It will be interesting to see what comes out of the aftermath of the Dick Smith collapse, there are already statements being made that the Secured Creditors will suffer an ‘enormous’ shortfall and thus everyone that stands behind them will fair even worse. The receivers are now looking toward the directors and auditors as potential providers of compensation.
What is really concerning is how much of this collapse was in fact quite visible; well in an invisible sort of way. The business was sold off by its previous owners for $96 Million. Its owners were a (reasonably) competent player in the retail space and thus considered the sale to be fair. It has a magic wand waved over it and miraculously increases in value almost six times and no one really asked any questions, in fact at the time it is hailed as a massive achievement for the venture capital market. The business continues to move out of many of its traditional products and centres on the one area that has the greatest amount of competition and providing the lowest per item returns. But it’s the value of the “Brand” we are told, it’s all in the name, we are told.
There are underlying fundamentals to business, if you get these right then your business, large or small will do well. If your business does well your name will become better known and thus you will become a “Brand.” Regrettably there are still many simply believe that the brand alone can carry the weight, but if you don’t get the basics right then sooner or later the Brand will fall, sometimes slowly and to some degree quietly, whilst others will evaporate in a spectacular implosion.
When looking at anything one must look well past the cover, but alas if everyone says it good then it must be good! Just like the Emperor’s New Cloth’s, yes? I recently received a newsletter talking about Price to Earnings ratios. I have always considered a publicly listed company to be sort of normal if it fell around the range of say 15 to 20, well in this article it quoted one prominent example with a ratio of 582 (my calculation is probably closer to 240 on very rough numbers, and I’m not an investment expert) but either way it’s a long way from 15 to 20!
You just can’t ignore the basics, well not if you want to minimise your risk that is!
I wonder what lessons Slater and Gordon may provide us? Hopefully, they’ll be positive ones.