Financial Ratio Analysis Of Dick Smith: Indications Of Possible Receivership

Calculation of Financial Ratios using Consolidated Financial Statements

Quick ratio – it measures the company’s liquidity through stating the ability of the company for making the payment towards current liabilities without selling the long-term assets of the company (Williams and Dobelman 2017). It can be seen from the annual report and calculation table that the quick ratio of the company is only 0.29. It states that the quick assets of the company are significantly lower as compared to the current liabilities. Therefore, to pay off the short-term obligations the company have to sell its long-term assets. As most of the businesses use the long-term assets for generating revenues, selling these assets will not only hamper the operations of the company but also will create an assumption in the mind of the investors that the company is not able to generate sufficient earning to make payment for the short-term obligations (Palepu, Healy and Peek 2013). The quick ratio of 1 state that the company’s quick assets are equal to its current liabilities and the short-term liabilities can be paid off from the quick assets. However, the quick ratio of Dick Smith for the year ended 2015 was just 0.29 that is clearly indicating that the quick assets are significantly low to pay off the short-term obligations of the company. Therefore, it is providing an indication that the company can go into receivership (Weil, Schipper and Francis 2013).

Debt equity ratio – it is a long-run solvency ratio used to evaluate the long-term soundness of the company’s financial policies. It shows the portion of assets financed through borrowing and portion that is financed by the shareholders fund (Coates 2014). The debt equity ratio of 100% shows that the company’s assets are equally financed by creditors and shareholders. Usually the creditors like low ratio that is less than 100% for debt to equity as low ratio indicates greater protection of their money. Further, the high debt to equity ratio indicates that the company is highly leveraged and overburden of interest can lead the company to unsustainable position. As it can be seen that the debt equity ratio of the company is more than 200%, it is giving an indication that the company can go into receivership (Brochet, Jagolinzer and Riedl 2013).

Borrowings – borrowing has adverse impact on the financial performance of the company. Increase in the debt indicates that the company is moving towards unstable financial status. Further, the interest on debt will overburden the company and at a point of time will lead the company to unsustainable position (Lawrence 2013). It can be observed from the annual report of the company that it raised new borrowing amounting to $ 70,500,000 during the year 2015. Further, the borrowing of the company is 13.86% of total assets which is a significant portion. Therefore, the borrowing of the company under the current liabilities of the balance sheet is a serious red flag that indicates that the company can go into receivership (Loughran and McDonald 2016).

• Cash from operating activities – it has been identified that the cash from the operating activities of the company has been reduced from $ 52,177 thousand to -$ 3,940 thousand over the years from 2014 to 2015. It led to the reduction of cash and cash equivalent balance for the years ended 2015. This in turn, will reduce the available current assets to pay off the current liabilities (Hilton and Platt 2013)
• Proceeds from borrowings – It can be seen that the proceeds from borrowing for the company has been increased to $ 12,500 thousand in 2015 from $ 57,598 thousand of 2014. This additional borrowing increased the debt equity ratio of the company. Further, during the year repayment of the borrowings reduced from $ 57,598 thousand to $ 52,000 thousand over the year from 2014 to 2015. This further increased the debt portion of the asset as compared to the equity (Daily, Kieff and Wilmarth 2014).

Discussion of Two Ratios Indicating Possible Receivership

• Board structure of Dick Smith

The board of the company for the year ended 2015 includes the following members –

• Robert Murray – Independent non-executive chairman
• Nicholas Abboud – CEO and Managing director
• Jamie Tomlinson – Independent non-executive director
• Lorna Raine – Independent non-executive director
• Robert Ishak – Independent non-executive director
• Michael Potts – CFO and Finance director (Dicksmith Australia 2018).

As per ASX Corporate Principles and Recommendations 3^rd edition, Principle 2 the board –

• Have nomination committee that has (i) at least 3 members, of which majority are the independent directors (ii) chaired by the independent director (iii) members of committee (iv) charter of committee (v) at the closing of each reporting period individual attendance for the members and number of times committee met
• Committee – During May 2015 the board extended role of remuneration committee for incorporating the functions of nomination committee. The nomination and remuneration committee charter includes the details regarding the selection of directors and the procedures of appointment that set out the procedures used by the company for addressing the succession issues of the board. It further ensures that the board has required balance of knowledge, skill, diversity, independence and experience for enabling them to perform the responsibilities and duties efficiently.
• Skills and qualification – the directors are selected based on their relevant and extensive expertise and experience. They bring variety of experience and skills to the board that includes the business and industry knowledge, operational, corporate governance and legal experience (Dicksmith Australia 2018).   
• As per the Principle 2, the nomination committee shall have at least 3 members, majority of which shall be independent. However, the committee of Dick Smith has 6 members, out of which 4 members are independent. As there is no maximum limit for the number of members Dick Smith could enhance the board structure and management under Principle 2.
• The board shall have sufficient size do that the requirement of business can n=be met and the required changes to the board’s composition can be managed without any disruption (Brigham and Ehrhardt 2013). If the numbers of members are enhanced, it will enhance the financial, managerial, operational and reporting procedures more transparent and efficient. Further, the business will be able to comply with the required regulations and strategic goals to improve the performances.

As per the requirement the board of the company established audit and finance committee. Main purpose of the board is to carry out the auditing, accounting and the financial reporting and risk management obligations and responsibilities. Under the charter, committee shall have at least three members and the majority of the board shall be non-executive independent member. The current members of the committee are Lorna Raine, Jamie Tomlinson and Robert Ishak. Each of these directors is considered as non-executive director and independent (Dicksmith Australia 2018). Further, the members shall be financially literate and must be familiar with accounting and financial matters with 1 member at least shall be financial professional or qualified accountant. All the committee members of the company are financially literate and Jamie Tomlinson has more than 12 years of experience as Chief Financial officer of large public company. Moreover, Lorna Raine is the qualified chartered accountant.

As per the requirement of ASX the company views the effective risk management as the key for maintaining and achieving the strategic and operational objectives. The management and identification of the company’s risks are the important priority for the board. The risk management is evaluated and managed by audit and finance committee and is governed by audit and finance committee charter that is viewed at investor centre at the company’s website under heading of corporate governance. The management regularly evaluates and monitors the efficiencies of the plans and process for risk management and the employee’s performances for implementing them (Dicksmith Australia 2018). Moreover, the management regularly reports to the board and the audit and finance committee regarding the risk management and identifies the material risk. It also identifies the extent to which the ongoing risk management of the company efficiently manages, identifies, addresses and tests the issues related to management of risk.

The board identifies the requirement for observing the highest standards for business conduct and corporate practice. Accordingly, it adopted the formal code of conduct that is required to be followed by all the officers and employees. Further, the company set out the code of conduct on various matters that includes business conduct, ethical conduct, compliance, information security, privacy, interest conflicts that is available at investor centre at the company’s website under heading of corporate governance. It has been identified that the cash from the operating activities of the company has been reduced from $ 52,177 thousand to -$ 3,940 thousand over the years from 2014 to 2015. It led to the reduction of cash and cash equivalent balance for the years ended 2015 (Dicksmith Australia 2018). However, nothing was mentioned regarding this in their AGM. Therefore, the company violated the Principle 3 under ASX Corporate Principles and Recommendations 3^rd edition that stated that the company must act ethically and responsibly.

Therefore it is concluded that, except the principle 3 for acting ethically and responsibly, the company is following and maintaining other principles like principle 2, principle 4 and principle 7.

Reference 

Brigham, E.F. and Ehrhardt, M.C., 2013. Financial management: Theory & practice. Cengage Learning.

Brochet, F., Jagolinzer, A.D. and Riedl, E.J., 2013. Mandatory IFRS adoption and financial statement comparability. Contemporary Accounting Research, 30(4), pp.1373-1400.

Coates IV, J.C., 2014. Cost-Benefit Analysis of Financial Regulation: Case Studies and Implications. Yale LJ, 124, p.882.

DAILY, J.E., KIEFF, F.S. and WILMARTH JR, A.E., 2014. Introduction. In Perspectives on Financing Innovation (pp. 13-16). Routledge.

Dicksmith Australia., 2018. Dick Smith | The Best in Tech at Amazing Prices. [online] Available at: https://www.dicksmith.com.au/da/ [Accessed 7 Apr. 2018].

Grant, R.M., 2016. Contemporary strategy analysis: Text and cases edition. John Wiley & Sons.

Hilton, R.W. and Platt, D.E., 2013. Managerial accounting: creating value in a dynamic business environment. McGraw-Hill Education.

Lawrence, A., 2013. Individual investors and financial disclosure. Journal of Accounting and Economics, 56(1), pp.130-147.

Loughran, T. and McDonald, B., 2016. Textual analysis in accounting and finance: A survey. Journal of Accounting Research, 54(4), pp.1187-1230.

Palepu, K.G., Healy, P.M. and Peek, E., 2013. Business analysis and valuation: IFRS edition. Cengage Learning.

Weil, R.L., Schipper, K. and Francis, J., 2013. Financial accounting: an introduction to concepts, methods and uses. Cengage Learning.

Williams, E.E. and Dobelman, J.A., 2017. Financial statement analysis. World Scientific Book Chapters, pp.109-169.

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