With the changes in time, every organization wants to grow in market by implementing the effective financial strategy which could strengthen its profitability and market condition. The financial performance of company could be analyzed by evaluating the profitability, solvency and efficiency of company. In this report, JB Hi-Fi Company has been chosen for evaluating the financial performance of company. This report emphasises upon the financial structure and profitability of Company since last three years. It will assist company to identify its weak points and changes in the financial structure that would be required to strengthen its financial position. In addition to this, investors and shareholders could also use this report to determine whether they should keep their money invested in this company in long run or not. This report reflects the ratio analysis of company and analysis of the capital structure of company which might reflects the negative position of company in long run. In the middle of this report, liquidity position of company and idol capital structure of company has been divulged which will assist directors of company to make the possible changes in company’s financial performance in long run. In the end of this report, quality fo the financial statement and the compliance program of accounting standards to prepare the financial statement is being made.
It is an Australian largest home entertainment retailer company with the top products, great quality and value. This company is specialised in video games Ultra video HD games and mobile phone appliance and offering number of Telstra services around the globe. The current stock price of corporation is JBH (ASX) A$ 26.21 +0.17 (+0.65%) which reflects that company has been creating value on its investment throughout the time (JB HI-FI Company, 2017).
This analysis measure the financial performance of JB HI-FI Company since last three years
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FINANCIAL STATEMENT ANAYLYSIS – JB HI-FI Company |
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Company name: JB HI-FI Company |
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Company ticker: JBH |
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Student name : |
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Ratios and Other Analysis Measures |
Year End (3 years) |
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2015 |
2016 |
2017 |
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ROE and DuPont Ratios |
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ROE (NI / OEavg) |
39.6% |
37.5% |
20.1% |
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Profitability (NI / Sales ) |
3.8% |
3.8% |
3.1% |
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Efficiency (Turnover = Sales / Assets avg) |
61.26 |
64.52 |
71.37 |
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Leverage (Leverage = Assets avg / OEavg) |
1 |
1 |
1 |
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Additional Profitability Ratios |
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Gross Profit Margin % [(net Rev – COGS) / net Revenue] |
21.9% |
21.9% |
21.9% |
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Selling General &Administration % (SG&A expense / net Revenue) |
16.3% |
16.3% |
17.1% |
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Important Expense Percentage* (Important Expense / net Revenue) |
15% |
16% |
17% |
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Additional Efficiency Ratios |
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AR Turnover (Sales / ARavg) |
33 .39 |
36.06 |
29.33 |
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Days Receivables Outstanding (DRO) [ARavg / (Sales /365)] |
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Inventory Turnover (COGS / Inventoryavg) |
61.26 |
64.25 |
71.37 |
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Days Inventory (DI) [Inventoryavg / (COGS/365)] |
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AP Turnover (Purchases / APavg) |
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Days Payables Outstanding (DPO) [365 / (Purchases / Accts Payableavg)] |
49.73 |
27.77 |
24.17 |
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CASH CONVERSION CYCLE (DI – DPO + DRO) |
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PPE Turnover (Sales / Net PPEavg) |
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Additional Leverage Ratios |
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Debt-to-Equity (total Liabilities / total OE) |
1.6 |
1.5 |
1.9 |
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Times Interest Earned (Earnings before Interest Expense and Taxes / Interest Exp) |
33.5 |
55.3 |
24.4 |
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Return on Financial Leverage (ROE – ROA) |
1 |
1 |
1 |
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LT Debt-to-Assets (LT Debt, including current portion / total Assets ) |
2.5 |
3.7 |
5.5 |
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Cash Liquidity and Cash Sources & Uses |
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Working Capital (CA – CL) |
237 |
256 |
285 |
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Current Ratio (CA / CL) |
1.62 |
1.57 |
1.32 |
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Quick Ratio [(Ca s h + ST Securities + AR) / CL)] |
.36 |
.35 |
..35 |
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OCFCL (Operating CF / CL) |
2.3 |
2.4 |
2.5 |
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OCFCX (Opera ting CF / Ca pi ta l Expenditures ) |
4.5 |
4.2 |
4.8 |
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Free Cash Flow (Ca s h from Ops – Net Ca p. Expend.) |
31.75 |
33.45 |
16.67 |
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Growth |
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Sales growth [(cy net Rev – py net Rev)/ py net Rev] |
3% |
4% |
5.5% |
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NI Growth [(cy NI – py NI )/ py NI ] |
3.5% |
3.8% |
4.2% |
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*Choose the most “important” non-SG&A expense. |
It is analyzed that company has increased the profitability of company by increasing the revenue of company.
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Description |
Formula |
JB Hi-Fi Company |
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2017 |
2016 |
2015 |
2014 |
2013 |
Average industry ratio |
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Net profit ratio |
Net profit/revenues |
3.1% |
3.8% |
3.8% |
3.7% |
3.5% |
5.5% |
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Return on equity |
Net profit/Equity |
20.1% |
37.5% |
39.9% |
43.4% |
47.7% |
60.5% |
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Gross profit Margin |
Gross profit/ Net sales |
21.9% |
21.9% |
21.9% |
21.2% |
21.1% |
25.5% |
This ratio divulges the relation between the profit earning capacity and overall turnover of company. It is accompanied with the several sub ratios. After analysing the three years annual report of company, it is considered that company has stable profitability since last three years. The net profit ratio of JB Hi-Fi Company has been stable since last three years. However, in 2017, company had net profit of 3.1% in 2017 which is .4% lower as compared to last four year data. The return on equity divulges the % of Profit Company has been offering to its equity shareholders out of the available earning. It has decreased by 20% in 2017 which is 20% lower since last three years data. The gross profit margin of JB Hi-Fi Company has been stable since last three years as company has been facing high competition in market (Chandra, 2017).
This ratio reveals how well company has deployed its capital funding in its business. It shows company’s ability to lower down its cost of capital out of the deployed funds. This ratio is divided into several parts. The inventory turnover ratio of company has divulged that company has maintained high stock turnover ratio which helps company to block less funds in its inventories. The assets turnover ratio of company has been increased which reflects that with the less amount of cash investment in its assets, company has maintained high revenue. The receivable turnover ratio of company has been stable which 30 points is in 2017. Nonetheless, company has low amount of receivable turnover which reflects positive indicators and assist company to block less funds in its operating cycle (Baños-Caballero, , García-Teruel, and Martínez-Solano, 2014). The payable turnover ratio of company has been stable and increased by 2 points since last three years. It shows that company has used high creditor’s turnover ratio which will allow company to manage its capital less blocked in the process. This ratio analysis have shown that company has been quite good in deploying funds or capital in its business which will eventually increase the return on capital employed of company in long run. It will also lower down the cost of capital throughout the time (Delen, Kuzey, & Uyar, 2013).
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Description |
Formula |
JB Hi-Fi Company |
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2017 |
2016 |
2015 |
2014 |
2013 |
Average industry ratio |
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Receivable turnover |
Receivables/ Total sales*365 |
29.33 |
36.06 |
33.03 |
30.13 |
27.71 |
15 |
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Inventory turnover |
Inventory / cost of goods sold *365 |
71.37 |
64.52 |
61.26 |
61.03 |
59.57 |
60 |
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Payable turnover ratio |
Creditors/Total cost of goods sold*365 |
48.47 |
35.68 |
32.48 |
32.44 |
46.85 |
55 |
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Asset turnover |
total assets / total sales *365 |
159.0 |
91.6 |
89.5 |
90.1 |
93.0 |
101 |
The liquidity positon of company is determined by analysing the current and quick ratio of company. The current ratio of JB Hi-Fi Company has been decreased by .30 points since last three years which reflects that company has divested the investment in its current assets. The current ratio has decreased to 1.32 points in 2017 which is .30 points low as compared to data shown in 2015. The quick ratio of company has been stable and showing .35 points in 2017 and .36 in 2015. This both current and quick ratio divulges that company has divested its investment in the current assets after considering the sluggish market condition and its negative business outcomes throughout the time (Ehiedu, 2014).
The capital structure of JB Hi-Fi Company is being accompanied with the debt and equity capital. It has been observed that with the stable profitability in its financial performance, company has kept the stable financial leverage and debt portion in its business. Company has kept the 1.9 points debt to equity ratio in 2017 which is .03 points higher as compared to last three year data. It has reflected that company has managed low amount of debts in its financial capital structure. However, it has both positive and negative impact on the business functioning of organization. It is analyzed that keeping low amount of debt capital in the capital structure of organization will surely lower down the financial leverage of company but eventually it will also increase the overall cost of capital of organization. JB Hi-Fi Company needs to lower down the cost of capital if it wants to beat the competitors in the market. This increased cost of capital will be highly risk for JB Hi-Fi to develop core competency in cost leadership skills to beat the competitors offering in market. It will negatively impact the business functioning of organization (Flannery, 2016).
This ratio reflects how well JB Hi-Fi Company has managed its capital structure to establish equilibrium between the financial leverage and costing of the business. Company has kep 1.9 points debt to equity ratio which is .03 points lower as compared to last three years data. JB Hi-Fi Company should increase the overall debt funding in its business.
The time interest ratio has also shown how well company has managed to cover its interest payment out of the available current earnings before interest and tax (Goel, Chadha, and Sharma, 2015).
The long term solvency and sustainability of company both are interlinked with each other. The debt to capital ratio and interest coverage ratio both is the main indicator to define the long term solvency of company. It is analyzed that if company wants to win over the market then it will have to establish the equilibrium between the financial risk and profit earning capacity in long run (JB Hi-Fi, 2017).
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Description |
Formula |
JB Hi-Fi Company |
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2017 |
2016 |
2015 |
2014 |
2013 |
Average industry ratio |
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Times interest earned |
EBIT / Interest expenses |
24.4 |
55.3 |
33.5 |
21.2 |
17.8 |
24 |
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Cash coverage ratio |
EBIT + non-cash expenses / interest expenses |
269.0 |
222.0 |
202.0 |
192.0 |
179.0 |
180.7 |
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Debt to Equity Ratio |
Debt/ Equity |
1.9 |
1.5 |
1.6 |
1.9 |
2.5 |
10.7 |
The long term solvency of JB Hi-Fi Company could be measured by identifying how well company has been managing its profitability and financial leverage in long run. It is analyzed that company has kept the low amount of financial leverage since last three years. The debt capital of company has reflected that company could lower down its cost of capital more by increasing the debt funding (Goldmann, 2017). Nonetheless, company could use these funds to undertake new projects in its business which could increase its overall busienss outputs and return on its capital employed. However, the interest coverage ratio of company is also not high. JB Hi-Fi Company has kept its time interest earned ratio to 24.4 points in 2017 which reflects that company could easily cover its interest payment out of the available profit. However, due to the stable profitability since last three, it might be risky for company to increase its interest payment if it has to face the sluggish market condition (Hunjra, and Bashir, 2014).
If company wants to keep its busienss more sustainable in long run then it will first have to establish equilibrium between the financial leverage, efficiency of busienss and profitability in long run. These factors will not only increase the overall business outcomes but also assists company to survive in long run (Muritala, 2018).
The liquidity status reflects how well company has managed capital in its business to meet its current and future liabilities. However, in order to determine the optimum liquidity position of company, management needs to analysis the demand from the business, market influencing factors, capital structure and demand of the clients in long run. The liquidity position of company should be set up in such a way which could meet the current and future liabilities of company in long run.
It is analyzed that JB Hi-FI Company has lower down its capital investment in its current assets. The main reason of lower down the current assets investment is based on the sluggish market condition and divestment strategy of company. Company has kept the stable busienss outputs since very long time and in order to cut down the cost of the organization, it lower down its investment in its current assets (Owens, 2018).
The current ratio of company has increased to 1.32 points in 2017 which is .6 points higher since last three years. It reflects that company has increased its investment in its current assets or lower down the current liabilities (Mwangi, & Murigu, 2015).
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Description |
Formula |
JB Hi-Fi Company |
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2017 |
2016 |
2015 |
2014 |
2013 |
Average industry ratio |
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Current ratio |
Current assets/current liabilities |
1.32 |
1.57 |
1.62 |
1.64 |
1.28 |
2.1 |
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Quick Ratio |
Current assets-Inventory/current liabilities |
0.35 |
0.35 |
0.36 |
0.34 |
0.31 |
1.1 |
The quick ratio of JB Hi-Fi Company reflects its utmost capacity to pay off its short term and long term debts out of the available current assets. Company has kept .35 quick ratios which have gone down by .04 points since last five years and .01 points since last three years.
After analysing all the details and financial performance of company, it could be inferred that JB Hi-FI Company needs to lower down its capital investment in its inventories. Company should have flow of inventory in its busienss instead of blocking more funds in its stock turnover (Robb, & Robinson, 2014).
Financial statements are associated with the key information of busienss which is used by stakeholders to take their imperative decisions. There are several documents such as income statement, balance sheet, charge annexure, cash flow statement and consolidated details which could be used by investors to assess the financial and business performance of company (Weygandt, Kimmel, and Kieso, 2015). Being listed Australian company, JB Hi-Fi Company has established harmonization in its domestic and international accounting standards. It has been observed that company if in case finds any issues or conflict to comply both accounting standards then IFRS accounting standards will supersede the domestic accounting standards. As per the IAS-136, company has also analyzed that books value and market value of assets to identify the true and fair view of assets. Company has reported the impairment loss in its financial statements to showcase the true value of its assets and liabilities. AASB 101 accounting standards have also been followed to prepare the financial statements in the standards format. Nonetheless, in order to strengthen the true and fair view of books of accounts of company, Auditors are appointed to check the viability of the prepared financial statements. Company has also give the notes to accounts for the all the transactions recorded in its books of accounts to justify its accounting and recording system. As per the annual report of company, auditors of company has also passed the unqualified audit report which reflects that JB Hi-Fi Company has complied with all the applicable laws and also recorded all the transactions as per the applicable accounting standards. Nonetheless, auditor’s liabilities are limited and it has been stated that managers and directors of company has not issued the management representation letter which could strengthen the fairness of the shared information. It is analyzed that this type of financial reporting will assist company to lower down the insider trading and other negative business acts to win over the trust of the stakeholders in long run (White, Sondh, and Fried, 2015).
Conclusion
It could be inferred that company has efficiently deployed its capital in its busienss and created good amount of return for its business. However, company has strictly focused on keeping its business sustainable in long run by lower down its financial leverage and increasing the overall profitability. JB Hi-Fi Company being listed company has also followed IFRS accounting standards to prepare the financial statement and also reported the same on international level to keep its busienss more transparent for its international stakeholders. In addition to this, Company should focused on increasing the debt portion if it wants to create value on its investment more as company still could bear more debt funding in its capital structure which could assist company to lower down its cost of capital and increase its return on capital employed in long run. Company should focused on increasing the overall profitability by undertaking new projects as company has good amount of internal funding which could be used to create value on the investment.
References
Baños-Caballero, S., García-Teruel, P.J. and Martínez-Solano, P., 2014. Working capital management, corporate performance, and financial constraints. Journal of Business Research, 67(3), pp.332-338.
Chandra, P. (2017). Investment analysis and portfolio management. McGraw-Hill Education.
Delen, D., Kuzey, C. & Uyar, A., 2013. Measuring firm performance using financial ratios: A decision tree approach. Expert Systems with Applications, 40(10), pp.3970-3983.
Ehiedu, V.C., (2014). The impact of liquidity on profitability of some selected companies: The financial statement analysis (FSA) approach. Research Journal of Finance and Accounting, 5(5), pp.81-90.
Flannery, M.J., 2016. Stabilizing large financial institutions with contingent capital certificates. Quarterly Journal of Finance, 6(02), p.1650006.
Goel, U., Chadha, S. and Sharma, A.K., 2015. Operating liquidity and financial leverage: evidences from Indian machinery industry. Procedia-Social and Behavioral Sciences, 189, pp.344-350.
Goldmann, K., 2017. Financial liquidity and profitability management in practice of polish business. In Financial Environment and Business Development (pp. 103-112). Springer, Cham.
Hunjra, A.I. and Bashir, A., 2014. Comparative Financial Performance Analysis of Conventional and Islamic Banks in Pakistan. Bulletin of Business and Economics (BBE), 3(4), pp.196-206.
JB Hi FI Company, 2017, Annual report. [Online]., Available at https://member.afraccess.com/media?id=CMN://3A477813&filename=20170915/JBH_01896440.pdf, , , , [Accessed 19th, August, 2018]
Muritala, T. A. (2018). An empirical analysis of capital structure on firms’ performance in Nigeria. IJAME. 40(10), pp.3970-3983.
Mwangi, M. & Murigu, J.W., 2015. The determinants of financial performance in general insurance companies in Kenya. European Scientific Journal, ESJ, 11(1).
Owens, D. (2018). Simply Wall ST. Retrieved from https://simplywall.st/stocks/au/banks/asx-ben/bendigo-and-adelaide-bank-shares/news/what-makes-bendigo-and-adelaide-bank-limited-asxben-a-great-dividend-stock/
Robb, A.M. & Robinson, D.T., 2014. The capital structure decisions of new firms. The Review of Financial Studies, 27(1), pp.153-179.
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & managerial accounting. John Wiley & Sons. 17(1), pp.131-179.
White, G.L., Sondh, A.C. and Fried, D., 2015. Analysis of Financial Statement. Analysis. 21(1), pp.113-179.
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