Financial Statement Analysis for JB Hi-Fi - Example

Finаnсiаl Statement Аnаlysis for JB Нi-Fi 2011-2015 By (name) Class (Course) Professor Institution City and State Date Letter of Transmittal 22/05/2016 To The secretary, Board of Directors, JB Нi-Fi Company Limited, Australia. Subject: Submission of financial analysis Report Dear sir/madam It is a great pleasure to submit your company’s financial analysis. Our bank was given the assignment of assessing you financials and provides a financial report. We believe we have done a comprehensive work to fulfill all your company’s requirements and instructions. Preparing the report gave us the opportunity of gaining more knowledge on your company’s financial status. We always encourage our esteem customers to take keen the various recommendations. It will be a profound 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 Sincerely (Name) Assistant Analyst Executive Summary The financial analysis report surveys JB Нi-Fi Company Limited an Australian based company. The company specializes in the production of consumer electronics, entertainment, and technology. The report aims at evaluating the company’s performance based on its financial status and its position in the overall competitive market. The company’s financial status depends on an analysis of its cash flows, income statements, and balance sheet. Moreover, the financial status of the company is shown by an analysis of financial statement ratios like profitability ratios, liquidity and activity ratios. An analysis of the company’s debt and solvency and its analysis position is paramount since it shows the financial position in the three years. Du Pont analysis helps to assess the operating efficiency of the company through the profit margin, asset turnover and leverage factors. The financial ratios show a picture about the overall performance behavior of JB Нi-Fi Company limited. Conclusions about the impact of each ratio on the company were analyzed. The company was recommended to invest in marketing, diversify their production lines and avoid long-term loans that could place the company at an insolvent state. The results from the financial statements and profitability ratios showed significant progress and potential for prospective investors. The analysis, however experienced some limitations. It fails to include important aspects of intangibles, brand, relationships and the skills and the culture within the company. It also relies on financial records that may have errors along with accounting mismanagement. Furthermore, inflationary effects had an impact on interest rates that affected the values of financial statements. Table of Contents Letter of Transmittal 2 1. INTRODUCTION 7 1.1 Purpose 7 The purpose of this financial statement exploration is to get a basis for forming opinions about the investment value of JB Нi-Fi Company and the expectations of the future performance. The horizontal, vertical and ratio analysis are to help recommend to the venture capitalist if it is worth investing in the company. 7 1.2 Scope 7 4. FINANCIAL ANALYSIS 11 4.1 Ratio Analysis 11 4.1.1 Activity Analysis 11 4.1.3 Liquidity Analysis 13 4.1.4. Long-Term Debt and Solvency 14 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. 14 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. 14 4.1.5. DuPont Analysis 14 6. PROSPECTIVE ANALYSIS 19 6.1 Sales and EBIT Forecast 19 7. CONCLUSION AND RECOMMENDATION 20 REFERENCES 22 AXEL TRACY. (2012). Ratio Analysis Fundamentals: How 17 Financial Ratios Can Allow You to Analyse Any Business on the Planet. 22 DAFT, R. L., KENDRICK, M., & VERSHININA, N. (2010). Management. Andover, South-Western/Cengage Learning. 22 JURY, T. (2012). Cash Flow Analysis and Forecasting the Definitive Guide to Understanding and Using Published Cash Flow Data. Hoboken, John Wiley & Sons. http://public.eblib.com/choice/publicfullrecord.aspx?p=912164. 22 LIST OF APPENDICES 23 Appendix1. List of Adjustments 23 Appendix2. Adjusted Accounts 23 Appendix3. Common Size Statements 24 Appendix4. Ratio Calculations 25 Long-Term Debt and Solvency 27 Solvency ratios 27 Formula 27 2011 27 2012 27 2013 27 2014 27 2015 27 Debt to equity 27 Total debt / Total equity 27 Debt to assets 27 Total debt / Total assets 27 240/775.84 27 150/821.56 27 140/853.87 27 180/870.62 27 125/903.81 27 Interest coverage ratio 27 Operating Income / Interest expense 27 Appendix5 Peer Company Data 28 Harvey Norman Company Performance in the last two years 29 Harvey Norman Company Performance in the last two years 29 1. INTRODUCTION 1.1 Purpose The purpose of this financial statement exploration is to get a basis for forming opinions about the investment value of JB Нi-Fi Company and the expectations of the future performance. The horizontal, vertical and ratio analysis are to help recommend to the venture capitalist if it is worth investing in the company. 1.2 Scope This financial analysis comprises adjustments on the company’s financial statements between the years 2011 to 2015 and determination of ratios. The ratio analyses comprise profitability, liquidity, and solvency ratios. Besides, the analyses include DuPont analysis, cash flow, and prospective analysis of the adjusted financial statement of the JB Нi-Fi Company. The analysis procedure is both vertical and horizontal. The vertical analysis explores the various categories of the company accounts; horizontal analysis compares the company performance to the performance of the main competitors within the industry. 1.3 Methodology The financial records for JB Нi-Fi Company are collected and adjusted excluding non-recurring items. The various financial ratios like activity, profitability, liquidity and solvency ratios are then determined to assess the JB Нi-Fi Company financial performance. The determined financial performances of the JB Нi-Fi Company are then compared with the financial performance of the main rival within the company. The analysis process is performed with forecast financial performance to compliment the determined ratios to help form the basis for the opinions about the company that is to give guidance to potential investors on the instability of JB Нi-Fi Company. 1.4 Assumptions During the determination of the assets values, there are no pronounced variations in the values of the company assets at the start and end of each year. The estimates and adjustments were made based on historical data on company performance. 1.5 Limitation The financial analysis does not include some important aspects that contribute to the success of a company like key intangibles, brand, relationships and the skills and the culture within the company. The omitted aspects are fundamental drivers of success over the long term and should be used while guiding investors to consider before investing in a company. 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. The financial data from the company are not verified meaning that no one has examined the accounting policies and practices. 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. 2. COMPANY OVERVIEW JB Нi-Fi Company Limited is an Australian publicly traded company. 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 Chadstone, 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. JB HI-FI HOME sells consumer electronics, cooking appliances, white goods and air-conditioning appliances. Besides, the company operates an online store and discount superstores. 3. ECONOMIC FRAMEWORK JB Нi-Fi Company Limited has been performing well in the market because of its structures. 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. The company performance is based on its strategies and the market forces like the customer bargaining power and competitors’ effect. The company posted an improvement in performances in the recent years registering a 6.4% increase in the net profit of value $136.5 million. 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%. The company foresees further improvement in performance regarding sales in the next financial year 2016. The sales are predicted to 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. However, analysts are worried about a likely decline in sales for JB Нi-Fi Company limited because the market for home appliances that forms the main target for the company is increasingly being crowded. The competitors are increasingly upping their games as the archrival Harvey Norman has revealed plans to introduce small appliances. 4. FINANCIAL ANALYSIS 4.1 Ratio Analysis 4.1.1 Activity Analysis 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. 4.1.1.1 Short Term Activity Ratios Inventory Turnover Inventory turnover= cost of goods / inventory cost Days in inventory Days in inventory = 365/inventory turnover JB Нi-Fi Company Limited records higher values in inventory turnover ratios compared to Harvey Norman that is an indication that the company performs well in the industry in regard to cash management. According to Axel, 2012, the use of cost of goods sold for the two companies in the calculation makes it more accurate because different companies have different markup sales prices for their products that can overstate the inventory ratio. 4.1.1.2 Long-term Activity Ratios 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 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. 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 n2015 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. 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. 4.1.3 Liquidity Analysis Liquidity measures the ability of a company to pay off its loans within the short-terms or long-term (Diamond & Kashyap, 2015). 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. 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 (Diamond & Kashyap, 2015). 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. 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. 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. 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. 5. CASH FLOW ANALYSIS Cash Flow from Operations The company has recorded upward trend in net income since 2010. The analysis shows a positive trend in the company revenues that best guides on the likely better performance in the future. The net income statement is adjusted for non-cash charges and the decreases and increases on the working capital, liabilities and operating assets in the balance sheet. The net operating cash flow shows fluctuations with highest value in 2012 and a lowest value in 2014. The net operating cash flow shows fluctuations and do not reflect the trend of the net income because of the fluctuations in deductions like depression, depletion and taxes. Cash Flow from investing activities These are mainly the cash outflows because most of the company investments include aspects like capital expenditures. The net investing cash in the five-year trend fluctuates according to the expenditure and the sales of company assets. Cash flow from financing activities The financing section of the cash flow shows fluctuation with the highest values recoded in 2012 while the lowest in 2014. The fluctuations are because of the changes in net sales and the net income that affects the dividends earned, the stock values. The company current ratios also fluctuate making the financing values to change. 6. PROSPECTIVE ANALYSIS 6.1 Sales and EBIT Forecast JB HI-FI has posted a good performance in the five-year trend. Year 2011 2012 2013 2014 2015 Sales (B) 2.96B 3.13B 3.31B 3.48B 3.65 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%. Forecast for 2016 and 2017 Year 2011 2012 2013 2014 2015 2016 2017 Sales 2.96B 3.13B 3.31B 3.48B 3.65B 3.85B 4.05B EBIT 223.86M 193.96M 212.46M 226.91M 241.07M 254.09M 267.81M 7. CONCLUSION AND RECOMMENDATION 7.1 Conclusion From the activity ratios, the company recorded high inventory turnover ratios when compared to Harvey Norman.it an indicator of proper cash management. Profitability ratios indicate a trend of increasing profitability. 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 cash flow analysis from cash operations showed an upward trend in net income since 2010 while the cash flows from financing and investing activities were fluctuating over the five years because of variations in net sales of the company. 7.2 Recommendations The company should work on their insolvency problem. the company’s management has the mandate of guaranteeing that organization debt ratios are above 1.0. It should avoid borrowing too much loans, which can reduce its profitability and turnover. Likewise, it is paramount that the company diversifies in their production line in order to increase on their sales volume. The JB HI-FI limited should also invest in advertising and marketing to promote the software sales department that is having a history of poor performance. REFERENCES AXEL TRACY. (2012). Ratio Analysis Fundamentals: How 17 Financial Ratios Can Allow You to Analyse Any Business on the Planet. DAFT, R. L., KENDRICK, M., & VERSHININA, N. (2010). Management. Andover, South-Western/Cengage Learning. Diamond, D.W. and Kashyap, A.K., (2015). Liquidity requirements, liquidity choice and financial stability. University of Chicago and National Bureau of Economic Research working paper. JURY, T. (2012). Cash Flow Analysis and Forecasting the Definitive Guide to Understanding and Using Published Cash Flow Data. Hoboken, John Wiley & Sons. http://public.eblib.com/choice/publicfullrecord.aspx?p=912164. LI, J., CHEN, J., & WANG, S. (2011). Risk management of supply and cash flows in supply chains. New York, Springer. LIST OF APPENDICES Appendix1. List of Adjustments The net income is adjusted for Non-cash charges Decrease and increase on working capital Balance sheet Liabilities Operating assets Appendix2. Adjusted Accounts The net income Statement Balance sheet Cash flow Appendix3. Common Size Statements Common Size Statements 2011 2012 2013 2014 2015 Revenue Cost of Goods sold Depreciation and Amortization Gross Income SG&A Expenses Operating expenses Net income EBITDA 100% 77.03% 0.91% 22.05% 14.5% 0.89% 3.62% 7.6% 100% 77.6% 0.98% 21.06% 14.9% 0.99% 3.33% 6.2% 100% 77.34% 1.004% 21.65 15.2% 0.87% 3.63% 6.4% 100% 77.3% 1.021% 21.68% 15.3% 0.93% 3.64% 6.5% 100% 77% 1.07% 21.94% 16.3% 0% 3.81% 6.6% Appendix4. Ratio Calculations JB Нi-Fi Company Performance in the last five years Formula 2011 2012 2013 2014 2015 COGs 2310M 2470M 2600M 2730M 2850M Inventory costs 406.94M 428.29M 426M 458.63M 478.87M total annual sales / inventory cost 5.68 5.77 6.1 5.95 5.95 Days in inventory 64.26 63.26 59.84 61.34 61.34 JB Нi-Fi Company Performance in the last five years 2011 2012 2013 2014 2015 Net sales 2932.75M 3090.29M 3242.63M 3436.55M 3600.87M Average assets 775.84M 798.7M 837.715M 862.245 887.215 Total asset turnover 3.78 3.869 3.87 3.99 4.06 JB Нi-Fi Company Performance in the last five years 2011 2012 2013 2014 2015 EBITA Per annum, report 223.86M 193.96M 212.46M 226.91M 241.07M Sales 2.96B 3.13B 3.31B 3.48B 3.36B EBIT to sales Per annum, report (%) 7.56% 6.2% 6.42% 6.52% 7.17% Ordinary earnings per share Per annum report (cents) 1.02 1.06 1.17 1.27 1.38 Liquidity Analysis Formula 2011 2012 2013 2014 2015 Gearing ratio Total equity/ total liabilities 152.31/623.53 0.244 184.5/637.06 0.29 243.83/610.04 0.40 294.63/575.99 0.512 343.48/560.34 0.613 Debt ratio Total liabilities/ total assets 623.53/775.84 0.804 637.06/821.56 0.78 610.04/853.87 0.66 575.99/870.62 0.66 560.34/903.81 0.62 Current ratio Current assets/ current liabilities 501.07/345.94 1.45 534.06/439.48 1.22 563.65/442.38 1.27 578.15/352.19 1.64 616.9/380.34 1.62 Quick ratio Cash and trade and other receivables/ current liabilities 27.25/345.94 0.079 39.71/439.48 0.09 67.37/442.38 0.15 43.45/352.19 0.12 49.13/380.34 0.13 Long-Term Debt and Solvency Solvency ratios Formula 2011 2012 2013 2014 2015 Debt to equity Total debt / Total equity 240/152.3 1.58 150/184.5 0.81 140/243 0.57 180/295 0.61 125/343 0.36 Debt to assets Total debt / Total assets 240/775.84 0.31 150/821.56 0.18 140/853.87 0.16 180/870.62 0.21 125/903.81 0.14 Interest coverage ratio Operating Income / Interest expense 162/5.97 27.14 161/12.81 12.57 178/8.95 19.88 191/7.91 24.15 201/5.82 34.54 DuPont 2011 2012 2013 2014 2015 Profit margin 21.8% 20.7% 21.1% 21.2% 21.9% Net sales 2932.75M 3090.29M 3242.63M 3436.55M 3600.87M Net income 110M 105M 116M 128M 137M Total assets turnover 3.78 3.869 3.87 3.99 4.06 Average total assets 775.84M 798.7M 837.715M 862.245 887.215 Financial leverage 5.04 4.40 3.47 2.92 2.61 Total assets 775.84 821.56 853.87 870.62 903.81 Total equity 623.53 637.06 610.04 575.99 560.34 Return on equity 49.23 62.14 54.40 47.72 42.79 Appendix5 Peer Company Data Harvey Norman Company Performance in the last two years Formula 2014 2015 COGs 1140M 1200M Inventory costs 297.67M 298.38M total annual sales / inventory cost 3.83 4.02 Days in Inventory 95.3 90.8 Harvey Norman Company Performance in the last two years 2014 2015 Net sales 2.29504B 2.39416B Average assets 4.15B 4.305B Total asset turnover 0.55 0.556 Harvey Norman Company Performance in the last two years 2014 2015 Sales 2.44B 2.58B EBIT to sales Per annum, report 297.55 342.56 EBIT to sales Per annum, report (%) 12.19% 13.28% Ordinary earnings per share Per annum report (cents) 0.20 0.25 Harvey Norman Company Performance in the last two years 2014 2015 Profit margin 56.3 56.3 Return on Equity 8.82 10.71 Read More