Dick Smith Holdings Plc Case Study Analysis

Introduction

Australia’s oldest and one of the largest consumer electronics retailer Dick Smith Holdings (DSH) collapsed in January 2016 when its share price fell over 84% in less than 4 months. Its demise came as a shock to the industry and left more than 3000 employees jobless after closing down 393 stores in Australia and New Zealand.

DSH was performing well at the stock market and expectations were high but its sudden collapse gives rise to a need to analyse reasons behind its failure to hopefully prevent such disasters in future. To effectively analyse the reasons for DSH’s failure, this essay examines various quantitative factors such as financial ratio analysis, stock market performance and Altman Z-Score bankruptcy prediction model, along with several qualitative factors such as industry challenges, weaknesses in corporate strategy and business model, accounting and regulatory issues, corporate

This unusually high ratio generated high growth anticipation amongst investors since companies with lower debt usually offer higher P/E ratios. However, in 2015, the ratio fell to 12.875 which points how much the stock was overvalued initially and was a product of an accounting artefact. The stock market immediately reacted to this due to drop in expectations.Was it Anticipated?

DSH’s collapse came as a major surprise to the market. Capital markets are very volatile and have a tendency to react to earnings and expectations of earnings. Before it fell, the consensus forecast for DSH advised investors that it would outperform the market. However, DSH’s share price shockingly fell over 84% since it made its FY15 reports available and dropped 47% alone after $60million inventory write-off announcement. These announcements were unanticipated as the analysts backed the company recommending ‘strong buy’ and the stock price took a thumping when their profit guidance