Rotten, stinking and crawling with maggots

In the first week of any course on company analysis there will be a discussion about the quick ratio, sometimes called the acid test. As the name implies, it’s a quick and dirty method of assessing the ability of company to meet short-term financial obligations in a fire sale situation. It’s a commonly used measure of liquidity.

Contemporary opinion suggests a stock with a quick ratio of one should be able to survive, although in most industries, that sort of measure would send warning bells. A ratio of 0.5 would usually be found in the files of company administrators. After all, Australian Corporations Law takes a dim view of companies trading without the ability to pay their debts as and when they fall due.

According to the Appendix 4E lodged with the ASX today (at 5.03pm, just after the deadline for most mainstream news services), Gunns has a quick ratio of less than 0.2.

Current liabilities, those repayable within 12 months, total a whisker shy of $800 million. We can assume those debts don’t include the $25 million owed to Forestry Tasmania or an undisclosed amount to South Australia’s equivalent authority.

We’re told in the fine print those bills don’t exist.

But those liabilities do include around $650 million in unpaid bills and bank debts, which might be difficult to settle with just $12 million in cash. Gunns might suggest the $952 million in assets currently on the market would easily extinguish those amounts; but let’s face it – the company’s record of selling assets at anywhere near their own inflated valuations is as bad as their 2007 Sauvignon Blanc.

But there’s more.

After being caught out flogging Auspine assets for less than one third of their purchase price, Gunns has been forced to expense some heavy losses in the current year. That’s a far cry from their half year report, where they upped the value of the Bell Bay (former FEA) sawmill by nearly $20 million. That asset is now on the market, with no apparent buyers. Still, the mythical $20 million in profit is included in the financial statements.

And if journalists are looking for the ultimate piece of creative accounting, why not ask about an ambit figure of $10 million, claimed to be profit from `harmonisation of the Green Triangle offtake agreement?’ In fact a handful of arbitrary asset mark-ups recorded as revenue are the only reason Gunns’ media release will refer to a $40 million underlying, pre-expense, post-fictitious asset inflation earnings number.

In reality, if one used consistent accounting treatment across the few remaining assets, the underlying loss would total around $300 million after ignoring Gunns’ `independent’ valuation of some plantation assets. After all, those assets are for sale, and marking them to market might scare away buyers.

Still, in analyst speak, it’s a shit result, and far worse than anybody expected.

I’ll leave it to others to dissect the consistency of Gunns’ application of accounting standards in coming days, but I can’t imagine they will return to trading on the ASX any time soon.