Context of the situation

In this report the discussion will be made on the liquidity factor of the JB HI FI limited which is one of the leading IT and electronics manufacturer register in the Australian stock exchange. In addition to that, the potential use of the funds, profit-earning capacity of the considering company will be evaluated. In addition to that, a resent downfall in the share prices is being observed therefore it will be beneficial for the company to make an exponential analysis of their key strength and weaknesses (Hoyle et al., 2015). Further, the company’s current performance will be evaluated by comparing with its rival or competing company Hervey Norman Holdings. Currently the company is engaged in the manufacturing and development of the CD, DVDs Software and larger electronic appliances. In addition to that, the company’s performance of the retail market is quite impulsive and stealthy.

In this context, three major terms regarding the financial activity of JB HI FI will be discussed. These are liquidity, insolvency and Altman’s Z-score. The liquidity of a company signifies the ability of the company to pay its obligation in terms of the liquid assets of the company. The insolvency is considered when the company is failed to repay its obligations. The Altman’s Z score is the term when it is required to figure out the financial distress of the company by measuring the risks inclined in the financial difficulty of the company.

In the next segment of the report, the liquidity ratio and the Altman’s Z-score of the company will be discussed for the last three years in order to evaluate the key issues in comparison with the financial performance of the company.

In case of the financial year 2015-2016, JB HI FI had managed to increase its sales amount by 8.3% and this growth helped the company to increase the market shares in that concurrent year (Investors.jbhifi.com.au. 2018). Due to the growth, the company had also managed to increase the consumer base for their home appliances items and due to these changes the company had managed to carry on the rollout of the home stores of it.

For the next financial year, the most important event for company was to acquire Good Guys. As a result, the position of the company in the Australian market became strong.
The company had managed to acquire 29% and 24% of shares respectively in the home appliances and electronic items and became the highest market shareholders for these items in Australia. But along with the impactful performance growth, the takeover also caused some negative impact on the performance of the company.

Enumerate options

Among the key issues regarding the financial performance of the entity, there are three issues which can be a matter of concern to the entity for the higher performance and lower the risk of insolvency. These issues are:

• Another issue that has been emerged from the financial activity of the organisation is the lowered demand of the items among the customers. This caused a decreased amount of total sales and reduced the gross profit of the company. This decline was caused due to the changes in governmental policies, increased price, less discounts and increased production cost. The effect could be seen upon the performance of Good Guys also as the net profit of the company was deceased in the meantime.
• The next major concern about the financial performance of the company is the excessive amount of acquired inventory of the company. Due to the excessive investment, the negative effect of this action can be seen on the quick ratio of the company where the ratio was lower than its key competitor and these caused an increased amount of risk for the insolvency. Whereas the total inventory amount of JB HI FI was calculated as 77.8% of their total assets, Harvey Norman managed to keep their inventory amount below 20% which increased their efficiency for paying the debt obligation of the company (jbhifi.com.au. 2018; harveynormanholding.com.au 2018).
• The inefficiency of the company for generating the profit in return of their total assets can also be a major issue in terms of their key financial performance. In comparison to its key competitor Harvey Norman, JB HI FI was managed to gain 10% lower gross profit which is quite low in terms of industry standard. Apart from that, the PBT measurement of the company is also 3% which are far lower than the PBT value of its competitor which is being measured as 29.6% (jbhifi.com.au. 2018). The good marketing strategy and the lower price offered by Harvey Norman has certainly helped the company to gain more profit but in terms of improving the performance of JB HI FI, there is no doubt that the company needs to work on their marketing and sales procedure.

For the first instance, as the changes in the demand of the consumer affected the whole industry, it also opens several scopes for development to the operations of the company. In such scenario, the company can react quickly and implement certain policies appropriate for this scenario in order to gain competitive advantage in terms of its competitors (Amiram et al. 2018). Proper marketing policies, adequate cost and pricing structure, and the exact use of the resources can certainly boost the performance of the company in terms of its competitor.

But along with the opportunities, there are certain disadvantages that come with it. In order to increase the demand, the company needs to implement certain policies such as reducing the price, increasing the marketing cost and providing certain other offers to the consumers. These can gain a competitive advantage in the market by affect in the sales and profit amount of the company (Blomkvist & Paananen 2017). Due to the increased operating cost and reduced sales price, the impact of these can be seen on the net profit of the company.

In this respect, it can be said that the negative impact of implementing these policies upon the performance of the company will only last for short term process. If the company manages to gain the competitive advantage and make its name in the time of crisis, the effect can be seen on the long term business of the company both in the physical and digital business.

The second issue which is related to the inventory also has certain advantages. By reducing the amount of total inventory will enable the company to manage its resources more efficiently. Apart from that, the cash inflow of the company will also be increased. The company will be able to pay its debt obligations and the insolvency rate of the company will be reduced (Chen et al., 2015). The obtained cash can also be used for paying wages and several other bills. The expenses which were incurred by the company for the maintenance of the assets will also be reduced.

But in spite of the disadvantages, there are certain advantages which are needed to take into consideration. First of all, this can increase the operating cost which will affect the price of the selling items. Apart from that, there are chances that the selling price of the inventory items may not be profitable for the company (jones & Cooper, 2018). Other than it, the inventory items are the investments of the company which can be helpful in future occasions. Thus, the cash inflow of the company will be affected if the inventory items are being sold.

Strength and weaknesses of issues

In this regard, the advantages of lowering the inventory amount can be considered profitable for the company. The advantages which will be gained by selling the inventory items can increase the efficiency of the company and thus, the short terms issues which will emerge from the selling of the assets can be compensated by the long term benefits generated from it (Boyd & Weetman, 2015).

In the last instance, increasing the profit amount of the company has certain benefits such as increased operational efficiency, scopes for implementing different pricing structure, or decreasing the risk involved in the business. As the growth of the business is directly linked with the incurred profit, it is very important for the company to keep track upon the stable profit rate from its operations.

But it can also lead to certain problems. Due to increase the profit, if the company increases its price, the customer base of the company will be lowered as the customers always seeks the goods which can be profitable for them too. In presence of the other competitor which offers better prices for the same items, the business of the company will be hampered. The amount of total sales and the brand name of the company will also be decreased (Hoyle et al., 2015).

In the case of increasing the profits of the company, the risk involved in this policy is more than the advantages. It is true that the profitability over the individual items will be increased by these, but the overall profit will be decreased along with the sales (Amiram et al., 2018). Due to the decreased demand of the consumers, if the company decided to increase the profits of the company by increasing the price and reducing the cost, in a long term process, it will do nothing but leaving a negative impact over the business of the company.

Conclusion:

In this case, it can be stated that in case of gaining the competitive advantage, the company needs to implement certain policies for improving its business. First of all JB HI FI needs to decrease the inventory items for better efficiency in operations. Apart from that, certain policies such as discounts, reduced price needs to be implemented in order to increase the demand. But due to the negative effects of increasing the profit, the company should not take this into consideration in the current situation.

If these strategies are being implemented in the financial actions of the company, this will give a competitive advantage to the company and will help the company to maintain the growth in its long term operations. Thus the liquidity and the insolvency of the company can also be improved.

Though it seemed that the cause of the insolvency of the company was the high debt, after examining the financial report, three major issues have been emerged. These issues are critical in comparison with the key competitor of the company. The scopes and limitations of these issues have also been stated in the given context. The risk factor which is included in this is also great as it is stated Altman’s Z score. Thus, in order to decrease the risk of insolvency, the implementation of these two policies is necessary. 

Reference

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Boyd, J., &Weetman, P. (2015). High quality financial reporting: the case of the Nairobi stock exchange (Doctoral dissertation).

Chen, C., Lo, K., Tsang, D., & Zhang, J. (2015, July). Earnings management, firm Location, and financial reporting discretion: An analysis of fair value reporting for investment property in an emerging market. In CEUR Workshop Proceedings (Vol. 1542).

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Investors.jbhifi.com.au. (2018). [online] Available at: https://investors.jbhifi.com.au/wp-content/uploads/2018/10/Annual-Report-2018-with-Chairmans-CEOs-Report.pdf [Accessed 23 Oct. 2018].

Jones, M., & Cooper, S. (2018). Financial reporting and business communication 22nd annual conference University of Bristol, 5th–6th July 2018. Accounting and Business Research, 48(1), 136-137.