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JB HIFI Ltd Financial Statement Analysis Academic Essay

Executive Summary

The following financial report has been done on JB HI-FI Ltd. The first section is about the 2014 financial performance with ratio analysis of the financial statements of that year. In the second section, we will see the trend analysis method being applied on the company’s past 10 years (2005-2014). Through the analysis we summarised that the company has been increasing in profits for almost all the years and we can predict that it would not change in the near foreseeable future. The unfavourable concern would be its short term debts as seen in our analysis. It also shows the company’s profitability, asset efficiency, liquidity and financial stability. The identified issues in the last section are just about the foreign currency and liquidity and these have been shown as minor issues in the company’s annual report.

JB Hi-Fi is Australia’s Largest Home Entertainment Retailer. There were 182 stores of JB Hi-Fi open in Australia and New Zealand. The company has 147 JB hi-fi stores and 22 JB Hi-Fi Home stores in Australia and 12 JB Hi-Fi stores in New Zealand. JB Hi-Fi has been offering Australia and New Zealand best value for home entertainment and consumer electronics. The company got a new CEO as of 2014 in Richard Murray who preceded Terry Smart after his retirement.

Question 3:

2.1 IS THE COMPANY PROFITABLE?

Table 1 profitable ratio
return on equity 47.7%
return on assets 22.4%
gross profit margin 6.5%
profit margin 5.5%
cash flow to sales 1.2%

Table 1

To see whether a company is profitable or not, profitability ratio should be used because it can measure a company’s ability to generate earnings relative to sales, assets and equity. By calculating the profitability ratio which is illustrated in Table 1, it can be easily find out that JB HIFI was profitable in 2014 because all the figures in Table 1 are positive.

ROE is Rate of Return on Common Stockholders’ Equity and it indicates the ability of companies to earn profit from shareholders’ investments. ROE shows 47.7% in 2014 which means that JB HIFI was able to earn profit with the money invested by the Shareholders. ROA is calculated as EBIT divided by average total assets. This ratio shows the ability of a company to convert sales revenue into profit and JB HIFI did quite well in 2014 as the ratio is 22.4%. GPM and PM are quite similar and they are positive in Table1, which means that JB HIFI has been earning revenue by selling its products.

The last on cash flow to sales (1.2%) is a more reliable figure than accrual based measurement such as PM and GPM, because it is cash-based from operating activities and it shows that JB HIFI has weak financial ability but it’s still profitable. Therefore, JB HIFI was actually profitable at 2014 and all those ratios above should expect an upward trend as an higher ratio is better.

HOW WELL IS THE COMPANY MANAGING ITS RESOURCES?

3.1 Table 2 Asset efficiency ratios
Asset turnover ratio 4.091
Inventory turnover 7.364
Days inventory turnover 49.564
Debtor turnover 51.617
Days debtor turnover 7.071
Creditor turnover 9.958
Days creditor turnover 36.65

Table 2

Asset efficiency ratios for JB HIFI can help us get information about whether the company manages its resources efficiently or not.

There are 5 ratios in asset efficiency ratios and the first one is Asset turnover ratio. Asset turnover ratio is 4.091, which means that JB HIFI manages its current and non-current investments quite efficiently. Inventory and days inventory turnover are very important because they tell us how effectively the company manages its inventory. JB HIFI has 7.364 for inventory turnover and 49.564 for days inventory turnover, which shows that the company may not convert inventory and accounts receivable to cash efficiently and the company would need around 49 days to sell its inventory.

Debtor turnover and days debtor turnover used to illustrate the number of times average debtors are turned over and the average period of time it takes for a firm to collect the money from its trade-related accounts receivable. The company should expect higher debtor turnover because it means that debts are more liquid and JB HIFI did well on this. In contrast, the suppliers expect shorter debt turnover because this would mean that they can get money in a short term.

Creditor turned over around 10 times and days creditor turnover is 36.65 in 2014, which is lower and debtor turnover and days debtor turnover. Therefore, JB HIFI is doing well in being able to collect its receivables quicker than the credit.

To sum up, JB HIFI manages its resources quiet well although it needs time to sell its inventory.

Is the company able to meet its short term debts? (Do you think the company is liquid so that it can stay in operation in the short term?

For this question, if the company wants to meet its short term debts, the company should have enough current assets to meet its short-term financial obligations. In addition, the company will have a better capacity to meet its short term financial commitments if the company has higher current ratio. Because of this, company’s current ratio, quick asset ratio and cash flows ratio should be considered for this question.

According to the financial statements of JB HI-FI Limited for 2014, we can figure out JB HI-FI Limited’s liquidity ratios, as below:
Current Ratio 1.642
Quick Asset Ratio 0.339
Cash Flows Ratio 0.117

According to the Birt et al (2008), current ratio around 1.5 and quick asset ratio around 0.8 are considered as minimum to meet the short term debts. As we can see from the table above, the current ratio for JB HI-FI is 1.642 (around 1.5) and the quick asset ratio for JB HI-FI is 0.339 ( far smaller than 0.8). Because of this, JB HI-FI would have found it difficult to meet its short-term debts.

In addition, if the company wants to have enough cash to pay for its short-term debt, the cash flow ratio should be more than 100%. However, as we can see from the table above, the cash flow ration for JB HI-FI is 11.7% (far smaller than 100%), which means JB HI-FI still need to improve its capacity to meet its short term debts.

In conclusion, JB HI-FI is not able to meet its short-term debts.

Is the company able to meet its long term debts? (Do you think the company will stay in operation in the long term, i.e. its long term financial stability?)

Company’s debt ratio (reflects the proportion of the debts response to its assets), equity ratio (reflects the relative equity used to finance the company assets), interest coverage ratio and debt coverage ratio should be considered for this question.

According to the financial statements of JB HI-FI Limited for 2014, we can figure out JB HI-FI Limited’s capital structure ratios, as below:
Debt ratio 0.657
Equity Ratio 0.343
Interest Coverage Ratio 22.645
Debt Coverage Ratio 5.154

The debt ratio for JB HI FI is 65.7% which means its total liabilities take a large portion (over 60%) of its total assets and it may have negative influence for the company to meet its long term debts. The equity ratio for JB HI FI is 34.3% and this reflects the company has not relied on its debt.

The interest coverage ratio for JB HI FI is 22.645 and the debt coverage ratio for JB HI FI is 5.154, which means the company has a strong ability to repay its debts and cover its interest expense.

To sum up, JB HI FI has enough liabilities to repay its debts and interest expesne. Because of this, JB HI FI is able to meet its long term debts.

Question4

10 YEAR TREND ANALYSIS

6.1 Profitability trend analysis: 2005-2014

Figure 4.1

Figure 4.2

The table shows JB HI-FI Ltd.’s profitability ratios including ROE, ROAetc and the trend analysis for profitability ratios. To calculate the trend analysis, we used 2005 as our base year. The trend analysis of ROE decreased from 100 in 2005 to 94.5 in 2006, after which it rose to a peak of 163.4 in 2012. This means that in 2012, JB HIFI had the highest potential for earning profit. However, after 2012, it dropped back to 125.5 in 2014. ROA saw a similar trend with ROE, but the peak point became 2001 as it increased from 87.8 in 2006 to 146.4 in 2011, after which it decreased to 118.8 in 2013 and rose back to 123.8 in 2014. Therefore, except 2006 and 2012. JB HIFI actually tried to improve its efficiency of managing its assets to produce profits in the other 8 years.

The trend analysis also shows that in 2011, GPM and GM was the highest, 125 and 126.9 respectively, which means that JB HIFI earned the most out of every dollar of sales in 2011 and the net profit after tax (134.41) in the income statement also provided it.

For the cash flow to sales trend analysis, we have to use 2006 for based year because we could not find the data for 2005. This trend analysis shows that JB HIFI has great ability to turn sales into cash in 2007 and from 2009 to 2013 because the figure increased from 100 in 2006 to 312.5 in 2007. Although it dropped nearly half to 143.8 in 2008, it rose to 393.8 in 2009 and kelp rising until 2013. All the trend analysis shows that JB HIFI is increasing its profits throughout the period expect some years, but its still profitable in all years including 2014. Therefore, the answer for Question 3 did not have to change.

6.2 Asset efficiency trend analysis: 2005-2014

Figure 4.3

The following table shows the trend analysis of assets efficiency ratios including Asset turnover, Invested capital turnover, Days inventory, Days debtors and Days creditors.

Asset turnover only decreased in 2006 and 2007, after which it rose from 95.3% in 2007 all the way to 118.7% in 2014 and this means that JB HIFI was improving its ability in managing its asset throughout the period.

In contrast, the inventory turnover saw a slight decrease in its first few years and it only increased in 2010. Therefore, JB HIFI did not do well in managing its inventory but since it fluctuated around 5% only it was not that much of a concern. Also, days inventory turnover also had a similar trend, although it increased in the first two years. Therefore, in 2006 and 2007, JB HIFI needed more times to sell their inventory and in other years its needed similar times since the trend was similar.

6.3 Liquidity Trend analysis
Liquidity Ratios 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Current Ratio

(CR)
1.374 1.422 1.351 1.379 1.317 1.252 1.448 1.215 1.274 1.642
Quick Asset Ratio (QAR) 0.258 0.257 0.345 0.244 0.314 0.330 0.272 0.241 0.311 0.339
Cash Flow Ratio (CFR) -0.037 0.113 0.305 0.117 0.450 0.419 0.318 0.489 0.354 0.117
Trend Analysis
Current Ratio

(CR)
100.0 103.5 98.3 100.4 95.9 91.1 105.4 88.4 92.7 119.5
Quick Asset Ratio (QAR) 100.0 99.6 133.7 94.6 121.7 127.9 105.4 93.4 120.5 131.4
Cash Flow Ratio (CFR) N/A 100.0 269.9 156.6 398.2 370.8 281.4 432.7 313.3 103.5

The trend analysis for debtor turnover only decreased in the first two years (2006 and 2007) and after which it rose from 83% in 2007 to 122.7 in 2014. This means that JB HIFI also improved the ability of velocity of debt collection. By contrast, days debtors turnover had an opposite trend because the debtor turnover increased so the company needed shorter period for turn over only. However, this was only benefitting for suppliers.

Current Ratio refers to capability of company pays back its short-term liabilities with its short-term assets. Quick Asset Ratio measures companies whether have ability to meet its short-term obligations with its most liquid assets. Besides, it excludes inventories from current assets. The Cash Flow Ratio means that current liabilities are covered by the cash flow generated from operations of companies.

The figure shows that Current Ratios of JB Hi-Fi Limited Company is a stable trend and only has a little rise in 2011 and 2014. Due to all Current Ratios less than 1.5 which from 2005 to 2013 and its trend is stable, it means that JB Hi-Fi Limited Company is short of current assets to meet the short-term financial obligations. However, it can meet the short-term financial obligations in 2014, because it is greater than 1.5.

Furthermore, the general trend of Quick Asset Ratios of JB Hi-Fi Limited Company is still steady. It follows cycle of increase and decrease, increasing during 2006 to 2007 and descends in 2008. Then it increases during 2008 to 2010 and decreases during 2011 to 2012. Finally, it increases during 2012 to 2014 and may descend in the future.

It means that JB Hi-Fi Limited Company is still finding it difficult to convert into cash which is also used to meet short term liabilities.

On the other hand, the trend of cash flow of JB Hi-Fi Limited Company is unstable and has a large fluctuation. The cash flow ratio has a rapid growth from 2005 to 2007 and quickly descends in 2008. It experienced a quick growth in 2009 again and then rapidly fall during 2010 to 2011. Finally, it promptly rises in 2012 and rapidly descends during 2013 to 2014. It means that JB Hi-Fi Limited Company needs for more capital. The higher cash flow ratio is more beneficial to company.

In conclusion, based on the following datas of Current Ratio, Quick Asset Ratio and Cash Flow Ratio of JB Hi-Fi Limited Company from 2005 to 2014 years, the result shows that it is unable to meet its short term debts and the previous answers do not have to change.

6.4 Financial stability

Capital structure ratios 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Debt ratio (DR) 0.716 0.744 0.738 0.694 0.654 0.589 0.801 0.733 0.711 0.657
Interest Coverage Ratio (ICR) 7.086 7.706 10.638 12.334 21.943 31.780 48.625 12.335 18.325 22.645
Debt Coverage Ratio (DCR) -21.354 6.712 1.955 3.123 0.747 0.381 2.446 0.871 1.004 5.514
Trend Analysis
Debt ratio (DR) 100.0 103.9 103.1 96.9 91.3 82.3 111.9 107.5 99.3 91.8
Interest Coverage Ratio (ICR) 100.0 109.5 150.1 174.1 309.7 448.1 686.2 174.1 258.6 319.6
Debt Coverage Ratio (DCR) N/A 100.0 29.1 46.5 11.1 5.7 36.4 13.0 15.0 76.8

Capital structure ratios can assess long term viability of companies. Debt Ratio, Interest Coverage Ratio and Debt Coverage Ratio are significant and essential to analyze Capital structure Ratios.

Debt ratios refer to proportion of companies’ assets that are financed by debt. The figure indicates that debt ratios of JB HI-FI Limited Company is a stable trend and just has some little change which means JB HI FI has a stable development in these ten years.

Interest Coverage Ratios refer to determine how companies can pay interest on outstanding debt. The trend of Interest Coverage Ratios is a great fluctuation. It has a slowly growth from 2005 to 2008 and has a rapidly growth during 2008 to 2011 which means JB HI FI’s ability to pay for its interest is become stronger from 2005 to 2011. Then it descends quickly in 2012 and begins to turn better and steady raise during 2013 to 2014. Although JB HI FI’s interest coverage ratio has been descends in 2012, it still raised steady in these years and this reflect JB HI FI still have excellent capability to pay interest on outstanding debt.

Debt coverage ratios refer to how long companies take the entities to repay the long-term debt at their current operating level. The trend of Debt Coverage Ratios of JB Hi-Fi Limited Company is still unstable. It has rapidly fall in 2007 and raise in 2008. Then it experienced a short decline between 2009 and 2010, after then it ascends in 2011. JB HI FI still has strong ability to pay for its long-term debt.

JB Hi-Fi Limited Company own strong ability to pay interest on outstanding debt and has enough assets than debts. To sum up, JB HI FI is able to meet the long-term debts and the answer for this question does not need to be change.

Question 5

Other issues

According to the company’s annual report there are few additional issues which could be of potential concern to the company’s financial position and performance.

There are four specific risks which is of concern. They are

Market risk
Liquidity risk
Credit risk Management
Fair value of financial Instruments

Market Risk

The market risk talks about the foreign currency and how the maximum amount of transactions are denominated in the functional currency of the country of operation and are therefore not exposed to foreign currency risk.

The company is also exposed to fair value interest rate risk as it borrows funds at floating interest rates. But it manages its risks by maintain an appropriate mix between fixed and floating rate borrowings through the use of interest rate swap contracts.

Liquidity Risk

The company usually manages liquidity risk by maintaining adequate reserves, banking facilities and reserve borrowing facilities and by continuously motoring forecasts and actual cash flows. But the risks have been significantly reduced compared to 2013 as shown in the annual reports.

Credit Risk Management

Credit risk refers to the risk that counterparty will default on its contractual obligations resulting in financial loss to the company. The company has endeavoured to minimise its credit risk by dealing with creditworthy counterparties. Its exposure and the credit ratings of its counterparties are continuously monitored and the aggregate value of transactions concluded is spread amongst approved counterparties. It does not have any significant credit risk exposure to any single counterparty or any company of counterparties having similar characteristics. The carrying amount of financial assets recorded in the financial statements, net of any allowance for impairment, represents the company’s maximum exposure to credit risk.

Fair Value of Financial Instruments

According to the report the only financial liabilities or assets carried at fair value are the interest swaps. There have been no transfers between the financial instruments this year so the risks were minimized completely.

Now after thoroughly analysing the reports and the risks the company as of June 2014 did not have any severe risks as the only serious risk the liquidity had also been reduced compared to 2013 and that company is in a strong position financially and the investors need not worry about any risks which could befall the company financially.

After thoroughly analysing the financial statements of the year 2014 of JB HI-Fi we can conclude that the company has been showing profits and the profitability ratios as well as the asset ratios have shown that to us. Also the trend analysis clearly indicates that even if the company had some ups and downs it was going forward and it will go forward in the next few years as well. This shows that the company is profitable in all ways. The only concern is the company’s short term debt which could not be shown as being repaid effectively. The identified issues are not that much of a concern because the company has been thorough in minimizing the risks involved. Thus we conclude that the analysis shows that JB HI-FI has been profitable all these years and will do so in the next few years .

Reference

Birt, J, Chalmers, K, Beal, D, Brooks, A, Byrne, S & Oliver, J 2008, Accounting: Business reporting for decision making, Wiley, Queensland.

JB Hi Fi Limited Company viewed 11 November 2014 https://www.jbhifi.com.au/General/Corporate/Shareholder-Matters/Financial-Annual-Reports/

‘Profitability Ratios’, 2013, Investopedia US, A Division of ValueClick, Inc, viewed 9th September 2013, http://www.investopedia.com/terms/p/profitabilityratios.asp.

Appendix 1

Profit and Loss

Appendix 2

Balance sheet

Appendix 3

Cash Flow

Appendix 4

2014 Profitability

Appendix 5

2014 Asset efficiency

Appendix 6

2014 Capital structure

Appendix 7

2014 Liability

Appendix 8

Appendix 9

Profitability Ratios

Appendix 10

Asset Efficiency Ratios

Appendix 11

Liquidity ratios

Appendix 12

Capital structure ratios

Appendix 13

Profitability Ratio

Appendix 14

Asset efficiency Ratio

Appendix 15

Liquidity Ratio

Report analysis Out of
Financial ratio analysis

Profitability

· Appropriate ratios applied

· Correct calculation of ratios