ACCT6003 Fundamental Analysis for Equity Investment
Fundamental Analysis for Equity Investment
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ACCT6003 Fundamental Analysis for Equity Investment
Week 12 Assignment on financial distress and fundamental performance
Marks: 6/100
In 2016, Dick Smith Ltd declared bankruptcy. At the time, Dick Smith was one of the leading
Australian consumer electronics retailers. In this case study, you are required to perform
credit scoring analysis and fundamental performance analysis for Dick Smith and draw
comparisons with its close competitor at the time, JB Hi-Fi. The analysis may provide
insights into the drivers of Dick Smith’s financial distress and eventual demise.
You are required to use the provided Excel spreadsheet template to perform credit risk
analysis using the Altman (2000) z-score model and fundamental performance analysis using
the Piotroski (2002) F-score model. In the lecture of Week 11 we briefly discussed the
Altman z-score, and in the Appendix to this assignment you are also provided with a
summary of the Piotroski F-score model.
This assignment will judge your ability to self-learn and apply a new model or approach by
reading the articles by Altman (2000) and Piotroski (2002) that are available on Canvas under
the Week 11 Readings. You are also required to research and learn about the reasons that led
to the collapse of Dick Smith.
The 2015 and 2014 annual reports of the two companies are provided on Canvas.
Required:
Using the provided Excel template, you are required to perform the following analysis:
1. In the worksheet named ‘Q1 z-scores’, you are required to read Altman (2000) and then
estimate the Altman z-scores using the formulae provided in the Appendix to this handout,
for both companies in 2014 and 2015. [1.5 marks]
2. In the worksheet entitled ‘Q2 F-scores’, you are required to read Piotroski (2002) and
then estimate the Piotroski F-scores for both companies in 2014 and 2015. A summary
description of the Piotroski (2002) F-score model is provided in the Appendix to this
handout. You are required to apply the exact definitions of each indicator as instructed by
Piotroski (2002). [1.5 marks]
3. In the worksheet entitled ‘Q3 Discussion’ and in less than 300 words, you are required to
describe your findings and discuss the contrasting credit risk and fundamental
performance of the two companies. You are then required to use the information provided
by these two models to retrospectively explain whether and how the Altman z-score
model and the Piotroski F-score model could have been used in 2014 and 2015 to predict
Dick Smith’s financial distress in 2016. As part of this discussion, you are also required
to discuss the limitations and strengths of these models specifically in the context of Dick
Smith. We will not accept any generic answers that are not specifically related to the case
study of Dick Smith and JB Hi-Fi. [3 marks]
Altman Z-score formula
To calculate the Altman Z-scores use this formula. Note the time indices on each variable:
− = +1.2 . ! !"# ; +1.4 . ! !"# ; +3.3 . ! !"#; +0.6 . ! !"# ; +1.0 . ! !"#;
Instructions for calculations:
• Apply the above formula to the letter.
• Retained Earnings, Total Assets and Total Liabilities can be taken from the Balance
sheet directly. Working capital is Current Assets minus Current Liabilities.
• Sales Revenue and EBIT is from the Income Statement. EBIT stands for Earnings
before Interest and Tax expenses.
• Market Value of Equity is equal to the number of common shares outstanding times
the stock price as financial year end.
Piotroski’s F-score summary
Joseph Piotroski’s F-score is a composite measure of the firm’s credit risk and 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 follows:
Profitability indicators.
• 1 if the return on total assets is positive.
• 1 if the reported cash flow from operations is positive.
• 1 if the current year’s return on assets is greater than the previous year’s.
• 1 if the reported cash flow from operations is greater than net income.
Credit risk and source of funds indicators.
• 1 if the firm’s debt to total assets is lower than the previous year’s.
• 1 if the firm’s current ratio is higher than the previous year’s.
• 1 if the firm has not issued new common stock in the current year.
Operating efficiency indicators.
• 1 if the firm’s current gross profit margin ratio is higher than the previous year’s.
• 1 if the firm’s asset turnover ratio is higher than the previous year’s.
In the end, add up the binary indicators to a total score of 0 to 9; the closer to 9 the better the
company’s fundamental performance.
To learn more about the definition of this indicators and how you should exactly calculate
each indicator see Piotroski (2002).