Accounting for Growth: Financial Ratio Analysis and Interpretation

This report presents a comprehensive financial analysis of a company, likely JB Hi Fi Ltd, using various financial ratios from 2013 to 2017. The analysis includes horizontal analysis of key financial metrics such as sales revenue, gross profit, operating income, and capital employed. The report delves into the interpretation of liquidity, profitability, gearing, efficiency, and investment ratios. It assesses the company's performance in terms of current and quick ratios for liquidity, gross profit and return on assets for profitability, debt-equity ratio for gearing, stock and asset turnover for efficiency, and EPS and dividend yield for investment. The findings highlight the company's strengths and weaknesses across these financial dimensions, providing insights into its financial health and performance trends over the specified period, including the impact of these ratios on its overall growth and stability. The report concludes with a review of the company's financial position and provides recommendations for future strategic decisions.

ACCOUNTING FOR GROWTH

TABLE OF CONTENTS
Horizontal Analysis ....................................................................................................................3
Interpretation for liquidity, Profitability, Gearing, efficiency and investment ratio...................6
REFERENCES..............................................................................................................................10

Horizontal Analysis
Particulars 2013
%
Change
In 2014 2014
%
Change
In 2015 2015
%
Change
In 2016 2016
%
Change
In 2017 2017
Revenue 3,308 5.3% 3484 4.8%
3,65
2 8.3%
3,95
4 42.3% 5,628
Cost Of
Revenue 2,610 5.2% 2,745 4.0%
2,85
4 8.2%
3,08
9 42.4% 4,398
Gross Profit 698 5.9% 739 8.0% 798 8.4% 865 42.2% 1,230
Operating
Expenses
Sales, General
And Adm... 921 5.4% 971 5.7%
1,02
6 8.0%
1,10
8 43.2% 1,587
Other
Operating
Expens... 63 7.9% 68 10.3% 75 6.7% 80 61.3% 129
Total
Operating
Expens... 984 5.6% 1039 6.0% 1101 7.9% 1188 44.4% 1716
Operating
Income -286 4.9% -300 1.0% -303 6.6% -323 50.5% -486
Interest
Expense 10 -10.0% 9 -33.3% 6 -33.3% 4 175.0% 11
Other Income
(Expense) 464 6.0% 492 2.4% 504 7.9% 544 39.0% 756
Income Before
Income T... 168 8.9% 183 6.6% 195 11.3% 217 19.4% 259
Provision For
Income T... 51 5.9% 54 9.3% 59 11.9% 66 31.8% 87
Net Income 117 10.3% 129 5.4% 136 11.0% 151 13.9% 172
Ratio Analysis
Particulars Formula
Profitability Ratio Analysis
2013 2014 2015 2016 2017

Gross Profit 698.00 739.00 798.00 865.00 1230.00
Operating income -286.00 -300.00 -303.00 -323.00 -486.00
Sales revenue 3308.00 3484.00 3652.00 3954.00 5628.00
Earnings before interest and
tax or operating profit 168.00 183.00 196.00 218.00 259.00
Capital employed 243.00 295.00 343.00 405.00 854.00
Net income 116.00 128.00 137.00 152.00 172.00
Average total assets 827.00 851.50 877.50 943.50 1722.00
GP ratio
Gross profit / sales
* 100 0.21 0.21 0.22 0.22 0.22
OP ratio
Net profit / sales *
100 -0.09 -0.09 -0.08 -0.08 -0.09
Return on capital
employed
EBIT / capital
employed 0.69 0.62 0.57 0.54 0.30
Return on assets
Net income /
avearge total
assets 0.14 0.15 0.16 0.16 0.10
Liquidity Ratio Analysis
2013 2014 2015 2016 2017
Current assets 564.00 578.00 617.00 703.00 1171.00
Current liabilities 442.00 352.00 380.00 447.00 886.00
Inventory 426.00 459.00 479.00 546.00 860.00
Prepaid expenses 4.00 4.00 4.00 0.00 30.00
Quick assets 134.00 115.00 134.00 157.00 281.00
Current ratio
Current assets /
current liabilities 1.28 1.64 1.62 1.57 1.32
Quick ratio
Current assets -
(stock + prepaid
expenses) 0.30 0.33 0.35 0.35 0.32

Solvency Ratio Analysis
2013 2014 2015 2016 2017
Long-term debt 124.00 180.00 139.00 110.00 559.00
Shareholder's equity 243.00 295.00 343.00 405.00 854.00
Debt-equity ratio
Long-term debt /
shareholders
equity 0.51 0.61 0.41 0.27 0.65
Efficiency Ratio Analysis
2013 2014 2015 2016 2017
Cost of goods sold 2610 2745 2854 3089 4398
Average Inventory 427.00 442.50 469.00 512.50 703.00
Turnover or sales revenue 3308.00 3484.00 3652.00 3954.00 5628.00
Average total assets 827.00 851.50 877.50 943.50 1722.00
Average fixed assets 278.50 281.00 280.00 284.00 786.00
Receivables or debtors 64.00 71.00 81.00 98.00 197.00
Creditors or payable 335.00 244.00 254.00 302.00 584.00
Cost of goods sold 2610.00 2745.00 2854.00 3089.00 4398.00
Stock turnover ratio (In
times) 6.11 6.20 6.09 6.03 6.26
Total assets turnover ratio 4.00 4.09 4.16 4.19 3.27
Fixed assets turnover ratio 11.88 12.40 13.04 13.92 7.16
Receivables or debtors
turnover ratio (in days)
(Debtors * 365) /
Credit sales 7.06 7.44 8.10 9.05 12.78
Creditors turnover ratio
(in days)
(Creditors * 365) /
COGS 46.85 32.44 32.48 35.68 48.47

Investment ratios
2013 2014 2015 2016 2017
Earnings per share
(Net income -
preferred
dividend) /
Number of shares
outstanding 1.16 1.25 1.35 1.50 1.53
Dividends per share
Annual dividends /
Number of shares 0.93 1.09 1.24 1.33 1.55
Debt to asset ratio
Total debt /total
assets 0.71 0.66 0.62 0.59 0.65
Total liabilities 600 565 552 588 1599
Interpretation for liquidity, Profitability, Gearing, efficiency and investment ratio
Liquidity Position: The organisation's liquidity has been measured through current and
quick ratio. From years 2013 to 2017, its quick ratio was stable, which reflected that JB HI Fi
Ltd has not gained capability for meeting its liabilities through its quick assets in short term. On
its contrary, its current ratio is also not matching the idle ratio, which is 2: 1; in the year 2014, it
was at its peak position as 1.64. It could be justified that its liquidity position was not good in
these 5 years (JB Hi Fi Ltd, 2018).
The below graph is indicating liquidity performance:
1 2013
2 2014
3 2015
4 2016
5 2017

1 2 3 4 5
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1.80
Current ratio
Quick ratio
Profitability ratio: The profitability of JB Hi Fi Ltd has been represented through Gross
profit, Return on capital employed, operating profit and return on assets from years 2013 to
2017.
2013 2014 2015 2016 2017
-0.2
-0.1
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
GP ratio
OP ratio
Return on capital employed
Return on assets
JB Hi Fi Ltd has stable gross profit; operating profit and return on asset is not increasing
from year to year; this reflects that organization has remained complacent so it should try to

convert profit through its operations. As in the same series, it is not capable to get good returns
on capital, which had been employed. The profitability position is not good.
Gearing ratio: The gearing position of Jb Hi Fi Ltd is improving from year to year as it
was 0.27 in the year 2016 but in the next year, it raised to 0.65 that replicated it had more debt as
compared to equity.
2013 2014 2015 2016 2017
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
Debt-equity ratio
Debt to asset ratio
Efficiency ratio: Its efficiency had been measured through stock, asset and fixed
turnover ratio of years from 2013 to 2017. This organization's stock turnover is stable as
approximately 6 times and it could repay its inventory from 5 years but on its contrary, it could
be observed from below graph that its turnover from asset and fixed asset is falling from huge
number, which shows it is not efficient.

2013 2014 2015 2016 2017
0
2
4
6
8
10
12
14
16
Stock turnover ratio (In times)
Total assets turnover ratio
Fixed assets turnover ratio
By observing its creditors and debtors’ turnover, both are increasing in the year
2017, which depicts JB Hi Fi Ltd have no efficient position.
2013 2014 2015 2016 2017
Receivables or debtors
turnover ratio (in days)
(Debtors * 365) / Credit
sales 7.06 7.44 8.10 9.05 12.78
Creditors turnover ratio
(in days)
(Creditors * 365) /
COGS 46.85 32.44 32.48 35.68 48.47
Investment Ratio: It had been depicted through EPS and Dividend yield, from both
perspective that it is increasing but with very minor variations. It is good for long term
perspective but not for short term as its liquidity position is not good.

2013 2014 2015 2016 2017
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
Earnings per share
Dividends per share
From the above graph, it could be concluded that from long-term investment perspective,
JB Hi Fi Ltd is good but it should be capable for maintaining its liquidity position along with
solvency ratio.