Working Capital Management Corporate Performance And Financial – Ratio Analysis Of Harvey Norman Limited And JB Hi-fi Limited

Ratio analysis of JB Hi-fi Limited

Discuss about the Working Capital Management Corporate Performance And Financial.

Performance valuation has become an important management technique used to evaluate past performances and make strategies for growth and development. There are various techniques that are used by management of a company for performance evaluation and one of the most popular techniques is ratio analysis. Ratio analysis helps in establishing a meaningful relationship between two or more financial figures which can be used to evaluate different aspects of the business (Baños-Caballero et.al, 2014). Here ratio analysis of two companies has been conducted to evaluate their preferences. In addition to individual performance evaluation, the comparison is also made between ratios of these two companies. Companies taken into consideration for such evaluation are Harvey Norman Limited and JB Hi-fi Limited. Both of these companies are working in Australian retail industry. Australian retail market is highly competitive that makes performance evaluation more vital for growth and development. From a general overview, it can be said that Harvey Norman is a larger company as compared to JB Hi-fi limited if the size of market capital and yearly revenue generated is considered.

Ratio analysis is a management technique that is used to analyse past performance of the company and compare its current financial and operational position with its past performances (Sujová, 2013). Here ratio analysis of JB Hi-fi limited has been done for the financial year 2016 and 2017. All ratios are divided into following five major categories.

It is the ratio that is used by investors and other interested stakeholders to analyse the short-term liquidity position of the company. This ratio analyses the ability of the company to meet its current liabilities. The ideal current ratio is considered as 2:1 but it might change from industry to industry (Juan García-Teruel and Martinez-Solano, 2007). Therefore best comparison in this scenario can be done with the help of pat year current ratio. The current ratio is decreased in 2017 as compared to 2016 which is the result of a substantial increase in current liabilities in 2017. It can be maintained by investment in highly profitable short-term investments.

The quick ratio is similar to current ratio with a small difference where quick assets are used to calculate instead of current assets. Assets like prepaid expenses and inventory are excluded as they are not readily convertible into cash by the company. A quick ratio of the company has decreased marginally but still, it is very high. That shows that company has strong immediate liquidity position (Agha, 2014).            

Short term financial ratios/ Liquidity ratios

These ratios depict the long term financial position of the company as it takes into account various components of the capital structure of a company. Two such ratios are discussed here taking the financial statements of JB Hi-fi limited into account.

All assets in an organisation are financed with the help of capital introduced by shareholders or external funds. These sources of capital can be divided into two components that are debt and equity. Maintaining efficient ratio between these components is very important as they have their own advantages and disadvantages on performance and operability of the company. 2:1 is considered to be an ideal debt to equity ratio but it is dependent on other factors such as the size of the organisation, nature of the business, economic conditions of industry, availability of finance etc. (Feld et.al, 2013).   

In this year debt to equity ratio of the company has increased from .272 to .655 which is a good sign for the company as ratio .272 shows overdependence on equity shareholders for financing. Certain debt component is required in the capital structure of the company with growth and development of the company.

Interest coverage ratio shows the number of times that a company can pay off its interest expenses as interest payment of long term debt is an essential requirement in business. Interest coverage ratio has decreased in the current year compared to previous year as interest expenditure has increased due to increase in long term debt funds.            

These are the ratios that help in analysing the operational efficiency of the company in respect of utilisation of available resources. These ratios are generally used by management of the company to identify operational problem areas and take corrective actions.

It shows the operational efficiency of the company to use the assets employed in the business. It can be said from the data presented in above table that operational efficiency to use total assets has increased substantially in the current financial year. The ratio has decreased from .153 to .070 in the current year (Van Der Aalst et.al, 2016).

This ratio shows the revenue generation capability of the company with the help of available assets in business (Dumas et.al, 2013). Both revenue and total assets have increased in the current year as compared to previous financial year but assets have increased at a higher rate as compared to revenue. This can also be analysed with the help of fall in interest coverage ratio in the current year.              

Long term solvency/ Financial leverage ratio

There are very common ratios that are used by shareholders and potential investors to analyse the profitability of the company. These are also used by management to form prospective business strategies for future.         

Net profit of the company in the current year has decreased in the current year as net profit has not increased at the same rate as compared to increase in total revenue of the company. The most common reason for such scenario is an increase in indirect expenses which can be controlled by implementing cost controlling techniques (Palepuet.al, 2013).

Operating profit is the profit is the profit that is earned by the company before deducting interest and tax expenses. Operating margin ratio of JB Hi-fi limited has decreased BY 23% in a current year which is not preferable for a growing company. This can be improved by the company by adopting principles of economies of scale, cost-benefit analysis, break-even analysis etc. (Vogel, 2014).    

These ratios help in analysing the current market value of the company with the help of its market value on the stock exchange. This ratio helps in deterring whether share price of the company is valued as per its potential future earnings or not (Trugman, 2016).

This ratio considers the concept of earring for valuation of the company. EPS quantify the returns that are generated by the company for each of the shareholders. As net profits of JB Hi-fi have increased in the current year, a slight increase in EPS can also be observed. But if the increase in total assets and revenue is considered then it can be said that present increase in EPS is not ideal.

It helps in depicting a relationship between dividend distributed by the company and its market value. In simple words, dividend yield ratio shows the portion of the market value of the company that is distributed in for of dividend (Bandurov, 2015). The dividend yield of the company has increased in the current year as both dividend per share of the company and market value of the company at the end of the financial year has increased.

Current ratio

Quick ratio

On the other hand, liquidity position of Harvey Norman Limited during both years has shown adequate results. Harvey Norman Limited has adequate current assets or liquidity in the business organisation that can be used to repay their current debt very effectively. In case of Harvey Norman Limited, it has been observed that management has invested a higher amount of cash in inventories during both the years. On the other hand, their credit policy (credit receivables policy) is also not adequate because a huge amount of trade debtors are lying in the outstanding (Diana Elena Vasiu et.al, 2015). Acid test ratio suggests underutilisation of current assets in the business operations. In both the years acid test ratio is higher than 1 time; therefore this suggests that there are current assets which are not yet used in business operations. In terms of current liabilities, Harvey Norman has taken huge short-term loans and borrowing in both the years i.e. 2016 and 2017 and this resulted in higher current liabilities.

Asset utilization (efficiency or turnover ratios)

Debt Equity ratio

Interest coverage ratio

Analysis: In case of Harvey Norman Limited, interest coverage ratio in both the year has shown positive result i.e. in both the year’s management has more than sufficient funds to repay finance cost for the year. Interest cost includes both interests payable on long term borrowings and short-term borrowings. Earnings before interest and tax are used to calculate interest coverage ratio. Interest coverage ratio of Harvey Norman Limited denotes efficiency of management in terms of cost management or cost control as their earnings before interest and tax is at higher side. It can be observed that interest coverage ratio in 2017 has fallen as compared to 2016 On the other hand; debt-equity ratio has been used to analyse long term solvency of Harvey Norman Limited. From the above calculation, it can be observed that there is no balance between debt and equity of the Harvey Norman Limited during both2016 and 2017 (Hajek & Michalak, 2013). As compared to external funds i.e. debt, more internal funds has been utilised in the business operations or business activities. In 2016 debt is 0.648 times of equity employed and in 2017 it is 0.489 times as compared to employed in business operations.

Net profit margin

Net profit / net sales X 100

Operating Margin

Operating profit or EBIT / net sales X 100

Analysis: Harvey Norman Limited has shown an adequate level of profitability during last year i.e. 2016 and 2016. From the analysis of net profit margin, it can be analysed that their profitability has been increasing as compared to previous year and the main reason behind this are increases swales level and moderate cost of sales level. As compared to industry standards, Harvey Norman Limited has generated a moderate level of net profit during both the years. On the other hand, operating profit of Harvey Norman Limited has shown most favourable results in both the years (Merwe Oberholzer, 2012). In 2016 operating profit margin of Harvey Norman Limited is 70.96 % which is very attractive for any investor or any stakeholder. It has been observed that operating profit margin has been declined in 2017 and the main reason behind this is an increase in expenses as compared to increase sales revenue. That means sales revenue is increased with less, no and operating expenses has been increased with higher margins (Hofmann & Lampe, 2013).

In current year of operation total assets of the company has decreased but there has been a substantial increase in net profits of Harvey Norman as compared to last financial year. The increase in net profit is substantial and due to this return on assets ratio has also increased from 7.93% to 10.81%. This shows that company is earning appropriate returns on its assets. The company should analyse their current direct and indirect expenses and try to continue similar operations in coming years (Swamy, 2013).     

Profitability ratio

Assets are the main business element that helps in generation of its revenue. Therefore it is important that assets of the company are used effectively to increase the revenue of the company. Current revenue generation capacity of the company from utilising its assets is efficient as it has increased in the current year in comparison to last year. It can be further increased by dissolving the fixed assets that are obsolete or scrap.

Earnings per share of the company have increased from 40.35 to 31.36 in the current financial year. This results in an increase of 29 percent in total net profits earned by the company in a current year. This increase is a positive sign for the company as more and more investors will be interested in investing in the company (Hofmann & Lampe¸2013). This will also enable the company to acquire external sources of financing as financial institution prefers companies that have increasing EPS as it shows a sign of potential future growth.

There has been an increase in dividend yield ratio but it is not very significant. Constant dividend yield ratio is also a positive sign for the company as it shows that company is paying an appropriate portion of the market share of the company in form of dividends. Constant growth in earnings of the company will help in increasing dividend yield in coming years.  

1. Short-term liquidity

Short-term liquidity comparison between these companies is done on the basis of current ratio and quick ratio. The current ratio of Harvey normal is increasing and it is better than JB Hi-fi in the current financial year. It shows that external parties that are in business with the company such as suppliers, working capital lenders etc. will prefer doing business with Harvey Norman. A quick ratio of Harvey Norman is substantially higher as compared to JB Hi-fi as the majority of assets of JB Hi-fi lies in form of stock which is hard to realise immediately. On another hand, the quick ratio of Harvey Norman is more than one which is an ideal standard for the quick ratio (Jordan et.al, 2009). In conclusion, it can be said that Harvey Norman is more liquid as compared to JB Hi-fi.

1. Long term solvency

It is the ability to pay off long term expenses and liabilities of a company. Two ratios i.e. debt to equity and interest coverage ratio has been taken as a base to comment on long term solvency of these companies. Debt to equity ratio of both these companies is low which shows that these companies prefer equity component in their capital structure as compared to debt component. But if a comparison is made then it can be evaluated that Debt to equity ratio of JB Hi-fi limited is preferable as has increased in a current financial year whereas it is decreased for Harvey Norman. Both these companies should fund their financial requirement from long term debt in case of additional requirement of funds.

1. Profitability

Market value ratios

Both operating margin ratio and net profit ratio are good indicators of profitability of a company. Both operating margin and a gross profit ratio of JB Hi-fi limited has decreased in the current financial year. In addition to that, the ratio of Norman Harvey is very high as compared to Harvey Norman. Operating margin of Harvey Norman has shown a sudden decline which is a negative sign for profitability position of the company (Konchitchki & Patatoukas, 2014). In spite of this fall, it can be said that profitability position of Norman Harvey is much better as compared to JB Hi-fi limited.

1. Efficiency   

The efficiency of resource utilisation is measured with the help of total asset turnover ratio and return on asset ratio. Both of these ratios are higher in case of Harvey Norman as compared to JB Hi-fi. This is a clear indication that Harvey Norman is utilising its assets very efficiently as compared to JB Hi-fi (Kirkham, 2012). This will give Harvey Norman an advantage and competitive edge over other companies in Australian retail sector.                  

1. Market value

Market value comparison is done on the basis of revenue, market share price and dividend distributed by these companies. From the perspective of EPS, JB Hi-fi Limited is in much more comfortable position as compared to Harvey Norman as it EPS is approximately 4 times of the EPS earned by Harvey Norman. But in case of dividend yield, Harvey Norman will be preferred as it has a higher yield on market price of shares.

Short-term solvency (Liquidity ratios): Harvey Norman Limited

On the basis of short-term solvency, Harvey Norman Limited is at the better position because in both the years their current ratio and the quick ratio has shown adequate level. On the other hand, liquidity position of JB Hi-fi Limited is not adequate because their most of the cash is blocked in inventories.

Long term solvency (Financial Leverage ratios): Harvey Norman Limited

Long terms solvency position of Harvey Norman Limited is better than JB hi-If limited because their interest coverage ratio is much higher than JB Hi-fi limited in both years. But both the organisations are not able to utilise their debt over effectively. Both companies have under-utilised debts.

Profitability ratios: Harvey Norman Limited

Profitability of Harvey Norman Limited is much better than JB Hi-fi Limited in both years and this decision is made on the basis of net profit margin and returns on assets. In both these basis and in both the years, Harvey Norman Limited has higher profitability as compared to JB Hi-fi Limited.

Ratio analysis of Harvey Normal Limited

Market value ratios: Harvey Norman Limited

Dividend payout ratio and earnings per share have been used for analysing market value of both the companies and on this basis Harvey Norman Limited is better than JB Hi-fi Limited.

Recommendation: On the basis of above analysis, it is recommended to investors to invest Harvey Norman Limited.

Conclusion 

It can be said that ratio analysis is one of the easiest methods to project a light on actual financial and market position of a company. In this project report, ratio analysis is used very effectively and efficiently to analyse past performances and future perspective of these two companies. This ratio analysis and comparison can be used by both management and investors to achieve their interest in the business. For more effective analysis, all ratios are divided into various categories to analyse the different functionality of business such as profitability, efficiency, liquidity, operational efficiency etc.

From the overall analysis, it can be said that financial position of Harvey Norman Limited is much better as compared to JB Hi-fi limited. Both of these companies have some deficiencies but if the condition of Australian retail market is considered, it can be said that there is a huge scope for growth and development.

References

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