Financial Analysis of JB Hi-Fi - Essay Example

Topic: Financial Analysis Report of JB Hi-Fi Table of Contents Executive Summary 3 Introduction 3 Sales Related Ratios 4 Operating Profit Margin 4 Net Profit Margin 5 Networking Capital Ratio 5 Debtors Turnover Ratio 5 Current Assets / Sales 6 Net Fixed Assets / Sales 6 Cost of Goods Sold / Sales 6 The Spread sheet Model: 6 References 7 Appendix 8 Table 1: Sales Related Ratios 8 Table 2: Formulas for the Forecasted Financial Statements 9 Table 3: Financial Model 10 Executive Summary Information in the financial statement is useful to various groups of stakeholders and therefore precise and accurate analysis of this information is important as the information influences the decision making process in an organization. The chairman reported that the company expects to open 16 stores in the year 2013 and thus an expected increase in sales and revenues in the future. So as to ensure that the balance sheet is balanced we use the plug. Plug is a balance sheet item that is used to balance the balance sheet items. Plug targets the flexible accounts which are easily adjustable like the cash and the short term debts. Pro forma financial statements are also called the projected financial statements. They are used for propose of measuring the performance of the firm and also to measure hoe stable is a firm financially. They are also used for future planning, determining whether a firm is able to borrow loans and service them, and also evaluating the performance of the firm under different models. Most models are based on sales volume This paper will seek to analyze the financial statement of JB Hi-Fi by use of historical data to predict the future.I will therefore forecast the years 2013, 2014 and 2015 using the year 2012 as my base year. Ratio analysis of relevant sales ratios will be used for the analysis. Introduction Financial statement analysis is the use balance sheet and income statement data to come up with values for financial interpretation and identification of the strengths and weaknesses of an organization (Stickney et al., 2006). Various techniques of financial statement analysis are: trend analysis, comparative statements, common size percentages, ratio and fund analysis as well as changes in working capital changes (Libby et al., 2004). For the purpose of analyzing JB Hi-Fi, relevant sales ratio analysis will be undertaken. For a successful financial analysis, comparison has to be made using consistent percentages through the years of analysis. The use of the sales ratios to analyze the years will reveal their similarities, trends, as well as differences in the company (Palepu & Healy, 2007). As Gregory (2008) notes, the stakeholders of the information contained in a financial statement include, potential investors, creditors, managers, shareholders, the government and creditors and they require the information for different reasons. Use of historical data is a major limitation of ratio analysis as it is therefore assumed that it reflects on the future trends whereas no one could be certain of the future (Palepu & Healy, 2007). Resvine et al (2004) explains that another limitation of using financial statements in analysis is that GAAP allows management to hide or omit important information in the financial statements and decision makers should be aware of this to incorporate other methods in aid of decision making. Sales Related Ratios Operating Profit Margin The prediction of the three years shows that the operation margin will improve over the three years forecast from 12.7% to 26.6% (table 1.1). This improvement is attributable to the expected increase in the number of stores by 16 in the year 2013 thus an expected increase in the revenues is expected. Net Profit Margin It is a measure of the net profit and it should be neither low nor high (Stickney et al., 2007). A projected decline is evidenced by the decline from 70.3 % to 50.4% and to 46.2% an indication on increased costs over the forecast period.As reported in its financial statements, JB faced increased costs of doing business such as an increase in the wages cost by a 10% in the in the fair work awards in the previous three years and thus the same is expected in the future. Networking Capital Ratio This is maintained at a positive figure from the past and the same is expected in the future as the projections indicate that the ratio will be0.04 in 2013 and 2014 and 0.05 in 2015.Though maintained positively, this shows a low level of networking capital compared to the sales generated. Debtors Turnover Ratio White et al. (2002) explains this ratio as one which shows how long it takes for debtors to be converted in to cash and that a high ratio indicates that shorter periods are taken. From table 1.1 the company has a prediction of 6days maintained in the three forecasted years and thus the company will perform poorly in debts collection and this is likely to lead to a financial strain for the company. Current Assets / Sales This shows how many current assets are held per unit sale. From the forecasts, the amounts of the assets are maintained throughout the period as it is in the past at lower levels an indicator that sales generation is not dependent on the current assets held as less assets are held which are for sales generation. The ratio is maintained at 0.15 throughout he three years. Net Fixed Assets / Sales This indicates the fixed assets per unit sale. JB projects an increase in fixed assets held per unit sale for 2013, 2014 and 2015 from 0.11, 0.16 to 0.23.This is explained by the expected stores increment which will in return increase the net fixed assets held by the company. Cost of Goods Sold / Sales This shows the expenses incurred in generating a unit sale. JB shows a prediction of a decrease in the forecasted years from 0.72 in 2013 to 0.66 and 0.61 in 2014 and 2015 respectively. This is because even as the sales are projected to increase, the company ha s a strong cost base to control price inflation and mitigate against competitor discounting thus maintaining their costs at a lower level The Spread sheet Model: To complete the model, we assume that: • Interest expense is 10% on outstanding debt • Interest income is 8% on the cash and marketable securities • Depreciation expense is 10% on fixed assets at cost • Dividend payout rate is 40 percent of after-tax earnings • Corporate tax rate is 40 percent Sales growth The 20% growth rate is obtained from the change in the rate of sales of good from the year 2013 to the year 2015. This is considered basing on the trends and conditions of the market as well as regional, local and national economy. This is also based on the growth sustainability context. The 20% is therefore attained as a result of increased asset level. References http://www.aspectfinancial.com.au.ezproxy.lib.uts.edu.au/af/company/mainview?ASXCo de=JBHS., Revsine, L., Collins, D.W., & Johnson,W.B. (2004). Financial reporting and analysis, 3rd edition. Upper Saddle River, NJ: Prentice Hall. Stickney, C.P., & Weil,R.L.(2006).Financial accounting: An introduction to concepts, methods, and uses. 11th edition.South-Western: Thomson. Libby, R., Libby,P.A & Short, D.G.(2004).Financial accounting. 4th edition. Irwin:McGraw- Hill. Palepu, K.G., & Healy, P.M.(2007).Business analysis & valuation using financial statements. 4th edition.South-Western:Thomson Appendix Table 1: Sales Related Ratios     2013 2014 2005 Operating Profit margin PBIT __ X 100% 5,067,440 * 100 6,137,137 *100 7,426,508 *100 Turnover 3,753,350 4,504,020 5,404,825   = 12.7% = 20.0% = 26.6% Net Profit margin Net Profit X 100% 2,641,665x100  2,271,088x100  2,498,166x100 Turnover 3,753,350 4,504,020 5,404,825   = 70.3% = 50.4% = 46.2% Net working capital C A- C L Turnover 796,337 -300,268 3,753,350 915,787 -360,322 4,504,020 1,053,155-432,386 5,404,825 to turnover Ratio = 0.04 = 0.04 = 0.05 Debtor Turnover End Year Trade Receivables X365 Turnover  88,647x365 3,753,350  101,944x365 4,504,020 117,236x365 5,404,825   = 6.5 days = 6 days = 6 days  Current Assets to Sales Ratio Current Assets 796,337 3,753,350  915,787 4,504,020  1,053,155 5,404,825 Turnover   = 0.16 =0.15 = 0.15 Net Fixed Assets to Sales Ratio Net Fixed Assets 1,972,767 3,753,350  2,367,320 4,504,020  2,840,784 5,404,825 Turnover   = 0.11 = 0.16 = 0.23 Cogs Sales Ratio Cost of Goods sold Turnover 1,876,675 3,753,350  2,252,010 4,504,020  2,702,412 5,404,825 = 0.72 = 0.66 = 0.61   Share price Total share value Total no. of share 25141665 4699377 = 5.35 2271087.50 289310 = 7.85 24987165 5838123 = 4.282 (Stickney et al., 2004) Table 2: Formulas for the Forecasted Financial Statements FORMULAS FOR PRO-FORMA FINANCIAL STATEMENTS Formula for Subsequent Periods Assumptions SALES = SALES(-1)*1.20 Constant Sales growth rate COGS = 0.50*SALES Sales Driven INT_DEBT = .10*(DEBT(-1) Given percentage INT_CASH = .08*(CASH(-1)) Given percentage DEPN = .10*(FA_COST) Given percentage PBT = SALES-COGS - INT_DEBT + INT_CASH - DEPN Identity TAXES = .40*PBT Given percentage PROFIT = PBT – TAXES Identity DIVIDENDS = .40*PROFIT Given percentage RET_EARNINGS = PROFIT – DIVIDENDS Identity CASH = CL+DEBT(-1)+EQUITY- OCA + NFA if positive = 0, otherwise The "Plug" OCA = .20*SALES Sales Driven FA_COST = NFA + ACC_DEPN Identity NFA = .80*SALES Sales Driven ASSETS = CASH + OCA + NFA Identity CL = .08*SALES Sales Driven; DEBT = DEBT(-1) if CASH ≥ 0 = OCA + NFA - CL – EQUITY otherwise Debt increases if needed to prevent CASH Read More