Financial Performance Analysis of David Jones Limited - Example

Financial performance analysis of David Jones Limited Student’s Name Institution Affiliation Financial performance analysis of David Jones Limited This paper is a report of the financial performance analysis of David Jones Limited and its controlled entities. The analysis has included the last 2 years the company has been in operation, which is year 2012 and year 2013. The key financial statements used in this paper are the balance sheet which reveals the financial position of David Jones Limited during the two years under analysis and the income statement which reveals the financial performance of David Jones Limited during the last two years. This will include both ratio analysis and common size analysis (horizontal and vertical analysis) Horizontal Analysis This is a very important analysis that shows the change in financial statement items across the years, that is the change from one year to the next. The horizontal analysis of David Jones Limited is shown in the table below. Income statement 2012 2013 Total revenue - -1.22% cost of revenue - -1.71% gross profit - -0.40% Other Inome - 8.62% Finance Income - 41.21% Total Income - 0.31% Expenses Employee benefits - 4.78% Lease & occupancy - 2.21% depreciation & Amortization - 9.26% Advertising, marketing & visual merchandising - -10.43% Administration - -10.37% other expenses - 7.90% Finance costs - -17.20% Total Expenses - 2.41% Profit before tax - -8.69% Income tax expense - -15.38% Profit after tax - -5.85% The horizontal analysis of the income statement of David Jones Limited shows that finance income is the item that had a significant increase of 41.21% whereas finance costs is the income statement item that had a significant decline of 17.20%. The horizontal analysis of the balance sheet of David Jones Limited Balance sheet 2012 2013 assets current assets cash and cash equivalents - -32.43% Receivables - 16.49% Inventories - -9.87% Financial assets - 3820.83% other assets - -7.37% Non-current assets held for sale - - total current assets - -8.83% Non-current assets - Financial assets - 0.00% property, plant & equipment - 2.19% Intangible assets - 1.52% Deferred tax assets - 11.75% other assets - 67.51% Total non-current assets - 2.77% Total assets - -0.25% Liabilities Current liabilities Accounts payable - -1.04% Interest bearing liabilities - -96.73% current tax liabilities - -1.42% Provisions - 37.11% Financial Liabilities - -86.88% Other liabilities - 182.29% Total current liabilities - -1.46% Non-current liabilities Interest bearing liabilities - -20.00% Provisions - 19.02% Other liabilities - -0.77% Total non-current liabilities - -15.13% Total liabilities - -6.13% Net assets - 3.27% Shareholders' equity Contributed equity - 3.23% Reserves - 3.37% Retained earnings - 3.38% Total Shareholders' equity - 3.27% The horizontal analysis of the balance sheet of David Jones Limited shows that finance assets is the item that had a significant increase of 3820.83% whereas Interest bearing liabilities is the balance sheet item that had a significant decline of 96.73%. Vertical Analysis This is a very important analysis that shows the proportion of a financial statement items in relation to another item during the same year (Barney, 1991). The Vertical analysis of David Jones Limited is shown in the table below. Income statement 2013 2012 Total revenue 100.00% 100.00% cost of revenue 62.22% 62.53% gross profit 37.78% 37.47% Other Inome 3.39% 3.08% Finance Income 0.03% 0.02% Total Income 41.20% 40.57% Expenses Employee benefits 16.05% 15.13% Lease & occupancy 10.48% 10.12% depreciation & Amortization 3.08% 2.78% Advertising, marketing & visual merchandising 1.90% 2.09% Administration 1.31% 1.44% other expenses 0.78% 0.72% Finance costs 0.49% 0.59% Total Expenses 34.08% 32.87% Profit before tax 7.12% 7.70% Income tax expense 1.96% 2.29% Profit after tax 5.16% 5.41% The vertical analysis of the income statement of the company has shown that total expenses comprise 34.08% of the total sales revenue. The cost of sales comprise of 62.53% and 62.22% of total sales revenue in year 2012 and 2013 respectively. Therefore, we can say that the cost of sales reduced slightly in year 2013. According to Bazerman, and Moore (2009) a reduction in cost of revenue is an advantage to the company since it can subsequently reduce its selling price in order to maximize sales volume. The vertical analysis of the balance sheet of David Jones Limited Balance sheet 2013 2012 assets current assets cash and cash equivalents 1.12% 1.65% Receivables 1.54% 1.32% Inventories 20.32% 22.49% Financial assets 0.08% 0.00% other assets 0.54% 0.58% Non-current assets held for sale 0.21% - Total current assets 23.81% 26.05% Non-current assets 0.00% 0.00% Financial assets 0.00% 0.00% property, plant & equipment 67.49% 65.87% Intangible assets 3.61% 3.54% Deferred tax assets 5.04% 4.50% other assets 0.05% 0.03% Total non-current assets 76.19% 73.95% Total assets 100.00% 100.00% Liabilities Current liabilities Accounts payable 21.15% 21.32% Interest bearing liabilities 0.03% 0.89% current tax liabilities 0.25% 0.25% Provisions 2.87% 2.09% Financial Liabilities 0.01% 0.11% Other liabilities 0.07% 0.02% Total Current Liabilities 24.38% 24.68% Non-current liabilities Interest bearing liabilities 8.08% 10.07% Provisions 0.59% 0.50% Other liabilities 2.22% 2.23% Total non-current liabilities 10.90% 12.80% Total Liabilities 35.28% 37.49% Net assets 64.72% 62.51% Shareholders' equity Contributed equity 45.62% 44.08% Reserves 6.21% 5.99% Retained earnings 12.89% 12.44% Total Shareholders' equity 64.72% 62.51% The vertical analysis of the balance sheet of the company has shown that total current assets comprise 26.05% and 23.81% of the total assets in year 2012 and 2013 respectively. This reveals that there was a decrease in current assets in year 2013. Similarly, accounts payables comprised of 21.32% and 21.15% of total assets in year 2012 and 2013 respectively. Therefore, we can say that the accounts payables reduced slightly in year 2013. Brigham and Herhardt (2009) observes that the payment of creditors can help to improve the creditworthiness of the company and when the company is in need of financing it will be given by the financial institution because of its good credit rating. Ratio Analysis Buttle (2004) explains that ratio analysis is very effective in revealing trend in company’s performance over a period of time. In order to make the full financial report analysis of the David Jones Limited ratio analysis was used. Several ratios have been used for this purpose. These ratios have been classified into four different classes namely; profitability ratios, liquidity ratios, gearing ratios, and assets utilization ratios or turnover ratios. Analysis of David Jones Limited with regard to Profitability The major ratios used in analyzing David Jones Limited with regard to profitability are gross profit margin, Profit margin, Return on assets and Return on Equity. In general, the ratios show how profitable David Jones Limited has been over the last two years. These ratios indicate a relatively decreasing trend in the profitability of David Jones Limited. However, the gross profit margin has slightly increased from 37.47% in year 2012 to 37.78% in year 2013. This reveals the insignificant growth in profitably of the company (Deleersnyder, et al. , 2008). The slight increase in gross profit margin of the company may have been contributed by the 1.71% decrease in cost of revenue as shown by the horizontal analysis in this paper. Nevertheless, the profitability of David Jones Limited declined in year 2013 as shown by the decline in net profit margin, return on assets, return on equity and a decline in earnings per share. The profit margin of the company decreased from 5.41% to 5.16% in year 2012 and 2013 respectively. The decrease was mainly caused by increase in employee benefits and depreciation and amortization expense, which have the effect of reducing the net profit and consequently the reported decline in profitability of the company as shown by the fall in profit margin. The return on assets of the company decreased from 8.15% to 7.69% in year 2012 and 2013 respectively. The decrease was partly caused by the disproportional change in profit after tax and the total assets which have the effect of a slight decrease in assets whereas the profit after tax has reduced by a huge amount and consequently the reported decline in profitability of the company as shown by the return on assets. The horizontal analysis shown in this paper has revealed that total assets reduced by only 0.25% whereas the profit after tax reduced by a significant 5.85%. This dis-proportionality must have caused a decline in return on assets of the company. The return on equity of the company decreased from 19.03% to 11.88% in year 2012 and 2013 respectively. The decrease was partly caused by 3.23% increase in contributed equity which have the effect of increasing total equity and consequently the reported decline in profitability of the company as shown by the return on equity. The earnings per share of the company decreased from 19.4 cents to 18.0 cents in year 2012 and 2013 respectively. The decrease was caused by decrease in profit available to company’s shareholders, which decreased from $101, 167,000 to $96,650,000 in year 2012 and 2013 respectively. Analysis of David Jones Limited with regard to Liquidity The major ratios used in analyzing David Jones Limited with regard to liquidity are working capital, current ratio, quick ratio and cash ratio. These ratios show a decline in the financial stability of the company in the short term. The working capital of the company decreased from 16,951,000 cents to negative $7,127,000 in year 2012 and 2013 respectively. The decrease was caused by the significant fall in cash and cash equivalents of 32.43% and a 9.87% decrease in inventories. The negative working capital shows that the company is having liquidity problems since it cannot cover the current liabilities using the current assets. The current ratio of David Jones Limited has decreased from 1.055 in year 2012 to 0.976 in year 2013. According to Fess and Warren (2004), this reveals that the company decreased its ability to pay its financial obligations in the short term by converting its current assets into cash. The decrease in current ratio in year 2013 was caused by the significant fall in cash and cash equivalents of 32.43% which contributed to the 8.83% decline in total current assets the result of which affected the company’s ability to pay its liabilities using its current assets. The quick ratio of David Jones Limited has decreased slightly from 0.144 in year 2012 to 0.143 in year 2013. This reveals that the company decreased its ability to pay its financial obligations in the short term by using only the most liquid assets of the company (Greite, 2007). The decrease in quick ratio in year 2013 was caused by the significant fall in cash and cash equivalents of 32.43% the result of which affected the company’s ability to pay its liabilities using its most liquid current assets. Moreover, the cash position of David Jones Limited as measured by the cash ratio is very poor. Even though this ratio has remained relatively constant over the two years period, the company cannot pay immediate financial commitment using only the cash and cash equivalents (Greuning, 2005). This is mainly due to the fall in cash and cash equivalents. Analysis of David Jones Limited with regard to Financial Stability The major ratios used in analyzing David Jones Limited with regard to long term financial stability are total debt ratio and debt-equity ratio. These ratios do not show a clear trend in improved financial stability of the company. The debt-equity ratio has fallen from 0.175 in year 2012 to 0.125 in year 2013. This shows that David Jones Limited is preferring equity financing to debt financing. The increased of equity capital will help David Jones Limited to reduce the heavy debt burden. This has been caused by the 20% decrease in interest bearing liabilities as evidenced in horizontal analysis in this paper. The total debt ratio has fallen from 0.375 in year 2012 to 0.353 in year 2013. This shows that in year 2013 35.3% of assets in David Jones Limited are financed by other parties outside the company. This may be seen as a positive move for the company to finance most of its assets rather than financing from other parties outside the company (Hilton, 2004). This has been caused by the 67.51% increase in other assets as evidenced in horizontal analysis in this paper. Analysis of David Jones Limited with regard to asset Utilization The major ratios used in analyzing David Jones Limited with regard to asset utilization are total asset turnover, inventory turnover, days’ sales in inventory, receivable turnover and days’ sales in receivable. The total assets turnover has decreased slightly from 150.52% in year 2012 to 149.06 in year 2013. Nevertheless, this ratio is good and shows that the assets of the company are fully utilized in the generation of sales for the company as shown by the decline total assets turnover. The days’ sales in receivable have increased from 3 in year 2012 to 4 in year 2013. As noted in Spiceland and Sepe (2001), this shows that David Jones Limited has reduced its effectiveness in collecting its receivables. This may have been contributed by change in its credit policies. In addition, its days’ sales in inventory decreased as shown by the fall from 87 days in year 2012 to 80 days in year 2013. This reveals that most cash resources of the company is loosen up in inventory which should can be invested in other income generating activities of the company (White, Sondhi and Fried, 2002). The decrease has been caused by the decrease in inventory turnover. References Barney, J., (1991). Firm resources and sustained competitive advantage. Journal of Management, 17(1), 99-120. Bazerman, M. H., & Moore, D. A. (2009). Judgment in managerial decision making (7th ed.). Hoboken, NJ: Wiley. Brigham, E. and Herhardt, M. (2009). Financial Management: Theory and Practice, 13th Edition. Ohio: Thompson South-Western. Buttle, F. (2004). Customer Relationship Management: concepts and tools, Oxford: Elsevier Butterworth-Heinemann Deleersnyder, B., et al. (2008). The role of national culture in advertising's sensitivity to business cycles: An investigation across continents. American Marketing Association, 1-40. Fess, E. and Warren, C., (2004). Accounting principles. Canada: Southwestern Company. Greite, S., (2007). The Development of the Australian Accounting Standards after the End of the G4+1. Sydney: GRIN Verlag. Greuning, H. V., (2005). International financial reporting standards: a practical guide. New York: Routledge. Hilton, R. W., (2004). Managerial Accounting: Creating Value in a Dynamic Business Environment. New Delhi: McGraw-Hill Publisher. Spiceland, J. D. and Sepe, J.F., (2001). Intermediate Accounting. New Delhi: McGraw-Hill Publisher. White, G.I., Sondhi, A.C. and Fried, D., (2002). The analysis and use of financial statements (3rd ed.). New Jersey: John Wiley and Sons Appendix Ratio analysis The table below shows a detailed calculation of a variety of ratios of the four year under analysis. Computation Year 2013 Year 2012 Liquidity Ratios Working capital Current assets-Current Liabilities 294,705-301,830=(7,125) 323,249-306,298=16,951 Current ratio Quick ratio Cash ratio Gearing Ratios Total debt ratio Debt equity ratio Profitability Ratios Gross Profit margin Profit margin Return on assets Return on Equity Earnings per share 18.0 19.4 Turnover Ratios Inventory turnover Days' sales in inventory Receivable turnover Days' sales in Receivables Total assets turnover Read More