The following analysis of the two companies Harvey Norman Holding Ltd and JB Hi Fi Ltd has been done in order to compare their financial performance because both of them share similar challenges and business environment as they both are located in Australia and carry on retail sales business.
Harvey Norman Holding Ltd is a public company that in the capacity of a franchisor facilitates business operators to run retailing business of office and home products. The retail sales include electrical products, computers, furniture, home appliances, floorings and other products. The franchises are spread in Australia, New Zealand, Ireland, Slovenia, Singapore and Malaysia (Harvey Norman Holding Ltd 2008).
The other company is JB Hi Fi Ltd established in 1974 in Australia. The company initiated its business with a plan to provide Hi Fi and recorded music at lowest prices all over the country. Today JB stores, along with DVD music and movies, sell DVD, VCR, Camera, Speakers, TVs and many other items of top global brands. Their fame is cheap prices (JB Hi Fi Ltd 2011).
Comparison of performance between Harvey Norman Holdings Ltd and JB Hi Fi Ltd
Gross Profit Margin: This ratio shows the portion of sales left after accounting for the cost of goods sold (Drake). Both the companies are showing a stable gross profit margin, there is no significant fluctuation from year 2009 to 2010 which are good signs. But Harvey Norman has an upper hand over JB in terms of gross margin ratio.
Net Profit Margin: JB shows a very low margin for net profitability as compared to Harvey Norman although its cost of doing business has been decreased by 0.2% in 2010. But still JB needs to lower down its operating costs or increase the sources of revenue. Harvey Norman on the other hand has shown a considerable increase in this respect.
Return on Equity: Return on Equity (ROE) indicates the profits a company is earning by the money contributed by common stock holders (CCD Consultants 2010). JB’s ROE is on a declining side although the decrease is not that much significant. The major reason behind this decline is the increase in average shareholders’ equity. Harvey Norman’s ROE has increased due to a considerable increase in its net profits in financial year 2010.
Asset Turnover (Times): The asset turnover ratio of JB is very convincing because the sales volume is huge as against the total investment in the assets of the company. Where Harvey Norman maintained a stable trend in this regard.
Return on Assets: Both the companies have shown improvement in their returns on assets. Although net profit and total assets of both the companies have increased but the increase in profit is proportionately higher.
Inventory Turnover (Days): The number of days a company keeps its funds in inventory is measured by this ratio (CCD Consultants 2010). The ratios calculated show that Harvey Norman has tied up more funds in its inventory as compared to the previous year, whereas JB has improved its inventory turnover from 2009.
Debtors Turnover (Days): JB has a very good debtors turnover ratio as compared to Harvey Norman, which has further improved in 2010. But Harvey Norman really needs to focus on this aspect of their financial analysis and decrease their portion of sales on credit. The slight improvement shown in 2010 is considered negligible when considering total days.
Creditors Turnover (Days): The creditors’ turnover days are also on the declining side for both the companies, but Harvey Norman is enjoying much higher credit period than JB.
Current Ratio: A higher current ratio is always desired (CCD Consultants 2010). Harvey Norman in this aspect is doing well by further increasing the coverage of current liabilities but it shall not creep so high that it indicates inefficiency. JB on the other hand shows a decrease in 2010. The decrease is not so alarming but shall be focused on to make sure that it does not fall down too much.
Quick Ratio: The quick ratio of both the companies is on the rising side. But Harvey Norman has shown a considerable improvement in this respect by almost 50% increase. JB’s quick ratio has been similar to what was in 2009. Although current liabilities are showing decrease in terms of individual items but the short term borrowings in 2010 nullified this effort.
Debt Asset Ratio (total debt): In this case assets of both the companies are heavily financed through debt. In 2010 both of them have shown improvement in this respect by lowering down their debt financing for assets.
Debt Equity Ratio (total debt): Following the similar trend Harvey Norman’s debt equity ratio shows that the company is relying more on equity based financing as it is shown by a decrease of 0.058, similarly JB has also tried to do the same but still the company’s operations are heavily financed by debts.
Times Interest Earned (Times): Both the companies have improved their ability to cover interest expenses with pre-tax earnings. But JB has shown a significant improvement.
List of References
CCD Consultants 2010. Financial Ratios resources. Web.
Drake. PP. Financial Ratio Analysis. 2011. Web.
Harvey Norman Holding Ltd 2008. Company profile. Web.
JB Hi Fi Ltd 2011. About Us. Web.
Spire Frame 2011. Gross Profit Margin. Web.