Horizontal and Vertical Analysis of the JB Hi-Fi Company - Example

Financial Statement Analysis for JB Нi-Fi 2011-2015 Name Class (Course) Professor Institution City and State Date Executive summary This paper gives main the analysis of JB Hi-Fi Ltd's financial articulation is relied upon to cover a time of five years, that is, from the FY2011 to the FY2015. The proportion examinations contain gainfulness, liquidity, and dissolvability proportions. Additionally, the investigations incorporate DuPont examination, income, and imminent investigation of the balanced money related explanation of the JB Нi-Fi Company. It gives conclusion and recommendation to the company management. Letter of Transmittal 26/05/2016 To The secretary, Board of Directors, JB Нi-Fi Company Limited, Australia. Subject: Submission of financial analysis Report Dear sir/madam Following the request to carryout financial analysis of your company, we were assigned this duty to assess your financial performance and give your financial report based on the past financial reports of your company. We strongly believe that the work which has been done is complete and is comprehensive enough fulfilling your company desire and wants and is per your wish. We actually were able to gain me experience through the preparation of this report, we believe that you will take heed of the various recommendation which we have made in this report. It will be a deep pleasure for us if the financial report serves its intended purpose. Our auditing team is available in any time to explain any questions that might arise. Yours faithfully Assistant Analyst Table of Contents Executive summary 2 Letter of Transmittal 3 Table of Contents 4 1.0 Introduction 6 1.1 Purpose 6 1.2 Scope 6 1.3 Methodology 7 1.4 Assumptions 7 1.5 Limitations 7 2.0 Company overview 9 3.0 Economic framework 10 4.0 Financial analysis 11 4.1 Ratio analysis 11 4.1.1 Short term Activity Ratio 11 4.1.1.1 Inventory Turnover 11 4.1.1.2 Days in inventory 11 4.1.2.1 Total Asset Turnover 11 4.1.2 Profitability Analysis 12 4.1.3 Liquidity Analysis 13 4.1.4. Long-Term Debt and Solvency 13 4.1.5. DuPont Analysis 14 5.0 Cash flow analysis 15 6.0 Prospective analysis 16 6.1 Sales and EBIT Forecast 16 7.0 Conclusion and recommendation 16 References 18 Appendix in excel 19 1.0 Introduction This paper gives both horizontal and vertical analysis of the JB Hi-Fi Company. 1.1 Purpose This is for the proprietors and administrators of JB Hi-Fi Company to settle on appropriate financial choices relating to the fate of the firm, it is imperative for them to have legitimate comprehension of the organization's performance. In this way, there is frequently a need to audit and break down an organization's money related explanations, for example, pay articulations, Statement of money streams and proclamation of financial position among others to make them reasonable to the organization's shareholders and different partners on the loose. 1.2 Scope Essentially the investigation of JB Hi-Fi Ltd's financial articulation is relied upon to cover a time of five years, that is, from the FY2011 to the FY2015. The proportion examinations contain gainfulness, liquidity, and dissolvability proportions. Additionally, the investigations incorporate DuPont examination, income, and imminent investigation of the balanced money related explanation of the JB Нi-Fi Company (Roy, Len, et al., 2015). The examination methodology is both vertical and flat. The vertical investigation investigates the different classes of the organization accounts; even examination thinks about the organization performance to the performance of the primary contenders inside the business. One of the most ideal approaches to do the investigation is to make correlation of the organization's performance with another organization's performance that works in the same business. 1.3 Methodology In breaking down the performance of JB Hi-Fi Ltd, it will be with a specific end goal to put forth utilization of its money related articulation as reported amid the year ending 2015. The money related records for JB Нi-Fi Company are gathered and balanced barring non-repeating things. This investigation will include calculation of the money related proportions, gainfulness proportions, liquidity proportions and additionally Du Pont examination and Cash stream examination among different parameters. The performance of JB Hi-Fi Ltd will in this way be contrasted with that of HVN's to figure out whether the potential development saw in the last half decade is beneficial (Roy, Len, et al., 2015) 1.4 Assumptions During the establishment of the assets net book value, there will be no pronounced variations in the values of the company assets at the start and end of each year. It will be likewise later found in the proportions calculation, if the Profit edge ends up being on an upward pattern throughout the previous five years, it will be expected that the following financial year 2016, will increment also. Along these lines, shareholders will also be of the assessment that the business is expanding getting to be gainful step by step and in this manner keep furrowing the cash in the business. The presumption will likewise apply in the alteration of expense in the income articulation of the JB Hi-Fi Company. 1.5 Limitations Despite the fact that the investigation of JB Hi-Fi Ltd budgetary proclamations is key in giving applicable data that is frequently thought to be of incredible essentialness while settling on various choices and additionally planning corporate plans and polices, it ought to dependably be noticed that there are likewise various constraints connected with these examination. Among them incorporates:- The JB Hi-Fi Ltd can't depend on this data to make their arrangement; Based on the way that money related articulations are readied utilizing authentic information, the data got from such proclamations sometimes might be inadequate in major corporate arranging given the way that the past circumstance may not win. Inflationary effects may limit the analysis if the rates are relatively high because the values associated with the assets and liabilities in the company records may appear extremely low since the adjustments do not include inflation. The inflationary effect is majorly about long-term effects. The comparison with the rival company may be misleading because the financial policies and practices between the two companies are different The subjective aspect is disregarded; in breaking down the money related explanations of JB Hi-Fi Ltd, just the quantitative data in regards to JBH's financial undertakings will be uncovered. Be that as it may, the subjective data like the clients' fulfillment, abilities of the administration and administration related work data are never considered in spite of being similarly essential. The financial analysis can be misleading because it relies on the financial records from the company that may be subject to errors along with accounting mismanagement, which then distorts the raw data that are used in the ratio determination 2.0 Company overview The company operates within Australia and New Zealand and employs an estimated number of employees totaling to 7300 working in all its 194 outlets. JB Нi-Fi Company headquarters is housed in Chad stone, Victoria. The Company is listed on Australian Security Exchange (ASX) under the code JBH. The company derives its revenue from trading in electronics both for home entertainments and for consumer products. JB Нi-Fi Company Limited operates under different units including JB HI-FI, Clive Anthony, and JB HI-FI HOME. On specific products, JB HI-FI sells consumer electronics, games, mobile phones and accessories, GPS and Car Audio, Computers and Tablets, Consoles, CDs and DVDs and the audio equipment and instrument (Rudolf & Papastergiou 2013). JB HI-FI HOME offers shopper gadgets, cooking machines, white merchandise and cooling apparatuses. Additionally, the organization works an online store and markdown superstores. Nitty gritty investigation of the organization's item merchandize demonstrates that the greater part of its benefits have originated from the items that it represents considerable authority in, imported CDs from the UK and the United States and in addition arranging exceptional requests for customers for imports from Asia, Africa and South America (JB Hi-Fi, 2015). Notwithstanding this, the organization additionally has a differentiated plan of action that right now ventures into other distinctive qualities of the business inside the far reaching gadgets industry. A portion of the regions of enthusiasm for its retail establishment as seen on the organization's financial articulations incorporate Plasma and LCD TVs, computerized camera photography, gaming consoles and embellishments, contraptions and data innovation among others (El Kasmioui & Ceulemans 2013). 3.0 Economic framework As indicated by the business analysts, retailing in Australia is relied upon to acknowledge positive quality development over the figure time frame, however the nation's financial standpoint may not increment accordingly (Vogel 2014). The low costs of wares and slower development of nearby populace will have negative effect on the retailing in this manner antagonistically influencing the economy. The company reports a likelihood of sales growth in 2016 as the consumer electronic retailer take advantage of the small business stimulus package and the buoyant housing market to add a small piece of equipment to the current stores. In the last four years, the company has used the stimulus package to help boost its like-for-like sales (Rudolf & Papastergiou 2013). The company performance is based on its strategies and the market forces like the customer bargaining power and competitors’ effect. The company predicted sales will rise by 5.4% that is $3.8 billion if the company takes advantage of the generate tax write-offs provided for small companies and if it takes advantage of the booming market in-home appliances. This ascent will be as an aftereffect of those retailers who are exchanging online who were not left behind also (Rudolf & Papastergiou 2013). They profit by the predominant low swapping scale. Since there was decrease in the estimation of Australian dollar against the US dollar, costs in remote online stores were on the upward pattern in this way profiting the online merchants. Accordingly Australian purchasers came back to their nearby online retainers in this way making their costs aggressive (Rudolf & Papastergiou 2013). This is the thing that assistance in enhancing the general offers of the organization and came about into a blasting year. 4.0 Financial analysis 4.1 Ratio analysis Proportion investigation includes dissecting an organization's money related proclamation in order to decide its financial execution in various key zones. So as to set up this, it regards break down the organization's exercises proportion. 4.1.1 Short term Activity Ratio The activity ratios analysis measures the JB Нi-Fi Company Limited sales per another asset account. This part will consider the inventory and total assets. This assessment will help in guiding on the efficiency with which the JB Нi-Fi Company uses its resources (El Kasmioui & Ceulemans 2013). 4.1.1.1 Inventory Turnover Inventory turnover= cost of goods / inventory cost 4.1.1.2 Days in inventory Days in inventory = 365/inventory turnover 4.1.2 Long-term Activity Ratios 4.1.2.1 Total Asset Turnover This ratio is to help in measuring the return on each dollar that the investors put in assets that is often equated to the net sales (Axel, 2012). Net sales are determined by subtracting the cash sales from totals sales. Net Sales = Total sales- cash sales TAS = Net sales of the company/ average total assets of the company Average assets = (Assets at the beginning of the year + Assets and year-end)/2 The two organizations are effectively utilizing their advantages for create income, however in FY2014 to FY2015, JBH's use of its resources for produce income diminished from 3.92 to 3.82 when contrasted with HVN's which expanded from 0.35 to 0.37, in this manner administration of JBH ought to attempt to build their administration of benefits in order to guarantee they act towards creating income (El Kasmioui & Ceulemans 2013). 4.1.2 Profitability Analysis EBIT to sales and the earnings per share are important ratios in determining how profitable a company is in the last five years. The determined values as reported in the JB HI-FI company annual financial statements gives a comparison of the revenue figures and the earnings per share. The value from 2011, 2012, 2013, 2014 and 2015, 7.56%, 6.2%, 6.42%, 6.52% and 7.17% respectively indicates that the company retains revenues after settling the operating expenses (El Kasmioui & Ceulemans 2013). The positive EBIT to sales recorded by JB HI-FI Company is an indication that the company has been running productively making profits. The EBIT value in 2011 was high, but the value dropped in 2012 and remained low in the following years up to 2015 when the value shoots ups again. The trends in EBIT values show the trends in profitability over the five-year period. The earnings per share are another indicator of profitability. The earnings per share in last five years show similar trends to the EBIT Values (Słyś & Kordana 2014) Comparing the JB HI-FI performance in 2014 and 2015 to that of Harvard Norman shows lower performance. Harvard Norman Company is making bigger profits than JB HI-FI, however, going by the earnings per share then investors in JB HI-FI get large returns than those in Harvard Norman (Słyś & Kordana 2014). 4.1.3 Liquidity Analysis Liquidity measures the ability of a company to pay off its loans within the short-terms or long-term. The gearing ratios for the five years indicate are all below 1.0 indicating that the company cannot settle its loans fully using the investors input. A value more than 1.0 would mean that the company could settle its debts fully by using the investors’ inputs. The company registers very low values in the debt ratio (Słyś & Kordana 2014) The debt ratios between the years 2011 to 2015 are all below 1.0 that means the company is leveraged and it cannot settle its debt. Less than 1.0 debt ratios make indication that the company has debts that it cannot settle by selling off all its assets. The current ratios for the five years show promising values as all the values in the five-year period are above 1.0 that indicates that the company can settle all its short-term debts using the current assets are still retain some value (Worthington & Devlin 2013). 4.1.4. Long-Term Debt and Solvency Diamond & Kashyap, 2015, maintain that solvency and long-term ratios are to show indications of the ability of the company to settle its loans and also important guides to the investors considering taking up some of the company shares because the investor must know the ratio of his/her equities to the debts the company already has. (Worthington & Devlin 2013). The debt to equity ratios are all positive that is a lucrative indicator because the investments pumped into the company can comfortably pay the debts of the company. The company is performing badly regarding debt to assets because the ratio is below 1.0 indicating that the debt the company owes other organizations is more than the company assets. 4.1.5. DuPont Analysis This analysis will use the three Pont formulas that is expressed as Return on equity= [profit margin/ (Net income/sales)] x [total asset turnover/ (net sales/average total assets)] x [financial leverage/ (total assets/ total equity)] JB HI-FI Company performs lower in profit margins compared to Harvey Norman because its gross margin percentages are relatively low (Vogel 2014). The current operation at the company generates sales but maintains high cost of production that reduces the profit margins. Even though the company registers low margins from sales, its turnover is high when compared to Harvey Norman. The company registered high values in its rates of return over compared to the ROE of Harvey Norman in 2014. However, in 2015 Harvey turns the tables as the ROE for JB HI-FI drops Harvey Norman’s ROE rises (Worthington & Devlin 2013). The five point duo-point is calculated as follows:   2011 2012 2013 2014 2015 Ratios           Gross Margin % 21.78 20.7 21.12 21.21 21.86 Operating Margin % 5.49 5.16 5.37 5.49 5.5 Net Margin % 3.71 3.35 3.52 3.68 3.74 Return on Assets % 14.81 13.26 14.07 15.07 15.56 Return on Equity % 49.23 62.14 54.4 47.72 42.79 It demonstrates all the money that streams into and out of the business venture. The income explanation is typically partitioned into three segments, that is, the income from operations, financing and contributing. In the initial two areas of operations and financing, it fundamentally demonstrates how the firm produces its money while the contributing segments depicts how the organization spends its money 5.0 Cash flow analysis Income from the Operating Activities:- This area tends to express the measure of money that originates from the association's offer of products and administrations less the expense of merchandise brought about to acknowledge such deals. Designers would in this way incline toward associations that a net positive income from its working exercises. In reference to our money related investigation, both JBH and HVN had positive income from their working exercises subsequently thought to be appealing to financial specialists, however JBH had a low trade stream of $41,330 out FY2014 when contrasted with HVN $339,000, this expanded in FY2015 to $340,000 when contrasted with JBH's $179,000. Income from the Investing Activities:- This fundamentally stipulates the measure of money that the firm has caused in capital use, for example, procurement of new hardware or whatever other resource that empowers the business to proceed with its operations Income from the Financing Activities This portrays the development of money installments connected with financing exercises of the business, for example, offer of stock and also securities or through bank acquiring. 6.0 Prospective analysis The trend in sales growth has been 5.7%, 5.8%, 5.13% and 4.88%. The company also registered growth in sales in the Same-stores by 2.9% that is mainly linked to the strong demand for mobile phones, computers and its appliances and the fitness products. The department that is not performing well according to the recent statistics is the software sales. The improvement in company sales has seen a rise in company shares by a value more than 10% to $21.69 in 2015. The rise in share value is a three-month high that takes gain for the year more than 35%. In the financial year 2016, the market structure is likely to stabilize that will further improve performance regarding sales in the next financial year 2016. With the trend in sales growth in the last five years, the 2016 sales are forecast to rise by 5.4%. Case in point, in JBH's business operations, there is probability that business yield will dependably be lower toward the start of the year with ensuing increment as the year advances on. This have a tendency to be the situation in the retailing business since customer's affinity to expend is regularly low to because of different responsibilities, for example, training in addition to other things. In the meantime, flimsiness in worldwide buyer showcase regularly influence the swapping scale which in the long run expanding the costs of retail items in this way lessening their interest. 6.1 Sales and EBIT Forecast (Exceed expectations Attachment) 7.0 Conclusion and recommendation Retailers are, for example, JBH will be relied upon to stay up to date with these new advancements while making their operations reasonably very much arranged for such outcomes. Though, a few retailers are campaigning the Australian government in a move to change the enactment so that such aberrations are minimized, the accomplishment of this is unverifiable The EBIT vales and the earning per share indicate an increasing trend over the five years. The liquidity ratios showed diverse trends, the debt ratios were below 1.0 while the current asset ratios were above 1.0. However, the debt to equity ratios was above 1.0. Ratios below 1.0 indicate the company’s insolvency and incapability to settle its debts and liabilities. In addition, the JB HI-FI limited Du Pont analysis indicated that it registered a higher ROE when compared to its competitor. The most immediate problem the company needs to address is the insolvency and cash flow management in order to restore investors’ confidence in the company. References El Kasmioui, O. and Ceulemans, R., 2013. Financial analysis of the cultivation of short rotation woody crops for bioenergy in Belgium: barriers and opportunities. BioEnergy Research, 6(1), pp.336-350. Roy, Len, et al. "JB HI FI LIMITED." (2015) Rudolf, V. and Papastergiou, K.D., 2013. Financial analysis of utility scale photovoltaic plants with battery energy storage. Energy policy, 63, pp.139-146. Słyś, D. and Kordana, S., 2014. Financial analysis of the implementation of a Drain Water Heat Recovery unit in residential housing. Energy and Buildings, 71, pp.1-11. Vogel, H.L., 2014. Entertainment industry economics: A guide for financial analysis. Cambridge University Press. Worthington, S. and Devlin, J., 2013. Fairness and financial services in Australia and the United Kingdom. International Journal of Bank Marketing, 31(4), pp.289-304. Appendix in excel Appendix1 List of Adjustments Appendix2 Adjusted Accounts Appendix3 Common Size Statements Appendix4 Ratio Calculations Appendix5 Peer Company Data Read More