JB HI-FI LIMITED

22319 Financial
Statement Analysis
Assignment Part 2
Huu Duc Bui 11557446
Yee Peng Chow 11377948
Omar Moussa 11417538
Khanh Linh Tran 11525565

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Table of Contents
Executive
Summary..
..2

Accounting
Analysis.
...2
Identifying
the
Key
Principal..3
Removing
Distortion
from
key
success.....4
Summary
.5

Financial
Analysis..
7
Ratio
Analysis.
.....7
Cash
Flow
analysis.
...8
Summary.
9

Conclusion
..10

References...
.10

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Executive Summary
Account analysis and financial analysis are important tools to examine the valuation of a
business. This is because of the distortions that hide the real value of the business
including management manipulation, unrealized future benefits. Therefore, understanding
the analysis of accounting principles and financial ratio, cash flow could have a great
impact on a business analysis especially for JB Hi-Fi where there are doubtful qualities in
the financial statement regarding valuation. This report will illustrate the accounting and
financial analysis in relation to the business conduction of JB Hi-Fi and examine whether
the value of the business is truly and fairly presented.
Accounting Analysis
There is considerable evidence suggesting that following the retirement of a CEO there is
a practice of earning bath where assets are written down and poor earning reported in
order to save income for later years and blame on the previous CEO associated with lower
bonus standard. This can be done by manipulating accounting principles and choices such
as operating lease, revenue recognition method. At the end of financial year 2014, Richard
Murray has replaced Terry Smart as the new CEO and the profit for the half year 2015 is
significantly lower than profit of 2014 thus the analysis of the accounting policies must be
carefully examined to avoid earning management. (JB Hi-Fi Half Year Report 2015).
There has been a few changes regarding the revenue recognition throughout the years for
JB Hi-FI according to note 1(v) with the addition of subscription revenue, commission
revenue and rendering of services. Nevertheless, these incomes are relatively small
(118000 for 2014) and only accounts for 0.003% of total revenue with fully disclosure from
the company. In addition, the main source of income is sale revenue recognition is fully
disclosed and according to the standard.
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Regarding plant and equipment, the PPE of JB Hi-FI accounts for 21% of the total asset of
the company. Given the nature of the retail industry, depreciation expense would not be
material comparing to other industry but still need careful consideration. The useful life of
JB Hi is from 1-> 15 years according to note 1(t) which is significant higher than other
retails in the industry such as Woolworth with only 3->10 years for PPE and Super retail
group with depreciation rate of 10->37.5%. This shows that JB Hi-Fi less sight
conservatism comparing to other company in the industry. However, this could be
susceptible whether the assets are operating after 10 years or should it be written off.
The company also exposes to interest rate especially from loans. The company has been
hedging its interest by cash flow hedge and in particular interest swap but it can be seen
from the financial statement that interest rate swap cause a loss to the company every
year thus this could be a concern.

Identifying the Key Principles

a) Inventory
With inventory, the management measures the inventories as the lower of cost and net
realizable value (JB Hi-Fi Annual Report 2014). The valuation of the net realizable of
inventories encompasses various assumptions but these key assumptions are not fully
disclosed in the financial report thus the reliability of inventory value in the balance sheet
may not be creditable (JB Hi-Fi Annual Report 2014). In addition, the company also has
choices regarding to their inventory policy of FIFO, LIFO and average cost but the
information is not disclose by the company thus low quality of disclosure regarding
inventory. This is a critical issue since inventory accounts more than half of the balance
sheet asset and could have huge impact on the company if measured incorrectly.
In addition, the inventory management is captured by inventory shrinkage feature and it
seems that the accounting feature is not reflecting the improvement in inventory
management of the company due to the fact that there was an increment in the inventory
shrinkage throughout the year from 0.31% of sale in 2010 to 0.5% in 2014. However, this
figure is much lower than the industry benchmark of 2% but it could be illustrated that the
company focusing on improving inventory management as a competitive advantage thus
company is not practicing conservatism as they do not aggressively record
expense(Healy & Palepu 2012). It can be illustrated from the financial reports that due to
competition pressure, the company has increased their inventory shrinkage significantly
since 2011 from 0.26% to 0.5% of sale revenue. This increases the expense of the
company thus reducing tax thus management has an incentive to increase their shrinkage
percentage.
Customer credit issue is another important aspect of the business and is captured through
doubtful debt allowance account. The allowance for doubtful debt increases from 1.6% to
1.9% from 2013 to 2014 despite the fact that the written off decrease from 12.4% to 0.6%.
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In addition, the written off is immaterial to the beginning balance of the trade receivable
comparing to the allowance for doubtful debt in 2014. This suggests that there is a high
risk that the company is understating their trade receivable (Healy 2007).
Lastly, the operating cost of the business has been increasing through years especially the
occupancy cost. While it is disclosed that the company has encompassed the rent cost
problems by negotiating leasing expense at low price but the average cost per store has
been going up since 2010 from $716,000 AUD to $813,000 AUD in 2014. This reflects that
the accounting data dose not reflects the true competitive advantage of the company
associated with the fact that the company does not disclose the information regarding the
occupancy expense in the income statement thus it needs to be carefully considered when
analysing the business (JB Hi-FI Annual Report 2014). The company classified their lease
as operating lease and a full disclose of their non-cancellable operating lease is disclosed
under note 32. This is all the compulsory commitment of the company regarding to lease
and could be restate as lease liability to compare with other retail in the industry.
Removing distortion from key success
Assuming the shrinkage ratio stays at 0.3% instead of 0.5%, the expense of the company
would decrease by $6,865,675 at the same with the increment in inventory. The company
tax expense and deferred tax liability by 6865675*0.3= $2,059,702 and the company profit
and shareholder equity would increase by $4,805,973.
Balance
Inventory
Deferred tax liability
Shareholders equity

+6,865,675
+2,059,702
+4,805,973

Cost of sale
Tax expense
Net profit

-6,865,675
+2,059,702
+4,805,973

Assuming the doubtful debt is 1% of trade receivable considering the low written off, the
account receivable would increase by: 0.9%* 24071 = 261000. Given the company tax
rate is 30%, the net profit and shareholders equity would increase by 261000*0.7 =
182700 and the deferred tax liability and tax expense increase by 261000-182700= 78300.
Balance sheet
Trade receivable
Deferred tax liability
Shareholder equity
Income statement
Cost of sale
Tax expense
Net profit

+261,000
+78,300
+182,700
-261,000
+78,300
+182,700
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The company states their interest rate from bank loan for 2014 is 5.27% therefore, a
capitalized of lease expense can be done as followed:
Noncancel
lease
payment
Within 1
year

(000)2013

Assumption(000
)
-2013

PV(000)
2013

PV (000)
2014

71,083

71,083

67524.4609
1

68738.482

Within 5
years

232,079

Year2 : 58019.75

52356.0178
7

48417.56864

Year 3:58019.75
.
Year 4 :58019.75

49734.9842

45993.70061

47245.1640
6

43691.17566

Year 5: 58019.75

44879.9886
6

41503.91912

Year 6: 47656.5

35018.2473
5

26177.07034

Year 7: 47656.5

33265.1727
5

24866.60049

330024.035
8

299388.5169

Later than
5 years

SUM

95,313

358,231

Assuming the lease payment from year 1 to year 5 are divided equally and lease payment
from year 5 later is accumulated equally to year 6 and year 7. Therefore, non-current asset
and non-current liability of the company increased by 330,024,035.8 at the beginning
balance of balance sheet. The lease expense of the company for 2014 is 148,969 which is
much higher than the anticipated value of 71,083 and the difference is paid in the same
year as well. The lease payment with more than year term in 2013 is 262499.5749 and in
2014 it will be 262499.5749 *1.0572=2775145506. But the amount stated in the financial
report is 299,388,516.9. Therefore, the there is a decrease in the lease liability of
(299,388,516.9-277,514,550.6+71,083,000-148,969,000)= 56,012,034 in 2014. The
depreciation of lease is (0.2*330024035.8 0.5*0.2*56012034)= 60,403,603.8 with 0.2 is
the depreciation rate and the decrease in lease liability is prorated throughout the year.
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Including the cost of lease payment back to the income statement: 148969000. The
interest on the lease therefore is (0.0527*330024035.8-0.5*0.0527*56012034) =
15,916,349.6. As a result, the tax expense of the company will increase by
0.3*(148969000-15916349.6-60403603.8)= 21,794,714 same with the tax deferred liability.
Thus net profit and shareholder equity will increase by 50,854,332.6. Summing up as the
following table:
Balance sheet
Beginning balance of lease asset
Decrease in lease asset during the
year
Accumulated Depreciation
Lease liability
Decrease in lease liability
Debt repayment

DTL
Shareholder equity
Income statement
Interest expense
Occupancy expense
Depreciation expense
Tax expense
Net profit

+330,024,035.8
-56,012,034
+(-60,403,603.8)
+330,024,035.8
-56,012,034
-133,052,650.4 ( lease paymentinterest expense on the lease)

+21,794,714
+50,854,332.6
+15,916,349.6
-148,969,000
+60,403,603.8
+21,794,714
+50,854,332.6

Summary
After removing all the distortion from the key success of the business, the net profit of the
company is increased by 55843005.6 (43%) and the tax expense of the company is
increase by 23,932,716.7. Therefore, it can be illustrated that the company actually
perform significantly better than the reflection of financial report but the management
wants to decrease tax expense suffered by the company and potentially return to investors
thus the earning is reduced by the choice of accounting policies. Despite the fact that
asset turn over reduce from 4.1 to 3.2, the ROE of the company would increase from 0.44
to 0.53 if distortions are removed.
Financial Analysis
By assessing and standardizing the financial information of JB HI-FI it gives the ability for
comparisons as well as to evaluate the current operations of the organisations. By
comparing past and present forecast it allows a cross analysis and comparisons against
other firms or industry standards. Financial Analysis is separated into two parts: ration
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analysis and cash flow analysis. Through looking at JB Hi-Fi Annual Report, we can
determine these figures and evaluate the current and past performance for this business.
Ratio Analysis
Profit Margins, Return on Equity and Total asset turnovers are measured in the operating
ratio analysis. This will allow JB Hi-Fi to forecast its activity in the near future by looking at
its financial performance over the last few years.
Return on Equity
Years
RETURN ON
EQUITY(ROE)

2010
45.41

2011
49.23

2012
62.14

2013
54.40

2014
47.72

ROE is the amount of net income that is returned as a percentage of shareholders equity.
This measures the companys profitability, JB HI-FI is seen to have a stable and rising
ROE with a slight decrease over recent years.
From the figures we see a positive indication from 2010- 2012 of increase in the Return on
equity generated by JB HI-FI from 45.41% to 62.14%. However from after 2012 the
decrease of return on equity has been seen to drop to 47.72% by 2014. Even though the
Return on equity is still high at 2014, previous years of 2011-2013 indicate to shareholders
that the equity that was been provided was used more effectively. By analysing the
historical data of JB HI-FI for the last 5 years it is seen that equity is still been used to a
relatively effectively and generating net income.
Asset Turnover ratio
Years
Total asset
Turnover

2012
3.96

2013
4.00

2014
4.09

The gradual increase from 2012 to 2014 from 3.96 to 4.09 illustrates the industry that JB
HI-FI is in has a large sales to asset ratio mainly because of it being a retail store. The rise
of the ratio gives a positive indication and implies the company is generating a larger
amount of revenues per dollar of assets.

Profit Margin
YEARS
GROSS
PROFIT %

2010
21.4

2011
21.8

2012
20.7

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2013
21.1

2014
21.2

The Gross profit margin is seen to be stable for JB HI-FI over time within the 5-year
historical data presented. This demonstrates that the company can generate a profit with
its sales after COGS.
However when we analyse the NET PROFIT margin of JB HI-FI we see a drop over the
years the highest point in last 5 years was in 2010 where they produced a 4.34% net profit
margin with $119 million. Between 2013 and 2014 we see the highest JB HI-FI has ever
received of $128 million net profit, however the NET PROFIT margin indicated at 3.52%
shows that even though that has been an increase in $9million profit over the years
between 2010- 2013 there has been a decrease in the overall net profit margin as a
percentage of sales. This cannot be an overlook as a whole on the companys status
because it is also seen that EPS increases from 1.08 in 2010 to slowly rise over the next
consecutive 5 years with a 2014 EPS of 1.27. Furthermore return on invested capital has
seen to decrease over the years from 34.48 in 2010 to 31.97 in 2014, this could indicate
bad news to shareholders and potential investors as the capital invested in the past was
being invested for effectively and efficiently.

Cash Flow Analysis

Solvency (short term liquidity) and financial stability (both long term and short term) of JB
Hi-Fi are measured through cash flow analysis.
Years
Current Ratio
Quick Ratio
Leverage Ratio
Cash Ratio

2012
1.22
0.22
0.81

2013
1.27
0.30
0.51
0.152

2014
1.64
0.32
0.61
0.123

In
2012,
the
firms
ability
to cover its current liabilities with its current assets was 1.22. As time progresses over the
next two years the ratio is seen to rise to 1.27 and 1.64 in 2014, which means it has the
ability to pay its current liabilities. The current ratios also show a rise, which illustrate the
efficiency and liquidity improving in JB HI-FI.
The quick ratio (acid test) measures the dollar amount of liquid assets that are available
for each dollar of current liabilities, In analysing JB HI-FIS quick ratio even though we
have seen an improvement from 2012 of 0.22 to 0.32 in 2014 it still indicates that they
cannot pay its debt without its inventory. This could also show that the organization may be
risky. JB Hi-Fi cash ratio has also decrease over the last year, showing that there are less
cash and cash equivalent in their company as there would like currently.
Through this ratio, JB Hi-Fi short term liquidity ratios are not of concerns and will be
expected to continue throughout the next few years.
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In 2010 JB HI-FI had a leverage (Debt/Equity) ratio of 0.12 which is extremely low; in 2011
it increased to 1.53 which could have mean that the JB HI-FI has been aggressive in their
financing growth with debt. This figure also illustrates the new debt may have been used to
potentially generate more income in the future through business and investment activities.
2012 -2014 figures show a decrease from the previous figure A the company stabilizes its
debt to equity which shows a decrease in the risk of the firm. This will allow Jb Hi-Fi to be
more stable in the future as they maintain to have a debt/equity below 1.
Financial Stability
Years
2012
2013
2014
Interest coverage 11.87
17.55
21.65
Financial
4.40
3.47
2.93
Leverage
1.11
0.94
1.90
Dividends
It can be seen that Interest coverage for JB Hi-Fi has increased dramatically over the last
2 years from 11.87 to 21.65; this means that their ability to service debt is very efficient and
should continue to rise over future profits which could be very attractive for shareholders.
Their financial leverage has decreased from 4.40 to 2.93 in the last 2 years, this means
that JB Hi-Fi are currently looking at lower net financial obligations then the last 2 years,
which means that financially, they are able to sustain their debt and have less risk in
future. We can also see that dividends have increase over the last year from 2013 2014,
which is something that attracts shareholders, meaning shareholders equity will be larger
than their current liabilities in future if this continues.
Summary
Finally, after applying and reviewing the ratios over the past 5 years by looking at historical
data there is a clear indication that JB HI-FI is a profitable firm as it is slowly improving
over the years into becoming a more profitable company. JB Hi-Fi have enough debt after
all the benefits, such as tax shields, however it is not in risk as the debt/equity ratio is
being sustain over the last few years. Cash generation from operations has increased over
the last few years for JB Hi fi and there is evidence of free cash flow.

Conclusion
It can be seen that JB HI-FI has an effective accounting and financial analysis and that
because of this, their profits have been able to sustain throughout the last 2-3 years and
should continue to experience growth for the next 3-5 years.
References
Healy, M.P. & Palepu, K. 2012, Business Analysis Valuation: Using Financial Statements,
Cengage, viewed 28 March 2015
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JB Hi-Fi 2014, Annual report 2013, JB Hi-Fi Limited, viewed 26 March 2015,
<https://www.jbhifi.com.au/Documents/Annual%20Reports/JB%20Hi_Fi
%20Limited_Annual_Report_2013.pdf>
JB Hi-Fi 2014, Annual report 2014, JB Hi-Fi Limited, viewed 26 March 2015,
<https://www.jbhifi.com.au/Documents/Annual%20Reports/JB%20Hi_Fi
%20Limited_Annual_Report_2014.pdf>
Morningstar, 2015, viewed 30 March 2015. <http://financials.morningstar.com/ratios/r.html?
t=JBH&region=aus&culture=en-CA>
Yahoo Finance, 2015, viewed 3 April 2015, <https://au.finance.yahoo.com/q/cf?
s=JBH.AX&annual>

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