Accounting for Decision-Making - JB Hi Fi Ltd and Harvey Norman Holdings Ltd - Assignment Example

Answer Page No. What date is the end of the financial year? (Stare Day, Month & year) 30th June 2010 4 Who is the Executive Chairman of Harvey Norman? Gerald Harvey 12 How many Non-Executive Directors are there? 5 13 How many franchised complexes were there in Australia as at 30 June, 2010? 194 3 What other countries does the Harvey Norman group operate in? New Zealand, Singapore, Malaysis, Slovenia, Ireland 50 In July 2010, how many former Clive Peeters retail sites did Harvey Norman acquire? 29 4 What were the dividends per share (fully franked) in 2010? 14 cents 3 What is the name of the firm of external auditors for Harvey Norman Holdings Ltd.? Ernst & Young 1 What products other than bedding and furniture do Harvey Norman stores sell? Computer, Communications, Consumer Electrical Products, Property Investment, Media Placement, Consumer Finance 15 Does the report contain a Statement of Compliance? Yes 51 How much is Profit from Continuing Operations after tax? $231,409,000 3 What is the figure for Net assets? $2,517,211,000 36 What is the figure for Contributed Equity? $259,610,000 36 What is the figure for GST paid in 2010? $49,837,000 41 What is the figure for Net cash flows from operating activities? $386,867,000 3 Does Harvey Norman Ltd. include a report by business segments? Yes 4 Executive Summary JB Hi Fi Ltd and Harvey Norman Holdings Ltd is a furniture giant dealing in a variety of furniture. With their establishment in Australia both of them has shown improvement. The financial analysis for 2009 and 2010 demonstrates the performance for both the company. The different ratios like profitability, efficiency and financial stability ratios reveal special features for both this companies. The limitations present areas where the financial data doesn’t work. The recommendations presents the different areas both this companies need to work upon to improve their performance. Thus, the overall ratio analysis highlights the area where both the companies are strong and areas where they need to work on. Content Introduction 4 Financial Analysis 4 Profitability Ratios 4 Efficiency Ratios 7 Financial Stability Ratio 9 Capital Structure Ratio 11 Limitations 12 Conclusion 12 Recommendations 13 References 14 Appendix 16 Introduction JB Hi Fi Ltd is a retail store. The company has a huge presence and deals in “Cd’s, DVd’s, disc, video games and consumer products”. (JB Hi Fi Website, 2011) The fact that the company deals in so many products and huge reach has given a wide market. The company has a presence in supermarkets, malls, departmental stores and provide the basic necessities for people thereby enabling them to grow. Harvey Norman Holdings Ltd is also a furniture giant. The company deals in “different furniture and home improvements”. (Harvey Norman Holdings Website, 2011) The wide range of product and dispersion has made it a huge success. The company with their policy to satisfy customers has grown and is able to capture a good market. The financial statement of both the companies reveals so. Even the share prices shows improvement. With more consumers moving towards supermarkets gives an opportunity to expand in overseas. Financial Analysis Financial analysis is very important for all business. Analyzing the statement helps in “planning, budgeting, monitoring, forecasting and improving the financial performance by taking vital decision”. (Micro Strategy, 2010) Proper analysing helps a long way to “understand the financial health”. (Micro Strategy, 2010) It helps to identify trends and compare with competitors and industry to gain advantage. The following is the ratios for JB Hi Fi Ltd and Harvey Norman Holdings Ltd Profitability Ratios Profitability ratios form a very vital part of financial analysis. This ratios help to understand the profit which can be attributed to the different factors which work in tandem to achieve the desired results. The profitability ratios are as follows Gross Profit Margin: It is defined as the profit generated after deducting cost of goods sold and before the indirect expenses are accounted for and considers only the direct expenses. (Kennon, 2010) Gross profit helps to find out the actual profit that is attributed directly to the product. It is calculated as– “Gross Profit / Sales X 100”. The graph for both the companies are The ratio indicates consistency for JB Hi Fi Ltd and Harvey Norman Holdings Ltd. Harvey Norman Holdings Ltd has a higher gross profit indicating soundness in manufacturing process. It also shows that the strategies are well managed. JB Hi Fi Ltd on the other hand needs to improve its performance. Net Profit Margin: “It is defined as the profit generated per dollar of sales and is calculated after all the direct and indirect expense has been considered”. (Kennon, 2010) Organisations prefer this to be high. It is calculated as “Earning before Interest and taxes (EBIT) / Sales X 100”. The graphs for both the companies is as It is seen that the net profit has decreased for JB Hi Fi Ltd. This is a worrying factor and reflects inefficiency to maintain the indirect expense. When we compare it to the gross profit margin it shows a huge dip signifying the amount of indirect expenses like marketing, distribution and other expenses the company incurs. Harvey Norman Holdings Ltd on the other hand has managed it well. Return on Assets: “It is defined as the amount of profit generated for per dollar of asset”. (Joseph, 2010) It helps to identify whether the assets are utilized properly or underutilized. It is calculated as “Earning before Interest and Taxes (EBIT) / Average assets X 100). The graph for both the companies is as Here we see that the return on assets for both have decreased in 2009 as compared to 2008. The worrying factor for Harvey Norman Holdings is their assets are underutilized. This has resulted in having more assets that warranted. JB Hi Fi Ltd on the other hand has a better return showing proper utilization of assets. Return on Equity: “It is defined as the profit earned as compared to the equity shareholders i.e. earning per dollar of equity” (Joseph, 2010) and is calculated as “Net Profit available to ordinary shareholders / Average Equity (excluding minority interest and preference capital) X 100”. The graph for both the companies is as follows We see that JB Hi Fi Ltd has a very high return on equity as compared to Harvey Norman Holdings Ltd. This is a worrying factor and shows the strategies and policies implemented hasn’t been successful. The return for Harvey Norman Holdings Ltd is very low which might lead to shareholders moving out to other companies or investing in risk free securities. Efficiency Ratios Operating ratios forms a very important part as it helps to “show the efficiency of the management and also indicates the company’s efficiency to manage its capital”. (Joseph, 2010) The following ratio helps to calculate the operating efficiency. They are as Asset Turnover Ratio: It is defined as “the total sales generated per revenue of assets”. (Joseph, 2010) It is calculated as “365/ (Sales Revenue / Average Total Assets)”. The graph for both the companies is as follows The ratio has decreased Harvey Norman Holdings Ltd and incresed for JB Hi Fi Ltd. JB Hi Fi Ltd has been able to use its assets better in 2010. This has made the ratio to improve. Harvey Norman Holdings on the other hand has shown poor use of assets. It needs to improve. Receivable Turnover Ratio: “It is defined as the number of times the company is able to recover the dues from the customer”. (Kennon, 2010) The higher it is the better it is. It is calculated as “365/ (Credit Sales / Average Receivable)”. The graph for both the companies is Here we see that JB Hi Fi Ltd has a very good rate and it recovers its chances of bad debts to be less. JB Hi Fi Ltd has also shows consistency and is a good sign. Harvey Norman Holdings on the other hand has a poor receivable rate. The bad sign for Harvey Norman Holdings is that it has decreased drastically in 2010 as compared to 2009. The company needs to improve it then it would be a good sign and reduce the chances of debts. Payable Turnover Ratio: “It is defined as the number of times the creditor is paid in the year and companies generally prefer to maintain it good so that reputation is good”. (Kennon, 2010) It is calculated as “365/ (Cost of good sold / Average payable)”. The graph for both the companies is as follows It is seen that JB Hi Fi Ltd has improved its turnover ratio drastically. This is a good sign and shows that the reputation has improved with the suppliers and also ensures steady supplies. Harvey Norman Holdings needs to improve it. This will help to earn a good reputation for the future. Inventory Turnover Ratio: “It is defined as the number of times inventory is rolled over during a year”. (Joseph, 2010) Companies prefer it to be high. It is calculated as “Cost of Goods Sold / Average Inventory”. The graph for both the companies is as The above ratio indicates that JB Hi Fi Ltd has revolved its inventory more compared to Harvey Norman Holdings Ltd. JB Hi Fi Ltd performance has improved in 2010 compared to Harvey Norman Holdings Ltd. The company needs to be replicated so that the inventory levels come down. This will ensure less money in inventory and help to ensure that the funds are not blocked. Financial Stability Ratios This ratio looks into both the short and long term financial stability and helps to find the prospective growth opportunity for the company. The ratios which include both the short and long term financial stability are provided below Current Ratio: “It measures the ability to pay the short term liabilities out of short term assets”. (Financial Modelling Guide, 2010) This ratio helps creditors, suppliers and investor to identify the liquid position. It is calculated as “Current Assets / Current Liabilities”. The graph for both the companies is as The ratio shows that Harvey Norman Holdings Ltd has a better liquidity position as compared to JB Hi Fi Ltd. JB Hi Fi Ltd need to improve the ratio as it is a concern as the short term obligations are higher. This might make investors and suppliers stay away. Harvey Norman Holdings Ltd on the other hand is in a better position but still needs to take it slightly up around 2. Quick Ratio: It is also known as acid test ratio. “It measures the ability of the firm to meet its short term obligation when inventories are removed as inventories take some time to be converted into cash”. (Financial Modelling Guide, 2010) It is calculated as “(Current Assets – Inventories) / Current Liabilities”. The graph for both the companies is as The ratio also indicates that Harvey Norman Holdings Ltd is better positioned as compared to JB Hi Fi Ltd. The ratio indicates the inefficiency of the company to meet its immediate debt. JB Hi Fi Ltd need to improve this as it is a concern and presenting a bleak picture. Capital Structure Ratio This ratio is of prime importance and provides relevant information about the company. “It identifies how much of the firm’s assets are financed through debt and includes long term debt”. (Transtutor, 2010) The ratios which help to determine it are as Debt Ratio: “It determines the proportion of long term debt in relation to the shareholders fund and long term debt”. (Transtutor, 2010) This ratio helps to identify the financial soundness. It is calculated as “Total Liabilities / Total Assets”. The graph for both the companies is as The ratio indicates soundness on the part of both the companies. It shows that the company has a scope for more investment through debts. This is a good sign and shows the company has a space for future projects. JB Hi Fi Ltd has reduced its debt a lot by paying off is a worry and needs to raise it so that it can save on taxes. Harvey Norman Holdings Ltd need to ensure that it keeps with the industry standard. As both the companies work in a type of market where to grow large debt is needed so the ratio seems to be sound. Debt to Equity Ratio: “It determines the proportion of long term debt in relation to the shareholders fund and long term debt”. (Transtutor, 2010) This ratio helps to identify the financial soundness. It is calculated as “Long Term Debts / Equity X 100”. The graph for both the companies is as The ratio indicates soundness on the part of Harvey Norman Holdings Ltd compared to JB Hi Fi Ltd. It shows that the company has a scope for more investment through debts. This is a good sign and shows the company has a space for future projects. As both the companies work in a type of market where to grow large debt is needed so the ratio seems to be sound. Limitations Inflation and changes in price has not been accounted for which might be misleading Historical cost has been considered which might not be true in the present scenario as value changes with time Changes in technology for production, distribution, marketing has not been accounted for which might give different result Conclusion JB Hi Fi Ltd and Harvey Norman Holdings Ltd both have been performing on similar lines and have been successful. The financial statement even highlights similar facts. Both the companies can improve with better strategy. The financial ratios of both the companies show some demarcating things and also highlight the different strategies taken by each. This even highlights that companies similar in nature use different strategies and improve their performance. Both this companies have room for improvement and with the growth this sector is showing it gives them opportunity to capture a good market and grow. Recommendations Norman Harvey Holdings Ltd needs to improve its current ratio so that it reflects soundness in its policies and strategies Both the companies need to reduce the amount held in inventories as it is high leading to a lot of money being invested Both the companies need to take more debt especially long term so that they are able to save on the taxes Norman Harvey Holdings Ltd needs to improve its operating ratios so that it can match its competitor JB Hi Fi Ltd needs to reduce its indirect cost, improve efficiency, bring down assets and improve their management References Financial Modelling Guide, “Liquidity ratios”, 2010, retrieved on March 20, 2011 from http://www.financialmodelingguide.com/financial-ratios/liquidity-ratios/ JB Hi Fi Website, “JB Hi Fi Ltd Website”, 2011, retrieved on March 20, 2011 from http://www.jbhifi.com.au/ Harvey Norman Website, “Harvey Norman Holdings Website”, 2011, retrieved on March 20, 2011 from http://www.harveynorman.com.au/ Joshua K, “Analyzing an income statement: Return on Assets”, about.com guide, The New York Times Company, 2010 retrieved on March 20, 2011 from http://beginnersinvest.about.com/od/incomestatementanalysis/a/return-on-assets-roa-income-statement.htm Joshua K, “Analyzing an income statement: Return on Equity”, about.com guide, The New York Times Company, 2010 retrieved on March 20, 2011 from http://beginnersinvest.about.com/od/incomestatementanalysis/a/understanding-return-on-equity.htm Joshua K, “Analyzing an income statement: Inventory Turnover”, about.com guide, The New York Times Company, 2010 retrieved on March 20, 2011 from http://beginnersinvest.about.com/od/analyzingabalancesheet/a/inventory-turns.htm Kennon J, “Analyzing an income statement: Gross Profit”, about.com guide, The New York Times Company, 2010 retrieved on March 20, 2011 from http://beginnersinvest.about.com/od/incomestatementanalysis/a/gross-profit.htm Kennon J, “Analyzing an income statement: Net Profit Margin”, about.com guide, The New York Times Company, 2010 retrieved on March 20, 2011 from http://beginnersinvest.about.com/od/incomestatementanalysis/a/net-profit-margin.htm Kennon J, “Analyzing an income statement: Receivable Turnover”, about.com guide, The New York Times Company, 2010 retrieved on March 20, 2011 from http://beginnersinvest.about.com/od/incomestatementanalysis/a/receivable-turnover.htm Micro Strategy, “Financial Analysis”, 2010, retrieved on March 20, 2011 from http://www.microstrategy.com/financial-analysis/ Transtutor, “Capital Structure Ratios”, 2010, retrieved on March 20, 2011 from http://www.transtutors.com/finance-homework-help/dividend-decisions-and-tools-of-financial-planning/Capital-Structure-Ratios.aspx Appendix Calculation of Ratios   JB Hi Fi Ltd Harvey Norman Holdings Ltd Ratios 2009 2010 2009 2010 Gross Profit Margin 21.64% 21.75% 27.58% 27.98% Net Profit Margin 6.16% 6.46% 26.58% 26.58% Return on Equity 41.19% 40.45% 10.65% 11.03% Asset Turnover (Times) 3.51 times 3.82 times 0.39 times 0.36 times Return on Assets 21.69% 24.71% 10.47% 11.34% Inventory Turnover (Days) 65 days 57 days 91 days 98 days Debtors Turnover (Days) 1.8 days 1.34 days 261 days 282 days Creditors Turnover (Days) 49 days 44 days 250 days 248 days Current Ratio 1.31 1.25 1.11 1.62 Quick Ratio 0.31 0.33 0.99 1.43 Debt Asset Ratio (total debt) 65.30% 58.90% 43.67% 41.70% Debt Equity Ratio( total debt) 1.88 1.43 0.775 0.717 Times Interest Earned (Times) 17.86 times 25.38 times 11.03 times 12.48 times Read More