Financial Information for Decision Making of JB Hi-Fi Limited

Question: Discuss about the Financial Information for Decision Making of JB Hi-Fi Limited. Answer: Introduction The analysis of financial performance and position is essential from the perspectives of the investors. The investors put their money on stake by investing in the companys shares therefore they should have understanding of the companys financial performance and position (Needles, Powers, and Crosson, 2013). In order analyze the companys financial performance, it is essential to assess the business of the company on four core parameters such as profitability, liquidity, efficiency, and gearing. In this context, a report has been presented here that covers the financial analysis of JB Hi-Fi Limited over the period of three financial years commencing from 2014 and ending on 2016. Company Background The JB Hi-Fi Limited, headquartered in Chadstone (Australia), listed on Australian stock exchange, is a retailing company. The company engages in the business of retail sales of home consumer products through two geographical segments such as Australia and New Zealand (JB Hi-Fi, 2016). The company offers a range of products which includes electronic products, telecommunication, and cooking products. The company was incorporated in the year 1974 and since then it has grown manifold to hold presently 194 JB Hi-Fi stores. Presently the company employs 7,814 people, which depicts its growing size. In the year 2016, the company operated with total revenues of $3.95 billion. Further, the EBIT and Operating profit after tax of the company were observed to be $221.2 million and $152.2 million respectively (JB Hi-Fi, 2016). The changes in technology have caused structural changes in the retail industry all over the world in the recent past years. The retail sale through stores is not in fashion now after introduction of sales through online platforms. Further, the competition has got stiff not in Australia but all over the world after introduction of online sales platform. However, JB Hi-Fi is getting into business acquisition strategies to reduce the adverse impact of competition. Recently in 2016, it has acquired one of its competitor in home appliances namely Good Guys (Berry, 2016). Analysis of Financial Performance The financial performance of the company has been observed to be good in the recent years as depicted from the gradual growth in the revenues, profits, and number of stores operated. Further probe into the profitability, liquidity, efficiency, and gearing is carried out as below: Profitability In order to assess the profitability of the company, the prominent ratios namely net profit and return on equity have been analyzed. The net profit ratio shows profits propionate to sales (Tracy, 2012). In regards to JB Hi-Fi, the net profit ratio for the year 2014, 2015, and 2016 have been found to be 3.67%, 3.75%, and 3.84% respectively (Appendix). Thus, it could be observed that the net profit ratio of the company has improved over the years. The increase in net profits ratio is the result of cost cutting. Due to increased competition in the industry, the company is bound to find the cost cutting mechanisms. Further, return on equity shows profits attributable to the equity owners proportionate to the total shareholders equity (Tracy, 2012). The return on equity of JB Hi-Fi has been found to be 43.54%, 39.83%, and 37.62% for the years 2014, 2015, and 2016 (Appendix). The return on equity is showing downward trend. The primary reason for downfall in the return on equity is increase in the shareholders equity over the period. The shareholders equity has increased from $294 million in 2014 to $404 million in 2016. Harvey Norman is the biggest competitor of JB Hi-Fi. Comparing the profitability of JB Hi-Fi with Harvey Norman, it has been observed that net profits ratio of the company is lower than that of competitor. However, the return on equity of the company is better. Harvey Norman has net profit ratio of 12.34% while the return on equity is 13.40% (Morningstar, 2017). Liquidity In order assess liquidity, the primary ratios such as current ratio and quick ratio have been computed and analyzed. The current and quick ratios show companys ability to meet the short term debt obligations. Higher the ratio better will be the liquidity position on the company (Tracy, 2012). In the case of JB Hi-Fi, the current ratio has been found to be 1.64, 1.62, and 1.57 times for the financial years 2014, 2015, and 2016 respectively (Appendix). The current ratio could be observed to be showing the downward trend over the period of time. Further, the quick ratio has been found to be 0.34, 0.36, 0.35 times (Appendix). The decreasing trend in current ratio implies degradation in the liquidity position of the company. However, the current ratio of the company is still better than that of its competitor. Harvey Norman has current ratio of 1.26 times which is lower than the companys current ratio of 1.64 times. Efficiency The measurement of efficiency relates to the assessment of managements efficiency in regards to utilization of assets. The ratios such as receivables days, payable days, and assets turnover have been computed for this purpose (Tracy, 2012). The receivable days have been found to be 7, 8, and 9 days for 2014, 2015, and 2016. The receivable days are showing a little bit increase which is adverse for the company because the funds are being tied for longer time now. The payable days have been found to be 33, 32, and 36. The increase in payable days is favorable for the company because now company is getting more credit period from the suppliers. The asset turnover ratio is also showing downward trend. The ratio fell from 4.05 times in 2014 to 3.99 times in 2016 (Appendix). The decrease in the asset turnover ratio shows degradation in the managements efficiency in regards to utilization of the assets optimally. Gearing/Solvency The gearing or solvency implies the companys ability to meet the long term debt obligations on time. For this purpose, the debt equity ratio and debt to asset ratios are considered to be suitable to evaluate. The debt to equity ratio assesses the debt propionate to equity and debt to asset ratio assesses total assets financed by debt funds (Tracy, 2012). In the case of JB Hi-Fi, the debt to equity ratio has been found to be 1.92, 1.60, and 1.46 times for the financial years 2014, 2015, and 2016 respectively. It could be observed that debt to equity ratio is decreasing over the period which indicates reduction in the risk of solvency. Further, the debt to asset ratio is also observed to be decreasing. In the year 2014, it was 0.66 times and went down to 0.59 times in the year 2016 (appendix). The debt equity ratio of Harvey Norman is 0.08 times which is way lower than that of the company (Morningstar, 2017). Thus, it could be inferred that the company is bearing more solvency risk than the competitor. Conclusion From the discussion in the report, it could be articulated that the financial performance of JB Hi-Fi is moderate. The company is growing at a slow pace. The revenue and net profits are increasing but at slow pace. Further, on certain parameters the company is lagging behind its competitor. The net margin of company is lower than the competitor. Further, the debt to equity ratio of the company is higher than the competitor which depicts high solvency risk for the company. However, the fact that company has acquired one of its competitors namely Good Guys could give a reason to investors to make investment in the companys shares. The acquisition of Good Guys is predicted to have positive impact on the financial performance of the company. Thus, it is recommended to the investors to make investment in the companys shares from the short term perspective. References Berry, P. 2016. JB Hi-Fi takes market lead with Good Guys. [Online]. Available at: https://www.news.com.au/finance/business/breaking-news/jb-hifi-acquires-the-good-guys/news-story/a181998df6d2f1f797fa2f8d28ab3f6d [Accessed on: 17 May 2017]. JB Hi-Fi. 2016. Annual report of JB Hi-Fi Limited for 2016. [Online]. Available at: https://www.jbhifi.com.au/Documents/2016%20JB%20Hi-Fi%20Annual%20Report_ASX.pdf [Accessed on: 17 May 2017]. Morningstar. 2017. Harvey Norman Holdings Ltd. [Online]. Available at: https://financials.morningstar.com/ratios/r.html?t=HVN [Accessed on: 17 May 2017]. Needles, B.E., Powers, M., and Crosson, S.V. 2013. Financial and Managerial Accounting. Cengage Learning. PWC. 2017. 2017 Retail trends. [Online]. Available at: https://www.strategyand.pwc.com/trend/2017-retail-trends [Accessed on: 17 May 2017]. Tracy, A. 2012. Ratio Analysis Fundamentals: How 17 Financial Ratios Can Allow You to Analyse Any Business on the Planet. RatioAnalysis.net.