ACCT3013 Financial statement analysis

W10E1: Dick Smith versus JB Hi-Fi

Dick Smith, one of the leading Australian consumer electronics retailer went bankrupt in early 2016. In this exercise, you are required to compare the fundamental performance of Dick Smith with its close competitor JB Hi-Fi to gain insights into the drivers of Dick Smith?s demise.

Required

1. Use Altman Z-score to determine the likelihoods of failure for both Dick Smith and JB Hi-Fi in 2014 and 2015. How does the Z-score perform in distinguishing these two companies?

2. Compute Piotroski?s F-scores (described below) for both companies in 2014 and 2015. How did the F-score perform in distinguishing these two companies?

Note: Dick Smith and JB Hi-Fi?s 2015 annual report can be accessed via http://www.asx.com.au/asxpdf/20150818/pdf/430kvhrl8cpg0l.pdf and https://www.jbhifi.com.au/Documents/Annual%20Report%20-%202015.pdf, respectively

ACCT3013 Financial Statement Analysis Workshop Financial performance and bankruptcy prediction [For enquiries please contact zihang.peng@sydney.edu.au] W10E1: Dick Smith versus JB Hi-Fi Dick Smith, one of the leading Australian consumer electronics retailer went bankrupt in early 2016. In this exercise, you are required to compare the fundamental performance of Dick Smith with its close competitor JB Hi-Fi to gain insights into the drivers of Dick Smith's demise. Required 1. Use Altman Z-score to determine the likelihoods of failure for both Dick Smith and JB Hi-Fi in 2014 and 2015. How does the Z-score perform in distinguishing these two companies? 2. Compute Piotroski's F-scores (described below) for both companies in 2014 and 2015. How did the F-score perform in distinguishing these two companies? Note: Dick Smith and JB Hi-Fi's 2015 annual report can be accessed via http://www.asx.com.au/asxpdf/20150818/pdf/430kvhrl8cpg0l.pdf and https://www.jbhifi.com.au/Documents/Annual%20Report%20-%202015.pdf, respectively. This assignment is technically mundane and simple, but it forces you to look through a large array of financial information in the annual reports. Piotroski's F-score is a composite measure of the firm's fundamental performance. F-score is calculated as the sum of nine binary variables capturing profitability, financial leverage/liquidity, and operating efficiency. The nine binary variables are defined as the following. Profitability variables SROA equals one if the return on asset is positive, and zero otherwise; SCFO equals one if the reported cash flow from operations is positive, and zero otherwise; SROA equals one if the current-year return on asset is greater than the prior-year return on asset, and zero otherwise; SACC equals one if the reported cash flow from operations is greater than its net income, and zero otherwise; Leverage/liquidity variables SNFL equals one if the firm's current-year net financial liability is lower than its prior-year net financial liability, and zero otherwise; SLIQ equals one if the firm's current-year current ratio (reported current assets/ reported current liabilities) is higher than its prior-year current ratio, and zero otherwise; SOFFER equals one if the firm has not issued new common stock in the current year, and zero otherwise; Operating efficiency variables SGM equals one if the firm's current-year gross margin ratio (ie, [sales-cost of goods sold]/sales) is higher than the firm's prior-year gross margin ratio, and zero otherwise; SAT equals one if the firm's current-year asset turnover ratio is higher than the firm's prioryear asset turnover ratio, and zero otherwise