B Hi-Fi Limited: Stock Prices - Case Study Example

Executive Summary Jb Hi Fi has been successful as retail player. Their market has grown which is reflected by the growth in sales. There is even scope for the company to move further as this sector is showing improvement. The financial analysis also highlights some important fact related to liquidity and capital structure. The findings shows the positives and negatives of both based on financial analysis. The ratios like liquidity ensures to find liquidity and the capital financed by the company are demonstrated by capital structure ratios. The efficiency ratio indicates the area where Jb Hi Fi needs to work to stay ahead of competition. The capital market ratio indicates the companies which are favoured by shareholders and also help to look into the future prospects of the company. The overall prospect for Jb Hi Fi highlight good investment avenue in the medium term. With the company showing trends towards improvement and the supportive government policies to curb iflation and interest rates will ensure that the investors get a good return on investment. Content Introduction 3 About the company 3 Financial Analysis 3 Liquidity ratio 4 Capital Structure ratio 5 Efficiency ratio 7 Profitability ratio 9 Market Performance ratio 11 Trend Analysis 11 Environmental Impact 12 Horizontal Analysis 12 Share Price Expectation 14 Conclusion 15 Recommendations 15 References 16 Appendix 18 Introduction Financial analysis holds importance for all business units. The users of the financial statements take the decision based on those. The paper hereby looks into the financial analysis of Jb Hi Fi. The paper looks into the analysis of various ratios and the performance of the company over a period of 3 years. The decision based on it will be sounder and the paper highlights the different areas Jb Hi Fi is strong and the areas they need to work upon. About the Company Jb Hi Fi is a retail chain in Australia and has been in operations since 1974. The company has spread over different locations and has at present 131 locations. The company delas in variety of products like Cd’s, DVD’s video games and consumer electronics. (Jb Hi Fi, 2011) The company has spread to NewZealand and with the policy of acquisition the company has been able to spread fast. Jb Hi Fi is traded in the Australian Stock Exchanges by the code JBH and has been performing consistently and is a future prospects with the growth in the retail sector. Financial Analysis Business all around the world analyzes the financial statement to understand the different areas that they need to work on. Anayzing the financial statement throws light on the different areas that needs to be worked on. Following is the rations for Jb Hi Fi. (Petroff, 2000) Liquidity Ratios Current ratio: A look at the current ratio for the Jb Hi Fi as shown in Figure 1 highlights the importance of liquidity and the manner the companies are able to meet their short term liquidity. The ratio for Jb Hi Fi shows similarity in performance over the years. The ratio for Jb Hi Fi has decreased in 2010 which is a concern and requires taking steps to raise the ratio to around 2. (Financial Modelling Guide, 2010) Figure 1: Current Ratio for Jb Hi Fi Quick Ratio: The second ratio which needs to be analyzed to understand the financial position of the company is quick ratio. This helps to examine the short term liquidity and helps to provide useful insights to the investor regarding the short term liquidity. Figure 2 shows the short term liquidity for Jb Hi Fi. The ratio also indicates that Jb Hi Fi is better positioned in 2010 compared to 2009. Jb Hi Fi still needs to improve this as it is a concern and presenting a bleak picture and raise it around 1. Since, the ratio is doesn’t consider inventories as inventories take time to be converted into cash is more conservative in nature (Ward, 2010) Figure 2: Quick ratio for JB Hi Fi To summarize Jb Hi Fi seems to have some problem with liquidity and need to improve it in the short run. Capital Structure Ratio Debt to Equity Ratio: When we analyze the long term liquidity for Jb Hi Fi it highlights some demarcating facts. A look at the Debt to Equity Ratio, as shown in figure 3, indicates soundness on the part of Jb Hi Fi as they have lesser percentage of the total debt corresponding to total equity in 2010. It shows that the company has a scope for more investment through debts. The ratio seems sound needs to be continues similarly for future opportunities. (Transtutor, 2010) Figure3: Debt to Equity Ratio for Jb Hi Fi Interest Coverage Ratio: When we look at the Interest Coverage Ratio, as shown in figure 4, it shows that the ratio is vry sound for Jb Hi Fi. The performance for Jb Hi Fi has improved in 2010 as in 2009. The company has improved its interest paying ability showing improvement in performance. Figure 4: Interest Coverage Ratio for Jb Hi Fi The long term liquidity position highlights soundness on the part of Jb Hi Fi as both the companies have looked towards strengthening their fundamentals. Efficiency Ratio Receivable Turnover Ratio: To find out the efficiency in utilization of assets for the three companies we look into the Receivable Turnover ratio as shown in figure 5. We see that Jb Hi Fi has a very good rate and it recovers its chances of bad debts to be less. The good sign for Jb Hi Fi is that it has increased in 2010 as compared to 2009. If the company can continually improve it then it would be a good sign and reduce the chances of debts. (Kennon, 2010) Figure5: Receivable Turnover Ratio for Jb Hi Fi Payable Turnover Ratio: When we look at the Payable Turnover Ratio, in figure 6, shows that the ratio has improved in 2010 as compared to 2009. This is a good sign and shows that the company has timely payments to the creditors. This will help to improve the brand image and will benefit in the long run. Figure6: Payable Turnover Ratio for Jb Hi Fi Asset Turnover Ratio: A look at the Asset Turnover Ratio for Jb Hi Fi as seen in figure 7 shows that the ratio has improved in 2010 compared to 2009. Jb Hi Fi has been able to use its assets better. Since the industry involves huge assets due to the nature of the business but the turnover is low and Jb Hi Fi need to take steps to improve the turnover ratio so that it presents the company in better light. (Asset Turnover Ratio, 2010) Figure 1: Asset Turnover Ratio for Jb Hi Fi Overall, we see that Jb Hi Fi has been able to utilize the assets efficiently which is helping them ensure proper utilization of the resources. Profitability Ratios Net Profit margin: When we consider the profitability ratio for Jb Hi Fi through Net Profit Margin, as shown in figure 8, shows that the net profit has fallen. The worrying factor for Jb Hi Fi is that their profits are declining over the years. The company need to look at it and take steps to improve their net margin. Figure8: Net Profit Margin for Jb Hi Fi Return on Assets: When we consider the Return on Assets, as shown in figure 9, shows that the return on assets for Jb Hi Fi is very low. The worrying factor for Jb Hi Fi is that their assets are underutilized. This has resulted in having more assets that warranted. (Cleveland & Alim, 2007) Figure 2: Return on Assets for Jb Hi Fi The findings are further substantiated through Return on Equity, as shown in figure 10, shows that the ratio for Jb Hi Fi is very low in 2010. The return for Jb Hi Fi has fallen in 2010 over 2009. This is a worrying factor and shows the strategies and policies implemented hasn’t been successful. (Little, 2010) Figure 3: Return on Equity for Jb Hi Fi Overall the profitability seems unsatisfactory for Jb Hi Fi but require taking major steps to improve it Market Performance Ratio Earnings per Share: When we consider the ratios which helps to find the market value of the companies helps to understand the performance better. The Earnings per Share ratio for Jb Hi Fi, as shown in figure 11, shows that Jb Hi Fi has a good earning ratio. Overall the performance of Jb Hi Fi is good but Jb Hi Fi further need to improve it so that the companies are more preferred by shareholders. Figure 4: Earnings per Share for Jb Hi Fi An investor can therefore look towards investing in Jb Hi Fi as they have a strong foundation and are less risky. Trend Analysis The trend analysis for Jb Hi Fi supports growth in the future. With the economy slowly coming out of recession and inflation being under control the overall trajectory shows growth in the future. This is addition to the impetus given by the government to develop the economy will help Jb Hi Fi. Jb Hi Fi on the backdrop of rising consumer confidence and with stabilizing economy can look towards a better prospect in the future. Environmental Impact Jb Hi Fi business prospect might get alter due to the environmental factors as changes in the factors will have a long term effect on growth. Jb Hi Fi performance might get atered due to rise in interest rates, changes in inflation. The recent policies of the government highlights special steps for the economy which will help to keep environmental factors nder control and will thereby help Jb Hi Fi to grow in the future. Horizontal Analysis The horizontal analysis of Jb Hi Fi will help to identify the pattern on growth in different areas thereby helping the user to understand the financial position better. This will also act as a guide to ensure that the different concern areas are looked after. The comparative balance sheet looks as follows   2010 2009 2008 % in 2010 % in 2009 % in 2008 ASSETS             current assets             cash and cash equivalent 51,735 35,790   7.24 5.41   trade and other receivablereceivable 63,499 60,269 52,996 8.89 9.11 9.89 inventory 334,754 324,519 271,878 46.86 49.05 50.74 other 4,520 5,661 5,328 0.63 0.86 0.99 TOTAL CURRENT ASSETS 454,508 426,239 330,202 63.63 64.42 61.62 non current assets             other finacial assets' 3 3 609 0.00 0.00 0.11 plant and equipment 163,982 136,063 112,923 22.96 20.56 21.07 goodwill   34,716 34,538   5.25 6.45 deffered tax assets 11,968 17,994 10,927 1.68 2.72 2.04 intagible assets 83,861 46,636 46,636 11.74 7.05 8.70 total non current assets 259,814 235,412 205,633 36.37 35.58 38.38 Total Assets 714322 661,651 535,835 100.00 100.00 100.00 Liabilities             Current Liabilities             trade and other Payable 289,505 273,950 206,104 40.53 41.40 38.46 borrowings 35,000   1,502 4.90   0.28 other finacial liabilities 684 1,554   0.10 0.23   provision 25,975 28,235 17,529 3.64 4.27 3.27 other current liabilities 1,964 1,781 1,185 0.27 0.27 0.22 Current tax Liabilities 10,011 18,204 12,173 1.40 2.75 2.27 Total Current Liabilities 363,139 323,724 238,493 50.84 48.93 44.51 non current liabilities             borrowings 34,624 89,358 123,015 4.85 13.51 22.96 provision 4,421 3,829 1,636 0.62 0.58 0.31 other non current liabilities 18,763 14,900 8,801 2.63 2.25 1.64 other finacial liabilities 79 588   0.01 0.09   total non current liabilities 57,887 108,675 133,452 8.10 16.42 24.91 Total Liabilities   421,026 432,399 371,945 58.94 65.35 69.41 net assets 293,296 229,252 163,890 41.06 34.65 30.59 equity             contributed equity 53,578 44,783 39,544 7.50 6.77 7.38 reserves 3,873 193 1,291 0.54 0.03 0.24 Retained Earnings 235,845 184,276 123,055 33.02 27.85 22.97 total equity 293,296 229,252 163,890 41.06 34.65 30.59 The comparative statement highlights growth and development for Jb Hi Fi. Share Price Expectations The share price movement for JB Hi Fi is as follows The above share price movement for Jb Hi Fi shows consistency with the movement in the stock exchange and with the economy reviving presents a good investment avenue for the future. Conclusion Jb Hi Fi has been successful as the financial statement even highlights similar facts. Jb Hi Fi improves with better strategy. The financial ratios of the company show some demarcating things and also highlight the different strategies taken by Jb Hi Fi. Jb Hi Fi have room for improvement and with the growth this sector is showing it gives them opportunity to capture a good market and grow. Recommendations Jb Hi Fi is good comany to invest in the medium run. With the economy reviving and the financial statement highlighting growth it provide a good avenue to earn return on the investment in the medium term. The share prices even have witnessed the same and have a direct relation with the stock exchnage thereby helping to ensure that the same fundamentals govern both. Overall the financial analysis highlights the growing nature of the company and is a good prospect to invest in the near future. References Asset Turnover Ratio, 2010, “asset turnover ratio”, retrieved on March 19, 2011 from http://www.buzzle.com/articles/asset-turnover-ratio.html Cleveland D & Alim W, 2007, “Return on Assets”, about.com Guide, The New York Times Company Financial Modelling Guide, 2010, “Liquidity ratios”, retrieved on March 19, 2011 from http://www.financialmodelingguide.com/financial-ratios/liquidity-ratios/ JB Hi Fi, 2011, “JB Hi Fi”, retrieved on March 19, 2011 from http://www.jbhifi.com.au/ JB Hi Fi Limited, 2011, “JB Hi Fi Limited: Stock Prices”, retrieved on March 19, 2011 from http://www.asx.com.au/asx/research/companyInfo.do?by=asxCode&asxCode=JBH Kennon J, 2010, “Analyzing an income statement: Receivable Turnover”, about.com guide, The New York Times Company Little K, 2010, “Understanding Return on equity”, about.com Guide, The New York Times Company Petroff J, 2000 “Financial analysis’, retrieved on March 19, 2011 from http://www.peoi.org/Courses/Coursesen/finanal/FN501EN.html Transtutor, 2010, “Capital Structure Ratios”, retrieved on March 19, 2011 from http://www.transtutors.com/finance-homework-help/dividend-decisions-and-tools-of-financial-planning/Capital-Structure-Ratios.aspx Ward S, 2010, “Is Your Business Sick: Current Ratio”, about.com Guide, The New York Times Company Appendix 1. Calculation of Current Ratio Current Ratio for 2008 = Current Assets / Current Liabilities = 330,202 / 238,493 = 1.37 Current Ratio for 2009 = Current Assets / Current Liabilities = 426,239 / 323,724 = 1.32 Current Ratio for 2010 = Current Assets / Current Liabilities =454,508 / 363,139 = 1.25 2. Calculation of Quick Ratio Quick ratio for 2008 = (Current Assets – Inventories) / Current Liabilities = (330,202 - 271,878) / 238,493 = 0.23 Quick ratio for 2009 = (Current Assets – Inventories) / Current Liabilities = (426,239 - 324,519) / 323,724 = 0.30 Quick ratio for 2010 = (Current Assets – Inventories) / Current Liabilities = (454,508 - 334,754) / 363,139 = 0.2 3. Calculation of Debt to Equity Ratio Debt to Equity Ratio for 2008 = Long Term Debts / Equity = 133,452 / 163,890 = 0.80 Debt to Equity Ratio for 2009 = Long Term Debts / Equity = 108,675 / 229,252 = 0.46 Debt to Equity Ratio for 2010 = Long Term Debts / Equity = 57,887 / 293,296 = 0.20 4. Calculation of Net Profit Margin Net Profit Margin for 2008 = Net Profit / Sales * 100 = 65,085 / 1,828,564 * 100 = 9.84% Net Profit Margin for 2009 = Net Profit / Sales * 100 = 94,438 / 2,327,266 * 100 = 5.14% Net Profit Margin for 2010 = Net Profit / Sales * 100 = 118,652 / 2,731,320 *100 = 4.33% 5. Calculation of Return on Assets Return on Assets for 2008 = Net Income / Total Assets * 100 = 65,085 / 661,651 * 100 = 9.84% Return on Assets for 2009 = Net Income / Total Assets * 100 = 94,438 / 385156 * 100 = 24.52% Return on Assets for 2010 = Net Income / Total Assets * 100 = 118,652/ 714,322 * 100 = 16.60% 6. Calculation of Return on Equity Return on Equity for 2008 = Net Income / Equity * 100 = 65,085 / 163,890 * 100 = 39.70% Return on Equity for 2009 = Net Income / Equity * 100 = 94,438 / 229,252 * 100 = 41.19% Return on Equity for 2010 = Net Income / Equity * 100 = 118,652 / 293,296 * 100 = 40.45% 7. Calculation of Receivable Turnover Ratio Receivable Turnover Ratio for 2008 = Sales / Average Receivable = 1,828,564 / 52,996 = 34.50 Receivable Turnover Ratio for 2009 = Sales / Average Receivable = 2,327,266/ 60,269 = 38.60 Receivable Turnover Ratio for 2010 = Sales / Average Receivable = 2,731,320/ 63,499 = 43.00 8. Calculation of Payable Turnover Ratio Payable Turnover Ratio for 2008 = Cost of Goods Sold / Average Payable = 1,428,873 / 206,104 = 6.92 Payable Turnover Ratio for 2009 = Cost of Goods Sold / Average Payable = 1,823,675 / 273,950 = 6.65 Payable Turnover Ratio for 2010 = Cost of Goods Sold / Average Payable = 2,137,146/289,505 = 7.38 9. Calculation of Asset Turnover Ratio Asset Turnover Ratio for 2008 = Sales Revenue / Average Total Assets = 1,828,564 / 535,835 = 3.40 Asset Turnover Ratio for 2009 = Sales Revenue / Average Total Assets = 2,327,266 / 661,651 = 3.52 Asset Turnover Ratio for 2010 = Sales Revenue / Average Total Assets = 2,731,320/ 714,322 = 3.81 10. Calculation of Interest Coverage Ratio Interest Coverage Ratio for 2008 = EBIT / Net Finance Expenses = 93,960 / 9,927 = 9.45 times Interest Coverage Ratio for 2009 = EBIT / Net Finance Expenses = 135,493 / 8,036 = 16.85 times Interest Coverage Ratio for 2010 = EBIT / Net Finance Expenses = 169,601/ 6,957 = 24.38 times 11. Calculation of Earnings per Share Earnings per Share for 2008 = Net Income / Outstanding shares = 61.78 cents (given in financial statement) Earnings per Share for 2009 = Net Income / Outstanding shares = 88.26 cents (given in financial statement) Earnings per Share for 2010 = Net Income / Outstanding shares = 109.74 cents (given in financial statement) Read More