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Financial Statement Analysis Assignment: A Comparison Between Jb Hi-Fi And Harvey Norman

Question

Task: Analysis of corporate liquidity - Your role is to use the annual reports from JB HiFi to investigate the liquidity and insolvency risk of JB HiFi from an accounting perspective. In 2017, JB HiFi was worrying investors because their take over of the Good Guys retail business was not going as well as forecast. Similarly, it suffered a drop in share price in February 2018, when it disclosed slower sales than expected at the Good Guys. (See https://www.insideretail.com.aui news/jb-h i-figets-hol iday-boost-nz-venture-rebounds-20 1802).

In this maximum 2000-word essay, you must use the IDEALS framework to critically analyse the performance of JB HiFi and whether or not it is in danger of becoming insolvent. Essential elements of the essay are:

  1. In defining the context you must calculate all the liquidity ratios covered in class, and the Altman’s Z-score for JB HiFi and its major competitor Harvey Norman Holdings for at least the past three years.
  2. From the context of the liquidity ratios, identify and provide reasons for selecting three core financial performance issues that JB HiFi should address to improve their financial performance and lower the risk of insolvency.
  3. Further discuss the strengths and weaknesses of the three key performance issues compared to its major competitor Harvey Norman Holdings by referring to data from the financial report, operating and financial reviews and comparisons with retail industry benchmarks.
  4. To conclude the essay, identify what the most important financial performance issue JB HiFi needs to address to prevent potential insolvency.
  5. In your closing self-reflection, outline some critical concerns about the role played by financial and non-financial information found in corporate annual reports.

A reference list is required and does not form part of the word count. If you disclose information without having it properly referenced you will subject to the academic honesty and plagiarism policy. In line with the University policy and all such cases will be referred to the Faculty Discipline Committee. It is required that you use EndNote for referencing and the APA 6th Style for your reference list.

Task overview: The purpose of the research report is to allow you to display:

  • Discipline knowledge and skills;
  • Critical, analytical and integrative thinking; and
  • Effective communication. This is a formative assessment designed to prepare you for Research Rerort Part 2.

Answer

Introduction: Financial statement analysis is one of the most important tools that can be used for analyzing liquidity and solvency position of a company. This financial statement analysis assignment can also be an important tool in comparing liquidity and solvency position with other competitors in the industry. The most efficient manner to analyze and compare the financial statement of a company is ratio analyzing as an effective and efficient comparison can be done. There are various factors that can make the comparison very difficult such as the size of organization and revenue generating capacity. Impact of these factors can be minimized by with the help of ratio analysis. This financial statement analysis assignment is prepared with an objective of analyzing liquidity and solvency position of JB Hi-Fi Limited which is a business organization that is working in the retail industry of Australia (Wahlen, Baginski & Bradshaw, 2014). This report will also facilitate the comparison between JB Hi-Fi Limited and Harvey Norman limited which are both working in retail sectors of Australia. In addition to that this report will also calculate the Altman’s Z score for both of these organization that will provide a better explanation of their financial position in Australia. This financial statement analysis assignment will also provide an analysis of financial and non-financial factors for the purpose of better comparison between these organizations.

Liquidity position
Ratios:There are two main liquidity ratios discussed in this financial statement analysis assignment that can help in analyzing the liquidity position of a company that is the current ratio and quick ratio. Both of these ratios will be calculated for JB Hi-Fi Limited and Harvey Norman limited in order to analyses their liquidity position.

Particulars

Harvey Norman

JB Hi-Fi

 

2016

2017

2018

2016

2017

2018

Current Assets

1605.547

1112.433

1317.618

702.400

1167.500

1210.500

Current liabilities

1279.012

829.964

829.964

446.800

885.800

917.200

Inventories

315.746

315.968

345.287

546.400

859.900

891.100

Prepaid expenses

0.000

0.000

0.000

0.000

0.000

0.000

Quick assets

1289.801

796.465

972.331

156.000

307.600

319.400

Current ratio

1.255

1.340

1.588

1.572

1.318

1.320

Quick ratio

1.008

0.960

1.172

0.349

0.347

0.348

On the basis of this evaluation, it can be said that the liquidity position of Harvey Norman is better as compared to JB Hi-Fi Limited in the retail sector of Australia. Detailed examination of these ratios are as follows-

Current ratios- The current ratio is the ratio between current assets and current liabilities of a company as general business organizations use current assets to pay off current liabilities. This ratio shows the ability of a company to pay off its dues that will occur in the next 12 months of operations. Generally, the optimum current ratio is considered to be around 2:1 but this standard changes with the nature of organization and industry in which such business organization is operating. In the Australian retail market, optimum current ratios are considered 1.5: 1. This ratio shows that a company should have at least 1.5 times of current assets for the payment of current liabilities (Brigham, Ehrhardt, Nason & Gessaroli, 2016).

In this case, it can be observed that the current ratio of Harvey Norman is better as compared to the current ratio of JB Hi-Fi limited in both the fiscal years that are taken into consideration. The current ratio of Harvey Norman has reached the optimum current ratio in the year 2018 but same is not the case in JB Hi-Fi Limited (JB Hi-Fi Limited, 2018). On the basis of this evaluation, it can be said that the liquidity position of Harvey Norman in better.

Quick ratio- There are certain current assets in the business that business organizations will not be able to sell or not willing to sell in the coming next 12 months. For example, there are chances that management of the company would not be able to sell inventory in the next financial years. This is the reason that inventory and prepaid expenses are not included in the calculation of quick assets (Weygandt, Kimmel & Kieso, 2015). The quick ratio is similar to the current ratio but in this ratio, quick assets are used instead of current assets to evaluate the short-term liquidity of the company. Generally, the optimum current ratio is considered to be around 1:1 but this standard changes with the nature of organization and industry in which such business organization is operating. In the Australian retail market, optimum current ratios are considered as 0.5: 1.

A quick ratio of Harvey Norman is substantially higher than the optimum quick ratio in both the financial years under consideration (Harvey Norman, 2018). On the other hand, JB Hi-Fi limited has not been able to achieve optimum quick ratio in both of these financial years. It provides more substantial evidence on the conclusion that the liquidity position of JB Hi-Fi limited is lower as compared to Harvey Norman.

Altman’s Z score: Altman’s Z score can be defined as the credit rating method that is used by business organizations in order to assign credit strength to a particular company on the basis of financial data available in latest financial statements. It analysis five major ratios in this financial statement analysis assignment that can be easily calculated from financial statements and a particular weight is assigned to each of these ratios on the basis of their relevance to the liquidity position of the company (Altman, Iwanicz?Drozdowska, Laitinen & Suvas, 2017). For non-manufacturing firms, the formula used for calculation of Altman’s Z score is as follows-

Altmans Z score

Table showing all the calculations in relation to the above calculation are as follows-

Particular

Harvey Norman

JB Hi-Fi

Current Assets

1317.618

1210.500

Current liabilities

829.964

917.200

Working capital (A)

487.654

293.300

Total assets (B)

4577.642

2491.700

T1 (A/B)

0.107

0.118

Retained earnings (C 

2337.241

463.200

T2 (C/B)

                0.511

0.186

EBIT (D)

530.172

334.500

T3 (D/B)

0.116

0.134

The market value of equity €

3879.267

2821.784

Total liability (F)

1639.710

1544.100

T4 (E/F)

2.366

1.827

Net Sales (G)

1993.760

6854.300

T5 (G/B)

0.436

2.751

Harvey Norman
Z= 6.56* 0.107+ 3.26* 0.511+ 6.72* 0.116+ 1.05* 2.366
= 5.6316

JB Hi-Fi Limited
Z= 6.56* 0.118+ 3.26* 0.186+ 6.72* 0.134+ 1.05* 1.827
= 4.1992

Z score of both of these organizations is more than 3 that shows that from the perspective of Z score both of these organizations are healthy. On a comparison between these organizations, it can be said that Harvey Norman is healthier as compared to JB Hi-Fi Limited (Almamy, Aston & Ngwa, 2016).

Three financial performance issues
Business combinations: In the year 2017, JB Hi-Fi limited has acquired the business of Good guys in order to increase the growth rate of revenue generation capacity of the company. In order to do so, the management of the company has affected the overall sales and profitability. It is common for a business organization to have a negative impact on financial as well as liquidity position of the company in the initial years of business combinations but it can be managed with the help of better management of new business segment purchased (Dutordoir, Roosenboom and Vasconcelos, 2014).

EBIT and sales: The ratio between sales and Earnings before interest and tax is called as net profit ratio of the company and this ratio is an important factor in depicting financial and future liquidity position of the company. Currently, net profit ratio of the company is substantially lower as compared to other business organizations working in the retail sector of Australia. Currently, the company is generating a net profit ratio of around 4% where the company is generating an EBIT of 334 million on total revenue of around 6854 million (Deegan, 2013). It can be said that the management of the company is required to control its overall cost in providing services and goods to customers especially the indirect cost of operations.

The market value of equity: The market value of equity is also an important factor that can be considered while evaluating the financial and liquidity position of a company. The market value of equity in case of JB Hi-Fi Limited is lower as compared to other business organization working in Australian Retail sector such as Harvey Norman which is the main competitor of the company in the market.

Comparison with Harvey Norman
Business combinations: In the year 2016, 2017 and 2018, Harvey Norman is not involved in any kind of business acquisition, merger or combination with any other business organization. This is an effective manner in which the rate of growth and development can be increased rapidly but mismanagement in these merger and acquisition activities can result in a negative impact on the financial position of the company. It is a common practice in consumer retail products industry to acquire new business in order to expand business and number of customers (Trautwein, 2013). Business growth strategy adopted by Harvey Norman is through franchisee which is a much more efficient method as compared to merger and acquisition. Other organizations in this industry also operate in this type of business combination.

EBIT and sales: The ratio between EBIT and sales of Harvey Norman is very impressive as compared to JB Hi-Fi limited in the financial year 2018. In the year 2018, net profit of Harvey Norman is 26.5% whereas this ratio is 4.8% in the case of JB Hi-Fi limited. This difference is very substantial for two business organizations that are operating in the similar industry. Optimum net profit ratio of the company operating in this industry is around 20-30% (Edwards, 2013). On the basis of comparison with industry and main competitor of JB Hi-Fi, it can be said that it is essential for the company to increase this ratio otherwise company will lose its competitive edge in the industry.

The market value of equity: The market value of equity shows the demand of a particular stock in stock exchange of Australia. The market value of equity in case of Harvey Norman is 3879 million according to a current share price of the company in the market. This amount is around 2821 million in case of JB Hi-Fi limited which clearly indicates that Harvey Norman is at the superior position in this factor also.

Most important financial performance issue
Net profit to total revenue of the company is the main financial performance issue in the company in the financial year 2017 and 2018. This ratio was around 5.5% in the year 2016 which has decreased to 4.6% and 4.8% in the financial year 2017 and 2018. This decrease in ratio clearly indicates that there is a requirement for a change in business operations. Other business organizations are earning a net profit ratio of around 20-30% in the same industry that supports this conclusion made in about JB Hi-Fi Limited. In the past three financial years, Harvey Norman has generated a net profit ratio of 26.5%, 24.7%, and 19.5%. This is very higher as compared to JB Hi-Fi and the trend of net profit is also increasing which is not the case in the financial performance of JB Hi-Fi (Ormiston and Fraser, 2013). Substantially lower net profit ratio as compared to the main competitor is the reason that it is selected as the most important financial performance issue in JB Hi-Fi limited.

Self-reflection: After evaluating the financial reports of both of these companies described in this financial statement analysis assignment it can be said that both financial, as well as non-financial decision taken by a business organization, can have a vital impact on the financial and solvency position of the company. The business operation currently adopted by the business organization is affecting net profit ratio of the company which is discussed above in this report. In addition to that non-financial decision such as the business acquisition of Good Guys in February 2018 will also affect the financial position of the company. This financial impact can either be negative or positive as it depends on the action taken by management to take advantage of synergy benefit created with this business combination.

Conclusion
On the basis of this financial statement analysis assignment, it can be concluded that financial as well as the liquidity position of JB Hi-Fi limited is not very effective in the market as compared to other consumer products retail companies in Australia. This conclusion of this financial statement analysis assignment has been formed after comparing the financial statements of the company with Harvey Norman which is the main competitor in the market. In addition to that comparison has also been made by ratios of other companies in the industry in which JB Hi-Fi Limited is operating. Financial statement analysis assignments are being prepared by our finance assignment help experts from top universities which let us to provide you a reliable assignment help online service.

References
Almamy, J., Aston, J., & Ngwa, L. N. (2016). An evaluation of Altman's Z-score using cash flow ratio to predict corporate failure amid the recent financial crisis: Evidence from the UK. Journal of Corporate Finance, 36, 278-285.

Altman, E. I., Iwanicz?Drozdowska, M., Laitinen, E. K., & Suvas, A. (2017). Financial Distress Prediction in an International Context: a Review and Empirical Analysis of Altman's Z?Score Model. Journal of International Financial Management & Accounting, 28(2), 131-171.

Brigham, E. F., Ehrhardt, M. C., Nason, R. R., & Gessaroli, J. (2016). Financial Managment: Theory and Practice, Canadian Edition. Nelson Education.

Deegan, C., 2013. Financial accounting theory. McGraw-Hill Education Australia.

Dutordoir, M., Roosenboom, P. and Vasconcelos, M., 2014. Synergy disclosures in mergers and acquisitions. International Review of Financial Analysis, 31, pp.88-100.

Edwards, J.R., 2013. A History of Financial Accounting (RLE Accounting). Routledge.

Harvey Norman. (2018). Annual report. Harvey Norman. Retrievable at: http://clients.weblink.com.au/news/pdf/02027865.pdf

JB Hi-Fi Limited. (2018). Annual report. JB Hi-Fi Limited. Retrievable at: https://investors.jbhifi.com.au/wp-content/uploads/2018/08/Appendix-4E-and-Financial-Report-2018-Full-Year.pdf

Ormiston, A. and Fraser, L.M., 2013. Understanding financial statements. Pearson Education.

Trautwein, F., 2013. Merger motives and merger prescriptions. In Mergers & Acquisitions (pp. 14-26). Routledge.

Wahlen, J., Baginski, S., & Bradshaw, M. (2014). Financial reporting, financial statement analysis and valuation. Nelson Education.

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

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