Financial Analysis of JB HI-FI Ltd - Research Proposal Example

Financial Analysis of JB HI-FI Ltd 1. Introduction As an assistant analyst for an investment bank, this report provides an informed financial analysis of JB Hi-Fi Ltd and its competitor for better investment decision making. By the use of appropriate financial statements analysis methods that are fit for the data available and that which can inform on the nature of the financial statements to be translated and interpreted using suitable ratios such as past financial performance records of the business. 1.1 Purpose This assignment aims at providing financial information that will be clear and understandable to enable users to make sound decisions and judgement. With the help of financial tools of analysing financial statements that include ratio analysis, this analysis will be undertaken through measure of profitability and adequacy of the profits of JB Hi-Fi Ltd. Secondly, this analysis will measure the worth of the business to its owners. The report looks at the measures of liquidity and financial strength. Lastly, the measures of productivity of assets and solvency will be explored. 1.2 Scope The report looks at the trading activities of JB Hi-Fi Ltd and one of its competitors to enable compare JB Hi-Fi Ltd results and that of the entertainment industry. The analysis report can be used by the general financial users that include but not limited to investors and owners. 1.3 Methodology The report employs ratios which is an extremely useful tool for expressing important relationships among variables of financial statements. 1.4 Assumptions With the aid of ratios the analyst hopes the user of this information will be able to follow underlying JB Hi-Fi Ltd business and make fair assessment of business risk, performance and profitability. 1.5 Limitation Major limitation of report is that it employs financial ratios that are limited as figures are meaningless unless based on indefinable economic relationships between item used and analysis. 2 Company overview JB Hi-Fi Ltd is a consumer electronics retailer in Australia that operates chain stores engaging in supply of computer/ video games through DVDs, CDs and of Blue-rays and digital contents with its headquarters at Melbourne which was established in 1983 (Jbhifi.com.au, 2016). It specializes in Hi-Fi equipment that has seen it expand its business by opening more stores and HI-FI HOME that has significantly grew the business strength (Jbhifi.com.au, 2016). 3 Economic Framework JB Hi-Fi Ltd has been successful player in its industry making above averages return with its economic success evident in its introduction of JB HI-FI HOME stores for home appliances and JB HI-FI NOW which is a digital platform. All these are signs of growing business (Jbhifi.com.au, 2016). 4 Financial Analysis The following information represents JB Hi-Fi Ltd financial performance for the past five years. Table 4.1: Financial performance of JB Hi-Fi Ltd 2010 2011 2012 2013 2014 Growth Sales 2.73b 2.96b 3.13b 3.3b 3.48b 5.30% EBIT 175.1m 162.6m 161.5m 177.8m 191.1 7.50% Earnings per share 109.7cps 101.8cps 105.9cps 117.7cps 128.4cps 9.10% Total Dividend fully franked 66.0cps 77.0cps 65.0cps 72.0cps 84.0cps 16.70% Source data: (Jbhifi.com.au, 2016) From the above data JB Hi-Fi Ltd financial performance was on an upwards trends during the five years between 2010 and 2015. The growth of sales, EBIT, earnings per share and dividends during the same period grew were 5.30%, 7.50%, 9.10% and 16.70% respectively. 4.1 Ratio Analysis These are extremely useful and analytical tools for financial statements. Ratio analysis is based on financial statements and is applied in order to derive an indication of a firm’s financial performance from several perspectives and are of various types (Kaplan.co.uk. (2016). 4.1.1 Activity Analysis Average Collection Period = 365 days/ Account receivable turnover 4.1.1.1 Short term Activity Ratios This ratio is calculated through the following method (Kaplan.co.uk. (2016). Accounts Receivable Turnover = Total credit sales/ Accounts Receivables. 4.1.1.2 Long term Activity Ratios Inventory Turnover = Total annual sales or cost of goods sold/ inventory cost 4.1.2 Profitability Analysis Profitability ratios assess the general profitability of a business. They include; Gross profit margin = (gross profit/sales) * 100 Net profit turnover = (net profit before interest and tax/sales)*100 Rate of return = (net profit/shareholders fund)*100 (Choudhry et al., 2001) Rate of return on capital invested measures the return on investment of shareholders’ funds tied up in the business. For JB Hi-Fi’s Ltd. profitability ratios for the past five years are as follows; Table 4.2 Gross profit margin of JB Hi-Fi Ltd ‘000’ 2010 2011 2012 2013 2014 gross profit 594,174 652,029 659,830 712,202 759,981 sales 2,731,320 2,959,253 3,127,792 3,308,396 3,483,775 gross margin, % 21.75 22.03 21.10 21.53 21.81 Table 4.3 Gross profit margin of Nine Entertainments Co. ‘000’   2013 2014 gross profit 172,642 158,221 sales 1,272,423 1,546,556 gross margin, % 13.56797 10.23054 Table 4.4 Net profit turnover of JB Hi-Fi Ltd ‘000’ 2010 2011 2012 2013 2014 net profit before interest and tax 169,601 158,581 148,373 168,052 182,677 sales 2,731,320 2,959,253 3,127,792 3,308,396 3,483,775 Net profit turnover, % 6 5 5 5 5 Table 4.3 Rate of return of JB Hi-Fi Ltd ‘000’ 2010 2011 2012 2013 2014 Profit before tax 169,601 158,581 148,373 168,052 182,677 Interest 523 458 659 451 325 Net worth 293,296 152,313 184,501 243,828 294,633 ROE, % 58.00 104.42 80.78 69.11 62.11 Table 4.5 Net profit turnover of Nine Entertainments Co. ‘000’   2013 2014 net profit before interest and tax 1190826 99205 sales 1272423 1546556 Net profit turnover 93.58727 6.414575 The above ratios JB Hi-Fi Ltd has been consistent in its profits recorded, this shows a business model that can be relied on as it’s predictable. Interns of competitiveness JB Hi-Fi Ltd scores are more stable and high. Table 4.6 Rate of return of JB Hi-Fi Ltd ‘000’ 2010 2011 2012 2013 2014 Profit before tax 169,601 158,581 148,373 168,052 182,677 Interest 51,223 4,858 51,659 54,230 51,420 Net worth 293,296 152,313 184,501 243,828 294,633 ROE, % 75.29 107.30 108.42 91.16 79.45 4.1.3 Liquidity Analysis Among the ratios for liquidity test include; a) Quick or acid test ratio It measures the ability of the business to pay its debt as they fall due from net liquid assets and is an indication of short-term financial stability of a firm; on average a ratio of 1:1 is considered adequate however the suitability depends on nature of business (Choudhry et al., 2001) Quick acid test ratio = current assets less trade stock/current liabilities. Table 4.7: Quick ratio of JB Hi-Fi Ltd ‘000’ Table x: Quick ratio of JB Hi-Fi Ltd ‘000’ 2010 2011 2012 2013 2014 current assets 454,508 501,072 534,060 563,652 578,147 trade stock 334,754 406,939 428,290 426,000 458,625 current liabilities 363,139 345,938 439,481 442,379 352,183 Quick ratio 0.33 0.27 0.24 0.31 0.34 b) Current ratio It measures the ability of the business to pay its short term debs without having to sell its non-current assets. A firm should be able to draw funds by realising it current assets to discharge all its short term liabilities and have a surplus to continue trading. A ratio of 2:1 is generally considered to be ideal for many businesses across-board (Accountingcoach.com, 2014). Current ratio = current assets/current liabilities Table 4.8: Current ratio of JB Hi-Fi Ltd ‘000’ 2010 2011 2012 2013 2014 current assets 454,508 501,072 534,060 563,652 578,147 current liabilities 363,139 345,938 439,481 442,379 352,193 Current ratio 1.252 1.448 1.215 1.274 1.642 JB Hi-Fi Ltd performance is adequate for an entertainment industry. 4.1.4 Long Term Debt and Solvency Among this ratio includes; a) Long term debt to total asset ratio is a percentage measure of firm’s assets that are financed through loans that last more than a year and provides insight about firm’s ability to meet it obligation of servicing outstanding loans. This can be calculated by; Long term debt to total asset ratio = long term debt / total assets Table 4.9: Long term debt of JB Hi-Fi Ltd ‘000’ 2010 2011 2012 2013 2014 long term debt 34,624 232,582 149,775 124,331 179,653 total assets 714,322 767,139 811,148 843,304 859,841 long term debt 0.048 0.303 0.185 0.147 0.209 b) Solvency ratio It measures a firm’s ability to pay its debts and other liabilities. It’s a show of sufficiency in a firm’s ability to in meeting its liabilities (Accountingcoach.com, 2014). If the solvency is low the more prone the company is to default its debt payments. Solvency ratio = [Net income (after tax profit) + depreciation]/ [short term liabilities + long term liabilities] Table 4.10: Solvency ratio of JB Hi-Fi Ltd ‘000’   2010 2011 2012 2013 2014 Net income 118,652 109,695 104,641 116,632 128,447 Total liabilities 421,026 614,826 626,648 599,476 565,208 solvency ratio 0.282 0.178 0.167 0.195 0.227 4.1.5 Du Pont Analysis DuPont analysis is used as an analysis measure of assets at gross book value as opposed to net book value to project higher return on equity (Ingersoll, 1987). This analysis incorporates three items i.e. profit margin, total assets turnover and equity multiplier (Ingersoll, 1987). The formula for DuPont measure is; ROE = Profit Margin (Profit/sales) * Total assets turnover (Sales/Assets) * Equity multiplier (Assets/equity) Table 4.11: ROE of JB Hi-Fi Ltd ‘000’ 2010 2011 2012 2013 2014 gross profit 594,174 652,029 659,830 712,202 759,981 sales 2,731,320 2,959,253 3,127,792 3,308,396 3,483,775 gross margin 0.2175 0.2203 0.2110 0.2153 0.2181 Assets 714,322 767,139 811,148 843,304 859,841 Total Assets T. 3.82 3.86 3.86 3.92 4.05 Equity 293,296 152,313 184,501 243,828 294,633 E. Multiplier 2.4355 5.0366 4.3964 3.4586 2.9183 ROE 2.03 4.28 3.58 2.92 2.58 5 Cash Flow Analysis Cash flow statement has three main components or sections i.e. operations, investing and financing that is very crucial for the firm activities (Ingersoll, 1987). a) Cash Flow from Operations Table 4.12: Cash Flow from Operations of JB Hi-Fi Ltd ‘000’ 2010 2011 2012 2013 2014 153,103 109,945 215,007 156,410 41,326 Cash flow from operations represents main source of firm’s cash generation. The funds are generated internally. For JB Hi-Fi Ltd was highest in 2012 and declined significantly in 2014. b) Cash Flow from Investing Table 4.13: Cash Flow from Investing of JB Hi-Fi Ltd ‘000’ 2010 2011 2012 2013 2014 (55,785) (43,919) (44,821) (38,301) (38,240) Investment is characterized by cash outflows in terms of capital expenditure in non-current assets, acquiring of other businesses and other investments. Addition of firm’s physical assets through capital expenditure is critical. For JB Hi-Fi Ltd has fairly stable with highest being in 2010 attributable to chain stores expansion. c) Cash Flow from Financing Table 4.14: Cash Flow from Financing of JB Hi-Fi Ltd ‘000’ 2010 2011 2012 2013 2014 (80,245) (90,861) (157,744) (91,023) (27,609) Cash flow from financing prominently features debt and equity as firms continuously acquire and pay loans. Also for investors perspective dividend payout is critical at this section. The figures were highest in 2012 and lowest in 2014. 6 Prospective Analysis This is forecast for future information of interest to JB Hi-Fi Ltd. In regard to this the analyst deduced the following; Revenue Growth: JB Hi-Fi Ltd has seen a tremendous growth in its sales with an achievement of $3.48b recorded in 2014 representing a sales growth of 5.3% with comparable industry growth of 2%. This saw its gross margin performing better through the market remaining competitive. The company strengths include it low cost in terms of business performance beating its competitors and enabling them gains more market shares. Its products are also of high quality, fashionable and original during the past four years, based on this in mind we can project that the revenue will grow at 5.30% to reach 3.66b in the coming financial year. Table 4.15: Revenue growth of JB Hi-Fi Ltd 2010 2011 2012 2013 2014 Growth Sales 2.73b 2.96b 3.13b 3.3b 3.48b 5.30% 6.1 EBIT Forecast Based on this analysis the company will experience sales growth, the EBIT is expected to grow at projected rate of 7.50%, this could reach 205.4325m. Table 4.16: EBIT growth of JB Hi-Fi Ltd 2010 2011 2012 2013 2014 Growth EBIT 175.1m 162.6m 161.5m 177.8m 191.1m 7.50% 7 Conclusion and recommendation From the analysis of financial statements of JB Hi-Fi Ltd from investor perspective it’s a company worth investing in as the owners ROE has been on the rise over the years, and will continue in future since it has a competitive business model. References Accountingcoach.com 2014. Financial ratios. Available at: http://www.accountingcoach.com/financial-ratios/explanation [Accessed 19 May 2016]. Choudhry, M., Joannas, R., Pereira, R. 2001. Capital markets instruments analysis and valuation. Prentice Hall, New York. Ingersoll, J. 1987. Theory of financial decision making. Bowman & Littlefield, California. Jbhifi.com.au. 2016. JB HI-FI. Available at: https://www.jbhifi.com.au/[Accessed 19 May 2016]. Jarrow, R. 1996. Modelling fixed income securities and interest rate options. McGraw-Hill, NewYork. Kaplan.co.uk. (2016). Kaplan financial knowledge bank. Available at: http://kfknowledgebank.kaplan Accessed 19 May 2016]. Read More