Analysis Of Dick Smith’s Annual Report And Liquidation

Core Business and Operating Activities

Questions:

Analyse this report based on your accounting studies and prepare a report showing how Dick Smith went from some very optimistic results (provide evidence) in this 2015 annual report to being liquidated. You should use some basic information such in this report such as:

a. A description of the core business of the company including full details of its operating activities.

b. A discussion on any significant issues emerging from the Directors’ Report.

c. A discussion on the Corporate Governance Statement.

d. A calculation of the key financial ratios for 2015

f. Other information 

When it comes to consumer electronics, Dicksmith Holding Ltd is the first name that flashes on people’s minds. It is based in Australia and its key operations aim to provide their customers with a strong and reliable channel platform. Because of this policy of customer satisfaction, Dicksmith has attained the position of the most convenient and largest retailer of consumer electronics and its stores have massively expanded worldwide reaching a scale of 393. Consumers are provided with a high sense of convenience by these strong, structured and integrated platforms so that consumers can shop through the stores or at the go or even from their houses (Dicksmith, 2015).

Despite these benefits over other competitors, there came a time when some of the stores of Dicksmith Ltd had to be closed down that made the company opt for better opportunities and redevelop its processes. Although some of the stores had to be closed down, yet the company did not lose hope and it strived to open further stores across Australia and New Zealand. Moreover, the company does not have to worry because it enjoys goodwill and brand appeal in the market that keens to sell a wide variety of products ranging from entertainment to computers and other accessories (Dicksmith, 2015). In the year 2013, a very different concept named MOVE was launched that aimed to focus on the consumer electronics along with fashion and in relation to this, it concentrated on connectivity in order to provide a widespread variety of different products like mobile phones, computers, headphones and other accessories etc. Latest products relating to consumer electronics as well as fashionable accessories are provided by the company as the range of its concept MOVE are regularly updated. For customer’s satisfaction and maintenance of high fashion theme all around, the company maintains strong relations with the leading designers and it also aims to diversify the MOVE stores to gain more efficiency in the market. From the strategies and operations of the company, it can be clearly observed that the company purposes to cater to the requirements of the customers and fulfill them.

A director’s report of a company can help to ascertain any information regarding the directors and at any time. From the director’s report of Dicksmith Holding Ltd, the number of meetings held by the company can be witnessed together with the directors who attended the meetings. It is observed that there were nine meetings of directors, three meetings related to remuneration and nomination committee and four meetings relating to audit and finance were held during the financial year. The Board of company has appointed the remuneration committee that aims to provide support to the Board itself and helps in deciding the remuneration of directors and other executives. It also provides help in attracting beneficial employees for the company and retaining the old employees whose value is very helpful for the company (Lubatkin, 2007). By this process, shareholder’s value can be created by way of both long-term and short-term investment scheme. The remuneration of directors and executives are decided by way of their performance and remuneration environment and it is paid irrespective of any factors like gender, age etc.

Significant Issues from Directors’ Report

It can be observed from the annual report of the company that it has followed all the statutory regulations by ensuring compliance and providing transparency associated with the remuneration process in the report. It can also be understood that there does not exist any kind of scheme associated with retirement benefits of non-executive directors and the annual report also makes this clear.

The director’s report also portrayed attention on insurance, indemnity deeds and right to inspect and access the books of accounts of the company by every director (Crane & Matten, 2010). It is however a matter of issue that the seven year term might be extended by the company where specific assessments starts to operate before the expiry period of seven year. The company can take steps to indemnify the employees as well as the directors against the liabilities but the directors are altogether satisfied with the provisions of non-audit services in the year. The director’s report of the company provides an opinion that independence of director is safeguarded that is it can neither be influenced nor be compromised by the services disclosed in the report (Crane & Matten, 2010). Other issues portrayed through this report relate to the exchange rates, differences in consumer demands, competition and discretionary nature of spending etc.

An authorization in written form has been adopted by the Board of Dicksmith Holding Ltd which is helpful in providing sheer strength to the operations of company. This authorization or charter contains information on the role, responsibility and composition of the Board, delegation of authority etc and this charter can be availed from dicksmithholding.com.au website.

Also, the interest of shareholders has been given due concern by the Board by complying with the principles of corporate governance that has in turn enabled the company to take advantage of various opportunities, assess and evaluate its performance (Goergen, 2012). The annual report contains details on the code of conduct of executives, directors and other employees that ensures the concept of transparency. Dicksmith Ltd has also been able to frame the Audit Committee and align it with the principles of Corporate Governance. This committee comprises of three non-executive members and majority of them are independent members (Benz & Fray, 2007).

The corporate governance principles of the company not only ensure transparency in the company but it also pursues high values of ethics and morality that makes the company advantageous over others (Cogan, 2009). This strong ethics is required to be followed and maintained by every member of the organization. The company has also introduced a risk management team in order to counter the risks and evaluate the power of framework. This team or committee contains three members and majority is independent (Corporate Governance principles, 2014). Combining the work efficacy of internal audit with the risk management team helps to prevent various hurdles in the company and thus enhancing its operations (Lubatkin, 2007).  

a. Current ratio

The current ratio is one of the major ratios that stress on the liquidity position of the company. It helps in providing an answer that whether the company has proper set of assets to meet the obligations. The ideal ratio is 2:1 that means the company have current asset of $1 for every $2 of current liability (Guerard, 2013). For Dicksmith, the current ratio has declined marginally. This indicates that the current liabilities increased more than the increment in the current assets.

Current ratio		2014	2015
Current asset		335906	389979
Current Liabilities		266807	316527
Current ratio =current asset/ current liabilities		1.258985	1.232056

Corporate Governance Statement

b. Acid test ratio

It is a better indicator than the current ratio because it eliminates the component of inventory at the very beginning (Guerard, 2013). The ideal ratio here is 1:1 but in case of Dicksmith the quick ratio is marginally lower and indicates the ratio is not ideal. Moreover, it is an alert for the management as a whole.

Quick ratio	2014	2015
Quick Asset		82092	96935
Current liabilities		266807	316527
Quick ratio =quick assets/ current liabilities		0.307683	0.306246

c. Receivable turnover

The receivable turnover projects that the receivable are collected 5 times a year and moreover, it remains unchanged both the years. It is needed to have a strong receivable turnover for better operations.

Receivable turnover	2014	2015
Net credit sales	1227604	1319670
Average inventory	253814	273429
Receivable turnover = net credit sales/ average inventory	4.836628	4.826372

d. Inventory Turnover

This ratio projects that inventory is sold 4 times a year and remained unchanged in both the years. However, the management must ensure that the inventory are sold regularly that will stabilize the company’s inventory turnover ratio.

Inventory turnover	2014	2015
cost of goods sold	919602	992828
Average inventory	253814	273429
Inventory turnover ratio = cost of goods sold/average inventory	3.623133	3.631027

e. Net profit Margin

This ratio portrays the net profit to sales. The computation of this ratio indicates that there has been an increment in the net profit margin (Gibson, 2012). However, the ratio is lower and this can be cited due to less net profit.

Net Profit Margin	2014	2015
Net Profit	19826	37905
Revenue	1227604	1319670
NP Margin =-  Net profit/revenue *100	1.615016	2.872309

f. Gross profit margin

This ratio is the ratio of gross profit to sales.  The gross profit margin of Dicksmith has dropped marginally indicating that the management has not been able to have a strong control over the cost of goods sold (Horngren, 2013).

GP margin	2014	2015
Gross Profit	308002	326842
Revenue	1227604	1319670
GP margin = gross profit/revenue *100	25.08969	24.76695

g. Assets turnover

The Asset turnover ratio highlights the management effort to generate revenue. Therefore, a high ratio is required and is even an ideal one. For Dicksmith the ratio has declined that indicates the management has not been able to utilize the assets in a profitable manner (Gibson, 2012). A higher ratio projects a strong situation but the ratio has dropped in this case.

Asset turnover ratio	2014	2015
Sales	1227604	1319670
Total assets	451171	508521
Asset turnover ratio = sales/ Total assets	2.720928	2.595114

h. Return on Assets

The main aim of this ratio is to stress the way in which the utilization of the assets are done. The ratio is very poor for Dicksmith that implies the improper utilization. Therefore, the management must pay heed to this ratio to derive strong returns (Horngren, 2013).

Return on assets	2014	2015
Net income	19826	37905
Avg total Assets	451171	479846
Return on assets = net income/ Avg total Assets	0.043943	0.078994

i. Return on Equity

Return in equity implies the manner in which the equity has been utilized to generate returns (Brigs, 2013). The ratio has enhanced in the year 2015 that gives an implication of the better use of the component of equity.

Return on equity	2014	2015
Net income	19826	37905
shareholder equity	166940	169147
Return on equity = net income/  shareholder equity	0.118761	0.224095

j. Earnings per share

EPS can be termed as the share of the portion of the company that is attached to every share of common stock that is outstanding in nature. When the EPS is higher, the company has a higher profitability scenario and vice versa (Brigs, 2013).  EPS for Dicksmith has declined in 2015 that is not a strong indicator.

Earnings per share	2014	2015
	0.16	0.08

The most relevant motive of a listed company is to safeguard the shareholder’s interests and Dicksmith Holding Ltd successfully fulfills this motive. The security holders of company are being given accurate and adequate information by making proper disclosures so that they can exercise their rights efficiently. Optimism of Dicksmith is clearly evident from its reports and several other widespread discussions.

Calculation of Key Financial Ratios for 2015

Dicksmith Holding Ltd is being identified as one of the biggest equity heist of all times as it successfully transformed $10 million to $520 million and that too within two years. The private equity assumes a special place of importance as it is considered as one of the most biggest ever witnessed. All these information about the company and its governance can be availed through the website and it can be learnt how a ten million dollar company got transformed into such a massive company in a short period.

The regular participation of security holders and communication with the company also favored the company and fetched various benefits. This showcases the strong relations of the company and hence also provides an evidence of optimism as the shareholders are attracted when their interests are safeguarded and when the company has strong fundamentals (Lemke, 2014). 

Conclusion

It can be observed that corporate governance has played a major role in enhancing the management of the company and making the company reach significant heights. After getting listed and following the ASX principles, Dicksmith witnessed significant growth within one year itself as it successfully complied with all the required obligations. But it is to be noted that in relation to the growth of company, it is the Board that must be complimented. The main reason is that the concepts of disclosure helped the company to gain a firm position on the minds of shareholders. Through a ratio analysis of the company, it can be observed that the company has performed well and has a strong future and only a few ratios must be stressed upon. But the reason that led the downfall of Dicksmith and made it enter into receivership is that it failed to acquire required funds in order to back up the business. Even in 2015, the sales and cash position of the company were significantly below expectations that was due to a poor point in the last quarter of the year. But however the major failure witnessed are the company’s inabilities to provide finance for re-stocking. Going by the entire discussion and highlighting on various ratios it can be commented that Dickmsith is not a good bet at the current point of time because liquidity position is shaken as indicated by the quick ratio. Moreover, net profit margin is not strong to provide solidity. The other ratios like asset turnover, equity turnover are projecting a weak scenario. Therefore, it is not good to invest in the company at the current point of time. 

References

Benz, M., Frey, B.S. (2007). Corporate Governance: What can we learn from public governance? Academy of Management Review, 32(1), 92-104

Brigs, A.  (2013). Financial reporting & analysis. Mason, Ohio: South-Western.

Cogan, D. (2009). Corporate Governance and Climate Change: Making the Connexion, Oxford University Press.

Corporate Governance principles. (2014). Corporate Governance principles 2014. Retrieved May 9, 2016,

Crane, A., & Matten, D. (2010). Business Ethics: Managing Corporate Citizenship and Sustainability in the age of globalization. New York: Oxford University press

Dicksmith. (2015). Dicksmith profile. Retrieved May 21, 2016,

Dicksmith Corporate Governance. (2015). Dicksmith Holdings 2015. Retrieved May 9, 2016,

Gibson, C. (2012). Financial statement analysis. Mason, Ohio: South-Western.

Goergen , M. (2012). International Corporate Governance, Prentice Hall.

Guerard, J. (2013). Introduction to financial forecasting in investment analysis. New York, NY: Springer.

Horngren, C. (2013) Financial accounting. Frenchs Forest, N.S.W: Pearson Australia Group.

Lemke, L. (2014). Regulation of Investment Advisers. Oxford University Press.