Financial Evaluation of JB Hi-Fi

Running head: FIN103
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Table of Contents
Answer to question 1 – Quality of earning................................................................................2
Answer to question 2 – EPS and P/E ratio.................................................................................4
Answer to question 3 – Dividends.............................................................................................5
Answer to question 4 – Net tangible asset and cash flows........................................................6
Answer to question 5 – conclusion and recommendation..........................................................7
Reference and bibliography.....................................................................................................10

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Answer to question 1 – Quality of earning
JB Hi – Fi is the largest home entertainment retailer from Australia. They are well
known for wide range, biggest brands and low prices. Consumers can purchase LCD, LED,
OLED, HD TVs, iPads, headphones, Wireless speakers, home theatres and mobile phones
from their shops (Jbhifi.com.au 2018).
(a) Earning quality
Earnings are the profit amount produced by the company during particular period of
time generally quarter or year. Earnings are used for determining the share price of the
company as earning trend of the company indicates that whether the company will be
successful and profitable in the long run or not. It can also be used for comparing the
performance of the company over the past periods (Vogel 2014). EBIT or earnings before
interest and tax is used for measuring the profit of the company and it includes all the
revenues and expenses except the charges for interest and taxes.
From the annual report of JB Hi-Fi it can be identified that the profit for the last 5
years are as follows –
 FY 2013 – $ 177.8 million
 FY 2014 – $ 191.1 million
 FY 2015 – $ 200.9 million
 FY 2016 – $ 221.2 million
 FY 2017 – $ 290.5 million
From the above it can be identified that over the last 5 years the EBIT of the company
was in increasing trend and has been increased from $ 177.8 million to $ 290.5 million.
Major reason behind increasing trend of EBIT for the company was the increasing trend of

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sales over the last 5 years. Apart from sales revenue the company received significant amount
of income in 2017 from other sources. Further, it is found that out of total sales revenue of $
5,628 million in 2017, $ 4,148.6 million were generated from JB Australia, $ 221 million
were generated from JB New Zealand and $ 1,258.4 million were generated from TGG (The
Goog Guys). As the increasing trend of EBIT over the past 5 years were due to increasing
trends of sales rather than the artificial profits generated through accounting anomalies the
earning quality of the company is good (Bruce-Twum and Mensah 2015).
(b) Effective tax rate
The corporate tax rate applicable for the company is 30% for the year ended 2017.
However, the income tax expenses of the company for the year ended 2017 amounted to $
86.8 million whereas the amount of profit before tax was $ 259.2 million (Fazzini 2018).
Hence the effective tax rate was $ 86.8 million / $ 259.2 million = 33.5%. There is change
between the effective tax rate and applicable tax rate as there is various adjustments to the
profit before taxes like previous year adjustments.
(c) Financial gearing profitability ratio
Ratio Formula 2017
Gearing ratio Total liabilities/total equity 1.9
Interest coverage ratio EBIT/interest expenses 25.2
Gross profit ratio Gross profit/sales 21.8%
Net profit ratio Net profit/sales 3.1%
Gearing ratio that measures the borrowed funds of the company as compared to its
equity indicating that the borrowed funds of the company is 1.9 times of shareholder’s equity.
Hence, the company is highly leveraged. On the other hand, the profitability ratios of the
company are indicating that the company has strong profitability position if the net profit,
gross profit and interest coverage ratio is considered (Robinson et al. 2015).