Financial Analysis of JB Hi Fi

This report analyzes the financial performance of JB Hi Fi using ratio analysis, vertical and horizontal analysis. It also discusses the economic outlook, profitability, efficiency, liquidity, and solvency position of the company.

Running Head: Financial Analysis of JB Hi Fi
Financial Statement Analysis

Financial Analysis of JB Hi Fi 1
Executive summary:
This report is prepared with the aim of analyzing the financial performance of the largest
retailer of consumer electronics of Australia i.e. JB Hi Fi. The financial information regarding
the company has been extracted from the annual report for the year ending 2017. The use of
ratio analysis has helped to determine the true picture of financial position of business of JB
Hi Fi. It has been identified that the financial performance of the company in year 2017 has
faced downfall when compared to the performance of year 2016. Also, the financial
performance of JB Hi Fi has not provided satisfactory outcomes when it is compared with the
average results of all other firms operating in the same industry. The financial statement
analysis has been carried using the vertical and horizontal analysis along with ratio analysis
and it has been found that the company is facing huge financial risk of insolvency.

Financial Analysis of JB Hi Fi 2
Table of Contents
ecutive summaryEx :....................................................................................................................................... 1
ackgroundB :................................................................................................................................................. 3
usiness AnalysisB :........................................................................................................................................ 3
conomic outlookE ........................................................................................................................................ 4
inancial performance and fi nancial statement analysisF ................................................................................ 5
inancial analysisF ......................................................................................................................................... 6
rofitability positionP :.................................................................................................................................... 6
ffi
ciency positionE :........................................................................................................................................ 8
iquidity ositionL P :....................................................................................................................................... 9
earing ratiosG :.......................................................................................................................................... 10
hich year s performance is betterW ’ ?............................................................................................................ 11
mpact of political environmentI ................................................................................................................... 12
ossibilities of Merger and AcquisitionP ........................................................................................................... 12
thical consideration when becoming insolventE ........................................................................................... 13
Conclusion:................................................................................................................................................ 13
References:................................................................................................................................................ 14

Financial Analysis of JB Hi Fi 3
Background:
JB Hi Fi is one of the top Australian companies which had got listed on the Australian Stock
Exchange in year 2003. However, the company is in existence since 1974. The headquarter
of the company is situated in Melbourne, Australia and is the largest retailer of the home
entertainment products such as LED LCD TVS Computers, Laptops I-pads, Headphones,
Speakers, Mobile Phones, Video Games, Digital Camcorders and Home Theater. Along with
these products, JB Hi Fi has also diversified its business in accessories such as radios,
keyboards, musical instruments like electric guitars, surveillance camera systems, DJ
equipment and so on. The company is famous for its wide range of business products and
brands along with its low price ranges. It belongs to Consumer Discretionary (consumer
electronics) Industry. Also, JB Hi Fi owns the sole retail chain across the Australia which
sells computer hardware of Dell brand. As of now company has over 184 stores that are being
operated in the entire Australia and more than 15 stores which are being operated in New
Zealand. In 2007, JB Hi Fi was also the biggest CD retailer of Australia and at the same it had
also achieved second position in context of computer games, televisions as well as car stereo
sales. In year 2004, the company had also acquired 70% of ownership of Clive Anthony
Chain of Queensland. Further in 2006, it had also acquired chain of Hill and Stewart which
has 11 stores operating in New Zealand. Further the company had opened the branch of Clive
Anthony’s in Sydney.
Business Analysis:
JB Hi Fi conducts an innovative business and had launched an online streaming service of

Financial Analysis of JB Hi Fi 4
music subscription that is labeled with the name of ‘JB HI-FI NOW’. The company has
already opened ten new stores in year 2012 and it has planned to open up additionally 53
stores in the upcoming years. JB Hi Fi does not only maintain a large portfolio of consumer
electronics. Rather, it has the potential to grow organically. Its smooth cash flows will allow it
achieve good sales growth. This potential of the company will further entrench it improve its
position further to become the top retailer of home entertainer products in the markets of
Australia and New Zealand.
JB Hi Fi has achieved a unique proposition in market place and by far it holds top most
market share position in all the product categories it is dealing in. The strong brand name in
the market has allowed the business of JB Hi Fi to create a superior competitive edge in the
Australian market. The company takes the pride to maintain a lower cost structure for its
business. They do not operate through any of the warehouses and due to this their cost of
operating the business usually remains lower than that of rival firms. They directly sell their
products straight from their suppliers to the customers. They stock up the products merely on
the shop floor. These strategies show that JB Hi Fi devotes considerable time to keep the
‘Cost of Business’ at the minimum possible level. Moreover, the company has employed
credible workforce and its staff members are a sort of Gen Y’ers who do not only possess the
knowledge of the products and technologies related to the business of the company’s products
but also use those products themselves (Reuters, 2018).
Economic outlook
At present, it would be appropriate to say that company is facing multiple risks in the market.
Firstly, it is facing the cyclical risk because of de-leveraging practices by its customers and
the cutting back in the spending patterns of the population of Australia. Secondly, it is facing
the structural risk because of the ways the Australian retailers will operate their business in

Financial Analysis of JB Hi Fi 5
subsequent years. The conventional ‘bricks and mortar’ retailers in Australian market have to
essentially change the manner in which they conduct the business due to technological
advancements which has diverted the interests of the customers in online buying rather than
visiting the individual store. To deal with risk, JB Hi Fi has adopted the ‘multi-channel’
approach and this has resulted in the significant increase in their sales made through online
mode.
Financial performance and financial statement analysis
To understand as to how the company is performing, the financial statements have been
evaluated using various kinds of analyses such as vertical analysis, horizontal analysis and
financial ratio analysis. Citing the fragile performance of the business segment of home
appliances of JB Hi Fi, because of challenging weather conditions and intense price
competition in the home appliances market has cut down the value of Good Guys, driving
stock of the company by almost 10% (Ready ratio, 2018). The prime reason for the drop in
the sales revenue generated through the sale of Good Guys was the cyclical factor under
which the customers of Australia are maintaining the low spending cycles. Further, the
economic factors such as sluggish growth in wage rates, increasing costs of living and the
raised level of household debt and so on have influenced the moods of Australian citizens
(Edge Consulting, 2012). However, even after these challenging situations, it has been
observed that the company has managed to perform successfully in the market in long run as
those factors only impacted the company’s performance in the short run. The company has by
far remained the outstanding performer among all the bricks and mortar retailers who had
suffered the emerging digital competition and weak confidence of the customers of this
industry. The vertical analysis of income statement has shown that the revenue in 2017 have
enhanced from the level of revenue of 2016.

Financial Analysis of JB Hi Fi 6
Financial analysis
To comment on the financial performance of the business, the use of key financial
management technique i.e. ratio analysis has been undertaken. As a part of ratio analysis
various ratios relating to the main components of the financial statements of the company
have been calculated and the results therefrom have been critically interpreted. The ratio
analysis has helped to evaluate the business from the viewpoint of major aspects such as its
profitability, liquidity, efficiency and solvency position.
Profitability position:
see appendi for calculations( x ) 2017 2016 Industry average
Return on assets 10.01% 16.13% 13.59%
Return on equity 27.40% 40.71% 41.11%
et profit marginN 3% 4% 4.21%
ross profit marginG 22% 22% 28.04%
et nterest ncomeN I I AN. . AN. . AN. .
pense ratio Cost toEx /
ncome ratioI
17% 16% %
Cash return on sales 3% 5% %
arnings per shareE per share1.54 $ per share1.51$ 1.05 $
rice earnings ratioP ti mes15.18 ti mes15.96 ti mes15.95
arnings yieldE 6.59% 6.27% %
Dividends per share 1.18$ 1$ $
Profitability position of the company is achieved when it is able to recover all the expenses of

Financial Analysis of JB Hi Fi 7
the business and even after recovering all the costs related to the business, it has sufficient
amount of earnings left with it to be distributed as the return among various investors of the
company such as shareholders, debenture-holders and bond-holders. If the company lacks
sufficient earnings to all the business expenses, then it raises the situation of business losses.
To ascertain the state of profitability position various ratios have been calculated. The return
on assets ratios shows the quantum of returns generated by the business through the effective
utilization of its total assets. In the present case, the ROA of JB Hi Fi has lowered down in
2017 as compared to that of 2016 and also the company has failed to meet the industry
average. The return on equity ratio measures the ability of company to generate returns using
the funds of the shareholders. In 2017, the ROE is 27.40% which is quite lower than ROE of
2016 i.e. 40.71%. This indicates that the firm was unable to efficiently utilize its investor’s
fund to generate desirable returns to offer to the shareholders in return to their investments.
Also, the company’s performance is not in line with the performance of overall industry in
this respect. The net profit ratio in current year is 3% and that in 2016 was 4%. It shows that
the company has not earned sufficient profits in 2017 to provide desirable returns to the
shareholders of the company. Though there is no considerable change in the gross profit ratio
of both the reported years because the cost of revenue has also increased in the same
proportion of sales (42%), it has been found the operating expenses of the business of JB Hi
Fi has increased by 49% whereas the revenue from sales has increased by only 42%. Due to
this the expense ratio has been identified as 17% in 2017 which was 16% in 2016. The cash
generated from the operating activities has also declined by 2% in 2017 and this shows that
though the sales of the business has grown materially but the company has not made enough
collections from its current year’s sales. Since, the confidence of shareholders has weaken in
the company because of its lower profits forecasts for the near future, the shareholders have
withdrawn their invested monies from the company. This reduction in the number of

Financial Analysis of JB Hi Fi 8
shareholders has enabled the company to offer more earnings per share to the remaining
shareholders and also the increase in the revenue has also increased the profit portion of the
company in 2017 and due to this EPS of $ 1.54 has been offered in the said year. The
earnings yield shows the percentage of every dollar that is invested in the business has earned
return. The earnings yield of JB Hi Fi has increased from 6.27% (2016) to 6.59% and this
shows that company has offered more returns to the shareholders. Price Earnings Ratio shows
the expected price of a share on the basis of its earnings. When the company has higher EPS,
its market price per share also tends to increase but due to losing confidence of shareholders
because of low profit forecasted results of company and other economic factors, the MPS has
decreased even when EPS has risen up. In the present case, the price-earnings ratio of
company is showing conflicting returns in relation to its EP. Though it has been found that
company’s EPS has increased but 15.18 times which was 15.96 times in 2016. This ratio is
reflecting negative future prospects of the business. Further, the dividend per share has also
increased due to increase in the payout ratio and EPS of the company.
Efficiency position:
see appendi for calculations( x ) YYY YYYY Industry average
Asset turnover ti mes3.27 ti mes4.19 ti mes3.31
Cash return on assets ti mes0.11 ti mes0.20 imesT
i ed Asset turnoverF x ti mes7.16 ti mes13.92 imesT
The asset turnover ratio of the company indicates how efficiently company utilizes its overall
assets to generate sales for the business. Generally higher asset turnover ratio is preferable. In
the present case the industry average of asset turnover ratio is 3.31 times and ATR in 2017 is
3.27 times. This shows that the company is managing its assets as efficiently as the other

Financial Analysis of JB Hi Fi 9
firms of the same industry. However, in 2016, the company’s performance was even better
than the industry standards, which has provided it a competitive advantage over other rival
firms of consumer electronics segment of Australian market (Ward, 2017). The fixed asset
turnover ratio of the company depicts its efficiency in utilizing the fixed assets of business to
generate sales. In the present case of JB Hi Fi, the fixed asset turnover ratio is declining in
2017 since 2016 and this shows that company in 2017, is not as efficient as it was in 2016, in
utilizing its assets.
Liquidity Position:
see appendi for calculations( x ) YYYY YYYY Industry average
Current ratio 1.32:1 1.57:1 1.17:1
uick ratioQ 0.35:1 0.35:1 0.40:1
Receivables turnover Days139.46 Days140.82 Days87.04
Average collection period Days9.55 Days8.28 Days
Liquidity position of any business is achieved when sufficient amount of current assets is
maintained by the company to meet its short term financial obligations arising during the
course of normal business (Kimmel, Weygandt & Kieso, 2010). Current liabilities are those
liabilities that become due in one year from the date of their occurrence. As per industry
average, a company dealing in consumer electronics must have a current ratio of at-least
1.17:1. However, the ideal current ratio is 2:1 in general business (Investing.com, 2018).
However, looking at the industry average it can be judged that the working capital structure
of firms operating in this industry must at least equal amount of current assets as that of its
current liabilities. The current ratio in 2017 is higher than the industry average. It signifies

Financial Analysis of JB Hi Fi 10
that the company has sufficient assets to meet its current debt obligations. But, at the same
time, the fact that the current ratio has downgraded since 2016, cannot be ignored. This
shows that the company has a scope of further improvement to make sound liquidity position.
The receivable turnover ratio tells the time that the firm can collect the average account
receivables. Higher ACR is generally preferable (Sinha, 2012). In the present case, the
company has quite higher account receivable collection ratio than the industry average in
2017 and this shows that the firm is effectively and efficiently maintaining its trade
receivables.
Gearing ratios:
see appendi for calculations( x ) 2017 2016 Industry average
Debt to equity ratio 65.47% 27.11% 7.81%
Debt ratio 65% 59% %
quity ratioE 35% 41% %
Cash debt coverage 17% 32% %
nterest cover ratioI ti mes25.04 ti mes56.69 imesT
The gearing ratios the company helps in determining the adequacy of its capital structure. A
firm’s capital structure comprises of both equity capital and debt capital. The equity capital
shows the amount of funds that are raised from the internal sources of the company i.e. its
shareholders and debt component shows the amount of funds raised through external
financing of the business (Higgins, 2012). To maintain the sound solvency position of the
business in the market a firm must finance its assets by making more use of the funds of the
investors and less of funds borrowed from creditors. The long term debt equity ratio of the JB

Financial Analysis of JB Hi Fi 11
Hi Fi in 2017 is 65.47% which is quite higher than the average debt equity ratio of all the
firms operating in the same industry and also the debt equity ratio of previous financial year
i.e. 2016 is also higher than the industry benchmarks. Hence, it can be said that the company
has high financial risk and therefore there are higher chances of its insolvency (Jenter, &
Lewellen, 2015). Insolvency occurs when the firm is unable to meet its debt obligations both
in principle and interest terms because of lack of availability of sufficient funds. The debt
ratio of a firm tells about the quantum of assets that are financed using the funds of creditors
instead of investors. Higher debt ratio suggests that the financial leverage of company is high
because of more proportion of debt in the capital structure. In 2016, the debt to asset ratio is
comparatively lower than the that of financial year 2017 which means that the company’s
financial leverage has increased in 2017. In such situations the firm will require to sell off its
assets to meet its debt obligations. The equity ratio of 2017 is 35% which is lower than that of
2016 when it was 41%. This shows that the firm’s financial leverage is increasing because of
low proportion of equity capital which is the internal source of financing (Zainudin,
Zainudin, Hashim & Hashim, 2016). The interest coverage ratio of the company tells about
its ability to pay off its interest obligations. In 2017 the interest expense ratio is 25.04 times.
However, in 2016 the same was found to be 56.69 times. It shows that the company is
severely losing its ability to meet its interest obligations arising out of debt financing and due
to this the banks and other financial institutions will lose interest in lending huge sums of
money to the company (JB Hi Fi, 2017).This will ultimately cause the high chances of arising
of situation of insolvency of JB Hi Fi.
Which year’s performance is better?
Though the financial outcomes of JB Hi Fi have shown that company’s performance in 2017

Financial Analysis of JB Hi Fi 12
is not satisfactory when made inter firm and intra firm comparative analysis of all the
financial ratios (Warren & Jones, 2018). However, looking at the strengths of company and
the ways it deals with various risks that takes place in both internal and external business
environment it can be said that there are chances that the firm may improve its overall
performance if it makes certain changes in its organizational structure and by further adoption
of digital technologies to conduct the business in the globalized environment.
Impact of political environment
The political factors can significantly influence the business of the company in terms of its
long term profitability. As JB Hi Fi is conducting its business in numerous countries it is
more exposed to the political system risks. The trading regulations and laws of all the
countries can materially affect the business performance. Along with it, the taxation
structures of different countries might affect the business operations of the company (Fern
Fort University, n.d.).
Possibilities of Merger and Acquisition
In the recent media coverage, it has been found that JB Hi Fi has announced the acquisition
deal of Good Guys and Whitegood retailers. The company has announced $ 870 as the
purchase consideration to take-over one of the biggest rivalry firm i.e. Good Guys. The
company has further announced the manner in which both the businesses will be operated
independently (Janda & Letts, 2016). The funding of purchase consideration will be
undertaken with the issue of equity capital of $ 394 million and $ 500 in the external debt
((Foye, 2016). The acquisition will be an excellent strategic opportunity to take back the

Financial Analysis of JB Hi Fi 13
business on the track and to achieve economies of scale (Mitchell, Thompson & MacDonald,
2016).
Ethical consideration when becoming insolvent:
The company must keep in mind following ethical considerations when it becomes insolvent:
 The company must study the regulations and provisions of Corporations Act so that
all the relevant provisions of the applicable act.
 Further, the company must stop all of its trading in case there is high risk of
insolvency imposed on the company.
 The company must try to compensate all the creditors who have to suffer losses due to
the financial insolvency of the company. It must make necessary efforts to satisfy the
creditors to the maximum possible extent.
Conclusion:
From the above exercise of ratio analysis it can now be concluded that the company’s
performance in year 2017 is degrading in terms of profitability and solvency as reflected by
return on assets, return on equity, net profit, debt equity and interest expense ratio. However,
the liquidity position of the company has improved since 2016 as depicted by current and
quick ratios. Moreover, from the overall financial performance point of view it can be argued
that company has managed to perform better in year 2016 than year 2017.

Financial Analysis of JB Hi Fi 14
References:
Edge Consulting. 2012. JBH – JB Hi Fi Limited. Retrieved from: <
http://edgeseven.com.au/articles/company-reports/jbh-jb-fi-limited/>
Fern Fort University. (n.d.) Jb Hi-Fi Limited PESTEL & Environment Analysis. Retrieved
from: < http://fernfortuniversity.com/term-papers/pestel/nyse4/6096-jb-hi-fi-
limited.php>
Foye, B. (2016). JB Hi-Fi dampens speculation of Good Guys acquisition. Retrieved from: <
https://www.crn.com.au/news/jb-hi-fi-dampens-speculation-of-good-guys-acquisition-
436361
Higgins, R. C. (2012). Analysis for financial management. New York: McGraw-Hill/Irwin.
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https://in.investing.com/equities/jb-hi-fi-ratios>
Janda, M. & Letts, S. (2016). JB Hi-Fi announces Good Guys takeover worth $870m.
Retrieved from: < http://www.abc.net.au/news/2016-09-13/jb-hi-fi-announces-870m-
good-guys-takeover/7837922>
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https://www.jbhifi.com.au/Documents/2017%20Annual%20Report.pdf>
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Kimmel, P. D., Weygandt, J. J., and Kieso, D. E. (2010). Financial accounting: tools for
business decision making. New Jersy: John Wiley and Sons.

Financial Analysis of JB Hi Fi 15
Mitchell, S., Thompson, S. & MacDonald, A. (2016). JB Hi-Fi confirms discussions to buy
The Good Guys. Retrieved from: < https://www.smh.com.au/business/companies/jb-
hifi-confirms-discussions-to-buy-the-good-guys-20160519-goyk07.html>
Pash, C. (2018). JB Hi-Fi shares are tanking after a profit downgrade. Retrieved from: <
https://www.businessinsider.com.au/jb-hi-fi-profit-downgrade-guidance-2018-5>
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https://www.readyratios.com/reference/analysis/solvency_ratio.html
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https://www.arnnet.com.au/article/640719/jb-hi-fi-cuts-profit-forecast/>
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Financial Analysis of JB Hi Fi 16
Appendix: