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FINANCIAL STATEMENT ANALYSIS

Assignment 1
Due Date: Monday 21 June 2010
Anoop Biswas (21841620)

ACC00724

Contents page
Question 1...............................................................................................................3 Background....................................................................................................3 Financial Performance...................................................................................3 Question 2...............................................................................................................8 Question 3.............................................................................................................11 Question 4.............................................................................................................12 9. 0 References.....................................................................................................13

Anoop Biswas (21841620) Submission Date: 21 June 2010

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Question 1
Making use of your calculations of ratios, and interpretation of the financial statements provided, write a general appraisal of the financial performance of JB Hi Fi Limited for the two years ending 30 June 2009. As part of your evaluation, consider trends and changes in key variables and ratios from 2008 through 2009.
Background JB Hi Fi Limited (JB Hi Fi) is one of Australias leading retailers and specialises in home consumer goods, with particular focus on consumer electronics and electrical goods; and software including music, games and movies The Company opened its first store in 1974 and was later listed on the Australian Stock Exchange (ASX) in 2003. [A fully automated exchange, the ASX is Australia's primary
national market for equities, derivatives, and fixed-interest securities]. More recently JB Hi Fi

was listed in the ASX100 index, which is the major market index made up of the top 100 shares in the ASX. Since 2002, JB Hi Fi has enjoyed a market growth that has seen their market share increase year on year with store numbers increasing from 21 to 123. More recently, and for the two years between 2008 and 2009, JB Hi Fi has increased their number of stores from 89 to 123, an increase of almost 50%.

Financial Performance Performance reports, also known as Income statements are the terms used to define a report that details revenue and expenses for a certain period (Marley and Pederson, 2009). Performance reports are very important documents as they not only disclose the profit or loss a company has made; they also identify other vital information such as capital return and any potential inefficiencies within the operation. The consolidated accounts of 2008 and 2009, for JB Hi Fi showed gross profit margins of 21.86% and 21.64% respectively. A gross profit margin (GPM) is the term used to describe what remains from sales after a company pays out the cost of goods sold (Neish and Banks, 2009). The following equation is used to calculate GPM and is expressed as a percentage;

Anoop Biswas (21841620) Submission Date: 21 June 2010

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Gross Profit Margin (GPM)

Gross Profit X Sales


100

Consolidated accounts show a decrease from 2008 to 2009 of 0.18% to a GPM of 21.64%. In real terms this means JB Hi Fi generated 21.64% profit margin for 2009 and that for every dollar generated in sales, the company has 21.64 cents left over to cover basic operating costs and profit. This is down from 21.86 cents in 2008. Given the rapid growth of the business it has been reassuring to see GPM remain stable over this period. The marginal decrease in cents in the dollar expressed as GPM is relatively insignificant given the global financial crisis seen around the world which affected major retailers throughout Europe and America far more than was seen in Australia. These figures are significant as JB Hi Fi also continued with their program to expand by increasing stores by almost 50% over the two years between 2008 and 2009. Net profit margin (NPM) is a ratio comparing net profit after taxes to revenue. Investors can calculate the net profit margin by using the income statement. NPM is calculated by the following calculation; Net profit before interest & taxation Sales
NPM calculated for JB Hi Fi showed a consistent improvement between 2008 to 2009 increasing from 5.59% to 6.10% respectively.

Net Profit Margin (NPM)

100

2008 Sales ($m) Gross Profit Margin (%) Net Profit $'m (After Tax) GPM (%) NPM (%) Earnings per share (cents)
NOT THIS ONE

2009 2,237,266 21.64% 94,438 21.64% 4.22% 88.3

1,828,564 21.86% 65,085 21.86% 3.56% 61.8

Sales Revenue ($'000) Cost of sales ($'000) Gross Profit ($'000) Profit before tax ($'000) GPM (%) NPM (%)

2008 1,828,564 1,428,873 399,691 93,960 21.86% 5.14%

2009 2,237,266 1,823,675 413,591 135,493 18.49% 6.06%

Anoop Biswas (21841620) Submission Date: 21 June 2010

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Table 1 JB Hi Fi Ltd. Performance Analysis 2008 - 2009

GPM & NPM Calculations 23% 22%


Value GPM in %

21% 20% 19% 18% 17% 16% 2008


Year

5.14%

18.49%

5.40% 5.20% 5.00% 4.80% 4.60%

2009

GPM (%)

NPM (%)

Although their gross profit margin has remined stable they have managed to increase their net profit margin which is a result of reducing overheads in comarison to the increase to gross profit. When a business expands and grows this can produce ecomimies of scale and overheads tend not to grow in proprtion with the increase in sales. This could also be a business focus to decrease overheads (proprotionaly) due to the uncertainty in the workds ecomony.

Typically a company that does not return a NPM of between 10 and 20% is seen as ineffective (lecture notes). Furthermore, any business that has a GPM between 20 and 30% is seen as reasonable with a GPM over 50% seen as excellent (lecture notes). JB Hi Fis GPM has been consistent around the 21% to 22% mark. Although, the NPM is below 10% this may not be necessarily poor perfrroance, but a result of the comeptetiveness of the industry in ehich it operates. It is important to note that the sales have improved year on year (TABLE !), however neither the GPM or NPM has increased significantly over the same period. This lack of increase in return for investment may be due to an increase in the manufacturing cost of the goods sold but fails to take into consideration the increase in strength of the Australian dollar that can have a marked determination on return. It is important to note that during this period the fluctuations in the foreign exchange rate would advsrely affect the cost of purchasing goods. In the case of JB Hi Fi, they purchase their goods in US$, and the weakening of the AU$ would result in the cost of pruchaisng goods increase.

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Value NPM in %

21.86%

6.06%

6.20% 6.00% 5.80% 5.60%

Insert GRAPH OF $AUS VS $US The operating profit of a company can be assessed by analysing the return on assets (ROA) and the return on the shareholders equity ratio (ROE). ROA means Return on Assets and is a measure of a companys profitability. It is calculated by dividing its fiscal years earnings by its total assets and is expressed as a percentage. We use the ROA to indicate how well the resources, at the businesss disposal, have been used to create wealth (lecture notes), in other words, how efficient it can be at squeezing profit from its assets. A high ROA is a sign of solid financial and operational performance and is in an indication of good management. A decreasing ROA is a sign of a company in trouble, and particularly more troubling for businesses that are trying to grow. Over the two year period ROA has increase from 20.88% to 23.97% an uincrease of approximately 15% The ROE in comparison is used to reflect how much the company has earned on the funds its shareholders have invested (lecture notes) i.e. a measure of the companys profitability. Essentially, ROE reveals the profit a company generates using the money that shareholders have invested in the company. ROE lets investors know how well their money is being utilised. ROE is calculated by taking a company's net income for a given period and dividing it by shareholder's equity. A company that shows repeatedly poor ROE figures is likely to be struggling.

2008 2009 20.88% 23.97%

Profit before tax ($'000) Total Assets Shareholders equity ($'000) ROA ROE

2008 93,960 535,835 163,889 17.54% 57.33%

2009 135,493 661,651 229,252 20.48% 59.10%

Table 2 ROA and ROE calculations 2008 2009

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ROA & ROE Calculations 21% 20% 19% 18% 17% 16% 15% 14% 63% 61% 17.54% 57.33% 59.10% 59% 57% 55% 53% 2008
Year

2009

ROA

ROE

In 2009 the ROA for JB Hi Fi was 214.61%. This was a significant improvement on 2008. The increase in the ROA in 2009 indicates that the company is using its resources well to maximise profit. Caution should be taken when evaluating ROAs in that it is operations focused and the asset valuation can be calculated using different methods (lecture notes). Between 2008 and 2009, asset values increased from $535,835m to $661,651m, an increase of 23.48%. This is likely to have been due to the opening of new stores. NEED TO WRITE SOMETHING ON ROE Finally the earnings per share, as per the income statements for JB Hi Fi show that the company is in a strong financial position. For the purpose of computing earnings per share, there are two types of capital structure; simple and complex (Nikolai et al 2007). The earnings per share are the conversion of the absolute dollar amount of profit to a pershare basis (reading). An increase of 42.88% was seen in the earnings per share between 2008 and 2009; an overall increase of 26.5 cents. The strong values seen in the calculations indicates that in 2009 JB Hi Fi had had a strong year, despite a world economic downturn, and financially is in a strong position for 2010. The only trend that is not as positive is the NPM which could be related to the opening of a large number of new stores.

The ROE (ROE = EBIT/Shareholders equity x 100) has been calculated firstly utilising the end of financial year value for the shareholders equity and then utilising an average equity as the equity has changed so much over the period of a year. In 2007 the ROE is 1.2 utilising the shareholders equity or 0.85 using an average shareholders equity. This is significantly above the average return on equity for companies for the past ten years which has ranged from 5 to 15 per cent (lecture notes). The ROE value is higher than the ROA value as the company has earned a return on the assets financed by the creditors (reading).

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Value ROE in %

20.48%

Value ROA in %

Question 2
Making use of your own calculation of ratios, evaluate the financial position of JB Hi Fi Limited at 30 June 2009. As part of your evaluation, make comparisons between the years 2008 and 2009.
Current ratios and quick ratios are used to assess the liquidity of a business and is a measure of a companys ability to meet short term debt obligations (Nikolai et al. 2007). Current ratio is calculated by dividing current assets by current liabilities. The higher the ratio the stronger the companys short term financial position is seen to be. JB Hi Fis current ratio for 2008 and 2009 respectively was 1.38 and 1.32, a decrease of just over 5%. A business that returns greater than a 2:1 current ratio is considered to be in a strong position. A worrying trend would be if the current ratio was decreasing year on year given the companys plans for growth. The quick ratio is used to exclude inventory from the total current assets. The reason for this is that inventory cannot always be converted into cash quickly or easily (Lecture notes). Quick ratio is calculated by taking the current assets subtracting the inventory and dividing it by current liabilities. In contrast to the current ratio 2009 saw an increase from 2008 recording a quick ratio from 0.82 to 0.98. This marginal increase indicates that the company has more cash at its dispense compared to 2008 and could be due to better working capital management (REFERNCE) and an improvement in just in time inventory management. The Debt to Assets ratio or Debt to Total Assets financial ratio is a measure of a companys solvency. In other words, it is a corporations ability to meet its fixed expenses, such as wages and rental costs, with the ability to maintain sufficient fluidity to continue to manage its expansion and growth. Debt to Assets ratios are calculated by dividing Total Liabilities by Total Assets. There is a greater risk associated with firms that have a high Debt to Asset ratio and this may indicate low borrowing capacity, which in turn will affect the firms financial flexibility. For a company looking to grow, a high Debt to Assets ratio is not a good position to be. JB Hi Fis Debt to Asset ratio for 2008 and 2009 respectively were 0.69 and 0.65 respectively indicating their ability to meet its long term fixed costs remain strong and this in turn will improve the firms ability to raise finances should the need arise.

Anoop Biswas (21841620) Submission Date: 21 June 2010

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2008 Current assets $'000 Current liabilities $'000 Inventory $'000 Current ratio Quick ratio 330,202 238,493 133,452 1.38 0.82

2009 426,239 323,724 108,675 1.32 0.98

Table 3 Current ratio and Quick ration calculations 2008 2009

Financial Performance Analysis - JB Hi Fi 2008 - 2009

1.50 1.20 0.90 0.60 0.30 0.00

1.32 0.69 0.31 2009 Year Current Ratio Quick Ratio

1.38

0.65 0.24 2008

Debt to AssetsRatio

Figure 1: Liquidity and gearing ratio trends


The interest cover ratio, calculated by dividing EBIT by interest expense, and is a measure of a firms ability to honour its debt payments. An interest cover ratio of; Less than 2.5 x is an early warning sign of financial weakening

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Less than 1.5 x indicates serious concerns of the overall health of a company Less than 1 shows that a company does not generate sufficient cash to cover its interest obligations. JB Hi Fis interest cover ration for 2008 and 2009 respectively were 110% and 176.7% and is linked to the increase in revenue seen over this period. This high ratio shows JB Hi Fi to be in a strong financial position and can easily repay its interest expense from operations earning. The strength of this ratio indicates that JB Hi Fi that compared to its total earnings the firm has very little outside debt. Finally the cash balances at year end for 2008 and 2009 respectively were -$m 1492 and $m 35790. This increase in the firms cash balances is promising given the continued increase in growth the company is seeing. The reason for the negative cash balance at the 2008 year end may have been due to a decrease in sales and the increase in 2009 due to continued retail growth and the strengthening Australian dollar.

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Question 3
You are required to describe and explain the way that JB Hi Fi has grown over six years. Critically evaluate the way this company has been built up over six years.
The increase between 2006 and 2007 is positive as there is evidence that companies heading for collapse show deterioration in this ratio in the 5 years preceding the collapse (lecture notes). This is supported by the trends seen in the current ratio.

Before increasing again in 2007 to 0.61. Figures from the Australian Bureau of statistics indicate that Australians are spending more on consumer products, and this trend has been increasing since 1986, while there was an 0.6% increase in consumer spending in August of 2007. This increase in consumer spending is helping to produce strong financial figures for Just Group Holdings as indicated by both the current ratio and quick ratio, which are both showing a strong ability for the company to repay its debts, related to the continued strength of consumer cash.

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Question 4
Making us of your own calculations of ratios, appraise JB Hi Fi as an investment from the perspective of shareholders.

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9. 0 References
Stephen Marley and Jeffrey Pedersen (2009) Accounting for Business An Introduction, Second Edition

Nikolai, Bazley, and Jones, Intermediate Accounting, 10th ed., Thomson South-Western, 2007

Neish and Banks, 2009) Management accounting Principles and Applications

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