In this report, study has been made on the case of Dick Smith Electronic Collapse. It is observed that company has been facing several cases and ethical issues in its administration department and directors code of conducts. Company has entered into related party transaction which is neither legal nor ethical for the organizations. Afterward, in second part of this report annual report of Qantas Australian Group Company has been analyzed by using financial tools for the investors.
This case reflects the unethical management practices which have been followed by managers and directors of Dick Smith Electronic Company. The main concern of this case is reflecting all the key issues which resulted into Dick Smith Electronic collapse (Chung, 2016).
Administration department concern (You have got friend into me)
In this case the main problem arouse in administration department of organizations. In this case Company entered into related party transaction by appointing the persons as administrator for its creditors who was working in the organization as an advisor. Receiver Ferrier Hodgson filed case against Dick Smith Electronic Company that directors of company breached their duty to exercise reasonable care and skills in managing company resources and indulged in artificially inflating profit of organization (Chung, 2016).
Share float information sink
It is evaluated that company has artificially inflated its profits and accountant and directors breached their duty to exercise reasonable care and skills in managing company’s inventory. This float has since been described as the greatest private equity heist of all the time.
Divergent of financial information
It is surrounded with Woolworth’s sale of Dick Smith business to anchorage. In these parties to the contract and other stakeholders do not agree with the book value of dick smith assets and inventory which result into less transparency in its reporting frameworks.
Banks and uneconomical outcomes
In this case, the main ethical issues in Dick Smith Electronic Collapse arouse of company’s failure to maintain its internal and external resources. Directors of company indulged in unethical business practice by appointing company’s advisor as administrator for the creditors at the time of liquidation. It is observed that person who is already having interest in Dick Smith Electronic Collapse will not take independent decision for creditors for their best interest. This appointed administrator will showcase creditors and other individuals who are having best interest in the business functioning of organizations. This seems unethical to appoint the person who was already working in the favor of Dick Smith Electronic as administrating offer for representing creditors for their dues. Dick Smith Electronic has also attempted delay and asymmetric information in its external information to its stakeholders which also provides unethical business practice. However, Company has faced various conflicts and soft landing of directors which results into liquidation of Dick Smith Electronic Collapse. Dick Smith Electronic ethical issues could be justified with its several acts such as insider trading, obfuscation and hiding information from stakeholders for gaining personal profits (Chung, 2016).
The main ethical issues which aroused in Dick Smith Electronic Collapse were related with the payment to creditors at the time of liquidation. Administrator who was related party to Dick Smith Electronic Company made 100% payment to banks and made creditors payment default to other creditors. This could be understood with the help of given table
(Chung, 2016).
|
Particular |
Banks gets |
Other creditors get |
Total |
|
Immediate sale unacceptable outcomes |
$ 140 M |
$ 30 M |
$ 170M |
|
Later liquidation |
$ 160M |
$0 |
$ 160M |
These types of discrepancies are done because administrator appointed by company was in favor of banks and was having less interest towards other creditors. This type of unethical practice put negative impacts of Dick smith brand image on its stake holders.
Dick Smith Electronic Company had set up rules and regulation accompanied with corporation act 2001. It is evaluated that company has believed in following stakeholders theories which reflects that all the directors of company would perform their task in the best interest of Dick Smith Electronic Company (Chung, 2016).
Contemporary theories
Dick Smith Electronic indulged in appointing a person who was having interest in the organizations as administrator for the creditors at the time of liquidation. This reflects that company followed unethical business practice and entered into related party transactions. in addition to this, directors of company have also violated agency rules and regulation as per Agency Theory.
Social contract theory
Dick Smith Electronic and directors of company would ethically oblige to abide by both social welfare and its responsibilities towards its stakeholders.
In the Dick Smith Electronic Collapse, there are several stakeholders who have got affected such as creditors (National Bank Australia and HSBC), shareholders (Ferrier Hodgson) and suppliers.
Shareholders- These are the person who have affected due to sudden up and down of share prices of Dick Smith Electronic.
Employees- These are persons who have been forced to leave their job due to collapse in Dick Smith Electronic.
Creditors- These are the persons who have given debts to Dick Smith Electronic such as National Bank Australia and HSBC, Ferrier Hodgson
These are the persons who have given debts to Dick Smith Electronic such as National Bank Australia and HSBC, Ferrier Hodgson
|
Particular |
Banks gets |
Other creditors get |
Total |
|
Immediate sale unacceptable outcomes |
$ 140 M |
$ 30 M |
$ 170M |
|
Later liquidation |
$ 160M |
$0 |
$ 160M |
(Chung, 2016).
These types of discrepancies are done because administrator appointed by company was in favor of banks and was having less interest towards other creditors. This type of unethical practice put negative impacts of Dick smith brand image on its stake holders.
These issues are related with the preparation and reporting of financial statement of organizations. It is observed that company has artificially inflated its profits and accountant and directors breached their duty to exercise reasonable care and skills in managing company’s inventory. Moreover, transparency is also one of the most issues which have been faced by stakeholders in Dick Smith Electronic. Inventory management of company is also untimely and booked at different artificial date so that cost of productions could be reduced to increase the overall profit of company.
Corporate governance of company is related with legal compliance of company with all the applicable laws and regulations. It is evaluated that Australian market is comprised with dynamic economy. However, all the rules and regulations of Australia are also not strengthening which results into less effective corporate governance of Dick Smith Electronic. Company has failed to make proper disclosure of its financial and non- financial information which results into high amount of ups and downs in the share price of Dick Smith Electronic. In addition to this company has also made default in appointing advisor of company as administrator for creditors for their debts. The main problem arouse in corporate governance and regulations are related with related party transaction in which company appointed a related party who was working in the organization as an advisor to be administrator for its creditors. Receiver Ferrier Hodgson lodged case against Dick Smith Electronic Company that directors of company breached their duty to exercise reasonable care and skills in managing company resources and indulged in artificially inflating profit of organization. This practice result into company making default in its corporate governance.
Director report- It is consisted with all the details of directors and other information about the company’s financial and non- financial information. Moreover, it sets out that company has complied with all the rules and regulation which applied on Qantas Australia group. There is other informatiosn such as Directors details, Notes to account, key financial statistics and auditor’s independent report. Other information is director’s history, their code of conduct, and future plan of Qantas Australia group (Annual report, 2016, Pg, 27- 50)
Director’s declaration – The Director’s declaration of Qantas provides that all the financial information shown reflects true and fair view of organizations. It also assure that company has reasonable ground to pay off its short term and long term debts and company will not go in liquidation for at least one year.
Comparison between director’s report and director’s declaration
Director’s report provides that financial position of company reflects true and fair view. Directors clarify the future plans of company and its strategic business setting. Nonetheless, Director declaration showcase that company is capable of meeting its all short term and long term liabilities and will not go in liquidation.
Key features
Assist stakeholders to make their decision in determined approach.
It boosts confident in stakeholders with company’s business operation.
It provides all the plans and procedure about the company and what it is going to do in future.
Requirement of both reports
This report is necessary for the purpose of providing true and fair view of financial statement of Qantas. Director declaration assists organizations to mitigate the risk of uncertainty in shareholders mind. On the other hand directors report provides key business functioning and all the required data of company.
Assets= Liabilities+ Shareholders equity
In the starting year accounting equation of Qantas Australia group would as fellows
16700=13445+3255 (Please see the calculation made in Excel)
The name of auditing firm of Qantas Australia Group is KPMG, an Australian partnership and a member firm of KPMG network who audited the financial statement of company (Annual report, 2016, Pg, 50)
KPMG has not passed any disclaimer on the business functioning of Qantas Australia Group which provides that company has provided true and fair view of its financial statement (Jacqueline, et al. 2012).
Other services which have been provided by KPMG in Qantas Australia Group
There are other services such as extent indemnity to extent permitted by laws and approved by directors of company. In addition to this, services like legal advisor and assessing of financial statement of company have also been provided by KPMG in Qantas Australia Group.
Qantas Australia Group has largest assets named property plant and equipment which is amounting to $M 11,670 (Annual report, 2016, Pg, 54). It covers more than 70% part of its total assets (Routledge, Sargeant, Jay 2014).
Opening value = $M 10,715
Closing value = $M 11,670
Valuation method- Plants and equipment in organizations have been valued by using method of depreciation and amortization methods. These assets have been valued on the basis of method of depreciation and amortization method. Fair value of Assets would be determined on the basis of its use in the organizations (Annual report, 2016, Pg, 54).
Qantas Australia group has followed written down value method for charging depreciation on its assets (Annual report, 2016, Pg, 54-70)
Qantas Australia group has more than 70% part of its total revenue from net passenger revenue which is around $M 13961 (Roth, 2017).
Revenue category consist of
Net passenger revenue- $M 13961
Net freight revenue- $M 850
Other- $M 1,389
(Annual report, 2016, Pg, 52-55)
Finance cost which have been charged by Qantas Australia group in its income statement from profit and loss account (Annual report, 2016, Pg, 52-54)
Finance cost- – $M 284
Finance cost in 2015- $M 349
Finance cost in 2016-$M 284
This finance cost has gone down by 19.36% in 2016 as compared to last year.
These changes arouse due to reduction in long term loans of company.
The directors of Qantas’s group have declared and issued fully franked dividend of seven percent per shares. This is consisted with amount of total $ 134 million (Annual report, 2016, Pg, 57).
Cash inflow from operating activities- $M 3,123
Net profit of company – $M 1,029
This provides that company has $M 2106 difference between cash inflow from its operating activities and net profit earned by company (Annual report, 2016, Pg, 57)
It is the amount of liabilities which would be aroused due to unforeseen internal and external factors. Management of company has put contingent liabilities in footnote of financial statement of company (Brigham and Ehrhardt, 2016).
Directors of Qantas Australian group of company have booked Unredeemed Frequent Flyer revenue as liabilities of company. This is the advance amount of received by organizations as revenue which would be provided by Qantas in near future to its clients (Jacqeline, et al. 2012).
Ratio analysis of Qantas Australia Group
Liquidity ratio
Liquidity position of Qantas is very weak and company has also increased its current liabilities which have resulted into high financial risk in organization. Nonetheless, current liabilities of company are also less as compare to its current assets.
|
Liquidity ratio |
2016 |
2015 |
|
Current ratio |
0.492031873 |
0.675903614 |
|
Quick ratio |
0.444223108 |
0.632797858 |
|
Working capital |
-3,570.0 |
-2,421.0 |
Profitability ratio
This ratio reflects that company’s ability to earn return on its investment. Qantas has increased its profit by 4% in 2016 as compared to last year. In addition to this, return on capital employed is also less to cover overall cost of capital which will diminish the value of capital. Nonetheless, company has paid good amount of return to its shareholders.
Operating profit margin= Operating profit / sales
Net profit margin= Net profit / sales
Return on Capital Employed= Net profit/ Capital employed
Return on Equity = Net profit/ Equity
|
Profitability Ratios |
2016 |
2015 |
|
Operating Profit Margin |
0.101419753 |
0.066262013 |
|
Net Profit Margin |
0.063518519 |
0.035407183 |
|
Return on Capital Employed |
0.0143628 |
0.0117929 |
|
Return on Equity |
0.316129032 |
0.162696107 |
|
Return on Total assets |
0.008474646 |
0.005812928 |
Debt equity ratio
It is inferred that Qantas has high financial leverage in its capital structure. However, company has reduced its long term debts in 2016 which has resulted into low amount of financial cost. Interest coverage ratio depicts the relation between operating profit and financial cost of company. it was 4.04 in 2015 which increased to 7.50 due to its less finance cost (Brigham &Ehrhardt, 2016).
Interest coverage ratio= EBIT/ Interest
|
Debt equity ratio |
||
|
Capital structure ratio |
2016 |
2015 |
|
Debt- equity |
0.124518411 |
0.171213558 |
|
Interest coverage ratio |
7.502283105 |
4.046332046 |
Efficiency ratio
Company has maintained effective turnover ratio which helps Qantas to reduce its capital blockage in the business. However, receivable turnover ratio has reduced to 18.47% in 2016 which reflects that company has reduced cash flow cycle which will eventually reduced the cost of capital (Barton & Wiseman, 2014).
Receivable turnover ratio= Total sales/ Average debtors
Creditor turnover ratio= Total net purchase/ Average creditors
Inventory turnover ratio= Cost of goods sold / Average stocks
Receivable turnover ratio= Total sales/ Average Assets
|
Efficiency ratio |
||
|
Efficiency ratio |
2016 |
2015 |
|
Receivable turnover ratio |
18.47206385 |
28.31871083 |
|
Creditor turnover ratio |
7.472976468 |
2.205201875 |
|
Inventory turnover ratio |
43.91793313 |
15.20646507 |
|
Assets turnover ratio |
0.148789023 |
0.278315956 |
Dividend per share –It provides that company has started to pay dividend to its shareholders in 2016. Company has adopted this practice with a view to increase its brand image in the market.
Dividend per share= Dividend paid/ No. of equity share
|
Particulars |
2016 |
2015 |
|
Dividend Paid |
134 |
0 |
|
Dividend per Share (DPS) |
0.041167435 |
0 |
Conclusion
There are several facts and issues have been analyzed in this report. The ratio analysis has been used to gauge the financial performance of Qantas Australia group which provide clear viewpoints whether investors should invest their money in organization or not. Now in the end it would be inferred that investors should not invest their money in Qantas Australia group for long run. As company is having high financial risk in its business functioning.
References
Barton, D. & Wiseman, M., 2014.Focusing capital on the long term. Harvard Business Review, 92(1/2), pp.44-51.
Brigham, E.F. & Ehrhardt, M.C. (2016). Financial Management: Theory & Practice. 15th ed. Boston: Cengage Learning.
Brigham, E.F. and Ehrhardt, M.C. 2016. Account Finance. Cengage Learning, PP 1-549.
Rao, P.M. (2011). Financial Statement Analysis and Reporting. Eastern Economic Edition, PHI Learning Private Limited, New Delhi.
Roth, M., 2017. Top Stocks 2017: A Sharebuyer’s Guide to Leading Australian Companies. John Wiley & Sons.
Chung, F. (2016) McGrathNicol releases Dick Smith report. News.com. au, retrieved on 26 April, 2017 from https://www.news.com.au/finance/business/retail/mcgrathnicol-releases-dick-smith-report/news-story/c2897a8cf8023b3f7490b7f16c2781c2
Routledge, Sargeant A, Jay E. (2014) Fundraising management: analysis, planning and practice.
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