CHAPTER 8 Analysis and interpretation of financial statements 3352015 2014
Expense ratiosSales and marketing$374 084
$3 652136100 10.24%
××==
$355 694
$3 483775100 10.21%
××==Occupancy$160 216
$3 652136100 4.39%
××==
$148 969
$3 483775100 4.28%
××==Administrative
$27 711
$3 652136100 0.76%
××==$27 600
$3 483775100 0.79%
××==Finance$5 927
$3 652136100 0.16%
××==
$8 845
$3 483775100 0.25%
××==Other$35 414
$3 652136100 0.97%
××==
$32 716
$3 483775100 0.94%
××==Total expenses$603 352
$3 652136100 16.52%
××==
$573 824
$3 483775100 16.47%
××==FIGURE 8.8 Analysis of JB Hi-Fi Ltd’s profitabilityNote: All numbers are in $000s.
The profitability ratios for JB Hi-Fi Ltd show improvement from 2014 to 2015 even with expense
ratios trending up. As shown in figure 8.8, in 2015 relative to 2014, the ROE declined to 42.79 per cent
from 47.71 per cent. While the numerator, profit, was higher in 2015 relative to 2014, the denominator,
equity, was larger in 2015 than 2014. An investment of $1 of shareholders’ equity in 2015 returned
42.79 cents of earnings available for distribution to shareholders. In 2014, an equivalent investment
generated 47.71 cents of earnings available for distribution to shareholders. The decline in the ROE is
not due to a decline in the ROA. JB Hi-Fi Ltd generated 15.56 cents of profit per dollar of investment in
assets in 2015; its profit-generating ability was lower in 2014 when $1 of investment in assets generated
15.08 cents of profit. Increased profitability and asset efficiency can contribute to an ROA improvement.
In terms of profitability, JB Hi-Fi Ltd’s gross profit margin was higher than 20 per cent in both years.
This reflects the company’s low pricing strategy. The gross profit margin for JB Hi-Fi Ltd increased
slightly, with $1 of sales revenue in 2015 resulting in 21.86 cents of gross profit (21.70 cents in 2014). If
$1 of sales revenue resulted in 21.86 cents (21.70 cents) of gross profit in 2015 (2014), the cost of sales
must therefore have accounted for 78.14 cents of each sales dollar in 2015 (78.30 cents in 2014). This
suggests that either (1) input prices decreased, and/or (2) JB Hi-Fi Ltd increased selling prices more in
2015 than in 2014. The change in the gross margin could also reflect a change in the mix of products
sold by JB Hi-Fi Ltd. Some product categories would have higher margins relative to those of other
product categories. Selling a higher proportion of higher margin products would be beneficial to JB
Hi-Fi Ltd’s gross profit margin. For example, the establishment of their online store could have changed
the product mix.