Financial Reporting: Liquidity, Insolvency and Altman’s Z-score Analysis of JB HI FI Limited

This report evaluates the liquidity, insolvency and Altman’s Z-score of JB HI FI Limited, a leading IT and electronics manufacturer in the Australian stock exchange. It also discusses the potential use of funds, profit-earning capacity, and the company’s performance compared to its competitor Harvey Norman Holdings. The report enumerates the options and strengths and weaknesses of the issues, and concludes with recommendations for the company’s financial actions.

Running head: FINANCIAL REPORTING
Financial reporting
Name of the student:
Name of the University:
Author note:

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Table of Contents
1. Introduction:...........................................................................................................................2
2. Context of the situation..........................................................................................................2
3. Enumerate options:.................................................................................................................3
4. Strength and weaknesses of issues:........................................................................................5
5. Conclusion:............................................................................................................................7
6. Reflection：.............................................................................................................................7
Reference....................................................................................................................................8

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1. Introduction:
In this report the discussion will be made on the liquidity factor of the JB HI FI
limited which is one of the leading IT and electronics manufacturer register in the Australian
stock exchange. In addition to that, the potential use of the funds, profit-earning capacity of
the considering company will be evaluated. In addition to that, a resent downfall in the share
prices is being observed therefore it will be beneficial for the company to make an
exponential analysis of their key strength and weaknesses (Hoyle et al., 2015). Further, the
company’s current performance will be evaluated by comparing with its rival or competing
company Hervey Norman Holdings. Currently the company is engaged in the manufacturing
and development of the CD, DVDs Software and larger electronic appliances. In addition to
that, the company’s performance of the retail market is quite impulsive and stealthy.
In this context, three major terms regarding the financial activity of JB HI FI will be
discussed. These are liquidity, insolvency and Altman’s Z-score. The liquidity of a company
signifies the ability of the company to pay its obligation in terms of the liquid assets of the
company. The insolvency is considered when the company is failed to repay its obligations.
The Altman’s Z score is the term when it is required to figure out the financial distress of the
company by measuring the risks inclined in the financial difficulty of the company.
2. Context of the situation
In the next segment of the report, the liquidity ratio and the Altman’s Z-score of the
company will be discussed for the last three years in order to evaluate the key issues in
comparison with the financial performance of the company.
JB Hi-Fi Harvey Norman
2018 2017 2016 2018 2017 2016
Current Ratio 1.32 1.32 1.57 1.59 1.5 1.26
Quick Ratio 0.3 0.3 0.34 1.08 0.97 0.97

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Debt-to-Worth Ratio 1.63 1.87 1.45 0.56 0.49 0.65
Inventory Turnover 6.15 6.25 6.03 4.01 3.92 4.01
Gross Margin % 21.4% 21.9% 21.9% 33.48% 32.6% 31.4%
Profit Before Taxes % 4.9% 4.6% 5.5% 26.60% 34.9% 27.5%
Return on Assets 13.4% 10.6% 22.0% 11.58% 15.27% 11.14%
GMROI $1.68 $1.75 $1.69 $2.02 $1.89 $1.84
Z-Score 4.1 3.8 8.4 5.9 6.6 5.5
In case of the financial year 2015-2016, JB HI FI had managed to increase its sales
amount by 8.3% and this growth helped the company to increase the market shares in that
concurrent year (Investors.jbhifi.com.au. 2018). Due to the growth, the company had also
managed to increase the consumer base for their home appliances items and due to these
changes the company had managed to carry on the rollout of the home stores of it.
For the next financial year, the most important event for company was to acquire
Good Guys. As a result, the position of the company in the Australian market became strong.
The company had managed to acquire 29% and 24% of shares respectively in the home
appliances and electronic items and became the highest market shareholders for these items
in Australia. But along with the impactful performance growth, the takeover also caused
some negative impact on the performance of the company.
3. Enumerate options:
Among the key issues regarding the financial performance of the entity, there are three issues
which can be a matter of concern to the entity for the higher performance and lower the risk
of insolvency. These issues are:
 Another issue that has been emerged from the financial activity of the organisation is
the lowered demand of the items among the customers. This caused a decreased

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amount of total sales and reduced the gross profit of the company. This decline was
caused due to the changes in governmental policies, increased price, less discounts
and increased production cost. The effect could be seen upon the performance of
Good Guys also as the net profit of the company was deceased in the meantime. The next major concern about the financial performance of the company is the
excessive amount of acquired inventory of the company. Due to the excessive
investment, the negative effect of this action can be seen on the quick ratio of the
company where the ratio was lower than its key competitor and these caused an
increased amount of risk for the insolvency. Whereas the total inventory amount of JB
HI FI was calculated as 77.8% of their total assets, Harvey Norman managed to keep
their inventory amount below 20% which increased their efficiency for paying the
debt obligation of the company (Investors.jbhifi.com.au. 2018;
harveynormanholding.com.au 2018). The inefficiency of the company for generating the profit in return of their total assets
can also be a major issue in terms of their key financial performance. In comparison
to its key competitor Harvey Norman, JB HI FI was managed to gain 10% lower gross
profit which is quite low in terms of industry standard. Apart from that, the PBT
measurement of the company is also 3% which are far lower than the PBT value of its
competitor which is being measured as 29.6% (Investors.jbhifi.com.au. 2018). The
good marketing strategy and the lower price offered by Harvey Norman has certainly
helped the company to gain more profit but in terms of improving the performance of
JB HI FI, there is no doubt that the company needs to work on their marketing and
sales procedure.

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4. Strength and weaknesses of issues:
For the first instance, as the changes in the demand of the consumer affected the
whole industry, it also opens several scopes for development to the operations of the
company. In such scenario, the company can react quickly and implement certain policies
appropriate for this scenario in order to gain competitive advantage in terms of its
competitors (Amiram et al. 2018). Proper marketing policies, adequate cost and pricing
structure, and the exact use of the resources can certainly boost the performance of the
company in terms of its competitor.
But along with the opportunities, there are certain disadvantages that come with it. In
order to increase the demand, the company needs to implement certain policies such as
reducing the price, increasing the marketing cost and providing certain other offers to the
consumers. These can gain a competitive advantage in the market by affect in the sales and
profit amount of the company (Blomkvist & Paananen 2017). Due to the increased operating
cost and reduced sales price, the impact of these can be seen on the net profit of the company.
In this respect, it can be said that the negative impact of implementing these policies
upon the performance of the company will only last for short term process. If the company
manages to gain the competitive advantage and make its name in the time of crisis, the effect
can be seen on the long term business of the company both in the physical and digital
business.
The second issue which is related to the inventory also has certain advantages. By
reducing the amount of total inventory will enable the company to manage its resources more
efficiently. Apart from that, the cash inflow of the company will also be increased. The
company will be able to pay its debt obligations and the insolvency rate of the company will
be reduced (Chen et al., 2015). The obtained cash can also be used for paying wages and

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several other bills. The expenses which were incurred by the company for the maintenance of
the assets will also be reduced.
But in spite of the disadvantages, there are certain advantages which are needed to
take into consideration. First of all, this can increase the operating cost which will affect the
price of the selling items. Apart from that, there are chances that the selling price of the
inventory items may not be profitable for the company (jones & Cooper, 2018). Other than it,
the inventory items are the investments of the company which can be helpful in future
occasions. Thus, the cash inflow of the company will be affected if the inventory items are
being sold.
In this regard, the advantages of lowering the inventory amount can be considered
profitable for the company. The advantages which will be gained by selling the inventory
items can increase the efficiency of the company and thus, the short terms issues which will
emerge from the selling of the assets can be compensated by the long term benefits generated
from it (Boyd & Weetman, 2015).
In the last instance, increasing the profit amount of the company has certain benefits
such as increased operational efficiency, scopes for implementing different pricing structure,
or decreasing the risk involved in the business. As the growth of the business is directly
linked with the incurred profit, it is very important for the company to keep track upon the
stable profit rate from its operations.
But it can also lead to certain problems. Due to increase the profit, if the company
increases its price, the customer base of the company will be lowered as the customers always
seeks the goods which can be profitable for them too. In presence of the other competitor
which offers better prices for the same items, the business of the company will be hampered.
The amount of total sales and the brand name of the company will also be decreased (Hoyle
et al., 2015).

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In the case of increasing the profits of the company, the risk involved in this policy is
more than the advantages. It is true that the profitability over the individual items will be
increased by these, but the overall profit will be decreased along with the sales (Amiram et
al., 2018). Due to the decreased demand of the consumers, if the company decided to increase
the profits of the company by increasing the price and reducing the cost, in a long term
process, it will do nothing but leaving a negative impact over the business of the company.
5. Conclusion:
In this case, it can be stated that in case of gaining the competitive advantage, the
company needs to implement certain policies for improving its business. First of all JB HI FI
needs to decrease the inventory items for better efficiency in operations. Apart from that,
certain policies such as discounts, reduced price needs to be implemented in order to increase
the demand. But due to the negative effects of increasing the profit, the company should not
take this into consideration in the current situation.
If these strategies are being implemented in the financial actions of the company, this
will give a competitive advantage to the company and will help the company to maintain the
growth in its long term operations. Thus the liquidity and the insolvency of the company can
also be improved.
6. Reflection：
Though it seemed that the cause of the insolvency of the company was the high debt,
after examining the financial report, three major issues have been emerged. These issues are
critical in comparison with the key competitor of the company. The scopes and limitations of
these issues have also been stated in the given context. The risk factor which is included in
this is also great as it is stated Altman’s Z score. Thus, in order to decrease the risk of
insolvency, the implementation of these two policies is necessary.

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Reference
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growing firms: a comparison of financial reporting and cost of debt across Gazelles
and Non-Gazelles. Chapters, 333-366.
Boyd, J., &Weetman, P. (2015). High quality financial reporting: the case of the Nairobi
stock exchange (Doctoral dissertation).
Chen, C., Lo, K., Tsang, D., & Zhang, J. (2015, July). Earnings management, firm Location,
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http://www.harveynormanholdings.com.au/ [Accessed 23 Oct. 2018].
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Investors.jbhifi.com.au. (2018). [online] Available at: https://investors.jbhifi.com.au/wp-
content/uploads/2018/10/Annual-Report-2018-with-Chairmans-CEOs-Report.pdf
[Accessed 23 Oct. 2018].
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Research, 48(1), 136-137.