Comparative Financial Analysis Of Two Australian Public Companies

Equity Analysis

With the ramified changes, every Organizaiton needs to use proper financial reporting in it books of accounts. Before a discussion can be made regarding the things to be discussed in the report, a brief understanding of the two companies is required. This report has been used to make an assessment and gather an understanding of the major requirements that are essential for the analysing the financial details of two company. Every detail has been carved in a form of comparative analysis between both the companies.

JB Hi-Fi is in the business of retailing and is listed on Australian Stock Exchange. The company is a market leader when it comes to electronics and supersedes when it comes to the sale of DVDs, CDs, mobile phones, video games, and etc. Melbourne marks the area where the shopping centre of the company is located.

Working in the retailing industry at a multi-national level, Harvey Norman works in the business of furniture, computers, bedding, communications, and certain electrical products sold in the consumer market. The operation of the company is maintained in the franchisee form. All the operators intended to the business are required to operate as a franchisee of the company.

1. The table presented down gives a list of the individual items of each of the company’s equity:

The different components presented in the shareholders’ equity are explained as follows:

Common shares are on the preferable list of some of the investors due to their high risk and high profit nature. The common stocks for both JB Hi-Fi and Harvey Norman Holdings have shown a rise in the year 2018 due to issuance of new shares (Lashgari, 2015).

The kind of owned instruments that do not fall in the common stock are included in the equity instruments. These include securities having equity nature. E.g. share warrant instruments, notes, share papers, and etc.  A rise is also shown as compared to the previous financial years in case of both the companies.

The retained earnings represent the share of profits that the company has earned over a couple or the current financial year and has used the same by investing it back in the company. No dividends have been paid or reserves been made out of this share. An increment in the retained earnings shows that the company is good at its profitability and is able to save enough after paying of all the due obligations and dividends. This strength is seen in the case of both the companies used in the current assignment (Baloch, et. al 2015).

Debt and Equity Position

This shows the total of unrealised losses and gains that have been reported by the organisation for the current and/or previous financial years. For the JB Hi-Fi limited, the total of the accumulated other comprehensive income has shown a decline, but for the Harvey Norman Holdings Limited, the same has risen (Black, 2016).

2. 

The above analysis shows that the company JB Hi-Fi Limited is more levered and is gaining the advantage of tax deduction on interest paid on the certain borrowed funds. However, the Harvey Norman Limited is working with the owned funds more in comparison with the borrowed funds. The risk is less but the ability to reduce the tax expense is very low. In comparison with the previous year the equity for both the companies has shown a rise, which may have a negative impact on the return on capital employed but is necessary for the expansion of business. Also, the risk of low return is reduced with increasing profits (Geske, Subrahmanyam, and Zhou, 2016).

3. The main activities of the cash flow shall be discussed here. The receipt from customers depicts the revenue that the company has generated on the sale. Both companies have reported high revenue as compared to the past year (Hui, Nelson, and Yeung, 2016). The main investing activity includes the acquisition of plant and property which has risen in the current year. This amounts a solid proof for the going concern and expansion  (Gordon, et. al 2017). The changes are presented in form of a table.

Cash Flow Sample Statement

4. 

• The cash used by the investing activities has fallen because of no business combination as was there in financial year 2017. The generation of cash by operating activities has risen for the rising revenues. Owing to no big public issue the financing activities have shown large cash outflow as compared to the financial year 2017.

• A large number of investments and properties have been purchased that has rose the cash used by investing activities. Rest of the activities have not shown much change as compared to financial year 2016.

5. From the tables presented in the two parts above, the status van be compared for both the companies. The investing activities’ cash flow position has improved highly in case of JB Hi-Fi Limited if the figures are looked. Harvey Norman’s investing activities are generating high cash outflows year by year, but the same is showing a declining trend in case of JB Hi-Fi. The most obvious reason is no business combination in the current financial year in JB Hi-Fi.

As far as the operating activities are seen, although the cash inflow amount is high in case of Harvey Norman, but the relative position is lacking as compared to JB Hi-Fi. When financing activities are seen, JB Hi-Fi is depicting cash outflows way higher than Harvey Norman.

6.

• OTHER COMPREHENSIVE INCOME STATEMENT FOR JB HI-FI LIMITED

• OTHER COMPREHENSIVE INCOME STATEMENT FOR HARVEY NORMAN HOLDINGS LIMITED

7. Every corporation that has listed for the public share issues is required to transparently issue its financial statements for the public reading and use. The financial statements have a requirement to be prepared in accordance with the accounting standards. These accounting standards need to be modified and lined on the footprints of the International Financial Reporting Standards (IFRS) for some entities who are required to follow the requirements of such IFRS (Xu, and Qi, 2017). Or the companies may opt to follow the IFRS itself. Certain items that have been mentioned in the above part have a special requirement as specified by the IFRS to be reported separately. That is why these have not been shown in the income statement of the both entities (Schaberl, and Victoravich, 2015).

Cash Flows Analysis

8. The comparative analysis is shown by the table below:

• The other comprehensive income reported by the Harvey Norman limited is higher. This company has a higher share when it comes to foreign transactions and revaluation.
• If these items were to be included in the income statement, then the profit attributable to the shareholders of JB Hi-Fi would have risen, while for the Harvey Norman Holdings Limited, it would have fallen.

9. All the transactions that are visible in the other comprehensive income are a result of the external environment of the entity and fairly not in control. So the managers cannot be bulked with the load of these. All they can do is resort to hedging for the adverse effects (Tessema and Deumes, 2018).

10. The tax expense for both the companies is shown in the table presented below:

11. Effective tax rate = Income Tax Expense

      Earnings before tax

• JB Hi-Fi limited has a higher effective income tax rate.

12. 

The deferred income tax liabilities are created because of the timing differences. When the entity has a taxable income which lacks behind the accounting income, then the entity pays less tax than what is required to be paid on the accounted income. As a result the future liability rises. To make a counter for the same in the financial accounts a deferred tax liability account is opened (Mullinova, and Simonyants, 2016).

The timing differences caused in Harvey Norman are due to revaluations pertaining to property and investments, non-allowable depreciation, reversal of building depreciation, difference in carrying amount of computer software, and other research and development. However, for JB Hi-Fi, the difference is created due to certain account balances being inventories, provisions, brand names, prepayments, and deferred revenue (Yasseen, Jansen, and Small, 2016).

13. The deferred tax liability for JB Hi-Fi limited has fallen, while for Harvey Norman Holdings Limited, there is a rise in the deferred income tax liabilities.

14. Cash tax amount represents the amount of tax that the company actually pays to the government from its pre-tax operating income. The same has been attained from the cash flow statement of the company. The following table represents the same:

15. Cash tax rate = cash tax amount

  Pre-tax operating income

• JB Hi-Fi Limited has a higher cash tax rate as compared to the Harvey Norman Holdings Limited.

16. The cash tax rate represents the rate that calculates the tax whose payment has been made to the government authorities. While the effective tax rate is the tax rate that calculates the tax that the company is liable to pay irrespective of the timing differences. The book tax rate computes the taxes on the book figures. There is a difference between both the rates due to the leverage use by the company and the certain temporary differences that generate deferred tax liabilities and deferred tax assets (Dyreng, et. al 2017).

Conclusion

The comparative analysis shown for both the companies has given a clear understanding of the different concepts related to financial reporting. Both the companies are generating profit and are following the corporate tax treatment as expected by the tax laws.

References

Baloch, Q.B., Ihsan, A., Kakakhel, S.J. and Sethi, S., 2015. Impact of Firm Size, Asset Tangibility and Retained Earnings on Financial Leverage: Evidence from Auto Sector, Pakistan. Abasyn University Journal of Social Sciences, 8(1). 19-45

Black, D.E., 2016. Other comprehensive income: a review and directions for future research. Accounting & Finance, 56(1), pp.9-45.

Dyreng, S.D., Hanlon, M., Maydew, E.L. and Thornock, J.R., 2017. Changes in corporate effective tax rates over the past 25 years. Journal of Financial Economics, 124(3), pp.441-463.

Geske, R., Subrahmanyam, A. and Zhou, Y., 2016. Capital structure effects on the prices of equity call options. Journal of Financial Economics, 121(2), pp.231-253.

Gordon, E.A., Henry, E., Jorgensen, B.N. and Linthicum, C.L., 2017. Flexibility in cash-flow classification under IFRS: determinants and consequences. Review of Accounting Studies, 22(2), pp.839-872.

Hui, K.W., Nelson, K.K. and Yeung, P.E., 2016. On the persistence and pricing of industry-wide and firm-specific earnings, cash flows, and accruals. Journal of Accounting and Economics, 61(1), pp.185-202.

Lashgari, M., 2015, January. RETURN ON COMMON STOCK. In Allied Academies International Conference. Academy of Accounting and Financial Studies. Proceedings(Vol. 20, No. 1, p. 19). Jordan Whitney Enterprises, Inc.

Mullinova, S. and Simonyants, N., 2016. Reflection of a deferred tax liability in the credit union reporting according to IFRS (IAS) 12″ Income taxes”. Modern European Researches, (1), pp.83-88.

Schaberl, P.D. and Victoravich, L.M., 2015. Reporting location and the value relevance of accounting information: The case of other comprehensive income. Advances in accounting, 31(2), pp.239-246.

Tessema, A. and Deumes, R., 2018. SFAS 133 and income smoothing via discretionary accruals: The role of hedge effectiveness and market volatility. Journal of International Financial Management & Accounting, 29(2), pp.105-130.

Xu, W. and Qi, M., 2017. Presentation Pattern and the Value Relevance of Comprehensive Income—Evidence from China. International Journal of Economics and Finance, 9(6), p.31.

Yasseen, Y., Jansen, J. and Small, R., 2016. Accounting for deferred taxation: accounting technical. Professional Accountant, 2016(27), pp.14-16.

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