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FINANCIAL ANALYSIS OF JB HI-FI LIMITED

Executive Summary: This study focuses on the JB Hi-Fi Limited, an Australian retail company and their financial performance in the Australian market. The particular topic has been chosen in this study because the Australian retail market has been fiercely competitive in the recent times. JB HiFi Limited is a retail company operating in the Australian market, which deals with selling different home and kitchen appliances along with the electronic products for the use of the consumers. The balances of some of the accounts have been mentioned in the study and their effects on the other accounts have also been briefly explained. The recommendations have been provided for improving its business further, however, it has performed efficient in the industry over the years.

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Table of Contents 1. Introduction:...........................................................................................................................4 2. Reason of choosing the topic:................................................................................................4 3. Company Background:...........................................................................................................4 4. Shareholder structure of the company:..................................................................................5 4. Sources of Finance:................................................................................................................5 5. Interior and exterior stakeholders:.........................................................................................7 6. Value of the items in the consolidated financial statements of the company:........................8 7. Normal balances of the listed accounts and their effects on the debit and credit sides:........9 8. Accounts that will be highly affected on increasing the value of the above accounts:........11 9. Recommendation:.................................................................................................................11 10. Conclusion:........................................................................................................................12 References:...............................................................................................................................13 Appendix:.................................................................................................................................15

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1. Introduction: This study focuses on the JB Hi-Fi Limited, an Australian retail company and their financial performance in the Australian market. In this study, the learner has provided information about the activities and operations of the company in the market and thereby, critically evaluating its shareholder structure. The company has earned a brand image in the Australian market and thereby, it needs to gather sufficient amount of funds to run its business operations. The values of the different accounts have been computed in the study to analyse their impacts on the other accounts and in turn, the business process of the company.

2. Reason of choosing the topic: The particular topic has been chosen in this study because the Australian retail market has been fiercely competitive in the recent times. This has caused the retail companies many difficulties to survive in the era of increased competition. In addition, the topic has also been selected because the result of the study would help the company in identifying its current standing in the retail industry of Australia. Thus, this study will be of immense importance for the company to improve its business further in the Australian retail market.

3. Company Background: JB Hi-Fi Limited is a retail company operating in the Australian market, which deals with selling different home and kitchen appliances along with the electronic products for the use of the consumers. The company has been operating in the markets of Australian and New Zealand having nearly 73,000 employees in its business units (www.jbhifi.com.au, 2016). The headquarters of the company is located in Chadstone, Victoria. The company has 180 stores in the markets of Australia and New Zealand and works under the names of “JB Hi-Fi”, “Clive Anthnoys” and “JB Hi-Fi Home”. It sells the various electronic items, mobile phones, car equipments, computers, CDs and DVDs along with the audio instruments. The company also provides opportunities to its customers to shop online by maintaining an online store without charging nay delivery fees from its customers (www.jbhifi.com.au, 2016). The organisation is also engaged in providing information technology and consulting services. It is also involved in selling its products to the various sectors of the economy, 4

which include the commercial, education and government sectors. The company has earned goodwill in the market by providing superior quality products and services to its customers.

4. Shareholder structure of the company: The shareholder structure of the company of JB Hi-Fi Limited is presented in the form of a table (Refer to Appendix, Table 1). From the table, it has been evaluated that the issue of a certain number of shares of the company have remained with the previous business owners, as they are expecting to earn a greater return from the shares (Bragg, 2012). However, the existing shareholders of the company are holding a part of their shares or nearly the entire shares because as per their expectations, the share prices of the company would increase further in the future. This is because the company has succeeded in satisfying the customers with its superior products and therefore, it would facilitate them to earn a greater market share (Fridson & Alvarez, 2011).

4. Sources of Finance: It has been assessed that the company generates funds both from the internal and external sources of finance. The internal source of finance for the company includes: Debt Financing: The company acquires loans from the present shareholders of the company to meet its shortterm and long-term obligations (Acharya & Richardson, 2009). The company has raised a debt of 33.4 million AUD in the year 2014 from the internal sources (www.jbhifi.com.au, 2016). Equity Financing: The company is also engaged in issuing shares to the existing shareholders and hold the profits earned in the business. This type of financing is generated by the company, since it does not involve the company paying interest on the amount of money received or from the issue of shares (Keown et al. 2011). The company has raised an equity financing of 16,000 AUD in the year 2013 through retained profits. The company also generates funds from the external sources, which are briefly listed below: Bank Loans: 5

The company has been acquiring loans from the banks and other financial institutions for maintaining the day-to-day activities and operations of the business. The company takes both short-term and long-term loans for securing some of its particular assets and the company obtains loans from the banks with its personal guarantee (Brigham & Ehrhardt, 2013). The company has obtained loans from the banks amounting to 179.7 million AUD in the year 2014. Overdrafts: This type of financing is also used by the company to meet its short-term liabilities. However, it has been argued by Robinson et al. (2015) that the bank provides overdrafts to the companies on certain terms and conditions and the bank can ask the company at any point of time to settle the full payment with interest. As a result, it could hamper the productivity as well as the profitability of the firm. Leasing: The company also leases its assets mainly to purchase modern equipments, machineries and furniture. As a result, it increases the cash flow of the company and thereby, helps the company in investing the money in its daily business operations (Chi & Gursoy, 2009).

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Figure 1: Figure showing the sources of finance of JB Hi-Fi Limited (Source: As created by author)

5. Interior and exterior stakeholders: Interior stakeholders: The interior stakeholders of JB Hi-Fi Limited comprise of the people within the internal environment of the business and this includes the owners of the company, the investors and the employees (Grzegorz, 2010). At the moment, the owners of the company are engaged in formulating strategies for ensuring better growth of the organisation in the long- run. The employees are, however, showing efficient skills in handling the customers and this would help them in getting a hike on their salaries (Beck, Demirgüç-Kunt & Levine, 2009). The company has wide range of investors, as it has earned sufficient amount of revenues in the past and distributed a part of the profits earned amongst the investors. Exterior stakeholders:

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The exterior stakeholders of the company comprise of the customers, creditors, suppliers and the government. The government will charge taxes from the incomes of the company (Fridson & Alvarez, 2011). The customers desire to receive quality products from the company and the suppliers are paid in time by the company, thus, increasing their profits as well. The creditors receive timely and prompt payments from the company and therefore, tend to remain satisfied with the company (Boehmer & Kelley, 2009).

Figure 2: Figure showing the interior and exterior shareholders’ structure of JB Hi-Fi Limited (Source: As created by author)

6. Value of the items in the consolidated financial statements of the company: The values of the different items in the consolidated financial statements of the company have been depicted below in the form of a table: Items

Years 2012

Cash and Equivalents

Cash

2013 40

2014 67

8

43

Inventories Sales Revenue Other Income Plant and Equipment Interest Expense Sales and Marketing Expenses Occupancy Expenses Trade and other Payables Non-Current Borrowings

428 3128.0 301 14.0 771.0

426 3308.4 (0.1) 333 10.2 839.0

459 3483.8 (0.1) 366 8.8 884.0

130.7 485.7

140.2 442.4

149.0 352.2

37.0

32.8

33.4

Table 2: Table showing the balances of the different accounts of JB Hi-Fi Limited for the years 2012-2014 (Source: www.jbhifi.com.au, 2016)

7. Normal balances of the listed accounts and their effects on the debit and credit sides: The normal balances of the above-mentioned accounts are listed below as per the industry standard: Items

Years 2012

Cash and Cash Equivalents Inventories Sales Revenue Other Income Plant and Equipment Interest Expense Sales and Marketing Expenses Occupancy Expenses Trade and other Payables Non-Current Borrowings

2013

2014

45

45

45

500 3000 0 200 5 300

500 3000 0 200 5 400

500 3200 0 250 5 600

100 450

120 450

120 400

30

35

32

Table 3: Table showing the normal balances of the above-listed accounts for the years 2012-2014 (Source: Financials.morningstar.com, 2016) 9

In order to decrease sales revenue, it is necessary to increase the purchases of the company. The purchase account comes in the debit side of the trading account of the company, while the sales revenue account comes in the credit side (Choi & Wang, 2009). Therefore, increasing the debit side would reduce the sales revenue. In order to decrease the inventories, it is necessary that the company pays a higher prepaid insurance on the stocks (Cornett et al. 2011). Therefore, the credit side of the account needs to be increased to decrease the total value of inventories. The value of plant and equipment of the company could be decreased if the accumulated depreciation on these assets increases largely. Thus, the debit side of the balance need to be increased in order to decrease the account value (Denis & Sibilkov, 2009). The interest expense of the company could be decreased by increasing the accrued expenses and therefore, the debit side of the account will be affected. The value of sales and marketing expenses of the company could be decreased by increasing the inventories of the company and therefore, the credit side of the account needs to be increased for reducing its value (Maditinos et al. 2011). The trade and other payables account could be decreased by increasing the receivables of the company and therefore, it would affect the credit side of the account. The non-current borrowings of the company could be decreased by increasing the issue of equity shares and therefore, the credit side of the account will be affected (Uotila et al. 2009). The cash and cash equivalent account could be decreased by increasing the provision for bad and doubtful debts, and therefore, the credit side of the account will be affected.

8. Accounts that will be highly affected on increasing the value of the above accounts: The accounts that will be highly affected after increasing the value of the above accounts will include the following: Cost of Sales Account: This account will increase largely when the sales and revenue of the company increase. This is because the increased sales of the company would result in increasing cost of goods sold and therefore, this account will increase with the increase in sales revenue (Zack, McKeen & Singh, 2009). 10

Expense and Capital Accounts: An increase in the occupancy cost could increase all the expense and capital accounts, as this account deals with the expenses like rent, electricity, telephone and others and capital accounts like property and equipment. Cash and Bank Accounts: An increase in the trade and other payables account and long-term borrowings could enhance the cash flow of the company because it will enable the company to gather adequate funds. This would increase the cash and bank balance of the company (Beck, Demirgüç-Kunt & Levine, 2009).

9. Recommendation: From the tables presented in the above section, it can be stated that the company has maintained a good position in the market as per the compliance with the industry standard. However, the increasing sales of the company in the subsequent years depict its vulnerability and the sales can experience a huge decline in the future period. Therefore, it is necessary that the company analyses the market trends from time to time to maintain its minimum line of sales. It has also been assessed that the company has increased its marketing expenses over time, which has increased the operating cost of the company largely. It is advisable that the company lowers its marketing costs to a certain extent, since it has already earned a brand image in the market. It is also necessary that the company increases its inventory due to the increased sales. If the company fails to meet the demands of its customers by supplying adequate products, the customers will tend to move away to its competitors. Therefore, maintaining a sufficient inventory level would help the company to avoid such circumstances.

10. Conclusion: This study deals with explaining the activities of JB Hi-Fi Limited, a retail company in Australia along with its shareholder structure and operational activities. The balances of some of the accounts have been mentioned in the study and their effects on the other accounts have also been briefly explained. An increase in the accounts mentioned could also affect the several other financial accounts of the company and the balances of the accounts have been 11

compared with the industry standards of the country. The recommendations have been provided for improving its business further, however, it has performed efficient in the industry over the years.

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References: Books: Acharya, V., & Richardson, M. (Eds.). (2009). Restoring financial stability: how to repair a failed system (Vol. 542). John Wiley & Sons. Bragg, S. M. (2012). Financial analysis: a controller's guide. John Wiley & Sons. Brigham, E., & Ehrhardt, M. (2013). Financial management: theory & practice. Cengage Learning. Fridson, M. S., & Alvarez, F. (2011). Financial statement analysis: a practitioner's guide (Vol. 597). John Wiley & Sons. Keown, A. J., Martin, J. D., Petty, J. W., & Scott, D. F. (2011). Financial management: Principles and applications. Prentice Hall. Robinson, T. R., Henry, E., Pirie, W. L., & Broihahn, M. A. (2015).International financial statement analysis. John Wiley & Sons. Journals: Beck, T., Demirgüç-Kunt, A., & Levine, R. (2009). “Financial institutions and markets across countries and over time-data and analysis”, 35(7), 3789-3900. Boehmer, E., & Kelley, E. K. (2009). “Institutional investors and the informational efficiency of prices”. Review of Financial Studies, 22(9), 3563-3594. Chi, C. G., & Gursoy, D. (2009). “Employee satisfaction, customer satisfaction, and financial performance:

An

empirical

examination”.International

Journal

of

Hospitality

Management, 28(2), 245-253. Choi, J., & Wang, H. (2009). “Stakeholder relations and the persistence of corporate financial performance”. Strategic Management Journal, 30(8), 895-907. Cornett, M. M., McNutt, J. J., Strahan, P. E., & Tehranian, H. (2011). “Liquidity risk management

and

credit

supply

in

the

Economics, 101(2), 297-312.

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financial

crisis”. Journal

of

Financial

Denis, D. J., & Sibilkov, V. (2009). “Financial constraints, investment, and the value of cash holdings”. Review of Financial Studies, 37(16), 110-136. Grzegorz, M. (2010). “Planning optimal from the firm value creation perspective: Levels of operating cash investments”. Romanian Journal of Economic Forecasting, 13(1), 198-214. Maditinos, D., Chatzoudes, D., Tsairidis, C., & Theriou, G. (2011). “The impact of intellectual capital on firms' market value and financial performance”. Journal of intellectual capital, 12(1), 132-151. Uotila, J., Maula, M., Keil, T., & Zahra, S. A. (2009). “Exploration, exploitation, and financial performance: analysis of S&P 500 corporations”. Strategic Management Journal, 30(2), 221-231. Zack, M., McKeen, J., & Singh, S. (2009). “Knowledge management and organizational performance: an exploratory analysis”. Journal of knowledge management, 13(6), 392-409. Websites: www.jbhifi.com.au

(2016).

Retrieved

13

January

2016,

from

https://www.jbhifi.com.au/Documents/Announcements/JB_Hi-Fi_Limited_Prospectus.pdf Financials.morningstar.com,. (2016). Balance Sheet for JB Hi Fi Ltd (JBH) from Morningstar.com.

Retrieved

13

January

2016,

from

http://financials.morningstar.com/balance-sheet/bs.html?t=JBH®ion=aus&culture=en-US

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Appendix:

Interests associated with MDIL Australian Ventures LLC BancBoston Interests related to the previous business owners Current Management Non-Executive Directors New Shareholders pursuant to the offer Total

Pre-Offer Shares Percent 60.629,680

At Completion of the Offer Shares Percent 59.4 -

0.0

4.727,632

4.6%

-

0.0

20,000,000 9.445,088

19.6 9.2

8,609,088

0.0 8.4

6,518,000

6.4

6,518,000

6.4

800,000

0.8

400,000

0.4

-

-

86,592,912

84.8

102,120,000

100.0

102,120,000

100.0

Table 1: Table showing the shareholder st...