Financial Statement Analysis of Kogan.com and JB Hi-Fi Limited

This report evaluates the liquidity of Kogan.com and compares it with JB Hi-Fi Limited. It also analyzes the operational and financial issues in the company through financial statements.

Advance Financial Reporting
1

Contents
Introduction................................................................................................................................3
Liquidity ratio and Z-score.........................................................................................................4
Operating and Financial Review section....................................................................................8
Strengths and weaknesses of performance issues....................................................................10
Conclusion................................................................................................................................12
References................................................................................................................................13
2

Introduction
Financial statement analysis is one of the most important strategies to compare a financial
position and other factors of a particular business organization with its competitors. The
primary advantage of financial statement analysis is that it uses actual historical data that is
published by the business organization through financial statements. This report will be
focused on evaluating the liquidity of kogan.com and comparing it with one of its major
competitors that is JB Hi-Fi Limited. In addition to that operational and financial issues in the
company will be evaluated with the help of financial statements (Robinson, Henry, Pirie &
Broihahn, 2015). Therefore it can be said that the primary objective of this report is to
conduct an overall analysis of financial statements for kogan.com.
Reference-
Robinson, T. R., Henry, E., Pirie, W. L., & Broihahn, M. A. (2015). International financial
statement analysis. John Wiley & Sons.
3

Liquidity ratio and Z-score
Liquidity ratio- the Main objective of liquidity ratio is to evaluate the short term liquidity
position of a company by evaluating the data available in financial statements. Two ratios
will be used for evaluating the liquidity of kogan.com and comparing it with JB Hi-Fi
Limited i.e. current ratio and quick ratio. Both of these ratios help in evaluating the
availability of financial assets to pay for short term debts.
It is important for evaluating the liquidity position of a company as there are various
stakeholders that evaluate liquidity position before getting into business with the
organization. For example, a supplier will decide its credit limit for the business organization
on the basis of liquidity (Wahlen, Baginski & Bradshaw¸2014). If the supplier is satisfied that
management of the company has sufficient financial assets for regular payment then raw
material will be provided on credit otherwise contract will be done in cash.
Reference-
Wahlen, J. M., Baginski, S. P., & Bradshaw, M. (2014). Financial reporting, financial
statement analysis and valuation. Nelson Education.
4

Following table shows the calculations in relation to liquidity ratios and Z-score –
Particular kogan.com JB Hi-Fi
2018 ($) 2017 ($) 2016 ($)
2018
($m)
2017
($m)
2016
($m)
Revenue 412312395 289517780
21115859
5 6854.3 5628 3954.5
EPS 0.15 0.04 2359 203.09 154.3 151.9
Gross profit 19980549 51693480 1636602 1470.2 1230.5 865.4
Net profit 14110993 3739865 809149 233.2 172.4 152.2
PBIT 21007211 6124365 1431221 334.5 259.2 217.8
Current assets 99042837 74440508 26898980 1210.5 1170.7 702.4
Current
Liabilities 57386059 37557000 25329187 917.2 885.8 446.8
Working capital
(CA-CL) 41656778 36883508 1569793 293.3 284.9 255.6
Inventory 50200175 39741987 20532375 606.6 859.9 546.4
Prepaid
expenses 0 0 0 0 0 0
Quick assets 48842662 34698521 6366605 603.9 310.8 156
Retained
earnings 11571023 7460780 7361042 463.2 381.6 328.3
Total assets 105984673 80323856 32443291 2491.7 2452.3 992.3
Total liabilities 58103415 37652171 25372551 1544.1 1598.8 587.6
Total number
of shares 93336581 93336581 343 114.88 114.42 98.95
5

MPS 5.65 26.45
Market value of
equity
527351682.6
5 93336575.35 1937.95 4.34 4.33 3.74
Current asset
ratio 1.73 1.98 1.06 1.32 1.32 1.57
Quick asset
ratio 0.85 0.92 0.25 0.66 0.35 0.35
A 0.39 0.46 0.05 0.12 0.12 0.26
B 0.11 0.09 0.23 0.19 0.16 0.33
C 0.20 0.08 0.04 0.13 0.11 0.22
D 9.08 2.48 0.00 0.00 0.00 0.01
E 3.89 3.60 6.51 2.75 2.29 3.99
Z-Score 10.61 6.02 7.03 3.60 3.00 5.49
Current ratio- Current ratio can be described as the ability of a company to pay off its short-
term liabilities. Source of payment for such short term liabilities should be short term assets
i.e. current assets.
An overall evaluation it can be said that the current ratio of kogan.com is appropriate in all
the financial year under consideration. In addition to that, it has been improving over the last
three financial years and the current ratio in the year 2018 has been 1.73 (Kogan.com, 2016).
The liquidity position of a company is considered to be optimum if it has double the amount
of current liabilities in the form of current assets for payment. In the case of kogan.com
current ratio of the company is very near to 2:1 (Kogan.com, 2017). The current ratio of this
organization is also better as compared to its main competitor in the market i.e. JB Hi-Fi
Limited. The current ratio of JB Hi-Fi Limited is also impressive i.e. 1.53 but it is lower as
compared to kogan.com (JB Hi-Fi Limited, 2016).
6

Quick ratio- quick ratio is similar to current ratio but the value of inventory and prepaid
assets are excluded in the calculation of quick assets from current assets as it is very difficult
to immediately convert inventory and prepaid assets into cash (Brigham, Ehrhardt, Nason &
Gessaroli, 2016). Generally, it is considered that the number of quick Assets and current
liabilities should be equal to each other therefore optimum quick asset ratio is considered to
be 1:1.
The quick ratio of kogan.com is very low in the year 2016 but it has improved over the period
of time in 2017 and 2018 (kogan.com, 2019). On the other hand, it can also be evaluated that
the company does not have sufficient quick assets for payment of total current liabilities
which can be a problem if the company is liquidated immediately. On the other hand, if the
comparison is made with JB Hi-Fi Limited, short term liquidity position of kogan.com is
significantly higher as compared to JB Hi-Fi Limited.
Reference-
Brigham, E. F., Ehrhardt, M. C., Nason, R. R., & Gessaroli, J. (2016). Financial Managment:
Theory and Practice, Canadian Edition. Nelson Education.
Kogan.com. 2016. Annual report. Retrievable at:
https://www.kogancorporate.com/resources/pdf/Kogan%20Annual%20Report%202016.pdf
Kogan.com. 2017. Annual report. Retrievable at:
https://www.kogancorporate.com/resources/pdf/KOG0004%20AR17_PFO_web.pdf
Kogan.com. 2018. Annual report. Retrievable at:
https://www.kogancorporate.com/document/a9caacf937444d1b88dd7c14d3574c16/
KOG0006%20Kogan%20AR18_PFO2_web.pdf
JB Hi-Fi Limited. 2016. Annual report. Retrievable at:
https://www.jbhifi.com.au/Documents/Appendix%204E%20and%20Annual%20Report%20-
%202016.pdf
7

Z-score method
Formula used for Z-score-
Here-
The z-score method is a combination of five different ratios in which weightage is assigned to
each and every ratio calculated. This ratio can also be defined as and liquidity ratio as it helps
in identifying short term liquidity of an organization. This is a combination of profitability
leverage liquidity solvency and activity ratio that helps in identifying whether a business
organization is insolvent or not. Z score ratio of lower than 1.8 means that there is a high
probability that a particular business organization will go under bankruptcy in the near future
(kogan.com, 2018). Z-Score has already been calculated for both the organization in all three
financial years under consideration.
On the evaluation of Z-score of kogan.com, it can be said that the financial position of the
company is good as z-score for this organization all the three financial years under
consideration is higher than 1.8. In addition to that Z score in the year 2018 has increased
significantly as compared to 2017. On another hand Z score of JB hi-fi limited has decreased
significantly in 2017 and 2018 as compared to 2016. Currently that score of JB hi-fi limited
has been 3.60 which is significantly lower as compared to kogan.com (JB Hi-Fi Limited,
2018).
On an overall evaluation, it can be said that the liquidity position of kogan.com is sound and
it is significantly higher as compared to JB Hi-Fi Limited which is considered as its main
competitor in the market.
Half yearly performance of Kogan.com
Liquidity Ratios
Kogan.com
HY2019
a) Current ratio
Current Assets 11,31,37,108
8

Current Liabilities 7,25,74,335 1.56
b) Quick ratio
Current Liabilities 7,25,74,335
Cash 1,55,33,320
Receivables 20,82,912 0.24
Altman's Z-Score
Kogan.com
HY2019
T1
Current Assets 11,31,37,108
Current Liabilities 7,25,74,335
Total Assets 12,21,82,528
0.33
T2
Total Assets 12,21,82,528
Retained earnings 93,59,948
0.08
T3
Finance Income 1,64,714
Finance Cost 4,85,801
Profit before tax 1,05,08,866
Earnings before interest and taxes 1,01,87,779
Total Assets 12,21,82,528
0.08
T4
Issued Shares 9,37,08,139
Share price 3.40
Market value 31,86,07,673
Total liabilities 7,60,13,455
4.19
Z-Score= 6.56(0.33) + 3.26(0.08) + 6.72(0.08) + 1.05(4.19) = 7.36
Management of the company has been able to maintain its strong liquidity position in the first
half of the year 2019. Current ratio and quick ratio of this company according to the half
yearly financial statement is 1.56 and 0.24. Current ratio of this company is very strong but
quick ratio of Kogan.com has been decreased as compared to 2018. This ratio can be
improved by the company over the next 6 month years. In addition to that z-score of
kogan.com is also improving in first half years of 2019. On an overall analysis of this
statement it can be said that liquidity position of the company is strong.
Reference-
9

JB Hi-Fi Limited. 2018. Annual report. Retrievable at:
https://www.jbhifi.com.au/Documents/2017%20Annual%20Report.pdf
Kogan.com. 2018. Annual report. Retrievable at:
https://www.kogancorporate.com/document/a9caacf937444d1b88dd7c14d3574c16/
KOG0006%20Kogan%20AR18_PFO2_web.pdf
JB Hi-Fi Limited. 2017. Annual report. Retrievable at: https://investors.jbhifi.com.au/wp-
content/uploads/2018/08/Appendix-4E-and-Financial-Report-2018-Full-Year.pdf
10

Operating and Financial Review section
As it is already identified that the liquidity position of kogan.com is sound and higher as
compared to other competitors in the market but it is important to maintain such liquidity
position for the long term. There are certain factors that should be considered by the
management of kogan.com for maintaining effective and efficient liquidity position in the
future-
Inventory management
On the basis of the half yearly financial statement it can be said that quick ratio of the
company has decreased. On the other hand current ratio of the ratio has improved over the
first six month. On the basis of these ratios it can be said that value of inventory at the end of
6 months is very high as primary difference between quick asset and current asset is
inventory and pre-paid expenses.
For improving liquidity position of the company, management is required to maintain an
effective balance of inventory. Inventory management strategies will also help in making sure
that overall cost of inventory storage and ordering cost. These strategies will also help in
effective cash flow management.
Management of account receivables
Effective and efficient management of account receivables is also very important for
maintaining liquidity in a business organization. The primary source of revenue for a business
organization is through the selling of product and services and the majority of product and
services are sold on credit by kogan.com (Ahmed, 2015).
References-
Easton, M., & Sommers, Z. (2018). Financial Statement Analysis & Valuation, 5e.
Ahmed, I. E. (2015). Liquidity, profitability and the dividends payout policy. World Review
of Business Research, 5(2), 73-85.
11

In such a scenario, it is very important that management has sufficient policies and
procedures for the collection of money from debtors i.e. credit clients. Allowing higher credit
period for debtors will result in loss of interest income for the organization. With the help of
effective and efficient collection procedures, management of the company can invest the
collected amount for gaining extra income in the form of interest. Management should also
ensure that two payments are made to creditors on a regular interval of time as an excess of
current liabilities can also affect the recruiter position of the company negatively (Akter &
Mahmud, 2014).
Profitability
Gross profit and net profit of 1 open.com in the year 2018 has decreased significantly as
compared to 2017. Total gross profit earned by the organisation in 2017 was $51693480
where as it has decreased to $19980549 in 2018. Main problem in this scenario is that overall
gross profit has decreased irrespective of the fact that total revenue has increased by 42%. It
clearly shows that management of the company is not operating efficiently in the year 2018
(Agha, 2014). Sudden decrease in profitability will definitely impact to overall liquidity
position of the company as lower revenue will result in less current assets and increased
current liabilities.
Reference-
Akter, A., & Mahmud, K. (2014). Liquidity-profitability relationship in Bangladesh banking
industry. International Journal of Empirical Finance, 2(4), 143-151.
Agha, H. (2014). Impact of working capital management on profitability. European Scientific
Journal, ESJ, 10(1).
12

Strengths and weaknesses of performance issues
Strengths
One of the primary strength of kogan.com over JB Hi-Fi Limited is the liquidity position of
the company. With the help of a calculating z-score method and other liquidity ratios, it can
be said that the short term liquidity position of kogan.com is significantly better as compared
to JB Hi-Fi Limited. Overall availability of financial assets for payment of short term liability
of the company is better in case of kogan.com as compared to JB Hi-Fi Limited. On the basis
of this evaluation, it can be said that overall operations to control cash and short term
liabilities in case of kogan.com is better. This strong liquidity position of the company will
definitely enable the business organization to acquire short term loans for working capital
easily (Francis, Pinnuck & Watanabe, 2013).
Weakness
Particular 2018 ($) 2017 ($) 2016 ($)
2018
($m)
2017
($m)
2016
($m)
Revenue
41231239
5
28951778
0
21115859
5 6854.3 5628 3954.5
EPS 0.15 0.04 2359 203.09 154.3 151.9
Gross profit 19980549 51693480 1636602 1470.2 1230.5 865.4
Gross profit
Ratio 4.8460 17.8550 0.7751 21.4493 21.8639 21.8839
References-
Francis, J. R., Pinnuck, M. L., & Watanabe, O. (2013). Auditor style and financial statement
comparability. The Accounting Review, 89(2), 605-633.
13

Operating profit
With the help of above evaluations it can be evaluated that gross profit ratio in kogan.com is
significantly lower as compared to JB Hi-Fi Limited. It can be said that operations of the
company are not efficient and they are very costly as compared to JB Hi-Fi Limited. There is
a requirement of controlling the overall cost of operations in order to reduce the direct cost so
that the profitability of the organization can be improved. In addition to that gross profit
earned by JB Hi-Fi limited has been constant in all the financial year whereas it is fluctuating
significantly in case of kogan.com.
The focus of the company should be on operations undertaken by the organization in the year
2018 as the gross profit ratio in this year has decreased to 4.8 6% from 17.8 5% in the year
2017 (Dumas, La Rosa, Mendling & Reijers, 2013). On the basis of this evaluation, it can be
said that the problem is not with the availability of a resource or its ability to use such
resources as it has generated significant gross profit ratio in the year 2017. Management
should undertake an overall analysis of the business operations to identify deficiency is in
supply chain management.
Earnings per share
The first factor that is considered by an investor before making an investment decision for a
particular stock trading in the market is earning per share generated by such an organization.
In the given scenario earning per share of kogan.com is significantly lower as compared to JB
hi-fi Limited in the year 2018 and 2017. This might be due to the fact that management a
significant amount of shares in the year 2017 (Van Der Aalst, 2013). Management is
required to conduct consolidation of shares or buyback of share to improve earnings per share
position.
References-
Dumas, M., La Rosa, M., Mendling, J., & Reijers, H. A. (2013). Fundamentals of business
process management (Vol. 1, p. 2). Heidelberg: Springer.
Van Der Aalst, W. M. (2013). Business process management: a comprehensive survey. ISRN
Software Engineering, 2013.
14

Conclusion
An overall evaluation it can be concluded that the primary focus of the organization should
be on improving gross profit in the coming financial years. Gross profit of other business
organization such as JB Hi-Fi Limited in similar business conditions is significantly higher as
compared to kogan.com. After making a comparison with JB hi-fi Limited it can be said that
there are no external factors that are affecting business operations or direct cost of
production. Cost of production in the year 2017 was very efficient but it has increased
significantly in the year 2018 and management of the company is required to analyze the
reasons behind this sudden increase in operational cost.
15

References
Agha, H. (2014). Impact of working capital management on profitability. European Scientific
Journal, ESJ, 10(1).
Ahmed, I. E. (2015). Liquidity, profitability and the dividends payout policy. World Review
of Business Research, 5(2), 73-85.
Akter, A., & Mahmud, K. (2014). Liquidity-profitability relationship in Bangladesh banking
industry. International Journal of Empirical Finance, 2(4), 143-151.
Brigham, E. F., Ehrhardt, M. C., Nason, R. R., & Gessaroli, J. (2016). Financial Managment:
Theory and Practice, Canadian Edition. Nelson Education.
Dumas, M., La Rosa, M., Mendling, J., & Reijers, H. A. (2013). Fundamentals of business
process management (Vol. 1, p. 2). Heidelberg: Springer.
Easton, M., & Sommers, Z. (2018). Financial Statement Analysis & Valuation, 5e.
Francis, J. R., Pinnuck, M. L., & Watanabe, O. (2013). Auditor style and financial statement
comparability. The Accounting Review, 89(2), 605-633.
JB Hi-Fi Limited. 2016. Annual report. Retrievable at:
https://www.jbhifi.com.au/Documents/Appendix%204E%20and%20Annual%20Report%20-
%202016.pdf
JB Hi-Fi Limited. 2017. Annual report. Retrievable at: https://investors.jbhifi.com.au/wp-
content/uploads/2018/08/Appendix-4E-and-Financial-Report-2018-Full-Year.pdf
JB Hi-Fi Limited. 2018. Annual report. Retrievable at:
https://www.jbhifi.com.au/Documents/2017%20Annual%20Report.pdf
Kogan.com. 2016. Annual report. Retrievable at:
https://www.kogancorporate.com/resources/pdf/Kogan%20Annual%20Report%202016.pdf
Kogan.com. 2017. Annual report. Retrievable at:
https://www.kogancorporate.com/resources/pdf/KOG0004%20AR17_PFO_web.pdf
16

Kogan.com. 2018. Annual report. Retrievable at:
https://www.kogancorporate.com/document/a9caacf937444d1b88dd7c14d3574c16/
KOG0006%20Kogan%20AR18_PFO2_web.pdf
Robinson, T. R., Henry, E., Pirie, W. L., & Broihahn, M. A. (2015). International financial
statement analysis. John Wiley & Sons.
Van Der Aalst, W. M. (2013). Business process management: a comprehensive survey. ISRN
Software Engineering, 2013.
Wahlen, J. M., Baginski, S. P., & Bradshaw, M. (2014). Financial reporting, financial
statement analysis and valuation. Nelson Education.
17