Financial Statement Analysis of JB HI FI Company - Example

FIN3FSA Financial Statement Analysis JB HI FI Company Contents FIN3FSA 1 Financial Statement Analysis 1 JB HI FI Company 1 Contents 2 Executive Summary 3 Introduction 3 Purpose 3 Scope 3 Methodology 4 Assumptions 4 Limitation 4 Company overview 4 Economic Framework 4 Financial Analysis 5 Ratio Analysis 5 Activity Analysis 5 Short term Activity Ratios 6 Long term Activity Ratios 6 Profitability Analysis 7 Long Term Debt and Solvency 8 Du Pont Analysis 9 Cash Flow Analysis 10 Prospective Analysis 11 Conclusion and recommendation 13 References 14 Executive Summary The report focus on providing financial statement analysis of JB HI FI for the financial period 2012/16 with the sue of ratio Analysis which will comprise of efficiency ratio, profitability ratio as well as the liquidity ratio as well as ascertain the company’s DuPont Analysis and providing overall recommendation with regards to company’s viability and whether investors will be encourage to invest in the company. From or ratio analysis, it was evident that JB HI FI company depicts a growth in business performance and thus, the company going concern is guaranteed. The Annual report of the company depicts a growth in retained earning implying that the shareholders wealth maximisation is guaranteed. Introduction Purpose The purpose of the study is to examine the financial performance of JB HI FI for the financial period 2012/2016 and providing recommendation as to whether the company is viable for investment. The appraisal tool employed for the study is he use of ratio Analyse as well as the DuPont Analysis in offer to ascertain the effectiveness of the company’s financial performance and decision of whether to invest in the business or not. Scope Our research will comprise the use of ratio analysis and DuPont Analysis in order to ascertain the effectiveness of the business operation for the last four years. Methodology The Analysis of financial statement for JB HI will entail the use of key ratio Analysis which are the liquidity, profitability and efficiency ratio as well as provide verdict on whether to invest in the business or not. The Annual report used is extracted from the company’s website and hence, the verdict provided will thus be reliable for investment decision. Assumptions Our Assumption is that the financial performance of the company will remain steady and thus, it will not be affected by both internal factors like organisation reorganisation and external factors like the effect of inflation, effect of competition and business operations will not change. Limitation The main limitation facing our analysis is the timeframe for our study is limited and our Analysis will only comprise of internal analysis like the use of ratio analysis and will not include other external factors like the PESTEL Analysis in order to ascertain the overall business operations. Company overview JB HI FI is leading consumer goods company in Australia and New Zealand. The business majors in electronic and home appliances. The company is amongst the leading fasted growing companies with its registered head office in Melbourne. The company major competitors are the Harvey Norman, BigW, Myer holdings as well as Dowjones. Economic Framework The retail market is growing drastically in Australia, which makes its hard for firms to survive in a competitive and ever growing industry. The retail industry has been growing since 2012 in Australia to 2017.Accordig to the information retrieved from the bureau of statistics; it is evident that the retail, sector in Australia is growing each year with an estimated growth in 1.8%. It is anticipated that anticipated trading environment is growing because of low consumption rate with the need to spend less and save more by Australian consumers, with increase in the rate of employment (Brigham, 2016). The implication is that many firms will have less increase in sales level due to declining the demand and consumption rate with the increase in the demand for online shopping with good pricing Financial Analysis We will undertake a financial statement analysis for JB HI FI Company for the financial period 2012/16 in order to ascertain the firm financial effectiveness. We will use the ratio analysis as well as the DuPont Analysis in order to identify wither the firm is profitably and with improved liquidity and efficiency. Ratio Analysis In order to ascertain the business performance, we will undertake the ratio analysis for JB HI Company. Some of the key ratio for our Analysis will be the profitability ratio, liquidity ratio as well as the efficiency ratio. Activity Analysis This ratio measures the ability of the firm to change its dents and stock to cash. The Activity ratio will comprise of short term and long-term ratio as explained below. Short term Activity Ratios The short-term activity ratio will focus on ascertaining the revenue according tom asset account. The short-term revenue for JB HI FI will focus on ascertaining the account receivables and inventory turnover.   2012-06 2013-06 2014-06 2015-06 2016-06 Accounts Receivable 7.2 7.62 8.23 9.1 9.88 inventory turnover 52.8 50.52 53.34 53.5 55.06 It is evident in the table above that the JB HI FI is depicting a growth in inventory turnover which signify that the ability of the company to sales more is grwoing each whilst the account receivable is growing each year. The implication is that the company is taking long to collect cash from its debtors and hence not an ideal debtors control system. Long term Activity Ratios The ratio focuses more on ascertaining the average collection period and the asset turnover for the company. It can be observed in the table below that the total asset turnover for the company is growing from the year 2012 to 2016 which signify the company is effective ion utilising its assets to generate more income. The can as well be observed that account payable is declining each year from 2012 to 2016 (Ganguin, 2004). This would mean that the company is taking the shrort time to pay its debt and hence risky to the company’s working capital. 2012-06 2013-06 2014-06 2015-06 2016-06 Payable period 46.32 48.94 38.52 31.86 32.84 total assets turnover 3.96 4 4.09 4.16 4.19 Profitability Analysis We use the following key profitability ratio to ascertain the effectiveness of the company. Net profit margin and the return on equity. 2012-06 2013-06 2014-06 2015-06 2016-06 Net profit margin 3.35 3.52 3.68 3.74 3.85 return on Asset 4.4 3.47 2.92 2.61 2.45 return on equity 62.14 54.4 47.72 42.79 40.68 Net Profit Margin The net profit margin in the Table depicts an increasing trend, which implies that the operation cot for the business is declining while the margin of safety is effective (Min, 2016). This implies a growth in profitability for the company and consequently guaranteed shareholders wealth maximisation. Return on Assets The return on asset depicts the ability of the company to uses its asset to generate more income, form the table above, it can be observed that JB HI FI is having a growth in its return on asset, which means that the ability of the company to uses its asset to generate more income is guaranteed (Peterson, 1999). As a result, the company is shareholders wealth maximisation is guaranteed. Return on Equity The return on equity measure the ability of the company to uses its equity capital to generate more income to the shareholders of the company. From the table, it can be observed that JB HI FI Company is having a declining trend in return on equity hence implying that the ability of the company to use equity capital is less effective hence, shareholder wealth maximisation is not guaranteed. Liquidity Analysis The ratio measures the ability of the company to uses its current asset to finance its debt as and when they full due for payment. 2012-06 2013-06 2014-06 2015-06 2016-06 current ratio 1.22 1.27 1.64 1.62 1.57 quick ratio 0.22 0.3 0.32 0.34 0.34 The above depicts that JB HI FI is having a growth in current ratio, which means that the ability of the company to uses tis current asset to finance its debt is increasing each year. The quick ratio for JB HI FI is growing each from 2012 to 2016 signifying that the ability of the company to convert its liquid cash and pay its debt is fast and guaranteed. Long Term Debt and Solvency This ratio focuses on ascertaining the ability of the firm to pay its debts that is falling within one year. It is ability of the company to generate income to finance its debts effectively. 2012-06 2013-06 2014-06 2015-06 2016-06 Debt to Equity 0.81 0.51 0.61 0.41 0.27 Leverage Ratio 4.4 3.47 2.92 2.61 2.45 The debt to equity ratio for the company is declining each year meaning that the capacity of the company to use its debt unlike equity is less effective. The company therefore ensure that ore debt capital is used unlike equity in order to ensure that there is an optimal capital (Min, 2016). The leverage ratio is as declining which signify that company is spending less in external source of finance. Du Pont Analysis DuPont Formula ROE = {Profit Margin x Asset Turnover Ratio x Equity Multiplier} 2012-06 2013-06 2014-06 2015-06 2016-06 Du Pont 58.3704 48.8576 43.9495 40.60742 39.52218 From the du pot Analysis for JB HI FI above, it can be observed that the company is margin is declining each year because of complex trading circumstance, with superior and aggressive level of discounting by its competitors as they compete for market share and expansion in the shrinking level. The tax burden as well s asset turnover turned to be steady for the financial period 2012/16 with the asset to equity is declining immensely since due to growth in its retained earnings. Unlike the industrial average and those of its competitors depict an astonishing return on investment which is chiefly due to high profitability and effectiveness with the use of retained earnings as a source of finance while the return on investment should be controlled by enhancing the profit margin. Cash Flow Analysis It can be observed from the table below of cash flow analysis for JB HI FI that the company has managed its cash flows. This provides an insight to the firm source of income and the manner to which the firm is allocating the cash realised. Ascertaining the table below depicts a detailed comprehension of the extent to which the firm is operating (Peterson, 1999). From the table of cash flow, it s evident that the company is financed mainly by the operating activities. JB HI FI LTD (JBH) Statement of CASH FLOW Fiscal year ends in June. AUD. 2012-06 2013-06 2014-06 2015-06 2016-06 TTM Cash Flows From Operating Activities Other non-cash items $ 215,007,000 $ 156,410,000 $ 41,326,000 $ 179,896,000 $ 185,140,000 $ 201,604,000 Net cash provided by operating activities $ 215,007,000 $ 156,410,000 $ 41,326,000 $ 179,896,000 $ 185,140,000 $ 201,604,000 Cash Flows From Investing Activities Investments in property, plant, and equipment $ (46,078,000) $ (35,307,000) $ (35,914,000) $ (42,466,000) $ (52,343,000) $ (43,621,000) Property, plant, and equipment reductions $ 1,257,000 $ 1,203,000 $ 674,000 $ 496,000 $ 342,000 $ 245,000 Acquisitions, net $ (4,197,000) $ (3,000,000) $ (2,400,000) $ (846,500,000) Net cash used for investing activities $ (44,821,000) $ (38,301,000) $ (38,240,000) $ (44,370,000) $ (52,001,000) $ (889,876,000) Cash Flows From Financing Activities Long-term debt issued $ 54,063,000 $ 315,000,000 Long-term debt repayment $ (84,174,000) $ (26,210,000) $ (40,113,000) $ (30,000,000) $ 110,000,000 Common stock issued $ 3,514,000 $ 1,082,000 $ 21,523,000 $ 3,125,000 $ 5,955,000 $ 396,165,000 Repurchases of treasury stock $ (25,830,000) $ (4,970,000) $ (13,181,000) Cash dividends paid $ (77,031,000) $ (65,263,000) $ (77,183,000) $ (87,174,000) $ (93,205,000) $ (99,036,000) Other financing activities $ (53,000) $ (632,000) $ (182,000) $ (508,000) $ (134,000) $ (10,690,000) Net cash provided by (used for) financing activities $ (157,744,000) $ (91,023,000) $ (27,609,000) $ (129,640,000) $ (130,565,000) $ 711,439,000 Effect of exchange rate changes $ 22,000 $ 572,000 $ 600,000 $ (200,000) $ 179,000 $ (99,000) Net change in cash $ 12,464,000 $ 27,658,000 $ (23,923,000) $ 5,686,000 $ 2,753,000 $ 23,068,000 Cash at beginning of period $ 27,246,000 $ 39,710,000 $ 67,368,000 $ 43,445,000 $ 49,131,000 $ 101,416,000 Cash at end of period $ 39,710,000 $ 67,368,000 $ 43,445,000 $ 49,131,000 $ 51,884,000 $ 124,484,000 Free Cash Flow Operating cash flow $ 215,007,000 $ 156,410,000 $ 41,326,000 $ 179,896,000 $ 185,140,000 $ 201,604,000 Capital expenditure $ (46,078,000) $ (35,307,000) $ (35,914,000) $ (42,466,000) $ (52,343,000) $ (43,621,000) Free cash flow $ 168,929,000 $ 121,103,000 $ 5,412,000 $ 137,430,000 $ 132,797,000 $ 157,983,000 Supplemental schedule of cash flow data Cash paid for income taxes $ (49,283,000) $ (39,554,000) $ (60,577,000) $ (59,886,000) $ (66,246,000) $ (66,872,000) Cash paid for interest $ (12,765,000) $ (8,896,000) $ (7,496,000) $ (5,689,000) $ (3,657,000) $ (3,217,000) Prospective Analysis This analysis ensures that we determine the prosects performance of the company based on the historic tend of the company. We will determine the mean return for the revenue and earnings before interest and tax (EBIT) using the mean returns. We will afterward predict the revenue and the EBIT for the JB HI FI Company. The following are therefore taken into consideration as the main assumption for our Analysis. 1. The past performance will be evident in the prospect 2. The business will not bring any key changes in its pricing policy The basis for Sales and EBIT expansion is the historic trend of earnings before interest and tax. We use the revert model to dertermine the future sales and expansion in which future sales and EBIT growth will be the mean return for the last four years of sales growth (Warren, 2006). Table of Sales & EBIT Growth Rate for Coles Ltd 2006 2005 2004 2003 Mean Sales growth 3.6% 2.3% 19.4% 5.2% 7.6% EBIT growth -17.1% 11.7% 34.3% 18.6% 11.9% From the table above, we use the mean revert model and it can be observe that the company is capable of financing the growth model of revenue and EBIT for 7.6% and 11.9% respectively (Peterson, 1999). Using the growth rate will ensure that the company is capable of forecasting the sales and EBIT comprehensively, the forecast will be significant in making sure that precise valuation of the company on the basis of predicted future business performance for JB HI FI limited. The Line chart for sales & EBIT growth Table 14 Sales & EBIT Forecast for Coles LTD   $ 2,016.00 $ 2,017.00 $ 2,018.00 $ 2,019.00 $ 2,020.00 Sales Forecast $ 3,954,467,000.00 $ 4,255,006,492.00 $ 4,578,386,985.39 $ 4,926,344,396.28 $ 5,300,746,570.40 EBIT Forecast $ 221,150,000.00 $ 247,466,850.00 $ 276,915,405.15 $ 309,868,338.36 $ 346,742,670.63 In using the growth rate, we are able to forecast eh dales and EBIT, which is ideal in ensuring that the fair value of the company is guaranteed. Conclusion and recommendation From our general analysis of JB HI FI company, it can be observed that the company improving well in term of profitability. However, the company must ensure that it is having an effective debtors and creditors management in order to guaranteeing the effectiveness of working capital and hence the going concern will be at risk (Walton, 2006). The company must reconsider its capital structure in order to ensure that the company is having an optimal capital structure that will lead to low cost on capital an high value top the firm as recommended by the Modigliani and miller proposition. References Brigham, E. (2016) Financial Management: Theory & Practice - Page 576, New York: Cengage Learning. Ganguin, B. (2004) Standard & Poor's Fundamentals of Corporate Credit Analysis, London : Cengage Learning. Kadre, S. (2015) Practical Business Analytics Using SAS: A Hands-on Guide - Page 151, London: John Wiley $ Son's. Maisel, L. (2013) Predictive Business Analytics: Forward Looking Capabilities , London: Cengage Learning. Min, H. (2016) Global Business Analytics Models: Concepts and Applications i, New York: John Wiley $ Son's. Peterson, P. (1999) Analysis of Financial Statements, London : Pearson Education. Ranganatham, M. (2006) Investment Analysis and Portfolio Management - Page 84, London : Cengage Learning. Tracy, A. (2012) Ratio Analysis Fundamentals: How 17 Financial Ratios, London : Pearson Education. Walton, P. (2006) Global Financial Accounting and Reporting: Principles and Analysis, New York : John Wiley & Son's. Warren, C. (2006) Financial & Managerial Accounting - Page 531, London : John Wiley & Son's. Read More