Poor Eddie, he had a stable and happy life working as a public servant and living in his own home with his family. He was able to pay his mortgage and other financial obligations each month and remained financially sound. When the forces of economic and social change threaten this, Eddie realises just how fragile his reality and security is. He loses his job and finds he has three dollars left in the bank. How will he pay his debts?
Sounds a bit like the Clarius Group, although their situation is not so drastic yet. Forces of economic change have shown their business reality and security may be a bit more fragile than they realised. How do we know if they can pay off debts and remain financially sound?
The current ratio is used to keep track of liquidity and measures if the Clarius Group is able to pay off any short term debts or other financial obligations lasting less than a year (current liabilities) with the current assets it has on hand.
These numbers tell us that Clarius Group’s current assets are two and bit times larger than current liabilities. If they needed to pay off all their debts within a year, they could manage this and still have current assets to spare. Here, finally, is a ratio that the Clarius Group may be excelling at! A firm is generally deemed to have good short term financial strength if your current ratio is 1.5 – 3¹.
The current ratio trend is different again to what I have seen while analysing the previous ratios. Now 2012 and 2015 are the worst years! While the ratio stays higher than the benchmark (2012) for 2013 and 2014, it is starting to trend down and I would like to know why.
In 2013, trade receivables decreased and we know this is due to a drop in revenue as the economy worsened. However, current tax receivables significantly increased because Clarius Group did not have to pay any tax and were due for a tax refund. This meant that while current assets dropped, they did so at a lower rate than might otherwise have been expected.
Current liabilities dropped in 2013 due to a large change in trade payables (a result of on hired labour costs reducing and not having the same number of contractors in paid work?). There were no current tax liabilities (as mentioned above there is a tax refund due) and no interest bearing liabilities. The bank overdraft, however, sneakily went up and shows it was more heavily used in 2013 (a sign of not enough cash coming in?).
The interesting thing to note about the interest bearing liabilities is that they came from a Receivables Purchases Facility that Clarius set up. This means they sold their trade receivable invoices to their finance providers at a discounted rate. In 2013, they utilised only a non recourse agreement which means the finance provider bears the full loss if the customer does not pay. If the facility was provided under recourse then Clarius Group would have had to pay some of their financing back. Being able to get non-recourse funding is probably due to their good management of accounts receivable.
In 2014, current assets stayed relatively stable because while current tax receivables dropped, Clarius Group’s cash increased due to a large tax refund. The bank overdraft was not utilised in 2014 (due to the big influx in cash?) but trade payables increased enough to slightly affect the current ratio. I cannot see the reason why trade payables increased, however, I am not too concerned in the downward movement for 2014.
Trade receivables dropped again in 2015 which is starting to become a bit concerning because I would think the economic downturn has steadied but they are still struggling to make sales. Cash also dropped due to timing differences in superannuation payments but also because of major restructuring costs (feels like management in 2014 were on the right track so it starts to look like they prematurely fired and hired and maybe this was not a good use for their cash?). This left current assets at their lowest level seen in four years.
Trade payables went back down in 2015 which meant current liabilities decreased overall. However, the decrease was at a slower rate than current assets meaning the current ratio decreased again. Clarius Group did not use their Receivables Purchase Facility in 2015 but they did dip into their bank overdraft as their overall cash flow became negative. They also have a new current liability, in the form of finance leases, to help them finance software licenses over the next three years.
It is great that Clarius Group have what is seen as a healthy current ratio but I think this is out of necessity rather than good management. With such low cash balances, Clarius Group would be hard pressed to pay back any significant ongoing interest payments. I think Clarius Group’s management realise that if they don’t keep themselves lowly geared they could edge towards troubled waters. With the way the recruitment industry is at the moment, management cannot afford to take on any more risk.
If Clarius Group continue to struggle with revenue and cash and cannot obtain any significant debt financing while also making losses to the point where no one wants to buy any more shares issued (equity financing), how are they going to grow and develop?
- n.d, Boundless.com, https://www.boundless.com/accounting/textbooks/boundless-accounting-textbook/reporting-of-current-and-contingent-liabilities-9/reporting-and-analyzing-current-liabilities-64/current-ratio-302-3754/