ACC10007 Financial Analysis of JB Hi Fi Ltd
INTRODUCTION
A financial analysis is carried out on JB HI-FI to help the company make better decisions. The purpose is to inspect the past and current data so that JB HI-FI’s performance and financial position can be executed and future financial risks and potentials maybe evaluated. Financial statement analysis has helped produce valuable information about trends and relationships, the earnings of the company, and the strengths and weaknesses of JB HI-FI.
COMPANY AND INDUSTRY BACKGROUND
John Barbuto in 1975 established JB HI-FI in Melbourne Australia. In 1983 it was later sold to Richard Bouris and David Rodd who expanded the business into a chain of 10 stores across Melbourne and Sydney, yielding over $150 million by 2000(MorningStar, 2015). Later they then sold the majority of their holdings to private equity and was put up on the Australian Stock Exchange in October 2003.Initially JB HI-FI specialized in HI-FI equipment but as the fame of Vinyl records dropped down, JB HI-FI cleared out all of their stock of records and began offering singularly CDs, and were considered as the first Australian retailer to do so(MorningStar, 2015). As the Vinyl records revived their business, it gave JB HI-FI a chance to expand their business over other states as well as Melbourne. The chain has now expanded over Australia and largest cities of New Zealand(JB Hi Fi Limited, 2014).
JB HI-FI has increased its profits by 26% in comparison with 2008/2009 analysis where as other music stores have been losing money in the business(MorningStar, 2015). JB HI-FI has also specialized in import of CDs from UK USA and on special order CDs can also be imported from Africa, Asia and South America. JB HI-FI has not only limited its business to selling CDs but has also expanded and is also considered as a leading retailer for consumer electronics such as Plasma, LCD TVs, digital cameras, in car entertainment portable audio and video recorders, computer and video games, gaming accessories and consoles, fridge and freezers BLU-Ray and DVD movies, information technology and gadgets(MorningStar, 2015).
OBJECTIVE OF THE PAPER
The purpose of this paper is to thoroughly analyze and interpret JB HI FI LTD.’s financial history for the last 3 years. The financial analysis has been done and the resulting ratios are used for examining the trends and have been compared with industry ratios as well. Profitability, liquidity and efficiency ratios have been used to estimate company’s current status to understand the financial status of the company.
RATIO ANALYSIS OF FINANCIAL REPORT DATA
This part of paper will conduct a financial ratio analysis to assess the historical performance of JB HI-FI. The financial ratios can be categorized under five headings. These are liquidity ratios, asset management ratios, financial leverage ratios, profitability ratios, and market based ratios. Also, ratio analysis lets us to analyze company’s performance in terms of continued profitability. Using the data we discussed above of financial statement we can conduct ratio analysis.
PROFITABILITY:
Return on Equity:
This ratio indicates how profitable a company is by comparing its net income to its average shareholders’ equity. The return on equity ratio (ROE) measures how much the shareholders earned for their investment in the company (Van Horne James, 2002). ROE can be calculated as Net Income after tax / Shareholders’ Equity × 100.
| JB HI FI LTD. | |||
| Net Income after Tax | Total Shareholders’ Equity | ROE | |
| 0 | 0 | ||
| 2012 | $104,641.00 | $168,407.00 | 62.14% |
| 2013 | $116,632.00 | $214,164.50 | 54.46% |
| 2014 | $128,447.00 | $269,230.50 | 47.71% |
Source: (JB Hi Fi Annual Report, 2014)
There is a significant decrease in the value of ROE in 2013 as compared to 2012. In 2014 47.71% means that every dollar of common shareholder’s equity earned about $0.4771 this year. In other words, shareholders of JB HI FI LTD. saw a 47.71 percent return on their investment. The ratio indicates a slight decrease from 2013 (54.46%) to 2014 (47.71%). The decrease is due to increase in total shareholders’ equity of the JB HI FI LTD.. The shareholders equity decreased by 23% in the years under consideration. This indicates that JB HI FI LTD. has not been able to earn net profit after tax that could be used to give the increased return to the shareholders. JB HI FI LTD. can use higher sales, lower taxes and tools to get more leverage for improving its return on equity. In order to increase the return on equity JB HI FI LTD. can hold more debt that will be used to get more assets. As equity is calculated by deducting debts from the assets, so by increasing debts JB HI FI LTD. can decrease its equity which will further increase return on equity.
Return on Total Assets:
The return on assets ratio or ROA measures how efficiently a company can manage its assets to produce profits during a period (Van Horne James, 2002). ROTA can be calculated as: .Net profit before interest and tax / Average Total Assets × 100
| JB HI FI LTD. | |||
| EBIT | Average Total Assets | ROTA | |
| 0 | 0 | ||
| 2012 | $162,027.00 | $789,144.00 | 20.53% |
| 2013 | $178,208.00 | $827,226.50 | 21.54% |
| 2014 | $191,522.00 | $851,572.50 | 22.49% |
Source: (JB Hi Fi Annual Report, 2014)
Return on assets increased from 2012 to 2014 by almost 1.96%. It means that either income before interest and tax is increasing or average total assets are increasing. In JB HI FI LTD. case we can see that its income before tax and interest expense has been increasing significantly while the average total assets are also increasing to cancel off the effect of increasing earnings before interest and tax. The increase in return on total assets is due to increase in the sales of JB HI FI LTD. by $175,379,000. In 2014 ROTA of 9.74% means that JB HI FI LTD. is driving profit before paying of its taxes and interests of $0.45 for every $5 it has invested in its assets ($0.45 is 9% of $5). JB HI FI LTD. can further increase its ROA by boosting its profit margin or, more efficiently, by using its assets to increase sales.
Gross Profit Margin:
Gross profit margin is financial metric used to assess a firm’s financial health by revealing the proportion of money left over from revenues after accounting for the cost of goods sold (Van Horne James, 2002). Gross Profit Margin: Gross Profit/Net Sales.
| JB HI FI LTD. | |||
| Gross Profit | Net Sales | Gross Profit Margin | |
| 0 | 0 | ||
| 2012 | $659,830.00 | $3,127,792.00 | 21.10% |
| 2013 | $712,202.00 | $3,308,396.00 | 21.53% |
| 2014 | $755,981.00 | $3,483,775.00 | 21.70% |
Source: (JB Hi Fi Annual Report, 2014)
From 2012 to 2014, a gross profit margin has almost remained at similar level. This is because JB HI FI LTD. has somehow maintained its net sales and gross profit. It is sole reflector of how much JB HI FI LTD. earns and maintains its level of profit after paying of the production costs that incurs during production. Here it reflects the JB HI FI LTD. is able to grip the cost of sales and maintain it in successive years. The overall increase in cost of sales of JB HI FI LTD. products was only $259,832,000 which is set off by increase in sales of $355,983,000. This means that JB HI FI LTD. is consistent in maintaining its cost of sales associated with increased sales. The gross profit can further be increased by boosting up sales revenue and cutting off more on the cost of sales.
Net Profit Margin:
Net profit margin is the percentage of revenue remaining after all operating expenses, interest, taxes and preferred stock dividends (but not common stock) (Van Horne James, 2002). Net Profit Margin: Net Profit after tax /Net Sales
| JB HI FI LTD. | |||
| Net Profit after Tax | Sales | Net Profit Margin | |
| 0 | 0 | ||
| 2012 | $104,641.00 | $3,127,792.00 | 3.35% |
| 2013 | $116,632.00 | $3,308,396.00 | 3.53% |
| 2014 | $128,447.00 | $3,483,893.00 | 3.69% |
Source: (JB Hi Fi Annual Report, 2014)
JB HI FI LTD. has maintained its net profit margin at almost 3% to 4% in all three years. As it shows how much of each dollar earned by the company is translated into profits so we can say that JB HI FI LTD. has converted 3.69% of its sales into its profits in 2014.
Remarks on Profitability:
The profitability ratios analyzed above some major points that can be highlighted for JB HI FI LTD. to look at. The main points are:
- Return on assets is increasing but return on equity is decreasing over the time span of three years under consideration. The biggest factor that influences ROE and ROTA are the financial leverage and debt structure of company. By increasing the debt, JB HI FI LTD. can increase its assets and Return on Equity will get a boost in result. In case of ROA the picture is different, as JB HI FI LTD. can utilize debt leveraging which can dampen the return on assets ratio of company because by taking debt JB HI FI LTD. will be increasing its assets (more cash) and it will decrease the return on assets ratio. So ROE and ROA moves in opposite direction and in order to increase ROE, JB HI FI LTD. will have to tradeoff between ROE and ROA. The figure below shows the increasing and decreasing trend in ROE and ROA.
Figure 1: Return on Assets and Return on Equity for JB HI FI LTD.
The second main point to analyze is that there is significant difference between net profit margin and gross profit margin. In 2014 the net profit margin was 3.69% and gross profit margin was 21.70%. The difference between both is translated by high sales and marketing expenses that are used for finding net profit for each year. JB HI FI LTD. has experienced the sales and marketing expenses of $355,694,000 in 2014 and $336,831,000 in 2013. This justifies the gap between net profit margin and gross profit margin. The figure below shows the trend in net profit margin and gross profit margin over span of three years.
EFFICIENCY ON OPERATIONS:
Inventory Turnover Period:
Inventory turnover is the times JB HI FI LTD. is able to convert its inventory into cash in a year of 365 days. It can be calculated by: Average Inventory Held / Cost of goods sold × 100(Brigham & Ehrhardt, 2013).
| JB HI FI LTD. | |||
| Average Inventory Held | Cost of Goods Sold | Inventory Turnover in days | |
| 0 | 0 | ||
| 2012 | $417,614.50 | $2,480,188.00 | 61.46 days |
| 2013 | $427,145.00 | $2,609,684.00 | 59.74 days |
| 2014 | $442,312.50 | $2,745,111.00 | 58.81 days |
Source: (JB Hi Fi Annual Report, 2014)
There is a considerable decrease in the inventory turnover period from the year 2012 to 2014. This decline can be seen as a favorable eventfor the company as the company is able to convert its inventory into cash in 58 days in 2014 as compared to 62 days in 2012. It is also justifying the increase in the sales of JB HI FI LTD.Company as in profitability ratio we analyzed that the sales revenue is showing and increasing trend. Decreasing inventory turnover in days means that JB HI FI LTD. has short cash conversion cycle as it can collect more revenue by selling of its inventories quickly.
Settlement period for Debtors/accounts receivables:
The accounts receivable in days is the reflection of company’s trading policies. It shows how efficiently JB HI FI LTD. is able to convert its receivables into cash by effective collection methods and techniques. The average receivable in days can be found by: Average Accounts Receivables / Credit Sales × 365(Brigham & Ehrhardt, 2013).
| JB HI FI LTD. | |||
| Average Accounts Receivable | Credit Sales | Accounts Receivable in Days | |
| 0 | 0 | ||
| 2012 | $58,315.50 | $3,127,792.00 | 6.81 days |
| 2013 | $61,312.00 | $3,308,396.00 | 6.76 days |
| 2014 | $67,495.50 | $3,483,775.00 | 7.07 days |
Source: (JB Hi Fi Annual Report, 2014)
From the analysis above we can see that JB HI FI LTD. has faced an increase in accounts receivable days. It can be due to bad management that can increase the risk of bad debts by JB HI FI LTD. Company. In order to improve the accounts receivable days JB HI FI LTD. can thoroughly track down its accounts receivables, state the terms of payment clearly, offer early payment discounts, calling the customer after sending the invoice for sold items and by efficiently maintaining aging receivable data. It can help JB HI FI LTD. to outline the bad debtors earlier than it actually incurs. The receivable days, although, have increased but still it looks that it is better on average as compared to its industry.
Settlement period for Creditors/accounts payables:
Accounts payables days describes the efficiency of the firm to payback its creditors. It shows whether a firm is taking too long to pay back its creditors or is paying early and taking advantage of early payment discounts. It can be calculated as: Average Accounts Payables / Credit Purchases × 100. Credit purchases are further calculated as: (Cost of goods sold – Opening Inventory) + Closing Inventory(Brigham & Ehrhardt, 2013).
| JB HI FI LTD. | |||
| 2012 | 2013 | 2014 | |
| Opening inventory (000) | 406,939 | 428,290 | 426,000 |
| Closing inventory (000) | 428,290 | 426,000 | 458,625 |
| Cost of goods sold (000) | 2,467,962 | 2,596,194 | 2,727,794 |
| Credit Purchases (000) | 2,489,313 | 2,593,904 | 2,760,419 |
Source: (JB Hi Fi Annual Report, 2014)
| JB HI FI LTD. | |||
| Average Accounts Payables | Credit Purchases | Payable Days | |
| 0 | 0 | ||
| 2012 | $351,202.50 | $2,489,313.00 | 51.50 days |
| 2013 | $393,911.50 | $2,593,904.00 | 55.43 days |
| 2014 | $344,999.50 | $2,760,419.00 | 45.62 days |
Source: (JB Hi Fi Annual Report, 2014)
It can be analyzed from above that the accounts payable days are decreasing on the time span of three years. This shows that JB HI FI LTD. has been utilizing benefits of early payments and is keeping up close relations with its suppliers. Its credit purchases are showing an increasing trend as it rose by around $271,106,000 from 2012 to 2014. The average accounts payable has been decreased by $6,203,000 from 2012 to 2014. This decrease is offsetting the increase in credit purchases in 2014.
Asset Turnover:
Assets turnover ratio tells about the efficiency of company to convert its assets into sales. The asset turnover days indicates about the days that are required by the company to convert the total assets into sales. It can be calculated as: Average Total Assets / Sales × 365(Brigham & Ehrhardt, 2013).
| JB HI FI LTD. | |||
| Average Total Assets | Sales | Asset Turnover Days | |
| 0 | 0 | ||
| 2012 | $789,144.00 | $3,127,792.00 | 92.09 days |
| 2013 | $827,226.50 | $3,308,396.00 | 91.26 days |
| 2014 | $851,572.50 | $3,483,775.00 | 89.22 days |
Source: (JB Hi Fi Annual Report, 2014)
It shows that JB HI FI LTD. is able to move from less efficient utilization of its total assets for generating sales towards more efficient sales generation from its total assets. Initially JB HI FI LTD. was able to convert its assets in sales in 92 days while it has moved to 89 days in 2014. This can be due to increased sales revenue, good inventory management and efficient use of assets. In order to further improve the asset turnover, JB HI FI LTD. can accelerate its deteriorating accounts receivable days and by liquidating assets and sell those assets which are not added up at the bottom due to being obsolete.
LIQUIDITY:
Current Ratio:
Current ratio is the tool used by investors to analyze the liquidity position of a company. It shows how much current assets does the company holds for covering up its short term current liabilities. It can be calculated as Current Ratio: Current Assets/Current Liabilities(Brigham & Ehrhardt, 2013)
| JB HI FI LTD. | |||
| Current Assets | Current Liabilities | Current Ratio | |
| 2012 | $534,060.00 | $439,481.00 | 1.22 |
| 2013 | $563,652.00 | $442,379.00 | 1.27 |
| 2014 | $578,147.00 | $352,193.00 | 1.64 |
Source: (JB Hi Fi Annual Report, 2014)
Figure 3: Current Ratio of JB HI FI LTD.
The current ratio has been improving for JB HI FI LTD. as it can be seen from the ratio trend above. The ratio increased from 2012, meaning that in 2014, there are more current assets to current liabilities. The higher the current ratio, the more capable the company is of paying its short term liabilities. So the increasing trend seen in JB HI FI LTD.’s current ratio is favorable as it has $1.64 of current assets for every $1 of its current liabilities. It shows that company is in a good liquid position. This increasing trend is justified as the current tax liability has decreased by $6,748,000 in 2014 from 2013 and receivables as well as inventories have risen by $6,499,000 and $32,625,000 respectively in 2014.
FINANCIAL GEARING:
Gearing Ratio:
Gearing ratio is a useful tool to analyze the capital structure of a company. It shows the level of leverage used by the company. It can be calculated as: Non-Current Liabilities / (Contributed Equity + Reserves + Non-Current Liabilities)(Brigham & Ehrhardt, 2013).
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