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The profitability ratio for the business reveals the ability of the business to make profits from conducting the activities of the company. The return on equity for the entity is shown to be have declined during the period which reveals that the profit which is available to the equity shareholders have declined (JB HI-FI INVESTORS. 2019). The return on assets reveals that the same estimate has increased to 9.91% in 2019 from previous year which reveals that the return from assets of the business has increased and the business is appropriately using the assets of the business (Ongore and Kusa 2013). The gross profit margin for the entity is depicted to have enhanced slightly in 2019 in assessment to previous year. In a similar manner, the operating profit margin for the corporate undertaking is also depicted to have enhnaced and the estimate for the same is shown to be 3.52%.
The efficiency ratio of the business reflects the internal policies and procedures which are adopted by the management of the company for the purpose of bringing about improvements in the operational structure. The asset turnover ratio is shown to have increased which reveals that the assets of the business are being efficiently used. The days inventory and times inventory turnover estimates both show improvement which reveals that the management of JB Hi fi is appropriately managing the inventory of the business (Williams and Dobelman 2017). The days debtor estimate shows a slight increase in the number of days which is a clear sign that some changes have been made in the debtor management policies which has also resulted in change decrease in debtor’s turnover ratio from previous year. In an overall estimate, it can be said that the efficiency ratios for the business have been appropriately management by the business.
The liquidity ratios for the business shows the capability of the undertaking to finance the operations of the entity and also meet the current obligations in proper method. The current ratio and quick ratio of the entity shows improvement during 2019 in comparison to previous year which is a clear indicator that the management of JB Hi fi has appropriately managed the liquidity position for the business.
The capital structure ratios are closely related with the capital structure which is used by the management of the company for financing the activities of the undertaking. The debt ratio and debt coverage ratio both show a decrease which is a clear indicator that the management of JB Hi fi is trying to reduce the debt capital and make adjustments in the structure of capital mix for the company. The interest coverage ratio shows a slight increase which may be due to increase serviceability of debts which is taken by the business.
The investment ratios are closely related with the investors needs and the same should be considered important by the management of the company. There is a decrease in dividend payout ratio and dividend yield ratio which is an indicator that the business has reduce the dividend amount which is offered to the investors during the period.
The computation of return on equity and return on assets shows an estimate of 25.08 and 9.91 respectively in 2019. The industry average for return on assets and return on equity is shown to be higher than the computed figure both in terms of 1-year averages and 5-year averages. This reveals that similar companies which are operating in the industry as JB Hi fi ltd is providing more returns to equity shares and also earning more returns in case of the assets which is utilised (Robinson et al. 2015). In addition to this, the gross profit margin and operating profit margin is also shown to be of lower value in comparison to industry average which shows that the business is underperforming in terms of profitability both considering 1-year averages and 5-year averages.
The asset turnover estimate for the company in 2019 is shown to be 2.82 while the industry average is shown to be 1.49 for 1-year averages and 1.4 in case of 5-year averages. This reveals that the senior management of the company is efficiently managing the assets of the business and generating appropriate profits using the same. The days inventory and days debtors are also in the range of industry averages for both 1-year averages and 5-year averages. A little improvement or supervision can bring about more reduction and therefore it can be said that efficiency is maintained by the business (Carraher and Van Auken 2013). The times debtor ratio and times inventory ratio both are slightly lower than both the averages considered for the analysis and this can be improved by the management of JB Hi fi ltd for the period.
The liquidity ratios show the most desirable results for both the 1-year averages and 5-year averages and this confirms that the management of the company is paying special attention for managing the liquid assets for the business. The current ratio for the business for 2019 is shown to be 1.38 which is equivalent to the averages for 1 years and 5 years. The quick ratio estimates and cash flow estimate is shown to be better than the estimates of industry which is a positive sign for the management of the company.
The estimates which are computed for capital structure ratios shows that they are of higher value than industry average both in terms of 1-year estimate and 5-year estimate. This reveals that the business is highly dependent on debt capital more than other businesses which are operating in the similar industry. The senior officials needs to provide for improvement in the estimate so that efficiency can be maintained in the operations of the business.
The dividend yield ratio for the business of JB Hi fi ltd is shown to be better than that of industry average for both 1-year averages and 5-year averages which demonstrates that the senior officials are dedicated towards the needs of the shareholders and effectively works to maximise the wealth of the shareholders of the entity (Kim, Kraft and Ryan 2013). The price earning ratio for the business is revealed to be low which needs to be improved in comparison to industry averages.
The du-point analysis for the business is done so that an appropriate estimate can be collected regarding the performance of the business and the return which can be provided to the shareholder of the entity. The assessment shows that profit margin for the business is equal to return on equity estimate for the business (Bauman 2014). The computation reveals a value of 0.85% in 2019 which has slightly increased from previous year. The analysis reveals that the seniors goverance needs to make improvements in the profitability aspect for the business so that it can generate more profits and offer more returns to the shareholders of the business. The computation of Du-point analysis is effectively shown below in details:
Du point ANALAYIS |
|
|
|
|
|
Net Profit Margin |
3.52% |
|
3.40% |
|
3.06% |
Return on Assets |
9.91% |
|
9.42% |
|
9.99% |
Financial Leverage |
2.44114548 |
|
2.62948501 |
|
2.88201523 |
ROE |
0.85% |
|
0.84% |
|
0.88% |
The above analysis shows that the business needs to focus on profitability aspect so that the business can further expand the scale of operations and generate more profits in the long run. The recommendation which can be suggested to the management of JB Hi fi ltd for improving the profitability aspect for the business is effectively listed below in details:
The ratio analysis is conducted considering the values which are stated in the financial report prepared for the business. The ratio analysis of profitability shows that the management needs to work on improving the profits further so that the management can offer appropriate returns to the shareholders of the company. The analysis also reveals that the liquidity estimates for the business is appropriate and the same can be used by the management for investing in new projects which can help the business to further enhance the productivity of the business. The analysis also reveals that the senior governance must improve the efficiency of the business by improving the inventory turnover ratio and debtor’s turnover ratio so that the same is lower than the industry average (Vogel 2014). The debtor’s day and inventory day ratio can be further improved by the management of the company so that the efficiency can be improved further in the operations of the business.
The analysis reveals that the estimate for average inventory and debtor are considered for the purpose of computing the inventory turnover and debtor’s turnover ratios for the business. In terms of capital structure ratio, the management of the business needs to reduce the debt capital which is used by the business for financing the operations of the business. The reduction of debt capital would also mean that the interest payment will reduce for the business lowering the interest coverage ratios of the entity. The management needs to rely on more equity capital for maintain an appropriate balance between risk and returns of the company. The equity and debt mix for the business needs to improved so that the business is able to achieve optimum capita structure for conducting the operations of the business in an effective manner. The investment ratios for the business is shown to lower than industry average and the same can eb improved further by the management of the company so that the needs of the shareholders are effectively taken care. In an overall estimate, it can be said that the management of JB Hi fi ltd needs to focus on profitability and dropping the costs of operations for the business so that the profits can be increased further and lower price can be charged for the services and products on offer in the business.
Bauman, M.P., 2014. Forecasting operating profitability with DuPont analysis. Review of Accounting and Finance.
Carraher, S. and Van Auken, H., 2013. The use of financial statements for decision making by small firms. Journal of Small Business & Entrepreneurship, 26(3), pp.323-336.
Doorasamy, M., 2016. Using DuPont analysis to assess the financial performance of the top 3 JSE listed companies in the food industry. Investment Management & Financial Innovations, 13(2), p.29.
JB HI-FI INVESTORS. (2019). Annual Reports | JB Hi-Fi Solutions. [online] Available at: https://investors.jbhifi.com.au/annual-reports/ [Accessed 16 Nov. 2019].
Kim, S., Kraft, P. and Ryan, S.G., 2013. Financial statement comparability and credit risk. Review of Accounting Studies, 18(3), pp.783-823.
Ongore, V.O. and Kusa, G.B., 2013. Determinants of financial performance of commercial banks in Kenya. International journal of economics and financial issues, 3(1), pp.237-252.
Robinson, T.R., Henry, E., Pirie, W.L. and Broihahn, M.A., 2015. International financial statement analysis. John Wiley & Sons.
Vogel, H.L., 2014. Entertainment industry economics: A guide for financial analysis. Cambridge University Press.
Williams, E.E. and Dobelman, J.A., 2017. Financial statement analysis. World Scientific Book Chapters, pp.109-169.
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