JB Hi-Fi Limited – Financial Statement Analysis (Ratio Analysis)

An entity’s financial statements present critical information through which investors can make prudent investing decisions. The information in financial statement provides data for horizontal analysis (comparative analysis of different years’ performance to generate a trend of the performance), vertical analysis (representation of different items in a financial statement as a proportion of a base amount) and ratio analysis that delineates relationships among various items presented in financial statements (Weygandt et al.). Ratio analysis provides information relevant to many users (e.g. managers, investors and lenders) and includes aspects such as liquidity, solvency, profitability and market position of an entity (Helfert 96; Reimers 480). For BCity sports club, core concerns are JB Hi-Fi’s profitability, gearing and market value (Brigham and Ehrhardt 89; Helfert 115; Weygandt et al.). Such aspects inform BCity sports club on the potential return by investing in JB Hi-Fi, how JB Hi-Fi disposes earnings available to common shareholders, and how JB Hi-fi’s current results affect the market value of its stocks (Herfert 115).  In this section, the report highlights the core ratios for evaluating such aspects.

Ratio analysis for JB Hi-Fi indicates favourable performance in various core aspects. The Profitability ratios (Table 1), for instance, indicate an improving position of shareholder’s return. Despite gross profit and profit margins remaining constant over the three-year period, other ratios indicate such favourable position. The Asset turnover for subsequent years for instance indicates that JB Hi-Fi has improved is use of assets to generate sales over the years (Weygandt et al.). This is reinforced by corresponding improvement in JB Hi-Fi’s return on asset.

Table 1:

Ratio Analysis of JB Hi-Fi Financial Performance

Ratio Formula 2010 2009 2008
  1. a) Profitability Ratios
  2. i) Gross Profit Margin
Gross Profit ÷ Net sales 0.22 0.22 0.22
  1. ii) Profit Margin
NOPAT ÷ Net sales 0.04 0.04 0.04
iii)Asset Turnover Net Sales ÷ Average Assets 3.97 3.89 3.70
  1. iv) Return on assets
NOPAT ÷ Average Assets 0.17 0.16 0.13
  1. iv) Return on Equity
NOPAT ÷ Average equity 0.52 0.58 0.55
  1. v) Earnings Per share (EPS)
NOPAT ÷ Average outstanding shares 109.70 88.30 61.80
vi)Price Earnings Ratio (P-E) Per-share market price ÷ EPS 0.14 0.22 0.17
  1. vi) Dividend Payout Ratio
Cash Dividends ÷ Profit 0.57 0.35 0.26
  1. b) Gearing ratios
  2. i) Debt to total assets ratio (D-A)
Total debt ÷ Total assets 0.59 0.65 0.69
  1. ii) Times interest earned
EBIT ÷ finance cost 25.17 17.67 11.00
iii) Cash Debt Coverage Net Operating cash flows ÷ average Assets 0.22 0.24 0.09

Data source (JB Hi-Fi 2008, 2009 and 2010 Annual Reports).

Similarly, the improved earnings per share over the three-year period indicate that JB Hi-Fi presents a sound investment opportunity. Such improvement in a period when the world was experiencing a financial crisis indicates the ability of the entity to generate earnings with constraining environmental factors. Additionally, the gearing of the entity indicates its ability to manage debts.  Such a position is beneficial to long-term investors since increased funding of the entity’s asset through debt could reduce the returns for investors, as revenues would be used to service such debts (Helfert 130). With an increasing pay-out, JB Hi-Fi presents a sound investment opportunity to long-term investors  to earn their return based on dividends payments. However, the JB Hi-Fi’s performance does not reflect its market value since its price-earnings (P/E) ratio for 2010 is unfavourable compared to other years despite a better financial performance in the year. Accordingly, the entity does not offer a sound investment opportunity for investors who intend to make their return by selling the stocks they hold in JB Hi-Fi in the Market.

Proceed to part 6 here.

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