JB Hi-Fi Ltd Financial Analysis
Company Information Jbhifi
The above analysis has explored that increase in sales is an indication of strong foundations. According to the financial statement of the company, JB Hi-fi Limited, it can be concluded that the revenue and the net profit after tax is gradually increased. This shows that there has been an increase in the efficiency and profitability position. Again, the working capital position of the company also shows that the company can meet its current liability obligations. This also indicates that the firm will make the debt payment on time. The asset position of the company demonstrated that it has enough liquid cash to meet short-term liability obligations. In addition, the total dividend that would be paid by the corporation also holds positive. The earnings per share are also increased over the period. The board has decided to pay a significant proportion of the profit in the form of dividend and hold on the rest to maybe because the board might want to invest in a new project of the company. It means the shareholders of the company is getting the return from the investment on a regular interval as well as the wealth is enhancing each year.
* Evaluate the performance of a company through a critical analysis of its published financial statements over the last 2 years as follows:
* Locate, extract and analyze data from the published financial statements to provide a comprehensive analysis of a company’s operations and performance;
* Structure an argument based on the analysis of five aspects of performance evaluation:
* Short term solvency
* Long term solvency
* Market-based ratios
* Present a clear, well-structured report using appropriate style and language.
The Retail Industry in Australia is under pressure from many angles and growth in this sector is becoming increasingly difficult to achieve. According to The Australian Bureau of Statistics, the retail sector overall has grown only modestly over the 2011-12 period with sales increasing by just 1.5% to $21600 million. Extremely difficult trading conditions driven mainly by low consumer confidence, uncertainty surrounding government policies, rising unemployment rates and the latest consumer trends were saving money and reducing debt is growing in popularity means it is becoming increasingly difficult to get consumers to spend their hard earned money in retail stores. On top of that, consumer goods retailers are facing a market which has been negatively affected by a rise in the number of consumers choosing to shop online due to the vast product range, competitive pricing and lack of GST payable on goods purchased from overseas retailers.
According to the NAB On-Line Retail Sales Index- In-depth report January 2012- January 2012, online retail sales during the period grew 29% compared with just 2.5% for traditional bricks and mortar retail.
With the continuing rising costs associated with traditional retailing and low growth figures forecast in the future, profitability is under immense pressure and will continue to be a key focus area for improvement. Only the best run and most efficient retail organizations will survive and thrive through what will continue to be extremely challenging times ahead and the time to plan and take action is now.
Table of contents
2. Evaluation and comparison of profitability
3. Efficiency: evaluation and comparison
4. Short term solvency analysis and comparison
5. Long term solvency analysis
6. Market-based ratios
JBHifi has experienced strong revenue growth of 8.40% to $2.96b in 2011 and a further 5.70% increase to $3.13b in 2012. During a period of very low growth in the retail sector and a very challenging marketplace, the revenue growth achieved is a good result and quite commendable. Based on the revenue figure alone, you could be lead to believe that the company is in a good position and has done a great job in achieving growth during tough retail trading times and much economic uncertainty. As we look deeper into the underlying company financial results, the position is not as strong as expected, the revenue growth looks unsustainable and we are starting to see some concerning trends that need to be addressed to ensure the overall financial position of the company and share price remain positive.
Although revenue has increased over the last 2 years, EBIT has been in decline since its peak in 2010 when the company recorded an impressive result of $175.1m, then dropping by 7.7% to $162.6m in 2011 and a further decline of 0.70% to $161.5m in 2012. Net profit after tax has followed a similar trend after also peaking in 2010 at $118.7m, declining by 7.60% in 2011 to $109.7m and then dropping a further 5% to $104.6m in 2012. Considering the fact that the company opened 15 new stores and closed 4 underperforming stores in 2012, this decline in earnings and profit over the last 2 years means an analysis of key financial areas of the business is required to identify areas for improvement and make recommendations to the management team. This report aims to analyze the company operations and performance by using the calculation of commonly used financial ratios.
2. Evaluation and comparison of profitability
What we are analyzing here is the Jbhifi ability to turn revenue into profit and how efficient the business is in making a profit out of its sales. Profitability ratios are used to determine the overall success of a company and compare the profit with the primary activities of the business. These ratios can also be used to help focus on areas of the business where improvements are required to help improve overall profitability. The most commonly used ratios are Net Profit Margin, Return on Assets and Return on Equity.
Net Profit Margin:
2010: 4.34% 2011: 3.71% 2012: 3.34% Industry average: 2.45%
The net profit margin ratio shows the proportion of sales after expenses have been accounted for leaving you with the net profit result. Although it can be challenging to accurately compare profit ratios for different retail businesses as finances, expenditure and many other variables are quite different, it is worth comparing how JB Hi-Fi performs against the retail sector overall as far as profitability goes. The average net profit margin is 2.45% for the retail industry, whereas JB Hi-Fi achieved 3.34% in 2012, well above the industry average. This could indicate that JB Hi-Fi carries a higher margin of safety and less risk in their ordinary operations compared with the average net profit of the retail sector, as a decline in profits will have a lower impact on the business. Delivering a higher net profit margin than the retail average over the last 3 years shows that JB Hi-Fi has achieved a strong result within the sector, but the decline in net profit over this period is a concern that needs to be addressed by management.
Return on Assets:
2011: 14.29% 2012: 12.90% Industry average: 7.77%
The return on assets ratio shows how profitable a company’s assets are in generating revenue and is also an indication of whether the company is a good investment. (Potter, Libby, Libby & Short 2009).
Again when compared with the industry average, JB Hi-Fi has outperformed the industry and its assets are very successful in generating revenue. This strong result shows that the management team is successful in their utilization of assets to their full potential and gives JB Hi-Fi a distinct advantage over its competitors within the retail industry. The return on assets ratio is a good indication of the management team’s efficiency at using the company’s assets to generate earnings. The higher the result achieved the better as the company is earning more profit on a lower investment. Although the current result is high, the concern is the decline of 9.70% from 2011 to 2012.
Return on Equity:
2011: 72.01% 2012: 56.71% Industry average: 16.80%
The return on equity ratio indicates the amount of net income generated as a percentage of shareholders equity and measures the company’s profitability by uncovering how much profit a company generates with the funding invested by shareholders. The industry average for return on equity ratio is 16.80% and when comparing this with the JB Hi-Fi result, the company’s figure is very high. But again the concern here for management is the steep decline of 21.25% but it could be argued whether the 2011 result was sustainable anyway.
3. Efficiency: Evaluation and Analysis
Activity ratios help to determine the company’s ability to convert different sectors of the balance sheet into cash or sales (Potter, Libby, Libby & Short 2009). The most commonly used ratios to measure efficiency are Inventory Turnover, Inventory Turnover Days and Average Days Sales Uncollected.
2010: 6.48 2011: 6.22 2012:5.90
This measures the number of times your inventory cycles or turns over in 1 year and is one of the most commonly used Supply Chain Metrics. Although this is a solid result for the company as many retailers operate on 6-8 turns, the concern is the continual decline over the last 3 year period which has impacted the turnover days negatively.
Inventory Turnover in Days:
2010: 56.3 2011: 58.68 2012: 61.68 Industry Average: 50
Inventory turnover in days measures the average time it takes for the company to produce and deliver inventory to customers (Potter, Libby, Libby & Short 2009). The inventory turnover in days for JB Hi-Fi is now well over the industry average of 50 days after increasing by 4.2% in 2011 and a further 5.1% in 2012. This indicates that the number of days to sell inventory from the retail stores is increasing which suggests that the company’s capital is under constraint by being tied up in inventories. The other main concern here is due to the direct delivery to store business model that JB HI-Fi operates under having no main warehouse means that stores are holding more inventory than in previous years which is confirmed by the increase in inventory on the balance sheet for 2012.
Average Days Sales Uncollected:
2010: 8.27 2011: 7.51 2012: 6.81
Average day’s sales uncollected shows the time is taken to collect debtors accounts. This result is strong for the company and has improved over the last 3 years. In a retail business where the majority of in-store transactions are paid for by either cash or credit card, this result should be a low number of days and is a positive for the company as it will have substantially fewer account receivables on the books and less risk of bad debts.
4. Short Term Solvency Analysis and Comparison
Liquidity ratios are a class of financial metrics that are used to determine a company’s ability to pay off its short term debts due in the next 12 months. Generally the higher the value of the ratio, the higher the margin of safety the company has to cover short term debts and obligations. Ratios that are commonly used to determine short term solvency are Current ration and the Quick Ratio.
Current Ratio of Jb hifi
2010: 1.25 2011: 1.45 2012: 1.22 Industry Average: 2.67
This ratio measures whether or not a company has enough resources to pay its debt’s over the next 12 months, comparing its current assets with its current liabilities. The industry average of 2.67 indicates that for every dollar that the company owes, it will have $2.67 available in current assets that can be easily converted into cash in the short term if necessary. Take note of the fact that the current JB Hi-Fi result for 2012 is less than half of the industry average and has declined by 16% since 2011. The good news is that the 1.22 figure is still above the 1 mark meaning that the company can still meet their current obligations but the result is getting perilously close to the 1 mark.
2010: 0.33 2011: 0.27 2012: 0.24 Industry Average: 1.92
This ratio measures a company’s ability to use its most liquid assets to pay out its current liabilities immediately. Inventory is generally excluded from this calculation to provide a more accurate account of the company’s ability to meet its short term obligations. Because inventory may not be turned into cash as quickly as other current assets, the quick ratio follows a more conservative approach than the current ratio and does exclude all inventories from current assets. The figures for JB HiFi on the quick ratio are surprisingly low compared with the industry average and has declined by 18% in 2011 and a further 11% in 2012.
5. Long Term Solvency Analysis
Long term solvency is analyzing the ability to pay off debts due longer than in 12 months time. This is a case of the assets generating cash flow (through normal operations or sale) to pay back all of the debt and obligations of the company.
Debt to Equity Ratio for Jb Hifi
2011: 4.04 Times 2012: 3.4 Times Industry Average: 2.16 Times
The debt to equity ratio shows the relationship between debt financing and equity financing. This ratio tells us how much of the business funding comes from shareholder funds/equity invested vs debt. The bad news about the JB Hi-Fi result for both 2011 and 2012 is that it is above the industry average but on the positive side, it has come down by just under 16% in 2012.
Debt to Total Assets:
2010: 0.59 2011: 0.8 2012: 0.77
This ratio shows the proportion of total assets financed by debt. This figure for JB Hi-Fi is quite high and has increased significantly since 2010. This indicates that a large number of assets purchased since 2010 have been through incurring more debt while earnings and profits have been in decline.
2010: 2.44 2011: 5.04 2012: 4.4
The leverage ratio shows the use of leverage and the amount of external funding. The higher the result, the greater is the use of debt by the company. Of concern for JB Hi-Fi is the fact that this figure more than doubled in 2011 but has since dropped by almost 13%.
6. Market-Based Ratios:
Dividends identify the percentage of earnings per common share allocated to paying cash dividends to shareholders. The dividend ratios help to measure the relationship from the dividends per share paid and the current market price of the shares. Commonly used ratios are the Price/Earnings (P/E) ratio and the Dividend Yield.
2010: 17.18 2011:16.77 2012: 8.37 Industry Average: 12.16
The Price/Earnings ratio looks at the relationship between the share price and the company’s earnings. Basically, it is the amount the market will pay for $1 of profit. It is no surprise to see that in 2012 this figure dropped significantly to half of the 2011 result, in line with a decline in the company’s profit and share price. It is now sitting well below the industry average which could indicate that investors are not expecting high earnings growth in the future.
Dividend Yield Ratio:
2010: 3.5% 2011: 4.51% 2012: 7.34% Industry Average: 4.75%
The dividend yield ratio is calculated by dividing the dividend per ordinary share by the current share price. This tells an investor the yield that can be expected by purchasing shares in the company. Although the increase in the results above looks positive, it’s important to note that the JB Hi-Fi share price dropped sharply from a price of $17.07 on June 30, 2011, to $8.86 on 30 June 2012.
JB Hi-Fi Annual Report 2012.
JB Hi-Fi Annual Report 2011
Potter, B.N., Libby, R., Libby, P.A., Short, D.G. (2009), Accounting In Context, McGraw-Hill Australia Pty Ltd
jb hi fi
Why JB Hi-Fi Limited (ASX: JBH) Is A Financially Healthy Company
Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as JB Hi-Fi Limited (ASX: JBH), with a market capitalization of AU$2.97B, rarely draw their attention from the investing community. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. Let’s take a look at JBH’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into JBH here.
How does Jb Hifi operating cash flow stack up against its debt?
Jb hifi debt levels surged from AU$109.70M to AU$559.40M over the last 12 months – this includes both the current and long-term debt. With this increase in debt, JBH currently has AU$72.80M remaining in cash and short-term investments for investing in the business. Moreover, JBH has generated AU$190.60M in operating cash flow during the same period of time, leading to operating cash to total debt ratio of 34.07%, indicating that JBH’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In JBH’s case, it is able to generate 0.34x cash from its debt capital.
Can Jb hifi pay its short-term liabilities?
Looking at JB hifi most recent AU$885.80M liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.32x. Usually, for Specialty Retail companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
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