JB Hi-Fi Pty. Ltd. Case Study Sample

• Subject Name : Accounting and Finance

Accounting for Managerial Decision

Table of Contents

Company Background:

Accounting Disclosure:

Significant Changes in Accounting Policies:

Operating Segments:

5 Years’ Profit and Income Tax:

.Accounting & Market Valuation:

Additional Disclosures:

Key Management Personnel:

Independent Auditors:

Largest Investors:

Financial Statement Analysis:

Trend Analysis of Key Profits and Cash Flows:

Ratio Analysis:

Impact of COVID-19 Pandemic:

Conclusion & Recommendation:

References:

Company Background of JB Hi-Fi Pty. Ltd.:

JB Hi-Fi Pty. Ltd. is one of the most renowned consumer electronics and home appliance retailer of Australia. This Melbourne based company is not only one of the largest retailers in Australia, but also considered as the 7^th largest electronics and home appliance retailer around the world. The initial business was started in 1974 by John Barbuto as a private company. Later in the year 2003, it was enlisted in ASX when all the private equity of the company was floated in the Australian Stock Market ("JB Hi-Fi - Australia's Largest Home Entertainment Retailer", 2020).

JB Hi-Fi operates mainly in the retail sector of Australia & New Zealand and trades various consumer electronic products, including small and large appliances, mobile products, computers, software, gaming accessories etc. Currently it has 210 retail stores, under the brand name “JB Hi-Fi” and 105 stores, under the brand “The Good Guys Stores”, which has been acquired by the company in the year 2016.

The company sells its products under three different store formats, namely, JB Hi-Fi, JB Hi-Fi Home and JB Hi-Fi Express. The maximum numbers of stores are operated under the JB Hi-Fi store format, which trades electronic and small appliances mostly. JB Hi-Fi Home deals with large home appliances. To capitalize the increasing demand of mobile products, the company has started the JB Hi-Fi Express retail chain stores, which focus mostly on mobile phones and mobile accessories. As discussed above, the company also generates revenue through the retail chain stores, under the brand name “The Good Guys Stores”. JB Hi-Fi had acquired Hill and Stewart in the year 2006 to expand its market in New Zealand and continued to operate the acquired stores under the same brand name. However, in the year 2010, it decided to shut and replace the Hill and Stewart retail chain with the stores, under its own brand name ("Annual Reports | JB Hi-Fi Solutions", 2020).

This report has been prepared to discuss the significant amendments in the accounting policies of JB Hi-Fi Pty. Ltd. along with its operating segments and profitability. It analyses the financial performance of the company over the last few years so that the investors can take proper investment decisions. Furthermore, the report also includes the possible effects of COVID-19 over the operation and performance of JB Hi-Fi.

Accounting Disclosure of JB Hi-Fi Pty. Ltd.:

Significant Changes in Accounting Policies:

In the current financial year of 2019, JB Hi-Fi has adopted some new accounting standards to maintain more advanced and better accounting process and bring more transparency in the financial statements, as well. The accounting policies and its impacts on the company’s financial statements are discussed below:

AASB 9 Financial Instruments: The company has replaced AASB 139 Financial Instruments with AASB 9 Financial Instruments to adopt the new classification and measurement process for financial assets & liabilities, new method of computing provision for doubtful debts and new procedure for hedge accounting (Lowe & Middleton-Jones, 2018).

However, it has been observed the provision for doubtful debts, calculated in accordance with the new standard, does not have any significant difference with amount of provision, computed under the previous standard.

Moreover, the group transactions do not include any revisions in items, related to hedge accounting under AASB 9, such as the interest rate swaps, caps and foreign currency exchange contracts.

For the aforementioned reasons, adoption of AASB 9 does not create any impact on the financial statements of the company.

AASB 15 Revenue from Contracts with Customers: The company has started to follow AASB 15 Revenue from Contracts with Customers instead of AASB 118 Revenue to introduce more developed and advanced principal-based approach regarding the recognition of revenue.

As per this new standard the revenue from any sale should recognized not only when the control of the product is transferred to the customer at the time collection or delivery, but also when all the performance obligations are fulfilled. The company distributes gift cards and store credits, which leads to performance obligation of delivering goods or rendering services in future. Therefore, the current financial statements may not be affected for adopting this new standard; there are high chances of significant amount of revenue reversal in future due to the performance obligation clause, stated above (Davern et al., 2019).

AASB 2016 – 5 Amendments to Australian Accounting Standards – Classification and Measurement of Share-Based Payment Transactions:  This standard has not been effective during the authorization of the financial statements and hence, inspite of applying this standard in the current financial year, there would be no impact on the company’s financial report for the same.

AASB 16 Leases: JB Hi-Fi has adopted AASB 16 Leases to implement more methodical accounting approach for dealing with the leases, taken for its retail stores, warehouses and offices. This new standard gives more emphasis on the both the present and future performances of any particular place and the possibility of any relocation, while recording the lease assets, liabilities and related expenses. Thus, this adoption has lead to significant impact on both current financial position and performance of the company (Joubert et al., 2017).

As per the audit report, the net assets of the company has reduced by $38 million-$41 million, approximately due to this adoption, whereas, it has caused reduction in net profit after tax by $4.9 million- $6.3 million approximately.

Operating Segments:

JB Hi-Fi operates through three main segments, namely, JB Hi-Fi Australia, JB Hi-Fi New Zealand and The Good Guys. The main revenue generating categories of JB Hi-Fi Australia and New Zealand were Communications, Audio, Fitness, Games Hardware and Small Appliances. The Good Guy has increased its sales through the sale of Refrigerator, Laundry, Dishwashers, Televisions, Communications and Computers. The company has enjoyed significant improvement in the Online Sales category and all the three operating segments have generated considerable amount of revenue through online sales ("Annual Reports | JB Hi-Fi Solutions", 2020).

The operating segment analysis has been presented in the following table:

It is evident from the analysis that JB Hi-Fi Australia is the largest segment in terms of the stores and also most profitable in comparison to the other segments, followed by The Good Guy. Whereas, JB Hi-Fi New Zealand not only operates only with fewest numbers of stores, it has also incurred loss in the current financial year. However, it should be noted that this particular segment had incurred loss in the last year also and has managed to reduce the amount of loss noticeable in the current year by reducing its Cost of Doing Business and Depreciation.

5 Years’ Profit and Income Tax:

The net profit earned and the amounts of income tax paid by the company over the last 5 years are as follows:

It is visible from the table, above, that JB Hi-Fi has experienced continuous growth in the year in the net profit over the last 5 years. However, in the year 2017, it has enjoyed comparatively higher growth rate in net profit. The tax expenses paid has followed the same trend as the net profit ("Annual Reports | JB Hi-Fi Solutions", 2020).

Accounting & Market Valuation:

The market capitalization of JB Hi-Fi as at 30^th June, 2019 was $2,969.73 million. However, the net book value of the company on the same date was $1,044.1 million ("Yahoo is now a part of Verizon Media", 2020).

Market capitalization is based on the market price per share of the company and the market price per share is determined on the basis of demand of the stocks, expected future cash flows, historical performance of the company, dividend policy, inflation rate, interest rate etc. On the other hand, net book value of the company is computed by deducting the book value of liabilities from the book value of assets. The book values do not include any future prospects or any external factors, like, interest rate or inflation rate etc. (Barth et al., 2019).

Hence, it can be concluded that the difference between the market capitalization and the net book value of JB Hi-Fi has been caused due to the expected growth of the company in future and impact of several external factors.

Additional Disclosures of JB Hi-Fi Pty. Ltd.:

Key Management Personnel:

The payment to the key management personnel in the current financial period in provided in the following table:

Independent Auditors:

The independent auditor can be defined as the external certified public accountant, who checks & scrutinizes the business transactions, accounting records and financial statements of the companies, with which he is not directly associated or has any sort of private interest. The main role of an independent auditor is to derive assurance that the business transactions are recorded properly and do not contain any sort of material misstatement through effective auditing processes ("AU 110 Responsibilities and Functions of the Independent Auditor", 2020). It is the responsibility of an independent auditor to provide opinion about whether the financial statements of the audited company present true and fair view or not. Thus the independent auditor helps to detect any fraud or error, which might caused material statements (Kassem & Higson, 2016). Indirectly he prevents the audited companies to publish any manipulated financial reports. In short, the independent auditor protects the stakeholders of a public company from any type of possible frauds, material misstatement and accounting improperties (Bratten et al., 2018).

The financial records and annual report of JB Hi-Fi have been audited independently by Deloitte Touche Tohmatsu group ("Annual Reports | JB Hi-Fi Solutions", 2020). The remuneration, paid to the independent auditor, in the accounting period 2019-20, is as follows:

Largest Investors:

The two largest investors of JB Hi-Fi are J.P.Morgan Nominees Australia Pty. Ltd. and HSBC Custody Nominees (Asutralia) Ltd., who hold 25.06% and 24.46% of total shares respectively ("Annual Reports | JB Hi-Fi Solutions", 2020).

Financial Statement Analysis:

Trend Analysis of Key Profits and Cash Flows:

Trend analysis of the company’s key profit and cash flow figures over the period of 5 years has been conducted to analyse the growth pattern of its profitability and liquidity (Atann et al., 2010, December). The results are provided in Appendix 1.

Over the period, it has been observed that the company has maintained gradual growth rate in terms of profitability. However, in 2017, the profit growth rate was much higher than any other years within the period. Only NPAT After Abnormal has increased rapidly in the year 2018, instead of 2017. Furthermore, it has also been noticed that the growth rate of EBIT has been lower than EBIT, Pre-Tax Profit and Net Profit after Tax before Abnormal throughout the period, except in 2018. It has caused due to the fall in depreciation and finance expenses, which has helped other profit figures to increase at higher rate than EBITDA.

Cash flow figures represent the liquidity position of any company. The trend analysis of JB Hi-Fi’s cash flow figures is presented in Appendix 2. It can be noted from the trend analysis that the Net Operating Cash Flow, Investing Cash Flow, Financing Cash Flow and Closing Cash Balance of the company have increased significantly and remained positive over the period. However, the Net Operating Cash Flow has experienced a sharp growth in the year 2018 due to high rise in receipts from customers. On the other hand, Net Investing Cash Flow has been negative throughout the period and had increased highly in 2017 for investing huge amount in subsidiaries. In the same year, the company had received high amount of cash through the issuance of shares and loans, which had lead to abnormal rise in Net Financing Cash Flows. Otherwise, in other years, it has remained negative. The close cash balance has been positive throughout the period and enjoyed high growth in the year 2017 and 2019.

Hence, it can be concluded from the above analysis, that due to the introduction of additional cash flows and investment in profitable subsidiaries in 2017, JB Hi-Fi has been able to enjoy high growth in its Net Operating Cash Flow and Net Cash Balance in the following year. It has resulted in sharp growth in the profit figures on 2017 & 2018, as discussed above.

Ratio Analysis:

Ratio analysis is an important managerial tool to evaluate the financial performance of any business and measure the different financial aspects, such as, profitability, asset efficiency, capital structure, market performance etc (Weetman, 2019). Hence, JB Hi-Fi’s financial performance in the last reporting period has also been evaluated through ratio analysis and the results are presented in Appendix 3.

Profitability: The profitability of the company has been measured through net profit margin, EBIT margin, EBITDA margin, ROA, ROI and ROIC. It has been observed that the EBITDA and EBIT margins of the company were 6.04% and 5.27% respectively in 2019 and higher than the previous year. However, though the net profit margin in 2019 has maintained the growth, it was only 3.52%, which is comparatively lower than the EBIT margin. It denotes that the company has spent high amount in interest and tax purpose for which it was not able to convert its EBIT into higher net profit.

The company has been able to increase its ROA and ROIC in 2019 to 10.19% and 42.11% from 2018. However, the ROE of the company has dropped to 23.92% in 2019 from 24.68% in 2018. Hence, it can be stated that though the company has been able to generate higher returns from its assets and invested capital, it was not capable to provide higher returns to its equity shareholders. It might have been caused due to the rise of equity share capital (Weetman, 2019).

Asset Efficiency: Asset turnover, fixed asset turnover and PPE turnover ratios have been used to evaluate the asset efficiency of the company. The total asset turnover and fixed asset turnover have increased to 2.78 and 5.58 respectively in 2019 from 2.75 and 5.35 in 2018. It indicates that the business has enhanced the efficiency in utilization of its assets. The PPE turnover has increased significantly to 37.05 in 2019 from 34.62 in 2018, which denotes that the company has utilized its Property, Plant & Equipment with much more efficiency than previous year to generate revenue.

The differences between the PPE Turnover and the fixed asset turnover, as well as, total asset turnover are very high, which has two possible reasons. The company either has lower amount of PP&E than other fixed and current assets or it has not been able to utilize its other assets to generate sufficient revenue (Wen & Zhu, 2019).

Liquidity: Liquidity ratios, such as, current ratio, quick ratio, net interest coverage ratio etc. measure the ability to pay off the current liabilities through its current assets. Other liquidity ratios, like, working capital turnover, days sales in inventory, days receivables outstanding etc. helps to understand how efficiently the business is managing and rotating its working capital (Easton & Sommers, 2018).

 The current ratio, quick ratio and net interest coverage ratio of JB Hi-Fi have increased to 1.38, 0.42 and 26.13 respectively in 2019 from 1.32, 0.35 and 21.19 in 2018, which denotes that the business has maintained better liquidity position in 2019 in comparison to previous year. The current ratio is above 1, which implies that the business has adequate current assets to cover it current liabilities. The significant rise in net interest coverage ratio also indicates same. However, the quick ratio with below 1 denotes that the business still lacks sufficient highly liquid assets to cover the current liabilities.

The days sales in inventory has reduced to 45.61 in 2019 from 47.45 in 2018, which has been resulted due to increase in efficiency to convert the inventories to sales. For any retail company, this is a sign of improvement. However, the days payable outstanding has reduced to 33.79 in 2019 from 35.43 in 2018, whereas, the days receivables outstanding has increased to 3.34 in 2019 from 2.96 in 2018. It implies that the company has paid its suppliers earlier than previous year, but has become slower to collect the outstanding from its customers. Though, being a retail company, JB Hi-Fi uses to generate most of the sales revenue from cash sales. However, due to the fall in days payable outstanding and rise in days receivables outstanding, has led the working capital turnover to fall 30.82 in 2019 from 30.97 in 2018. Though the cash balance has not been affected in the last reporting year, it can be affected in the near future if the same trend continues in the following years.

Capital Structure: The capital structure can be analysed through debt ratio, debt-to-equity ratio and equity ratio. The debt ratio of JB Hi-Fi has fallen to 0.59 in 2019 from 0.62 in 2018 and equity ratio has increased to 0.41 in 2019 from 0.38 in 2018. As the debt ratio is higher than the equity ratio, it can be stated that the total assets has been financed more by the debt capital, instead of equity capital. However, the rise in the equity ratio indicates that the company is giving more emphasis on financing through equity capital (Wen & Zhu, 2019).

Market Performance: The market performance of JB Hi-Fi has been measured through Price-to-book value, earning per share and P/E ratio. Increase in net profit has helped the earning per share to rise to 215.27 cents in 2019 from 201.71 cents in 2018. The price-to-book value and price-to-earning ratio have also risen to 2.84 and 12.01 in 2019 from 2.73 and 11.16 in 2018 ("Yahoo is now a part of Verizon Media", 2020). It indicates that the market stock price of the company has enjoyed steady growth over the period.

Impact of COVID-19 Pandemic:

COVID-19 pandemic has become the greatest threat for humankind within the recent few months. Countries, like, USA, Britain, China, India and Australia are going through extended lock down, for which many of the business activities, such as, manufacturing, construction, mining, transport etc. have almost shut down and other activities, like, retail, information, education etc. have slowed down drastically.

The retail companies of Australia, which deal with non-essential products, have faced huge drop in revenue. However, decrease in wages & other operating expenses have covered up the fall in revenue. Moreover, the retail companies have started to focus more on the online retailing for continuing the selling activities (Jane Cohen, 2020). Thus, large retail companies, which deal with non-essential products, like JB Hi-Fi, have not faced any significant fall in profit. The small retailers are not being able to enjoy the stated advantages, for which many of the small retailers are exiting the market gradually.

However, large proportion of electronic products, home appliances, computers and software were used to be imported from China. Hence, JB Hi-Fi is facing shortage in supply of products for this severe pandemic, which has originated from China ("Coronavirus Update: Industry Fast Facts | IBISWorld Industry Insider", 2020).

Conclusion & Recommendation on JB Hi-Fi Pty. Ltd.

It can be concluded from the above discussion that JB Hi-Fi has emerged as player in the Australian Retail Industry through proper strategic decisions and improvisation over the years. The company has maintained steady growth in profit and cash flows. The market return of the company has also been satisfactory over the years. However, as the COVID-19 pandemic has impacted gravely on the no-essential retail industry, the financial performances of JB Hi-Fi may get affected negatively in next few months. Hence, it would be better to held any investment in this company currently and further investment decision should be taken after publication of the next annual report of JB Hi-Fi.

References for JB Hi-Fi Pty. Ltd.

Annual Reports | JB Hi-Fi Solutions. (2020). Retrieved 12 May 2020, from https://investors.jbhifi.com.au/annual-reports/

Atan, R., Raman, S. A., Sawiran, M. S., Mohamed, N., & Mail, R. (2010, December). Financial performance of Malaysian local authorities: A trend analysis. In 2010 International Conference on Science and Social Research (CSSR 2010) (pp. 271-276). IEEE.

AU 110 Responsibilities and Functions of the Independent Auditor. (2020). Retrieved 12 May 2020, from https://pcaobus.org/Standards/Archived/PreReorgStandards/Pages/AU110.aspx

Barth, M. E., Israeli, D., & Sridharan, S. A. (2019). Equity Book Values Greater Than Market Values: Accounting, Risk, or Mispricing?. Risk, or Mispricing.

Bratten, B., Causholli, M., & Sulcaj, V. (2018). Overseeing the external audit function: Evidence from recent audit committee voluntary disclosures.

Coronavirus Update: Industry Fast Facts | IBISWorld Industry Insider. (2020). Retrieved 12 May 2020, from https://www.ibisworld.com/industry-insider/coronavirus-insights/coronavirus-update-industry-fast-facts/#Retail

Davern, M., Gyles, N., Potter, B., & Yang, V. (2019). Implementing AASB 15 revenue from contracts with customers: the preparer perspective. Accounting Research Journal

Easton, M., & Sommers, Z. (2018). Financial Statement Analysis & Valuation, 5e.

Jane Cohen, M. (2020). COVID-19: Retail’s survival and revival. Retrieved 12 May 2020, from https://home.kpmg/au/en/home/insights/2020/04/coronavirus-covid-19-retail-survival-and-revival.html

JB Hi-Fi - Australia's Largest Home Entertainment Retailer. (2020). Retrieved 12 May 2020, from https://www.jbhifi.com.au/

Joubert, M., Garvie, L., & Parle, G. (2017). Implications of the New Accounting Standard for Leases AASB 16 (IFRS 16) with the Inclusion of Operating Leases in the Balance Sheet. The Journal of New Business Ideas & Trends, 15(2), 1-11.

Kassem, R., & Higson, A. W. (2016). External auditors and corporate corruption: implications for external audit regulators. Current Issues in Auditing, 10(1), P1-P10.

Lowe, P., & Middleton-Jones, R. (2018). Financial Statements

Weetman, P. (2019). Financial and management accounting. Pearson UK

Wen, H., & Zhu, T. (2019). Interpretation of Financial Statements.

Yahoo is now a part of Verizon Media. (2020). Retrieved 12 May 2020, from https://finance.yahoo.com/quote/JBH.AX?ltr=1

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