JB Hi –Fi is the allocated company for this task.
The summary of the ratios is indicated as follows.
Profitability Ratios
The relevant summary extract is shown below.
The gross profit margin for the company has shown marginal improvement between FY2014 and FY2016 after which the trend has reversed as the gross profit margins in FY2017 and FY2018 are comparatively lower. The increased profitability may be attributed to improved productivity along with lower indirect expenditure owing to the proactive actions taken by the company in this regards. The drop in gross profits may be attributed to the acquisition of another business named “The Good Guys” which tends to have a lower gross margins when compared to the acquiring company i.e. JB Hi-Fi (JB Hi-Fi, 2018).
The operating profit margin also shows a similar trend where the margins tend to peak in FY2016 and trend reversal is seen from FY2017 onwards. The explanation in regards to improvement of profitability and decline in the same has been already explained with regards to the variation in the gross profit margins. With regards to returns on equity, a downward trend is visible from the computed ratios. The decline in this ratio during the interval FY2014-FY2016 is on account of higher increase in shareholders ‘equity as compared to EBIT. One of the key contributors with regards to this rise is the retained earnings on account of profitable operations of the company. However, in FY2017, there has been a very significant decline owing to the incremental equity of $ 395 million that company has raised for providing acquisition funding. The return on total assets have adhered to a trend similar to the operating and gross profit and the underlying reasons have been explained before.
Efficiency Ratios
The relevant summary extract is shown below.
The asset turnover ratio for the company has not shown a particular trend but during the period it has decreased. This is not a healthy sign as a higher asset turnover is preferable for the company. Of particular significance is the sizable fall in FY2017 when the ratio dropped to 2.29. This aberration can be explained by the acquisition of a new business in the middle of the financial year owing to which complete assets were reflected in the balance sheet but only half-year revenues were reflected in FY2017 financial statements. As a result, the asset turnover recovered in FY2018 to 2.75 (JB Hi-Fi, 2018).
The settlement period for debtors has adhered to an increasing trend during the given period which is not positive for the company. This is because a higher value implies longer delay in receipt of the cash from credit sales which would result in higher demand for working capital yielding higher finance costs (Damodaran, 2015). The inventory turnover period for the company has been rangebound and hence has not shown any significant improvement or deterioration to merit any detailed discussion.
Liquidity Ratios
The relevant summary extract is shown below.
The quick ratio for the company has not shown any sizable movement during the given period and hovered in the narrow range of 0.34-0.36. As a result, it can be concluded that the quick ratio has not improved or deteriorated in the given time period. While the current ratio may appear on the lower side, but this is not the case considering the nature of business where inventory is a significant portion of the current assets (Brealey, Myers and Allen, 2012).
The current ratio of the company has deteriorated during the given period. A significant fall in the current ratio is witnessed in FY2017 which may be linked to the acquisition as the acquired business may have a very lower current ratio, thus adversely impacting the overall current ratio of the company. However, a positive aspect is that there is no deterioration in this regards in FY2018. Going forward, the company needs to be mindful of any fall in this regards as it would impair the ability of the company to meet the short term obligations (JB Hi-Fi, 2018).
Financial Gearing Ratios
The relevant summary extract is shown below.
There is significant amount of fluctuation with regards to interest cover ratio which peaked out in FY2016 and is on a downtrend since. The improvement witnessed in interest cover was owing to lowering finance costs coupled with increasing operating profits. However, in FY2017, the company had to increase the borrowings significantly so as to fund the acquisition which led to rising interest cost and subsequent decline in the interest cover. However, a positive aspect from the perspective of the company is that despite the decline, it still remains quite healthy and does not pose any concern or worry for the lenders (JB Hi-Fi, 2018).
The debt to assets ratio has shown a positive trend from the beginning of the period till FY2016. However, there is reversal of trend from FY2017 onwards which is attributed to the acquisition and the related incremental debt that the company had to assume on the balance sheet. However, the commitment of the company to reduce financial risk by balance sheet deleveraging is apparent from FY2018 when there is an improvement in this ratio (JB Hi-Fi, 2018). While at present no issue is posed but the company needs to be careful in the future not to assume any major debt on the balance sheet.
Investment Ratios
The relevant summary extract is shown below
From an investment perspective, a key positive about the company is visible in the form of a healthy and stable dividend yield. The earnings of the company has shown a positive trend during the period under consideration as the EPS has grown at a CAGR of 9.6% which is quite impressive. However, a key aspect that needs to be mentioned is that a significant amount of this jump in EPS has been achieved on the wake of the acquisition of the “The Good Guys”. But simultaneously, the higher equity base in FY2017 must also be considered. The P/E ratio is reflective of the limited organic growth by the business since there does not seem to be any re-rating of the stock (Petty et. al., 2015).
There has been a rise in the customer receipts of the company on account of operating activities in FY2018. However, this has been accompanied by a proportionate increase in payment to employees and suppliers. There has been an increase in the interest payment in FY2018 owing to the higher debt assumed from acquisition. The tax outflow in FY2018 is also greater owing to higher profits before tax being generated by company. However, despite the above factors the operating activities generated higher cash flow in FY2018 in comparison to FY2017 which is primarily attributed to higher customer receipts (JB Hi-Fi, 2018).
Cash Flows from Investing Activities
The noticeable account in the above extract is the payment made for business acquisition in FY2017 which corresponds to buying of “The Good Guys” for a consideration of $ 836.6 million (Mitchell, 2016). Additionally, cash outflow has also been incurred for the purchase of plant and equipment and in this regards, cash outflow in FY2018 has exceeded the corresponding figure in FY2017 by $ 5.3 million. Negligible cash inflows have been realised from sale of plant and equipment in both the years (JB Hi-Fi, 2018).
Cash Flows from Financing Activities
The company issued equity in FY2017 for raising $ 395.9 million which was meant for the acquisition of the business. Also, debt funding to the extent of $ 450 million was taken for providing the funding assistance in the acquisition. However, in FY2018, there has been a repayment in the outstanding debt owing to which it would reduce from FY2017 levels. Driven by higher EPS, the per share dividend declared in FY2018 has been higher and also there has been an increase in outstanding shares which is responsible for the higher cash outflows related to dividends in FY2018 when compared with FY2017 (JB Hi-Fi, 2018).
References
Brealey, R. A., Myers, S. C. and Allen, F. (2011) Principles of corporate finance, 10th ed. New York: McGraw-Hill Publications
Damodaran, A. (2015). Applied corporate finance: A user’s manual 4th ed. New York: Wiley, John & Sons.
Link: https://people.stern.nyu.edu/adamodar/pdfiles/acf4E/acf4Ebook.pdf
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]
Petty, J.W., Titman, S., Keown, A., Martin, J.D., Martin, P., Burrow, M. and Nguyen, H. (2015). Financial Management, Principles and Applications, 6th ed.. NSW: Pearson Education, French Forest Australia.
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