Assignment Tasks
This assignment task is a written report and analysis of the financial performance of one selected listed company on the ASX in order to provide financial and investment advice to a wealthy investor. This assignment requires your group to undertake a comprehensive examination of a firm’s financial performance based on update financial statements of the selected company.
Background
You’re a group of investment analysts who work for a large investment consulting firm based in Australia. There’s one big institutional investor from overseas that is interested in investing in the Australian market. You’ve been asked to choose one listed company the industry you think will have the most promising future for investment in Australia, then evaluate the performance of that company. Finally make a recommendation through your Report to the investor whether and why they should or should not invest in the company.
Solution
Abstract:
This report looks at the JB Hi-Fi Company for investment potential. JB Hi-Fi Limited is a company which is engaged in the home consumer products retailing market. The company is based on two geographical segments: New Zealand and Australia. The liquidity of the company is also analyzed in detail. The company is investigated in terms of its profitability, efficiency, and operational capabilities. The dividend policy is also analyzed which shows a stable stream of dividends paid each year. Sensitivity analysis is conducted based on estimations for the next three years to better predict its cash flows for future investments. Based on the analysis, the recommendation letter is drafted for the suggestion on investment in this company. The results find the company as a good potential for investment in the future for the investment institution.
1-Introduction:
This report looks at the JB Hi Fi Company for investment potential. The company is investigated in terms of its profitability, efficiency, and operational capabilities. The liquidity of the company is also analyzed in detail. Sensitivity analysis is conducted based on estimations for the next three years to better predict its cash flows for future investments. The dividend policy is also analyzed which shows a stable stream of dividends paid each year. The results find the company as a good potential for investment in the future for the investment institution.
2-Financial Analysis of JB Hifi:
2.1-Description of the Company
JB Hi-Fi Limited is the company which is engaged in the home consumer products retailing market. The company is based on two geographical segments; New Zealand and Australia. The company is involved in the sale of the consumer electronics products and services which includes the Blue-ray Discs, games, white goods, DVDs, digital video contents, musical instruments, small appliances, CDs, cameras, computers, audio equipment, televisions, and software. The company also provides consulting and information technology services. The company has more than home-branded stores in Australia with four in New Zealand operating 190 stores in total. The company also offers Home roll-outs and has about 40 stores with small appliances. The company has JB Australia, JB New Zealand and the Good Guys. Around 70% of the revenue is generated by JB Australia, while the 20 to 30% is generated from the Good guys. JB New Zealand gives 3% to 4% of the total revenue.
Geographically, the sales per region show that Australia contributes around 95% of the total sales revenue while the remaining is generated from the New Zealand region (Market Screener, 2018).
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The company is generating profits at a time when other retailers are failing. The company revenue has been dependent on its major sale profits which were relying on the strong sales of headphones, drones, and TVs. The company is now the seventh largest electronics chain which has risen in global fame by starting from the northwest Melbourne and has stores in New Zealand and Australia (Brook, 2018).
2.2-Calculation and analysis of the Performance Ratios:
For the analysis financial statements of the company for the last three years of 2016, 2017, 2018, the financial ratio analysis is conducted. The figures for the ratio analysis are taken from the website of Morningstar.com. Furthermore, for the sensitivity analysis and the estimation of the balance sheet and income statement figures, the website of the market screener is used. The computations of the financial ratios for profitability, efficiency, and liquidity ratios are based on the division of the relevant figures to compute the ratio. The profitability ratio of the company is computed using the income statement data. The ratios show the profitability of the company’s retailing operation in Australia and New Zealand. The company has a gross profit margin of 21.88% which has declined in the last three years by less than 1%.
| Profitability Ratios | 2016 | 2017 | 2018 |
| Revenue | $ 3,954,467 | $ 5,628,000 | $ 6,854,300 |
| Cost of Goods Sold | $ 3,089,059 | $ 4,397,500 | $ 5,384,100 |
| Gross Profit Margin | 21.88% | 21.86% | 21.45% |
| Operating Income | $ (322,029) | $ (485,600) | $ (599,200) |
| Revenue | $ 3,954,467 | $ 5,628,000 | $ 6,854,300 |
| Operating Profit Margin | -8% | -9% | -9% |
| Net Profit | $ 152,181 | $ 172,400 | $ 233,200 |
| Total Revenue | $ 3,954,467 | $ 5,628,000 | $ 6,854,300 |
| Net Profit Margin | 3.85% | 3.06% | 3.40% |
(Pandey, 2015)
The operating profit margin of the company has evidently been negative in the last three years. The margin has increased over the three years from -8% to -9% from 2016 to 2018.
The net profit margin for the company has however been positive because of the interest income and provisions for the income taxes. The net profit margin of the company has declined from 3.85% to 3.06% in 2017 and then increased to 3.4% in 2018. The company cost of goods sold and the operating expenses have increased in the three years which is one cause of the decline in the profit margins.
The operating efficiency ratios of the company are also computed which shows that the company efficiency of its operations has improved over the last three years. The company inventory turnover ratio shows how efficiently the inventory has been turned into sales. The greater the ratio, the better the inventory ratio is considered. The company inventory turnover for the last three years has increased from 4 times to 6 times. The company efficiency in terms of its inventory liquidity has improved in three years (Morning Star, 2019).
| Operating Efficiency Ratios | 2016 | 2017 | 2018 |
| Cost of Goods Sold | $ 3,089,059 | $ 4,397,500 | $ 5,384,100 |
| Average Inventory | $ 765,812.33 | $ 875,500.00 | $ 891,100.00 |
| Inventory Turnover Ratio | 4.03 | 5.02 | 6.04 |
| Net Sales | $ 3,954,467 | $ 5,628,000 | $ 6,854,300 |
| Average Total Assets | $ 1,978,794 | $ 2,472,000 | $ 2,491,700 |
| Asset Turnover Ratio | 2.00 | 2.28 | 2.75 |
| Net Sales | $ 3,954,467 | $ 5,628,000 | $ 6,854,300 |
| Fixed Assets | $ 289,863 | $ 1,281,600 | $ 1,281,200 |
| Accumulated Depreciation | $ (235,808) | $ (276,300) | $ (326,500) |
| Fixed Asset Turnover Ratio | 73.16 | 5.60 | 7.18 |
The asset turnover ratio computes the efficient use of the assets of the company. The company has been improving its asset utilization efficiency as well. The bar chart below shows how the company assets have been effectively converted into sales. The ratio shows how many times the company has effectively utilized its assets for the generation of its sales. The asset turnover has increased from 4 times to 6 times in 2018 from 2016 (ASX, 2019).
The fixed asset turnover of the company shows how effectively the company has utilized its fixed assets to generate revenue. The company fixed asset turnover for 2016 is 73 times in 2016, and it declined to 5.6 times in 2017 and the increased to 7.18 times in 2018. The company fixed asset turnover was too high in 2016 because of the low amount of fixed assets. The high fixed assets in 2017 and then in 2018 are reasons for the low fixed asset turnover in 2017 and 2018 (Fusion Media Limited, 2019).
The liquidity ratios of the company show that the company’s current assets and liquidity have declined in the last three years. The current ratio of the company has declined from 1.57 to 1.32 in the three years even though the assets of the company have increased significantly.
| Liquidity Ratios | 2016 | 2017 | 2018 |
| Current Assets | $ 702,518 | $ 1,170,700 | $ 1,210,500 |
| Current Liabilities | $ 446,833 | $ 885,800 | $ 917,200 |
| Current Ratio | 1.57 | 1.32 | 1.32 |
| Current Assets | $ 702,518 | $ 1,170,700 | $ 1,210,500 |
| Inventories | $ 546,437 | $ 859,900 | $ 891,100 |
| Current Liabilities | $ 446,833 | $ 885,800 | $ 917,200 |
| Quick Ratio | 0.35 | 0.35 | 0.35 |
| Cash | $ 51,884 | $ 72,800 | $ 72,000 |
| Current Liabilities | $ 446,833 | $ 885,800 | $ 917,200 |
| Cash Ratio | $ 0.12 | $ 0.08 | $ 0.08 |
The quick ratio has remained constant over the last three years with little or insignificant difference in the amount. The cash ratio of the company has also declined over the years. The company cash ratio has declined even though its cash amount has increased over the last two years. This is because of the reason that the current liabilities have increased as well.
The difference in the current and quick ratio shows the level of the inventory which is bound in the form of current assets. The company has a 1.57 and 1.32 current ratio in 2016 and 2017, 2018. The company quick ratio is 0.34 which shows that more than half of the current assets are bound in the form of inventory which is not a liquid form of the assets.
The profitability, efficiency and liquidity ratios of the company show that the company’s performance, efficiency, and liquidity are stable and improved over the last three years. This is evident in the computations shown in the analysis.
2.3-Cash Management Analysis:
The potential shareholders and its potential investors need to know the level of cash the business makes need to have for its operational activities. The investors need also to know how much of it is invested in the business. The amount of cash which is left after that determines the stock value as this cash flow naturally belongs to the company investors. The health of the cash flow and the concept of risk return on the cash flow yield of the stock are important to be analyzed.
Free Cash Flow:
The free cash flow of the company is the amount of cash which JB Hi-fi has left with after it has paid all of its expenses, and this includes its net capital expenditures. This is the capital that the company needs to spend each year on growing business operations. The methods used for the analysis of the cash flow of the company include the comparing of the FCF yield to the market index yield. Another method is to examine the operating cash flow of the business and see if it will continue to grow in the future as well.
The company yield has been 7.73% in the last year which shows the ability of the company to produce the cash as same to the market index. The size of the company account is also taken into account. The positive operating cash flow of the company shows the disciplined operational efficiency of the company (Simply Wall Street, 2019).
Looking at the financial liquidity of the company can give an idea of the investment potential of the company stock. The current and long term debt of the company has surged in the last year. Other than this, the company has over 72 Millions of Australian dollars in short term investments and cash for investing in its business. The operating cash flow generated by JBH is $190.6 Million which makes the operating cash to total debt ratio of 34%. This shows that the debt of the company is covered by the operating cash flow of the company. This shows that the company can generate 34 times cash from the debt capital it used (Simply Wall Street Pty Ltd, 2018).
2.4-Sensitivity Analysis:
For the sensitivity analysis, the estimates for the following accounts have been shown. The source for these estimates is the market screener website. The estimation shows the values for sales, EBITDA, operating profits, net income, Price per earnings ratio, earnings per share, dividend per share and dividend yield (Jain and Khan, 2007). The estimations are done for the years 2019, 2020 and 2021. The company seems to have increased its sales, which are also evident in its net income, and price per earnings ratio, earnings per share. The dividend of the company is expected to increase in 2019 and then lower somewhat in 2020 and 2021.
| Annual Income Statement Data | ||||||
| Actual in M AUD | Estimates in M AUD | |||||
| Fiscal Period June | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 |
| Sales | 3954 | 5628 | 6854 | 7089 | 7264 | 7405 |
| EBITDA | 262 | 360 | 412 | 421 | 420 | 421 |
| Operating profit (EBIT) | 221 | 306 | 351 | 362 | 360 | 364 |
| Pre-Tax Profit (EBT) | 218 | 259 | 335 | 349 | 348 | 346 |
| Net income | 152 | 172 | 233 | 244 | 245 | 246 |
| P/E ratio | 15.7 | 15.3 | 11.2 | 12 | 12.1 | 12.2 |
| EPS (cts AUD) | 150 | 153 | 201 | 211 | 209 | 208 |
| Dividend per Share (cts AUD) | 98,8 | 118 | 132 | 138 | 136 | 136 |
| Yield | 4.18% | 5.05% | 5.86% | 5.43% | 5.37% | 5.38% |
| Reference price (cts AUD) | 2364.6 | 2337 | 2252 | 2535 | 2535 | 2535 |
For the sensitivity analysis, the realistic, pessimistic and optimistic scenarios are built on the percentage change in these accounts. The change is based on the estimations of the accounts in a realistic scenario. The below table shows that the realistic estimates for the company are based on the following percentage changes in the said accounts. For example, the sales are expected to be increased by 3.4% in 2019, by 2.4% in 2020, and by 1.94% in 2021.
| Annual Income Statement Data | Realistic | ||
| Estimates in M AUD | |||
| Fiscal Period June | 2019 | 2020 | 2021 |
| Sales | 3.43% | 2.47% | 1.94% |
| EBITDA | 2.18% | -0.24% | 0.24% |
| Operating profit (EBIT) | 3.13% | -0.55% | 1.11% |
| Pre-Tax Profit (EBT) | 4.18% | -0.29% | -0.57% |
| Net income | 4.72% | 0.41% | 0.41% |
| P/E ratio | 7.14% | 0.83% | 0.83% |
| EPS (cts AUD) | 4.98% | -0.95% | -0.48% |
| Dividend per Share(cts AUD) | 4.55% | -1.45% | 0.00% |
| Yield | -7.34% | -1.10% | 0.19% |
| Reference price (cts AUD) | 12.57% | 0.00% | 0.00% |
For the optimistic scenario, the sales, EBITDA, operating profits, net income, Price per earnings ratio, earnings per share, and dividend per share and dividend yield has been increased further by 2% in the years 2019, 2020 and 2021. The values for 2019 are based on the 2% further increase in the 2018 values of these accounts. The sales thus are expected to be increased by 5.43% in the optimistic scenario in 2019, by 4.47% in 2020 and by 3.94% in 2021. The Earnings per share for the company has increased by 6.5% in 2019 and 2% in 2020.
| Annual Income Statement Data | Optimistic | ||
| Estimates in M AUD | |||
| Fiscal Period June | 2019 | 2020 | 2021 |
| Sales | 5.43% | 4.47% | 3.94% |
| EBITDA | 4.18% | 1.76% | 2.24% |
| Operating profit (EBIT) | 5.13% | 1.45% | 3.11% |
| Pre-Tax Profit (EBT) | 6.18% | 1.71% | 1.43% |
| Net income | 6.72% | 2.41% | 2.41% |
| P/E ratio | 9.14% | 2.83% | 2.83% |
| EPS (cts AUD) | 6.98% | 1.05% | 1.52% |
| Dividend per Share (cts AUD) | 6.55% | 0.55% | 2.00% |
| Yield | -5.34% | 0.90% | 2.19% |
| Reference price (cts AUD) | 14.57% | 2.00% | 2.00% |
For the pessimistic scenario, the sales, EBITDA, operating profits, net income, Price per earnings ratio, earnings per share, and dividend per share and dividend yield has been declined by 2% in the years 2019, 2020 and 2021. The values for 2019 are based on the 2% further decrease in the 2018 values of these accounts. The sales thus are expected to be increased by 1.43% in the optimistic scenario in 2019, by 0.47% in 2020 and decline by -0.06% in 2021.
| Annual Income Statement Data | Pessimistic | ||
| Estimates in M AUD | |||
| Fiscal Period June | 2019 | 2020 | 2021 |
| Sales | 1.43% | 0.47% | -0.06% |
| EBITDA | 0.18% | -2.24% | -1.76% |
| Operating profit (EBIT) | 1.13% | -2.55% | -0.89% |
| Pre-Tax Profit (EBT) | 2.18% | -2.29% | -2.57% |
| Net income | 2.72% | -1.59% | -1.59% |
| P/E ratio | 5.14% | -1.17% | -1.17% |
| EPS (cts AUD ) | 2.98% | -2.95% | -2.48% |
| Dividend per Share(cts AUD ) | 2.55% | -3.45% | -2.00% |
| Yield | -9.34% | -3.10% | -1.81% |
| Reference price (cts AUD) | 10.57% | -2.00% | -2.00% |
By employing the changes in the estimations for the three years 2019, 2020 and 2021, the following estimated values for the three scenarios are gathered. The realistic scenario values for these accounts are shown in the table above. However, for the optimistic and pessimistic scenarios, the values are shown in the table below.
| Optimistic | Pessimistic | |||||
| Fiscal Period June | 2019 | 2020 | 2021 | 2019 | 2020 | 2021 |
| Sales | 7,473.84 | 7,588.60 | 7,696.84 | 7,190.28 | 7,298.04 | 7,400.64 |
| EBITDA | 438.62 | 427.40 | 430.42 | 421.78 | 410.60 | 413.58 |
| Operating profit (EBIT) | 380.58 | 365.21 | 375.32 | 366.10 | 350.81 | 360.76 |
| Pre-Tax Profit (EBT) | 370.57 | 353.96 | 350.93 | 356.61 | 340.04 | 337.09 |
| Net income | 260.40 | 250.90 | 251.92 | 250.64 | 241.10 | 242.08 |
| P/E ratio | 13.10 | 12.44 | 12.54 | 12.62 | 11.96 | 12.06 |
| EPS (cts AUD) | 225.72 | 211.20 | 211.16 | 217.28 | 202.84 | 202.84 |
| Dividend per Share (cts AUD) | 147.03 | 136.75 | 138.72 | 141.51 | 131.31 | 133.28 |
| Yield | 5.14% | 5.42% | 5.50% | 4.92% | 5.20% | 5.28% |
In terms of the financial ratios for the three scenarios, the results are drawn based on the same assumptions as done for the above basic accounts. The optimistic scenario shows that a 2% increase is witnessed in the financial ratios, while the pessimistic scenario shows that 2% decline is witnessed in these ratios.
| Financial Ratios | Realistic | Optimistic | Pessimistic | |||
| Size | 2019e | 2020e | 2019e | 2020e | 2019e | 2020e |
| Capitalization | 912 | – | 930.24 | 893.76 | 0 | |
| Enterprise Value (EV) | 244 | 171 | 248.88 | 174.42 | 239.12 | 167.58 |
| Valuation | 2019e | 2020e | 2019e | 2020e | 2019e | 2020e |
| P/E ratio (Price / EPS) | 12 | 12.1 | 12.24 | 12.34 | 11.76 | 11.86 |
| Capitalization / Revenue | 0.41 | 0.4 | 0.42 | 0.41 | 0.40 | 0.39 |
| EV / Revenue | 0.46 | 0.44 | 0.47 | 0.45 | 0.45 | 0.43 |
| EV / EBITDA | 7.71 | 7.55 | 7.86 | 7.70 | 7.56 | 7.40 |
| Yield (DPS / Price) | 5.34% | 5.37% | 5.45% | 5.48% | 5.23% | 5.26% |
| Price to book (Price / BVPS) | 2.84 | 2.63 | 2.90 | 2.68 | 2.78 | 2.58 |
| Profitability | 2019e | 2020e | 2019e | 2020e | 2019e | 2020e |
| Operating Margin (EBIT / Sales) | 5.11% | 4.96% | 5.21% | 5.06% | 5.01% | 4.86% |
| operating Leverage (Delta EBIT / Delta Sales) | 0.99 | – | 1.01 | 0.97 | ||
| Net Margin (Net Profit / Revenue) | 3.44% | 3.37% | 3.51% | 3.44% | 3.37% | 3.30% |
| ROA (Net Profit / Asset) | 11.60% | 11.20% | 11.83% | 11.42% | 11.37% | 10.98% |
| ROE (Net Profit / Equities) | 24.30% | 22.20% | 24.79% | 22.64% | 23.81% | 21.76% |
| Rate of Dividend | 65.30% | 65% | 66.61% | 66.30% | 63.99% | 63.70% |
| Balance Sheet Analysis | 2019e | 2020e | 2019e | 2020e | 2019e | 2020e |
| CAPEX / Sales | 0.90% | 0.86% | 0.92% | 0.88% | 0.88% | 0.84% |
| Cash Flow / Sales | 4.12% | 3.98% | 4.20% | 4.06% | 4.04% | 3.90% |
| Capital Intensity (Assets / Sales) | 0.3 | 0.3 | 0.31 | 0.31 | 0.29 | 0.29 |
| Financial Leverage (Net Debt / EBITDA) | 0.79 | 0.62 | 0.81 | 0.63 | 0.77 | 0.61 |
The results show that an optimistic scenario, the financial ratios, and the company income statement and balance sheet items will improve as compared to the realistic estimates and decline in the pessimistic scenario. However, the difference is not so significant in terms of both scenarios. The company is going to give out dividends in both scenarios in a stable manner.
2.5-Systematic Risks and Un-systematic Risks:
There are several risks which the company faces, and it is enlisted in detail in its financial statements as well. The company faces business risks which are both specific and general. These business risks are a threat to the financial performance and operational efficiency of the company in its future years (Baker and Powell, 2009). This business risk is arising from the competition, loss of reputation, potential security breach, any workplace safety, and health incident, any regulatory breach, loss of supplier relationships, and changes in the consumer spending behavior (ASX.Com, n.d.).
2.6-Dividend Payout Ratio and Dividend policy:
The company dividend payments are made directly to their shareholders in New Zealand or Australia. The company historically has remained a stable divided paying company with an annual dividend yield of 5.41%. The dividend payout ratio for the company for the last three years shows that the company has paid interim and final dividends ranging from 99 cents per share to 114.4 which are also the highest and the latest dividend paid to the company shareholders in recent years (ASX Limited, 2019).
3-Recommendation Letter:
Dear Potential Investor,
This is to inform you that the company JB Hi Fi has been found to be a good potential investment for your institute. The company has a healthy financial background and has strong financials to support its balance sheet. The operational efficiency of the company is also evident from its ability to produce cash amidst such an uncertain business environment. The company has enough cash to provide for its total debt, which also shows its strong financial capability. As an investor, liquidity is one important aspect as well which is also fulfilled by JB Hi Fi. However, most of its current assets are in the form of inventory; it still has enough cash reserves.
Therefore, it is recommended to invest in JB Hi-Fi Ltd for your investment.
Regards,
XXX
4-Conclusion:
It is thus concluded that as per the results the company is found to be a good potential investment in the future for the investment institution. The company financial ratio analysis, sensitivity analysis, cash flow analysis, and dividend policy analysis are conducted. The liquidity of the company is also analyzed in detail. The company is investigated in terms of its profitability, efficiency, and operational capabilities. The dividend policy is analyzed which shows a stable stream of dividends paid each year. The sensitivity analysis is conducted based on estimations for the next three years to better predict its cash flows for future investments. Based on the analysis, the recommendation letter is drafted for the suggestion on investment in this company
5-References:
ASX (2019) Dividend Payment History, 4 May, [Online], Available: https://www.asx.com.au/about/asx-dividend-information.htm [4 May 2019].
ASX Limited (2019) Dividend information, 4 May, [Online], Available: https://www.asx.com.au/about/asx-dividend-information.htm [4 May 2019].
ASX.Com JB Hi Fi Report, [Online], Available: https://www.asx.com.au/asxpdf/20180914/pdf/43yb65f1jrh407.pdf [4 May 2019].
Baker, H.K. and Powell, G. (2009) Understanding Financial Management: A Practical Guide, John Wiley & Sons.
Brook, B. (2018) Other retailers are suffering, so how is JB Hi-Fi still making a motza?, [Online], Available: https://www.news.com.au/finance/business/retail/other-retailers-are-suffering-so-how-is-jb-hifi-still-making-a-motza/news-story/4fdd5960c81b62fd9eb872bd68d9cb6f [4 May 2019].
Fusion Media Limited (2019) JBH Ratios, 4 May, [Online], Available: https://www.investing.com/equities/jb-hi-fi-ratios [9 May 2019].
Jain and Khan (2007) Financial Management, Tata McGraw-Hill Education.
Market Screener (2018) JB HI-FI LIMITED (JBH), [Online], Available: https://www.marketscreener.com/JB-HI-FI-LIMITED-6496641/company/ [4 May 2019].
Morning Star (2019) JB Hi Fi Ltd, 4 May, [Online], Available: http://financials.morningstar.com/ratios/r.html?t=JBH®ion=aus&culture=en-US [4 May 2019].
Pandey, I.M. (2015) Financial Management, 11th edition, Vikas Publishing House.
Simply Wall Street (2019) Why You Should Care About JB Hi-Fi Limited’s (ASX:JBH) Cash Levels, 16 January, [Online], Available: https://simplywall.st/stocks/au/retail/asx-jbh/jb-hi-fi-shares/news/why-you-should-care-about-jb-hi-fi-limiteds-asxjbh-cash-levels/ [4 May 2019].
Simply Wall Street Pty Ltd (2018) Why JB Hi-Fi Limited (ASX:JBH) Is A Financially Healthy Company, 13 Feburary, [Online], Available: https://simplywall.st/stocks/au/retail/asx-jbh/jb-hi-fi-shares/news/why-jb-hi-fi-limited-asxjbh-is-a-financially-healthy-company/ [4 May 2019].
