JB Hi-Fi Company Financial Analysis

2021-04-30 18:14:38
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JB Hi-Fi Limited (JBH) is an Australian specialty discount retailer stores that deals in of branded home entertainment products, founded in 1975 with headquarters located at Melbourne. The company's primary focus is on consumer electronics, software including games, electrical goods games, and movies retailing at lower prices than competitors. The company basically operates from a stand-alone store, satellite shopping centers and online stores in New Zealand and Australia. For the financial year ended 2015, the company had total sales of $3.65 billion a growth of 4.8%. JB HI-Fi had a total of 187 stores spread across Australian and New Zealand. The company assumes that its aggressive policies on investment will see the company open additional six stores and convert other stores to JB Hi-Fi Homes. (Kieso 2013; Weygandt et al 2013, p. 15)

Currently, the main competitor of JB Hi-Fi Company is the Muir Electrical Company and the Good Guys Discount Warehouse. The Good Guys act as a distributor and marketer of electrical appliances that the company offers which include, home appliances, entertainment products and office appliances.

Profitability Ratios

Return on assets is a ratio that helps assess the ability of a company to generate net income from its total assets. The formula of return on assets can be calculated as net income divided by the total assets. JB HI-FI Company return on assets has been determined to be 15.25% in 2015 and 14.94% in 2014. This implies that JB HI-FI Company uses its assets effectively to generate net income for the company (Kieso 2013; Weygandt et al 2013, p. 15). The average return on assets for industry participants was 15.23%, a sign that JB Hi-Fi outperformed its competitors.

Profit margin a profitability ratio that measures the net income generated from the sales of a product. The formula of profit margin can be calculated as net income divided by the revenues of the company. JB HI-FI Company had a profit margin of 3.74% in 2015 compared of 3.69% in 2014. (Wood & Sang 2005, p 8). The ratio can be considered low an indication that JB HI-FI Company generates low profit from its sales and this can be considered a weakness. The average profit margin for industry competitors was 4.63%, implying that, other competitors outperformed JB Hi-Fi in generating profits from its sales.

Return on equity This ratio seeks to examine in an accounting perspective the ability of the firm to maximize the wealth of its shareholders. The formula of ROE can be given as net income available to ordinary shareholders divided by the book value of equity. This has been determined to be 39.74% in 2015 compared to 43.60% in 2014. This implies that JB HI-FI was able to maximize shareholders wealth in 2015 but there was a decrease attributable to increase in shareholders equity. Further comparison with industry competitors shows that the average return on equity was 41.72% a sign that JB Hi-Fi was outperformed by its competitors (Kieso 2013; Weygandt et al 2013, p. 15).

Activity Ratios

Asset turnover is an activity ratio seeks to determine the ability of a company to use its assets to generate sales. The asset turnover can be determined as sales divided by the total assets and have been determined to be 4.08 in 2015 and 4.05 in 2014. This implies JB HI-FI Company is able to generate revenues by effectively using its assets, and such effectiveness increased in 2015 compared to 2014. Compared to competitor average asset turnover ratio of 3.8 JB Hi-Fi uses its assets more efficiently than competitors (Wood & Sang 2005, p 8).Debtors Turnover ratio seeks to determine the frequency with which an organization collects cash from its credit sales. The formula of debtors - turnover can be given as credit sales divided by the average trade debtors and this has been determined to be 47.98 times in 2015 and 49.24 times in 2014. This results obtained implies the company collects its accounts more regularly and this may be due to better terms of credit terms or low credit sales.

Days in debtors ratio seeks to determine the number of days, it takes the company to collect its sales done on credit. This is the number of days that elapse between the day of credit sale and the day receiving payment. The formula of the ratio can be given as number of days a year divided by the debtors turnover. JB HI-FI Company had days in debtors ratio of 7.6 days and 7.41 days in 2015 and 2014 respectively. This shows that JB HI-FI Company takes not more than a week to collect its accounts, which can be attributed to the cash transaction used by JB HI-FI.

Liquidity Ratios

Current ratio is a liquidity that assesses an organizations ability to meet its short term liabilities from its current assets. The formula of current ratio can be given as current assets divided by current liabilities. Based on calculations, JB HI-FI Company had a ratio of 1.64 in 2014 compared to 1.27 in 2013, which was an increase of 0.37. The ratio of 1.64 in 2014 implies that the assets realizable within the year are able to cater for the entire short term obligations of JB HI-FI Company, hence a positive liquidity position based on current ratio. Compared to other industry participant, with an average current ratio of 1.62, JB Hi-Fi can be considered to be performing better as the ratio was above 1.0.

Quick ratio seeks to evaluate the liquidity position of an organization by assessing the degree to which it can be able to convert its current assets into cash immediately to repay of short- term obligations. The current assets should be easily convertible within the shortest time and the formula of quick ratio can be given as cash plus accounts receivables plus short term investments divided by the current liabilities. The quick ratio of JB HI-FI Company has been determined to be 0.34 in 2015 and 0.32 in 2013. This implies that JB HI-FI has no sufficient current assets that can be converted to cash quickly to meet the current liabilities of the company, despite an increase from the previous year and can thus be deemed as weakness to the company. Compared to the quick ratio of other industry participants with an average ratio of 0.39, JB Hi-Fi can be considered to be performing at par with other competitors. (Webb & Leeder 2007, p. 7)

Solvency Ratios

Debt to Asset ratio seeks to show the amount of debt financing present in the capital structure of a company. It shows the value the companys asset attributable to debt holders and equity holders. The debt to -asset ratio can be calculated as total liabilities divided by the total assets and JB HI-FI Company debt to assets ratio has been determined to be 61.63% in 2015 and 65.73% in 2014. This shows that the companys assets are financed more by debt than by equity. (Webb & Leeder 2007, p. 7)

Debt to Equity ratio seeks to determine the degree to which assets of an organization have been financed components of capital structure, that is, debts and the shareholders equity. It shows the amount of debt for every dollar of owners equity used to finance assets. The formula of debt- to equity ratio can be given as total liabilities divided by the total shareholders equity. The debt- to equity ratio JB HI-FI Company has been determined to be 1.61 in 2015 and 1.92 in 2014. This shows that JB HI-FI Company finances most of its assets using debt and the decrease in the ratio shows that in 2015 more assets were financed by equity compared to 2014.

Asset to Equity ratio seeks to highlight the amount of assets that have been financed by the shareholders equity. The formula of asset to equity ratio can be given as a total asset divided by the total shareholders equity and has been determined to be 2.61 in 2015 compared to 2.92 in 2014. The ratios can be deemed to be high, implying that most of JB Hi-Fi Company financed most of its assets with lesser amount of equity.

Based on the qualitative and quantitative analysis of JB Hi Fi, the recommendation is to invest in the company. This is because the company performed better in several fronts in 2015 compared to 2014 such as profit margin, return on assets, asset turnover, and in most instance outperformed the industry competitors such as in profitability and asset management..

Bibliography

Kieso, D, Weygandt, JJ & Warfield, T D 2013, Intermediate Accounting, 15 edn, John Wiley and Sons, Hoboken.

Wild, JJ, Shaw, KW & Chiappetta, B 2011, Fundamental Accounting Principles, 20 edn, McGraw -Hill Irwin, New Yor.

Wood, F. & Sang, A 2005, Business Accounting, 10 edn, Prentice Hall, Harlow.

Webb, K, Leeder, SR 2007, New Years resolution: lets get rid of excessive food prices in remote Australia, Medical Journal of Australia, vol. 186, no. 1, pp. 7-8, viewed 12 June 2012, <https://www-mja-com-au.ezproxy.cdu.edu.au/journal/2007/186/1/new-year-s-resolution-let-s-get-rid-excessive-food-prices-remote-australia>.http://www.thegoodguys.com.au/

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