JB Hi-Fi Financial Analysis: Investment, Ratios, & Governance 2016

This report provides a comprehensive financial analysis of JB Hi-Fi, focusing on its investment decisions, corporate governance practices, and key financial ratios based on the 2016 annual report. The analysis includes an overview of the board of directors, their roles, and evaluation of their characteristics in maximizing shareholder value. Significant investment decisions, such as capital expenditure projects for new stores and online ventures, are examined. The report also evaluates JB Hi-Fi's adherence to ASX Corporate Governance Principles and Recommendations, along with an assessment of the external audit function. Key financial ratios, including efficiency, liquidity, profitability, leverage, and market value ratios, are computed to assess the company's financial health and cash flow management. The report concludes with an overall evaluation of JB Hi-Fi's financial performance and governance structure.

FINANCIAL MANAGEMENT

JB Hifi
Executive Summary
The performance of any organization is laced with immense pressure and therefore, the investment
decision should be taken with precision. There are innumerable factors that need to be considered. In
this tune, the key accounting policies come to the forefront. For the purpose of study and report, JB-
Hifi is selected and various matters have been analyzed in respect to it. A matter such as investing
decision, corporate governance, policies of the board and ratios are computed so that research is made
on the project. Moreover, the top investors are selected and an evaluation of the company.
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JB Hifi
Contents
1. Introduction.........................................................................................................................................4
2. Analysis and discussion of JB-Hifi......................................................................................................4
2.2. Board of director’s overview...........................................................................................................5
2.2.1. Evaluation of the characteristics of Board...................................................................................8
2.2.2. Significant financing or investment decisions..............................................................................9
2.2.3. Key ASX Corporate Governance Principles and Recommendations...........................................9
2.2.4. External function of audit..........................................................................................................10
2.2.5. Measures to assure moral judgments.........................................................................................10
2.2.6. Top Investors.............................................................................................................................11
3. Evaluation of ratios............................................................................................................................11
i. Efficiency ratio..................................................................................................................................11
ii. Liquidity ratio....................................................................................................................................12
iii. Profitability ratio............................................................................................................................12
iv. Leverage ratio................................................................................................................................12
v. Market value......................................................................................................................................12
vi. Management of cash flow..............................................................................................................13
4. Conclusion.........................................................................................................................................14
References.................................................................................................................................................15
Appendix...................................................................................................................................................17
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JB Hifi
1. Introduction
JB Hi-Fi can be understood as the leading company that provides their customers with products which are
required for carrying out their everyday household activities. The company produces electrical items of daily
household use for its customers that consist of television, camera, refrigerator, software and much more. The
company also has an altogether separate branch which mainly provides IT related services and also offers
consultation to its customers (JB-Hifi, 2016). The presented report has been made by taking into
consideration the 2016 annual report of the company. An overall view of the financial report of the company
is shown in the article. A thorough introduction of the company followed by the activities of the board is
given priority in this report. The corporate governance mechanism is also bought into view by the JB Hi-Fi
company report. A deep study of the procedures followed by the company and its working is given the first
priority in the report. Ratios of the company are used as an evaluation data to highlight and explain the
working and the processes followed by the company.
2. Analysis and discussion of JB-Hifi
Appliances related to household utility, video games, CD’s, Blu-rays, hardware and much more are the
specialty of the production unit of the JB Hi-Fi with Australia and New Zealand being their main Dominical
areas of work in the retail field. The company also provides consultancy services as another branch along
with its major technological services. The company has a massive assistance of sixty home branded stores
that helps the company is offering its services to its customers across the whole of Australia and New
Zealand. Replacement of insurances, selling of the corporate items along with government and also
education-related items with included service providence are some of the other tasks in which the company
is involved. The company has its headquarters in Melbourne (JB-Hifi, 2016). JB Hi-Fi is also honored with
the title of a rapid and successfully developing company in the whole of Australia. The company also pays
attention in continuously increasing the quality of the products to cater to the expectations of the costumes.
The company maintained low-cost operation throughout the year that helped it to cater marvelous
achievements in the dividend, sales, and the profit department as per the financial report of the year 2016. An
increase in the sales of 8.3% and an increase in the net tax profit by 11.5% in comparison to the last year
were recorded by the company with $3.95 billion from sales and $152.2 million form net tax profit section.
This low-cost operational plan acts as a method to compare, provide and survive in the competition between
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JB Hifi
different companies in the same field (JB-Hifi, 2016). The company through its activities has obtained the
faith of its customers which helps it to experiment and expand its characteristics in different departments.
Corporate investors always had the upper hand in the investor's department as per the record which proves
that its five major investors belong to this category and this brings to light that their percentage of holding is
much more significant and more. Involvement of corporate investors means that the company has been and
has the capacity to perform continuously and ably (William, 2010). This also shows that the shareholders
have much more faith in the company as compared to others in the same field. The proportion of the equity
holding of other companies provides enough data to provide an idea of the working procedure of the
company (Wagenhofer, 2014). The above data in respect to the matter of equity holding will also be enough
to explain the evaluation of equity in case of individual shareholders and shareholding by companies
(Peirson et. al, 2015).
2.2. Board of director’s overview
Name Gender Age Education Remuneratio
n ($)
Career history
Gary Levin Male B.Com and
LLB
1,56,000 In JB Hifi, Gary has been a
director and is a member of
Remuneration Committee
and Audit and Risk
Management Committee.
Currently, he operates as the
Board of Baby Bunting
Group Ltd (JB-Hifi, 2016).
Beth
Laughton
Female Bachelor of
Economics,
FCD, FAICD
1,66,093 Beth spent 25 years in
corporate finance wherein
she offered advice
associated with acquisitions
and mergers. Beth was also
the non-executive director
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JB Hifi
and chairperson of Sydney
Ferries, a non-executive
director of Port Adelaide
Maritime Corporation, non-
executive director, and
member of Australian Stock
Exchange Audit Committee.
Thereafter, in June 2012,
Beth became the chairperson
of JB Hifi but was later
transferred to the position of
remuneration committee
(JB-Hifi, 2016).
Greg
Richards
Male B. Ec (Hons) 2,90,000 In 2007, Greg was appointed
to the Board and thereafter
in 2012, he became
chairperson. He also worked
at Goldman Sachs for 19
years. Presently, he is the
chairperson and member of
the Risk and Audit
Management Committee and
Remuneration Committee.
Wai Tang Female MBA,
BAppSc, and
GAICD
1,15,201 In 2015, Wai was appointed
to the Board and became the
member of the Audit and
Risk Management
Committee. She pursues
extensive experience in the
retail industry by serving as
senior executive and other
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JB Hifi
roles of the board. She was
also the general manager
(GM) for Pacific Brands and
co-founded Happy Lab
Retail Confectionary
Concept (JB-Hifi, 2016).
Richard
Murray
Male CA, B.Com,
Grad. Dipl.
Extensive
experience in
Finance and
Investment
2,750,596 In July 2014, Richard
became CEO after being
appointed to the board in
2012. In 2003, he joined JB
Hifi as a Chief Financial
Officer and took the
business with the help of
IPO processes. However,
before he served Deloitte for
ten years (JB-Hifi, 2016).
Presently, he is the
chairperson of Australia
Charities Fund Employer
Leadership Group.
Richard
Uechtritz
Male 1,30,000 Richard has more than thirty
years experience in retail.
He is also the co-founder of
leading photo chains of
Australia like Kodak
Express and Rabbit Photo.
Thereafter, in 2000, he
became the CEO and
managing director of JB
Hifi.
James King Male B.Com, 52,000 In 2004, James was
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JB Hifi
FAICD appointed to the board and
thereafter, he retired in 2015.
He further served as a
chairperson and became the
member of Remuneration
Committee and Risk
Management Committee.
2.2.1. Evaluation of the characteristics of Board
It is the primary responsibility of the Board to initiate follow up actions so that shareholder value
can be maximized. Further, it is no doubt that, the company performance primarily depends upon
the Board’s functioning that ultimately influences the prices of shares. Therefore, they are surely
answerable to the shareholders (Parrino et. al, 2012). Besides, adherence to appropriate corporate
governance is also one of the major tasks required to be fulfilled by the Board and for such
purpose, the CEO of the company must take effective steps towards enhancing its stability and
profitability as a whole. Nevertheless, the major factors taken into account for the fulfillment of
desired motives are diversity, experience, skills, knowledge, etc. With the help of these
attributes, the company can easily mix the same with different people so that ideas and advanced
thoughts can be attained and enhanced, thereby playing a key role in maximizing governance
measures and decision-making ability as a whole (JB-Hifi, 2016).
Departments like financial expertise, executive expertise, governance expertise, property
experience, merger or acquisition expertise, etc are some of the departments that necessitate skill
and enhanced the experience on the part of the company so that it can enhance its productivity
and profits as a whole. Furthermore, based on the records framed by the board, it can be
witnessed that the company possesses an effective admixture of people who are adequately
qualified and experienced in the previously mentioned departments, thereby assisting in
enhancing the company’s competitive advantage as a whole. Besides, these people can easily
assist in efficiently planning the strategies of the company, thereby, in turn, assisting in proper
decision-making on the part of the company. Nonetheless, the company possesses a massive
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JB Hifi
number of non-executive directors within its framework and these are higher than the executives
are. In the current scenario, JB Hifi has approximately six directors out of which one director is
an executive (CEO) and the rest of them are non-executive directors. Overall, it is a very good
opportunity for the company to undertake major initiatives to provide non-electoral and electoral
information to the company shareholders (JB-Hifi, 2016). Further, it must also be noted that
there are immense scanning processes and examinations that are conducted by the company prior
to presenting a candidate for the purpose of election.
2.2.2. Significant financing or investment decisions
JB Hifi has made many important financing or investment decisions within its operations that
have allowed it to sustain in the market. It has invested $52.3 million in the Capital Expenditure
Project that is associated with the inauguration of its new stores, modification of the existing
stores, online projects, and relocation strategies (JB-Hifi, 2016). These investment decisions can
allow the company to maximize its productivity and earnings as a whole. Further, the company
has also contributed towards its online projects on a large scale as it can create a better impact as
a whole (Northington, 2011). For such purpose, it has also financed major online sites that were
prevalent in New Zealand so that its online presence can be of greater effectiveness. JB Hifi has
also invested in IT security measures so that it can reduce faulty breach of systems that pose a
greater threat of loss. Furthermore, the company has also contributed towards its stores
diversified in Australia and New Zealand. For such purpose, it has invested in staff training,
supply chain, store wages, etc that can play a key role in affixing a strong position of the
company in the entire market.
2.2.3. Key ASX Corporate Governance Principles and Recommendations
Every listed organization must make timely disclosure of important items that can affect
decision-making.
Remuneration of directors must be sufficient to attract and retain high-quality directors.
Every listed company should possess board of an accurate size, composition, and skills.
Every listed organization must also disclose their duties and roles together with performance
monitoring procedures.
Every listed company must undertake ethical and responsible operations.
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JB Hifi
Every listed organization must also respect shareholders’ rights by providing them required
facilities.
2.2.4. External function of audit
It can be seen that the auditing report of the company has been made taking into consideration
the requirements in Corporations Act 2001. This act deals with the auditors’ independence and it
is satisfactory to witness and observe that the information of such Act offered to the company is
clearly equivalent to that of the company’s annual report. In other words, the company offered
all the necessary details regarding the action to the board prior to the enactment and presentation
of the annual report (JB-Hifi, 2016).
Remuneration of auditors:
2015 2016
Audit and review of financial statements 333000 323500
Audit and review of subsidiary financial statements 29800 29000
IT services (i) 58216 511507
Net remuneration for audit and other services 421016 864007
(Source: JB-Hifi, 2016)
Notes:
i. The major plan of the company was Customer Relationship Management Tool for which Deloitte
operated as the auditor for the period 2015-2016.
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JB Hifi
2.2.5. Measures to assure moral judgments
JB Hifi has adopted a Code of Conduct within its framework so that it can assure that its
environment has the highest level of ethics. In relation to this, every respondent is under a non-
delegable duty to comply with the same and in return, the company will always endeavor to
safeguard their dignity, freedom, and rights (Petty et. al, 2012). This assures that a safe and
sound environment is created that is not only challenging but also rewarding to the employees.
Besides, the company also attempts in safeguarding the personal and private information of its
subordinates so that a sense of ethical responsibility is effectively maintained (Melville, 2013).
In addition, the company has also made sure that its auditors for completing the audit processes
adequately adhere to AAS standards (JB-Hifi, 2016). Besides, this plays a key role in enhancing
the audit quality as a whole, thereby assuring the fact that the financial details forming part of the
annual report are true and fair or do not contain any material misstatement (Volcker, 2011)
2.2.6. Top Investors
Name Equity Percentage
Australian Super Pty Ltd. 10,185,705 8.87%
Legg Mason Asset
Management (Australia) Ltd.
9,383,772 8.17%
UniSuper Ltd. 6,847,103 5.96%
Ellerston Capital Ltd. 5,985,908 5.21%
Airlie Funds Management Pty
Ltd.
5,918,853 5.16%
3. Evaluation of ratios
i. Efficiency ratio
This ratio reflects the methods by which the company has utilized its resources to create income.
Based on the ratio computation of the company, it can be seen that the equity turnover and asset
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JB Hifi
turnover is accomplished in nature, which signifies that the resources are utilized effectively.
Furthermore, this proves to be a strong indicator in terms of both financial capability and
productivity on the part of the company (Libby et. al, 2011). Nevertheless, the total asset
turnover ratio of the company enhanced in the current year and its asset turnover ratio witnessed
a declining pattern.
ii. Liquidity ratio
Liquidity ratio assists in signifying the ability of a company to meet its short-term debt
obligations. If the liquidity ratio of a company is appropriate in nature, it also becomes easier to
attain loan and other borrowings from financial institutions. From the liquidity ratio of JB Hifi, it
can be seen that it is in a strong liquidity position as its current ratio reports above one and is
consistently around the standard ratio of 2:1 (Needles & Powers, 2013). This means that the
company is effectively capable of honoring its debt obligations with the help of its assets. In
contrast to this, the quick ratio of the company had reported a negative trend as it remains below
one. This is a negative indicator on the company’s part as it signifies liquidity failure when stock
or inventory is excluded from the current assets (Choi & Meek, 2011).
iii. Profitability ratio
This ratio signifies the ability of a company to generate income with its assets. Furthermore,
from the profitability ratio of JB Hifi, it can be observed that both net profit and gross profit
ratios depict a positive trend, as the rate of increment in these ratios is somehow marginal in
nature (Libby et. al, 2011). However, even though these ratios are stagnant in nature, yet it must
be noted that the company must focus on its operational costs so that an effective percentage of
profit can be obtained.
iv. Leverage ratio
This ratio is the amount, which is funded by equity and debt meaning that both the investor’s
contribution and liabilities form part of the capital structure. In the case of JB Hifi, it can be seen
that the equity ratio is below 0.5 that means low investment from the investors in comparison to
the debt contribution. In contrast to this, the debt-equity ratio of the company is immensely high
that signifies higher component of debt in comparison to the equity (Carmichael & Graham,
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