Analysing Murray Goulburn's Financial Standing Based on 2017 Report

This report assesses Murray Goulburn's financial health based on its 2017 annual report, which reported a net loss attributed to one-off costs. The analysis employs four key financial ratios: the current ratio, debt ratio, inventory turnover, and quick ratio, to determine if the loss indicates a 'favorable' f...Read More

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Question 1
a) The net loss reported on page 37 could be attributed to the huge jump in one off costs on
account of the asset and footprint review that the company announced in the last month of
the financial year. This is clearly reflected in the jump in other expenses which for
FY2017 has increased to $ 355.8 million from the corresponding level of $ 4.9 million.
Also, the administration expenses jumped by almost 100% on account of these one-off
costs. Thus, the loss does not imply that the firm is underperforming.
b) The four ratios are as follows.
1) Current Ratio – This has been selected as this highlights the short term liquidity of the
position. A poor current ratio typically indicates that the company may be facing short
term cash crunch (Damodaran, 2015).
Current Ratio (FY 2017) = Current Assets/Current Liabilities = 782840/456305 = 1.72
The above current ratio is quite healthy and implies that the company is in a healthy
position to meet the outstanding short term liabilities. Clearly, the loss does not pose any
threat to the liquidity of the company in the short run as captured by current ratio
(Northington, 2015).
2) Debt Ratio - This is an indication of the long term solvency risk of the company.
Typically, a lower debt ratio would imply that the balance sheet is less leveraged which
augers well for the financial position of the company as it reduces the default risk (Petty,
et. al., 2015).
Debt Ratio (FY2017) = Total Liabilities/Total Assets = 940218/1675609 =0.56
The debt ratio of the company seems comfortable considering the business that the
company operates in. The long term solvency does not seem a problem based on the above
dent ratio. Thus, the given loss does not pose risks to long term solvency for the company
(Damodaran, 2015).
3) Inventory Turnover – This reflects the ability of the company to convert the inventory into
sales. This is an imperative ratio highlighting the efficiency for a manufacturing company.
High inventory on the books does not auger well for the company (Brealey, Myers and
Allen, 2014).

Inventory Turnover (FY2017) = Cost of goods sold/Average Inventory =
(2169224)/[(464532+568660)/2] = 4.19
This is clearly on the lower side and needs to be higher so as to reduce the cash cycle and
thereby reduce the working capital requirements of the company. Currently, the company
takes more than 70 days to convert the inventory into sales which is definitely a concern
(Damodaran, 2015).
4) Quick Ratio - This is important considering in manufacturing based firms, a large amount
of assets tend to be in the form of inventories and hence this ratio becomes important.
Quick Ratio (2017) = Quick Assets /Current Liabilities = (782840-464532)/456305 = 0.7
It is apparent that this is significantly lower than the current ratio which is more than 2.5
times. However, still it does not pose much concern considering the fact that the company
is in manufacturing business where inventory forms a large part of the current assets.
Hence, this does not pose much concern for the company’s financial position and short
term liquidity (Northington, 2015).

References
Brealey, R. A., Myers, S. C., and Allen, F. (2014) Principles of corporate finance, 2nd ed.
New York: McGraw-Hill Inc.
Damodaran, A. (2015). Applied corporate finance: A user’s manual 3rd ed. New York:
Wiley, John & Sons.
Northington, S. (2015) Finance, 4th ed. New York: Ferguson
Petty, J.W., Titman, S., Keown, A., Martin, J.D., Martin, P., Burrow, M., & Nguyen, H. (2015).
Financial Management, Principles and Applications, 6th ed.. NSW: Pearson Education, French
Forest Australia.