surfstitch

Making waves – SurfStitch Group Ltd (SRF) goes into administration


The information in this article is market commentary only and reflects Lincoln's views and beliefs at the time of preparation, which are subject to change without notice. To obtain up-to-date information, please contact us.

Yesterday it was announced to the market without much fanfare that SurfStitch Group Limited (SRF) went into voluntary administration.

SRF listed at $1 in December 2014 and was trading at a record high of $2.09 in November 2015. At the time, it claimed to be the global leader in online retailing within the ‘pure play’ Action Sports sector, servicing customers in over 125 countries, with a growing presence in Europe and the USA.

Its shares had fallen 90 percent to 22¢ by June 2016 following three profit warnings. The stock closed at 6.8¢ before being suspended. The company said that appointing administrators was necessary as it sought to remove uncertainties and address key business issues.

The company cited ongoing legal battles for causing a significant strain on cashflow and making it difficult for them to continue with regular business operations.

SurfStitch Financially Unhealthy since listing

Following the release of its first result as a publicly listed company, the risks to SRF were clear for investors to see. Despite being awash with cash following the capital raising, the company was immediately rated as Unhealthy by Stock Doctor with an “Early Warning” rating.

In subsequent years, the company was unable to address key weaknesses in their accounts. More specifically, negative operating cash flows, as well as a lack of profitability, were a legacy for SRF who were unable to turn their dire situation around.

When it appointed administrators, the company declared that a drain on cash had put a lot of pressure on the business.

The reality is that this did not come as a surprise to the Lincoln Financial Health Model as it was clear Operating Cash Flow to Total Tangible assets (OCFTAI) and Operating Cash Flow to Current Liabilities (OCFCL) were at critical points. Further, Current Liabilities to Total Liabilities (CLTL) was also in a poor position. This created an untenable scenario where a large amount of debt was due for payment within 12 months, yet the company was not generating the cash to meet its commitments.

The importance of Financial Health and being wary of unhealthy businesses

Since listing, SRF had been exposed to unacceptable risks and never was Financially Healthy. Therefore, investors have always had a clear view as to the level of risk their investment was exposed to.

Financial Health reached a critical point in 2015 when the company went into Distress and its fate was sealed. Investors who retained their shares despite ample warning, today hold an ‘investment’ that may likely be worthless. SRF now joins the honour roll of other infamous corporate failures such as:

SRF now joins the honour roll of other infamous corporate failures such as:

  • Ten Holdings
  • Paladin Energy
  • Arrium
  • Dick Smith
  • Babcock and Brown
  • Gunns
  • OneTel
  • Bond Corp
  • Quintex

This list is among the 94% of corporate failures Lincoln Stock Doctor has accurately identified as being Financially Unhealthy, often years before their collapse! Stock Doctor members have the advantage with information and insights available all day, every day.

To learn more about Stock Doctor visit www.lincolnindicators.com.au or call 1300 676 333.

 

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