JB Hi Fi is one of the top Australian companies which had got listed on the Australian Stock Exchange in year 2003. However, the company is in existence since 1974. The headquarter of the company is situated in Melbourne, Australia and is the largest retailer of the home entertainment products such as LED LCD TVS Computers, Laptops I-pads, Headphones, Speakers, Mobile Phones, Video Games, Digital Camcorders and Home Theater.
Along with these products, JB Hi Fi has also diversified its business in accessories such as radios, keyboards, musical instruments like electric guitars, surveillance camera systems, DJ equipment and so on. The company is famous for its wide range of business products and brands along with its low price ranges. It belongs to Consumer Discretionary (consumer electronics) Industry. Also, JB Hi Fi owns the sole retail chain across the Australia which sells computer hardware of Dell brand.
As of now company has over 184 stores that are being operated in the entire Australia and more than 15 stores which are being operated in New Zealand. In 2007, JB Hi Fi was also the biggest CD retailer of Australia and at the same it had also achieved second position in context of computer games, televisions as well as car stereo sales. In year 2004, the company had also acquired 70% of ownership of Clive Anthony Chain of Queensland. Further in 2006, it had also acquired chain of Hill and Stewart which has 11 stores operating in New Zealand. Further the company had opened the branch of Clive Anthony’s in Sydney.
Business Analysis:
JB Hi Fi conducts an innovative business and had launched an online streaming service of music subscription that is labeled with the name of ‘JB HI-FI NOW’. The company has already opened ten new stores in year 2012 and it has planned to open up additionally 53 stores in the upcoming years. JB Hi Fi does not only maintain a large portfolio of consumer electronics. Rather, it has the potential to grow organically. Its smooth cash flows will allow it achieve good sales growth. This potential of the company will further entrench it improve its position further to become the top retailer of home entertainer products in the markets of Australia and New Zealand.
JB Hi Fi has achieved a unique proposition in market place and by far it holds top most market share position in all the product categories it is dealing in. The strong brand name in the market has allowed the business of JB Hi Fi to create a superior competitive edge in the Australian market. The company takes the pride to maintain a lower cost structure for its business.
They do not operate through any of the warehouses and due to this their cost of operating the business usually remains lower than that of rival firms. They directly sell their products straight from their suppliers to the customers. They stock up the products merely on the shop floor. These strategies show that JB Hi Fi devotes considerable time to keep the ‘Cost of Business’ at the minimum possible level. Moreover, the company has employed credible workforce and its staff members are a sort of Gen Y’ers who do not only possess the knowledge of the products and technologies related to the business of the company’s products but also use those products themselves (Reuters, 2018).
Economic outlook
At present, it would be appropriate to say that company is facing multiple risks in the market. Firstly, it is facing the cyclical risk because of de-leveraging practices by its customers and the cutting back in the spending patterns of the population of Australia. Secondly, it is facing the structural risk because of the ways the Australian retailers will operate their business in subsequent years.
The conventional ‘bricks and mortar’ retailers in Australian market have to essentially change the manner in which they conduct the business due to technological advancements which has diverted the interests of the customers in online buying rather than visiting the individual store. To deal with risk, JB Hi Fi has adopted the ‘multi-channel’ approach and this has resulted in the significant increase in their sales made through online mode.
Financial performance and financial statement analysis
To understand as to how the company is performing, the financial statements have been evaluated using various kinds of analyses such as vertical analysis, horizontal analysis and financial ratio analysis. Citing the fragile performance of the business segment of home appliances of JB Hi Fi, because of challenging weather conditions and intense price competition in the home appliances market has cut down the value of Good Guys, driving stock of the company by almost 10% (Ready ratio, 2018).
The prime reason for the drop in the sales revenue generated through the sale of Good Guys was the cyclical factor under which the customers of Australia are maintaining the low spending cycles. Further, the economic factors such as sluggish growth in wage rates, increasing costs of living and the raised level of household debt and so on have influenced the moods of Australian citizens (Edge Consulting, 2012).
However, even after these challenging situations, it has been observed that the company has managed to perform successfully in the market in long run as those factors only impacted the company’s performance in the short run. The company has by far remained the outstanding performer among all the bricks and mortar retailers who had suffered the emerging digital competition and weak confidence of the customers of this industry. The vertical analysis of income statement has shown that the revenue in 2017 have enhanced from the level of revenue of 2016.
Financial analysis
To comment on the financial performance of the business, the use of key financial management technique i.e. ratio analysis has been undertaken. As a part of ratio analysis various ratios relating to the main components of the financial statements of the company have been calculated and the results therefrom have been critically interpreted. The ratio analysis has helped to evaluate the business from the viewpoint of major aspects such as its profitability, liquidity, efficiency and solvency position.
Profitability position:
|
(see appendix for calculations) |
2017 |
2016 |
Industry average |
|
Return on assets |
10.01% |
16.13% |
13.59% |
|
Return on equity |
27.40% |
40.71% |
41.11% |
|
Net profit margin |
3% |
4% |
4.21% |
|
Gross profit margin |
22% |
22% |
28.04% |
|
Net Interest Income |
N.A. |
N.A. |
N.A. |
|
Expense ratio/Cost to Income ratio |
17% |
16% |
% |
|
Cash return on sales |
3% |
5% |
% |
|
Earnings per share |
1.54 $ per share |
1.51$ per share |
1.05 $ |
|
Price earnings ratio |
15.18 times |
15.96 times |
15.95 times |
|
Earnings yield |
6.59% |
6.27% |
% |
|
Dividends per share |
1.18$ |
1$ |
$ |
Profitability position of the company is achieved when it is able to recover all the expenses of the business and even after recovering all the costs related to the business, it has sufficient amount of earnings left with it to be distributed as the return among various investors of the company such as shareholders, debenture-holders and bond-holders. If the company lacks sufficient earnings to all the business expenses, then it raises the situation of business losses. To ascertain the state of profitability position various ratios have been calculated.
The return on assets ratios shows the quantum of returns generated by the business through the effective utilization of its total assets. In the present case, the ROA of JB Hi Fi has lowered down in 2017 as compared to that of 2016 and also the company has failed to meet the industry average. The return on equity ratio measures the ability of company to generate returns using the funds of the shareholders. In 2017, the ROE is 27.40% which is quite lower than ROE of 2016 i.e. 40.71%. This indicates that the firm was unable to efficiently utilize its investor’s fund to generate desirable returns to offer to the shareholders in return to their investments.
Also, the company’s performance is not in line with the performance of overall industry in this respect. The net profit ratio in current year is 3% and that in 2016 was 4%. It shows that the company has not earned sufficient profits in 2017 to provide desirable returns to the shareholders of the company. Though there is no considerable change in the gross profit ratio of both the reported years because the cost of revenue has also increased in the same proportion of sales (42%), it has been found the operating expenses of the business of JB Hi Fi has increased by 49% whereas the revenue from sales has increased by only 42%.
Due to this the expense ratio has been identified as 17% in 2017 which was 16% in 2016. The cash generated from the operating activities has also declined by 2% in 2017 and this shows that though the sales of the business has grown materially but the company has not made enough collections from its current year’s sales. Since, the confidence of shareholders has weaken in the company because of its lower profits forecasts for the near future, the shareholders have withdrawn their invested monies from the company. This reduction in the number of shareholders has enabled the company to offer more earnings per share to the remaining shareholders and also the increase in the revenue has also increased the profit portion of the company in 2017 and due to this EPS of $ 1.54 has been offered in the said year. The earnings yield shows the percentage of every dollar that is invested in the business has earned return.
The earnings yield of JB Hi Fi has increased from 6.27% (2016) to 6.59% and this shows that company has offered more returns to the shareholders. Price Earnings Ratio shows the expected price of a share on the basis of its earnings. When the company has higher EPS, its market price per share also tends to increase but due to losing confidence of shareholders because of low profit forecasted results of company and other economic factors, the MPS has decreased even when EPS has risen up. In the present case, the price-earnings ratio of company is showing conflicting returns in relation to its EP. Though it has been found that company’s EPS has increased but 15.18 times which was 15.96 times in 2016. This ratio is reflecting negative future prospects of the business. Further, the dividend per share has also increased due to increase in the payout ratio and EPS of the company.
Efficiency position:
|
(see appendix for calculations) |
YYY |
YYYY |
Industry average |
|
Asset turnover |
3.27 times |
4.19 times |
3.31 times |
|
Cash return on assets |
0.11 times |
0.20 times |
Times |
|
Fixed Asset turnover |
7.16 times |
13.92 times |
Times |
The asset turnover ratio of the company indicates how efficiently company utilizes its overall assets to generate sales for the business. Generally higher asset turnover ratio is preferable. In the present case the industry average of asset turnover ratio is 3.31 times and ATR in 2017 is 3.27 times. This shows that the company is managing its assets as efficiently as the other firms of the same industry.
However, in 2016, the company’s performance was even better than the industry standards, which has provided it a competitive advantage over other rival firms of consumer electronics segment of Australian market (Ward, 2017). The fixed asset turnover ratio of the company depicts its efficiency in utilizing the fixed assets of business to generate sales. In the present case of JB Hi Fi, the fixed asset turnover ratio is declining in 2017 since 2016 and this shows that company in 2017, is not as efficient as it was in 2016, in utilizing its assets.
Liquidity Position:
|
(see appendix for calculations) |
YYYY |
YYYY |
Industry average |
|
Current ratio |
1.32:1 |
1.57:1 |
1.17:1 |
|
Quick ratio |
0.35:1 |
0.35:1 |
0.40:1 |
|
Receivables turnover |
139.46 Days |
140.82 Days |
87.04 Days |
|
Average collection period |
9.55 Days |
8.28 Days |
Days |
Liquidity position of any business is achieved when sufficient amount of current assets is maintained by the company to meet its short term financial obligations arising during the course of normal business (Kimmel, Weygandt & Kieso, 2010). Current liabilities are those liabilities that become due in one year from the date of their occurrence. As per industry average, a company dealing in consumer electronics must have a current ratio of at-least 1.17:1.
However, the ideal current ratio is 2:1 in general business (Investing.com, 2018). However, looking at the industry average it can be judged that the working capital structure of firms operating in this industry must at least equal amount of current assets as that of its current liabilities. The current ratio in 2017 is higher than the industry average. It signifies that the company has sufficient assets to meet its current debt obligations. But, at the same time, the fact that the current ratio has downgraded since 2016, cannot be ignored.
This shows that the company has a scope of further improvement to make sound liquidity position. The receivable turnover ratio tells the time that the firm can collect the average account receivables. Higher ACR is generally preferable (Sinha, 2012). In the present case, the company has quite higher account receivable collection ratio than the industry average in 2017 and this shows that the firm is effectively and efficiently maintaining its trade receivables.
Gearing ratios:
|
(see appendix for calculations) |
2017 |
2016 |
Industry average |
|
Debt to equity ratio |
65.47% |
27.11% |
7.81% |
|
Debt ratio |
65% |
59% |
% |
|
Equity ratio |
35% |
41% |
% |
|
Cash debt coverage |
17% |
32% |
% |
|
Interest cover ratio |
25.04 times |
56.69 times |
Times |
The gearing ratios the company helps in determining the adequacy of its capital structure. A firm’s capital structure comprises of both equity capital and debt capital. The equity capital shows the amount of funds that are raised from the internal sources of the company i.e. its shareholders and debt component shows the amount of funds raised through external financing of the business (Higgins, 2012). To maintain the sound solvency position of the business in the market a firm must finance its assets by making more use of the funds of the investors and less of funds borrowed from creditors.
The long term debt equity ratio of the JB Hi Fi in 2017 is 65.47% which is quite higher than the average debt equity ratio of all the firms operating in the same industry and also the debt equity ratio of previous financial year i.e. 2016 is also higher than the industry benchmarks. Hence, it can be said that the company has high financial risk and therefore there are higher chances of its insolvency (Jenter, & Lewellen, 2015). Insolvency occurs when the firm is unable to meet its debt obligations both in principle and interest terms because of lack of availability of sufficient funds. The debt ratio of a firm tells about the quantum of assets that are financed using the funds of creditors instead of investors.
Higher debt ratio suggests that the financial leverage of company is high because of more proportion of debt in the capital structure. In 2016, the debt to asset ratio is comparatively lower than the that of financial year 2017 which means that the company’s financial leverage has increased in 2017. In such situations the firm will require to sell off its assets to meet its debt obligations. The equity ratio of 2017 is 35% which is lower than that of 2016 when it was 41%. This shows that the firm’s financial leverage is increasing because of low proportion of equity capital which is the internal source of financing (Zainudin, Zainudin, Hashim & Hashim, 2016).
The interest coverage ratio of the company tells about its ability to pay off its interest obligations. In 2017 the interest expense ratio is 25.04 times. However, in 2016 the same was found to be 56.69 times. It shows that the company is severely losing its ability to meet its interest obligations arising out of debt financing and due to this the banks and other financial institutions will lose interest in lending huge sums of money to the company (JB Hi Fi, 2017).This will ultimately cause the high chances of arising of situation of insolvency of JB Hi Fi.
Which year’s performance is better?
Though the financial outcomes of JB Hi Fi have shown that company’s performance in 2017 is not satisfactory when made inter firm and intra firm comparative analysis of all the financial ratios (Warren & Jones, 2018). However, looking at the strengths of company and the ways it deals with various risks that takes place in both internal and external business environment it can be said that there are chances that the firm may improve its overall performance if it makes certain changes in its organizational structure and by further adoption of digital technologies to conduct the business in the globalized environment.
Impact of political environment
The political factors can significantly influence the business of the company in terms of its long term profitability. As JB Hi Fi is conducting its business in numerous countries it is more exposed to the political system risks. The trading regulations and laws of all the countries can materially affect the business performance. Along with it, the taxation structures of different countries might affect the business operations of the company (Fern Fort University, n.d.).
Possibilities of Merger and Acquisition
In the recent media coverage, it has been found that JB Hi Fi has announced the acquisition deal of Good Guys and Whitegood retailers. The company has announced $ 870 as the purchase consideration to take-over one of the biggest rivalry firm i.e. Good Guys. The company has further announced the manner in which both the businesses will be operated independently (Janda & Letts, 2016). The funding of purchase consideration will be undertaken with the issue of equity capital of $ 394 million and $ 500 in the external debt ((Foye, 2016). The acquisition will be an excellent strategic opportunity to take back the business on the track and to achieve economies of scale (Mitchell, Thompson & MacDonald, 2016).
Ethical consideration when becoming insolvent:
The company must keep in mind following ethical considerations when it becomes insolvent:
Conclusion:
From the above exercise of ratio analysis it can now be concluded that the company’s performance in year 2017 is degrading in terms of profitability and solvency as reflected by return on assets, return on equity, net profit, debt equity and interest expense ratio. However, the liquidity position of the company has improved since 2016 as depicted by current and quick ratios. Moreover, from the overall financial performance point of view it can be argued that company has managed to perform better in year 2016 than year 2017.
References:
Fern Fort University. (n.d.) Jb Hi-Fi Limited PESTEL & Environment Analysis.
Higgins, R. C. (2012). Analysis for financial management. New York: McGraw-Hill/Irwin.
Investing.com. (2018). JB Hi-Fi Ltd (JBH): JBH Ratios.
JB Hi Fi. (2017). Annual Report.
Jenter, D. and Lewellen, K. (2015). CEO preferences and acquisitions. The Journal of Finance, 70(6), pp.2813-2852.
Kimmel, P. D., Weygandt, J. J., and Kieso, D. E. (2010). Financial accounting: tools for business decision making. New Jersy: John Wiley and Sons.
Pash, C. (2018). JB Hi-Fi shares are tanking after a profit downgrade.
Ready ratio (2018) Solvency Ratio.
Reuters. (2018). JB Hi-Fi cuts profit forecast.
Saleem, Q. and Rehman, R.U. (2011). Impacts of liquidity ratios on profitability. Interdisciplinary Journal of Research in Business, 1(7), pp.95-98.
Sinha, G. (2012) Financial Statement Analysis. 2nd edn. India: PHI Learning Pvt. Ltd.
Tracy, A. (2012) Ratio Analysis Fundamentals: How 17 Financial Ratios Can Allow You to Analyse Any Business on the Planet. 1st edn. RatioAnalysis.net.
Ward, S. (2017) Balance Sheet Definition and Examples
Warren, C. S., and Jones, J. (2018). Corporate financial accounting. USA: Cengage Learning.
Warren, C. S., Reeve, J. M., and Duchac, J. (2011). Accounting. USA: Nelson Education.
Zainudin, E.F., Zainudin, E.F., Hashim, H.A. and Hashim, H.A. (2016). Detecting fraudulent financial reporting using financial ratio. Journal of Financial Reporting and Accounting, 14(2), pp.266-278.
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