Picture of JB HI-FI Performance - Case Study Example

JB HIFI Name: Institutional Affiliation Executive Summary This report carries out an in depth analysis on JB HI-FI. The report is organized in sections which makes it easier and understandable. The report uses information from various sources so as to gain a deeper understanding of the performance of the company. The methodology section, describes the methods used to undertake the analysis, the type of data that will be used and some of the assumptions made. The report used relevant financial information so as to determine the company’s performance for the past 5 years. This involved analysing the company’s annual financial reports, financial statement, share performance and investment activities of the company. This enabled us get a clear picture of JB HI-FI performance. The report also looked at the financial stability of the company, both in the short term and long term. These involved analysing the company’s share market indicators and the firm values, the changes in the accounting policies and the general outlook of the company for the next two years. Table of Contents Executive Summary 2 Introduction 4 Purpose of Analysis 4 Methodology 4 Company and Industry Profile 5 Company Highlight during the past 5 years 5 Operation and Performance 7 Ratios 8 Financial Stability 9 Ability to Meet Short-term Obligations 9 Liquidity Ratios 9 Ability to meet Long term Financial Obligations 11 The Cash Flow Position of the Company 13 Share Market Indicators and Firm Value 14 Accounting Policy Changes 16 Intangible Assets 17 Impairment of Intangible Assets 18 Overall Assessment and general outlook of JB HI-FI 18 Summary Outlook 21 Recommendations 22 Conclusion 22 References 23 Introduction Financial analysis is important for any company so as to determine its performance and identify its weaknesses and Strengths. This analysis is important for JB HI-FI Limited since it will enable the company evaluate its performance in the industry and also be able to identify the areas that the institutions requires adjustments. Purpose of Analysis The main purpose of this analysis is to analyse the performance of JB HI-FI, identify the strengths and weaknesses of the company so that we could recommend the measures the company can undertake so as to improve on the weaknesses. This will be achieved by using the accounting methods of analysis such as ratios and trends analysis. Methodology The main research methodology that will be used to carry out this analysis will be the secondary data research. Secondary data research refers to the evaluation and examination of data that had been collected in the previous research. There are two main types of secondary data, and these are internal and external data [Bak06]. Internal data, refers to data that exists within the institution or the organization itself which in this case is JB HIFI. These include JB HIFI’s reports, figures and the past researches. External secondary data on the other hand refers to data that is obtained from sources such as textbooks, journals, reports and government institution [Bak06]. Only relevant external secondary data research materials will be used, those that relate to the goals of the research. The main aim of this paper is to analyse the operation and performance of JB HIFI and understand what has enabled the company grow significantly, for the past few decades. One of the main assumption is that the accounting figures provided, reflect the true financial position of the company since this is what will form the basis of the analysis. Company and Industry Profile The company was established in the year 1974 and has grown to become one of the largest retailers in Australia. Over the years, the company has expanded from a one store that was situated in Victoria, to over 170 stores situated all across New Zealand and Australia. The company currently employs over 5500 individuals [Tho11]. The company mainly stocks, AV equipment, consumer electronics, games, music and movies [Tho11]. Company Highlight during the past 5 years From the analysis of JB HIFI’s past 5 years performance it is vivid that the company has been experiencing consistent significant growth in the industry. The graph below show the performance of JB HIFI for the past 10 years [Mor141]. The graph shows how the company has been able to survive through the economic hard times and still grow significantly. It is important to note that the company was able to survive through the 2008 global financial crisis that saw some of the Multinational close down across the globe. The company financial activities has also continued to grow, in the year 2010 , the company registered a revenue of about 2.959 Australian Billion Dollars from its sales and this figure has continue to in the past years and in June 2014, JB HIFI, registered a revenue of about 3.483 Australian billion dollars from its sales [Mor142]. This is about 17.57per cent growth in its sales within a short period of 5 years. The net income value has also registered growth over the past 5 years, this is despite certain challenges such as increase in the cost of production, increase in taxes and the interest expenses. In 2010, the company registered a net income of about 109.7 Australian million dollars, and in 2014, the company registered a net income of about 128.4 million dollars [Mor142]. Thus amounting to a 17.05 per cent increase in net income by the company. Operation and Performance In this section we are going to analyse the performance of JB HIFI For the past 5 years. This will involve analysing some of the crucial ratios that determine the financial position of the company. Some of the key ratios that will be analysed will be Return on Equity, Return on Capital, Return on Assets, Asset turnover ratio and the Net Profit Margin. Analysis of the company’s revenue is also critical since it shows the trend of the performance of the company. Financials 2010 2011 2012 2013 2014 Revenue (AUD Mil) 2,731 2,959 3,128 3,308 3,484 Net Income (AUD Mil) 119 110 105 116 128 Earnings per share (AUD) 1.08 1.01 1.06 1.17 1.27 The graph above shows the values of Revenue, Net Income and Earnings per share for the past five years [Mor142]. One of the main factors that determines whether a business is performing its business effectively is sales. The sale revenue show the efforts that the management and employees to promote the products of the company. From the figures above, the sales revenue have consistently from 2010 to 2014 with the highest figures of sales recorded in the year 2014. However, as much as sales revenue is important, what is of greater importance is how viable a business is and whether it is breaking even or not. This is because there are a lot expenses and other deduction such as interests and taxes that subtracted from the sales revenue so as to determine the profit or the net income of the business. There are instance where organizations have been able to make billions in sales, but have not managed to break even thus end up closing after few years of operation. It is important the management of the organization and the team of accountants formulates policies that will ensure that the organization is able to reduce their cost of production and thus breakeven. It is therefore important to note that JB HIFI is one of the few big companies that manage to register profits despite of the existing stiff completion experienced in that specific industry. The company’s net income values dropped two years consecutively in 2011 and 2012, this is despite the company registering an increase in sales in both years. This can therefore be attributed to the upward trend in the value of the cost of sales in both years. In 2011 the company’s cost of revenue was about 2.315 billion Australian dollars, 169 million dollars higher than the 2010 cost of sales value. The 2012 cost sales revenue also went up and was about 2.480 billion Australian dollars. After implementing policies to reduce the cost of production the company was able to once again increase the value of the net income and thus increased in 2013 and 2014 [JBH14]. Another important factor that is worth noting, is the fact that the company has also taken into consideration, the importance of its shareholders and that is why there is improvement on the company’s Earnings per share for the past 5 years. From a figure of 1.08 in 2010 to a figure of 1.27 in 2014. Ratios Ratio 2010 2011 2012 2013 2014 Asset Turnover 3.97 4.00 3.96 4.00 4.09 Return on Assets 17.25 14.81 13.26 14.07 15.07 Return on Equity 45.41 49.23 62.14 54.40 47.72 Return on Capital Invested 34.48 31.99 31.78 35.17 31.97 [Mor143] Return on Assets- This ratio is used to evaluate the performance of the management and informs the investors determine how effectively the firm utilizes its assets. From the figures above it is right to say that the company uses its assets effectively to generate revenue. Return on Equity- Return on equity value is also used to gauge the performance of the management and in this case JB HIFI has a good Return on Equity value and thus uses the owner’s equity effectively. Return on Capital- this ratio determines how well JB HIFI generates cash flow in relations to the capital invested. JB HIFI has a good return on capital in that thus performs favourably. Financial Stability Ability to Meet Short-term Obligations In determining whether the company will be able to meet its short term financial obligations, we will use the latest financial information obtained from JB HIFI’s 2014 annual financial report document. Liquidity Ratios This refers to ratios that are used to determine a company’s ability to meet its short term (less than one year) financial obligations. These ratios involve the current ratio, Acid test ratio and Cash ratio. Current Ratio Current Ratio = Current Assets / Current Liabilities Current assets = 578,147 Current Liabilities = 352,193 Current Ratio = 578,147 / 352,193 Current Ratio = 1.64 times. Acid Test Ratio/ Quick Ratio Quick Ratio = Inventory / Current Liabilities Inventory = 458,625 Current Liabilities = 352,193 Quick Ratio = 458,625 / 352,193 Quick Ratio = 1.30 times Cash Ratio Cash Ratio = Cash / Current Liabilities Cash = 43,445 Current Liabilities = 352,193 Cash Ratio = 43,445 / 352,193 Cash Ratio = 0.12 times From the ratio values calculated above, it can be seen that JB HI FI has a current ratio of 1.64, quick ratio of 1.30. This ratio are above the standard required for companies which is 1.0. This therefore means that the company is able to meet its short term financial obligation. However, the company should strive to improve its Cash ratio since it is below 1.0 implying that the company is not liquid adequately liquid. Ability to meet Long term Financial Obligations The ratio used to determine whether a company is able to meet its long-term financial obligation are the gearing ratios, also referred to as gearing ratio. These ratio include; Total Debt ratio, Debt Equity ratio and Time Interest Earned. Total Debt Ratio Total Debt Ratio = (Total Assets – Total Equity) / Total Assets Total Assets = 859,841 Total Equity = 294,633 Total Debt Ratio = (859,841 – 294,633) / 859,841 Total Debt Ratio = 0.66 *100 = 66% Total Debt Ratio = 66% The total debt ratio of 2014 is 66% implying that the 66% of the company was financed by the non-owner funds. The company should therefore try as much as possible and maintain the value as low as possible. Debt- Equity Ratio Debt Equity ratio = Total Debt / Total Equity Debt Equity Ratio = 565,208 / 294,633 Debt Equity Ratio = 1.92 This ratio determine the proportion of a company’s Debt to the company’s Debt. The value in this case is greater than 1.0 therefore implying that more assets are financed by debt than those financed by Equity. JB HI-FI should try as much as possible and reduce the value so that more of their assets be financed by equity and not debt. Time Interest Earned Time Interest Earned = EBIT / Interest Time Interest Earned = EBIT = 182,677 – 8,845 = 173,832 Interest = 8,845 Time Interest Earned = 19.65 times This implies that JB HI-FI is 19.65 times greater than its yearly annual interest expense. This therefore implies that the company can afford to pay more interest expenses. This further shows that JB HI-FI is less risky and that the bank cannot have a problem accepting any loan application. The Cash Flow Position of the Company In this section we are going to work out JB HI-FI statement Cash flow so as to determine whether the business is liquid. We will use the 2014 financial information to determine this. Cash flows from operating activities 2014 $’000 Receipt from customers 3,832,979 Payments to Suppliers and Employees (3,723,982) Interest and bill discounts received 402 Interest and other finance cost paid (7,496) Income Taxes paid (60,577) Net cash inflow from operating activities 41,326 Cash flows from financing activities Payment for acquisition of subsidiary ( the net cash acquired) 0 Acquisition of the non-controlling interest (3,000) Payment for equipment and plant (35,914) Earnings from sale of equipment’s and plant 674 Net Cash outflow from investment activities (38,240) Cash flows from financing activities Proceeds from the issue of equity securities 21,523 Proceeds / repayment of the borrowings 54,063 Payments for Debt issue cost (64) Payment for the shares bought back (25,830) Share issue and buy back costs (118) Dividend paid to the owners of the company (77,183) Net Cash (outflow) from financing activities (27,609) Net (decrease) / Increase in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year 67,368 Effects of exchange rate changes on cash and cash equivalents 600 Cash and cash equivalents at the of the year 43,445 [JBH14] From the analysis above, it can be stated JB HIFI has a positive cash flow implying that the company is liquid. It is really important for a company to be liquid so as to carry out its daily activities effectively. Share Market Indicators and Firm Value JB HI-FI considers the each and every aspect of the company’s capital structure and mainly focuses on maximizing the returns of the shareholders. The continued growth in the Company’s balance sheet and the low gearing levels enables the company to consider the various capital management structure. Between May 26th and June 17th in 2014, the company bought back 1,438,091 ordinary shares which is 1.4 percent of the total shares issued by the company [JBH14]. This was aimed at reducing the dilutionary impact of the ordinary shares that were issued to the employees. The company acknowledges that the 2014 financial year has been a successful one since the Earnings per Share increased by 9.1 percent compared to the previous financial year. The company’s share price has improves by 9% from a value of 16.81 to 18.30 in the month of June [JBH14]. The graph below show the general performance of the share price from November 2013 to October 2014. The graph shows significant decline on the company’s share price performance and this trend is likely to continue in the future considering the current performance by JB HI-FI [Mor144]. The share closed at a value of 14.88 as at October 14 2014. The second figure shows a summary of the company’s Valuation as at 14th October 2014 [Mor145]. Accounting Policy Changes Over the years the accounting principle of recording financial information has been changing over time and because of this the companies should prepare their financial statements according to the new principle. In Australia the body in charge of financial reporting is the Australian Accounting Standards Board. The Australian Accounting Standards Board is the body that develops and maintains the financial reporting standards and is applicable to both the public and private sectors of the economy. We are going to discuss how JB HIFI recorded the transaction of various intangible assets such as goodwill, trademarks, brands and the right to profit share [JBH14]. In the 2014 financial year, the company adopted a set of revised and new accounting standards and interpretation that were issued by the Australian Accounting Board especially those that are relevant to the company’s operation. The figure below shows the set of new changes in the accounting principle applicable to JB HI-FI [JBH14]. Intangible Assets Goodwill Goodwill the excess amount of the cost of acquisition over the fair value of the organization’s share of the entire identifiable asset of the acquired venture as at the date of acquisition. This makes goodwill be regarded as an intangible asset. It is important to note that goodwill is not amortized but rather tested for any form of impairment annually [JBH14]. Trademark and Brand names Brand names are recognized by JB HI-FI as to having a perpetual life are not amortized. The JB JI-FI Company gave consideration to the commercial and technical life of the specific brand names and thus registered so as to determine their useful life and thus came to a conclusion, to regard them as having an indefinite life [JBH14]. Rights to profit share The management rights in relations to profit shares agreement (Highpoint store) have as part of the cost of acquisition. The company did this after giving due consideration to the commercial and technical life and thus were best seen to be regarded to have perpetual life [JBH14]. Impairment of Intangible Assets Intangible assets and goodwill that have perpetual useful life are not subjected to any form of amortization and are also tested yearly for any form of impairment or any change in circumstance indicating that they might be impaired [JBH14]. It is important to note that an impairment loss is acknowledged by the amount by which the specific asset’s amount is more than the recoverable amount. The recoverable amount refers to the higher amount of an asset’s fair value minus the costs to sell it and value in use. In order to asses an impairment, the assets are put together at the lowest levels where they are separate cash inflows that are greatly independent of the other cash inflows from other assets or the other groups of assets also referred to as the cash generating units [JBH14]. However, non-financial assets other than goodwill that have suffered an impairment are generally reviewed for possible reversal of the impairment, at the end of the financial reporting year. Overall Assessment and general outlook of JB HI-FI From some of the analysis carried out above, it can be said that the general performance of JB HI-FI Company is good. However we are going to carry out a further analysis on the company so as to gain a greater understanding of the company’s performance and to be able to determine its future performance. The figure below shows the performance of the company for the year 2013 and the year 2014 [JBH14]. The movement section shows whether there was an increase or a decrease in the value from FY13 TO FY14. It is vivid that the company showed improvement in most of the items indicated in the table and this is a positive sign on the company’s performance. The value of the company’s total sales increased by 5.3% which is a good thing for the company [JBH14]. This can be greatly attributed to the rolling out of the home branded store and numerous stores in Australia and New Zealand. However, the cost of doing business went up by a slight margin mainly attributed to the changes in the economy. It is worth noting that JB HI-FI still has the lowest cost of doing business compared to all the other major retailers in the industry [JBH14]. The company has even greater plans for the future performance of the company. In order to achieve this the company has invested a lot so as to get an even greater performance in the future. These include Capital Expenditure and Acquisitions. Such investment will boost the company’s performance for the next several years. Capital Expenditure The company has invested about 35.91 million dollars during the 2014 financial year in the capital expenditure projects [JBH14]. The company plans to use 9.5 million dollars to open seven new stores during the same financial year. 13.9 million Has been allocated for opening one new home store and converting the existing 13 stores to Home stores, during the same financial year [JBH14]. This will have a great impact on the sales considering the company had already used this move in the previous financial year and it boosted their sales. 7.8 million dollars will be used in relocating stores and completing stores opened during the previous financial year [JBH14]. The remaining funds will be utilized on digital and online projects and miscellaneous expenses. Acquisitions The company acquired the remaining 49% share of the Network Neighbourhood Company that it didn’t own previously. This was acquired at a cost of 5.4 million dollars [JBH14]. This is an anticipated move by the company and is aimed towards ensuring future earnings growth in the company. Summary Outlook JB HI-FI continues to enjoy great performance in Australia and New Zealand and this can be greatly attributed to the well laid strategies by their team of management. This is very admirable and that the company should lay down even stronger measures that would ensure that the performance is much better in the future. If all the investment strategies discussed above for the financial year 2014 are effectively implemented, this will see the sales, gross margin and profitability ratios significantly improve. This will be good news to both the executive directors and the shareholders of the company. One of the notable factors is the fact that the company’s share price has been declining since September 2013 to October 2014 and that this would be a worrying trend to the shareholders and if it continues, this is likely to influence their capital structure especially in terms of Equity. However, it is important to note that the company has a sound financial health, judging by the calculated financial ratios and the trend analysis carried out on the company for the past 5 financial years. Recommendations From the analysis, one of the main factors that affects the company’s performance is the Cost of doing business. This has had the effect of reducing the amount of profits JB HI-FI realizes each financial year. From the analysis of the past 5 financial years, there has been an increasing trend on the cost of doing business which should not be the case especially with the current improvement in technology globally. The company should employ appropriate measures that will ensure that the cost goes down significantly. This will significant impacts such as increase in the return to investors, increase in ploughed back capital and will also have the effect of increasing the value of the company hence the general performance of the company will improve automatically. Conclusion From the analysis above, it can be stated that JB HIFI performance and operations are on the right track and that the company should maintain this performance and ensure that it improves on its areas of weaknesses thus ensuring that it experiences a much better operation and performance in future. References Bak06: , (Baker, 2006), Tho11: , (Thomas Duryea Consulting, 2011), Mor141: , (Morningstar, Inc., 2014), Mor142: , (Morningstar, Inc., 2014), JBH14: , (JB HI-FI Limited, 2014), Mor143: , (Morningstar, Inc, 2014), Mor144: , (Morningstar, Inc, 2014), Mor145: , (Morningstar, Inc, 2014), Read More