This report comprises an analytical study done on the financial statements of two companies, Premier Investments Ltd and David Jones Ltd. The first part comprises an introduction giving the background of the two companies to be analyzed. The next part is an analysis of both companies, which comprises the ratio and trend analysis and comparisons between both companies. The analysis is then followed by additional information on the recent trends affecting both companies. The information from the analysis and recent trends reveals that investing in David Jones either through shares or bonds would be more beneficial to the investor than investing in Premier Investments.
The companies under consideration are both Australian. Premier Investments Limited is based in Melbourne. It is listed on the Australian Securities Exchange (ASX) as PMV: AU. Premier invests in listed securities and money market deposits in Australia. Premier went public in 1987as an investment company, whose main purpose was to acquire control or strategic shareholding in companies in Australia particularly those dealing in retailing, importing and distributing (Bloomberg 2012). In 2008 Premier gained a controlling interest in the Just Group, which owns several clothing brands. Today Premier has eight subsidiaries and investments in other companies. David Jones is an Australian department store listed in the ASX as DJS: AU. Mr. David Jones established it in 1838. Over the years, David Jones continued to expand and today it deals in up-market retail stores with 35 department stores and two warehouse outlets throughout Australia. It also has a credit card business under David Jones Credit Card.
This report shall focus on an analysis of both companies using ratio and trend analysis for two years (2010 & 2011) for both companies to determine and compare their profitability, efficiency and financial stability.
The Ratio Analysis
Profitability refers to the ability of a company to generate. The two companies have the ratios computed on profitability over two years. The following is an analysis of the various ratios on profitability (Drake 2007).
Gross Profit Margin
Gross profit is the ratio between gross income to sales. Premier Investment has experienced an increase in gross profit margin by percentage from 59.09% to 59.51%, which is positive on the company’s sales side. The increase was brought about by an increase in the total income of 2011 by $1859. There was a decrease in the cost of materials in form of finished goods, work in progress, and raw materials used by $4913. However, there was a notable decrease in revenue from goods sold from 878,494 to 875,610.
David Jones’ gross profit margin decreased from 39.73% to 39.11% (Fidelity 2012). From the financial statements, it is clear that this was brought about by a reduction in gross profit brought about by a reduction in revenue from the sale of goods by 91343, which is a 4.45% decrease.
Net Profit Margin
Net profit margin refers to the ratio of net income or profit to sales. Premier Investments experienced a decrease in net profit margin from 16.11% to 5.94%. This can be attributed to a 4.21% increase in total expenses. This is drastic considering that Premier had recorded an increase in total revenue (Financial Review 2012).
David Jones saw a decrease in net profit margin by percentage from 16.97% to 12.62%, which can be largely attributed to the 4.45% decrease in revenue from the sale of goods. However, there was a notable decrease in key expenses such as employee benefits and lease and occupancy expenses, which is the reason why the net profit margin decreases in a modest proportion even with a decrease in revenue.
Return on Equity
This ratio represents the return on average common stockholders’ equity. Premier investment experienced a 7.00% return on equity as compared to 9.24% in 2010. This can be attributed to the significant drop in net profit from 79663 in 2010 to 40517 in 2011. Total equity did not vary significantly and only an increase in reserves and a decrease in retained earnings produced a total reduction of equity by 1.55%. David Jones’ return on equity declined from 22.91% in 2010 to 21.45% posted in 2011. This reduction is brought about by a decrease in total profit after income tax from 170,766 in 2010 to 168,139 posted at the end of 2011. The total equity of David Jones increased by 5.54% from 744,238 in 2010 to 785,480 posted in 2011. This resulted in a reduced return per dollar of shareholding (Weetman 2007).
Return on Assets
This ratio represents the ratio between the profit and the assets invested in the company. Premier Investments posted a significant reduction in return on assets from 9.81% in 2010 to 3.56% in 2011. This drop can be attributed to a 49.12% decrease in 2011. Total assets also increased by 1.33in 2011. David Jones’ return on assets also decreases from 29.16% in 2010 to 20.39% in 2011. The decrease can be attributed to a reduction in profit after income tax of 1.54% and an increase in total assets by 1.64%.
In general terms, the profitability of both companies has reduced with Premier Investment being the worst affected after posting a 49.12% decrease in net profit. Since the reduction can be attributed largely to an increase in expenses, we can conclude that the expenses of a company have a huge impact on its profitability (My ShareTrading 2012).
Asset turnover is the ratio between sales and assets. It represents the number of times the sales cover the assets.
Premier Investment posted a 0.60 times asset turnover ratio is 2011 as compared to 0.61 times in 2010. The difference is not significant mainly due to the almost constant income from sales which decreased by only 0.328% and an almost constant value of total assets which increased by only 1.33%. David Jones on the other hand had an asset turnover of 1.62 times in 2011 compared to 1.72 times in 2010. This represents a drop-in asset turnover ratio that can mainly be attributed to the reduction in revenue from sales of goods by 4.45% and a 1.64% increase in total assets.
Inventory Turnover (Days)
Inventory turnover is the ratio of the cost of goods sold to the inventory. This ratio represents the number of times inventory is ‘turned over’ or sold and re-stocked. If the ratio is represented in form of days, it represents the number of days taken to sell all stock and replace it (Investopedia 2012).
Premier Investments Limited has an inventory turnover of 75 days in 2011 as compared to 72 days in 2010. This means that it took longer to sell goods in 2011, which shows a reduction in efficiency for the year. David Jones has an inventory turnover of 88 days as compared to 83 days in 2011. This also shows a reduction in efficiency for the year 2011. A comparison between both companies reveals that Premier is more efficient in sales than David Jones is.
Debtors Turnover (Days)
Debtor’s turnover, also known as the Accounts receivable turnover, is the number of times per year that the average amount of receivables is collected. The ratio is calculated by dividing the net sales by average accounts receivable, less the uncollectible amounts (Hermanson, Edwards, & Maher 2007).
For our companies, Premier Investment shows a debtor’s turnover of 3 days as compared to 4 days in 2011. That means it takes less time to collect debts from credit customers. This represents an increase in the efficiency of Premier’s Debt collection policy. David Jones on the other hand has a debt turnover of 2 days for 2011 as compared to 1.5 days in 2010. Comparatively, David Jones is more efficient in collecting debt from credit customers but in terms of improvement of debt collection policy, Premier has the lead.
These ratios measure the ability of an entity to meet its short-term financial obligations using assets most readily convertible to cash. There are several liquidity ratios. Each of them is analyzed below for both Premier and David Jones.
This is a ratio between the current assets and current liabilities. It calculates the ability of a company to satisfy its current liabilities using its current assets. It intends in finding out how many times the current assets cover the current liabilities.
Premier has a current ratio of 173.81% in 2011 compared to the same ratio of 431.09% in 2010. This means that the number of times the current assets cover the current liabilities has reduced. This can majorly be attributed to an increase in current liabilities of 137.90%. David Jones saw an increase in their current ratio from 122.91% in 2010 to 104.72% in 2011. This represents an increase in the number of times the current assets cover the current liabilities, which can be attributed to the decrease in current liabilities by 15.05%. Comparatively, Premier has higher liquidity but David Jones has a higher increase in its liquidity based on the current ratio.
The quick ratio, also known as the acid test ratio, is a ratio that measures liquidity by calculating the number of times the current liabilities are covered by the most liquid current assets as such, since stock or inventory is considered to take time to dispose of, thus it is excluded from the numerator in the equation.
Premier had a quick ratio of 140.07% in 2011 as compared to 351.29%in 2012. This indicates a reduction in the number of times the current liabilities are covered by quick assets. The major cause of this reduction is the increase in total current liabilities. David Jones had a quick ratio of 11.78% in 2011 as compared to 12.88% in 2010 (Jones 2012). This indicates a slight reduction in the number of times the quick current assets cover the current liabilities. Comparatively, the premier has more coverage of current liabilities with quick assets than David Jones does.
Financial Leverage Ratios
Debt to asset ratio
This ratio measures the proportion to which the entity’s assets are financed by debt, which is inclusive of both long-term and short-term debt. The ratio is calculated by dividing total debt by total assets.
Premier Investment Limited has a debt to asset ratio of 15.96% for 2010 and 18.35%for 2011. This indicates an increase in the proportion of assets financed by debt capital. Thus, for the year 2011, Premier’s assets were more leveraged than in 2010 (Edwards & Hermanson 2007). This increase in leverage can be majorly attributed to an increase in current liabilities in 2011 by 137.90% from the value posted in 2010. David Jones has a 35.35% debt to asset ratio for 2011 as compared to 37.72% for 2010. This indicates reduced leverage on assets for the year 2011 compared with 2010. Comparatively, David Jones is generally more leveraged than Premier Investments. This, therefore, translates to a larger financial risk to the shareholders of David Jones.
Debt to Equity Ratio
This ratio measures the proportion of debt of an entity used to finance the entity in proportion to the shareholders’ equity. The ratio intends to inform the shareholders of the level of debt financing in the entity. The ratio also informs the creditors of the extent to which the entity can cover their debts if they were to be liquidated.
For our case companies, Premier Investments has a debt to equity ratio of 22.47% for 2011 as compared to 18.99% for 2010. This increase was because of a 16.475 increase in total debt in 2011 from the value posted in 2010 and a reduction in shareholders’ equity by 1.55%. David Jones’ debt to equity ratio for 2011 was 54.63% as compared to 60.56% in 2010. This indicates a reduction in the proportion of debt used to finance the entity in proportion to shareholders’ equity (Drever Santon). This is a result of two factors; a 5.54% reduction in shareholders’ equity and a 4.80% decrease in total liabilities. David Jones is therefore becoming less reliant on debt as a source of financing.
Times Interest earned
Times interest earned is a ratio that indicates the ability of a company to meet required interest payments when due. The ratio is useful to creditors who would like to know how many times the earnings can cover their interest payment requirements.
In our case, Premier Investment has a times interest earned ratio of 5.41% for 2011 as compared to 17.99 times in 2010. This indicates a reduction in the number of times the earnings cover the interest expense. This shows an increased risk towards default on interest payments if the trend persists. David Jones on the other hand had a times interest earned ratio of 31.79 times as compared to 49.33 times in 2010 (Invest Smart, 2012). This indicates a reduction in the interest coverage of the creditors of David Jones. Comparatively, David Jones is the company with the higher times interest earned ratio; therefore, a lender should feel safer lending to David Jones than to Premier Investments.
Earnings per Share
This ratio measures the amount of income earned per share of common stock. There are two types of earnings per share, basic and diluted. Basic Earnings per share is computed by dividing the earnings attributable to shareholders by the number of shares outstanding. The diluted Earnings per Share is computed by including the potentially dilutive shares such as convertible preference dividends to the number of outstanding shares (Invest Smart 2012).
Premier has a Basic Earnings per share ratio of 26.13 cents per share for 2011 as compared to 52.78 cents per share for 2010. The decrease in earning potential is caused by the reduction in net profit in 2011. David Jones has basic Earnings per Share of 33 cents per share as compared to 34 cents per share in 2010 (My Share Trading, 2012). David Jones also issued 5,805,636 shares as part of the dividend reinvestment plan. This effectively diluted EPS to 32.4 cents per share. Comparatively, David Jones shares are likely to earn an investor more revenue in dividends than Premier shares, as per the 2011 EPS.
This ratio is also known as the P/E ratio and it measures the price per share of common stock to the earnings per share of common stock.
Premier Investments price per share was5.29 AUD on the close of the market on 4th May 2012 (Premier Investments 2012). The Earnings per share for 2011 was 26.13 cents per share. The P/E ratio is 20.24. David Jones’ price per share was 2.5 AUD at the close of the market on 4th May 2012. The EPS for 2011 was 32.4 cents when diluted. Therefore, the P/E ratio is 7.72. The David Jones shares will yield more per Australian dollar.
Trends in the Case Companies
The computation of the financial ratios goes a long way into assisting the investor who intends to invest in either company to consider where to invest and whether or not to invest. This information is however not sufficient for decision-making as the information from financial statements could be outdated depending on emerging trends since the financial statement date (Lynch 2000).
The Age reported that the profits of Premier Investments had fallen by 2.4% in January. This is compared to the same period in 2011 and was due to reduced retail sales from the Just Group, which Premier owns. The CEO was however confident and noted that they had done their best in these tough times for retailers. The Age also reported that David Jones was classified as the worst performer among companies dealing with the customer discretionary sector, which encompasses those industries that tend to be the most sensitive to economic cycles. Apart from David Jones, most companies in the industry are behind their US counterparts by about 10 years. The reason is the failure to exploit online sales opportunities (The Age, 2012).
The companies are both facing challenges this year and if they do not adapt, they could find themselves facing “death by a thousand lashes”, as David Jones’ CEO puts it.
The analysis performed on both companies is limited to the correctness, completeness and timeliness of the financial information used to derive the ratios for comparison. The financial statements are from 2011, and an investor who wishes to rely on the computations of ratios from these statements for decision-making must do so with utmost care because the information could be outdated. As we have seen from the trends in 2012, the companies continue t face new challenges and thus the investor must consider all trends and new information before making a significant investment decision.
The trend analysis derived is also limited to a 2-year period, which is not sufficient to give a good observation over time as the changes may be isolated, and not necessarily follow a trend.
From the calculations and analysis given, I would recommend that an investor consider buying David Jones shares particularly based on the earnings per share. An investor wishing to invest in corporate bonds should also consider buying David Jones bonds because it has a better times interest earned ratio than Premier.
It is important to carry out a more detailed trend analysis of about 5-10 years to see the true trend of these two companies for a better conclusion.
Bloomberg, 2012, Premier Investments Limited, Bloomberg, Web.
Jones, D 2012, About David Jones, DavidJones.com, Web.
Drake, P 2007, Financial Ratio Analysis, James Madison University Website, Web.
Drever, Santon, & McGoan 2007, Contemporary Issues In Accounting, John Wiley, Australia.
Edwards, J, & Hermanson, R, 2007, Accounting Principles: A Business Perspective. First Global Text Edition, Volume 1. Financial Accounting, Saylor.org, Web.
Fidelity ,2012, Customer Discretionary, Fidelity.com, Web.
Financial Review, 2012, Premier Investments, Financial Review, Web.
Invest Smart, 2012, David Jones Limited, Invest Smart, Web.
Hermanson, R, Edwards, J, & Maher, M 2007, Accounting Principles: A Business Perspective. First Global Text Edition, Volume 1. Financial Accounting, Saylor.org, Web.
Investopedia, 2012, Inventory Turnover, Investopedia.com, Web.
Lynch ,M 2000, How to read a Financial Report, Stanford University Website.
My ShareTrading, 2012, Premier Investments (PMV), Mysharetrading.com, Web.
Premier Investments, 2012, Welcome to Premier Investments Limited, Premier Investment Website, Web.
The Age, 2012, Premier Profit Eases as Retailing Struggles, TheAge.com.au, Web.
Weetman, 2007, Financial and Management Accounting: An Introduction, Prentice Hall, Chicago.
|Relevant Financial Ratios|
|Premier Investments Limited||David Jones Limited|
|Gross Profit Margin (GPM)||59.09%||59.51%||39.73%||39.11%|
|Net Profit Margin (NPM)||16.11%||9.54%||12.11%||12.62%|
|Return on Equity (ROE)||9.54%||4.35%||22.91%||21.45%|
|Return on Assets (ROA)||9.81%||5.72%||20.81%||20.39%|
|Asset Turnover (times)||0.61||0.60||1.72||1.62|
|Inventory Turnover (Days)||73||75||83||88|
|Debtors’ Turnover (Days)||4||3||1.2||2|
|Creditors’ Turnover (Days)||31||24||35||30|
|Debt Asset ratio||15.96%||18.35%||37.72%||35.33%|
|Debt Equity Ratio||18.89%||22.47%||60.56%||54.63%|
|Times Interest Earned (times)||17.99||8.69||35.21||31.79|