Introduction
Atlassian is an Australian software company with a broad global presence and unique products. Although the company has been steadily increasing its earnings year over year, Atlassian’s financial position has several serious problems that have emerged over the past five years. This work presents an audit report for this organization, based on calculations from the annual reports of four key liquidity and solvency ratios: cash ratio, current ratio, debt-to-equity ratio, and times interest earned. The calculation was made using the Excel software package, and the interpretation of each relationship is given after the main table.
Analytical Review
Table 1 – Atlassian Ratios Calculation (Atlassian, 2019, 2021, 2023)
Metrics
Cash Ratio
Table 1 presents source data from the company’s annual reports, compiled from Form 20-F and 10-K filings, that simplify their assessment over several years through standardization, along with four financial ratios calculated on this basis. The cash ratio was a reasonably strong indicator in 2018 – as a rule, a rare company can have three times more liquid assets than short-term liabilities. However, the values subsequently followed a parabolic distribution, with a minimum in 2021 (Atlassian, 2021). Then growth resumed and even became more than one, which indicates the company’s stable liquidity; at the same time, for five years, the indicator did not fall below zero – an acceptable limit, after which investors often begin to monitor the company’s position more closely.
Current Ratio
The current ratio is similar to the cash ratio but considers several less-liquid short-term assets. However, judging by the data available over five years, this indicator is very close to the first, because we are talking about an IT company that does not hold inventories in its reserves, unlike other industries, and this indicator expands only due to accounts receivable. The company has significantly increased current liabilities since 2018, leading to a noticeable decrease in the present and cash ratios. In 2021, both assets and liabilities used in the calculation decreased (Atlassian, 2019, 2021). Subsequently, the dynamics are on the rise, and from 2022, the current ratio will already be above 1, which is a sufficient condition for the company’s liquidity: its short-term assets will be enough to cover any short-term payments.
Debt-to-Equity
However, the third metric examined in the paper concerns potential Atlassian investors and carries many risks, especially in 2023-2024. Debt-to-equity shows a company’s capital structure that has opted for debt, significantly reducing equity until 2023 (Atlassian, 2019, 2021, 2023). Total liabilities are growing faster than the attempt to restore equity capital in 2023, while the company has not even reached the 2018 level.
Impact of Macroeconomic Factors
Critical Rate
Since the organization has its headquarters in Australia, it depends on the country’s macroeconomic indicators. The critical rate set significant records in 2023, most recently hitting its low in 2021-22 (Trading Economics, 2023a). Atlassian significantly increased its liabilities in 2019-2020 and continues to grow in 2023, when interest rates are higher, and borrowed capital is accordingly more expensive than usual.
Although the company already has experience paying off significant interest and reducing its debt burden – which happened in 2020-2021, especially against the backdrop of growing profits and revenues- the current situation is characterized by many internal and external risks.
Firstly, the fourth indicator under consideration, the times earned interest ratio, has the smallest negative value since 2018, due to significant operating loss with small interest expense. In 2020-2021, Atlassian emerged from a similar situation with positive operational profit indicators, which allowed it to reduce its debt burden and, accordingly, improve solvency and liquidity (Atlassian, 2019, 2021). The situation in 2023 has a similar dynamic; again, operating expenses exceed the company’s revenue, so that the problem may worsen significantly with the current increase in debt obligations.
Inflation
Secondly, the situation is aggravated by another macroeconomic indicator. Inflation in Australia and elsewhere is relatively high, and they are trying to bring it down by raising interest rates (Trading Economics, 2023b). Thus, with more expensive lending and the consequences of high inflation – a decrease in purchasing power, a slowdown in business development, an increase in operating and other costs – Atlassian finds itself in a rather tricky situation that requires appropriate innovative breakthroughs or a review of financial management. Although the organization is still well kept afloat by substantial liquid assets, it faces external factors that may increase their influence on activities in this sector.
However, it is worth noting that, at the moment, the company’s interest expenses are relatively low; the debt-to-equity ratio has returned to levels seen in 2019-2020, which suggests it is maintaining control over debt financing. On the one hand, Atlassian may again resort to increasing borrowings to compensate for negative revenue or using existing assets, as it already did around 2020-2021 (Atlassian, 2019, 2021). On the other hand, the need to increase revenue is not going away, and if in 2020 such growth was due to the pandemic and IT solutions rarely lost their profits while saving on operating expenses, a significant part of the revenue, today such a practice is hardly possible – only with the massive transition of employees to remote work, the closure of offices and similar events that were undertaken in 2020.
Conclusion
As a result, Atlassian currently has good liquidity, and solvency is improving, while efficiency is suffering significantly. As a result, the financial future largely depends on external factors and internal policies that require either a breakthrough in the market or a more cautious approach to resources. On the other hand, the company already had experience emerging from negative EBIT indicators, which, against the backdrop of declining interest expenses and growing cash ratios, could be an excellent moment to reduce the debt burden and, as a result, risks. The work shows that Atlassian is in a generally strong position as it faces a significant test in the coming year that will shape financial policy trends and show how management can manage challenges.
References
Atlassian. (2019). Annual Report 2019.
Atlassian. (2021). Annual Report 2021.
Atlassian. (2023). Annual Report 2023.
Trading Economics. (2023a). Australia Interest Rate.
Trading Economics. (2023b). Australia Inflation Rate.