The impact of a company’s financial statement depends mainly on the company’s business strategy; both transactional and operational, its industry profile and the nature of its competitive environment. This report analyses 15 ratios of JB Hi-Fi’s financial performance and suggests a recommendation for investors.
JB Hi-Fi Limited (JBH) is a specialty discount retailer of branded home entertainment products. The group's products fall into consumer electronics, car sound systems, music, Digital Versatile Disc’s (DVD’s) and white-goods. JB Hi-Fi Limited achieved revenue growth of 17%, EBIT growth of 23% and NPAT growth of 26% for the year ended in 30 June 2010 through a strong expansion of stores.
Table of Content
2. Financial Ratios Calculation3
2.1.2 Comparison and Evaluation of Liquidity:3
2.2.2 Comparison and Evaluation of Activity:6
2.3.2 Comparison and Evaluation of Profitability:9
2.4.2 Comparison and Evaluation of Solvency & Leverage:11
3. Recommendations for investor13
This report is going to have an analysis of the business performance of JB HiFi using the calculation of ratios. 2. Financial Ratios Calculation
The tests of liquidity can be used to help determine the relationship between current assets and liabilities and subsequently the company’s ability to pay its debt. The two ratios used to help determine liquidity are Current Ratio and Quick Ratio. The Current ratio helps determine the balance between current assets and total current liabilities as at a specific date and the Quick ratio compares the assets defined as ‘quick’ such as cash and near cash assets (most liquid) to that of the current liabilities (Potter, Libby, Libby & Short; 2010).
Table 1: Test of Liquidity for JBH
| Formula| Equation| Ratio|
Current ratio (2010)| | | 1.25|
Current ratio (2011)| | | 1.45|
Quick ratio (2010)| | | 0.33|
Quick ratio (2011)| | | 0.27|
2.1.2 Comparison and Evaluation of Liquidity:
JB HiFi| Industry Ratio|
1.25(2010) 1.45(2011)| 2.67%|
The current ratio is an indication of a firm's market liquidity and ability to meet creditor's demands. If the current ratio is below 1, then the company may have problems meeting its short-term obligations. If the current ratio is too high, then the company may not be efficiently using its current assets or its short-term financing facilities (Potter, Libby, Libby & Short; 2010). This may also indicate problems in working capital management.
The current ratio of the JBH is greater than 1 for both FY10 and FY11, indicating that the current assets are able to cover the current liability to meet its demand to pay for short term bills. Additionally, the JBH’s current ratio is below the industry average in both financial years which indicates that it is more actively and efficiently in accessing its working capital.
JB HiFi| Industry Ratio|
0.33(2010) 0.27(2011)| 1.92|
The Quick ratio is a more stringent measure of liquidity because it does not include inventories and paid expenses that often cannot be turned back into cash or liquidated quickly (Potter, Libby, Libby & Short; 2010). JBH’s quick ratio is far below industry average in both financial years. This may indicate that the company is unable to convert current assets into cash quickly. In order to determine if JBH has a liquidity issue, it is necessary to further examine its inventory turnover ratio. However, it should be noticed that JBH does not operate a warehouse; instead all stock is delivered directly to each store and largely stored on the shop floor. In these two financial years, JBH adopted an...