The Five Cs and Altman Zscore.
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.
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.
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
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.
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.
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.
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