Ratio Analysis And Corporate Governance: Analysis Of Dick Smith Holdings Annual Report 2015

Ratio Table

One serious red flag that can be identified from the financial statement of the company is Trade and other payable. It can be identified that major portion of the company’s liabilities and equities that is 45% is trade and other payable (Baños-Caballero, García-Teruel & Martínez-Solano, 2014). High level of payables will burden the company with level of liabilities and it will have to raise funds through borrowing for meeting the liabilities. Further, it will have an adverse impact on the liquidity position of the company and for improving the liquidity position it must pay off its trade payables within the period of 30 – 90 days (Enekwe, 2015).

Various warning signs are there that may confirm the discussion made above in part (a). Two of those signs are as follows –

• Operating activities – it is identified from the consolidated cash flow of the entity for the year ended 2015 that the cash outflow from operating activities amounted to $ 3,940,000. Major portion of the amount that is $ 14,30,877,000 paid towards payment of employees and supplies. It has been further noticed that the payment amount has been increased to $ 14,30,877,000 as compared to $ 12,61,131,000 for the previous year. It is indicating that the company is not paying for its dues on time (Easton & Sommers, 2018).
• Another indication is that the company has borrowed additional $ 70,500,000 through short-term borrowing. It is indicating that the entity is not able to meet its obligations related to payment and therefore required to borrow short-term funds from outside sources (Dokas, Giokas & Tsamis, 2014).

• Board structure of Dick Smith for the financial year 2015

As per the requirement of ASX regarding the board structure the listed company shall have the board of appropriate composition, size, commitment and skills to enable it in discharging the duties efficiently (Singh & Rose, 2018). Further, the board shall have nomination committee that –

• Has 3 members at least, majority of which are independent directors and
• The committee must be chaired by the independent director (Lama & Anderson, 2015).

Further, the committee shall disclose

• Charter of the committee
• Members of the committee
• At closing of the year, number of the times committee met over the period and the member’s individual attendance during the meetings

However, if the entity does not have the nomination committee, it must disclose the process and fact it uses for addressing the issues associated with the succession of board. This disclosure also ensures that the board has proper balance regarding independence, experience, skills, diversity and knowledge for enabling discharge of responsibilities and duties efficiently (Lama & Anderson, 2015).  

Further, the company must have and disclose the matrix for board skills that sets out mix of diversity and skills that currently the board has or the board is looking for achieving regarding membership.

It has been identified from the annual report of Dick Smith that it follows the requirement of ASX regarding the nomination committee and board skills. In 2015 May the company’s board expanded responsibilities of remuneration committee for incorporating the functions of the nomination committee and establishing the remuneration committee and nomination committee. Further, regarding the qualification or skills it has been found that the directors are selected based on their extensive relevant expertise and experience (Australia, 2018). They bring variety of experience and skills that includes business and industry knowledge, accounting, financial management operational, legal and experience regarding corporate governance.

• Sceptical view

Sceptical view is the attitude that involves the questioning mind that is alert to the conditions indicating possible misstatement. Using the sceptical view it can be stated that Dick Smith could have enhanced the board structure and the management as it did not disclosed the following –

• As per the requirement of ASX the registered entity’s nomination committee shall be chaired by independent director. However, Dick Smith did not mention by whom the committee is chaired.
• Further, the company did not disclose regarding number of times the committee met during the year and attendance of individual member (Lama & Anderson, 2015).
• Impact of the changes on regular operations

Common Size Balance Sheet

As the board did not mention the times the committee met during the year likelihood is there that they have not met the number of times they were supposed to. It will have adverse impact on the operational activities of the company as major decisions will be postponed and approval for any major decision will not be gained from required number of members.

As per the requirement of ASX the board shall have audit committee that –

• Has 3 members at least, all of which are non-executive directors and majority of which are independent directors
• The committee is chaired by the independent director (Exchange, 2014).

Further, the committee shall disclose

• Charter of the committee
• Relevant experience and qualification of the committee’s member.
• At closing of the year, number of times the committee met over the period and the member’s individual attendance during the meetings (Exchange, 2014).

However, if the company does not have the audit committee, it must disclose the process and fact it uses for addressing the issues associated with the succession of board. This disclosure also ensures that the board has proper balance regarding independence, experience, skills, diversity and knowledge for enabling discharge of responsibilities and duties efficiently (Singh & Rose, 2018).  

The board shall before approving the financial statement receive the declaration from CFO and CEO the statement in their opinion are maintained properly and complied with the AS and provides true and fair view of the company’s financial position and performance (Exchange, 2014).

Further, the entity that has AGM shall assure that the external auditors are attending the AGM and they are available for answering the questions from the security holder those are relevant to audit.

It has been found from the annual report Of Dick Smith for the year ended 2015 complied with all the requirements of ASX regarding principle 4. It established the audit and finance committee the main purpose of which is assisting board regarding carrying out of the financial, auditing and accounting reporting. Further, before approving the financial statement board received written declaration from CEO and each managing director as per the compliance with Section 295A of Corporation Act 2001. Further, the external auditor of the company is represented at AGM. Hence, the principle is properly implemented by the company (Australia, 2018).

Evidence from the 2015 Annual Report of Dick Smith

As per the requirement of ASX the company –

• Must have the committee or committees for supervise the risk.
• Board or the committee shall review the risk management framework of entity at least once in a year for satisfying itself that it is sound and disclose whether the review has been taken place.
• If the entity has internal audit function must disclose the the structure of the function and the role (Council & Exchange, 2014).

It has been found from the annual report Of Dick Smith for the year ended 2015 complied with all the requirements of ASX regarding risk management framework. It considers efficient risk management as the key for maintaining and achieving strategic and operational objectives. Further, the risk management is analysed and managed by audit and finance committee. Dick Smith also reviews the procedures of risk management for ensuring that it complies with all the legal obligations (Australia, 2018). Further, though the company does not have any separate function for internal audit it has the store focussed function for loss prevention in association with assessment and management of risk regarding loss.

Evidence from the 2015 Annual Report of Dick Smith

From the entity’s annual report for the year ended 2015 it has been identified that the net cash flow from operation amounted to $ 3,940,000. Main reason behind the negative cash flow was payment to the employees and suppliers amounting to $ 14,30,877,000. As per the requirement of principle 3 the listed company must have code of conducts for the directors, employees and senior executives. It shall act responsibly and ethically with the legal obligations and must involve itself with integrity, honesty and shall be consistent with reasonable expectations of the investors. It has been identified from the AGM report that the company did not discuss regarding the negative cash flow of the company. Hence, for providing true and fair view of the financial statement and act ethically it should have discussed regarding the negative cash flow from operation in the AGM (Tricker & Tricker, 2015). 

Evidence from the 2015 Annual Report of Dick Smith and ASX Corporate Governance Principles & Recommendations

Reference 

Australia, D. (2018). Dick Smith | The Best in Tech at Amazing Prices. [online] Dicksmith Australia. Retrieved 29 November 2018, from https://www.dicksmith.com.au/da/

Baños-Caballero, S., García-Teruel, P.J. & Martínez-Solano, P. (2014). Working capital management, corporate performance, and financial constraints. Journal of Business Research, 67(3), pp.332-338.

Council, A. C. G., & Exchange, A. S. (2014). Corporate governance principles and recommendations . ASX Corporate Governance Council.

Dokas, I., Giokas, D. & Tsamis, A. (2014). Liquidity efficiency in the Greek listed firms: a financial ratio based on data envelopment analysis. International Journal of Corporate Finance and Accounting (IJCFA), 1(1), pp.40-59.

Easton, M. & Sommers, Z. (2018). Financial Statement Analysis & Valuation, 5e.

Enekwe, C.I. (2015). The relationship between financial ratio analysis and corporate profitability: a study of selected quoted oil and gas companies in Nigeria. European Journal of Accounting, Auditing and Finance Research, 3(2), pp.17-34.

Exchange, A. S. (2014). Corporate Governance Principles and Recommendations . Sydney: ASX Corporate Governance Council, 27 March.

Lama, T., & Anderson, W. W. (2015). Company characteristics and compliance with ASX corporate governance principles. Pacific Accounting Review, 27(3), 373-392.

Singh, G., & Rose, A. (2018). Forthcoming principles and recommendations focus on corporate culture. Governance Directions, 70(7), 432.

Tricker, R. B., & Tricker, R. I. (2015). Corporate governance: Principles, policies, and practices. Oxford University Press, USA.