The report aims to perform a financial performance analysis of Dick Smith Holdings Ltd. based on the annual report published for the year 2014 and 2015. The main findings of the analysis will be able to look into the factors, which ultimately led to the liquidation of company. The report first discusses on the background of the company. The later on discussions are seen to be related to the different analysis of the ratios based on profitability ratio, liquidity ratio, solvency ratio and share market performance. The profitability ratio has considered ratios such as Net Profit Margin, Return on Equity, Gross Profit Margin, and Cash return on sales along with return on assets. The main consideration of the efficiency ratio has been further seen in terms of the Assets turnover, Receivables Collection Period and inventory turnover period. The factors leading to the liquidity of Dick Smith Holdings Ltd. has been taken into account by discussing the current ratio, quick ratio and times interest earned. Solvency position of the company has been discerned by the computation of the ratio based on the Debt Equity Ratio and Total Debt To Total Assets. The last part of the report has been able to discuss the main ratio based on significant considerations made from the Price Earnings Ratio and Earning Price per Share. The main intention of the discussion is seen with finding out the indications for the corporate stress and identifying the potential sources of the concern for the corporate survival (Cooper, Ezzamel and Qu 2017).
Dick Smith Holdings Ltd (listed under ASX:DSH) was known for their services in terms of being large electrical goods retailer, which was seen to operate in more than 390 stores across New Zealand and Australia under four brands. The company which was formed in 1968, until 25 July 2016, the company was recognized to be one of the wide chain of retail stores for selling several types of consumer electronic such as electronic project kits and hobbyist electronic components. On 25 February 2016, the receiver as well as the manger of Dick Smith, announced closure of the business in Australia and New Zealand. More than 2,460 staff in Australia and 430 in New Zealand were declared redundant post this event. The last store of the company closed on 3 May 2016 (Asic.gov.au. 2017).
On 4 January 2016, the share value of the company had fallen by more than 80% since December 2013. Due to this financial distress, the trading activity of Dick Smith was called to a halt. On the next day, the retailer were seen to collapse and placed under receivership. The main creditors of the company were identified to be National Australia Bank (NAB) and HSBC Bank Australia. As Dick Smith failed to secure the buyers, the company was seen to close down with a loss of 2,460 jobs. On 15 March 2016, online retailer founded by Ruslan Kogan named Kogan acquired the company.
Profitability ratio
The profitability ratio of the company has been taken into consideration by discussing on the ratios such as Net Profit Margin, Return on Equity, Gross Profit Margin, Cash return on sales and Return on assets.
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a) Profitability Ratio Analysis:- |
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Dick Smith Holdings Limited |
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Particulars |
2015 |
2014 |
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Revenue (A) |
1319670 |
1227604 |
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Net Profit/Loss (D) |
37905 |
19826 |
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Shareholders’ equity(H) |
169147 |
166940 |
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Gross Profit (B) |
326842 |
308002 |
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Net cash from operating activities (E) |
-3940 |
52177 |
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Total Assets (F) |
452105 |
401975 |
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Net Profit Margin (D/A) |
2.87% |
1.62% |
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Return on Equity (A/H) |
22% |
12% |
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Gross Profit Margin (B/A) |
25% |
25% |
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Cash return on sales (E/A) |
0% |
4.25% |
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Return on assets (D/F) |
0.084 |
0.049 |
Gross profit margin
This ratio is the amount of total revenue minus the cost of goods sold. The ratio is calculated by dividing the gross profit/loss by net sales. This ratio is seen to be useful for knowing about the company’s production efficiency over time. It can be clearly seen that the gross profit margin of the company has been seen with a decreasing trend of 25.09% in 2014 to 24.77% in 2015. Hence, it can been seen that the company’s production efficiency is in a declining trend.
Net profit margin
This ratio is seen to be useful for revealing the remaining profit after the costs of production, administration, and financing have been subtracted from sales, and income taxes. The net profit margin has shown an increase of 1.62 % in 2014 to 2.87% in 2015. Despite of the increasing trend of the net profit, it is usually considered as a short-term measurement of the company’s actions. It does not consider the capital investment or other expenditures.
This ratio is seen as the measurement of the profitability, calculated for knowing the profit generated with each dollar of shareholders’ equity. The Return on Equity is obtained by dividing the net income by shareholders’ equity. Due to increasing amount of shareholders equity the ROE has increased from 12% in 2014 to 22% in 2015.
This ratio is seen to be useful for identifying the how much profit is being generated per dollar of sales. A decreasing return on sales has clearly indicated that the company’s growth is in a declining trend. Due to negative net cash from operating activities, the cash return on sales of Dick Smith has reduced from 4.25% in 2014 to -0.30%.
This ratio depicts percentage of profit a company earns in relation to its overall resources. The computation of this ratio is done by dividing the net profit/loss by total assets. The increasing trend of the total assets of Dick Smith has led to a slightly increasing trend of return on assets.
Efficiency ratios
The main consideration of the efficiency of the company has been considered by evaluating the Assets turnover ratio, Receivables Collection Period and inventory turnover period.
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b) Efficiency Ratio Analysis:- |
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Dick Smith Holdings Limited |
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2015 |
2014 |
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Revenue (A) |
1319670 |
1227604 |
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Trade and other Receivables (B) |
53323 |
46688 |
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Cost of Goods Sold (D) |
992828 |
919602 |
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Total Assets (F) |
452105 |
452105 |
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Inventory (E) |
2524 |
3179 |
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Assets turnover (A/F) |
2.919 |
2.715 |
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Receivables Collection Period (365/(A/B)) |
14.75 |
13.88 |
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Inventory Turnover Period (365/D/E)) |
0.928 |
1.262 |
The asset turnover ratio is able to state the ability of the company to utilize the assets to produce more sales. As discerned earlier, the increase in the total assets of the company has led to an increasing trend of asset turnover in 2015.
This is identified as the frequency of converting the receivables into cash. The computation of the ratio involves dividing the total revenue with trade and other receivables by 365 days. The company has been able to pay its debtors slightly faster. This is evident with an increasing trend of receivables collection period of 13.88 in 2014 to 14.75 in 2015. Dick Smith has a high proportion of quality customers that pay off their debts quickly.
This ratio shows the frequency to convert the available stock for sales in 365 days. Due to declining trend of the inventory from 2014 to 2015, the inventory turnover ratio has reduced from 1.262 to 0.928 in 2015.
The liquidity position of the company has been discerned by computing the current ratio, quick ratio and times interest earned ratio.
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c) Liquidity Ratio Analysis:- |
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Dick Smith Holdings Limited |
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2015 |
2014 |
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Total Current Assets (A) |
334177 |
287358 |
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Inventory (B) |
2524 |
3179 |
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Total Current Liabilities (F) |
299668 |
258248 |
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EBIT (D) |
71907 |
43863 |
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Interest Expense (E) |
3679 |
2335 |
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Current Ratio (A/F) |
1.12 |
1.11 |
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Quick Ratio [(A-B)/F) |
1.11 |
1.10 |
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Times interest earned (D/E) |
19.55 |
18.79 |
The current ratio shows the ability of a company to pay its current liabilities from the current assets. The calculation of this ratio has been seen with dividing current assets by current liabilities. The current ratio has seen with a slightly increasing trend with an increasing of 1.11 in 2014 to 1.12 in 2015.
This ratio has been computed to know about the ability of the company to repay the current liabilities in terms of quick assets. This ratio has been also discerned with an increasing trend of 1.10 in 2014 to 1.11 in 2015 .
The times interest earned ratio shows the company’s ability to pay the interest expense with the earnings generated before interest and tax. Due to increasing trend of EBIT of the company from 2014 to 2015 with AUD 43863 million to AUD 71907 million has resulted in an increased times interest earned ratio. However, it can be still seen that the company’s interest expenses increased from AUD 2335 million in 2014 to AUD 3679 million in 2015. This is clearly a negative indication on the financial performance of the company.
The solvency ratio of the company has been calculated with debt equity ratio and total debt to total assets ratio.
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d) Solvency Ratio Analysis:- |
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Dick Smith Holdings Limited |
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2015 |
2014 |
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Shareholder’s Equity (B) |
169147 |
166940 |
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Total Debt (D) |
70500 |
15359 |
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Total Assets (E) |
452105 |
452105 |
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Debt Equity Ratio (D/B) |
0.42 |
0.09 |
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Total Debt To Total Assets (D/E) |
0.16 |
0.03 |
The debt equity ratio is commonly used to depict the ability of the company to repay the debt in terms of the equity. The main computation of this value is seen to be done by dividing the total debt/long term borrowings with total shareholder’s equity. The company has been able to show a lower reliance in the long term borrowings which is evident with an increased debt equity ratio of 0.09 in 2014 to 0.42 in 2015.
The main computations of the total debt to total assets have been seen with the portion of the assets, which are funded by the debt. It has been seen that only a small portion of the company’s assets are funded from the long-term borrowings.
This analysis has be seen to be done based on computing Price Earnings Ratio and Earning Price per Share. The calculations for the same has been depicted below as follows:
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e) Share Market Performance Ratio |
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Dick Smith Holdings Limited |
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2015 |
2014 |
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Market price per share (A) |
1.995 |
2.065 |
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Earnings per shares (B) |
3 |
4 |
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Earnings (D) |
37905 |
37905 |
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Cash Dividends (F) |
5 |
8 |
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Price Earnings Ratio (A/B) |
0.67 |
0.52 |
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Earning Price Per Share |
3.00 |
4.00 |
The price earnings ratio represents the expected returns from the share of the market. The increase in this ratio has been able to show market has high expectations from the Dick Smith even though the present earnings have been not justified for such a high price. The increase in the price earnings ratio has shown an increasing trend of 0.52 in 2014 to 0.67 in 2015.
This discerned as the earnings in terms of the total shares of the company. The declining trend of this ratio has clearly shown that the company is unable to make the most of the publicly listed shares.
Conclusion
The main depiction of the annual report of the company published in 2014 an 2015, has been able to highlight several positive aspects discerned from the increased total assets. This has led to considerable amount of improvements in terms of the return on assets and assets turnover ratio. The company’s shareholders equity has also shown an increasing trend which have resulted in increasing trend of Return on Equity. Another increasing financial indication due to this has been seen with increasing debt equity. However, the main reason for the financial distress has been mainly seen due to drastic decrease in Net cash from operating activities. Another sign of decline financial performance has been recognized with decreased inventory in 2015 and increasing cost of sales, which finally led to the liquidation of the company.
Reference List
Asic.gov.au. (2017). Dick Smith Holdings Limited | ASIC – Australian Securities and Investments Commission. [online] Available at: https://asic.gov.au/about-asic/media-centre/key-matters/dick-smith-holdings-limited/ [Accessed 19 May 2017].
Asx.com.au. (2017). [online] Available at: https://www.asx.com.au/asxpdf/20150818/pdf/430kvhrl8cpg0l.pdf [Accessed 19 May 2017].
Cooper, D.J., Ezzamel, M. and Qu, S.Q., 2017. Popularizing a management accounting idea: The case of the balanced scorecard. Contemporary Accounting Research.
Fullerton, R.R., Kennedy, F.A. and Widener, S.K., 2014. Lean manufacturing and firm performance: The incremental contribution of lean management accounting practices. Journal of Operations Management, 32(7), pp.414-428.
Simons, R., 2013. Performance Measurement and Control Systems for Implementing Strategy Text and Cases: Pearson New International Edition. Pearson Higher Ed.
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