The question asks us to compare and evaluate JB Hi-Fi’s calculated ratio report, with that of the retail industry ratio report (Potter, Libby, Libby, Short p. 1133). The retail ratio report is comprised of a basket of listed companies which operate under the retail banner, which makes it relevant to use as a comparison to JB Hi-Fi.
1. Liquidity ratios are a class of financial metrics that is used to determine a company's ability to pay off its short-terms debts obligations. Generally, the higher the value of the ratio, the larger the margin of safety that the company possesses to cover short-term debts.
Table 1: Current Ratio
Current ratio: This ratio measures whether or not a firm has enough resources to pay its debts over a twelve month period, comparing its current assets, with its current liabilities.| 2010: 1.25| 2011: 1.45| Industry: 2.67|
Comparison: The industry average of 2.67 indicates that for every dollar owed, companies, on average will have $2.67 available in assets to convert into cash in the short term. From the JB Hi-Fi data calculated, it is interesting to note that current ratios of 1.45 in 2011 and 1.25 in 2010 are significantly below the industry average. However, this is not too concerning because JB Hi-Fi still have a ratio above 1, and therefore would still be able to meet their current obligations. The lower figure may be explained by the fact that JB Hi-Fi may have a high turnover of current assets, such as stock, which if sold before accounts payable become due, would decrease the current ratio. Table 2: Quick Ratio
Quick ratio: This ratio examines a firm’s ability to use its quick assets to extinguish its current liabilities immediately. Inventory or stock is generally excluded from this equation in order to produce a more accurate account of the firm’s ability to meet its short term obligations| 2010: 0.33| 2011: 0.27| Industry: 1.92|
Comparison: The quick ratio measure’s an organisations ability to meet its current obligations with its most liquid assets. As inventory might not be turned into cash as promptly as other current assets, the quick ratio follows a more conservative approach than the current ratio and excludes inventory from current assets. JB Hi-Fi’s quick ratio declined from 0.33 to 0.27 in 2010 to 2011 which are both alarmingly low from that of the industry’s quick ratio of 1.92. The organisation is clearly lacking in meeting its prompt liquidity requirements.
2. Activity ratios assess a firm’s ability to convert different sectors of the balance sheet into cash or sales.
Table 3: Inventory turnover Ratio
Inventory turnover: This ratio measures the flow of stock within a certain time period. It assesses how long it takes for stock to be sold within a business.| 2010: 56.3| 2011: 58.67| Industry: 50|
Comparison: In this case, the industry report indicates an average of 50 days inventory turnover throughout the retail industry. This is in comparison to 58.67 (2011) and 56.30 (2010) days it took JB Hi-Fi to move on stock within the business. These numbers hold up quite well to the industry average when taking into consideration the number of 45 firms used in the calculations. JB Hi-Fi takes approximately 7 days longer than average to move on their inventory, which in the scheme of things is a relatively insignificant difference.
Table 4: Accounts Receivable Ratio
Accounts receivable: This ratio measures a firm’s effectiveness in extending credit as well as being able to collect debts| 2010: 1.45| 2011: 1.34| Industry: 25.78|
Comparison: In this situation, the retail sector average is 25.78 days taken to receive cash from customers, compared to 1.34 (2011) and 1.45 (2010) days for JB Hi-Fi to collect its money from its debtors. This is positive for JB Hi-Fi as it indicates that it performs extremely well when it comes to collecting from debtors. The company’s figures are well below that of...