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ACCT3013 Financial Statement Analysis Workshop Financial performance and bankruptcy prediction

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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;
SΔROA 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 SΔNFL equals one if the firm’s current-year net financial liability is lower than its prior-year
net financial liability, and zero otherwise;
SΔLIQ 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;
SΔOFFER equals one if the firm has not issued new common stock in the current year, and
zero otherwise; Operating efficiency variables SΔGM 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; SΔAT equals one if the firm’s current-year asset turnover ratio is higher than the firm’s prioryear asset turnover ratio, and zero otherwise;

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