Analyzing the Financial Liquidity of Kogan.com

This report analyzes the financial liquidity of Kogan.com and suggests ways to prevent the company from going bankrupt. It includes a comparison of financial ratios with competitors and an in-depth analysis of liquidity and insolvency ratios using the Altman Z-score.

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Kogan
(Name)
Course
Instructor
University
Date

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Introduction
Kogan.com is a retail and service providing company that offers a variety of services that
include consumer electronics, hardware, home appliances, and many more products. Like many
corporations, Kogan.com is faced with the threat of bankrapcy every time they do not make
informed financial decisions. This report will analyze aspects of Kogan.com financials and see
what can be done to prevent the company from going bankrupt.
Main Issue to Be Analyzed
The main issue is to analyze the financial liquidity of Kogan and determine where it is at the risk
of becoming insolvent. Looking at one company will not be enough, but we will need to compare
the financial ratios with those of its competitors. An in-depth analysis of liquidy and insolvency
ratios is required through the utilization of the Altman Z-score. It is handy in determining the
possibility of a corporation in becoming bankrupt within a given period of time. It utilizes
financial ratios for the prediction of what might happen to the corporation in the future based on
what happened in the past.
Key Items to be Considered
Insolvency is a situation where a company suffers consecutive losses such that it becomes
very difficult to sustain its operations. At this point, the organization files for insolvency
(bankruptcy). The company may be in so much debt that it is not able to pay the interest rates of
the loans it had taken out (Bewick, 2015). Liquidity and credit risks are the leading causes of
insolvency. Liquidity risk refers to a situation where there is a shortage of liquid cash. Credit risk
is the capacity of an organization to pay a debt once it matures. All the relevant data will come
from annual financial reports.

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The Facts
Financial
Ratios
Kogan JB
HiFi
Benchmark
2017
HY19 FY18 FY17 FY16 FY18 FY17 FY16
Current
ratio
1.56 1.73 1.98 1.06 1.32 1.32 1.57 1.5
Quick
ratio
0.24 0.84 0.91 0.19 0.3 0.3 0.34 -
Debt to
equity
ratio
0.6 0.55 0.88 3.59 1.63 1.88 1.45 2.2
Inventory
turnover
3.86 7.38 7.89 7.83 6.15 6.25 6.03 5.2
Return
on asset
15.99 19.82 7.82 4.41 13.42 10.57 21.95 -
Gross
margin
81% 81% 17.86% 15.48% 21.45 21.86 21.88 37.1
Profit
before
tax
4.53% 4.36% 2.12% 6.73% 4.88% 4.61% 5.51% 4.7%
Z-score 7.56 15. 78 8.21 7.15 4.08 3.74 8.53 3
Qualitative analysis

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In the short period between the end of the 2018 financial year and the half financial year
of 2019, Kogan.com has experienced a decline in its working capital, Retained earnings. The
company has also experienced in the decline of its share value. Looking back from 2016, they
have declined each financial year which implies the company has been facing liquidy issues for a
while. Individually the effects of an individual component of finance does not have that must
impact but when a company suffers a decline in working capital and a drop in its share price is
an indication of poor financial and management decision that is affecting the quality of products
and services provided in the market.
A decline in the liquidity ratios and the Z-score is an indication that Kogan.com is facing
financial difficulties in terms of the available revenue to settle the current liabilities. JB HiFi’s
liquidity ratios are relatively stable from 2016 which indicates the company is able to utilize the
available financial resources effectively to avoid too much external borrowing (Tomczak, 2014).
Kogan.com might be borrowing too much and using almost more than half of its retained
earnings to settle the current liabilities due to its reduced ability to convert its products into cash
when needed.
As a service providing company, Kogan has to pay close attention to the review they
receive from customers. As Kogan increased its market base, the number of complained filed
against the company also increased. In 2016 there were no complaints filed against the
organization, but in 2017, a total of 70 complaints were filed against the company with 33
complaints being made in January. Late deliveries and confusion complaints do not impact a
company such as complaints on the quality of products delivered to clients. As Kogan.com
grows, it seems to be struggling with both the quality of goods and services they offer to their
clients. Kogan topped the list of most complained about the organization in December 2017 (27

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complaints), October 2018(36 complaints) and July 2018 (42 complaints)i. The Complaints filed
against the company seem to be increasing annually and unless something is done the situation
will continue to get worse for the company.
Enumerate Options
Increase in Current and Quick Ratio
The liquidity of an organization indicates the ability of an organization to meets its short
term obligations. An optimal quick and current ratio should be greater than one. The quick ration
has continuously continued to decline from 0.91 in 2017 from where it had improved from 0.19
in 2016. It is currently at 0.24 which is a very poor indicator for the organization’s ability is to
meet its short-term debt. JBH, on the other hand, has continuously held at an average of 0.3
which is also a poor indicator of its ability to meet its short-term debt. Kogan has the signs of a
declining organization with this gradual decline in quick ratio. Its current ratio is above the
optimal ratio which is 1.5. The current ratio for Kogan as of now is 1.56 which means the
organization has $1.5 currents assets for every $1 current liabilities (Tomczak, 2014). If the
quick ratio continues in its decline, it will also affect the current ratio.
The Decline in Inventory Turnover Ratio
In the current half year, the ratio stands at 3.86 from 7.38 in the previous financial years.
From 2016 to 2018 the average ratio has been 7.7 ( 7.38+7.89+7.83
3 ) before it sudden declined to
3.86 in this current financial year. Kogan.com has even dropped below the industrial benchmark
of 5.2. Two main problems could be the cause of this decline. The market is not pleased with the
services provided by the organization; hence they avoid their products and services
altogether(Facione, 2015). The second cause would be a decline in Kogan.come’s Market share

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due to increased competition from its competitors. JBH has a consistent Inventory turnover of
6.15, 6.25, and 6.03 in 2018, 2017, and 2016 financial years respectively. The optimal ratio
should be between 4 and six implying that JBH can satisfy the requirement of their customers.
From the ratio analysis, it is clear JBH has its own problems but they able to meet their short
term debt through their inventory sale since it is above the required, ideal ratio.
Maintain the current Debt-to-Equity Ratio
JBH has a very high debt to equity ration implying that most of their short term financial
requirements are financed through short and long term debt. Kogan has the best Debt to equity
ratio compared to its main competitor. At 0.6, in the current financial year, Kogan.com can
secure more funding from financial institutions as long as they can increase their quick ration
which would be a good indicator for financial institutions of the organization's ability to meet
their regular interest payments. They are also way below the benchmark which is 2.2. If Kogan
cannot improve their Quick ratio, then it is advisable that they do not increase the amount of debt
they have with financial institutions.
Assess and Make Preliminary Decisions
Quick ratio
As of now, Kogan.com is not to meets its short-term financial requirement without
overlying on its current assets specifically its inventory. As its quick ratio declines, its marginal
profit is increasing. Kogan is increasing the prices of their product to have more working capital
which should not be the case. An optimal quick ration should show that the company is turning
to financial institutions to offer them short-term loans to meet their daily obligations. The
founder Ruslan Kogan has insisted that the organization is paying more attention to marketing

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and increasing their inventory (Kogan.com, 2018, p. 3) which will not be effective until they can
meet their short term liabilities with the cash in hand. Prices of their commodities will also not
fluctuate as much as they will have enough cash to meet their expenses.
Kogan.com has not been accurate in its inventory management. The amount of cash in
hand to meet short-term obligations is not consistent with the gross margin ratio and the debt to
equity ratio. They are not borrowing as much, and they have a huge gross margin, but their short
term obligations are not being met. Inaccurate reporting could be a problem, but if the quick ratio
would increase by more than one, then the organization could have more than enough cash to
meet its obligations. The other problem could be that they have an absolute inventory which
cannot be sold in the current market. Impairing electronic inventory after 365 days (Kogan.com
2019, p. 12) is too long since when more advanced products are available, then it becomes
worthless.
Kogan.com need to start stating the amount of impaired inventory they have as an
accounting requirement (Accounting Tools, 2018). The quick ratio will be a good indicator to see
whether they will improve on their ability to meet short term obligations without overlying on
their inventory. Kogan.com might be compensating for the increase in absolute stock by
increasing the prices of their services. Kogan.com need to practice prudence which Baker (2015)
has emphasized to be being reliable and providing accurate financial information that is free
from biasii.
Inventory Turnover
The main reason that has led to a decrease in the number of sales for the company is the
negative complaints they are receiving since 2017 (Hatch, & Clun, 2019). When the quality of

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good and services of an organization is questioned, the new, and potential clients will stay away
from the product. Kogan.com has seen its inventory turn over drop from 7.83 in 2016 to 3.68 in
this current financial year. Mr. Kogan insists that they are focusing on increasing the quantity of
inventory, but they should also listen to what their customers are saying. Quality is more
important than quantity. It is better to have a small amount of inventory that brings back positive
feedback from the market than having negative reviews on the quality of goods and services
provided (Fan, 2015).
The main problem of increasing the quality of inventory turnover is Koogan.com will
have to come up with an appropriate product mix just like JBH which is not necessarily affected
by a decrease in sales (Kane, 2013). JBH Inventory turnover ratio has been consistently stable
over the last two financial year even with the fluctuation of sales.
An increase in inventory is good for Kogan.com, but the appropriate product mix will be
crucial to guarantee that they can convert their products into cash as quickly as possible without
relying on debt to finance their short term obligations.
Debt to Equity Ratio
Kogan has an optimal debt to equity ratio which could be attributed to the over-reliance
on current assets to finance their short-term obligations. To financial institutions, Kogan is a very
good client who will be able to pay back the regular interest repayment since they can convert
their inventory into cash (Surjandy & Ratnasari, 2018 p. 31). The organization could turn to
financial institutions for most of its financial requirements and create a product mix that is
ideally suited for its market.

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However, an increase in debt to equity ratio also possess a potential threat. It could lead
to more financial problems if the product mix is not effective. Increasing the amount of company
debt has to be based on the ability of the organization to continue selling the amount of good that
they are currently selling, but any sudden decline in sales could result in Kogan.com’s inability
to meet its debt obligations.
The amount of debt Kogan can be increased steadily to increase marketing and inventory, but
there has to be a way of monitoring how sales are fluctuating in the market. The company also
has to reduce the inventory impairment period for its electronic products which will help to
reduce the amount of absolute products they have in company.
Conclusion
Before we get to the financial details of any organization, it is very important to
remember for any organization that offers goods and services. The prime concern should the
satisfaction of customers (Kim, 2017). Kogan.com must deal with the problem of customer
complains. It is not advisable for an organization that is growing to have such poor reviews that
seems to be increasing for the last two financial years. Kogan has to find an alternative source of
financing other than depending on their inventory. Their debt ratio is too low, and they can take
advantage of this and finance an increase in inventory by taking up more loans.
External funding will enable the organization to focus on a product mix as it has worked
for JBH. If they had a large debt to equity ratio, then the organization could be in greater danger
of bankruptcy, but in this case, they are having financial issues due to overreliance on the income
generated from sales as part of their working capital. Borrowing only the amount the
organization can afford to pay the regular interest payments. Mr. Kogan has already identified

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the potential areas where they require more investments which is marketing and an increase in
inventory. If they take up a loan for this specific purpose, then they will be able to grow their
market share and still provide the same services as the expansion continues.

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References
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https://www.accountingtools.com/articles/2017/5/13/obsolete-inventory-percentage
Barker, R. (2015). Conservatism, prudence and the IASB's conceptual framework. Accounting
and Business Research, 45(4), 514-538. Retrieved from
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Bewick, S. (2015). The EU Insolvency Regulation, Revisited. International Insolvency Review,
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Facione, P. A. (2015). Critical thinking: What it is and why it counts [Essay]. Insight
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Electronic Journal. doi: 10.2139/ssrn.2653139
Hatch, P., & Clun, R. (2019, 3 March 2019). Kogan.com beats Apple as most complained about
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Kane, T. (2013). GETTING THE PRODUCT MIX RIGHT©. Acta Horticulturae, (1014), 371-375. doi:
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Kogan.com Ltd. Retrieved from Sydney:

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Kogan.com. (2019). Appendix 4D – Kogan.com Ltd. Retrieved from Sydney:
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i Hatch, P., & Clun, R. (2019, 3 March 2019). Kogan.com beats Apple as most complained about
company. Sydney Morning Hearald.
ii Barker, R. (2015). Conservatism, prudence and the IASB's conceptual framework. Accounting and
Business Research, 45(4), 514-538. Retrieved from http://dx.doi.org/10.1080/00014788.2015.1031983.
doi:10.1080/00014788.2015.1031983