Financial statements are the most important of the annual report and users of the annual report uses financial statements to predict the financial performance of the company. The financial statements are mainly divided into four main parts namely, statement of comprehensive income, statement of financial position, statement of change in equity and statement of cash flows. Among them statement of cash flow the most important as it helps in providing the actual cash flows take place in the company through the operating activity, investing activity and financing activity.
In this report, cash flow statements of Harvey Norman Holdings and JB Hi Fi for year 2016 are analyzed to report on the cash position of the company. Financial ratios are also calculated to support the findings.
There are two methods to prepare the statement of cash flows, namely direct method and indirect method. Mainly there is difference for preparing the cash flow from operating activity. Cash flow from investing activity and financing are calculated in the similar manner under both the options.
It has been analyzed from the annual report of the Harvey Norman Holdings that company has implied direct method to prepare the statement of cash flows. The statement of cash flows in annual report of Harvey Norman Holding Limited is presented on the page 65 and reconciliation of profit after income tax to net operating cash flows has been incorporated in the notes to account in section 28 (b) on page 112 (Annual report 2016: Harvey Norman Holding Limited). Under direct method for preparing the cash flow statement, it is important to disclose the reconciliation statement under notes to accounts in order to facilitate the better understanding of cash flows under the operating activity. On looking at the annual report of the JB HiFi for the year 2016 it has been noted that this has also used direct method to prepare the cash flow statement. The reconciliation of profit after income tax to net operating cash flows has been incorporated in notes to accounts at note number 14 (Annual report 2016: JB HiFi).
Comment on the cash flow statement of the Harvey Norman Holding Limited
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Cash flow (Used in)/ from various activities |
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Activities |
2016 |
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Amount (‘000) |
|
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Net Cash Flows From Operating Activities |
$ 437,691.00 |
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Net Cash Flows Used In Investing Activities |
$ -179,853.00 |
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Net Cash Flows Used In Financing Activities |
$ -307,427.00 |
On the basis of above chart it can be said that Harvey Norman has generated enough cash flow their operating activities. The cash flow under operating activities comes from receipts from their franchisees and receipts from their customer. There was more than 29 % increase in the cash flow from operating activity in year 2016 as compare to cash flows from operating activity in year 2015. The main expenses that require cash to be paid are payments made to suppliers and employees, GST expenses, income taxes, and other cash expenses. It is very easy to prepare the cash flow statement from direct method if all the cash receipts and payments are recorded as when they occur. Apart from these, there are some cash income like dividend received in cash from investment made and interest received. Cash generated from the operating activities are free cash flow for the company and it is used to invest expansion of business or to make purchase of fixed assets (Annual report 2016: Harvey Norman Holding Limited).
Investing activity refers to activity that requires cash to be invested in the fixed assets, acquiring any business or to purchase the securities. There is mainly use of cash in this activity and any cash flows from this activity can be through sale of any asset or sale of any securities. When cash used in the investment activity in year 2016 has been compared with year 2015 it has been found that company has invested 2 times more in year 2016. Company has mainly invested in purchasing the properties and equity investment.
Cash used in financing activity has increased in year 2016 as compared with year 2015. It is due to increase in amount of dividend paid in year 2016 and discharge of loans taken from related parties. So it can be said that Harvey Norman has used huge amount of cash and cash equivalents in paying the dividend and purchasing the investments (Annual report 2016: Harvey Norman Holding Limited).
Working capital ratio defined as the ability of the company to pay its current liabilities using the current assets of the company. The formula to measure the working capital is current assets less current liabilities. Current assets refer to the assets of the company that can be converted into cash and cash equivalents within 1 year span of time. Current liabilities refer to those liabilities that are due in one year or shorter period.
Formula: Current Assets – Current Liabilities
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Harvey Norman Holding Limited |
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Calculation of Working Capital Ratio |
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Particulars |
2016 |
2015 |
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Current Assets |
$ 1,605,547.00 |
$ 1,644,585.00 |
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Current Liabilities |
$ 1,279,012.00 |
$ 1,251,196.00 |
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Working Capital Ratio |
$ 326,535.00 |
$ 393,389.00 |
There has been decrease in working capital ratio in year 2016 as compared to year 2015. It can be said that company maintains sufficient cash and cash equivalents to pay the current liabilities (Annual report 2016: Harvey Norman Holding Limited).
The cash flow adequacy ratio is used for analyzing whether a business entity is able to meet its operating expenses by its cash inflows. The ratio compares the cash inflows generated by a business to its long-term debts, purchase of its non-current assets and dividend paid to the shareholders (Porter and Norton, 2014).
The formula for calculating the ratio is depicted as follows:
Operating cash flow ÷ (Long-term debt + Non-current assets Purchased + Dividends Paid)
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Harvey Norman Holding Limited |
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Calculation of Cash Flow Adequacy Ratio |
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Particulars |
2016 |
2015 |
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Cash flow from operations |
$ 437,691.00 |
$ 340,448.00 |
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Long-term debt paid |
$ 45,862.00 |
$ – |
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Fixed assets purchased |
$ 68,155.00 |
$ 55,012.00 |
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Cash dividends distributed |
$ 266,882.00 |
$ 184,940.00 |
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Cash Flow Adequacy Ratio |
1.15 |
1.42 |
The results in both the years is greater than 1 which indicates company is generating sufficient cash flows to avoid taking any cash resources from outside sources (Annual report 2016: Harvey Norman Holding Limited).
The ratio helps in assessing the financial leverage of a company by comparing the total liabilities of a business entity with its total assets (Roth, 2008). It is calculated by the formula:
Debt to total asset ratio=Total Liabilities/Total Assets
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Harvey Norman Holding Limited |
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Calculation of Debt to Total Asset Ratio |
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Particulars |
2016 |
2015 |
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Total Liabilities |
$ 1,743,126.00 |
$ 1,769,801.00 |
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Total Assets |
$ 4,431,800.00 |
$ 4,326,661.00 |
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Debt to Total Asset Ratio |
0.39 |
0.41 |
On looking at the above ratio calculation it can be said that company in year 2016 debt capital was 39 % of the total assets invested by the company that indicates that company is mainly depended on the equity capital to finance its assets (Annual report 2016: Harvey Norman Holding Limited).
The debt coverage ratio assesses the debt paying capability of a business entity through its operating cash flows (Fridson and Alvarez, 2011). The formula for calculating the debt coverage ratio is as follows:
Debt Coverage Ratio=Net Operating Income/Total Debt Service
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Harvey Norman Holding Limited |
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Calculation of Debt Coverage Ratio |
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Particulars |
2016 |
2015 |
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Net income before tax |
$ 493,763.00 |
$ 378,100.00 |
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Add: Interest Expenses |
$ 28,706.00 |
$ 32,872.00 |
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Add: Depreciation |
$ 62,422.00 |
$ 64,399.00 |
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Add: Amortization |
$ 16,125.00 |
$ 13,047.00 |
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EBITDA |
$ 601,016.00 |
$ 488,418.00 |
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Interest Expenses |
$ 28,706.00 |
$ 32,872.00 |
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Principal Payments |
$ 45,862.00 |
$ – |
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Total Debt Services |
$ 74,568.00 |
$ 32,872.00 |
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Debt Coverage Ratio |
8.06 |
14.86 |
The debt coverage ratio is greater than 1 in both the years that shows that company has sufficient cash flow to pay the interest and principal payments (Annual report 2016: Harvey Norman Holding Limited).
The ratio depicts the cash inflows realized by a business entity as compared to its net sales or revenue. It assesses the ability of an entity to transform its sales realized into cash and is calculated from the following formula:
Cash flow to sales ratio=Operating Cash flows/Net Sales Realized
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Harvey Norman Holding Limited |
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Calculation of Cash Flow to Sales Ratio |
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Particulars |
2016 |
2015 |
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Cash Flows from the operating activity |
$ 437,691.00 |
$ 340,448.00 |
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Net revenue |
$ 1,795,759.00 |
$ 1,617,151.00 |
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Cash Flow to Sales Ratio |
24.37% |
21.05% |
Harvey Norman is earning sufficient cash revenue from the sales in both the years. There has increase in cash earned from operating activity in year 2016 as compared to 2015 (Annual report 2016: Harvey Norman Holding Limited).
Following is the cash generated or used by the JB HiFi in various activities.
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JB HiFi |
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Cash flow (Used in)/ from various activities |
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Activities |
2016 |
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Amount (‘000) |
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Net Cash Flows From Operating Activities |
$ 185,140.00 |
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Net Cash Flows Used In Investing Activities |
$ -52,001.00 |
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Net Cash Flows Used In Financing Activities |
$ -130,565.00 |
JB HiFi receives the cash mainly from the receipts from the customer and its main expenditure includes payments to the suppliers and employees. Other expenditures that company has to bear are income taxes and finance cost. JB HiFi has invested $ 52,343,000 in purchasing the plant and equipments. There was no more expenditure in the financing activity. In financing activity, it has been seen that JB HiFi has used cash to pay for the dividend and to repay the borrowings. Some of the cash has also been used to buy back the equity shares from the open market (Annual report 2016: JB HiFi).
The ratio depicts the proportion of current assets of a company to its current liabilities and is calculated with the formula: Working capital ratio=Current assets/Current liabilities (Fabozzi, 2008).
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JB HiFi Limited |
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Calculation of Working Capital Ratio |
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Particulars |
2016 |
2015 |
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Current Assets |
$ 702,518.00 |
$ 616,901.00 |
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Current Liabilities |
$ 446,833.00 |
$ 380,336.00 |
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Working Capital Ratio |
$ 255,685.00 |
$ 236,565.00 |
The results show that JB HiFi has enough working capital in both the years.
This ratio helps in analyzing the cash sufficiency of a business entity by measuring its efficiency of meeting its current liabilities with the cash flows generated.
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JB HiFi Limited |
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Calculation of Cash Flow Adequacy Ratio |
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Particulars |
2016 |
2015 |
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Cash flow from operations |
$ 185,140.00 |
$ 179,896.00 |
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Long-term debt paid |
$ 30,000.00 |
$ 40,113.00 |
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Fixed assets purchased |
$ 52,343.00 |
$ 42,466.00 |
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Cash dividends distributed |
$ 93,205.00 |
$ 87,174.00 |
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Cash Flow Adequacy Ratio |
1.05 |
1.06 |
The ratio shows than JB HiFi generates enough cash and it does not depend on the borrowings and other sources of cash (Annual report 2016: JB HiFi).
The ratio depicts the amount of assets of a business entity that are financed by its creditors, liabilities and debt.
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JB HiFi Limited |
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Calculation of Debt to Total Asset Ratio |
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Particulars |
2016 |
2015 |
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Total Liabilities |
$ 587,679.00 |
$ 551,534.00 |
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Total Assets |
$ 992,381.00 |
$ 895,013.00 |
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Debt to Total Asset Ratio |
0.59 |
0.62 |
Debt capital used by the JB HiFi to finance the total assets was 59 % in year 2016 that can be subject matter of issue for the company(Annual report 2016: JB HiFi).
The ratio is used for analyzing the capacity of a company to generate income from its operational activities in order to meet its expenditure (Tracy, 2012).
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JB HiFi Limited |
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Calculation of Debt Coverage Ratio |
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Particulars |
2016 |
2015 |
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Net income before tax |
$ 217,839.00 |
$ 195,532.00 |
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Add: Interest Expenses |
$ 3,857.00 |
$ 5,927.00 |
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Add: Depreciation and amortisation |
$ 40,901.00 |
$ 39,124.00 |
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EBITDA |
$ 262,597.00 |
$ 240,583.00 |
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Interest Expenses |
$ 3,657.00 |
$ 5,689.00 |
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Principal Payments |
$ 30,000.00 |
$ 40,113.00 |
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Total Debt Services |
$ 33,657.00 |
$ 45,802.00 |
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Debt Coverage Ratio |
7.80 |
5.25 |
Debt coverage ratio was quite sufficient in both the years.
This ratio helps in measuring the ability of a company to generate cash from its sales realized.
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JB HiFi Limited |
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Calculation of Cash Flow to Sales Ratio |
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Particulars |
2016 |
2015 |
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Cash Flows from the operating activity |
$ 185,140.00 |
$ 179,896.00 |
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Net revenue |
$ 3,954,467.00 |
$ 3,652,136.00 |
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Cash Flow to Sales Ratio |
4.68% |
4.93% |
JB HiFi generates nearly small of cash resources as compared to sales revenue (Annual report 2016: JB HiFi).
Conclusion
On the basis of analysis it can be said that Harvey Norman Holding Limited can prove to be better investment for the short term credit risk as company believes in maximizing the returns through investing the various investments together it is generating good amount of cash flows from its revenue.
It can be stated from the ratio analysis of both the companies that JB Hi-Fi possesses more extensive cash resources as compared to Harvey Norman. The JB Hi-Fi Company invest only that proportion of its cash resources that it has realized from its savings and does not excessively invest in the cash generating options such as fixed assets. On the other hand, Harvey Norman does not hold it cash resources as it excessively invest the cash realized into its investment in fixed assets and thus does not stores adequate cash resources on hand.
The company Harvey Norman possesses more ability to survive in the long-term as it has more cash generating capacity. Also, it is able to adequately manage its cash activities by investing in properties and purchase of fixed assets. On the other hand, JB Hi-Fi although is generating cash flows from its operational activities but is not able to adequately manage its cash investments. The company has also incorporated debt in its capital structure that can restrict its long-term growth and profitability.
On comparing the cash to sales ratio for both the companies it has been found that Harvey Norman Holding Limited has generated 24.37 % cash resources from its sales revenue while JB HiFi has generated only 4.68% cash resources in year 2016. So, it can be concluded that Harvey Norman is successfully utilising its resources to generate enough cash from its revenue.
References
Annual report 2016: Harvey Norman Holding Limited. Retrieved on 6 September, 2017, from https://static1.squarespace.com/static/54803162e4b08e1b8a472201/t/58ec31736a49630e8a463444/1491874201272/2016-Annual-Report.pdf
Annual report 2016: JB HiFi. Retrieved on 6 September, 2017, from https://www.jbhifi.com.au/Documents/2016%20JB%20HiFi%20Annual%20Report_ASX.pdf
Fabozzi, F.J. et al. 2008. The Complete CFO Handbook: From Accounting to Accountability. John Wiley & Sons.
Fridson, M. and Alvarez, F. 2011. Financial Statement Analysis: A Practitioner’s Guide. John Wiley & Sons.
Porter, G.A. and Norton, C.L. 2014. Financial Accounting: The Impact on Decision Makers. Cengage Learning.
Roth, M. 2008. Top Stocks 2008: A Sharebuyer’s Guide to Leading Australian Companies. John Wiley & Sons.
Tracy, A. 2012. Ratio Analysis Fundamentals: How 17 Financial Ratios Can Allow You to Analyze Any Business on the Planet. RatioAnalysis.net.
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