Financial Ratio Analysis of Harvey Norman: A Comprehensive Report

Desklib provides past papers and solved assignments for students. This report analyzes Harvey Norman's financial performance.

FINANCE FOR BUSINESS
1

Table of Contents
Introduction......................................................................................................................................3
1. Description of Harvey Norman...................................................................................................4
2. Calculation and analysis of ratios................................................................................................6
Liquidity position.........................................................................................................................7
Profitability Position....................................................................................................................7
Market value ratio........................................................................................................................8
3. Graphs and comparison of share price movement...................................................................9
4. Cost of Equity...........................................................................................................................11
5. Identify the capital structure.....................................................................................................13
Conclusion.....................................................................................................................................16
Recommendation...........................................................................................................................17
References......................................................................................................................................18
2

Introduction
This assignment is prepared to gain knowledge about the financial statements of the company
and to understand the financial ratios of the company. This report is prepared in regards to the
company Harvey Norman which is the multinational retailer company. The company deals in
products like furniture, communications, computers, bedding, and consumer electrical products.
The headquarters of the company is in the New South Wales, Australia and has the revenue
around the 530 crores AUD. In this report, the financial ratios will be evaluated for the two years
to know the company’s financial stability. The comparison will also be done on the share price
movements with the help of the graphs. The cost of equity will be calculated to evaluate the risk
rate of the company. The capital ratios are also determined to analyse the capital structure of the
Harvey Norman.
3

1. Description of Harvey Norman
Harvey Norman is one of the top leading companies of Australia engaged as multi-retailer of
furniture, computers, communication and various types of commercial and consumer electrical
products. As the company is leading in the market it generally captures large market share so
there are franchises of companies and it operates in this firm at a large level. Harvey Norman is
also listed in ASX and in fact, there are around 208 stores in Australia itself. Also, the reason for
its big capture in the market is because it deals mainly household goods retailer and produces and
provide all types of household appliances whether small, large, related to information
technology. Company financial performance is also appraising and there are yielding higher
returns for its investors and a greater source of earnings per share. Although in such big
establishment operations are handled at large scale and also opportunities for growth as
individual and also corporate level are more. From the company’s performance, it can be
highlighted that they focus on initially understanding of customer requirements and also provides
ranges and choices for sake of best experience. Harvey Norman also initiates for providing
support for the starting off our business. The company also provides accurate information that
too in a timely manner for delivering products on time. Harvey Norman at present has good
profitability position and also liquidity is strong. It has also played a vital role in regulating of the
economy and also is continuing well with low unemployment and lower employee turnover rate
and net migration driving sales is also low. It is also appreciated that such large establishment is
already performing well and also able to survive in such an intense competition. Although
competition is intense and also it makes organization work harder but at the same time it
provides opportunities for growth and products at better prices to customers. Mainly homecare
products are considered to be key core products that have contributed to its more sales and also
lifted net profit. From data and facts of the company, it has been noted that there has been a 15%
rise in profit with furniture and appliances sales strong. It is also interpreted from company’s
reviews that it is considered as very busy sales world, as Harvey keep its employee on toes in
order to do jobs around the store. It is also noticed that various types of sales promotion activities
are carried out to promote their product and also a strategy to increase it. As the company is
already established there is a large number of teams already working for its growth and decisions
are taken with informative facts and internal management is involved in full. Since Harvey
Norman is leading this sector its strategies and new developments are providing threats to others
4

also at same time opportunities also. From customer reviews about experiences, there are only
positive feedbacks that is their way of providing services was excellent it includes delivery time,
processing of orders and help and support is present all time. Therefore, the company is
performing well with profitability and good returns for customers and investors and also
customer services at par.
5

2. Calculation and analysis of ratios
Harvey Norman
Particular 2018 2017
current assets 1317618 1112433
current liabilities 829964 743425
cash 170544 80224
liquid assets 972331 796465
total assets 4577642 4189744
total liabilities 1639710 1376837
net assets 3260024 3077311
net profit 380050 452966
equity 388381 386309
LIQUIDITY
RATIOS:
current ratio
1.58756042
4
1.77236170
4
quick ratio
1.17153394
6
1.07134546
2
cash ratio
0.20548361
1
0.10791135
6
PROFITABILTY
RATIOS:
net profit to total
assets ratio
0.08302309
4
0.10811304
9
return on equity
0.97854941
4 1.1725484
Market valuation ratio
earnings per share 33.71% 40.35%
6

dividend per share 30 26
The table prepared above gives brief details relating to a company’s profitability, liquidity and
also financial stability using market valuation ratios. Harvey Norman is already one of the
leading companies engaged in home care appliances, communications, and information
technology, and others. In order to present investors true and fair position of a company, it is
necessary to carry out analysis of various financial performances.
Liquidity position
Liquidity position is generally used to show short term obligations of the company. The liquid
ratio is carried out to state whether a company’s current assets can be used to pay off its short
term obligations. Also, liquid assets are defined as the difference between the sum of liquid
assets and with that of outgoing and incoming cash flows. Generally, in calculating liquid ratio
inventory are excluded as it assumed that it takes a longer time to be converted into cash and
obligations could not be paid off in a shorter period of time. Normally 1.1 is taken as an ideal
liquid ratio. In finance, the liquid ratio is a measure of financial metrics and also determines the
ability of company debtors to pay short term obligations over a short period of time. In Harvey
Norman current ratio, quick ratio and cash ratio are computed for sake of measuring liquidity
position of the company. Current ratio and quick ratio of the company in both years is good and
also increasing thereby concluding favorable liquidity position. Also, the cash ratio is moderate
and below 1 so there is a requirement to give attention. The company is in a good position and
favorable in terms of debt and others.
Profitability Position
Profitability position is the measure of the financial stability of the company over a period of
time. There are basically financial metrics that are used to measure the ability of the firm to
generate earnings and returns and exceeds its cost and expenses. Profitability is important to
measure the company as it presents its financial position in a given period of time and also an
indication of whether the company is performing well or not. Greater profitability ratio indicates
higher returns for investors and at the same increasing returns and profits for the company. There
are various types of profitability ratios that have been used to measure a company’s profitability
that is a return on equity and net profit to total assets ratio. Net profit to total assets shows the
7

ability to generate more revenue and it has declined slightly from the year 2017 but in the annual
report, it can be shown up risen due to sales of homecare. Also return on equity for the company
is related to shareholders more and it is lower in 2018 but the position is moderate at the same
time.
Market value ratio
There is also an important constituent in the measure of company position. Market value ratios
are used for measuring the value of the current market price share of the company of stock held
by the public. These ratios are basically concerned and, linked with investors and employed
whether a company’s shares are overpriced or under-priced in market valuation. Also, company
market position and current market stake are also determined with these types of ratios. The
company also calculate this ratio to know the way how a company regulate its past activities and
have future outlook. There can be various types of interpretation that can be carried using the
market value ratio. Earnings per share and dividend per share are crucial as it indicates earnings
and dividend per share of the company that would yield returns for stakeholders. Earnings per
ratio have increased but dividend per share has increased.
8

3. Graphs and comparison of share price movement
Share price fluctuation in the company Harvey Norman:
Share price fluctuation in the company Harvey Norman on all ordinary indexes:
The graphical report which is shown above is representing the share price analysis of the 5 years
of the company Harvey Norman. The company is the largest dealing retailer in the market which
is listed in the Australian Stock Exchange. The fluctuations show in the share price results in the
change in the demand and the supply of the products of the company. It is essential for the
9

shareholders of the company to analyze the market situation and the share price of the company
so that the portfolios of the market price can be evaluated. The market share price of the
company Harvey Norman is evaluated in respect to the ordinary indexes to analyses the current
market trend (Ramadan, 2015).
The market share price of the company is increasing which is indicating the positive rate of
return for the investors. In the year 2016 – 2017 the market share price of the company was
increasing but later on in the year 2017 – 2018 the market share price of the company is
declining (Harvey Norman limited, 2018). The highest share price of the company Harvey
Norman in the year 2016, 2 Sept was $5.226 which was declined in the year 2018, 29 June with
the price of the $3.267. It was observed that the change in the share price is of 2.20%. The
change in the volume of the market index was 3859425.
The ordinary index of the company is indicating that the company share price market value is
increased from the previous year. In the year 2016 June the Harvey Norman HVN price was
$4.389 and XAO price was 5192 (Harvey Norman limited, 2017). In the year 2017, June the
HVN price of the company was declined as a comparison to the previous year but XAO price of
the company has increased. The HVN price of the company was $3.759 and XAO price of the
company was 5764. In the year 2018, the HVN price of the Harvey Norman was $3.267 and
XAO price of the company was 6289.
10

4. Cost of Equity
Capital assets pricing model is basically used for measuring theatrically required rates of return
for company assets in order to make decisions about the addition of assets and also well-
diversified preparation of a portfolio. This model is used widely through the concept of finance
and risky securities and expected returns. Investors and stakeholders who are associated with the
company always expect a great return for their investment in the company and therefore they
also need to know about time value for money. In the formula of CAPM risk-free rate return
accounts for the time value of money and other inclusions are relating to stakeholders and
investors taking additional risk. The beta of the company has been acquired from recruiters site
of Harvey Norman and used in a formula which denotes potential measurement of risk that will
be added to a market portfolio that looks like it. The objective of the Capital asset pricing model
is to ascertain and evaluate whether the stock of a company is valued fairly when it is risk and
time value of such stock is compared with expected returns. In using this formula there are
11
Risk-free rate of return 6%
Market risk premium 7%
beta 0.54
The Capital Asset
pricing model
The expected rate of
return=
risk-free return+
(Premium
Market
rate*beta)
3.84

several drawbacks also. As it is only theoretical in some aspects. Using of Capital asset pricing
model in order to prepare the model for sake of portfolio will help investors for management of
risk. If investors and stakeholders are using the CAPM model are just for assuming the relative
risk.
12