Murray Goulburn is an Australian private company that processes and supplies dairy products in Australia and internationally. The firm offers a wide range of dairy commodities such as milk powders, cheese products, butter, infant formula and liquid drinking milk. The company was incorporated in 1950 and operates under the leadership of Ari Mervis. Murray Goulburn has had problems key among the decline in export sales hence falling prices of milk due to oversupply. As a result, farmers and members have lost money through the collapse in the firms stock price and a massive debt balance. This report will present an assessment of Murray Goulburn's financial performance by analyzing financial ratios, vertical and trend analysis of the financial statements for the period between 2013 and 2017. Lastly, the conclusion of the report will give recommendations on how the firm can survive its current debt crisis.
Trend analysis is vital as it portrays the general performance of a firm by showing the increase and decrease of items in the financial statement. Additionally, it helps to determine if management realizes the set goals and objectives. The trend analysis for Murray Goulburn exhibits changes of various amounts in the corresponding income statements from 2013 to 2017 (see table 1 in the appendix). Murray Goulburn presents entire positive trends in the operating revenue; however, despite this sales revenue was decreasing in each of the years as shown in graph one below. Consequently, the net profit had negative trends for years 2013, 2014 and 2015. The year 2016, however, recorded a positive trend of 14.16% following an improvement in the net profit from $21.246 million in 2015 to $39.848 million in 2016 ((Murray Goulburn Annual Report, 2016). Murray Goulburn recorded a tremendous loss of $370.8million in 2017 hence the negative trend of (1,162.34) %.
Graph 1 presents the trends for total operating revenue and net profit after tax for the period between 2013 and 2017.
Table 2 in the appendix illustrates a vertical analysis of Murray Goulburn income statement for the period ended June 30, 2017. The cost of sales was quite high since it constituted 87% of the total sales. The increase in this expense as a percentage of the total revenue indicates that the firm's performance in controlling the costs of sales was terrible. Poor purchase policy or buying from a more expensive supplier could be the reason for the high expense. As a result, Murray Goulburn's gross profit was only 13% of the sales. Therefore, there is a need for the firm to re-look the controls on the cost of sales. Conversely, the company's performance in managing operating expenses such as selling, distribution, administration, and finance costs was commendable as they were all below 10% of total sales except other expenses which represent 14% of total sales revenue.
Murray Goulburn only holds 1.15% of its financing inform of cash reserves which may be an indicator of severe problems in cash flows management. The current assets accounts constitute 46.7% of the total assets in the fiscal year 2017 (see table 3 in the appendix). The inventories account is mostly responsible for the total as it represents 27.7% of the total assets. The high percentage implies that Murray Goulburn has put massive investments in inventories that are not fast moving thus holding cash. Accounts receivables represent 16.8% of the total assets which means Murray Goulburn is not efficient in collecting its debtors. The company's average collection period of 47 days reflects the inefficiency. In the year 2017, Murray Goulburn spent 53.28% of total financing on non-current assets. The property plant and equipment account (PPE) is hefty on the company's balance sheet. PPE represents 45.3% of Murray Goulburn's total assets. The company has, however, put plans to close down three of its operating facilities in Edith Creek, Rochester, and Victoria meaning no more capital investments (Murray Goulburn Annual Report, 2017). Similarly, Murray Goulburn will not undertake any other significant capital investments in nutritional and dairy beverages a move that will see a write-down in these projects (Murray Goulburn Annual Report, 2017).
Accounts payables represent 39.3% of the total liabilities. The company takes 62 days to pay-off the creditors which imply it takes full advantage of credit terms that suppliers allow. However, there is need to make prompt payments to avail discounts that suppliers may offer and also maintain supplier goodwill. Murray Goulburn borrows on a long-term basis; thus it has an exposure to the impact of interest rate changes. The firm's debt obligations had a fair value of $463.9 million as of June 30, 2017. Borrowings represent 49.3% of the total liabilities which evidence the colossal debt. Debt levels increased in 2017 due to net issuances of approximately $55.93million (Murray Goulburn Annual Report, 2017).
The profitability ratios gauge an entity's overall effectiveness in using the capital assets to generate profits. Gross profit margin was 12.92% in 2017 a 1.96% decline from 14.88% in 2014. Net profit margin was 1.40% in 2016 and (14.88%) in 2017 a trend that shows declining profitability (see table 4 in the appendix). The negative net profit margin in 2017 is due to the loss recorded of $370.8million (Murray Goulburn Annual Report, 2017). Similarly, there was a drop in the return on assets from 1.98% to (19.24%). In general, Murray Goulburn had a lousy year since there was deterioration in its ability to generate profit. The three primary profitability ratios have declined for the two years an indicator that the firm is not using its resources efficiently. The decrease is due to the declining sales volume from $2.77billion in 2016 to $2.49 billion in 2017. Also, there was a significant increase in other expenses from $4.928 million to 355.84 million (Murray Goulburn Annual Report, 2017). Consequently, there is a need for the management to manage costs to improve the net profit adequately.
Activity ratios gauge the operations of a company by indicating how well it utilizes the assets and liabilities (Thukaram, 2015, p.94). Accounts receivables turnover is an indicator of the number of times a company collects its debtors (Thukaram, 2015, p.96). Murray Goulburn's accounts receivable turnover ratio shows a moderate improvement from 7 times in 2016 to 8 times in 2017. Consequently, the firm's average collection period improved slightly from 50 days to 47 days (see table 5 in the appendix). Creditor's turnover depicts the number of times a company repays its accounts payable within a year. For the two years under consideration, the accounts payables turnover was six times. The average payment period increased from 62 days in 2016 to 64 days in 2017 meaning it took more days for the firm to pay its creditors.
The analysis of a corporation's liquidity is crucial as it informs the ability of the entity to meet the current claims and obligations. The current and quick ratios assess the short-term solvency of the business by indicating the capacity to meet near-term debts (Thukaram, 2015, p.85). While the current ratio determines the firm's potential to pay off near-term obligations, the quick ratio evaluates the ability to pay off short-term debts from quick assets. The current ratio was 1.9 in 2016 but declined to 1.72 in 2016. Similarly, the quick ratio also dropped from 0.8 in 2016 to 0.69 in 2017 (see table 6 in the appendix). The downward trend is an indicator of deteriorating liquidity of Murray Goulburn implying if the trend continues, the firm may have problems in paying the short-term debts.
Recommendations to the Board on Debt Management
Murray Goulburn has a colossal debt that stands at $463.9 million as of June 30, 2017 (Murray Goulburn Annual Report, 2017). The firm may face solvency risk which may result from the inability to pay off the principal and interest due to the declining profitability trend. Several proposals have been made by the board to manage the current debt crisis. These include adjusting the amount of share equity milk deductions, issuing new shares, adjusting the dividends paid to shareholders and selling assets to reduce the debt (Murray Goulburn Annual Report, 2017).
Additionally, Murray Goulburn could undertake the following measures to manage the debt levels. Firstly, the firm's management should conduct effective control of inventory. Stocks take up a sizeable amount of the firm's working capital thus affecting liquidity. A company wastes its cash flow when it holds high inventory levels that are more than enough to fill customer orders promptly. Hence, management of Murray Goulburn should examine its day sales of inventory and the cash conversion cycle to ascertain to ascertain the effectiveness of inventory management. Also, the board can consider approving the restructuring of its debts. Assuming Murray Goulburn obtained financing during a high-interest regime and the current rates of interest are lower hence restructuring would benefit the firm. Loan restructures improves a firm's bottom line and also enhances cash flows through a reduction in monthly installment payments and interest expense (Schiano, 2007, p.134).
The company could also survive the debt crisis through aggressive marketing strategies which will lead to increased sales and net income. Managing the company's spending will also improve the bottom-line leaving extra cash to reduce debt levels. Cost of sales was very high constituting 87% of the total revenue. Therefore, the gross profit was minimal. Management of the company should scrutinize its day to day expenses and implement cost-cutting measures on those costs it can cut back on. Effective management of the costs will improve the firm's profitability leaving additional cash to pay down the debts. Another useful strategy would be debt consolidation. Businesses usually have loan facilities with various lenders. Accumulation of the monthly payments from different financial institutions has the effect of overloading a company's budget. Assuming that Murray Goulburn has loans from different lenders, the board should approve the consolidation of all the debts and negotiate a payment plan that the firm can manage. Debts consolidation may extend the repayment period thus reducing the monthly installments and reducing the pressure of handling several lenders (Mark, 2016). Despite the vast debt, Murray Goulburn had additional borrowings of $55.93million in 2017 which only increased the existing obligations. The board should cease approving further borrowings until the firm improves performance. As a last resort, the board may consider bringing an investor on board who can take over and operate some segments of Murray Goulburn's business. As a result, the debt to equity ratio will decrease hence reducing the debt levels.
Mark, H. (2016). Debt consolidation: 18 insane but true-facts about consolidating debt. Morrisville: Lulu Press Inc.
Murray Goulburn. (2017, June 30). Murray Goulburn Annual report 2017. Retrieved from http://www.mgc.com.au/media/49636/4-Murray-Goulburn-annual-report-2017.pdf
Murray Goulburn. (2016, June 30). Murray Goulburn annual report 2016. Retrieved from http://www.mgc.com.au/media/49636/4-Murray-Goulburn-annual-report-2016.pdf
Schiano, M. (2007). My revised debt inventory. The ultimate guide to a better credit score (p. 134). Orlando: Education Foundation Inc.
Thukaram, R. M. (2007). Management accounting. New Delhi: New Age International Limited.
Table 1: Murray Goulburn trend analysis for the five years ended June 30, 20...
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