Essay: Financial Performance Analysis Of JB HI FI And Telstra Corporation.

This assessment task is a written report and analysis of the financial performance of two selected listed companies on the ASX in order to provide financial and investment advice to a wealthy investor. This assignment requires your group to undertake a comprehensive examination of corporate financial performance based on update financial statements of the chosen companies. 

This assignment must be completed IN Group. Each group can be from 2 to maximum 4 student members. Each group will choose two companies and once the companies has been chosen, the other group cannot choose the same two companies. First come first served rule applies here, it means you need to form your group, choose two companies
from the list of ASX and register them with your lecturer as soon as possible. Indicate your group leader when registering your group with your lecturer for assignment administration and submission. Once your lecturer registers your chosen companies,they cannot be chosen by any other group.

Your lecturer then will put your group on Black Board to enable you to interact and discuss on the issues of your group assignment using Black Board environment. However, face to face meeting, discussion and other methods of communication are needed to ensure quality of group work. Each group needs to have your own arrangement so that all the group members will contribute equally in the group work. If not, a Contribution Statement, which clearly indicated individual contribution (in terms of percentage) of each member, should be submitted as a separate item in your assignment. Your individual contribution then will be assessed based on contribution statement to avoid any free riders.

Financial analysis is a process which explains the performance of a business on the basis of analysis on the financial statements of the company. Financial analysis process takes the concern of financial statements and other financial activities of the business to identify the overall position of the business. It evaluates the position through technical analysis and the fundamental analysis to create a better base for the investors to make decision about the investment into the company (Higgins, 2012).

Ratio analysis, cost of equity, weighted average cost of capital, horizontal analysis, vertical analysis etc are few evaluation methods to measure the financial performance of a company. In the report, financial performance of JB HI FI and Telstra Corporation has been evaluated to identify the best company for the purpose of the investment.

Company descriptions:

Telstra limited:

Telstra limited is a telecommunication company in the Australian market. It offers the telecommunication solution and the services to the business people and the Australian individuals. The main services of the business are network solution which also includes the global IP private networks, global Ethernets, international private line, security solution, managed store, customer control centre. It is the largest company in the telecommunication sector of the business (Bloomberg, 2018). It has been founded 43 years before at 1^st July 1975. Total number of employees of the company is 32000 and 150 subsidiaries are running by the company to run the business.

1. JB HI FI:

JB HI FI is an Australian company which deals in the consumer goods. The company specializes in electronic products, blu rays, video games, CDs, DVDs, mobile phones, electronic home appliances etc. It has been founded in 1974. The company is operating its services through 303 stores. The company is operating its operations and activities under the retail industry. The company has expanded its business in New Zealand market as well. The main competitive advantage of the business is its products and various outlets which make it convenient for the customers to reach over the store and purchase the products from the company.

Performance ratio analysis:

Performance ratio analysis is a financial evaluation method which is used by the companies to measure the operating and financial performance of a business. It measures the liquidity, profitability, solvency, efficiency and capital structure level of the business to identify the position of the business. This evaluation process makes a base for the investors to identify the investment level of the business and the risk position to make decision about the investment into the company (Gibson, 2011). In the report, performance ratios of JB HI FI and Telstra have been calculated to measure the overall performance of the business. The performance ratios of the business are as follows:

Profitability Ratios

Profitability ratios:

            Profitability ratios depict the profit generation ability of a business. It measures the total profit of the business through assets, equity, sales revenue etc to identify that how much profit has been generated by the business through the available resources.

            Return on equity measures the net profit of the business against the available equity of the business. It explains the profit generation capability of the business. ROE of JB HI FI explain that the profitability level of the business has been lower from last 3 years in 2017. The current ROE of the business is 20.2%. On the other hand, the Telstra Corp’s ROE explain about the reduced level as well. The changes in both the companies have occurred due to the external factors.

Rate of return on ordinary equity		JB HI FI
Net profit /		136,511	152,181	172,400
Total equity		343,479	404,702	853,500
Answer:		39.7%	37.6%	20.2%

Rate of return on ordinary equity		Telstra Corporation
Net profit /		4,231,000	5,780,000	3,891,000
Total equity		14,103,000	15,871,000	14,541,000
Answer:		30.0%	36.4%	26.8%

Return on assets measures the net profit of the business against the available resources of the business. It explains the profit generation capability of the business. ROA of JB HI FI has been reduced in 2017 because of lower profits from last 3 years. The higher expenses have led to lower profitability (Morningstar, 2018). On the other hand, the Telstra Corp’s ROA has also been reduced. The changes in both the companies are quite similar.

Return on Total assets		JB HI FI
Net profit /		136,511	152,181	172,400
Total Assets		895,013	992,381	2,452,300
Answer:	%	15.25%	15.33%	7.03%

Return on Total assets		Telstra Corp
Net profit /		4,231,000	5,780,000	3,891,000
Total Assets		40,445,000	43,286,000	42,133,000
Answer:	%	10.46%	13.35%	9.24%

Further, the gross profit margin and net profit margin of both the companies have been calculated and it has been measured that the gross profit of the business is similar in last 3 years while the level of the net profit has been fluctuated. The current net profit level of JBH is lowest in all the three years. On the other hand, the gross profit and net profit level of TLS brief reduction in both the levels. It led to the conclusion, that both the organization has faced the lower profitability position in current year. The main reasons behind it are changes in the economical performance.

Gross profit margin		JB HI FI
Gross profit /		798253	865408	1230500
Sales Revenue		3652136	3954467	5628000
Answer:		21.9%	21.9%	21.9%
Net profit margin
Net profit /		136,511	152,181	172,400
Sales Revenue	%	3,652,136	3,954,467	5,628,000
Answer:		3.74%	3.85%	3.06%

Gross profit margin		Telstra Corporation
Gross profit /		18975000	18587000	14954000
Sales Revenue		25845000	25834000	25912000
Answer:		73.4%	71.9%	57.7%
Net profit margin
Net profit /		4,231,000	5,780,000	3,891,000
Sales Revenue	%	25,845,000	25,834,000	25,912,000
Answer:		16.37%	22.37%	15.02%

Liquidity ratios:

            Liquidity ratios depict the ability of a business to manage all the short term debt through the available short term assets of the business. It measures the total debt payment position of the business through measuring the level of current assets and current liabilities of the business. 

            Current ratio measures the current assets of the business against the current liabilities of the business. It explains the short term debt capability of the business. Current assets of JB HI FI explain that the current liquidity level of the business has been lower from last 3 years in 2017. The current liquidity ratio of the business is 0.35 in 2017 (Morningstar, 2018). On the other hand, the Telstra current liquidity ratio explains about the reduction level as well. The changes in both the companies have occurred due to lower current assets than current liabilities.

		JB HI FI
Liquidity Ratios		2015	2016	2017
Current Ratio
Current Assets /		616,898	702,518	1,170,700
Current liabilities		380,336	446,833	885,800
Answer:		1.62	1.57	1.32

Liquidity Ratios

Current Ratio		Telstra Corp
Current Assets /		6,970,000	9,340,000	7,862,000
Current liabilities		8,129,000	9,188,000	9,159,000
Answer:		0.86	1.02	0.86

Further, quick ratio measures the quick assets which could instantly convert into cash to the current liabilities of the company. It explains the liquidity risk level of the business. Quick ratio of JB HI FI has been similar in all the three years. On the other hand, the Telstra Corp’s ROA has been reduced. The evaluation on both the companies express that the liquidity position of JBH is better. The risk level is lower in JBH.

		JB HI FI
Quick ratio
Current Assets - Inventory /		138,027	156,081	310,800
Current Liabilities		380,336	446,833	885,800
Answer:		0.36	0.35	0.35

 

		Telstra
Quick ratio
Current Assets - Inventory /		6,479,000	8,783,000	6,969,000
Current Liabilities		8,129,000	9,188,000	9,159,000
Answer:		0.80	0.96	0.76

 

Capital structure ratios:

            Capital structure ratios depict the capital management ability of a business. It measures the total assets, equity, debt, liabilities etc to identify that how the capital level has been managed by the business.

            The debt to assets ratios measures the total debt against the total assets to identify the performance level of the business. The ratio of JBH express the company has improved the level through reducing the debt level against the assets of the business. In case of TLS, the level has also been improved because of lower assets level.

		JB HI FI
Capital Structure ratio		2015	2016	2017
Debt to asset ratio
Total debt		171,198	140,846	713,000
Total assets		895,013	992,381	2,452,300
Answer:		0.191	0.142	0.291

		Telstra
Capital Structure ratio		2015	2016	2017
Debt to asset ratio
Total debt		18,213,000	18,227,000	18,433,000
Total assets		40,445,000	43,286,000	42,133,000
Answer:		0.450	0.421	0.437

The interest coverage ratio further explains about the ability of the business to repay the interest amount. On the basis of the evaluation, the performance of JBH is negative because of negative profits while the performance of TLS is better (Morningstar, 2018). Further, the gearing ratio has been calculated and it has been identified that the gearing position of TLS is better because of the management of optimal capital ratio.

		JB HI FI
Capital Structure ratio		2015	2016	2017
Interest cover ratio
EBIT /		-302,309	-322,029	-485,600
Interest expenses		5,927	3,857	10,700
Answer:		-51.005	-83.492	-45.383
Gearing ratio
Long term liabilities /		171,198	140,846	713,000
Capital employed		514,677	545,548	1,566,500
Answer:		0.333	0.258	0.455

		Telstra
Capital Structure ratio		2015	2016	2017
Interest cover ratio
EBIT /		7,729,000	7,110,000	2,067,000
Interest expenses		846,000	796,000	729,000
Answer:		9.136	8.932	2.835
Gearing ratio
Long term liabilities /		18,213,000	18,227,000	18,433,000
Capital employed		32,316,000	34,098,000	32,974,000
Answer:		0.564	0.535	0.559

On the basis of liquidity, profitability and capital stricture ratios, it has been measured that both the companies are operating the business in the same manner but the financial strategies of TLs is better because the risk level of the business is lower.

3. Analysis of stock price:

The stock price level of both the companies has been calculated against the all ordinary stock prices to identify the changes and the overall performance of the business. The graph of JBH and TLS are as follows which have been presented against the return of AORD.

Introduction:

            The report has been presented to identify the performance of stock price of JBH and TLS against the stock price of AORD. It focuses that how much changes have occurred in the stock price against the index prices.

Analysis:

            Through measuring the stock price of JBH, it has been measured that the stock price is depicting the positive changes mostly. It brief that the company has managed to improve the stock prices against the AORD prices. The correlation of JBH is -13% which explains that the changes into one stock don’t lead to other stock. Both are operating individually (Yahoo finance, 2018). The graph brief improved changes in JBH stock than AORD which lead to the conclusion that the overall performance of the business is better and the company could be a better choice for the investment.

            Further, the stock price of TLS has been studied. Through the study, it has been measured that the stock price of TLS is reducing than the stock price of AORD. It briefs the stock price of the company is reducing against the AORD prices. The correlation of TLS is 38.49% which explains that the changes into one stock highly lead to other stock. The changes into TLS would lead to AORD as well (Yahoo finance, 2018). The graph brief reduced changes in TLS stock than AORD which lead to the conclusion that the overall performance of the business has been lowered and the management is required to look over the issues.

            To conclude, the average stock return of JBH, TLS and AORD are 0.73%, -1.94% and 0.34% which explains that the stock price of JBH is way better in the industry and the investment into the company would lead to better returns.

4. Analysis on changes into stock price:

The performance of stock price of JBH and TLS has been studied and it has been found that huge changes have occurred into the stock price of both the companies. The stock price of a business could be changed because of various internal and external aspects such as changes into the internal policies or impact of economical issues on the business. In case of JBH and TLS, the reasons behind the changes have been evaluated.

In case of JBH, on 31 Dec 2015, the stock price of the company has been improved from $ 19.28 to $ 23.13. It was a huge change which has been occurred due to the new project proposal of the business which has been leaked (AFR, 2018). In addition, in the year of 2017, the stock price of the business has also been improved due to the acquisition of “Good Guys” (CRN, 2018). The internal and external factors have helped the business to improve the performance.

In case of TLS, on 31 July 2016, the stock price of the company has been lowered from $ 4.97 to $ 4.53. It was a huge change which has been occurred due to the leaked news from the company about the changes into board of directors (AFR, 2018). In addition, on 31 July 2017, the stock price of the business has also been lowered due to the impact of the government regulations on the company (Bloomberg, 2018). It express that the business is required to focus on all the internal and external aspect to evaluate the performance of the business.

Beta value and cost of equity:

Beta:

Beta values explain the systematic risk of a business which is calculated on the basis of the changes into the stock price against the index stock price (Madhura, 2014). Beta values make it easier for the stockholders to identify the related risk with the stock. The beta values of JB HI FI and Telstra has been found at Reuters (2018) which are as follows:

	JBH	TLS
Beta	0.36	0.66

It explains that the risk level of both the companies is lower to level 1 which explains that the stock price is less volatile against the index stock price. The stock price of both the companies is less volatile.

CAPM:

            CAPM is a financial evaluation method which is used to identify the cost of equity of a business. It measures that how much return could be expected from a business against the investment into the equity of the business (Lord, 2007). The CAPM evaluation method has been applied on both the companies which are as follows:

JBH
CAPM (Cost of equity)
Risk free rate	5.00%
RM	6.00%
Beta	0.360
Required rate of return	7.16%
TLS
CAPM (Cost of equity)
Risk free rate (Rf)	5.00%
RM (Rp)	6.00%
Beta	0.660
Required rate of return Rf* (Rp)*Beta	8.96%

The required rate of return from JB HI FI is 7.16% whereas the return from TLs is 8.96%. It explains that the TLS is offering higher return to the company.

6. Dividend policies:

The dividend policies are of two types which explains the companies about the dividend payout rules. There are two theories of dividend payment. One is relevant dividend policy and other is irrelevant dividend policy. Relevant policy brief the business to pay most of the net profit to stockholders as return while irrelevant brief to not to distribute to the profit among the stockholders and use it for further investment of the business.

In case of evaluation on the JB HI FI, it has been found that the dividend per shareholder of the company has been improved in the year of 2017. However, the company has reduced the dividend payout ratio by a bit in 2017 (Lord, 2007). The overall dividend payout ratio of the business is 62.6% which is higher and explains that out of $ 100 net profit $ 62.6 has been paid by the business as dividend amount. It brief company is following relevant dividend policies which would attract more investment towards the company.

JB HI FI
	2015-06	2016-06	2017-06
Dividends AUD	0.87	0.93	1.09
Payout Ratio % *	66.6	62.8	62.6

Further, in case of Telstra Corporation, it has been found that the dividend per shareholder of the company has been similar in last 3 years. However, the company has improved the dividend payout ratio to 108.7%. The overall dividend payout ratio of the business is 108.7% which is higher and explains that out of $ 100 net profit $ 108.7 has been paid by the business as dividend amount. It brief company is following relevant dividend policies which would attract more investment towards the company

Telstra Corp
	2015-06	2016-06	2017-06
Dividends AUD	0.3	0.31	0.31
Payout Ratio % *	79.3	88.1	108.7

The evaluation on both the company brief that the performance of Telstra is better as Telstra is offering higher dividend to the stockholder in comparison with Telstra.

Recommendation letter:

evaluation on JB HI FI and Telstra corporation has been done on the basis of your query. Various financial analysis techniques have been applied on both the companies to reach over a conclusion that which company is best for the purpose of investment. The various analysis tools such as ratio analysis, stock price evaluation, CAPM, beta, dividends etc has been evaluated and it has been found that the performance of both the companies are quite similar. However, the financial strategies and performance of TLS is better because the company has made all the required changes along with the time to manage the performance of the business.

The profitability ratio analysis on both the companies brief the level has been reduced because of changes into net profits. Further, the liquidity level explain about better performance of JB HI FI. And the capital structure analysis lead to the conclusion that the position of Telstra is better in terms of managing the capital level and risk level of the business.

The stock price evaluation brief that position of JBH is better in terms of overall return. But the correlation and the volatility of Telstra is lower. As well, the beta of TLs is lower than JBH and the return of TLS is higher. the dividend payout ratio of TLS is also higher.

It recommends you to invest in the TLS stock because the stock would offer more return rather than the JBH stock.

References:

AFR, JB HI FI, Viewed August 31, 2018

AFR, Telstra corporation, Viewed August 31, 2018, 

Bloomberg, Telstra corporation, Viewed August 31, 2018,

CRN, JB HI FI, Viewed August 31, 2018,

Gibson, C.H., 2011. Financial reporting and analysis. South-Western Cengage Learning.

Higgins, R.C., 2012. Analysis for financial management. McGraw-Hill/Irwin.

Lord, B.R., 2007. Strategic management accounting. Issues in Management Accounting, 3.

Madura, J. 2014. Financial Markets and Institutions. Cengage Learning.

Morningstar, JB HI FI, Viewed August 31, 2018, 

Morningstar, Telstra corporation, Viewed August 31, 2018, 

Reuters, JB HI FI, Viewed August 31, 2018,

Reuters, Telstra corporation, Viewed August 31, 2018,

Yahoo Finance, JB HI FI, Viewed August 31, 2018,

Yahoo Finance, Telstra corporation, Viewed August 31, 2018.