Accounting Analysis of JB Hi-Fi Ltd: Financial Performance Report

This report presents an accounting analysis of JB Hi-Fi Ltd, a retailer of consumer goods. It utilizes a six-step accounting analysis framework to assess the company's financial performance. The analysis covers industry characteristics, company strategies, the quality of financial statements, current ...Read More

Table of Contents
Introduction and Background......................................................................................................................2
Discussion and Analysis...............................................................................................................................2
Conclusion...................................................................................................................................................5
References...................................................................................................................................................6

Introduction and Background
The report has been prepared on the accounting analysis of one of the companies listed on Australian
Stock Exchange namely JB Hi-Fi Ltd. Six step accounting analysis framework has been used to analyze
and check if the company’s accounting reflects the reality of the business. Accounting distortions, if any,
has also been highlighted along with the impact on profitability and sustainability.
Discussion and Analysis
JB Hi Fi is a retailer of the consumer goods including video games, Ultra HD Blu-rays, DVDs, CDs,
electronics home appliances, mobile phones, etc. The company was established in 1974 and has been a
growing company since then. The 6 steps have been performed below:
1. Industry economic characteristics: the company is in the business of retailing the electronic
products in Australia and has grown over the years by means of expanding the product line like
dell computer hardwares, computer games, CDs, DVDs, car stereos, etc. The company is also
expanding by means of acquisitions like Clive Anthonys chain in Queensland, Hill and Stewart
chain, the Good Guys warehouses, etc. All this has helped the company to gain the competitive
edge in the market. However, there is stiff competition from the new entrants and other existing
players (Goldmann, 2016).
2. Company’s strategies: The Company is focusing on growing the area of operation and business
and thereby expanding outside Australia as well and that is the reason why several acquisitions
are in place. The company is also strategizing through innovation and diversification of the
product line through technology. This will help the company in increasing the revenue, margin
and profitability. It is also in line for rebranding few of the local stores with a view to improve
performance. On top of this the company’s remuneration strategy seeks to award, recognize
and felicitate the key employees and retain them (Alexander, 2016).
3. Quality of the firm’s financial statements: The Company has been preparing the financials in
compliance with the Australian Accounting Standards and the Corporations Act 2001 and it has
also been mentioned by the auditors in the annual audit report that the financial statements of
the entity are showing true and fair view of the company. Furthermore, the company has
disclosed all the accounting standards being used and the estimates and assumptions made by
the management along with the basis of preparation of the financial statements. Therefore, it

can be said that the company has tried to meet the transparency and information requirements
of the stakeholders (Jefferson, 2017).
4. Current profitability and risks to the company: In case the profit and loss account of the entity is
seen, we can see that the profitability has increased by 26% along with the sales growth of
almost 18% which is much higher than the industry trend. The company is spending heavily on
the sales and marketing expenses in order to capture more and more market but it also poses
the risk of lowering the profitability in long run. In case the balance sheet is analyzed, we can
see that the current ratio has improved marginally but it is still less than standard ratio of 2
times (Linden & Freeman, 2017). Thus, the company needs to improve on the liquidity aspect.
The debt borrowings has declined over past year and it is a positive sign for the company.
(Source: Annual Report, 2018, pp. 60)

(Source: Annual Report, 2018, pp. 62)
5. Forecasted financial statements: In terms of the forecasts for future years, the company expects
to maintain the double digit sustainable and profitable growth. It also estimates the growth in
market share as a result of increased spending on marketing and advertisement. The company
has also been working on several cost control measures so as to reduce the overall overheads
and improve the profitability in the future (Choy, 2018).

6. Valuation of the firm: In case the valuation of the firm is analyzed, we can see that as per the
below valuation the company will be valued at AU$ 3.18 billion. It shows that the company’s are
undervalued currently as the future cash flows indicate the value to be $ 35.9 whereas the
current share price is $ 22.90. Thus, the company needs to improve its fundamentals to improve
the share price and the P/E ratio as a whole (Heminway, 2017).
2018 2019 2020 2021 2022 Terminal Value
Levered FCF (A$, Millions) A$211.25 A$231.23 A$235.45 A$236.05 A$269.32
Source Estimates Estimates Estimates Estimates Extrapolated @
(14.09%)
Present Value Discounted @
8.55% A$194.60 A$196.22 A$184.06 A$169.98 A$178.66
Present Value of 5-year Cash Flow (PVCF)= AU$923.52m
Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = AU$269.32m × (1 + 2.8%) ÷ (8.6% – 2.8%) = AU$4.79b
Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = AU$4.79b ÷ ( 1 + 8.6%)5 = AU$3.18b
Conclusion
From the above discussion and analysis, it can be concluded that the company is growing in terms of
topline as well as the bottom line but it needs to improve further upon its fundamentals as well as
liquidity to grow further and maintain sustainability.

References
Alexander, F., 2016. The Changing Face of Accountability. The Journal of Higher Education, 71(4), pp.
411-431.
Choy, Y. K., 2018. Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview Analysis.
Ecological Economics, 2(1), p. 145.
Goldmann, K., 2016. Financial Liquidity and Profitability Management in Practice of Polish Business.
Financial Environment and Business Development, Volume 4, pp. 103-112.
Heminway, J., 2017. Shareholder Wealth Maximization as a Function of Statutes, Decisional Law, and
Organic Documents. SSRN, 5(2), pp. 1-35.
Jefferson, M., 2017. Energy, Complexity and Wealth Maximization, R. Ayres. Springer, Switzerland.
Technological Forecasting and Social Change, 1(2), pp. 353-354.
Linden, B. & Freeman, R., 2017. Profit and Other Values: Thick Evaluation in Decision Making. Business
Ethics Quarterly, 27(3), pp. 353-379.