Financial Analysis to an Adjusted Set of Accounts of JB Hi-Fi Ltd - Research Proposal Example

Financial Analysis to an Adjusted set of Accounts of JB Hi-Fi Ltd By (Name) Institution Instructor Class/Course City Date Table of Contents Letter of transmittal Executive Summary Table of Contents 1. Introduction 1.1 Purpose 1.2 Scope 1.3 Methodology 1.4 Assumptions 1.5 Limitation 2 Company overview 3 Economic Framework 4 Financial Analysis 4.1 Ratio Analysis 4.1.1 Activity Analysis 4.1.1.1 Short term Activity Ratios 4.1.1.2 Long term Activity Ratios 4.1.2 Profitability Analysis 4.1.3 Liquidity Analysis 4.1.4 Long Term Debt and Solvency 4.1.5 Du Pont Analysis 5 Cash Flow Analysis 6 Prospective Analysis 6.1 Sales and EBIT Forecast 7 Conclusion and recommendation References Appendix1 List of Adjustments Appendix2 Adjusted Accounts Appendix3 Common Size Statements Appendix4 Ratio Calculations Appendix5 Peer Company Data 1.1. Introduction JB Hi-Fi company is a retail consumer company dealing with electronics and supply of video games, Blu-rays, CDs and DVDs operating different chain stores with its headquarter in Melbourne, Australia. It is involved in the sale of consumer electronics products and services, including televisions, audio equipment, computers and cameras; telecommunications products and services; software, including compact discs, digital video discs, Blu-ray discs and games; musical instruments; white goods; cooking products; small appliances, and digital content, including music, books and video. As it is, JB Hi-Fi Limited is an Australia-based company engaged in the retailing of home consumer products. From the company’s financial statements, it can be seen that the company has continued to increase its profits by at least 26 per cent in the fiscal year 2010 as compared to previous years (JB Hi-Fi, 2014). Throughout the last half a decade, the company has been increasing the prices of its products by double each fiscal year that explains the reason why it has experienced such immense profits and success (JB Hi-Fi, 2014). In addition to this, a detailed review of the company’s product merchandize shows that most of its profits have come from the products that it specializes in, imported CDs from the UK and the United States as well as organizing special orders for clients for imports from Asia, Africa and South America (JB Hi-Fi, 2014). In addition to this, the company also has a diversified business model that currently reaches into other different attributes of the business within the expansive electronics industry. Some of the areas of interest in its retail franchise as seen on the company’s financial statements include Plasma and LCD televisions, digital camera photography, gaming consoles and accessories, gadgets and information technology among others (JB Hi-Fi, 2014). As it is, the Company has two segments: Australia and New Zealand. The Company also offers information technology and consulting services. The Company has around 43 JB Hi-Fi Home branded stores, including three in New Zealand. It operates around 144 physical stores and an online store. The Company also operates JB Hi-Fi Now, an online digital content platform. Its JB Hi-Fi Solutions is engaged in the sale of products and services to the commercial, government, and education sectors, including insurance replacements. Through its various financial aspects, this study seeks to dig deeper. This study analyzes JB Hi-Fi’s segment performance by highlight the company’s revenue, cash flow and profit strengths, and weaknesses in terms of product or geographic segment. More than that, the main part of the analysis is to assess the underlying causes of the changes in the activity, profitability, liquidity, and solvency sections as well as the reasons for the changing ratios or the underlying causes for the changing ratios. 1.2 Purpose The purpose of this study is to first analyze the economic status of JB Hi-Fi in the context of its industry and the economy. This would mean analyzing its strengths and weaknesses by assessing how the company has performed against its competitors in terms of its strategy and plans to capture market share, compete based on price, product, or distribution. This analysis would also examine the company’s competition based on geographic extension into new areas or products through organic growth or by acquisition of companies. In the analysis, the study will analyze JB Hi-Fi’s segment performance by highlighting the company’s revenue, cash flow and profit strengths, and weaknesses in terms of product or geographic segment. It would also involve calculating ratios such as activity, profitability, liquidity, and solvency ratios. However, the main purpose of the study among the above is to assess the underlying causes of the changes in the activity, profitability, liquidity, and solvency sections. By making judgment and explanations for the reasons of the changing ratios and the underlying causes for the changing ratios, this study will extract an effective financial report and position of the company. 1.2 Scope The scope of the study is focused on the analysis of the financial report of JB Hi-Fi by examining its activity ratios, profitability ratios, liquidity ratios, solvency ratios, Dupont analysis together with cash flow, and prospective analysis on the adjusted financial statements of the company. The emphasis will be on the structural methods that will utilize researched information pertaining to the finances, challenges, success stories, and relevant opinions regarding the JB Hi-Fi relevance in the financial and economic segment of the economy. The study will also be focused on analyzing the ratios of the company in comparison to the main competitor and/or industry. 1.3 Methodology Methodology describes the process of carrying out the study and the study design. More importantly, the research instruments used are also described, including the methods implemented to maintain the validity and reliability of the instrument. This section of the study shows how the financial statements of the company are adjusted excluding non-recurring items, that ratio, such as activity, profitability, liquidity, and solvency are calculated to assess the financial performance of the company. More than that, the prospective analysis is carried out with forecast financial performance to compliment the ratio analysis in forming an opinion on the company. This section also shows that an opinion will be formed on the investability of the company. 1.4 Assumptions In this section, the data and information provided by the company in its annual reports, investor presentations, and other materials are deemed to present accurate information. It should also be noted that any other assumptions made in presenting the analysis of the company are based on the factual truth of the company. Company overview As an Australian-based company, JB Hi-Fi Limited retails home consumer products, especially in the two market segments of Australia and New Zealand. The company is involved in the sale of consumer electronic products and services as well as offering information technology and consulting services. The Company has around 43 JB Hi-Fi Home branded stores, including three in New Zealand. It operates around 144 physical stores and an online store. The Company also operates JB Hi-Fi Now, an online digital content platform. Its JB Hi-Fi Solutions is engaged in the sale of products and services to the commercial, government, and education sectors, including insurance replacements. A detailed review of the company’s product merchandize in JB Hi-Fi (2014) shows that most of its profits have come from the products that it specializes in, imported CDs from the UK and the United States as well as organizing special orders for clients for imports from Asia, Africa and South America. Operation’s overview As stated above, the company sells consumer electronics products in Australia and New Zealand including televisions, audio equipment, computers, cameras, telecommunications products and services, software (CDs, DVDs, Blu-ray discs and games), musical instruments, white goods, cooking products, small appliances, digital content (music, books and video) and information technology and consulting services. JB has continued to develop its online presence. Our online sales grew 35% over the half year and were up 49% in December 2010. Whilst a small but growing percentage of JB total sales, the online business is an important part of our overall strategy. The Group holds significant market-share in many of its product categories. As stated by JB Hi-Fi (2014), company’s sales are primarily from its branded retail store network. Sales are also generated from the Group’s branded online stores, its commercial and education offer and its JB Hi-Fi Now digital content platform as outlined below. As at 30 June 2014 the JB Hi-Fi Limited operated the following sales channels: “JB Hi-Fi” – 160 physical stores and an online store; “JB Hi-Fi Home” – 22 physical stores and an online store; “JB HI-FI Now” – online digital content platform; and “JB Hi-Fi Commercial & Education” (including JB Hi-Fi Education Solutions selling products and services to the commercial and education sectors, including insurance replacements. FY14 FY13 Mvt Total Sales $3,483.78m $3,308.40m +5.3% Gross Margin 21.70% 21.53% +17 bps Cost of Doing Business ("CODB") 15.19% 15.10% +9 bps Earnings Before Interest and Tax ("EBIT") $191.12m $177.75m +7.5% EBIT Margin 5.49% 5.37% +11 bps Net Profit After Tax ("NPAT") $128.36m $116.38m +10.3% Earnings per share ("EPS") 128.4 cps 117.7 cps +9.1% Total dividend - fully franked2 84.0 cps 72.0 cps +16.7% The final FY2014 dividend is 29.0 cents per share, to be paid on 5 September 2014 (record date 22 August 2014). The full year dividend of 84.0 cents per share represents a payout ratio of just over 65% of FY2014 earnings. Adjustment to the Company’s Financial Statements As it stands, the business has been very successful in the recent past that it is not easy to envision ways in which it can be improved further. Nevertheless, there are still extensive opportunities within the wide electronics field that the company can exploit in order to reach even greater heights in financial stability. For instance, diversification of its retailer franchise into other accessories such as CB Radios, musical instruments, Ukuleles and guitars, portable DJ public address docking systems, and IP and fixed surveillance camera systems (JB Hi-Fi, 2014). These adjustments can be translated on the cash flow statements of the company to help it grow its marginal profits even higher that it currently is. Table 1: Adjusted Cash flow statements ITEM FY2010 FY2011 FY2012 FY2013 FY2014 FY2014 LAST 5 YEARS Financial Performance Sales ($m) EBIT ($m) Net Profit attributable to owners of the Company ($m) Basic EPS (cents) 2,731.3 2,959.3 175.1 118.7 109.7 3,127.8 196.0(i) 134.4(i) 124.7(i) 3,308.4 161.5 104.6 105.9 3,483.8 177.8 116.4 117.7 3,483.80 191.1 128.4 128.4 5% 7% 10% 9% 8% 6% 6% 8% Shareholder value created Company share price at the end of the reporting period ($) 19.07 17.07 8.86 16.81 18.30 9% 4% Market capitalization ($) 2,066.1 1,682.0 875.8 1,663.3 1,810.7 9% 2% Enterprise Value(ii) ($m) 2,084.0 1,887.3 985.9 1,720.3 1,946.9 13% 3% Movement in enterprise value during the financial year ($m) 378.8 (196.7) (901.4) 734.4 226.7 Dividends paid to shareholders during the financial year ($m) 67.1 88.4 77.0 65.3 77.2 Off market share buy-back ($m) - 173 - - - On Market share buy-back ($m) - - - - 25.8 Shareholder value created(iii) Per annum ($m) 445.9 65.0 (824.4) 799.7 329.7 Cumulative ($m) since IPO 2,027.4 2,092.4 1,268.0 2,067.7 2,397.4 16% 275(V) Rolling ($m) last five years 1,776.0 1,653.9 215.0 992.5 815.9 (18%) 9% (i). FY11 results are normalized to exclude the impact of the Clive Anthony’s restructuring charge ($24.7m post tax). (ii). Enterprise value is measured as the sum of market capitalization and net debt. (iii). Shareholder value created is measured as the increase in the enterprise value, plus cash dividends and share buy-backs paid during the financial year. Cumulative shareholder value is measured from the date of listing in October 2003 when opening shareholder value was $201.7m. (iv). Percentage movement shown is the compound annual growth rate over the last 5 years. (v). Percentage movement shown is the compound annual growth rate since IPO. Revenue and Net Profit / (Loss) Percentage change % Amount $’000 Revenue from ordinary activities up 8.29% to 1,682,634 Profit from ordinary activities after tax up 15.57% to 87,859 Net profit attributable to members of the parent entity up 15.57% to 87,859 Dividends (Distributions) Amount per security Franked amount per security Final dividend – year end 30 June 2010 33.0¢ 33.0¢ Interim dividend – year end 30 June 2011 48.0¢ 48.0¢ Record date for determining entitlements to the dividend: final dividend interim dividend 23 August 2010 17 February 2011 Dividend payment date: final dividend interim dividend 3 September 2010 4 March 2011 Net Tangible Assets Per Security 31 Dec 2010 $ 31 Dec 2009 $ Net tangible assets per security 2.34 1.71 (b) Segment information The segment information for the period ended 31 December 2010 is as follows: 31 Dec 2010 Australia New Zealand Total $'000 $'000 $'000 Revenue from external customers 1,606,500 76,134 1,682,634 Operating EBITDA 140,353 (63) 140,290 Total segment assets 915,854 61,407 977,261 31 Dec 2009 Australia New Zealand Total $'000 $'000 $'000 Revenue from external customers 1,477,180 76,594 1,553,774 Operating EBITDA 123,742 (1,139) 122,603 Total segment assets 811,725 62,681 874,406 Liquidity analysis Liquidity analysis is the ability of a company to pay its short-term obligations in a means of selling assets quickly in raising cash. On the other hand, solvency is where a company owns more than it owes. In this way, it has a positive net worth and a manageable debt load. In this way, a company with adequate liquidity may have enough cash available to pay its bills, but it may be heading for financial disaster eventually. The following tables detail the JB Hi-Fi Ltd.’s remaining contractual maturity for its financial assets and liabilities. The tables have been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which JB Hi-Fi Ltd. can be required to pay. The table includes both principal and estimated interest cash flows. Cash flows for financial assets and liabilities without fixed amount or timing are based on the conditions existing at the reporting date. The company holds the following financial assets and liabilities at reporting date: Consolidated 014 2013 $'000 $’000 Financial assets Cash and cash equivalents 43,445 67,368 Trade and other receivables 70,745 64,246 114,190 131,614 Financial liabilities Trade and other payables 273,723 361,181 Bank loans 179,653 124,331 Interest rate swaps (net settled) 104 956 453,480 486,468 Liquidity arrangements The company had access to the following undrawn borrowing facilities at the end of the reporting period: Unsecured bank overdraft facility: Consolidated 2014 2013 $’000 $’000 Unsecured bank overdraft facility: Amount used Amount unused Amount used - - Amount unused 89,293 88,424 89,293 88,424 Unsecured indemnity guarantees: amount used 601 1,549 amount unused 1,099 151 1,700 1,700 Unsecured bank loan facilities (term debt): amount used (i) 180,000 125,000 amount unused 20,000 75,000 200,000 200,000 Headroom in total borrowing facilities (excluding security indemnity guarantees) 109,293 163,424 Cash flow Analysis JB Hi-Fi Limited Condensed Consolidated Income Statement Half-year ended 31 Dec 2010 31 Dec 2009 $'000 $'000 Revenue 1,682,634 1,553,774 Cost of sales (1,320,169) (1,225,968) Gross profit 362,465 327,806 Other income 1,244 650 Sales and marketing expenses (147,927) (139,024) Occupancy expenses (56,809) (49,199) Administration expenses (13,713) (12,922) Other expenses (17,084) (15,358) Finance costs (2,611) (3,234) Profit before tax 125,565 108,719 Income tax expense (37,706) (32,695) Profit for the half-year 87,859 76,024 Attributable to: Equity holders of the parent 87,859 76,024 87,859 76,024 Cents Cents Earnings per share Basic (cents per share) 80.64 70.45 Diluted (cents per share) 80.04 69.37 JB Hi-Fi Limited Condensed Consolidated Balance Sheet As at 31 Dec 2010, Jun 2010, 31 Dec 2009 31 Dec 2010 30 Jun 2010 31 Dec 2009 $'000 $'0 00 $'000 ASSETS Current assets Cash and cash equivalents 180,011 51,735 127,436 Trade and other receivables 2 130,273 63,499 113,356 Inventories 388,082 3 34,754 373,256 Other 5,060 4,520 6,378 Total current assets 703,426 4 54,508 620,426 Non-current assets Other financial assets 3 3 3 Plant and equipment 176,834 1 63,982 155,107 Deferred tax assets 13,982 11,968 16,086 Intangible assets 83,016 83,861 82,784 Total non-current assets 273,835 2 59,814 253,980 Total assets 977,261 7 14,322 874,406 LIABILITIES Current liabilities Trade and other payables 3 507,437 2 89,505 446,980 Borrowings 4 - 35,000 - Other financial liabilities 167 684 805 Current tax liabilities 27,605 10,011 19,934 Provisions 26,785 25,975 30,837 Other current liabilities 2,336 1,964 2,062 Total current liabilities 564,330 3 63,139 500,618 Non-current liabilities Borrowings 5 34,574 34,624 69,491 Provisions 4,618 4,421 4,247 Other non-current liabilities 20,985 18,763 16,271 Other financial liabilities - 79 - Total non-current liabilities 60,177 57,887 90,009 Total liabilities 624,507 4 21,026 590,627 Net assets 352,754 2 93,296 283,779 EQUITY Contributed equity 63,644 53,578 52,867 Reserves 1,340 3,873 1,944 Retained earnings 287,770 2 35,845 228,968 Total equity 352,754 2 93,296 283,779 JB Hi-Fi Limited Condensed Consolidated statement of cash flows Half-year ended 31-Dec-10 31-Dec-09 $'000 $'000 Cash flows from operating activities Receipts from customers Payments to suppliers and employees 1,786,530 1,635,445 Interest and bill discounts received -1,543,417 -1,434,940 Interest and other costs of finance paid 1,205 576 Income taxes paid -3,333 -3,326 Net cash (outflow) inflow from operating activities 218,543 168,359 Cash flows from investing activities Payments for property, plant and equipment -27,659 -30,554 Proceeds from sale of plant and equipment 265 256 Payments for intangible assets -1,358 Net cash (outflow) inflow from investing activities (-27394) (-31,656) Cash flows from financing activities Repayment of borrowings -35,000 20,000 Proceeds from issues of equity securities 7,900 6,275 Dividends paid to members of the parent entity -35,934 -31,332 Net cash (outflow) inflow from financing activities -63,034 -45,057 Net increase (decrease) in cash and cash equivalents 128,115 91,646 Cash and cash equivalents at the beginning of the half-year 51,735 35,790 Effects of exchange rate changes on cash and cash equivalents 161 Cash and cash equivalents at end of the half-year 180,011 127,436 As at 31 Dec 2010, 31 Dec 2009 References Akkizidis, Ioannis, Wolfgang Breymann, Willi Brammertz, Rami Entin, and Marco Rustmann. 2013. Unified financial analysis the missing links of finance. 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