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Briefly describe the Description of JB Hi-Fi Company

Description of JB Hi-Fi Company

With the ramified economic changes and complex business structure, each and every investor should use financial analysis tools before making investment decision. These financial analysis tools assist in evaluating financial performance of company. There are several financial tools such as ratio analysis, bottom up analysis, cash flow analysis and top down analysis. This analysis is used to evaluate the past and determine the future trend of company. In this report, JB Hi-Fi Company has been considered to provide the recommendation to investor and directors of company regarding the financial leverage and financial performance.

JB Hi-Fi Company is Australia and New Zealand retail consumer goods specialised in video games, Ultra blue rays, DVD and CD players and other home appliance seller.

The stock price movement of company is A$ 23.51 +0.11 (+0.47%) which shows the positive increment for the investors in their investment. The main Headquartered of company is in Chadstone, Australia.  The current CEO of company is Richard Murray.

These below are the persons who are the key shareholders of the JB Hi-Fi Company who owns highest shares. 

The table above given shows the highest numbers of shareholder investors who have invested their capital in JB Hi-Fi Company. 

The governance structure of JB Hi-Fi Company reflects the compliance program which company has undertaken to comply with the all the rules and regulations. 

(Yahoo finance, 2017)

Key managerial person

The present CEO of JB Hi FI Company is Richard Murray

Name

Age

Since

Current Position

Gregory Richards

2012

Non-Executive Chairman of the Board

Richard Murray

2015

Chief Executive Officer, Executive Director

Nick Wells

Chief Financial Officer

Simon Page

2015

Chief Information Officer

Cameron Trainor

2016

Managing Director

Tim Carter

62

2015

Supply Chain & JB Hi-Fi Solutions Director

Peter Green

2010

Operations Director

James Saretta

2016

Strategy & Digital Director

Terry Smart

2016

Managing Director – The Good Guys

Douglas Smith

51

2012

Company Secretary

Stephen Goddard

2016

Non-Executive Director

Beth Laughton

2011

Non-Executive Director

Mark Powell

55

2017

Non-Executive Director

Wai Tang

2015

Non-Executive Director

Richard Uechtritz

2011

Non-Executive Director

(JB Hi-Fi Company) 

This ratio analysis is used to evaluate the financial performance of JB Hi-Fi Company since last two years

Financial information of JB Hi-Fi Company

JB Hi-Fi Limited (JBH.AX)

Particulars (Amount in Million

2014

2015

2016

2017

AUD$

AUD$

AUD$

EBIT

-300

-302

-322

-486

Interest

9

6

4

11

Net profit

183

196

218

259

Total Assets

860

895

992

2,452

Total Liabilities

565

552

588

1,599

Shareholders' Equity

295

343

405

854

Short term solvency ratio 

Current ratio

The current ratio evaluates the JB Hi-Fi Company’s ability to pay off its short term and long term debts. This ratio shows that company has been increasing its investment in its current assets which is consistently increasing the overall output and production level.

Liquidity ratio

Years

2017

2016

Current ratio

         1.57

1.32

Quick ratio

.34

30

It shows that JB Hi-Fi Company has lower down its investment in the current assets which has reduced its current ratio to 1.32 points in 2017. It is .20 points lower as compared to last year data.

The quick ratio of company is also too low which depicts that company has kept very less investment in the current assets other than inventories (JB Hi-Fi Company. 2015). The quick ratio has shown the slight changes which reflect that company needs to increase its investment in its inventory if it wants to increase the production level as per the clients need in market.

Providing equation

2015

2016

2017

Net profit After tax/OE

0.55154

0.475979385

0.42241

0.34557

EBIT/TA*NPAT/EBIT*TA/OE

0.55154

0.475979385

0.42241

0.34557

Governance and Ownership Structure

Debt to equity

The debt to equity shows company’s financial leverage which will demonstrate the financial risk of the business.

Computation of debt to equity of Company

3.    Debt Ratio

2014

2015

2016

2017

A.  Total Liabilities

565

552

588

1599

B.      Total assets

860

895

992

2,452.00

(A/B)

66%

62%

59%

65%

The debt ratio of company has been stable since last five years. However, in 2017, JB Hi-Fi Company had 65% debt to equity which is 6% higher as compared to last year data. , JB Hi-Fi Company is having higher financial leverage.

The gearing ratio shows company’s ability to pay off its interest payment out of the earnings before interest and tax.

Gearing Ratio

2014

2015

2016

2017

Gearing Ratio

-3%

-2%

-1%

-2%

 The gearing ratio of JB Hi-Fi Company has been showing the negative results. Company has not having adequate amount of return or net profit which is negatively impacting the business of organization.

Inventory turnover ratio

It shows company’s efficiency to deploy its funds in its business.

Efficiency ratio

Years

2017

2016

Inventory turnover ratio

6.25

6.03

Asset turnover ratio

3.27

4.19

Receivable turnover ratio

131.33

132.66

Days' sales in inventory

2.78

2.75

Days' sales in receivables

58

60

The inventory turnover ratio of JB Hi- Fi Company reflects that company has been managing stable inventory turnover and kept very less amount of capital in the inventories.

The assets turnover ratio reflects JB Hi-Fi Company’s ability to manage its funds in its assets  it has reduced its asset turnover to 3.27 times in 2017 which is 1 time lower as compared to last year data.

The debtor turnover ratio has been decreased by 1 times which shows the negative results as company has to block more funds in the busienss.

Computation of Return on Assets of Company

1.        Rate of Return on Assets

2014

2015

2016

2017

A.      Net income

183

196

218

259

B.      Total assets

860

895

992

2,452

          (A/B)

21.28%

22%

22%

11%

The rate of return on equity has decreased to 11% in 2017 which is 10% lower as compared to last year data. It is observed that company has lower down its return earning capacity since last one year (JB Hi Fi., 2018). 

Return on equity

2.       Rate of Return on Equity

2014

2015

2016

2017

A. Net income available to equity shareholders.

183

196

218

259

B. Shareholder’s Equity

295

         17,981

405

854.00

(A/B)

62.03%

1.09%

53.83%

30.33%

The return on equity of company has gone down as compared last year. Return on equity of JB Hi-Fi was 53% in 2016 which have gone down to 30.33%.  The main reason of decrease is related to the negative profit earning capacity of company (JB Hi Fi., 2018). 

Earnings per share

It is the amount of portion earned or available to the shareholder

Market Value ratios

Years

2017

2016

Earnings per share

-        2.80

-        7.40

P/E ratio

             -   

             -   

Dividend pay-out ratio

             -   

             -   

The market value ratio of company has shown the negative results.

Price to earnings ratio

It measures company’s share price value in the market and its impact on the earning of company (Collier, 2015).

Dividend payment ratio

Company has paid 1.2 dividend payments to its shareholders to attract more investors in business (JB Hi Fi., 2018).

The above graph reveals that company has been creating value on its investment. It is observed that the share price movement of the JB Hi- Fi Company is too volatile which shows that investors might face high risk if they invest their capital in this company.

Key Managerial Person

The share price movement of the all ordinary index is also showing the high amount of increment since last two years. It shows that as compared to market, JB Hi-Fi Company has been creating less value in market (JB Hi Fi., 2018).

It is analyzed that company has increased its share price value but due to the negative business factors the value share price have gone down.

  • There are several announcements which have directly and indirectly impacted the share price movement of JB Hi-Fi Company. It is analyzed that the share price movement of the company is based on the positive and negative implication of the announcement made by company.
  • The JB Hi-Fi Company has invested AUD $ 213 billion investment in its research and development department which may negatively impact the present profitability and positively impact the share price of company in long run.
  • The merger and amalgamation of company with the small companies will also positive impact the share price of company (JB Hi Fi., 2018).

Stock information and Beta calculation

The beta value of company shows that changes in the share price of company based on the changes in the price of the all ordinary index value (JB Hi Fi., 2018).

The beta value of company has

The beta value of National Australian Bank

Regression Statistics

Multiple R

0.028713

R Square

0.000824

Adjusted R Square

-0.04913

Standard Error

0.024156

Observations

22

ANOVA

df

SS

MS

F

Significance F

Regression

1

9.63E-06

9.63E-06

0.016502

0.899069

Residual

20

0.011671

0.000584

Total

21

0.01168

Coefficients

Standard Error

t Stat

P-value

Lower 95%

Upper 95%

Lower 95.0%

Upper 95.0%

Intercept

0.008187

0.005151

1.589412

0.127651

-0.00256

0.018932

-0.00256

0.018932

X Variable 1

0.009512

0.074043

0.128459

0.899069

-0.14494

0.163962

-0.14494

0.163962

E(R) =

E(R) = Return on Capital required

 = % of risk free rate of return

β = Beta

= Market risk factor (National Australian Bank. (2017).

Calculation of Required rate of return

Risk free rate (A)

4%

Beta (B)

0.009511506

Market Risk premium (C)

6%

Required rate of return [A+(B*C)]

4.06%

 (Please see the excel)

Notes- The risk free rate of return computation is based on the return available on the 10 years treasury bonds of the Australia (Weygandt, Kimmel, and Kieso, 2015).

After analysing the annual report of JB Hi-Fi Company it is observed that company has good amount of flow in is business. The cost of capital of company is very low which will assist it to invest in other business investment projects. It is inferred that company has created good amount of investment in its business. However, due to the negative business output and less profitability, company need to select other business investment projects. JB Hi-Fi Company has conservative investment method which shows that company is investing in its own and other business slowly. The investment of company is based on the market factors(JB Hi Fi., 2018).

Cost of capital- 3.55%

Computed by using the CAPM method

Cost of debt- 1.93%

The cost of debt is compute by following formula

 i.e. interest/ debt *100 (Brigham, and Ehrhardt, 2013).

WACC = cost of debt* portion of the debt capital+ cost of Equity * portion of the Cost of equity

WACC

Capital Amount

Cost of capital

% of portion

WACC

Equity

854

4.06%

35%

1.41%

Debt

1,599

0.69%

65%

0.45%

Total capital

2,453

WACC

1.86%

The weighted average cost of capital is too low which reflects that company will have higher return on capital employed if it undertakes other projects. The WACC of company is 1.86% which is very low for the investment purpose (JB Hi Fi., 2018).

The weighted average cost of capital is the total amount of capital which company needs to pay to its creditors and other lenders. If company has higher WACC in its business then it will restrict company to undertake other investment projects in its business. It will also negatively impact the return on capital employed of company (JB Hi Fi., 2018).  

Performance Ratio Analysis of JB Hi-Fi Company

The financial leverage and gearing ratio is determined on the basis of debt and equity portion of company. The debt to equity shows company’s financial leverage which will demonstrate the financial risk of the business (JB Hi Fi., 2018).

Computation of debt to equity of Company

3.    Debt Ratio

2014

2015

2016

2017

A.  Total Liabilities

565

552

588

1599

B.      Total assets

860

895

992

2,452.00

(A/B)

66%

62%

59%

65%

The debt to equity ratio of company is way too higher which shows high financial leverage of company. It is observed that company has lower down its cost of capital by increasing the debt portion which will eventually positively impact the return on capital employed (JB Hi Fi., 2018).

The gearing ratio of company shows its ability to cover the interest payment from the earning capacity of company. It is observed that company has increased the gearing ratio negatively which might result to failure of JB Hi-Fi Company in long run (JB Hi Fi., 2018). 

Gearing Ratio

2014

2015

2016

2017

Gearing Ratio

-3%

-2%

-1%

-2%

 The gearing ratio is negative due to the negative impact of the profitability and less interest payment (Dagwell, R., Wines, G. and Lambert, C., 2015).

JB Hi-Fi Company has followed profit based divided policies in its business.  This type of dividend policy is followed when company offer good amount of capital to its shareholders. Company has been facing loss in its business since very long time which negatively impacts its business operations. It is observed that company has expanded its business and offering very less amount of divided (Dahmash, 2007). 

To,

Directors of the JB Hi-Fi Company

Address:-

After analysing all the detail of the JB Hi-Fi Company, it is inferred that the weighted average cost of capital is too low. If JB Hi-Fi Company could undertake other projects which offer higher return on capital employed.

After analysing all the details and financial factors of business, it could be inferred that company has good amount of return from its business. If company could follow proper strategic program such as changes in debt to capital structure, dividend policy and business expansion then it will eventually increase the value on the capital investment of National Australian Bank (JB Hi Fi., 2018).

Now in the end, it could be inferred that company needs to maintain the effective profitability in its busienss which will eventually increase the overall outcomes. The financial leverage of company is also very high which shows that company (JB Hi Fi., 2018).

Conclusion 

There are several factors which have positively and negatively impact the financial performance of company. It is observed that if company should lower down the financial leverage of business which will increase the overall efficiency of the busienss. It is analyzed that if company could undertake the effective capital structure then it could lower down its overall financial risk and eventually increases the overall profitability as well.  The rate of return on equity has decreased to 11% in 2017 which is 10% lower as compared to last year data. Now in the end, it could be inferred that if the proper functions are not undertaken then it will negatively impact business in long run.   

References

Collier, P.M., 2015. Accounting for managers: Interpreting accounting information for decision making. John Wiley & Sons.

Dagwell, R., Wines, G. and Lambert, C., 2015. Corporate accounting in Australia. Pearson Higher Education AU.

Dahmash, F.N., 2007. An Examination of the Value Relevance and Bias in the Accounting Treatment of Intangible Assets in Australia and the US Over the Period 1994-2003 Using the Feltham and Ohlson (1995) Framework. University of Western Australia.

JB Hi Fi. (2015). Annual report. Available at https://www.jbhifi.com.au/General/Corporate/Shareholder-Matters/Financial-Annual-Reports/., , Accessed on 29th April 2015

JB Hi Fi.. (2016). Annual report. Available at https://www.jbhifi.com.au/General/Corporate/Shareholder-Matters/Financial-Annual-Reports/., , Accessed on 29th April 2018

JB Hi Fi.. (2017). Annual report. Available at https://www.jbhifi.com.au/General/Corporate/Shareholder-Matters/Financial-Annual-Reports/., , Accessed on 29th April 2018

JB Hi Fi.. (2018). Annual report. Available at https://www.jbhifi.com.au/General/Corporate/Shareholder-Matters/Financial-Annual-Reports/.,, , Accessed on 29th April 2018

Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & managerial accounting. John Wiley & Sons.

Yahoo finance, 2018 retrieved on 19h January from https://in.finance.yahoo.com/

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