JB HI-Fi is the company which has been allocated to perform this task.
The computation of ratios is shown below.
Profitability Ratios
The profitability ratios highlight the profitability trends of the continuing operations of the firm and is a key performance metric since the profitability of the operations tend to impact the EPS which in-turn impact the firm value (Brigham and Houston, 2014).
For JB Hi-Fi, the return on total assets showed a positive trend during the initial three years of the period under consideration but there was a reversal noticed in FY2017. The positive trend was on account of healthy growth in EBIT driven by company’s effort to improve the productivity and cut down on the indirect expenditures which boosted the operating profit margins. In FY2017, the company concluded the acquisition of home appliance major for $ 870 million which was concluded only in middle of the year (Mitchell, 2016). Thus, the financial statements in FY2017 represented revenues only partially while the assets representation was complete which is responsible for the steep fall. However, the fact that the return on total assets has not improved in FY2018 is a matter of concern (JB Hi-Fi, 2018).
In contrast, the return on equity has decreased during the five years under consideration. During the period FY2014-FY2016, this decrease is mainly on account of increasing retained earnings leading to higher shareholders’ equity (JB Hi-Fi, 2016). However, the sharp fall in this ratio in 2017 is caused by the raising of fresh equity to the extent of $ 395 million which has caused the shareholders’ equity to double from FY2016 to FY2017. The gross profit margins and net profit margins of the company both showed positive trend during FY2014-FY2016 but have reversed in FY2017 since the profitability margins for the acquired business (i.e. “The Good Guys”) is lower in comparison to JB Hi-Fi (JB Hi-Fi, 2018).
Efficiency Ratios
Efficiency ratios provide a measure of the underlying operational and asset usage efficiency of the company. The first key measure is inventory turnover period which has shown miniscule fluctuation in the five year period. Hence, there has been no improvement in this regards. Any improvement in this aspect would be captured by the decrease in inventory turnover period which would imply lower time for conversion of inventory into sales (Damodaran, 2014).
The second key measure is settlement period for debtor which has been on rise during the five year period. This is not in the best interest of the company considering that a longer settlement period would imply a longer cash cycle which would automatically lead to higher working capital requirement (Gitman, Juchaou and Flanagan, 2017). On the asset turnover front, during the initial three years, there was only a slight deterioration but it has been significant in FY2017. This can be explained by the acquisition happening in the middle of the financial year owing to which only part of the revenues of the acquitted entity were reflected in FY2017 income statement (JB Hi-Fi, 2018).
Liquidity Ratios
Liquidity ratios assume importance especially for creditors as these highlight the ease with which the short term obligations would be met by the company (Brigham and Houston, 2014). Two key ratios in this regards are current ratio and quick ratio. The current ratio in the five year period under consideration is on the decline but has witnessed a significant reduction only in FY2017 which is on account of the acquired entity having lower liquidity ratios in comparison to JB Hi-Fi. A silver lining in regards to current ratio is that there is no decline in FY2018. In regards to quick ratio, no major changes have occurred during the five year period and stability is maintained which is reflective of the fact that major fluctuations in current asset was experienced owing to inventory ((JB Hi-Fi, 2018; 2016; 2014).
These ratios tend to signify the ease with which the company can fulfil long term commitments (Damodaran, 2014). There is a positive trend in regards to debt to assets ratio which has reached the lowest point at the end of FY2016. This highlights the minimum leveraging of the balance sheet was achieved at the end of FY2016 (JB Hi-Fi, 2016). However, in FY2017, there is a sudden jump which does not come as a surprise considering that company raised debt to the tune of $ 500 million to fund the acquisition. A positive observation is the return of thee trend of lowering debt to assets ratio in FY2018 which highlights management commitment to lowering the debt on the books (JB Hi-Fi, 2018).
The peaking of the interest cover also happens in FY2016 since the interest cost was at the lowest point and operating profit at a high point. However, in FY2017 there is a decline in this regards as the interest expense has shot up in a disproportionate manner as compared to operating profit. Despite the decline in interest cover in FY2017 and FY2018, the company is able to provide enough cover to meet the interest obligations (JB Hi-Fi, 2018).
The EPS of the company has witnessed a strong growth in the five years under consideration but majority of this growth has been achieved in FY2018. The key contribution of this growth is not the superior performance of the company but the acquisition of another entity with significant profits and complementary product line of home appliances. The P/E ratio also is indicative of lacklustre organic growth of business owing to which there has not been any P/E expansion and in the recent times it has contracted on account of the acquisition and the related risks assumed. From an investor perspective, the healthy divided yield is a significant positive for the stock (Gitman, Juchaou and Flanagan, 2017).
Cash flows from operating activities
The requisite extract from the cash flow statement of FY2018 annual report is presented below.
The cash receipts from customers have shown a significant jump for FY2018 when compared with the previous year. However, most of these gains are neutralised by the corresponding rise in cash outflows to customers and suppliers in FY2018. The finance and interest related outflow have increased in FY2018 to $ 15 million as compared to corresponding value of $9.3 million in FY2017. Further, on account of increased profits, the tax outflow has been higher in FY2018 when compared to the previous year. Overall, cash generated from operating activities has shown increase of $ 101.5 million in FY2018 which is positive for the company (JB Hi-Fi, 2018).
Cash Flows from Investing Activities
The requisite extract from the cash flow statement of FY2018 annual report is presented below.
The company made no acquisition in FY2018 but made a big ticket acquisition in FY2017 leading to cash outflow of $ 836.6 million. Besides, investment related cash outflow has been incurred in relation to plant and equipment which has been higher in FY2018 in comparison to the previous year. The generation of cash inflows on account of plant and equipment sale has been quite minimal for the company in each of the two years considered (JB Hi-Fi, 2018).
The requisite extract from the cash flow statement of FY2018 annual report is presented below.
A significant equity based funding was carried by the company in FY2017 which led to cash inflow of $ 395.9 million. Additionally, in the same year, a debt of $ 450 million was also raised by the company. This was done in order to complete the acquisition of home appliances major “The Good Guys”. As the profits of the company have soared in FY2018, the respective divided outflow has also increased (JB Hi-Fi, 2018).
References
Brigham, E. F. and Houston, J. F., (2014). .Fundamentals of Financial Management, Boston: Cengage Learning.
Damodaran, A. (2014). Applied corporate finance: A user’s manual, New York: Wiley, John & Sons.
Gitman, L.J., Juchaou, R., and Flanagan, J. (2017).Principles of Managerial Finance NSW: Pearson Australia
JB Hi-Fi (2014) Annual Report FY2014, [Online] Available at https://www.annualreports.com/HostedData/AnnualReportArchive/J/ASX_JBH_2014.pdf [Assessed December 2, 2018]
JB Hi-Fi (2016) Annual Report FY2016, [Online] Available at https://www.annualreports.com/HostedData/AnnualReportArchive/J/ASX_JBH_2016.pdf [Assessed December 2, 2018]
JB Hi-Fi (2018) Annual Report FY2018, [Online] Available at https://investors.jbhifi.com.au/wp-content/uploads/2018/10/Annual-Report-2018-with-Chairmans-CEOs-Report.pdf [Assessed December 2, 2018]
Mitchell, S. (2016) JB Hi-Fi agrees to buy The Good Guys for $870m, [Online] Available at https://www.afr.com/business/retail/appliances/jb-hifi-agrees-to-buy-the-good-guys-for-870m-20160912-grev25 [Assessed December 2, 2018]
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