3.4 Effects of Initiatives on profitability and liquidity There is more cash available for spending on other business opportunities such as: Pay off a loan; Take advantage of new opportunities; Adoption of new technologies; Increased efficiency on operations. Implication of new assumptions for Y+1 as well as consideration of the changes that were applied in the Y-0 eventually allowed achieving positive results for the company. First of all, when comparing cash budget Y-0 and Y+1 it becomes possible to see that due to the introduction of new proposals overall expenses within Y+1 were maintained relatively close to expenses within Y-0. Moreover, assumptions that were set for the Y+1 allowed further increasing the overall profitability of the company and achieving final amount for closed balance of 347. Furthermore, implications that were introduced in Y-0 and were present in Y+1, such as electricity costs policy and supplier policy, also made a significant impact in terms of boosting the overall performance of the business during the Y+1 period. All in all, initiatives that were proposed and incorporated proved to be efficient and had a significant impact on the companys performance. 4. Conclusion Taking everything into account, all the implementations that were made within Y-0 and Y+1 have proven to be successful in terms of allowing the company to expand its capital. As it can be seen from the calculations provided in the report the company experienced a steady growth of shares which can be used as a support to the previous statement. Finally, the decisions which were made regarding Braemer Shipping Ltd created a positive effect on the business simultaneously setting the ground for the companys future expansion. Reference List Hanjin Shipping (2015) Business Report Hunter L. (2017) Lecture, Available at: (Accessed: 10 March 2017) JOC (2016) Hanjin Shipping Bankruptcy, Available at: http://www.joc.com/special-topics/hanjin-shipping-bankruptcy (Accessed: 2 February 2017) Paris C. and Nam I.-S. (2016) Move by South Koreas Hanjin Shipping Roils Global Trade, Wall Street Journal, Available at: https://www.wsj.com/articles/troubled-hanjin-shipping-to-sell-healthy-assets-to-rival-1472611190 (Accessed: 2 February 2017) Subramanyam K. R. and Wild J. J. (2009) Financial Statement Analysis, 10th edition, McGraw-Hill/Irwin: New York Matassa F. (2011) Museum Collections Management: A Handbook, Facet Publishers