Financial Statement Analysis - JB Hi-Fi Company Ltd - Research Proposal Example

Name of the Institution: Financial Statement analysis JB Hi-Fi Company Ltd Name: Unit Name & Code: Lecturer Name: Paper Due Date: LETTER OF TRANSMITTAL May 8, 2016 Name, Undergraduate Student Department of Business Studies University of…….. Subject: Letter of Transmittal Dear Sir/Madam, With the due respect, as an undergraduate student in the school of business studies, I wish to submit “Financial Statement Analysis of JB Hi-Fi Company” under the course Financial Accounting II. Based on the fact that I am on a learning curve, the analysis of a company’s financial statement has improved my understanding of a company’s financial reports. Many thanks for having given us this assignment because without it I would have not learnt much like I have done. Finally, I would appreciate my advice where I might have misinterpreted some information. Yours Sincerely, Name Admission no EXECUTIVE SUMMARY Based on the analysis of the JBH’s performance for the last half a decade, the company seems to be doing fine and management should only strategize on how to counter challenges that crop up as a result of competition from the online traders. Investors on the others should continue investing in this company since it has shown prospect of remaining competitive and even do much more than its competitors. Table of Contents Table of Contents 4 1.0 INTRODUCTION 5 1.1 Purpose 5 1.2 Scope 5 1.3 Methodology 6 1.4 Assumptions 6 1.5 Limitation 7 2.0 COMPANY OVERVIEW 8 3.0 ECONOMIC FRAMEWORK 9 4.0 FINANCIAL ANALYSIS 10 4.1 Ratio Analysis 10 4.1.1 Activity Analysis 10 4.1.1.1 Short term Activities Ratios 10 4.1.1.2 Long term Activities Ratios 11 4.1.2 Profitability Ratios 11 4.1.3 Liquidity Ratios 12 4.1.4 Long term Debt & Solvency 12 4.1.5 Du Pont Analysis 13 5.0 CASH FLOW ANALYSIS 14 6.0 PROSPECTVE ANALYSIS 15 6.1 Sales and EBIT Forecast 16 7.0 CONCLUSION AND RECOMMENDATIONS 16 1.0 INTRODUCTION 1.1 Purpose For the shareholders of JB Hi-Fi Company to make proper economic decisions pertaining to the future of the company, it is important for them to have clear understanding of the company’s performance. Therefore, there is often a need to review and analyze a company’s financial statements such as income statements, Statement of cash flows and statement of financial position among others so as to make them understandable to the company’s shareholders and other stakeholders at large. One of the best ways to do the analysis is to make comparison of the company’s performance with another company’s performance that operates in the same industry. For instance, the performance of JB Hi- Fi Ltd which operates in the Retailing industry will have to be analyzed while comparing its performance with Harvey Normal Holdings Ltd who operates within the same industry. 1.2 Scope Basically the analysis of JB Hi-Fi Ltd’s financial statement is expected to cover a period of five years, that is, from the FY2011 to the FY2015. Likewise, the performance of the company in FY2014 to FY2015 will have to be compared to that of its competitor, Harvey Norman Holdings Ltd so as to engage its strength and weaknesses. The main reason behind this, is to determine whether the growth that has reported for the last five years is within the threshold as reported by its competitors or less than expectations. This will therefore influence the decisions that the company’s stakeholders may consider to be appropriate 1.3 Methodology In analyzing the performance of JB Hi-Fi Ltd, it will be in order to make use of its financial statement as reported during the year ended 2015. This analysis will involve computation of the financial ratios, profitability ratios, liquidity ratios as well as Du Pont analysis and Cash flow analysis among other parameters. The performance of JB Hi-Fi Ltd will thus be compared to that of Harvey Norman Holdings Ltd so as to determine if the potential growth witnessed in the last half decade is worthwhile. 1.4 Assumptions Despite the stiff completion in the retailing industry, the management of JB Hi-Fi Ltd often believes that the business will continue to grow regardless of newer entrants in the industry. As will later be found in the ratios computation, if the Profit margin turns out to be on an upward trend for the last five years, it will be assumed that the next financial year (2016), will increase as well. Therefore, shareholders will as well be of the opinion that the business is increasing becoming profitable day by day and thus continue ploughing the money in the business (Abratt & Russell 117-119) On the other hand, if the profit margin trend for the last five years is on a downward trend, it will be assumed that the business will still report less profit and therefore it will discourage investors from investing. 1.5 Limitation Although the analysis of JB Hi-Fi Ltd financial statements is essential in giving relevant information that is often considered to be of great significance while making a number of decisions as well as formulating corporate plans and polices, it should always be noted that there are also a number of limitations associated with these analysis (Lin 55). Among them includes:- The JB Hi-Fi Ltd cannot rely on this information to make their plan; Based on the fact that financial statements are prepared using historical data, the information derived from such statements in some cases may be insufficient in major corporate planning given the fact that the previous situation may not be prevailing. Comparison of JB Hi-Fi Ltd’s (JBH) performance and Harvey Norman Holdings Ltd’s (HVN) performance may prove to be impossible; Given that the financial statement are based on historical data, comparative analysis of financial statements of different years tend to be difficult since inflation normally distort the view reported by the financial statements across the five year period. The qualitative aspect is ignored; in analyzing the financial statements of JB Hi-Fi Ltd, only the quantitative information regarding JBH’s financial affairs will be revealed. However, the qualitative information like the customers’ satisfaction, skills of the management and management related labor information are never taken into account despite being equally important 2.0 COMPANY OVERVIEW JB Hi-Fi Company is a retail consumer company that deals with electronics and supply of video games, Blu-rays, CDs and DVDs. It operates a number of chain stores with its headquarter in Melbourne, Australia. In reference to the company’s financial statements, it can be seen that the company has continued to increase its profit growth by 6.4% per cent in the last five years (JB Hi-Fi, 2015). Throughout the same period, the company has been increasing the prices of its products by double each fiscal year which explains the reason why it has experienced such immense profits and success (JB Hi-Fi, 2015). Likewise, 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, 2015). 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, 2015). Based on the increased profits during the half decade, the dividends payable to the shareholders have also grown by 7.1%. In order to maintain this trend, strategies have to be put in place to ensure company’s business operations are increased intensively. 3.0 ECONOMIC FRAMEWORK According Cucchiella & Federica (899), Retailing in Australia experienced positive growth in 2015 compared to the previous years as a result of the wealth effect. There was strong housing market which was supported by the low interest rate as well as household credit growth which enabled the consumers to spend since the perceived value of their assets increased intensively. Companies specialized in home and garden retail items as well as electronics and appliances specialists both benefited from the high number of new homeowners who were desiring to decorate and furnish their homes with the latest equipment. On the other hand, those retailers trading online were not left behind as well. They benefited from the prevailing low exchange rate. Since there was decline in the value of Australian dollar against the US dollar, prices in foreign online stores were on the upward trend thus benefiting the online traders (Cucchiella & Federica 899). As a result Australian consumers returned to their local online retainers therefore making their prices competitive. This as well prompted the online traders to introduce additional services such as reduced delivery fees hence winning them back. According to the economists, retailing in Australia is expected to realize positive value growth over the forecast period, though the country’s economic outlook may not increase as such. The low prices of commodities as well as slower growth of local population will have negative impact on the retailing thus adversely affecting the economy. As a result, only modest growth is expected of retailing in Australia over the forecasted duration 4.0 FINANCIAL ANALYSIS This entails determining the stability, viability and profitability of JBH Ltd business operations. This information is often presented in a report using ratios obtained from a company’s financial statements. The analysis help to determine whether the company has the ability to continue operations. 4.1 Ratio Analysis It involves analyzing a company’s financial statement so as to determine its financial performance in a number of key areas (Cucchiella & Federica 899). In order to establish this, it is advisable to analyzed the company’s activities 4.1.1 Activity Analysis To have a proper understanding of JBH Ltd’s performance it is encourage to assess the extent to which its activities may influence meeting of short term as well as long term financial obligations. Among the ratios that describe the JBH Ltd’s activities includes:- 4.1.1.1 Short term Activities Ratios (Excel attachment) Illustration Inventory Turnover Although the two companies are able to control their merchandise, for instance in 2014, JBH was able to control its merchandise by selling off its inventory 5.91 times as compared to HVN’s 3.57 times. Likewise, in 2015 JBH sold off its inventory 5.68 times as compared to HVN’s 3.78 time. Therefore, it proves JBH manages its merchandise quite efficiently as compared to HVN 4.1.1.2 Long term Activities Ratios (Excel Attachment) Total Assets Turnover The two companies are efficiently using their assets to generate revenue, however in FY2014 to FY2015, JBH’s usage of its assets to generate revenue reduced from 3.92 to 3.82 as compared to HVN’s which increased from 0.35 to 0.37, therefore management of JBH should try to increase their management of assets so as to ensure they act towards generating revenue. 4.1.2 Profitability Ratios These are ratios that shows a company’s ability to generate profit based on its operations. (Excel Attachment) Gross Profits Margin Based on the computations, the companies sold their inventories at a profit every financial year. However HVN seems to be selling its inventory at a higher profit than JBH, that is, in 2014 it sold its inventory at 29.66% as compared to JBH’s 21%. The same increased in 2015 to 30.30% whereas JBH’s profitability increased to 22% Therefore, management of JBH should strive to increase profitability from their operations so as to win the confidence of investors. 4.1.3 Liquidity Ratios This indicated the ability of a company to settle its short term dent as well as long term debt when they become due (Excel Attachment) Current Ratios Both JBH and HVN have the abilities to meet their short term obligations when they become due without necessary having to sell off some of their long term assets. In the two companies, HVN had the highest ability to meet its short term obligations at 1.23 as compared to JBH’s 1.22. However in the subsequent year of 2015, the ability of JBH increased significantly to 1.45 times as compared to HVN’s 1.31, this shows that JBH’s management are increasingly having properly management of their debt than their competitors hence creditors should continue supplies them with merchandise. 4.1.4 Long term Debt & Solvency This shows the company’s ability to pay off its long term debts when they fall due (Uechi 493). (Excel Attachment) Debt to Equity Ratio This indicates the amount of company’s financing that is contributed by creditors. A higher ratio therefore confirms that a company is unstable since it relies mostly on creditors to sustain its operations (Uechi 493). Both JBH and HVN can sustain their operations without necessarily having to depend on creditors. In reference to the analysis carried out, JBH reliance on investors to finance its operations has been on an upward trend for the last five years. In FY2011, investors were able to finance its operations 100%, this increased to 195% in the FY2012 and 250% in the FY2013 and later on 345% and 409% in the financial year FY2014 and FY2015 respectively. Likewise, in HVN the level of investors financing increased from 930% in FY2014 to 1183% in FY2015 implying that the company relies mostly on investors to finance its operations. In comparison of the two companies, HVN tend to be stable than JBH since level of investor financing stood at 930% in FY2014 as compared to JBH’s 345% in the same year this increased to 1183% as compared to JBH’s 409%. 4.1.5 Du Pont Analysis This is a financial ratio that is based on the return on equity thus it is used to analyze a firm’s ability to increase its returns on equity (Colmenar 757). This analysis looks at three main aspects of the Return On Equity (ROE) ratio which includes:- Profit Margin Total Asset Turnover Financial leverage In relation to the performance measures stated above, a firm can increase its ROE by ensuring that it maintains a high profit margin, increasing asset turnover or leveraging assets appropriately (Excel Attachment) Based on the analysis of the two companies, JBH had difficulty in selling its retain products across five year period, however they were able to reduce the cost of goods from 4.11 in FY2011 to 3.82 in the FY2015 while their rate of assets turnover also increased across the five year period, thus realizing increased Return On Equity from 40% in FY2011 to 72% in the FY2015 The management of HVN on the other hand also experienced difficulty in making sales although the sales output increased from 14% in FY2014 to 16.6% in the FY2015. However, they were efficient in managing their cost of sales despite having difficulty in turning over their assets thus achieving a Return On Equity of 16% in 2014 which eventually increased to 29% in the subsequent year of FY2015. 5.0 CASH FLOW ANALYSIS It shows all the cash that flows into and out of the business enterprise (Malinova, Katya, and Andreas 511-517). The cash flow statement is normally divided into three sections, that is, the cash flow from operations, financing and investing. In the first two sections of operations and financing, it basically shows how the firm generates its cash whereas the investing sections describes how the company spends its cash Cash Flow from the Operating Activities:- This section tends to state the amount of cash that comes from the firm’s sale of goods and services less the cost of goods incurred to realize such sales. Inventors would therefore prefer firm’s that a net positive cash flow from its operating activities. In reference to our financial analysis, both JBH and HVN had positive cash flow from their operating activities thus considered attractive to investors, though JBH had a low cash flow of $41,330 in FY2014 as compared to HVN $339,000, this increased in FY2015 to $340,000 as compared to JBH’s $179,000. Cash Flow from the Investing Activities:- This basically stipulates the amount of cash that the firm has incurred in capital expenditure such as acquisition of new equipment or any other asset that enables the business to continue its operations Cash Flow from the Financing Activities This describes the movement of cash payments associated with financing activities of the business such as sale of stock as well as bonds or through bank borrowing. 6.0 PROSPECTVE ANALYSIS This is a method of analysis that tries to unearth the risks associated with a given business operations or project. The ideal purpose of this concept is to identify hazards that render business operations incapable of fulfilling its sole purpose while stating the probability that this may happen. This risk is often stated as the combination of the probability of its occurrence and the severity of its outcome (Delen and Dursun 3975-3978) For instance, in JBH’s business operations, there is likelihood that sales output will always be lower at the beginning of the year with subsequent increase as the year progresses on. This tend to be the scenario in the retailing industry since consumer’s propensity to consume is often low to due to other commitments such as education among other things. At the same time, instability in global consumer market normally affect the exchange rate which eventually increasing the prices of retail products thus reducing their demand. 6.1 Sales and EBIT Forecast (Excel Attachment) 7.0 CONCLUSION AND RECOMMENDATIONS According to Australian’s economic analysts, the global retailing market is experiencing rapid changes due advanced technology that has seen online traders gaining entry into the market. Retailers are such as JBH will be expected to keep abreast of these new developments while making their operations suitably well prepared for such eventualities. Whereas, some retailers are lobbying the Australian government in a move to amend the legislation so that such disparities are minimized, the success of this is uncertain and therefore firms in retailing industry should instead have a pro-active approach as well as adequate attempt to allay some of these challenges through organizational restructuring, streamlining of these processes and sufficient cost management mechanisms. As result, retailers face a complex situation for the future of their business operations, therefore, retailers must strive to maximize their efficiency while moving towards the implementation of the new technologies. Reference List Roy, Len, et al. "JB HI FI LIMITED." (2015). Abratt, Russell, Nicola Higgs, and Deon Nel. "Ethical Perceptions of Retail Managers in Australia, Singapore, South Africa and Zimbabwe." Proceedings of the 1993 World Marketing Congress. Springer International Publishing, (2015):115-122 Lin, R. 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