Quality of Earning
JB Hi – Fi is the largest home entertainment retailer from Australia. They are well known for wide range, biggest brands and low prices. Consumers can purchase LCD, LED, OLED, HD TVs, iPads, headphones, Wireless speakers, home theatres and mobile phones from their shops.
- Earning quality
Earnings are the profit amount produced by the company during particular period of time generally quarter or year. Earnings are used for determining the share price of the company as earning trend of the company indicates that whether the company will be successful and profitable in the long run or not. It can also be used for comparing the performance of the company over the past periods. EBIT or earnings before interest and tax is used for measuring the profit of the company and it includes all the revenues and expenses except the charges for interest and taxes.
From the annual report of JB Hi-Fi it can be identified that the profit for the last 5 years are as follows –
- FY 2013 – $ 177.8 million
- FY 2014 – $ 191.1 million
- FY 2015 – $ 200.9 million
- FY 2016 – $ 221.2 million
- FY 2017 – $ 290.5 million
From the above it can be identified that over the last 5 years the EBIT of the company was in increasing trend and has been increased from $ 177.8 million to $ 290.5 million. Major reason behind increasing trend of EBIT for the company was the increasing trend of sales over the last 5 years. Apart from sales revenue the company received significant amount of income in 2017 from other sources. Further, it is found that out of total sales revenue of $ 5,628 million in 2017, $ 4,148.6 million were generated from JB Australia, $ 221 million were generated from JB New Zealand and $ 1,258.4 million were generated from TGG (The Goog Guys). As the increasing trend of EBIT over the past 5 years were due to increasing trends of sales rather than the artificial profits generated through accounting anomalies the earning quality of the company is good.
- Effective tax rate
The corporate tax rate applicable for the company is 30% for the year ended 2017. However, the income tax expenses of the company for the year ended 2017 amounted to $ 86.8 million whereas the amount of profit before tax was $ 259.2 million. Hence the effective tax rate was $ 86.8 million / $ 259.2 million = 33.5%. There is change between the effective tax rate and applicable tax rate as there is various adjustments to the profit before taxes like previous year adjustments.
- Financial gearing profitability ratio
| Ratio | Formula | 2017 |
| Gearing ratio | Total liabilities/total equity | 1.9 |
| Interest coverage ratio | EBIT/interest expenses | 25.2 |
| Gross profit ratio | Gross profit/sales | 21.8% |
| Net profit ratio | Net profit/sales | 3.1% |
Gearing ratio that measures the borrowed funds of the company as compared to its equity indicating that the borrowed funds of the company is 1.9 times of shareholder’s equity. Hence, the company is highly leveraged. On the other hand, the profitability ratios of the company are indicating that the company has strong profitability position if the net profit, gross profit and interest coverage ratio is considered.
Answer to question 2 – EPS and P/E ratio
- Earnings per share
EPS is the major financial metric used for indicating the company’s profitability. EPS is calculated through dividing the entity’s net income by total number of the outstanding shares. It is used by the market participants for measuring the profitability of the entity before purchasing the company’s share. For JB Hi-Fi it is found that the amount of net income is $ 172.4 million (excluding non-controlling interest) whereas weighted average number of outstanding shares is 110.47 million.
Ex – issue price is the deemed value that is immediately attributed to the share of the company after taking place of any issue transaction. It is computed as follows –
Ex – issue price = Market value of shares prior issue + amount received from issue
Number of shares outstanding after issue
Ex – issue price = $ 2784,692,387 / 114,421,403 = $ 24.34
Share dilution = Market price ex-issue / MP cum issue
= 24.34 / 26.82 = 0.9074
Adjusted EPS = Net earnings / WANOS * dilution factor
= 172.4 / 110.47 * 0.9074 = 1.4
- Price / earnings ratio
Price earnings ratio is used for measuring the amount of dollar the investor can expect from the investment. PER is calculated as follows –
PER = current market price per share / EPS
PER = $ 23.37/ $ 1.4 = 16.69
- Using PER for valuing JBH
PER is price that the investor is willing to pay for $ 1 of the company’s profit or earning. As per the above calculation the PER for JB Hi-Fi is 16.69 that indicate that better performance can be estimated from the company. However, this is the simplistic way to view PER as it does not take into consideration the growth prospects of the company. A company with high PER indicates its long term sustainability.
Answer to question 3 – Dividends
- Dividend per share
Dividend per share is the aggregate of dividends issued by the company for each ordinary outstanding share. It is calculated through dividing the total amount of dividends including the interim dividends over the particular period of time. Hence, for JB Hi Fi dividend per share will be as follows –
DPS = Dividends paid during the year / No. of shares
DPS = 191.1 / 114.42 = 1.7
Pre-tax dividend yield = pre tax dividend per share / market price per share
= ((191.1/70%)/114.42) / 23.37 = 0.1 or 10%
- After tax dividend yield for superannuation fund
Dividend payout ratio = 65% of net profit
Therefore, dividend = $ 172.4 million * 65% = $ 112.06
After superannuation tax = 112.06 * (1-0.15) = $ 95.251
Dividend yield = ($ 95.251/114.42) / 23.37 = 0.035 = 3.5%
- Dividend cover
Dividend cover = net income / dividend paid during the year
Dividend cover = 172.4 / 191.1 = 0.9
Answer to question 4 – Net tangible asset and cash flows
- NTA per share
It is calculated through dividing the net tangible asset of the company by the number of shares outstanding. Here, net tangible assets mean total tangible assets of the company reduced by total liabilities. It is calculated as follows –
Equity attributable to owners = $ 853.5 million
Intangible assets = $ 1026.6 million
Deferred tax assets = Nil
Adjusted equity = $ 853.5 – 1.026.6 – Nil = -$ 173.1 million
Number of shares outstanding = 111.7 million
NTA per share = – $ 173.1 / 111.7 = -$ 1.55 per share
Hence, NTA per share is in negative or shareholder does not have any tangible asset per share as the liabilities are more than the tangible assets of the company.
