Financial Ratio Analysis Of Five Companies

Methodology

API Limited or the Australian Pharmaceutical Limited is the parent company of Soil Pattinson Chemist and Pharmacist Advice and Priceline Pharmacy. Various services provided by the company include the delivery of wholesale products, marketing programs, advisory services for business and retail services (API, 2018). Nick Scali Limited along with its subsidiaries is engaged in retailing and sourcing the household furniture and associated accessories all over New Zealand and Australia. It provides chairs, dining tables, lounges, coffee tables, TV Units, rugs, pendants, mirrors and lamps.

It sells its product through physical stores as well as through online (Nickscali.com.au, 2018). JB Hi FI is engaged in retailing of the home consumer products. It has 2 segments – New Zealand and Australia. It is engaged in selling the consumer electronic services and goods that includes audio equipment, televisions, software, computer, compact discs, blue rays and digital versatile discs (Jbhifi.com.au, 2018). The Reject shop Limited is engaged in discount variety retail shops all over Australia. Various products the company deals with include hardware, basis furniture, home wares, confectionary, kitchenware, household cleaning products and snack foods (Rejectshop.com.au, 2018). Super Retail Group Limited is engaged in retail industry primarily.

Main activities of the company includes retailing of the auto accessories and parts, equipments, tools, camping, retailing of the boating, fishing equipment, apparel, bicycles and retailing equipment (Superretailgroup.com.au, 2018). Blackmores Limited is engaged in selling, developing and marketing natural health products for animals as well as humans all over New Zealand, Australia and Asia. It offers various products for different conditions related to bones, joints, arthritis, brain health, muscles, flu, cold, immunity, exercise, energy and digestive health (Blackmores.com.au, 2018).

Formula for computing ratios –

Ratio computation –

Return on equity – ROE is the profitability measure used for computing the dollar of profit generated by the company with each dollar of the shareholder’s equity. It is considered as an important measure for any entity as it can be compared with the peers and higher ROE represents better financial position. Hence, it is used for comparing the performances of the company. ROE is calculated through dividing the net profit by shareholder’s equity (Greco, Figueira & Ehrgott, 2016). If year 2017 is considered it can be identified that the ROE for the companies are as follows –

• API Limited – 0.09
• Nick Scali Ltd – 0.53
• JB Hi Fi Ltd – 0.20
• The Reject Shop Limited – 0.09
• Super Retail Group Limited – 0.13
• Blackmores Limited – 0.33

However, while computing return on equity, only net profit and equity is taken into consideration. If the company raises additional amount through borrowing for purchasing the plant and equipment it will increase the amount of total assets as well as total liabilities. However, it will not have any impact on net profit as well as on total equity. Hence, if the company raises additional $ 200 million through borrowing for purchasing the plant and equipment it will not have any impact on the return on equity (Uechi et al., 2015).

Debt to equity ratio – D/E ratio is used to measure the leverage position of the entity and it computes the weight of total debts against weights of total equity. It highlights the company’s capital structure to determine whether the debt proportion is higher or the equity proportion. Generally, the high D/E ratio signifies that the entity may not be able to earn sufficient cash for satisfying the obligation of debt.

Results

However, the low D/E ratio may signify that the entity is not availing the advantage of enhanced profits as that may bring the financial leverage. Investors as well as the lenders prefer low D/E ratio as their interests are protected in better way in case the business declines. Hence, the entity with high debt to equity ratio will not be able to attract the additional fund, if any, required for business operation. D/E ratio is computed through dividing the total liabilities including short term as well as long term borrowings and other payables by shareholder’s equity. Hence, if the amount of liabilities increases it will increase the D/E ratio. In the given case, the company borrowed $ 200 million for investing in plant and equipment. It will have direct impact on D/E ratio of the companies as follows –

From the above table it can be identified that for all the companies’ debt to equity ratio has been increased after including $ 200 million loan in debt component. Therefore, it can be stated that raising additional capital through loan or borrowing will increase the debt to equity ratio of the company which in turn will make the company more leveraged.

Comparing and contrasting the financial performance of the companies

• Net profit ratio – net profit margin signifies the profit remained with the firm after paying all the expenses from revenues. It can be found that the net profit margin for API Limited remained same at 1%, for Nick Scali Ltd it increased from 11% to 16%, for JB Hi Fi Limited it reduced from 4% to 3%, for The Reject Shop Limited it remained same at 2%, for Super Retail Group Ltd it remained same at 4% and for Blackmores Ltd it reduced from 10% to 9% over the period from 2015 to 2017. Hence, in terms of profitability Nick Scali Ltd is in best position and API Limited is in worst position among all (Nickscali.com.au, 2018).
• Current ratio – it represents the ability of the company to pay off its short term obligation with the short term assets available with it. If all the companies are compared it can be observed that all the entities are able to pay off the short term obligations with its current assets as their current ratio for all the years are more than 1. However, in terms of liquidity Blackmores position is best and JB Hi Fi Limited’s position is worst as its current ratio has been reduced from 1.67 to 1.32 over the years from 2015 to 2017 (Miller-Nobles, Mattison & Matsumura, 2016).   
• Inventory turnover ratio – it measures the efficiency in terms of the times the company is able to sell or replace its inventories during the particular period of time, generally a year. If all the companies are compared it can be observed that API Limited is most efficient selling or replacing its inventories as compared to others as for all the 3 years its inventory turnover ratio is more than 8 times. Conversely, Super Retail Group Ltd is least efficient as for all the 3 years its inventory turnover ratio is less than 3 times (Wahlen, Baginski & Bradshaw, 2014).
• Asset turnover ratio – it is used for measuring the sales value generated by the company as compared to the asset’s value. It is used as the indicator for the efficiency with which the entity deploys its assets for generating revenue. If all the companies are compared it can be observed that JB Hi Fi Limited is most efficient in deploying it’s assets as compared to others as for 2015 and 2016 its asset turnover ratio is more than 4 times and for 2017 it is 3.27 times. Conversely, Super Retail Group Ltd is least efficient as for all the 3 years its asset turnover ratio is less than 2 times
• Leverage ratio – it is used for measuring the leverage level of the company that is the debt component as compared to the assets. Higher the ratio, the company is considered as more leveraged. It can be found that among all the 6 companies, JB Hi Fi Limited is highly leverages as compared to others and The Reject Shop Limited is lower leveraged among all (Xu et al., 2014).
• Return on equity – ROE is the profitability measure used for computing the dollar of profit generated by the company with each dollar of the shareholder’s equity. It can be found that among all the 6 companies, return on equity for Nick Scali Ltd is highest followed by Blackmores Limited. On the other hand, return on equity for API Limited is lowest followed by Super Retail Group Ltd.
• Return on total assets – it is used to measure earnings of the company as compared to its assets. it measures the performance of the company through comparing the net income generated by it as compared to the capital investment in assets.  It can be found that among all the 6 companies, return on total asset for Nick Scali Ltd is highest whereas the same is lowest for API Limited (Vogel, 2014).
• Earnings per share – it can be identified that the earnings per share for Blackmores Ltd is highest among all whereas it is lowest for API Limited (API, 2018).
• Net debt to equity ratio – D/E ratio is used to measure the leverage position of the entity and it computes the weight of total debts against weights of total equity. It highlights the company’s capital structure to determine whether the debt proportion is higher or the equity proportion. Higher debt equity ratio represents that the company is exposed to interest risk (Arsad, Shaari & Isa, 2017). It can be identified that JB Hi Fi Limited’s D/E ratio is highest and therefore its position is worst among all. On the other hand, The Reject Shop’s D/E ratio is lowest among all and therefore its position is best among all.

Total return to shareholders ratio

It is used to measure the performance of various company’s shares and stocks over the particular period of time. It combines the appreciation or depreciation in share price and dividends paid to the shareholders and are expressed in terms of annualized percentage (Evans & Mathur, 2014). For all the 6 companies following changes have been found in terms of total return to shareholder ratio over the last 3 years period –

• API Limited – from 1.41 in 2015 it has been reduced to 0.35 in 2016 and further reduced to – 0.20
• Nick Scali Ltd – from 0.33 in 2015 it increased to 0.60 in 2016, however fell to 0.42 in 2017.
• JB Hi Fi Ltd – from 0.08 in 2015 it increased to 0.47 in 2016, however fell to 0.14 in 2017 (Jbhifi.com.au, 2018).
• The Reject Shop Limited – from -0.28 in 2015 it increased to 1.18 in 2016, however fell to 0.58 in 2017 (Rejectshop.com.au, 2018).
• Super Retail Group Limited – from 0.07 in 2015 it increased to 0.17 in 2016, however fell to -0.05 in 2017.
• Blackmores Limited – from 2.33 in 2015 it reduced to 0.87 in 2016 and further fell to -0.40 in 2017.

API Limited

The market value can be stated as stagnant during 2014-15, 2015-16 and 2016-17. This is evident with decrease in the total return to shareholders. In 2016-17 this value is depicted to be negative in nature. It needs to be also seen that the Earnings per share of the company is seen to be stagnant in 2015-2017. The net profit margin has also not increased which shows the value of the company to be cheap. However, API has performed fairly well in terms of current ratio and inventory management (Karadag, 2015).

Nick Scali Ltd

The market performance was favourable from 2014-2016. However, in terms of the market performance in 2016-2017, the company’s market share along with other ratios decreased as well. This is evident with inventory turnover increase from 2014-15 to 2015-16, however it decreased in 2016-2017. The company has been able to keep a positive trend in terms of Net profit margin, Return on equity and Return on total assets. This shows that the company can be marked as expensive (Zietlow et al., 2018).

JB HI Fi Limited

The market performance is inferredwith a growing trend from 2014-2017. The performance in 2016-2017 is seen to be decreasing in nature for all the ratios. The market performance in this aspect is recognised to be decreasing with the evaluation based on decreasing total return to shareholders. However, in terms of the EPS the company has shown some significant improvement from 2014-2017. The profit, current ratio, and asset turnover ratio of the company has significantly reduced. Therefore, the company needs to be categorised as cheap.

Discussion

The Reject Shop Limited

The market performance of the company needs to be identified as reducing in terms of EPS and Total returns to shareholders. Moreover, the net profit margin ratio of the company is seen to be stagnant from 2014-2017.The current ratio of the company is depicted with a linear trend. Despite of few setbacks, the overall ratio analysis of the company can be considered to bepositive in nature. Therefore, the company needs to be categorised as expensive (McKinney, 2015).

Super Retail Group Ltd

The market performance of total returns to shareholders is identified to be negative in terms of Total return to shareholders. The increase trend of EPS shows that the company is competent in earning more equity capital. The increasing trend of the profitability ratios along with the other ratios shows that the company needs to be categorised as expensive.

Blackmores Limited

The overall market performance of the company is following a negative trend. This is evident with both negative returns to the shareholders and EPS. Moreover, the net profit of the company is also depicted to be fluctuating in nature. This is considered to be particularly negative for the future prospect. The leverage ratio and Return on equity is also seen to be decreasing in nature. The overall depiction of the market performance and ratio analysis shows that the company is identified to be cheap in nature (Renz, 2016). 

Reference 

API. (2018). About Us – API. [online] Retrieved 3 November 2018, from https://www.api.net.au/about-us/

Arsad, R., Shaari, S. N. M., & Isa, Z. (2017, November). Comparative study on DuPont analysis and DEA models for measuring stock performance using financial ratio. In AIP Conference Proceedings (Vol. 1905, No. 1, p. 040007). AIP Publishing.

Blackmores.com.au. (2018). BLACKMORES Vitamins & Supplements – Australia’s #1. [online] Retrieved 3 November 2018, from https://www.blackmores.com.au/

Evans, J. R., & Mathur, A. (2014). Retailing and the period leading up to the Great Recession: a model and a 25-year financial ratio analysis of US retailing. The International Review of Retail, Distribution and Consumer Research, 24(1), 30-58.

Greco, S., Figueira, J., & Ehrgott, M. (2016). Multiple criteria decision analysis. New York: Springer.

Jbhifi.com.au. (2018). JB Hi-Fi | JB Hi-Fi – Australia’s Largest Home Entertainment Retailer. [online] Retrieved 3 November 2018, from https://www.jbhifi.com.au/

Karadag, H. (2015). Financial management challenges in small and medium-sized enterprises: A strategic management approach. EMAJ: Emerging Markets Journal, 5(1), 26-40.

McKinney, J. B. (2015). Effective financial management in public and nonprofit agencies. ABC-CLIO.

Miller-Nobles, T. L., Mattison, B., & Matsumura, E. M. (2016). Horngren’s Financial & Managerial Accounting: The Managerial Chapters. Pearson.

Nickscali.com.au. (2018). Nick Scali | Lounge, Dining & Occasional Furniture | Nick Scali Furniture. [online] Retrieved 3 November 2018, from https://www.nickscali.com.au/

Rejectshop.com.au. (2018). The Reject Shop | Homepage. [online] Retrieved 3 November 2018, from https://www.rejectshop.com.au/

Renz, D. O. (2016). The Jossey-Bass handbook of nonprofit leadership and management. John Wiley & Sons.

Superretailgroup.com.au. (2018). Home – Super Retail Group . [online] Retrieved 3 November 2018, from https://www.superretailgroup.com.au/

Uechi, L., Akutsu, T., Stanley, H. E., Marcus, A. J., & Kenett, D. Y. (2015). Sector dominance ratio analysis of financial markets. Physica A: Statistical Mechanics and its Applications, 421, 488-509.

Vogel, H. L. (2014). Entertainment industry economics: A guide for financial analysis. Cambridge University Press.

Wahlen, J., Baginski, S., & Bradshaw, M. (2014). Financial reporting, financial statement analysis and valuation. Nelson Education.

Xu, W., Xiao, Z., Dang, X., Yang, D., & Yang, X. (2014). Financial ratio selection for business failure prediction using soft set theory. Knowledge-Based Systems, 63, 59-67.

Zietlow, J., Hankin, J. A., Seidner, A., & O’Brien, T. (2018). Financial management for nonprofit organizations: Policies and practices. John Wiley & Sons.

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