Cash flow analysis for JB HI-FI‘s investment and financing activities in 2017
The company listed on ASX chosen for this particular task is JB HI-FI. The latest annual report and corresponding financial statements are available for the year ending on June 30, 2017.
- The relevant extracts pertaining to the cash flow from operations for the company are highlighted as shown below (JB Hi-Fi, 2017).
Based on the above extract, the key items have been described as follows (JB Hi-Fi, 2017).
- “Receipts are customers”– This would indicate the monies that have been received from the consumers during the year by selling the underlying products. It is essential to differentiate between revenue and the customer receipts since the former is accrual in nature and identified in the income statement unlike the latter which is based on cash and hence represented in the cash flow statement. Considering the company has acquired a business, hence the operational cash flows have enhanced in excess of 40% in FY2017 over the previous year.
- “Payments to suppliers and employees” – The company in order to continue with the business needs support from suppliers and employees. This item captures the cash amount that is paid to the suppliers and employees during the given year. Any future provisions with regards to employee benefit would not be visible here. The acquisition of the new business has led to significant increase not only in customer receipts but also corresponding payments.
The relevant extracts pertaining to the cash flow from investment for the company are highlighted as shown below (JB Hi-Fi, 2017).
Based on the above extract, the key items have been described as follows (JB Hi-Fi, 2017).
- “Payment for business combination” – This amount in cash has been spent by the company for business acquisition. In case of the most recent year i.e. FY2017, business has been acquired by the company for a consideration amount of $ 836.6 million.
- “Payments for plant and equipment” – This amount in cash has been spent by the company for plant and equipment acquisition. In case of the most recent year i.e. FY2017, plant and equipment has been acquired by the company for a consideration amount of $ 49.1 million which does not indicate a major change over the previous year.
- “Proceeds from sale of plant and equipment” – This amount in cash has been obtained by the company for plant and equipment disposal. In case of the most recent year i.e. FY2017, this amount is $0.2 million which is quite nominal in comparison to the size of the total cash flows from investment.
The relevant extracts pertaining to the cash flow from financing for the company are highlighted as shown below (JB Hi-Fi, 2017).
Based on the above extract, the key items have been described as follows (JB Hi-Fi, 2017).
- “Proceeds from issues of shares” – This amount in cash has been received from the issue of shares for the given year. In case of the most recent year i.e. FY2017, this amount is $ 395.9 million which is significant higher than the corresponding amount for FY2016 that stood at $ 6 million.
- “Proceeds/(repayment) of borrowings” – This amount in cash highlights the amount of borrowings taken or repaid depending on whether there is a cash inflow or outflow respectively. In the most recent year i.e. FY2017, the borrowing level has increased which is not surprising considering the acquisition completed by the company.
- The cash flow trends to JB Hi-Fi are captured below (JB Hi-Fi, 2017).
With regards to cash flow on account of operating activities, there is a positive trend considering that this amount is increasing on a y-o-y basis albeit by a small amount only. The cash outflow on account of investing activities was quite mild for FY2016, FY2015 but then there is a surge in the cash outflow in FY2017 which is fuelled by the acquisition by the company which accounts for more than 95% of the total outflow witnessed. The cash outflow on account of financing activities is proof of the conscious effort by the company to limit the debt levels and provide balance sheet some strength. Equity capital has also been raised in order to improve the leverage ratios. However, the trend has reversed in FY2017 when owing to the huge acquisition in excess of $ 800 million, company had to increase the debt but a good aspects for the stakeholders is that this has been supplemented with equity financing so that balance sheet does not become over-leveraged (Damodaran, 2015).
- Key items are described below.
- “Changes in the fair value of cash flow (hedges) net of tax” – Owing to foreign presence of company, it earns revenue in foreign currency which would eventually be converted into AUD. As a result, there is a currency exchange rate risk which crops up and in order to minimise the same, cash flow hedges are put in place as risk management tools. However, these are financial instruments which exhibit daily fluctuations in accordance with the currency exchange rate. As a result, their fair value keeps on changing and the difference between the fair value at the year beginning and year ending is recorded under OCI statement (Petty et. al., 2015).
- Exchange differences on translation of foreign operations” – Owing to foreign presence of company, it earns revenue in foreign currency which would eventually be converted into AUD. But there is a time delay in this conversion which leads to realisation of possible gains and losses recorded under OCI statement (Arnold, 2015).
- The requisite reasons for separation of OCI statement from the traditional income statements find mention below (Brealey, Myers and Allen, 2014).
- The financial reporting norms require that certain items are recorded under OCI statement and hence reporting entities have to comply with the same.
- Unlike P&L statement entries which result in actual gains or losses, in case of OCI certain items recorded do not have actually realised any profit or loss but are highlighting notional quantities which are liable to change in the future.
- The role of these items is not to directly lead to any income for the firm but rather these are essentially assets for the company or risk management tools and the value changes are typically recorded under OCI statement
- For the year ending on June 30, 2017, the tax expense for the company has been reported in the income statement as $ 86.8 million (JB Hi-Fi, 2017).
- For FY2017, the tax before profit has been reported at $ 259.2 million. If this multiplied by 30% which happens to be the corporate tax rate at the time, then the tax expense should be $ 77.8 million which does not match with the actual tax expense reported. The actual tax expense is about $ 10 million greater. This deviation can be answered taking assistance from the following extract (JB Hi-Fi, 2017).
It is evident that while the actual tax expense uses the computation the theoretical tax expense as the key initiating point and further makes reconciliation adjustments which become a necessity since the rules relating to tax and accounting income tend to differ. The income tax expense which was computed earlier is in accordance with the accounting concepts but eventually since tax paid is linked to total income tax payable, it is essential that the tax expense should reflect the income tax rules applicable which has been done here (JB Hi-Fi, 2017).
- Deferred Tax Assets
These would capture those long term tax assets whose origin is attributed to the current transactions and in future would lead to tax savings. As on June 30, 2017, about $ 105 million of deferred tax assets have been reported by the company with the following split. Also, it is noticeable from the breakup that the deferred tax assets have shown significant increase in FY2017 owing to deferred revenue based temporary difference (JB Hi-Fi, 2017). These assets tend to arise because deviation in tax and accounting rules lead to temporary differences between created in the carrying value of various items.
These would capture those long term tax liabilities whose origin is attributed to the current transactions and in future would lead to tax outflow. As on June 30, 2017, about $ 113.2 million of deferred tax liabilities have been reported by the company with the following split. Also, it is noticeable from the breakup that the deferred tax liabilities have shown significant increase in FY2017 owing to brand name based temporary difference (JB Hi-Fi, 2017). These liabilities tend to arise because deviation in tax and accounting rules lead to temporary differences between created in the carrying value of various items.
- In accordance with the balance sheet of the company for FY2017, it is apparent that on the last day i.e. June 30, 2017, the company had current tax liability of about $ 11.8 million. The same figure for the previous year stood at a lower amount i.e. $ 10.9 million. As this item is realised under current liability, thus the tax outflow on account of this would occur before June 30, 2018.
The income tax expense and income tax payable tend to show deviations. This typically happens because of the difference in underlying definition of these two integral concepts. The income tax expense as reported in the income statement would refer to the tax for the whole year that the reporting entity ought to pay the ATO. However, it is essential to note that over the year through way of advance tax, a significant portion of the tax expense has already been given to the tax expense and at times this could be more than 100% of the tax expense. Tax payable on the other hand essentially refers to the tax for the given year that still is pending and hence payable to the tax department or ATO. Thus, tax payable = Tax expense – Tax paid (Parrino and Kidwell, 2014).
- The income tax expense (i.e. $ 86.8 million) and income tax paid ($96.8 million) do not match for FY2017. Two main reasons are attributed for the above difference as highlighted below (Damodaran, 2015).
- Some amount of tax paid in FY2017 may be on account of tax payable which was pending at the end of FY2016 and thus only a part of the total tax paid has been made for FY2017.
- Further, since tax expense computation is performed only after the year ends, hence during the year the management cannot possibly accurate pre-empt the tax expense and cannot ensure that tax paid and tax expense for a year are same.
- One aspect that caught a lot of attention from my end was the schedule regarding income tax expense computation as the divergence of the theoretical income tax expense and the actual income tax expense came as a big surprise for me. The need for reconciliation can be understood concerning the divergence in rules applicable for tax income and accounting income. Also, the role played by deferred assets and liabilities was a major take away for the analysis of the given company.
References
Arnold, G. (2015) Corporate Financial Management. 3rd ed. Sydney: Financial Times Management.
Brealey, R. A., Myers, S. C., & Allen, F. (2014) Principles of corporate finance, 2nd ed. New York: McGraw-Hill Inc.
Damodaran, A. (2015). Applied corporate finance: A user’s manual 3rd ed. New York: Wiley, John & Sons.
JB HI-FI (2017) Annual Report 2017 [online] Available at https://www.jbhifi.com.au/Documents/2017%20Annual%20Report.pdf
Parrino, R. and Kidwell, D. (2014) Fundamentals of Corporate Finance, 3rd ed. London: Wiley Publications
Petty, J.W., Titman, S., Keown, A., Martin, J.D., Martin, P., Burrow, M., & Nguyen, H. (2015). Financial Management, Principles and Applications, 6th ed.. NSW: Pearson Education, French Forest Australia.
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
