Accounting Business Reporting for Decision Making

336 Accounting: Business Reporting for Decision Making

JB Hi-Fi Ltd converted $1 of sales revenue into 3.69 cents of profit in 2014, and this increased to

3.74 cents in 2015. Users would have been pleased with this improved profit margin. The profit margin

for an entity is a function of the industry it operates in. Low-volume businesses have higher profit mar-

gins while high-volume businesses tend to operate with lower profit margins. The increase in profit

margin reflects the company’s higher gross profit margin in 2015 relative to 2014. The profit margin is

also affected by expense ratios, so attention now turns to these.

An entity’s expenses (excluding the cost of sales) can be expressed (in aggregate or individually)

as a percentage of sales revenue to determine which expenses have increased or decreased rela-

tive to sales revenue. From JB Hi-Fi Ltd’s statement of profit or loss (figure 8.2), the sum of the

entity’s sales and marketing, occupancy, administration, significant items and other expenses totalled

$603 352 000 in 2015 ($573 824 000 in 2014). Expressed relative to sales revenue, these expenses

represent 16.52 cents of every sales dollar in 2015 (16.47 cents in 2014). This analysis identifies that

JB Hi-Fi Ltd’s costs were a higher proportion of revenue in 2015 relative to 2014. All expense ratios

increased in 2015 relative to 2014 except for administrative and finance expenses. The increase in the

occupancy expense ratio reflects the growth in the number of stores. JB Hi-Fi Ltd also spent a higher

percentage of sales revenue on sales and marketing expenses in 2015 compared to 2014, reflecting

the competitive nature of this industry. The decrease in the finance expense ratio, with finance costs

representing 0.16 cents (0.25 cents) of $1 of revenue in 2015 (2014), was due to lower borrowings as

well as lower interest rates.

The cash to sales ratio for JB Hi-Fi Ltd suggests that every dollar of sales revenue generated 4.93 cents

of net operating cash flows in 2015, compared to 1.19 cents in 2014. Any improvement in this ratio is

favourable, although cash flow timing affects this ratio.

The reality check ‘Commonwealth Bank makes multibillion dollar profit on more lending’ discusses

profit margins in the banking sector.

REALITY CHECK

Commonwealth Bank makes multibillion dollar profit on more lending

Despite what it is calling a competitive mortgage market, the country’s biggest home lender has just

announced an 8 per cent rise in its half year profit. The Commonwealth Bank says cash profit came in at

$4.6 billion. But chief executive Ian Narev is warning of a significant economic threat as Australia moves

away from a resource dependent economy. Explaining the results, the CEO noted:

‘... Banks have many levers they can pull to adjust their bottom line and that’s exactly what we saw

during this last six months — the six months til the end of December.’

Now the Commonwealth Bank did overall have, make what’s called a net interest margin, they had a

lower net interest margin, and that’s the difference between what they borrow funds at — the interest

rate at which they borrow funds — and the interest rate that they get from borrowers. So that was

down.

But the retail net interest margin was up and that’s because... borrowers may be paying less to

borrow home loans, but depositors are getting a lower interest rate on their savings.

And just after the Reserve Bank cut interest rates last week, we saw the Commonwealth Bank also

cut its headline standard variable mortgage rate but it’s also lowered deposit rates, and in fact it lowered

deposit rates sooner before it cut interest rates, so that’s how banks make their money.

The other issue is that to get over, banks use a lot of overseas funding and so the Commonwealth

Bank is paying less for overseas funding from wholesale markets because that’s the economic cli-

mate now, and also they get a lot of their home loan money from their own deposits so in fact about

two-thirds.

So they’ve got a lot of variables that they can pull so it doesn’t automatically follow that their profits

will be lower.

Source: Lannin, S 2015, ‘Commonwealth Bank makes multibillion dollar profit on more lending’, ABC News,

11 February.