QUESTION
Overview
You are required to undertake an analysis of the financial health and management practices of Clive Peeters Limited. The analysis is to be based on Annual Reports of the firm and any other information you deem relevant i.e. newspaper and journal articles etc. This will require you to search the web for articles on Clive Peeters; there has been a significant amount written on the firm.
The assignment is undertaken in two stages as outlined under requirements.
Background
Clive Peeters is a whitegoods and electrical goods retailer operating in all states of Australia. The firm was founded about 50 years ago and was bought by Peter Lord and Greg Smith in 1993. The company was listed on the stock exchange in 2005 with a $120 million float.
The Annual Report states that the firm ‘specialises in the retail of premium electrical appliances but caters for all customers.’ It also states that the firm has ‘a very impressive range of electrical appliances, an ever expanding services proposition, and growing brand recognition.’
In 2008 the firm had more than 1500 staff and 48 stores Australia wide, when in Western Australia it traded under the brand Rick Hart, while in all other states it traded as Clive Peeters.
You will need to log on to the Learning Hub and under Assignments are the Annual Reports for Clive Peeters Limited for the years 2007, 2008 and 2009. To calculate the ratios you will sometimes need average figures, consequently you will also need the figures for 2006 which are in the report for the year 2007.
For your analysis please use the Consolidated Column.
Please note that there is a small discrepancy between the figures carried forward between two years. Just choose one of them for your calculations – it does matter which one you choose.
The assignment is in two parts, part 1 is a number of short answer questions. The aim of part 1 is for you to familiarize yourself with the Clive Peeters reports prior to the major analysis as required in part 2.
Required
Part 1
From the Consolidated column of the 2008 report provide a short explanation and/or calculation if appropriate for the following:
- Calculate the Working Capital figure
- For decision making purposes what is the significance of the Working Capital figure with reference to the composition of that capital in terms of meeting short term obligations for Clive Peeters
- Explain how the Plant and Equipment is valued by Clive Peeters
- Explain for decision making purposes the relationship between Total Liabilities and Equity
- What factors should Clive Peeters consider when setting the targeted gross margin
5 x 2marks = 10 marks
These are short answer questions consequently do not worry about the number of words.
Due Date: Give to your tutor in hard copy after class on March 20 and March 21, 2012.
Part 2
Provide a written report based on the following:
i) A comparison of the financial ratios for the years 2007,2008 and 2009.
ii) Other information from the Annual Report i.e. the Managing Director’s and the C.E.O’s report. Corporate Governance Statement
iii) Other information available in the public domain i.e. newspaper reports etc.
40 marks
Length: The total report should be approximately 3000 words.
Due date: Hand a hard copy to your tutor after class on April 17 and April 18 2012 and provide an electronic copy in grade book by midnight April 17 2012.
Total marks for the total assignment. (10 marks + 40 marks) = 50 marks
General instructions
The report should have the following sections:
Introduction
Financial Analysis (analysis of ratios)
Other information from Annual Report
Media and Journal Articles
Conclusion
The ratios required are the ones we did in class, however because Clive Peeters is a retailer most sales will be for cash to customers coming in off the street, therefore the debtors Turnover has no real meaning. So do not include this ratio in your analysis.
Penalty for late submission: 10% of marks per day for assignments not submitted by the due date unless special arrangements have been made with your lecturer.
Assignments must include the Assignment Cover sheet.
Any published material you refer to must properly referenced and included in a bibliography at the end of your report.
Ensure that you abide by the RMIT regulations on Presentation of Assignments. These can be found on the RMIT website.
SOLUTION
A comparison of the financial ratios for the years 2007, 2008 and 2009
The following financial ratios of Clive Peeters have been calculated:
Net profit margin
Gross Profit Margin
Asset Turn Over
Return on Assets
Return on Equity
Working Capital ratio
Quick Asset
Inventory Turnover Ratio
Gearing Ratio
Below is the discussion on each of the ratios and the analysis on these ratios for the here years.
Net Profit Margin: It gives the information on the profits made by the company from the revenues that have been generated in a given year (Ittelson 2009). The net profit is calculated after deducting the taxes from the operating profit of a company.
Thus higher Net profit margin shows the better performance by the company. However the decrease in net profit margin may be because of the price war with the competitors which would have resulted in increased expenses and thus lowering the profits.
In case of Clive Peeters the net profit for the year 2007, 2008 and 2009 has shown a decreasing trend. This as analyzed from the annual report is because of the increased expenses by the company on distribution and sales and marketing
Gross Profit Margin: It is calculated by getting the profit which is deducting the cost of goods sold from revenue generated (Troy 2011). Thus it is the actual profit the company earns from the actual business without considering other indirect costs related to the business.
This is important in considering and developing the budgets wherein the sales forecasts may have o be done. This also assists in developing the pricing strategies. This may be for two reasons, firstly to increase the sales in case the growth is linked to the volume. Higher the volume greater will be the profit. Secondly, gross margins analysis assists to fight the competitors in the market.
In case of Clive Peeters they have maintained the gross profit margin as almost the same over 2007 and 2008 and the gross profit had reduced in the year 2009. Thus it is this year which has seen decline in sales whereas the other costs of the company have increased which has resulted in negative net profit margin.
Asset Turn Over: This financial ratio tells how well the assets of the company have been utilized. It is dependent on the sales of the company and the assets of the company. In retail industry where the competition is high and in those industries where the profit margins are low asset turn over tends to be on the higher side.
The asset turnover of the Clive Peeters has been reducing because of decrease in sales of the company although the asset turnover is a little bit on the higher side being in competitive industry. Thus decrease in sales in 2009 has been impacting not only the net profit but also the returns on asset.
Return on Asset: This signifies the efficiency of the management in utilizing the assets of a company in generating revenues and thus the profits. Thus it is desirable o have high and increasing value of return on assets.
As seen from the calculations return on assets of clive peters has been decreasing indicating the inefficiency of the company. The return on assets which is dependent on net profit and total margin of Clive Peeters could have been improved by reducing the total assets of the company. This is because the management is not able to increase the revenue over the period of three years in comparison to the costs of the company. Thus either the company’s management should take steps to increase the sales or the assets employed should be decrease and invested in other investment opportunity.
Return on Equity:
Return on equity is calculated in order to analyse the profit being earned by the amount invested by the shareholders in the company (Wild, 2005). Thus it can be seen that for Clive Peeters this has also been declining. Thus the impact of performance in terms of sales and net profit margin has certainly impacted the shareholders interest.
Working Capital Ratio: This is very important as this is the measure of the company’s financial health and thus depicts how well company is placed in meeting its short term liability. Thus if the current assets are less than current liabilities the company will run into the problem of meeting the short term liability from its fixed assets which is alarming situtaion and may require a deep analysis into the problems being faceed. In case of Clive Peeters the working capital ratio is increasing thus it shows that the company is exceeding its current assets regularly thereby giving the indication that the company is having operational efficiency. Thus the concern of inefficiency at operational level is not the concern. The working capital ratio of Clive Peeters shows that the company is strong enough to meet its short term obligations, thus is in strong position to run the business.
Quick Asset Ratio: This is one of the ratios to estimate and analyze the liquidity which is there within the company. As this is dependent on inventories holded by the company and will be higher if inventoeries are less thus is desired to be high. It can be seen that tghe quick asset of Clive Peeteres is increasing on year on year basis but the increase is not that much as compared to working capital ratio. Thus it can be seen that the inventories are putting pressure on the company and thus are impacting the quick assets of the company.
Although this might be termed as conservative approach but does give precise picture, when the companies show inability to reduce the inventory being handled. Thus it has to be seen in association with Inventory turnover.
Inventory Turnover Ratio: This ratio gives the information on how well the inventory is being managed and utilized by the company. Low inventory turnover ratio implies either the company is keeping inventory in order to meet the sales which are increasing or inefficiency in creating sales which is resulting in high inventory. If this ratio is compared with thre gross profit margin it shows that the growth in profit margin is not there. This means Clive Peeters had estimated or budgeted the growth to be less. Based on the budgets the the goods have not been raised and inventory has been used up for the increased demand, may be. This is also shown by the increase in inventory turnover ratio of the company which has shown an increase on year on year basis.
Gearing Ratio:
The Gearing Ratio of Clive Peeters is increasing rapidly on yearly basis. This shows the vulnerability of the company for the downturn in business. This also shows the liabilities that have been created by the company and thus increasing the costs of interest that has to be paid for the liabilities and in long term may put pressure on the company. In 2009 the gearing ratio of Clive Peeters was more than 57% which clearly shows that more than 50% was the liability over share capital. This is very alarming and this has to be handled quickly and efficiently.
Based on above discussion it can be said that the financial Ratios of the Clive Peeters show that the expenses of the company have been increasing at a rate higher than the rate at which the revenue of the company is increasing.
Analysis from Managing Director’s and the C.E.O’s report. Corporate Governance Statement
Corporate Governance:
Corporate Governance gives the information on how the company is governed and the techniques of management followed in a company. This actually gives the stakeholders interest in running the business and is conducted by the board of directors on their behalf to takes steps for the benefit of the stakeholders.
Corporate Governance given in the annual report as per the compliance of the guidelines gives the interaction between the stakeholders, board of directors and the management of the company in developing the strategies for improving the performance of the company and to achieve the desired shareholder’s results.
Corporate governance provides with the distinction between the owners of the company and the management of the company i.e. the who has the control over the company and who actually controls the activities of the company.
The STrategic decisions of the company and the authorities of the management is defined in the corporate governance. Thus corporate governance gives the added advantage to the stakeholders of the company.
Corporate governance is very important as it gives transparency, safguard interest of shareholders and gives the basis for the management of the company to perform. It gives the direction to the government in the sense the shareholders exercise their full rights and the same is recognized and respected by the company’s management.
The corporate governance statement of 2007 of Clive Peeters highlights the following:
Role & Structure of Board and Management
Authority Delegation
Code of Conduct and Conflict of Interests
Composition of Audit and Compliance Committee
Risk Management
Share Trading Policy
Disclosure Policy
Shareholders Communication Policy
The corporate governance statement of 2008 of Clive Peeters highlights the following:
Lay foundation for Management
Structure of the Board
Safeguard Financial Reporting integrity
Risk Management
Disclosure of Statements
Fair Remuneration
The corporate governance statement of 2009 of Clive Peeters highlights the following:
Lay foundation for Management
Structure of the Board
Safeguard Financial Reporting integrity
Risk Management
Disclosure of Statements
Fair Remuneration
As seen above the corporate governance statement of the Clive Peeters is quite similar over the past three years giving more or less the same points. However there are two points worth noting. Firstly the corporate governance statement of 2008 and 2009 are more elaborative thus it provides more insight onto how the policies of the company have been evolving and how well the share holder’s interests were fulfilled. Another aspect that has been included in the corporate governance statement of 2008 and 2009 is the fair remuneration which was not highlighted in 2007. Thus it shows that the company is retrospecting on the aspects which are leading to reduced sales or increased costs.
The corporate governance reports of 2008 and 2009 have been more meaningful where in they provide the information on how well the shareholders interests were complied with. In case it was not complied the steps that have to be taken. As noted the structure of the board was not as directed in the corporate governance as independent directors were not part of the board. Thus these are some of the points that have been highlighted. Another point that has to be considered is that in 2007 the annual report of 2007 shows positive results for the company apart from the investments been made by the company. The corporate governance report was not ellaborative whereas the corporate governance report was elaborative in 2008 and 2009. Thus the company does take steps to look into the issues and the steps that may improve the performance of the company.
There are a lot of advantages of the corporate governance which include ensuring success of the company and the economic growth. It also ensures that the confidence of the shareholders is maintained and thus the investment in the company is not hampered. Corporate Governance thus gives the direction to the management of the company ensuring the interest of all and that too efficiently utilizing the resources as given by the shareholders.
The objective of the managing director’s report in the annual report is to provide the information to the board of directors on the activities that have been taken up by the company to achieve the desired results and to report how and to what level these activities comply with the results desired. It also lists down the strategic issues that the company is facing and what strategic steps may ensure these issues are avoided
The aim is to ensure that the board is involved in the performance and decision making and to ensure that the company is moving towards achieving the results to ensure shareholders interests in the investment in the company.
According to the managing Director’s report of Clive Peeters in all the three years a positive coming year is expected. Another similarity in all the three years is that they have invested huge in the new stores across Australia, especially Western Australia. The Managing Directors report highlights the issues by calculating the various ratios like net profit margin and the return on equity and assets. Rightly so it has been admitted in the annual report of 2009 that the situation is serious if not alarming in the light of reducing important financial ratios.
There have been some aspects that have been subjective for example the managing directors reports of 2007, 2008 and 2009 says that the company is making huge investments in the new markets like West Australia. Another important point is that the according to the managing directors report these huge investments have resulted in the reduced values as calculated of the financial ratios and thus may have to wait for a few years to ensure that these territories start giving profits to the company. The company is in the growth phase as far as these territories are concerned.
The Chairman’s statement also highlights these issues although not assisted by the financial ratios. The Chairman’s report depicts the crunch situation of 2009 and thus suggests that the steps need to be taken to improve the situation that has risen in the wave of huge investments the company has made.
The Chairman’s and Managing Director’s report does highlight the issue that the company has been facing in the wake of increased competition in the retail market. The company has also been facing issues in 2007 and 2008 due to new products that have been added in the list of products offered by the company. Another issue that has been highlighted is that of increased cost of fuel and other resources. But the main concern has been shown in the report of 2009 which is the decreasing sales over the years of CLive Peeters. The Management report also suggests that they have been as they had to in marketing of the new stores that have come up.
Thus the opening of the new stores has resulted in huge investments for setting up of the stores and expenses of sales and marketing and other related factors.
Over the period Clive Peeters has been in news but not for the positive reasons. there have been instances where in cases of thefts have been highlighted. There have been cases of decreased customer spending and thus this may impact the revenues of Clive Peeters. Such things have been impacting the company wherein one of the aspects as highlighted in the corporate governance statement have to be complied with is safeguarding the financial reporting integrity. This is because of the highlighting of thefts by the payroll manager of the company (Battersby, 2009).
Conclusion and Analysis
As analyzed from all the perspectives, namely, financial ratios, Chairman’s report and the managing director’s report and the corporate governance statement it can be said that the Clive Peeters is facing the problem of leadership where in the issue is of impressing the company and motivation is lacking to improve the sales which is of prime objective. Secondly corporate governance statement is kept simple and straightforward but the implementation is not that good. Had that been the case the issues of investment and losses would have been highlighted to the shareholders and different strategy would have been formulated.
Thus the issue with the company is the change in its management as given in the corporate governance statement which has seen the changes by the end of 2009 may be as a result of results shown by the company. But the analysis shows that the issues of investments were not properly highlighted and the remedial steps were not taken in time. The management also has not taken innovative steps and has been taking traditional steps of making new investments as has been highlighted in the annual report.
The main point of concern for Clive Peeters is that the industry has shown growth but not as much growth is seen with Clive Peeters. As seen from the news articles Clive Peeters has been going through the troubles phase as Harvey Norman in 2011 has closed down the stores in Victoria and West Australia because of the poor results of the company. After the investments made by Harvey Norman the results were not good enough as the sales have been dropping in the challenging business environment.
The policies and decision making of the Clive Peeters has to change or amended in order to ensure that they perform in order to achieve desired results without putting too much extra pressure on the already spending pockets of the company.
The Financial ratios and the annual report suggests that over the three years the profits of the company is decreasing thus there is a need to make investments but not in the new territories at least not in tghe current environment wherein the costs are increasing and the competition is increasing. The point that has to be considered is that the competitors are gaining. This may be due to that they are facing different competitors in different territories, thus the need to make investments in every territory is important there by increasing the pressure on the management. Thus concentrating only on the existing territories and making investments in them to ensure that they become the market leader in the territory.
The worse part of the company is that the fraud have been highlighted hitting the shareprice of the company and thus the investors interest. The company needs to rebuild the image for each dedicated management is required with short term goals and building on them to rebuild the image of the company as a whole. This can be done shown by the harmony in the corporate governance statement, managing directors report and the chairman’s report supported by the financial results of the company as it the most important part around which the growth of the company is standing.
References
Troy L. (2011). Almanac of Business & Industrial Financial Ratios, CCH Inc
The Risk Management Association, (2011), Annual Statement Studies Financial Ratio Bechmarks 2010-2011,
The Risk Management Association, (2010), Annual Statement Studies: Financial Ratio Benchmarks, TRMA
Zappone Chris, (2011), “Harvey Norman pulls plug on Clive Peeters”, http://www.smh.com.au/business/harvey-norman-pulls-plug-on-clive-peeters-20110810-1ilr5.html
Kidman Angus, (2010), “Harvey Norman scoops up Clive Peeters stores and stock”, http://www.crn.com.au/News/218650,harvey-norman-scoops-up-clive-peeters-stores-and-stock.aspx
Black Anthony, (2012), “Veteran retailer Gerry Harvey’s confidence trick”,
Carson Vanda , Battersby Lucy, (2009), “Clive Peeters left reeling by $20m sting”, http://www.theage.com.au/business/clive-peeters-left-reeling-by-20m-sting-20090811-egz2.html
Janda, Michael (2010). “Not so easy – Clive Peeters brings in administrators” ABC website, Retrieved 23 May 2010.
http://www.smartcompany.com.au/retail/20110811-harvey-norman-admits-mistake-on-clive-peeters-investment-warns-10-of-retailers-could-shut.html
Bernstein Leopold A., (1997), Financial Statement Analysis And Annual Report Booklet
Ittelson Thomas R., (2009), Financial Statements: A Step-by-Step Guide to Understanding and Creating Financial Reports
Wild John J, (2005), Financial Statement Analysis
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