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Your assignment calls for you to calculate certain financial ratios and to compare these ratios with the competitor's ratios or industry average ratios to evaluate the firm's profitability and liquidity performance. Second part of the assignment requires you to value the bonds that chosen company and the competitor company are planning to issue.
Suppose you have been hired by a large financial institution as a financial analyst. One of your first job assignments is to prepare a report and present the analysis of the financial condition of a company.
Choose a non-financial company that you would like to analyse, and obtain its financial statements. Now, select another company (preferably a competitor) from the same industry, and obtain its financial statements too. Students can obtain latest financial statements for two years (2015 & 2016) from IBISWorld database (available via the library link in the student portal) or from the internet (finance.yahoo.com).
If you are interested in analysing the company you work for, use this opportunity to complete the exercise. Otherwise, feel free to choose any other company that interests you. However, note that the company you select must have latest two years financial statements available and should be a non-financial company.
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ACCA (2017) describes the financial statements of a company as a record of its profitability position and financial position. A person with financial literacy is in a better position to analyze and interpret these statements and comments on an organization’s liquidity position, solvency position and capital structure as per the opinion of Sherman (2011). Naresh (2012) mentions liquidity and profitability as two negatively associated concepts wherein trade-off is required. If an organization tries to maximize its liquidity, it has to sacrifice with the profitability and vice versa. The finance manager of an organization has to ensure the maintenance of this trade-off. Apart from it, another major function of a finance manager is to do the valuation of securities to be issued for raising long term funds for financing its long term assets as mentioned by Sherman (2011). The present study deals with these two major issues. Two Australian companies have been selected for this study, and these are JB Hi Fi and Harvey Norman. Both companies are competitors in the retail sector of consumer and electronics goods.
JB Hi Fi (2017) was established in 1974. It was listed in Australian Stock Exchange in 2003. It offers leading brands of the sound system, computers, home theatre, phones, games, tablets and recorded music etc. Their unique selling proposition is the low prices of their products.
Harvey Norman (2017) was established in 1961. It was listed in Australian Stock Exchange in 1987. It deals with computers, furniture, communications and electrical products.
According to ACCA (2016), the liquidity position refers to the capability of an organization to repay its current liabilities in time. It has been analyzed through liquidity ratios, as shown in Table 1 given below:
| Table 1: Liquidity ratios | ||||
| JB Hi fi | Harvey Norman | |||
| 2015 | 2016 | 2015 | 2016 | |
| Current ratio | 1.62 | 1.57 | 1.31 | 1.26 |
| Quick ratio | 0.36 | 0.35 | 1.03 | 1.05 |
(Refer appendix 1 for calculations)
Analysis of JB Hi fi for 2015-2016
The current ratio depicts the proportion of current assets to current liabilities. In the case of JB Hi fi, it was 1.62 in 2015, which has reduced to 1.57 in 2016. This ratio is not good as it is less than the rule of thumb, which is 2:1. The rule of thumb for the quick ratio is 1:1 and JB Hi Fi’s quick ratio is much less than the standards rule. It shows that the liquidity position of the company is not good.
Comparison of JB Hi-fi with Harvey Norman
The current ratio of Harvey Norman is also less than the rule of thumb, but its liquidity position is better than the liquidity position of JB Hi Fi. The quick ratio of Harvey Norman is greater than 1; it means its liquid assets are sufficient to cover its current liabilities.
Overall the liquidity position of Harvey Norman is better than the liquidity position of JB Hi Fi.
