FINANCIAL STATEMENT ANALYSIS AND FINANCIAL DISTRESS PREDICTION

Lecturer:

Financial Statement Analysis and Financial Distress Prediction for DSHE Holdings Ltd

  1. Trend Analysis

This section helps to analyse the financial information of the DSHE Holdings Ltd. The primary goal is to analyse the amount of change and percentage change between the year 2013 and 2015. 2013 is the base year, and we compute the other two years as a percentage of the base year.

The rate trend analysis of the DHSE Holdings Ltd. indicates an increase in the cash, receivable, inventories and other current assets. For the total current assets, the company had a 61% increment in the year 2014 and an 87% increment in the year 2015. Current liabilities also increased over the three years period under analysis. For the case of the total current liabilities, there was a 79% increment for the year 2014 and an 113% increment in the year 2015. A percentage analysis of the working capital revealed an increase in the working capital over the period. As shown in the graph below, working capital of the DHSE Holdings Ltd. Increased with 16% and in the year 2015, it increased with a 23%. For this analysis, the year 2013 was the base year.

The inventories also increased over the period of the three years as previously noted. In the year 2014, the stocks experienced an increment of 50.63% concerning the year 2013. There was an increase in the inventories of 73.91% for the year 2015 concerning the year 2013.

 FINANCIAL STATEMENT ANALYSIS AND FINANCIAL DISTRESS PREDICTION

Chart 1: A graph of % increase in the working capital for the years 2013 (1), 2014 (2) and 2015 (3).

For the income stamen, there was an increase of 7.5% in the net sales between the years 2014 and 2015. The cost of goods sold also had an increase of 7.96% resulting to a 6.1% increment of gross margin. However, the net profit after taxation had a 10% decrease, which may have resulted from the 74.7% increase in taxes between the year 2014 and 2015.

  1. Financial Health of DSHE Holdings Ltd. (Springate Model)

Springate model helps to predict the bankruptcy of business. It uses four financial ratios that contribute to distinguishing between sound companies and those that are likely to fail (Vasigh, Fleming and Kay 204). The Following is the Springate formula:

 FINANCIAL STATEMENT ANALYSIS AND FINANCIAL DISTRESS PREDICTION   1

For the case of the Springate model, the cutoff rule is that we will term a firm to have failed if Z<0.862. For the event of the DSHE, the Springate Z-score is 1.735 and 1.643 for the years 2014 and 2015 respectively. Therefore, it is wise to consider that the firm will not fail. However, for the year 2013, the Springate Z-score is less than 0.862 (Yadav and Vijay 1591). However, some of the data for this year was missing. The missing data was EBIT, pretax profit, and the sales. Therefore, this value of the Z-Score is not correct.

According to Gunathilaka (43), a firm with a Springate Z score greater than 0.862 is financially healthy. Therefore, the DSHE is a healthy company. We can validate the results by a closer examination of the term bankruptcy. Husein and Lamberti (407) defines bankruptcy as a situation in which the assets of a company exceeds the liabilities. The current assets fro the three years analyzed was higher than the current liabilities. Therefore, the DSHE Holdings Ltd is not bankrupt.

  1. An exploration and Reporting on Relevant Information Releases

All listed companies have the responsibility to disclose their performance and operations information to the stakeholders through financial reports. A financial statement ensures accountability to the stakeholders. Take the current complexity of information; companies should present the information in harmony with the statutory requirements, shareholders’ difficulty of understanding the content and emergence of other forms of reporting (Ezzy and Revees 2). As a matter of facts, annual reports should bridge the gap between the information that the stakeholders expects to gain from the annual report and the legal requirements of reporting. Since materiality is an important principle of the financial reporting, efforts to disclose more efficiently focuses on evaluating whether the statement discloses material information to commercial users or merely adds confusion (White 5). The law, therefore, may rule in favor if the disclosure omits some information that a reasonable investor would alter to confuse the shareholders (White 6).

In an annual report, a company should give a business description, the strategies and its performance places of interest. The report must also contain a statement from the chairman and the chief executive. Business review is an important part of the report, which indicates the past performance and information that might assist to comprehend the future direction of the corporation. The report should have a section providing information about the management of the enterprise. This report should also contain details of their remuneration, their wealth, and guidance on how one can access their audited remuneration reports (Ezzy and Revees 3).

There are other relevant sections of the annual report such as statistical summary, corporate governance, corporate responsibility and shareholders information. The statistical analysis contains key fiscal and non-fiscal performance pointers for at least a period of five years. Company governance section provides information about the organization and the associates of the pertinent panel commissioners (White 7). Under the section of the corporate responsibility, the firm should provide a summary of its environmental and social impacts. Finally, the report should provide dates of activities that are relevant to the shareholders and key contacts where they can get more information.

From the above exploration, it is clear that DSHE Holdings Ltd. violates most of the reporting requirements. For example, in the statistical analysis with financial and non-financial performance indicators, the company gives a report for only two years instead of five years. This information is misleading because it is hard to determine the trend of the business. Material information about the board of governors should contain details of their remuneration, their wealth, and guidance on how one can access their audited payment reports. However, the board of directors does not reveal this information in the 2014 and 2015 annual reports. The compensation information provided is insufficient to determine the amount and the source of wealth of the members of the board of governors. Therefore, there is a potential basis for a claim against Dick Smith Holdings Limited directors and senior management. The charges may also affect the DSHE Holdings Ltd.’s audit firm for their failure to disclose the necessary information to the stakeholders.

Work Cited

Ezzy, Graham and Tony Revees. Reporting to Shareholders. Shane Buggle. Sydney: Assurance & Advisory Business Services, 2008.

Gunathilaka, Chandana. «Financial Distress Prediction: A Comparative Study of Solvency Test and Z-Score Models concerning Sri-Lanks.» The IUP Journal of Finance Risk Management (2014): 39-51.

Husein, Fakhri and T. Galuh Pambekti. «Precision of Models of Altman, Springate, Zmijewski, and Grover for Predicting the Financial Distress.» Journal of Economics, Business, and Accountancy Ventura (2014): 405-416.

Kumar, Manoj and Madhu Anand. «Assessing Financial Health of a Firm Using Altman’s Original and Revised Z-Score Models: A case Study of Kingfisher Airlines Ltd (India).» Journal of Applied Management and Investment (2013): 36-48.

Sadgrove, Kit. The Complete Guide to Business Risk Management. New York: Routledge, 2016.

Vasigh, Bijan, et al. Foundations of Airline Finance: Methodology and Practice. Farnham: Ashgate Publishing, 2010.

White, J. Mary. Disclosure Effectiveness: What Companies Can Do Now. Document. Sydney: National Association of Corporate Directors, 2014.

Yadav, Srinivas and Pallapothu Vijay. «Predicting Bankruptcy: An Empirical Study Using Multiple Discriminant Analysis Models.» Pezzottaite Journals (2013): 1588-1595.