Financial health refers to the ability of a company to maintain its finances in order to remain viable in the market which is full of competition. A company can measure its financial health, based on its liquidity (the ability to meet short term obligations as they arise) or its solvency (ability of a firm to meet long-term obligations when they come due). The health can also be measured by calculating the worth of total assets (current ad fixed) and comparing it with the firm’s total liabilities. This essay will use Oilibya- an oil exporter from Libya- as a case study, with specific reference to major financial concepts that recently led to its crisis which impacted on the world market. It shall also tackle the possibility of the company’s recovery, relative to the measures the company can put in place.
Oilibya, owned by the Libyan government, recently gained negative publicity due to its huge losses following the ongoing clashes in Libya, whereby rebels have captured much of the country’s oil fields and capital. It has also suffered reduced exports and prices, following UN sanctions, lowering its liquidity (the ability to meet short term obligations as when they come due). For example, a gallon of gas initially trading at $ 3.97 has declined gradually to less than $ 3.60 and is projected to fall further in the month of October to less than $3.30. Low liquidity coupled with Instability in governance has scared away investors leading to huge losses. Over the years Oilibya has been registering skyrocketing results in terms of its profits, but due to the country’s political instability the company is headed to insolvency unless urgent political measures are put in place. The crisis has resulted to over 5% loss in the general income of Oilibya translating to loss of millions. Oilibya Kenya has for example threatened to withdraw payment to the Libyan Government.
Governance and competition have significantly impacted on Oilibya’s financial health negatively. Ownership and governance structure refers to entities that constrain a firm’s activities. External governance includes government, stock exchanges, creditors, external auditors, media and financial analysts. Interplay of external oil export sanctions from the U.N on Libya and internal turbulence in government (which owns Oilibya), has directly affected its operations, lowering its liquidity. Stiff competition from other efficient and reliable oil exporters such as Kenol/ Kobil has also played a part in compounding the downward trend of Oilibya.
The company can recover financially as well as reclaim its corporate image hampered through unfavorable media coverage. Stable ownership and reformed governance structure can rekindle prospects of the company’s revival to its past success. If the company can be sold to private entities that are free of government interference, it will serve as a solution to operational turbulence emanating from political instability in government (which presently owns Oilibya). Private investors are also bound to be more obliged to organizational goals and objectives. The company can also recover if it scales down its operations as a response to problems of liquidity, by prioritizing most profitable operations and limiting those with higher risk and comparatively lower returns.
It should be noted that, financial health can be influenced by macro-level factors (monetary policy, legal changes, recession and liquidity) and/or industry level factors such as competition. Firm level factors such as ownership and governance structure as well as operating risk can also impact on the financial activities of a company. Financial health analysis is therefore very important to companies, since it helps in forecasting financial progress or retrogression. In case of financial crisis companies should signal the market to maintain goodwill as well as protect the corporate image of the company, which goes a long way in fighting competition.