This assignment is based on JB Hi Fi Australia to analyse their financial position. In first part an analysis will be carried on based on the operations of JB Hi Fi and their competitive advantage over other competitors in the market.
In the next part an analysis of the company perforce based on liquidity ratio, profitability ratio and capital structure ratio will be done. This will provide an idea about the overall financial performance of the company. Calculations will be based on two years performance of the company. In next part information from ASX list (ASX: JBH) will be used to determine the changes in share prices of the company over the recent months. This information will be used later to prepare a graph.
JB Hi Fi is an Australia-based retail business specializing mainly in video games, HD Blu ray CD, DVD and other electrical appliances. Moreover, they sell home appliances which also include mobile phones in retail form. JB Hi Fi has been listed in ASX list of publicly traded companies (Investors.jbhifi.com.au, 2019).
JB Hi Fi has set up its headquarters at Melbourne Chadstone shopping centre. JB Hi Fi expanded their operations in New Zealand in the financial year 2006-07. JB Hi Fi dates back to 1974 when it was set up by John Barbuto in a suburb of Melbourne.
In the year 1983 the company was sold to three partners namely, Richard Bouris, David Rodd and Peter Caserta who were responsible for expanding the business and making it relevant. They expanded JB Hi Fi and made it into a chain of ten stores in Melbourne and parts of Sydney. Company was valued at $150 million by the year 2000 (Henderson et al., 2015).
It was in the year 2003 that company gained its position in ASX list of publicly traded company. JB Hi Fi made a remarkable breakthrough when all other music companies were generating loss in the financial year 2013 and 2014; JB Hi Fi increased its profit by almost 26%. JB Hi Fi started as a music CD selling company which later expanded its business with changing time and now it is one of the biggest retailers in Australia.
Company sells a range of electronic products which includes television sets, HD bluray CD, video games, mobile phones, digital camera and other home related application across all its chain stores in Australia. From 2012 JB Hi also expanded its business into items of musical interest such as guitars, and other musical instruments. This made their profits to rise up by a substantial percentage (Investors.jbhifi.com.au, 2019).
Following are a list of competitive advantages of JB Hi Fi:
CURRENT RATIO |
||||
Year |
Formula |
Current asset |
Current liabilities |
Results |
2017 |
Current ratio= Current assets/current liabilities |
1167.5 |
885.4 |
1.318613 |
2018 |
Current ratio= Current assets/current liabilities |
1210.5 |
917.2 |
1.319778 |
Table 1: Current ratio (Source: Created by learner)
ACID TEST RATIO |
|||||
Year |
Formula |
Current assets |
Inventory |
Current liabilities |
Results |
2017 |
Quick ratio= Current assets-inventory/current liabilities |
1167.5 |
859.7 |
885.4 |
1166.529 |
2018 |
Quick ratio= Current assets-inventory/current liabilities |
1210.5 |
891.1 |
917.2 |
1209.528 |
Table 2: Acid test ratio (Source: Created by learner)
Fixed asset turnover:-
FIXED ASSET TURNOVER |
||||
Year |
formula |
Turnover |
Non-current Asset |
Results |
2017 |
Fixed asset turnover=Turnover/Non-current assets |
5628 |
1292.3 |
4.355025923 |
2018 |
Fixed asset turnover=Turnover/Non-current assets |
6854.3 |
1281.2 |
5.349906338 |
Table 3: Fixed asset turnover (Source: Created by learner)
Calculation of liquidity ratio of JB Hi Fi implies that company is fairly liquid and is in good position in comparison to previous year (Maskell, Baggaley and Grasso, 2016). In 2018 there has been a constant rise in every ratio caption. Current ratio implies that JB Hi Fi will be able to meet its short term debts within that year itself in relation to their assets. Increase in current ratio from 2017 to 2018 indicates that company is managing its inventory efficiently.
Acid test ratio calculation indicates that company can settle its short term debts within the current year without having to sell its inventory. Fixed asset turnover shows that company will be able to settle its debt using its fixed asset. This indicates that company is fairly liquid and its performance is increasing over the previous years.
NET PROFIT MARGIN |
||||
Year |
Formula |
Net profit/loss before tax |
Sales |
Results |
2017 |
Net profit margin= Net profit before tax/Sales*100 |
259.2 |
5628 |
188.8273 |
2018 |
Net profit margin= Net profit before tax/Sales*100 |
334.5 |
6854.3 |
200.0861 |
Table 4: Net profit margin (Source: Created by learner)
Year |
Formula |
Total asset |
Current liabilities |
Results |
2017 |
Employed capital= Total asset-current liabilities |
2459.8 |
885.4 |
1574.4 |
2018 |
Employed capital= Total asset-current liabilities |
2491.7 |
917.2 |
1574.5 |
Table 5: Employed capital (Source: Created by learner)
RETURN ON CAPITAL EMPLOYED |
||||
Year |
Formula |
Net operating profit |
Employed capital |
results |
2017 |
ROCE= Net operating profit/Employed capital |
306.3 |
1574.4 |
0.19455 |
2018 |
ROCE= Net operating profit/Employed capital |
350.6 |
1574.5 |
0.222674 |
Table 6: Return on capital employed (Source: Created by learner)
GROSS PROFIT MARGIN |
||||
Year |
Formula |
Gross profit |
Revenue |
Result |
2017 |
Gross profit/revenue*100 |
1230.5 |
5628 |
21.86389 |
2018 |
Gross profit/revenue*100 |
1470.2 |
6854.3 |
21.44931 |
Table 7: Gross profit margin (Source: Created by learner)
Company is profitable and there are not many discrepancies in performance of company. JB Hi Fi is making profits over the years as denoted by the relevant calculation of profitability ratios. From results of net profit margin it has been found out that company has increased its performance from 2017 to 2018 slightly (Investors.jbhifi.com.au, 2017).
There has not been much rise in overall profitability of the company. Return on capital employed has improved in 2018 in comparison to 2017. This indicated that company has been successful in making its operations using their capital in a very profitable manner. There is a slight decrease in gross profit margin which indicated that cost of sales has increased slightly in 2018 in comparison to 2017.
DIVIDEND PAYOUT RATIO |
||||
Year |
Formula |
Declared dividend |
Net income |
Results |
2017 |
Dividend payout ratio = Declared dividends/Net income |
118 |
207.7 |
0.568127 |
2018 |
Dividend payout ratio = Declared dividends/Net income |
132 |
233.2 |
0.566038 |
Table 8: Dividend payout ratio (Source: Created by learner)
Dividend payout ratio is a financial tool used to determine the market value of a company. In case of JB Hi FI it has been found that company has slightly decreased its payout ratio (Investors.jbhifi.com.au, 2018). Company needs to focus on better methods to apply their capital in order to generate better revenue and that will result in better dividend for the shareholders.
Figure 1: Share price graph of two years (Source: Asx.com.au, 2019)
JB Hi Fi has seen a lot of fluctuations in last two years. Price of share does not remain stable and this is evident from the graph displayed above. There are lot of fluctuations in the share prices of JB Hi Fi. This is avoided due to fluctuation in share market where new entrants also turn in.
From the graph displayed above it has been noticed that in the year 2017 January the company has the highest share price in this two years combines. Share prices reached a staggering $29 in that period.
During June, July and August of 2018, company saw the last share prices in two years combined. Share prices dropped to $20.38 during that period which again rise to some degree and again dropped during that period itself. It was the lowest among the entire months ion these two years period.
From August to September the share prices rose again from $22.370 to $23.470 and again to $26.170 by last of August. There was a slight decline in share price in august but this again went table in September. During October there was again a small decline in share prices (Investsmart.com.au, 2019).
During October the share price was $24.310 and saw some fluctuations during the month but was stabilized again by the end of November. Overall 2017 and 2018 were quite profitable as share price was $26 on an average (Asx.com.au, 2019).
During the end of the period there were some discrepancies as share prices started to drop to $24 at the end of December of 2018. There are many reasons for dropping of share prices. There are lot of instances where share prices rise and fall very fast and this is caused by a number of reasons.
Some of this reason has been discussed below:
Cost of equity is the rate of return that shareholders seek out of their investment in the market share of a company. This cost of equity represents the compensation paid to the market for bearing the risk of owning asset and the company operations (Reuters.com, 2019).
This rate is important to satisfy the investors investing their shares in a company. It is necessary to produce a satisfactory rate of return to make the investors stay and not sell their shares in the market. If shareholders sell their shares in the market it will reduce the capital as well as value of share in the market. In this case of JB Hi Fi, they must pay their shareholders back at the rate of 6.39%. This is a satisfactory rate and their investors will be satisfied with this rate of return.
Capital structure is a process by which a company makes use of different sources of funds in order to manage its operations and generate revenue for itself. Capital structure consists of mainly debts and other equity shareholders fund in order to understand the portion of funds and its sources.
This is the lifeblood of any business as this provides funds for running a business successfully. In case of JB Hi Fi the capital structure is pretty simple as they have raised funds mainly from shareholders equity (Investors.jbhifi.com.au, 2018).
Capital structure of JB Hi Fi displays a total debt of $469,400 while interests amounted to $16,600. Their long term debt amounts to $469,400 which makes their debts percentage to be 33% (Investors.jbhifi.com.au, 2018).
JB Hi Fi does not make use of preference stocks and their share amounts to $947,600 which is the highest proportion of amount out of all the capital sources. Equity percentage is 67% making a higher proportion in comparison to debt. In order to understand their capital structure better a calculation of capital gearing ratio and debt to equity ratio has been provided below:
CAPITAL GEARING RATIO |
||||
Year |
Formula |
Long term borrowings |
Shareholder fund |
Results |
2017 |
Gearing ratio= long term borrowing/long term borrowing +shareholder fund*100 |
558.8 |
853.5 |
65.47158758 |
2018 |
Gearing ratio= long term borrowing/long term borrowing +shareholder fund*100 |
469.4 |
947.6 |
49.53566906 |
Table 9: Capital gearing ratio (Source: Created by learner)
Capital gearing ratio is the proportion of company’s dependence on debt capital and equity capital. A higher percentage denotes that company is more dependent on debt financing for their operations. On the other hand am lower percentage denotes that company is more interested in shareholders’ funds for their operations (Investors.jbhifi.com.au, 2018).
From the calculation provided above it is very clear that company depended more on debt financing in the year 2017. However, they managed to improve their operations and hence in the year 2018 their dependence on debt was reduced and they relied more upon shareholders equity for their operations.
A larger portion of capital structure in debt financing means that company will not be able to sustain its debt in case of any shortcomings in financial operations. There is certain risk associated with this kind of capital structure where debt is utilized more in comparison to equity (Investors.jbhifi.com.au, 2018).
DEBT TO EQUITY RATIO |
|||||
Year |
Formula |
Short Term Debt |
Long Term Debt |
Shareholder Equity |
Results |
2016 |
Short term debt +long term debt/shareholder equity |
0 |
558.8 |
853.5 |
0.65471 |
2017 |
Short term debt +long term debt/shareholder equity |
0 |
469.4 |
947.6 |
0.49535 |
Table 10: Debt to equity ratio (Source: Created by learner)
Debt to equity ratio is same as capital gearing ratio just the difference is that here short term borrowing are also considered. In case of JB Hi Fi, there is no short term borrowing hence the results are pretty much same as that of capital gearing ratio.
These results show that company was more dependent on debt financing during the financial year 2017. Ion the other hand, in the year 2018 company depended more on their equity shareholders funds. Therefore, company is improving over time and in 2018 it is quite profitable as well as managing their capital effectively (Investors.jbhifi.com.au, 2018).
From this assignment it can be concluded that JB Hi FI limited is a profitable company and is very liquidity. They are one of the largest retailers who rely both on online as well as offline sales. There are some changes in their operations which has b\to be done in order to take their performance better.
JB Hi FI limited depends on their shareholders equity as their primary source of finance. In 2017 relied heavily on debt financing which is a volatile situation for their company. They made huge improvements in their operations by managing their origination better and dealing mostly on shareholder funds. They gain better shareholders due to their satisfactory level of rate of return on investment of shareholder. Their rate of return was estimated to be 6.39%.
Following are some of the recommendation for JB Hi Fi limited:
Books-
Journals-
Websites-