Holmesglen BEX207: Financial Decision Making - JB Hi-Fi Ratio Analysis

This report presents a financial analysis of JB Hi-Fi, focusing on the years 2016, 2017, and 2018. The analysis begins with the calculation of various financial ratios, including gross profit ratio, profit margin, expenses to sales ratio, return on ordinary shareholders ratio, current ratio, quick ratio, receivables turnover, inventory turnover, debt ratio, equity ratio, asset turnover, and return on total assets. These ratios are computed using data extracted from JB Hi-Fi's annual reports. The report then evaluates the company's profitability, financial stability, and liquidity over the three-year period, identifying trends and providing explanations for any significant changes. The analysis delves into the factors affecting JB Hi-Fi's performance, such as expense management and changes in liabilities relative to assets. Furthermore, the report addresses problems encountered when using annual reports for ratio analysis, including challenges in identifying the reasons behind changes, the exclusion of market-related factors, the limitations of quantitative analysis, and the potential for data manipulation. The conclusion summarizes the key findings and implications of the analysis.

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Financial decision making

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Table of Contents
Introduction......................................................................................................................................3
1. Calculation of ratios.....................................................................................................................3
2. Evaluation of profitability, financial stability, and liquidity of the company.............................3
3. Problems in using the annual report............................................................................................5
Introduction..................................................................................................................................5
Problems identified......................................................................................................................5
Conclusion...................................................................................................................................6
Conclusion.......................................................................................................................................6
References........................................................................................................................................7

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Introduction
Financial decisions are required to be made in all the businesses and in that there will be
need to evaluate the data and options which are available. The performance of the company will
be analyzed and this can be done with the help of the available techniques. In the given report
ratio analysis will be performed in the context of JB Hi-Fi. There will be a calculation of various
ratios which will be made from the data which will be collected. The results will be considered
and with the help of them there will be evaluation of the profitability, liquidity and financial
stability of the company. All the changes which are taking place will be considered and the
reasons for the same will also be identified.
1. Calculation of ratios
Particulars Formula 2016 2017 2018
Gross profit ratio Gross profit/sales*100 21.88 21.86 21.45
Profit margin Net profit/sales*100 3.85 3.06 3.40
Expenses to sales ratio Total expenses/Sales*100 16.39 17.29 16.59
Return on ordinary
shareholders ratio
Net profit/average shareholders
fund*100
287.72 70.66 52.98
Current ratio Current assets/current liabilities 1.57 1.32 1.32
Quick ratio Quick assets/current liabilities 0.35 0.35 0.35
Receivables turnover Sales/Average receivables 44.05 38.59 34.42
Inventory turnover COGS/Average inventory 6.03 6.25 6.15
Debt ratio Total liabilities/total assets 0.59 0.65 0.62
Equity ratio Total equity/total assets 0.41 0.35 0.38
Asset turnover Sales/Average total assets 4.19 3.26 2.77
Return on total assets Net profit/Average total assets 16.13 9.99 9.42
2. Evaluation of profitability, financial stability, and liquidity of the company
The business is required to maintain a good financial position and in that various
financial aspects are taken into account. There will be consideration of the profitability
maintained by the company together with the liquidity that is ensured. The financial stability will
be analyzed to identify the position of the company in the current scenario and also for the

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coming period.
Profitability:
Profits maximization is the main aim of the business and it shall be focused upon. In
these various ratios by which the profitability can be analyzed will be covered. Many of such
calculation for JB Hi-Fi has been carried above. It has been identified that the company is
maintaining the profits on regular basis but some downfall is noted in them. The net profit ratio
has declined from 3.85 in 2016 to 3.06 in 2017 and after that some improvement has been made
which made it reach at 3.40 (JB Hi-Fi, 2016). This is because of the rise in the expenses at high
rate in the past years. Due to that the net profits which are made by the company have declined in
spite of having the rise in the revenues. The same decline is noted in the returns which are
calculated on the total assets and equity. In that also the equity and asses balance is increasing
but the profits are not increasing at the same level (Xu et al., 2014). Due to the higher change in
the other factors in comparison to profits the decline has been faced. The company will be
required to eliminate all the unnecessary expenses so that the earnings can be improved thereby
increasing the profitability level.
Liquidity:
The company involves various such obligations which are required to be met on time and
for that it is required that appropriate liquidity shall be maintained. In this, there will be holding
of such assets which will be easy to be converted into cash and used for the repayment purpose.
For the analyzation of the same there will be calculation of the current and quick ratio. The
calculations have been made and it is identified that there is decline in the current ratio and the
quick ratio is constant from past three years at 0.35 (JB Hi-Fi, 2018). This is low in comparison
to the standards which are set at 1:1. The assets in the company are increasing but the amount of
the increase in the liability is more than this. There is very high rise in current liabilities in 2017
and that changed the whole scenario. Now the company has high amount of the liabilities which
are required to be repaid but the same quantity of the assets and cash is not available. The
turnover ratios are declining which shows that collection process of the company needs
improvement. It can be said that more investment in the current assets is required and by that the
situation will be improved.

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Financial stability:
It is highly required that stability in the financial aspects is maintained in any company.
For this, it is needed that appropriate balance among the debts and equity in the company shall be
maintained so that there are limited obligations which are to be met (JB Hi-Fi, 2017). This will
reduce the burden and focus can be made on making the other investments for further
development. Total equity in comparison to the assets is less and is declining. It has been noted
that the debt amount is rising faster than that of the equity (Babalola & Abiola, 2013). There is
the stability which is involved but it needs to be improved further as the fluctuations are noted in
the equity ratio from 0.41 in 2016 to 0.35 in 2017 and finally at 0.38 in 2018. The company has
stability and is required to continue in the coming period.
3. Problems in using the annual report
Introduction
In the process of calculation of the ratios, there is the need to use the annual report of the
company. The report will be explaining all the problems which have been faced in making the
calculations with the use of annual report will be taken into account.
Problems identified
In the calculation of the ratios, there is the use of the annual report and in that there are
various issues which are faced. The changes which are made are easily detected but there is
difficulty in identifying the reasons for the same. There are various reasons which are involved in
the change and they all are not identifiable in an easy manner.
The calculation is made on the book values but all the changes which are taking place in
the market are ignored which is not appropriate (Faello, 2015). The market undergoes various
changes due to several factors such as inflation but their impact is not incorporated in the
business accounts. There is only the quantitative analysis which is made in this and no
consideration is given to the quality of the aspects which are covered. By this, the factors which
will be affecting the quality of the products are ignored and if there will be any issues in the
same then they will not be removed. There is the risk of manipulation which is involved as the
data can be manipulated and by that correct position of the business will not be reflected. The

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accounts are in the hands of the management and to reflect the better position there can be
changes which are incorporated. In the process of ratio calculation there is consideration of the
data which is available in the annual report and by that the true position will not be reflected.
Conclusion
The report is covering all the issues which are faced in carrying out the ratio analysis. It
has been identified that in using the annual report for the collection of data there are various
aspects which need to be given importance by which correct results will be attained.
Conclusion
The report has covered all the data which is required for the analyzation of the
performance of the business. In that, the collection of the information is made from the annual
report of the company. By using the collected data the ratio analysis has been performed in
which various ratios have been calculated. There has been evaluation of the liquidity,
profitability and financial stability of the company by considering all the results which have been
obtained.

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References
Babalola, Y. A., & Abiola, F. R. (2013). Financial ratio analysis of firms: A tool for decision
making. International journal of management sciences, 1(4), 132-137.
Faello, J. (2015). Understanding the limitations of financial ratios. Academy of Accounting and
Financial Studies Journal, 19(3), 75.
JB Hi-Fi. (2016). Annual report. Retrieved from:
https://www.jbhifi.com.au/Documents/2016%20JB%20Hi-Fi%20Annual
%20Report_ASX.pdf
JB Hi-Fi. (2017). Annual report. Retrieved from:
https://investors.jbhifi.com.au/wp-content/uploads/2018/08/Annual-Report-2017.pdf
JB Hi-Fi. (2018). Annual report. Retrieved from:
https://investors.jbhifi.com.au/wp-content/uploads/2018/10/Annual-Report-2018-with-
Chairmans-CEOs-Report.pdf
Xu, W., Xiao, Z., Dang, X., Yang, D., & Yang, X. (2014). Financial ratio selection for business
failure prediction using soft set theory. Knowledge-Based Systems, 63, 59-67.