Analysing Financial Statements - Case Study Example

FIN3FSA Financial Statement Analysis Assessment2 Contents FIN3FSA 1 Financial Statement Analysis 1 Assessment2 1 Contents 2 Executive Summary 3 Introduction 4 Purpose 4 Scope 4 Methodology 4 Assumptions 4 Limitation 5 Company overview 5 Economic Framework 5 Financial Analysis 6 Ratio Analysis 7 Activity Analysis 7 Short term Activity Ratios 7 Long term Activity Ratios 8 Profitability Analysis 9 11 Long Term Debt and Solvency 11 12 Du Pont Analysis 12 Cash Flow Analysis 13 Prospective Analysis 15 Conclusion and recommendation 16 References 18 Executive Summary JB Hi depicts strong growth in sakes from $ 3,127,792,000 in 2012 to $3,954,467,000 in 2016. At the time of low expansion in the retail industry and very intricate market, the revenue expansion attained a better outcome. Based on the income, it is evident that the company is having a good performance. However, a comprehensive scrutiny depict that the position is not as anticipated, the income expansion is promising and with positive trend in ensuring that the overall financial position of the company and share prices remain steady. Even thought the income depicts a growth for the last four years, the EBIT has been declining while the net profit after tax is as well declining each year. The reason for the change in ratios and the enhance in sales and EBIT is due to increase in competitive force in the retail industry as well as the decline in spending, increasing in the rate of unemployment as well as the increase in the demand for online shopping. taking into consideration the fact that the company opened 15 more retail outlets and closed four that were underperforming in the year 2012, this reduction in earning and profit for the last four years implies that the assessment of main financial areas of the business is paramount in identifying areas of improvement and making recommendation to the management of JB HI FI company. The risk that the company facts if from external such as the growth in demand for online shopping, the growth in competitive force and the government policy and as a result, the economic risk is affected by the present market condition. The report will aim at analysing the operation and financial performance of the company with the sue of the key financial ratios Introduction Purpose The aim of the report to undertake comprehensive financial statement analysis of JB HI company for the financial period 2012-2016 in order to ascertain the effectiveness of the firm performance with regards to profitability, liquidity and efficient of the company as well as advising the investors on whether the company is variable for investment or not. Scope Our scope of the study will comprise of both the qualitative and non quantitative analysis. Qualitative analysis comprise of the use of ratio analysis to ascertain eh current performance as well as anticipate the future trend in business situation for the company and providing verdict with regards to viability of businesses operations. Non quantitative analysis will focus more on the ability to read and understand the financial data of the company and form the best opinion with regards to business performance of the company. Methodology Our financial statement analysis will comprise of the use of the ratio Analysis of the company extracted from the company’s annual report in order to ascertain the effectiveness of firm financial performance. The Annual report will be extracted from the company’s website. Assumptions The following are key assumption to our Analysis The effect of inflation will not affect our four years forecast The company will experience a steady growth in financial performance as is at the present The effect of competition will not affect the business performance of the company. Limitation The following are the key l imitation experienced in our financial statement Analysis; The financial statement will be for four years only hence, a true overview of the company will not guaranteed We will use only information from the annual report and no any other information from the company will be provided by the company The time frame will be limited for our Analysis and forming final conclusion with regards to company overview and future trend We will not involve other exgternal factors (Non financial) such as the worldwide economic trend and political and social factors Our Analysis will not comprise of other indepth analysis tool such as the sensitivity Analysis Company overview The company is an Australian and New Zealand retailer of c consumer goods that speclise in electronics and home appliances. The company is one of the leading fasted growing and most triumphant business of its kind (Brigham, 2016). The company’s main competitors are Harvey Norman, Myer holdings, BigW and David Jones. The company’s main office is situated in Melbourne and is registered in the Australian stock market, Economic Framework The retail industry in Australia is experiencing high pressure from many directions and expansion in this market is turning to be intricate to realise. As per the Australian Bureau of statistics, the retail industry depicts an expansion from 2012 to date with the growth in sales by almost 1.7%. Very complex trading situations driven by low consumer trust, uncertainty that sounds the government policy, the growth in the rate of unemployment and the current consumer trend of saving more and minimising the debt balances. This implies that it will be hard for to get customers to spend more in the retail stores (Ganguin, 2004). Consumer goods retailers are experiencing a market that has been negatively impacted by the growth in the number of customers considering shopping online because of the wide product assortment, competitive pricing as well as inadequacy of the GST payables on goods bought from international markets. As per the NAB online retail revenue index, comprehensive report for the period January 2017 online retail sales increased by 30% unlike the customer bricks and mortal retail which had a growth of 2.5%. With the constant growth in cost linked to the customer retailing and low expansion estimates, profitability is under high pressure and will constantly be the main focused area for enhancements. Just the best run and most effective retail business will survive the competitive market. Financial Analysis Our financial statement analysis will focus more on ascertaining the company’s capacity of turning income to profit and extent of effectiveness that the company is in making profits. Profitability ratio is important in determining the overall business success. The Ratio As well important in focusing on areas that need improvement. We will as well as certain the liquidity situation f the company in order to check if the business is actually maximising the shareholders wealth as well as ascertain the overall efficiency of the company in business operation and financial based on the above ratio analysis, we will provide an investment verdict of whether JB HI GI is a viable entity and whether investors should invest in the company or not. Ratio Analysis We will undertake key ratio analysis for JB HI IF company for the financial period 2012/16 in order to ascertain the effectiveness of the company and whether the company is a going concern or not. Activity Analysis The ratio evaluates the ability of the company to convert inventory and receivables to liquid cash to finance business operations and its debt. The following are two-activity ratio that will be used Short term Activity Ratios The ratio evaluates the company’s revenue per another asset account. The following are the activity ratio used for analysis of JBH HI FI company accounts receivable and inventory as depicted in the table below   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 total assets turnover 3.96 4 4.09 4.16 4.19 From the table above, it is evident that the company is having a high inventory turnover with a growth on the Account receivables which implies that the company is having an improved growth in sales as depicted by the growth in inventory turnover. However, the company is having a growth in account receivable, which might signal of poor debtor’s managements. Long term Activity Ratios This ratio comprise of the average collection period and total assets turnover. It is evident from the table below that there is growth in total asset turnover (Min, 2016). This would imply that the ability of the company to use its asset to generate income is improving and a decline in account payable is evident which implies that the company is having a poor creditors payment controls which in turn would implies a risk to the company’s working capital efficiency. 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 The profitability ratio will be measured by the company net profit margin, the return on asset and the return on equity as depicted in the table below. 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 From the table above, it is evident that the net profit margin for the company is growing each year. This signifies that the company is having less operation cost with a margin of safety (Ranganatham, 2006). There is a growth in net profit margin is an attribute of the improved inventory turnover and effective product promotion which in turn guarantees the company’s profitability. Return on Assets The return on asset above depicts that a decline tendency signifying that the ability of the company to use asset to generate more income to shareholders is declining trend from 2012 to 2016. This depict that the company is not profitable in using its asset to create more income and hence a sign of poor investment. Return on Equity: The return on equity for the company depicts a declining trend from 2012 to 2016. This implies that the ability of the company to use the equity to generate more income less effective hence the shareholder’s wealth maximisation is not guaranteed. Liquidity Analysis This ratio is a class of financial metrics that is employed in establishing the company’s capacity to pay its debt as and when they fall due for payment (Ranganatham, 2006). The higher the equity ratio, the high the margin of safety for the business that will cover its debt commitment. We will use the current ratio and quick ratio to ascertain the liquidity situation of the JB HI FI Company. 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 From the table above, it is evident that the current ratio for the company is more than one and growing each year. This depict that the ability of the company to meets short term debt as and when they fall due for payment is effective and thus the company is having an improved working capital (Tracy, 2012). About the quick ratio, it can be observed that the ratio is growing each year from 2012 to 2016, which is a sign that the ability of the company to use its liquid asset to pay its debt is effective. Long Term Debt and Solvency The Long-term solvency focus on examining the capacity of the company to pay its debt that falls within one year of repayment. This is the case for asset generating cash flows to payback of each debt and company debt commitment. 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 solvency ratio above depicts a decline in debt to equity ratio from the year 2012 to 2016. This implies that the ability of the company to use more of debt capital unlike equity capital is reducing each year. This is not ideal since, under Modigliani and miller orr model, debt is considered as the cheapest source of capital and thus a company must have an effective mix of debt and equity that would lead to low cost of capital and high value to the firm. It is as well evident in the table above that the company is having a declining advantage ratio (Peterson, 1999). This would means that the company is spending less of external funding like the debt capital to finance its business operations. 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 It is evident that for the last four years, the company’s Du Pont declined from 2012 to 2016 as depicted in the table above. As observed in the annual report of the company, the margin decline on the year ending 0212 due to a mix of intricate trading situations, high and aggressive level of discounting by its competitors as the fight for more market portion and growth in the shrinkage level. This was the case with other companies like Harvey Norman. Furthermore, whilst tax burden and asset turnover remained stead for the four-year period, the assets to equity declined drastically because of the growth in the retained earnings (Warren, 2006). Contrasted with the industrial average and Harvey Norman, JB depict an outstanding return on investment, which is mainly because of high profitability and efficiency of management. Furthermore, the company must as consider the venture opportunities with the use of retained earnings as the source of capital whilst the return on investment must be managed by improving the profit margin. Cash Flow Analysis The table depicts how the company (JB) has controlled its cash flows for the last four years. This provides awareness into the company’s source of income and how the company allocate the cash realised. Examining the table below, it will provide a comprehensive understanding of how the company operates and it is evident that the business is financed primarily by operating activities. Most of the company’s source of cash is realised from 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 The prospective analysis enables us to establish the future performance of the company on the basis of the past performance of the business. We will establish the mean return for the sales and EBIT with the use of mean return; we will forecast the sales and EBIT for the company. Sales and EBIT forecast in establishing the growth rate in the dales, we take into consideration the following assumptions This historic trend will keep on in the future The company is not going bring in main changes in pricing policies The basis for sales and EBIT growth is past performance of EBIT and sales and we use the ea revert model to establish the prospect ales and growth in which prospect sales and EBIT expansion with be mean return for the last four years sales increase. 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% With the use of the mean reverting model, we are in a position of funding n the growth model of sales for 7.6% and EBIT growth rate of 11.9%. With the use of this growth rate, we will be in a position of mains the sales and EBIT forecast (Peterson, 1999). This prediction will be important in ensuring that correct valuating of JB HI FI Company based on the forecasted prospect performance. 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 With the use of the growth rate, we will predict the sales and EBIT for JB HI FI Company, which is important providing a fair value of the firm (Walton, 2006). The kept justification used in the seales forecast as the basis for production, is that many of the company’s income is realized from its business. Conclusion and recommendation From the above ratio analysis, Du Pont Analysis and prospective Analysis, the overall conclusion is that the company is having a declining trend in its business performance. The company is not capable of using the asset and equity capital to create income to investors while at the same time, the ability of the company to meets its short-term debt commitment is not guaranteed as depicted by the week working capital. As a result, it is advisable that the company must ensure that it is having an effective working capital management in term so long creditor’s payment period and short debtor’s collection period while at the same time revising its source of capital and capital structure in order to ensure that the company is having an optimal capital structure. The company must hold a diversified portfolio of investment in order to guarantee constant return to shareholder and improve on the company’s liquidity, efficiency and profitability performance. 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