Financial Accounting Analysis of JB Hi-Fi

This assignment requires an in-depth analysis of JB Hi-Fi's financial performance using various financial ratios. The provided data includes balance sheet and income statement figures for 2016, enabling the calculation of key ratios such as debt to equity, current ratio, asset turnover, net profit margin, return on assets, and cash flow to sales. The analysis will shed light on JB Hi-Fi's leverage, liquidity, efficiency, profitability, and cash flow management.

ACCY801 Business Report-Trimester 3, 2017
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Contents
Introduction......................................................................................................................................3
Analysis and Discussion of Annual Report of JB Hi-Fi Limited....................................................3
a. Brief Summary of Company....................................................................................................3
b. Board of Directors Details.......................................................................................................4
c. Assessment on the characteristics of the Board.....................................................................10
d. Investment or financing decisions made by JB-Hi-FI Ltd.....................................................11
e. Key Recommendations of the ASX CGC IN Table Format..................................................12
f. Audit Firm of JB Hi-Fi Limited..............................................................................................13
h. Top five investors of JB-Hi-FI and their Ownership Stake...................................................14
i. Analyzing the financial statements of JB-Hi-FI Limited........................................................15
Conclusion.....................................................................................................................................18
References......................................................................................................................................20
Appendix........................................................................................................................................22
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Introduction
The present report is developed for analysis and examination of the accounting and
financial environment of a selected organization. This is done to evaluate the implications of the
financial environment of an organization on the investment decisions of end-users. In this
context, the report aims to presents an analysis of annual report of JB Hi-Fi Limited for
evaluating its financial planning to support the decision-making process of end-users. The report
for analyzing the financial position of the company has presented its brief summary describing
its details such as industry sector, primary activities and its current performance. The details
regarding the board of directors emphasizing on its composition, expertise and other information
such as gender, age, education, career history and remuneration. In addition to this, it examines
the financing decisions made by the company and its corporate governance policies. Also, it
discusses the external audit function of the company in accordance with the ASX corporate
governance. The measures taken by JB Hi-Fi for ensuring its business operations are in
accordance with high level of ethical principles is also discussed in the report. Also, it evaluates
the ownership stake of JB Hi-Fi and its financial statements through the help of ratio analysis.
Analysis and Discussion of Annual Report of JB Hi-Fi Limited
a. Brief Summary of Company
The JB Hi-Fi Limited is involved in retailing of home consumer products in Australia and
New Zealand. The company operates in highly competitive retail sector of Australia and has
achieved a recognized position in the sector through retailing of consumer goods such as DVDs,
CDs, electronics and home appliances, blue-ray disc, musical instruments and many others. In
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addition to this, the company is also involved in providing information technology and
consulting services. The company owns about 60 home branded stores out of which four are in
New Zealand and has more than 190 physical retail stores in Australia and New Zealand. The
company is recently emphasizing on establishing approx 75 home stores in Australia and New
Zealand and as such is largely investing in its supply chain activities and training programs for
employees. This is done by the company to support its plan of business expansion and thus
supporting its long-term growth and development plan (JB Hi-Fi, 2017).
The company has reported sales of about $3.95 billion in the year 2016 realizing an
increase in sales of about 8.3% as compared to the previous year. In addition to this, the net
profit after tax and earnings per share reported an increase of about 11.5% in the FY 2016 in
comparison to the previous year. Also, the total divided also recorded a rise of about 10 per cent
and gross profit of about 8.4 per cent. The company has achieved a competitive advantage in the
highly competitive retails sector of Australia through reducing its operational costs by 15.2% in
comparison to the proviso year. The balance sheet of the company has recorded a growth in
strength with decrease in financial and operating leverage. Thus, it can be said that the company
present financial condition is strong as reported from its recent annual report (JB Hi-Fi limited
Annual Report, 2016).
b. Board of Directors Details
The Board of directors of the company holds the major responsibility of promoting long-
term value of shareholders. The board holds the composition for ensuring that its members
provide a range of expertise, skills, diversity and knowledge for promoting the long-term growth
of the company (JB Hi-Fi limited Annual Report, 2016). The varying members of the board and
their details can be explained through the use of a table as follows:
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Board
Members
Name
Gender Designation Education Career
History
Remuneration
Greg
Richards
Male Mr. Richard is
presently working
as Chairman Non-
Executive
Director of Board.
He is also
chairman of the
remuneration
committee of the
company and of
the audit and risk
management
committee.
B.Ec (Hons) Mr. Richard
before
joining the
company has
worked in
the banking
industry. He
possesses
over 25 years
of experience
in the
banking
sector and
also worked
in Goldman
Sachs
JBWere for
more than 19
years before
joining the
$290,000
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company.
Mr. Richard
ahs also
worked in
equity capital
markets and
is presently
engaged in
voluntary
activities of
serving
various non-
profit
companies.
Richard
Uechtritz
Male Presently
appointed as a
non-executive
director of the
company
- Mr. Uechtritz
has over 20
years of
experience in
retail and is
regarded to
be the co-
founder of
photo chains
$130,000
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of Rabbit
Photo and
Smiths
Kodak
Express.
Also, he has
remained a
director of
Kodak from
where he
resigned in
the year 2010
before
joining the
board team
of JB Hi-Fir
in the year
2011.
Beth
Laughton
Female Presently working
as non-executive
director of the
board of JB Hi-Fi
B.Ec,
FAICD, FCA
Mrs.
Laughton is a
Chartered
Accountant
and has
$166,093
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experience of
over 25 years
in corporate
finance. She
has also
served as a
board
member of
GPT Funds
Management
Limited and
a non-
executive
director of
the Sydney
Ferries from
the year 2004
to 2010.
Wai Tang Female Non-Executive
Director
BAppSC,
MBA,
GAICD
Has carried
out senior
executive
roles in Just
Group and
$115,201
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was also a
general
member of
business
development
for Pacific
brands.
Richard
Murray
Male Chief Executive
Officer and
Executive
Director
B.Comm,
CA,
GDipAppFin
(Sec Inst),
ASIA
Chartered
Accountant
with over 20
years of
experience in
retail and
finance
sector.
$2,750,596
Stephen
Goddard
Male Non-Executive
Director
MSc, BSc
(Hons)
Having 30
years of
experience in
retail and has
carried out
the role of
senior
executives in
-
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some of
renowned
retail
companies in
Australia
(Source: Jb Hi-Fi Limited , 2017)
c. Assessment on the characteristics of the Board
The Board of JB Hi-Fi holds the responsibility of promoting shareholder growth and is
directly accountable to the shareholders. As such, the board members have the responsibility of
monitoring and controlling the operations of the company on the shareholders perspectives. The
board develops and implements the corporate governance policies for the company in order to
ensure that business operations are carried out in honest, open and ethical manner (Henderson et
al., 2015). The Chief Executive Officer is accountable to the board and carries out the
responsibility of managing, directing and promoting the profitability of the company. The Board
composition consists of various executive and non-executive directors that are appointed through
the use of most adequate search process. This is done to ensure that board members having
different skills, capabilities, backgrounds and gender for promoting diversity and thus facilitating
effective decision-making (Weygandt, Kieso and Kimmel, 2010). The board of the company has
maintained that it promote diversity among its members in order to operate effectively. The
board composition is reviewed regularly and currently have majority of non-executive directors
on its board composition. The board composition currently consists of six directors, five non-
executive directors including Chairman and a non-executive director. The board has maintained
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that its entire team member’s carries out their responsibility independently and acts in best
interest of the company (JB Hi-Fi limited Annual Report, 2016).
The directors of the company regularly discuss the issues facing the company for
developing an effective resolution. The Board also seeks suggestions from the directors for
resolving nay situation of conflict of interest in the company. The board members continually
meet in order to discuss the issues faced by the company and the board papers are presented to
the directors for reviewing. The board members have varying expertise as discussed in the above
section and therefore are regarded to be component for effective resolution of problems faced by
the company. The board members on the basis of their expertise can bested to be highly
competent for promoting the sustainable growth of the company. The board members have
developed various committees for monitoring and controlling the business operations (Horngren
et al., 2012). The board committee includes audit and risk committee, remuneration and
nomination committee. The audit and risk committee holds the responsibility of providing
assistance to the board on the matters of financial management, financial disclosures, overseeing
business performance and reviewing of company policies regarding risk assessment and
management (Stickney et al., 2009). The remuneration committee provides suggestions to the
Board regarding the remuneration structure of the key management personnel. On the other
hand, the nomination committee holds the responsibility of developing formal procedures for
selection of the board members and directors (JB Hi-Fi limited Annual Report, 2016).
d. Investment or financing decisions made by JB-Hi-FI Ltd
As analyzed form the director’s review in the annual report of the company for the
FY2016, the company is currently focusing on opening new home stores in both Australia and
New Zealand. This is aimed by the company for supporting its plan of business expansion in
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order to improve its profitability position in highly competitive retail market of Australia. The
home appliance market in Australia is currently regarded to have a value of about $4.6 billion
that is greater in comparison to many other retail categories. Thus, the investment decisions
made by JB Hi-Fi in home sector can be regarded to be appropriate as it will help in promoting
the long-term growth of the company. The company is presently emphasizing largely on
innovation and technology for supporting the growth of its home appliances sector. This will
prove to be useful for the company for meeting its significant opportunity of growth in home
appliance sector in future (JB Hi-Fi limited Annual Report, 2016).
e. Key Recommendations of the ASX CGC IN Table Format
ASX CGC Principle Recommendations
Delegation of adequate role to board and
management
The companies should effectively develop
the board functions and management
Effective Board Composition Maintaining the independency of Directors
Promoting ethical decision-making Developing code of conduct
Financial reporting Integrity Companies should develop audit committee
for achieving integrity in financial processes
Timeliness Develop written policies for their continues
disclosures
Protecting Shareholder Rights Promoting effective communication policies
between companies and shareholders through
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arranging meetings
Managing Risk Developing Risk committee
Fair Remuneration Developing Remuneration committee for fair
remuneration to the employees
(Source: ASX Corporate Governance Council, 2014 )
f. Audit Firm of JB Hi-Fi Limited
The auditing function of the company is carried out by Deloitte. The auditing firms as per
the Corporations Act 2001 have declared that directors have maintained independency in
carrying out their roles and responsibilities. The auditor report ha stated that the general purpose
financial statement of the company is prepared in accordance with the AASB standards and
Corporations Act 2001. The financial reports have thus provided a true and fair view of the
accounting activities of the company (Australia, 2011). The auditors’ report ahs also declared
that development of consolidated statements of the company as per the IFRS standards. The
remuneration report of the company developed under the supervision of directors is also
reviewed by auditors. The auditors have regarded that remuneration reports are developed as per
the section 300A of the Corporations Act 2001. The Board has also maintained an effective
internal control over the business operations through development of adequate business polices
and procedures (Weil, Schipper and Francis, 2013). The auditor’s ahs also stated that auditing of
the company is carried out by maintaining independency as per the requirements of the
Corporations Act 2001 (JB Hi-Fi limited Annual Report, 2016). The overall remuneration
received by the auditors for the FY 2016 is $ 421,016 that comprises of remuneration recued or
airing and reviewing of group and subsidiary financial statements and also of its IT services that
can be depicted as follows:
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(Source: Jb Hi-Fi Limited Annual Report 2016)
g. Measures for Promoting Ethical Judgments
The company in order to ensure that business operations are carried out in honet and
trspnect manner has adopted a Code of Conduct. The Code of Conduct is developed by the board
members for promoting the adoption highest ethical standards in business operations (Palepu et
al., 2007). The Code of Conduct provides guidance to the directors, executives and employees of
the company about the acceptable behavior so that they carry out their responsibilities as per the
ethical norms and policies. The key elements of the code of conduct of the company are
respecting employee’s dignity, providing a safe and healthy workplace, recognizing the
employee’s achievements, securing the confidential information of the customers, suppliers and
employees and complying with the legal laws. The company has also provided specific
guidelines to the employees for guiding them to implement the Code of Conduct in practices
while carrying out their daily job activities (JB Hi-Fi limited Annual Report, 2016).
h. Top five investors of JB-Hi-FI and their Ownership Stake
The five investors of the company with their ownership stake as extracted from the
annual report of the company are as follows:
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(Source: Jb Hi-Fi Limited Annual Report 2016)
As illustrated above, the major investors of the company are HSBC, JP Morgan, Citicorp,
national Nominees and BNP. They hold the largest number of equity shares of the company and
thus regarded to be major shareholders of JB Hi-Fi. In this context, it is essential for the
company to carry out its business activities as per the interests of its shareholders for achieving
long-term growth (Bazley, Hancock and Robinson, 2014). The Board of Directors in this context
should ensure that company aims to maximize the shareholder returns through implementing
sound business policies and activities (JB Hi-Fi limited Annual Report, 2016).
i. Analyzing the financial statements of JB-Hi-FI Limited
The analysis of the financial statements of any company helps to interpret its financial
performance in that year and also allows making comparison. In this section financial statement
of year 2016 of JB HI FI are analyzed using the ratio analyses technique in order to report on the
financial performance of the company.
Liquidity Analyses
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Liquidity analyses mean short term financial capability of the company to pay the short
term or current liabilities. Current ratio and quick ratio is used to check the liquidity of the
company.
 Current Ratio: This ratio calculates times the current assets is available with the company
to pay the current liabilities. Current liabilities are those liabilities that are due in one year
time period whereas current assets are assets that can be converted into cash and cash
equivalents in very short period of time. The current asset of the company in year 2016 is
1.57 that indicates that there are sufficient current assets to deliver the amount of current
liabilities as and when it is arises (JB HI Fi Limited Annual Report, 2016).
 Quick ratio: This ratio is similar to the current ratio the only difference is that it ignore
the current assets that cannot be converted into cash and equivalents in short period of
time like inventory and prepaid expenses. This ratio is termed as the true measure of
liquidity position of the company. The quick ratio of the company is 0.57 times that
shows that company actually has only 57% assets to the liabilities that can be used to pay
them (JB HI Fi Limited Annual Report, 2016). Therefore it can be said that liquidity
position of the company is very bad in year 2016 (Weygandt, Kieso, and Kimmel, 2010).
Efficiency Analyses
This analysis provides the effectiveness of the company to use their resources to make the
sales.
 Asset Turnover Ratio: This ratio provides the times the assets have been used to convert
them into sales. It calculates the efficiency of the management on the allocation of assets
in the cash generating units to earn more and more revenue. The asset turnover ratio of
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the company is 3.98 times that shows that company has able to uses the assets almost 4
times to earn that much sales. So it is worth saying that management has performed very
well to earn high sales revenue (JB HI Fi Limited Annual Report, 2016).
Leverage or Solvency analysis
The leverage analysis shows how much debt capital is used by the company to finance
the assets and process in the company.
 Debt Equity ratio: This ratio tells the times the debt capital employed by the management
as against the equity capital. This ratio is really helpful in decision the capital structure of
the company. Higher amount of debt capital is not good for the company as it generates
the fixed charge on the company profits and decreases the overall profit of the company
(JB HI Fi Limited Annual Report, 2016). The debt equity of the JB HI Fi Company is
1.45 times that clearly indicates that debt capital is almost 1.5 times the equity capital.
This shows that capital of the company is not sound and company needs urgent attention
to this (Weil, Schipper and Francis, 2013).
Profitability Analysis
This analysis provides capability of the company to earn the profits using the resources
employed by the company.
 Net Profit Ratio: This ratio tells the percentage of net profit after tax earned on the total
sales of the company. The net profit of the JB HI Fi Company is 3.85% that shows that
company earned a profit which is less than the overall cost of capital of the company (JB
HI Fi Limited Annual Report, 2016).
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 Return on assets: This ratio calculates the percentage of profits earned using the total
assets. The return on assets ratio of JB HI Fi Company is 15.33% that is above
expectation of the management. So it can be said that profitability of the company is
relatively weak as expected by the management (Palepu, 2007).
Cash Flow
The cash flow to sales ratio of the company is 4.68% that shows that company generates
short of 5% cash of total sales from the operations (JB HI Fi Limited Annual Report, 2016).
Market performance
The EPS of the JB HI Fi Company is 153.76 cents per share and it has increased as
compared to previous year (Stickney, 2009).
Conclusion
Thus, it can be summarized from overall analysis of annual report of JB Hi-Fi that the
company is currently having a good financial position. The company operates in retail sector of
Australia but has attained a competitive advantage through minimizing its operational costs. The
board of Directors composition has ensured that the company has maintained high level of
expertise in its board diversity for effective decision-making. The company is recently planning
to invest in its home sector growth as Australian home sector is presently in a state of ongoing
growth. Thus, the financing decision of the company to invest in home sector is appropriate for
promoting its sustainable growth. The company has also adopted sound corporate governance
policies as per the ASX Corporate Governance Council guidelines and recommendations. This
ensures that the company carries out is operations in ethical manner and thus securing interest of
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its major shareholders. The auditor report has also declared the financial reports of the company
to be in effective compliance with AASB and Corporations Act. At last, the ratio analysis of the
company has indicated its sound financial growth in the current and future period of time.
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References
ASX Corporate Governance Council. 2014. [Online]. Available at:
http://www.asx.com.au/documents/asx-compliance/cgc-principles-and-recommendations-3rd-
edn.pdf [Accessed on: 12 October 2017].
Australia. 2011. Australian Corporations & Securities Legislation 2011: Corporations Act 2001,
ASIC Act 2001, related regulations. CCH Australia Limited.
Bazley, M., Hancock, P. and Robinson, P. 2014. Contemporary Accounting PDF. Cengage
Learning Australia.
Henderson, S. et al. 2015. Issues in Financial Accounting. Pearson Higher Education AU.
Horngren, C. et al. 2012. Financial Accounting. Pearson Higher Education AU.
JB Hi-Fi limited. 2016. Annual Report.
JB Hi-Fi. 2017. [Online]. Available at: https://www.jbhifi.com.au/General/Corporate/Consumer-
Matters/About-Us/ [Accessed on: 12 October 2017].
Palepu, K. et al. 2007. Business Analysis and Valuation: Text and Cases. Cengage Learning
EMEA.
Palepu, K. et al. 2007. Business Analysis and Valuation: Text and Cases. Cengage Learning
EMEA.
Stickney, C.P. et al. 2009. Financial Accounting: An Introduction to Concepts, Methods and
Uses. Cengage Learning.
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Stickney, C.P. et al. 2009. Financial Accounting: An Introduction to Concepts, Methods and
Uses. Cengage Learning.
Weil, R., Schipper, K. and Francis, J. 2013. Financial Accounting: An Introduction to Concepts,
Methods and Uses. Cengage Learning.
Weil, R., Schipper, K. and Francis, J. 2013. Financial Accounting: An Introduction to Concepts,
Methods and Uses. Cengage Learning.
Weygandt, J., Kieso, D.E. and Kimmel, P.D. 2010. Financial Accounting: IFRS. John Wiley &
Sons.
Weygandt, J., Kieso, D.E. and Kimmel, P.D. 2010. Financial Accounting: IFRS. John Wiley &
Sons.
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Appendix
Ratio Analysis 2016
Leverage Ratio
Debt to equity
Ratio Debt/Equity 1.45
Liquidity ratios:
Current ratio Current assets/Current liabilities 1.57
Quick Ratio
Current assets-Inventory/Current
Liabilities 0.35
Efficiency Ratio
Asset turnover
ratio Net Sales/Total Assets 3.98
Profitability
ratios:
Net profit margin Net profit/sales*100 3.85%
Return on assets Net income/ total assets
15.33
%
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