Financial Accounting In Economic Context: Analysis Of Harvey Norman And JB Hi-Fi

Vertical Analysis

Discuss about the Financial Accounting in Economic Context.

The report aims to present a detailed analysis of two Australian largest retailers listed on ASX; that is, Harvey Norman and JB Hi-Fi. The analysis entails vertical analysis of companies’ income statement and balance sheet, ratio analysis and the recent events that could have affected their performance since the fiscal year ending June 2016. This would be very important to potential investors willing to invest in either of the two companies, since it would assist them in differentiating which of the two companies would be more profitable and more viable for them.

As shown in the vertical analysis of the two companies, it is evident that gross profit margin for JBH increased as from 21.21% in 2014 to 21.88% (JB Hi-Fi 2016). Furthermore, the net income margin for JBH has also gained significant increase over the past three years as from 3.67% in 2014 to 3.84%, meaning that the company profitability has improved over the last three years. On the other hand, based on JBH balance sheet analysis, it is evident that total current assets to total assets over the past three years increased significantly as from 67.21% in 2014 to 70.87% (JB Hi-Fi 2015). Contrary, based on the balance sheet analysis of JBH, it is evident that its non-current assets to total assets decreased as from 32.79% to 29.23% in 2016. This means that the company has relatively higher assets that are could be converted to cash easily as compared to fixed ones. Furthermore, its total liabilities to total assets have been experiencing a significant increase moving as from 65.70% in 2014 to 59.27% in 2016. This means that the company has been insignificantly depending on creditors to finance their assets.

On the other hand, based on Harvey Norman Holding income statement analysis, it is evident that its gross profit margin over the past three years experienced a slight increase as from 56.26% in 2014 to around 56.40% in 2016 (Harvey Norman Holdings 2016). On overall, its net income margin increased as from 8.71% in 2014 to around 12.35% in 2016; meaning that for the past three years, Harvey Norman experienced an improved profitability. By looking at Harvey Norman balance sheet analysis, it is evident that its total current assets to total assets experienced asymmetric trend in the past three years moving as from 38.04% in 2014 to 38.45% in 2015 and then to 36.24% in 2016 (Harvey Norman Holdings 2015). Further, it is evident that its total liabilities to total assets for the past three years decreased as from 41.51% in 2014 to 39.85% in 2016, meaning that it does not rely heavily on creditors in financing its assets.

Current Ratio

This is the financial ratio used in measuring an organization’s capacity in paying its current liabilities with current assets (Jopling, Lucas & Norton 2004). High current ratio would show that the firm has adequate current assets in maintaining normal operations. It is usually computed as follows;

From on the current ratio analysis, it is evident that JBH experienced a decreasing trend. This is based on the fact that the company current ratio decreased from 1.642 in 2014 to 1.573 in 2016. On the other hand, HVN current ratio increased from 1.273 in 2014 to 1.31 in 2015 but later decreased to 1.26. By comparing the two companies using their current ratios, it is evident that JBH is performing relatively better in terms of settling its current obligations as compared to Harvey Norman Holdings.

This is a capital structure ratio used in measuring percentage of the total assets which is provided by creditors. In addition, debt ratio helps in measuring extent of an organization of using gearing (Pratt 2013). This ratio is usually computed by dividing total debts by total assets.

From the above analysis, it is evident that JBH debt ratio decreased significantly over the last three years. This is evident by a decreasing trend as from 0.66 in 2014 to 0.59 in 2016. On the other hand, HVN debt ratio also experienced a decreasing trend as from 0.415 in 2014 to 0.398 in 2016. This is a clear indication that both firms do not over rely on debts or creditors in financing their assets.

This is a financial ratios used to measure the rate of return that is earned via the total assets provided by owners and creditors (Boland & Birt 2010). In this case, ROA for the two companies is computed as follows;

Based on the above analysis, it is evident that JBH ROA experienced an increasing trend over the past three years moving as from 22.33% in 2014 to 23.53% in 2016. On the other hand, HVN ROA also experienced an increasing trend over the same period moving as from 7.98% in 2014 to 11.90% in 2016.

Company that is More Profitable Based on Income Statement Analysis

Based on the income statement issues pointed the first and second issues above, it is evident that HVN is more profitable as compared to JBH. This is based on the fact that HVN net profit margin and gross profit margin were relatively higher over the past three years as compared to JBH. In addition, HVN is more profitable than JBH since the company has relatively lower debt ratio for the past three years as compared to JBH. Further, HVN is more profitable as compared to JBH since by looking at its operating profit margin, it is evident that the margin increased as from 9.28% in 2014 to 11.39% in 2016 while JBH margin increased as from.48% in 2014 to 5.59% in 2016, meaning that HVN operating income margin was higher than JBH.

Debt Ratio

Based on balance sheet analysis, it is evident that JBH has better financial position as compared to HVN. This is mainly based on the fact that, JBH has higher total current assets to total assets ratio as compared to HVN for the past three years, meaning that it can convert its assets to cash easily to pay its debts as compared to HVN. On the other hand, JBH has the best financial position compared to HVN since it has lower total non-current assets to total assets as compared to HVN. Finally, it is evident that JBH has the best financial position of better balance sheet as compared to HVN since the company had relatively higher total current ratios for the past three years as compared to HVN.

Harvey Norman and JB Hi-Fi are Australian largest retailers listed on ASX. Harvey has market cap of around $5.5 billion while JBH has market cap of around $3 billion. Recently, JBH acquired The Good Guys which at first seemed as a smart move (Harrison 2016). This is mainly based on the fact that the move would make this business one of the largest retailer of the home appliances with approximately 29% of market share and the prominent retailer of the consumer electronic products with around 24% of market share. In addition, not only is acquisition of The Good Guys by JBH expected to grow the company EPS by around 11.7% in the fiscal year 2017, but its EPS is also anticipated to grow by significant margin of 13.5% in the fiscal year 2018. With these, JBH current price/earnings ratio might be relatively a decent worth. The event by JBH is relatively good for the company‘s future since it seems to result in significant growth in the company’s profit or earnings in future (Richards 2016). In addition, this event is good since it is expected to help the company achieve significant growth in future. The move is also good since it would put more pressure on its competitors; hence, a high probability of attaining competitive advantage over the competitors.

On the other hand, after JBH deal with The Good Guys, Harvey Norman which had some hope of getting shot at acquiring The Good Guys was facing very tough competition both in consumer electronics and appliance market (Cummins 2016). This event is bad for Harvey Norman Holdings since it expected to result in share price decrease which would in turn result in slammed shares. In addition, the event is bad since it is expected to expose the company to franchisee losses and around $1.15 billion loss.

Conclusion

In conclusion, it is evident that JBH would offer a better investment opportunity for potential investors as compared to HVN. This is based on the fact that the company had relatively higher ROA over the past three years as compared to HVN, meaning that the management is efficient enough in generating income from assets. In addition, I would recommend potential investors to invest in JBH since the company has a high potential of generating higher earnings in future given its recent event of acquiring The Good Guys, which is expected to result in increased EPS in future.

References

Boland, G & Birt, J 2010, Study Guide to accompany Accounting: business reporting for decision making. John Wiley & Sons Australia.

Cummins, C 2016, Amazon Australia expansion set to shake up JB Hi-Fi and Harvey Norman ;Viewed at 4^th May 2017 from; https://www.smh.com.au/business/retail/disruptor-amazon-set-to-shake-up-jb-hifi-and-harvey-norman-20160926-groe32.html

Harrison, T 2016, How Amazon could wreck JB Hi-Fi Limited & Harvey Norman Holdings Limited; Viewed at 4^th May 2017 from; https://www.fool.com.au/2016/11/07/how-amazon-could-wreck-jb-hi-fi-limited-harvey-norman-holdings-limited/

Harvey Norman Holdings 2015, Harvey Norman YE 30 June 2015 (with 2014 comparatives); Viewed at 4^th May 2017 from; https://www.harveynormanholdings.com.au/pdf_files/2015-Annual-Report.pdf

Harvey Norman Holdings 2016, Harvey Norman YE 30 June 2016 (with 2015 comparatives); Viewed at 4^th May 2017 from; https://www.harveynormanholdings.com.au/pdf_files/2016-Annual-Report.pdf

JB Hi-Fi 2015, JB Hi-Fi YE 30 June 2015 (with 2014 comparatives); Viewed at 4^th May 2017 from; https://www.jbhifi.com.au/Documents/Annual%20Report%20-%202015.pdf

JB Hi-Fi 2016, JB Hi-Fi YE 30 June 2016 (with 2015 comparatives); Viewed at 4^th May 2017 from; https://www.jbhifi.com.au/Documents/2016%20JB%20Hi-Fi%20Annual%20Report_ASX.pdf

Jopling, R, Lucas, P & Norton, G 2004, Accounting for Business: A Non-accountant’s Guide. McGraw-Hill Higher Education.

Meigs, RF, Lam, WP & Mallouk, BM 2002, Financial accounting. McGraw-Hill Ryerson.

Pratt, J 2013, Financial accounting in an economic context. Wiley Global Education.

Richards, D 2016, COMMENT: Harvey Norman Facing Tough New Competition Following The Good Guys Deal; Viewed at 4^th May 2017 from; https://www.channelnews.com.au/comment-harvey-norman-facing-tough-new-competition-following-the-good-guys-deal/

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