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Company Management
QUESTION
Pick a listed company and conduct the credit risk analysis by using the Five Cs and Altman Zscore. You are encouraged
to finish it together with one classmate. If not, you can do it on your own. More details
will be announced in the lecture.
Subject | Business | Pages | 5 | Style | APA |
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Answer
Credit Risk Analysis
Credit risk analysis is a financial analysis performed by credit analyst to determine the potential of
borrowers in fulfilling their debt obligation. The main aim of credit analysis is to ascertain the credit worthiness
of any potential borrowers and their capacity to comply with the underlying debt obligations. If a borrower
happens to avail the recommended level of the default risk, an analyst may approve the application of credit at
agreed terms and conditions. As a result, credit risk analysis is useful in determining the risk rating that a
borrower may be subjected to as per their ability to receive credit. Credit analysis is performed in consideration
of the Five Cs that is; character, capacity, condition, capital, and collateral. As such, the credit risk analysis of
New Oriented Education and Technology Group Inc. (New Oriental) is analyzed.
Character
The first school of the New Oriental Education and Technology Group Inc. was established by the
executive chairman, Mr. Michael Minhong Yu, in Beijing, China in the year 1993 purposely to provide test
preparation courses for college students TOEFL. New Oriental China was established in the year 2001 to be a
domestic holding company that acted as a sponsor of many schools. From its inception, the company has
facilitated foreign investment through establishment of an offshore company, New Oriental in August 2004 in
the British Virgin Islands. On 2006 January, the change of offshore holding company’s corporate domicile to
Cayman Islands was approved by the shareholders upon registration with Registrar of Companies of the
Cayman Islands making the company to be fully named Cayman Islands Company. Moreover, according to
Yhip and Alagheband (2020), the Five Cs of the credit risk analysis the character of a borrower is instrumental
to financial organizations since it creates confidence and trust based needed to give financial assistance like
loans. As a result, lenders should know the borrowers and guarantors level of integrity before undertaking a
loaning process.
Capacity (Cash Flow)
New Oriental has a consolidated financial data with detailed operational report from May 31 2018,
2019, and 2020. The financial data has also been included in the annual report with a consolidated statement of
the operational data that represents the fiscal years that ended May31, 2016 and 2017. Additionally, Disemadi
(2019) argued that, capacity (Cash Flow) in the credit analysis of an organization depicts the level of cash flow
that can be used to determine whether a lender qualified for a loan. In this regard, the provision of a financial
statement is significant in evaluating borrower’s reliability. Moreover, the total net revenues, total operation
cost and expenses, operating income, income taxes, and the net income of the Net Orient have been illustrated
in the Fig1 below from the year 2016 to 2020.
Fig 1. A consolidated financial data of New Oriental
Condition
New Oriental has benefited greatly from reliable demographic trend that involves the demand to have
quality education in China and economic growth. As a result, New Oriental is committed to elevate private
educational services in China through; increasing employment opportunities and education that require specific
qualifications beyond the existing school curriculums, promoting urbanization and population growth with a
disposable income per capita, and the increase in the adoption of technological innovation. However, any
diverse change that may be realized on the economic conditions in China is likely to cause a diverse effect on
the private educational industry in China.
The number of the enrollment of students is depended upon the courses and the ability to maintain the
quality and consistency of the teaching modalities. As such, the future operations are depended upon the
chances to increase both offline and online student enrollment in China. The operating costs and expenses of
this company consisted of the cost of the revenues, marketing and selling expenses and the general and
administrative expenses.
Capital
In October 2018, New Oriental initiated a share purchase program with an aggregate value of US$200
million. Under such programs, shares purchase of 952000 ADSs was purchased for about US$56 million on
open market. The same shares weighed an average purchase price of about US$58.78 per ADS. As an
illustration by Bazarbash (2019), the capital of any organization as per the Five Cs of the credit cost analysis is
a reflection the investment and the intended investment programs. As such, capital is an indication that the
company may be ready to take risk of borrowing money. In July 2020 there was a completion in offering of
US$300 million as an aggregate principal that amounted to about 2.125% notes that are to be due in 2025.
US$271.1 million was received after offering 2025 notes after the deduction of commissions, joint book
runners, and approximated offering expenses.
Collaterals
New Oriental has US$25.1 billion of the market capitalization. From the start of the year 2020, the
company gains were 30.98% while as of April 2021 the stock was closed at US$14.74 per every share. The net
revenue as from 2018, 2019, and 2020 was US$2,477.4 million, US$3,096.5 million, and US$3,578.7 million in
that order. Furthermore, revenues are the net refunds, related surcharges, and business taxes. As such, services
from different education program like language trainings, test preparations, and books provision are the sources
of revenue. As well, according to Manurung and Manurung (2019), collateral play an integral role during the
lending agreement by acting as a borrower’s pledge in order to secure a repayable loan. An illustration of the
above operational cost and expenses has been provided in Fig 2.
Fig 2. The illustration of Operating Cost and Expenses
References
Bazarbash, M. (2019). Fintech in financial inclusion: machine learning applications in assessing credit risk. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3404066 Disemadi, H. S. (2019). Risk Management In The Provision Of People’s Business Credit As Implementation Of Prudential Principles. Diponegoro Law Review, 4(2), 194-208. https://ejournal.undip.ac.id/index.php/dlr/article/view/24904 Manurung, E. T., & Manurung, E. M. (2019). A new approach of bank credit assessment for SMEs. Academy of Accounting and Financial Studies Journal, 23(3), 1-13. https://www.researchgate.net/profile/Elvy_Manurung/publication/334670926_ Yhip, T. M., & Alagheband, B. M. (2020). Credit Analysis and Credit Management. In The Practice of Lending (pp. 3-46). Palgrave Macmillan, Cham. https://link.springer.com/chapter/10.1007/978-3-030- 32197-0_1
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