The Reasons Behind the Collapse of Clive Peeters Limited Finance Essay

The purpose of this report was to discuss the reasons behind the collapse of Clive peeters limited, one of the leading electronic appliances sellers in Australia and examine these reasons to reach an ultimate conclusion on the future of this company. Research for this report was based mostly on this company's annual report for financial years 2006-2009, calculating various debt ratios and web based researches done on Clive Peeters Limited collapse done by experienced academics.

The major findings indicate that the company had serious flaws in its business structure and eventually failed to deliver due to its heavy dependency on debt coupled with some other factors like: bad image caused by the theft of the company accountant, too much discounting, company size and recession.

This report also sheds light on the current position of the company and explains different methods of external administration: receivership, voluntary administration and liquidation.

Table of Contents

Contents

Page Number

Company Background: Clive Peeters Limited

1

Types of Companies

2

Debt Analysis of Clive Peeters Limited (2006-2009)

4

Debt-Equity Ratio

4

Current Ratio

5

Debt Ratio

7

Acid Test Ratio

8

Times Interest Earned Ratio

10

Cause of Clive Peeters Limited's Collapse

11

Status Quo of Clive Peeters Limited

13

Conclusion: Personal View on the Future of Clive Peeters Limited

14

References

15

Company Background: Clive Peeters Limited

Clive Peeters Limited was one of the leading computer and electrical appliance retailer throughout Australia. The first store for Clive Peeters Limited was opened in Melbourne way back in the years of 1972. Since then it expanded its business to other states of Australia including: Victoria, Queensland and Tasmania. In the year of 2005 Clive Peeters took over Rick Hart, a chain retail store located in Western Australia (Company Overview: Clive Peeters Limited Website).

Around August 2010, Clive Peeters Limited failed to pay ASX's listing fee which disabled them to be listed in Australian Securities Exchange (ASX). Just few days before Clive Peeters Limited losing their ASX position, their accountant was found guilty of misrepresenting accounting figures for payroll and stealing a mammoth amount of 20 million dollars. According to a lot of critics Clive Peeters Limited's demise was caused due to this bad image created by their accountant to the public. Soon after that Clive Peeters Limited went into administer ship. About that time Harvey Norman took over 32 of the Clive Peeters Limited's and Rick Hart's stores.

According to Gerry Harvey the person who bought most of the stores of Clive Peeters Limited, Clive Peeters Limited may have been trading as insolvent for the last two years before getting into administration (Recent Highlights: on Clive Peeters Limited).

Types of Companies

Usually companies in Australia are registered with Australian Securities and Investment Commission (ASIC) under the corporations act. The two main branches of companies are: Public Companies and Proprietary Companies. Proprietary companies are of two types: Limited by Share and Unlimited with share capital. On the other hand, public companies can be of four main types. These are:

Companies Limited by Shares: Usually as per s.9 of Corporations Act whereby the liabilities of the members of the company is only limited to the unpaid amount of shares held by them (Australian Corporations Act, 2001).

Unlimited with Share Capital: In this case members of the company usually have no limit on their liability towards the company.

Company Limited by Guarantee: Company formed on the principle of having the liability of its members limited to the respective amounts that the members undertake to contribute to the property of the company in the event of it being wound up.

No Liability Company: In this case company is formed on the basis that members of the company would bear no liabilities towards the company (Harris et al 2009).

Clive Peeters Limited was a public company prior to its collapse. It was also listed in Australian Securities Exchange (ASX) index. Its main area of business was retail. Before it collapsed it was operating as company limited by shares. This meant that members of the company were its shareholders and their liabilities were only limited to their unpaid amount of capital. This company was listed in the ASX meant that the shares of the company was available to the public and they could trade them easily individually or through their brokers. This meant that as shareholders they all were members of the company and would be affected if something is to happen to Clive Peeters Limited.

There are lots of differences between the companies based on their types. Clive Peeters is a public company limited by share capital and ASX listed company where CPA Australia is a public company limited by guarantee and ASX unlisted company. CPA Australia limited by guaranty that means no required share capital for its formation. A public company limited by guarantee is one of which members guarantee to contribute a certain amount in the event of liquidation.

Kimberley Diamond Company NL was a public company with no liability but it had a share capital and it was listed before 2008. The main revenue generating source was diamond mining and exploration.

Singapore telecommunications Limited is listed on the Australian and Singapore stock exchanges. It's a private limited company and limited by share capital. SingTel is the parent company of Optus since 2001 and listed on both the Australian and Singapore stock exchanges. (ASX Website)

Debt Analysis of Clive Peeters Limited (2006-2009)

Debt-Equity Ratio

Usually a debt equity ratio indicates the amount of debt a business has borrowed from external lenders in comparison with the owner's equity. This gives an idea out of the whole equity how much a business has borrowed and how much it has received from its owners. Normally a debt equity ratio can be calculated using the following formula:

Total Liabilities/owners equity

If the ratio is too high, it means that the business is too much dependent on external financing and these external lenders have higher risk in case the business becomes insolvent.

For Clive Peeters Limited the debt equity ratio was following starting from year 2006 to 2009:

For 2006:

87.6 / 71.6

= 1.22

For 2007:

118.1 / 77.6

= 1.52

For 2008:

174.8 / 80.2

= 2.18

For 2009:

150.8 / 69.4

= 2.17

We can see from the above figures that Clive Peeters Limited's debt-equity ratio increased dramatically over the years from 2006 to 2009. This meant that over the years Clive Peters Limited had relied a lot on borrowings from external lenders for their business activities.

Current Ratio

This ratio helps users to figure out the ability of a business to pay its short term liabilities. The formula for current ratio is as follows:

Current Assets/Current Liabilities

If a company has a higher current ratio, it indicates that the company would be able to pay its short term liabilities like: debts and payables using its cash, inventory and receivables.

For Clive Peeters Limited the current ratio for the period of 2006-09 are as follows:

For 2006:

115.3/83.5

=1.38

For 2007:

140.5/114.9

=1.22

For 2008:

193.0/138.0

=1.40

For 2009:

158.9/111.1

= 1.43

This clearly indicates that Clive Peeters Limited's ability to pay its current liabilities like payables and debts were clearly decreasing using its current assets like cash, inventory and receivables over this particular period of time which surely is not a good sign. This implies that Clive Peters Limited was unable to manage its cash properly and had a severe loophole in their cash management system.

Debt Ratio

A debt ratio refers to the amount of the debt a company has in regards to its assets. It is calculated using the following formula:

Total Debt/Total Assets

The higher the ratio indicates the lower the chance of a company to pay its debts using its assets.

For Clive Peeters Limited the debt ratio for the period of 2006-09 are as follows:

For 2006:

87.6/159.2

=0.55

For 2007:

118.1/195.7

=0.60

For 2008:

174.8/255.0

=0.68

For 2009:

150.8/220.2

= 0.68

The figures clearly indicates an upward movement of debt ratio which indicates over this particular period Clive Peeters Limited's debt in comparison to its assets increased quite enormously.

Acid Test Ratio

This ratio helps users to figure out whether a company can pay off its current liabilities like payables and debts using only its cash, receivables and current investments but not using its inventory.

If this ratio falls below 1, a company usually has to work out its strategy with extreme caution so that in case of bad times they do not fall into any financial hardship and become unable to pay their debts. It is calculated using the following formula:

(Cash +Accounts Receivables + Short Term Investments)/ Current Liabilities

For Clive Peeters Limited the acid test ratio for the period of 2006-09 are as follows:

For 2006:

41.2/83.5

=0.49

For 2007:

41.6/114.9

=0.36

For 2008:

61.7/138.0

=0.45

For 2009:

150.8/220.2

= 0.46

From the figures it is quite clear that through out the whole period Clive Peeters Limited's acid test ratio was below 1 which indicates that in case of financial hardship Clive Peeters Limited would face difficulty to pay off its current debts using its cash, receivables and other forms of short term investments.

Times Interest Earned Ratio

Again this ratio is used to indicate whether a company would be able to pays its debts. It is calculated using the following formula:

EBIT/total interest payable on bonds and other debts

This ratio usually indicates how many numbers of times a company can pay its interests on debts using its pretax income. Sometimes if a company is unable to maintain a certain times interest ratio may enable its creditors to undertake further actions.

For Clive Peeters Limited the Times Interest Earned ratio for the period of 2006-09 are as follows:

For 2006:

19.51/1.4

=13.94

For 2007:

20.51/27.2

=0.75

For 2008:

17.3/16.7

=1.04

For 2009:

(8.1)/14.1

= (0.57)

From the above numbers we can easily understand that over the years of time Clive Peeters Limited's Times Interest Earned ratio dropped dramatically to a negative figure on 2009 which eventually forced Clive Peeters Limited to be declared as bankrupt.

Cause of Clive Peeters Limited's Collapse

One of the major contributors of Clive Peeters Limited's collapse was the theft by its own company accountant for an amount of $ 20 million dollars. In her two year period as an accountant of Clive Peeters Limited, Ms. Sonya Causer had been involved in stealing of almost 19 million dollars worth of money which later she used to buy herself 44 properties and expensive cars and jewellery. According to the prosecutor in charge of this case a primary cause of the collapse of Clive Peeters Limited was this theft and the bad image that they earned due to this incident.

Apart from this, too much debt and borrowings from external creditors were another reason held for Clive Peeters Limited's collapse. During the time it was booming it used quite a substantial amount of debt to expand its business but as soon as the economy was hit by a recession a people stop buying luxury goods like plasma TVs and LCD TVs Clive Peeters Limited started to experience its consequences.

To increase their volume of sales Clive Peeters Limited kept on providing discounts to their customers. Since their discounts were on pretty much all through the year, when the economy was hit by recession and people stopped buying their products they could not even reach their breakeven.

The size of Clive Peeters Limited is another important factor to be considered. With only 45 stores across all over Australia it would be considered as a fairly a medium company compare to its direct competitors during that time like Harvey Norman. Harvey Norman could easily provide huge discounts to its customers and still could make profit margin due to its size but it's not as same for Clive Peeters Limited. But Clive Peeters Limited tried to follow the strategies of Harvey Norman and ultimately paid the price.

Overall it can be concluded that Clive Peeters Limited had serious flaws in their business models which eventually made them to pay dearly. Relying on too much debt, too much discounting, and following its competitors' strategies and not coming up with some differentiating strategies were the main reasons for its demise (Thomson 2010).

Status Quo of Clive Peeters Limited

Clive Peeters Limited collapsed and went into voluntary administration on 19th of May, 2010. During that time the appointed administrators started to investigate whether the company could be preserved through a deed of company arrangement or a sale (Stafford et al 2010).

There are different types of external administration in case a company is in financial hardship. The main three of them are as follows:

Receivership

Voluntary Administration

Liquidation

Both receivership and voluntary administration are methods to keep a company alive during their time of financial hardships. The main difference between them is that in case of receivership, the process is being initiated by one of the secured creditors of the company. Usually they appoint a receiver who tries to sell the assets of the company in order to recover the money of the company's creditors. On the other hand, in case of voluntary administration, an administrator is appointed by the court who tries to keep the company afloat by restructuring its strategies, selling part of it and reducing the costs incurred by the company.

Liquidation is the process by which a company is brought to a complete end. All the assets and properties are distributed amongst company's creditors following a certain order. After the company is liquidated it would no longer exist in that name and the company would be de-registered from Australian Securities and Investment Commission (ASIC). (Harris et al 2009).

Conclusion: Personal View on the Future of Clive Peeters Limited

We all know that part of the Clive Peeters Limited's business was bought by Harvey Norman Holdings Limited after it went into voluntary administration. Its original name was kept as it is and its staffs in some of its stores were being able to keep their jobs. In my view, though Harvey Norman has bought part of its business, to keep the company afloat more money needs to be injected and its whole business structure needs a restructuring. Otherwise, it is going to be very difficult to keep Clive Peeters Limited from getting liquidated.

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