Financial Performance of JB HI- FI Retail Company

Question: You are to use the Five-Step Analysis Process Outlined at the End of the Week 1 Content to undertake a Financial Analysis of the Company Use Data from the last two Financial Year. Answer: Introduction In this report financial analysis has been made on the financial performance of JB HI- FI Retail Company. Financial analysis is the process to evaluate the financial performance of company by taking into consideration of all the financial data shown in balance sheet. There are several financial tools such as ratio analysis, Du point analysis, investment analysis, horizontal analysis, interest cover ratio and vertical analysis. JB HI-FI is an Australian company, engaged in providing retail of consumers goods specialized in video games and other home appliance. The main headquarter of company is in Australia which has been operated under the guidance or instruction of Richard Murry CEO of company. Body context Five step analysis processes is used to identify how well company has been performing throughout the time. Ideally, this analysis is used by investors to make efficient investment decision for creating value from their capital. Step-1 Evaluation of Cash Flow Statement Cash flow statement provides liquidity position of the company which reflects how well company is keeping cash inflow to meet out its liabilities. By considering annual report of JB HI-FI following things have been considered. Computation of cash flow statement 2016 2015 % Change in cash flow $'000 $'000 Cash flow From operating activities 185140 179896 3% Cash flow From investment activities -52001 -44370 17% Cash flow from Financial activities -130565 -129640 1% Operating profit margin- By evaluating the financial statement of company it was observed that JB HI- FI Ltd has increased its inflow from operating activities by 3% as compared to last year. The changes in cash inflow from operating activities have been aroused due to decrease in payment to suppliers and positive increment in the amount receipt from clients. Investing activities- JB HI- FI has high amount of cash outflow from its investing activities which could results into negative impact on the liquidity position of company. JB HI- FI Ltd has increased its cash outflow payment by 17% as compared to last year from its investing activities. Increment in cash outflow from investment activities has been found due to high amount of payment by company to acquire plants and machinery in current year. Financial activities- Currently JB HI- FI has high cash outflow from its financial activities which is related with repayment of borrowings, dividend payment to shareholders and other financial expenses. By evaluating companys cash flow statement it is evaluated that there is only 1% changes in cash outflow from financial activities as compare to last years. Step- 2 Evaluation of Financial Performance of Company Free cash flow of company- It represent the cash that company generate from its business functioning after spending the money required to maintain business. JB Hi-FI Company has been able to generate increased revenue and profit in 2015 and 2016, reaching a record $ AUD 3954467000 total revenue for the fiscal year 2016. Additionally, company has increased its Net profit margin in 2016 to .38 %. Further capital expenditure of company has increased to AUD $ 130 million in 2016 which is expected to be cap out at AUD $ 170 million in 2017. Return on capital invested It is the return on capital that company is making over its cost of capital. By evaluating financial statement of JB HI- FI it is considered that company has increased its return on capital employed to .108 in 2016 as compared to last year. This reflects that company has been deploying its capital in efficient manner. Net operating profit after tax- This is the amount of profit which is eared by JB HI-FI from its business operation. It is considered that NOPAT of the company has increased by 11% in 2016 as compared to last year. It reflects that company has deploying its capital in efficient manner and increasing its total revenue as well. Operating capital- It is the capital amounted invested in the business functioning of JB HI-FI. It is computed that AUD 2558685000 amount has been deployed in the value chain activities of company in 2016 which is 8% more than its last year operating capital. Therefore, it could be Inferred that company has increased its operating capital to increase business functioning. Step- 3 Du Pont Analysis This analysis is used to identify the true performance of JB HI- FI by using book value of assets engaged in its business with its return on capital earned. Company has 196% returns on equity which is computed by taking the book value of all total assets. It revealed that company has been earning good amount of profits in both years and creating value in its capital investment. DuPont Model: What If Analysis Income Statement Sales $3,954,467 Expenses (COGS/Oper. Exp.) $3,089,059 Net Profit After Taxes $795,893 Interest Expense $3,857 divided by Net Profit 20.13% Income Taxes $65,658 Sales $3,954,467 Margin multiplied by ROA = 80.16% Balance Sheet Sales $3,954,467 Current Assets $702,518 divided by T. Asset 3.983021 Total Assets $992,831 Turnover Long Term Assets $290,313 ROE mult. by 196.57% Current Liabilities $446,833 Total Liabilities $587,679 Long Term Debt $140,846 T. Assets $992,381 Stockholder Equity $404,702 divided by Fin. Lev. 2.45 Multiplier Equity $404,702 Before Tax Cost of Debt 10.00% Tax Rate 30.00% After Tax Cost of Debt 7.00% NOTE= $= AUD000 Step-4 Ratio analysis In this step of financial ratio analysis of JB HI- FI Company and its interpretation has been done. Liquidity ratio This ratio depicts the company ability to pay off its short term and long term debts. Current ratio- Company has decreased its amount blockage in its inventory which results into downward in its current ratio to 1.57 in 2016 from 1.62 in 2015. Computation of ratio analysis Liquidity ratio 2016 2015 Current ratio 1.572216018 1.621989504 Quick ratio 0.349304998 0.362915948 Working capital 255,685.0 236,565.0 Quick ratio- This ratio depicts the utmost liquidity position of company. However, company has maintained its liquidity position in effective manner in both years with slight changes. This ratio depicts how well company is performing in driving profit from its deployed assets. Profitability Ratios 2016 2015 Operating Profit Margin 0.021427161 0.055161965 Net Profit Margin 0.038483315 0.0373784 Return on Capital Employed 0.3 0.7 Return on Equity 0.376032241 0.397436233 Return on Total assets 0.153279863 0.152524042 Operating Profit Margin It is evaluated that company has reduced its expense and increased its total revenue throughout the time. It results into decrease in operating profit margin by 30% as compared to last year. Net Profit Margin It is analyses that company made increment its net profit margin. However, it depicts that JB HI- FI Company has deployed its capital in efficient manner which results into driving good amount of profit. Return on Capital Employed It is the ratio which divulges the relation between return earned by the company on the basis of capital employed. However, this return should be greater than its cost of capital otherwise it would result into loss of company from its business functioning. Company has decreased its return on capital to 30 % from 70% in 2016. Return on Equity It reflects the relation between net profit and equity capital of shareholders in company. JB HI- FI Company has been providing 37% return to its shareholders in 2016 which is 2.29 % less as compare to last years return on equity. However, this has decreased due to its high payment of finance cost. Solvency Ratio This ratio reflects how well company has been maintaining its financial risk in its business operation. Debt equity ratio of JB HI- FI Company is 1.45 in 2016 which is very effective. However, company has decreased its debt- equity ratio by .15 % as compared to last year data. Debt equity ratio Capital structure ratio 2016 2015 Debt- equity 1.452127738 1.605728443 Interest coverage ratio 21.96862847 33.99004555 Gearing Ratio This ratio divulges companys ability to pay off its interest amount. However, company has very low Gearing ratio in both years. If any uncertainty in the business function arises then company could face loss in its business. Efficiency Ratio This ratio provides how well company has invested its money in its business functions. Efficiency ratio Efficiency ratio 2016 2015 Receivable turnover ratio 44.04790786 47.983393 Creditor turnover ratio 8.695059477 9.080369657 Inventory turnover ratio 6.025621569 6.08830971 Creditor Turnover Ratio This shows the chain of amount blocked in its credit purchase. In both years company has 8.69 and 9.08 creditor turnover ratio in 2016 and 2015 respectively. It depicts that company has maintained less effective turnover ratio in both years. Debtor Turnover Ratio This ratio provides the relation between total credit sales and average debtors of company. However, in both years company has been maintaining effective debtor turnover ratio of 44.04 and 47.98 receivable turnover relation in 2016 and 2015 respectively. Stock Turnover Ratio This ratio reflects the relation between average stocks and sales of company during the years. It is further observed that in both years 2015 and 2016 company has maintained 6 stock turnover ratio which is very less as compare to industry stock turnover in retail business ((Lo, 2013). Step- 5 Conclusion It is evaluated that JB HI-FI has increased its business efficiency in significant manner. By comparing the data of company with its competitors it is identified that where all the other rivals in the market are suffering loss due to sluggish market condition, JB HI-FI has been earning good amount of profit. However, by evaluating financial statement It could be inferred that JB HI- FI has to maintain its liquidity position in effective manner to meet its all the cash outflow requirements. If company is unable to maintain enough liquid in its business functioning then it may result into destruction in its smooth business operation. All other company in same group mapping are providing negative 15.17% return on equity to its investors while on the other side JB HI- FI providing 37% return to its investors. In addition to this, after analyzing its last year performance, company has improved its business functioning drastically. Now in the end it would be inferred that all the investors who want to create value from their investment should invest their money in JB HI-FI Company.