CHAPTER 8 Analysis and interpretation of financial statements 351JB Hi-Fi chief executive Richard Murray said the first quarter of this financial year had been
weak, and there had been one-off factors boosting the previous comparable result. ‘We exe-
cuted the key Christmas trading period well, maintaining our price leadership and keeping costs
well controlled while investing for future growth in HOME, commercial and online,’ he noted in the
report.
JB Hi-Fi continued to rollout expanded stores that also sell appliances and whitegoods, its HOME
format, opening three more in the half-year and converting 14 existing stores. The retailer said it had
39 HOME format stores by December 31, 2014; in the current half-year JB Hi-Fi expects to convert a
further 11 stores and open two new shopfronts in the HOME format.
Mr Murray said the retailer had got off to a good start to 2015, with January sales up 8.9 per cent and
comparable sales 7 per cent, and year to date sales now up 2.2 per cent and comparable sales edging
up 0.2 per cent. ‘January sales and operational earnings are ahead of the same period last year and
year to date comparable sales growth is now positive,’ he said.
‘This gives us confidence on our momentum for the second half.’
However, not confidence that JB Hi-Fi will beat 2014’s full-year result. It is forecasting annual sales
of $3.6 billion and a net profit in the range of $127–131 million, compared with last financial year’s
$128 million profit.
Source: Janda, M 2015, ‘JB Hi-Fi profit falls, earnings outlook subdued’, ABC News, 2 February.8.10 Limitations of ratio analysis
LEARNING OBJECTIVE 8.10 Discuss the limitations of ratio analysis.
There are a number of limitations of ratio analysis. Some limitations relate to the nature of the finan-
cial statements and the data disclosed (or not disclosed), while others are inherent in the nature of
the financial ratios themselves. The limitations of the analytical process need to be considered when
interpreting and relying on the ratios to form an opinion about an entity’s financial health, past,
present and future.
Ratio analysis relies on financial numbers in financial statements. Accordingly, the quality of
the ratios calculated is dependent on the quality of an entity’s financial reporting. The quality may
be affected by inadequate disclosures and details in an entity’s financial statements and/or in its
accounting policy choices and estimations. Financial statements often aggregate numbers, with some
separate figures reported in the notes to the accounts. The information needed to calculate a par-
ticular ratio may not be available, so an alternative financial number will have to be used instead.
There exists a variety of ways to account for some transactions (e.g. the measurement of property,
plant and equipment). If ratios are being calculated for different entities, it is important to establish
that the entities account for transactions in the same manner. If the entities adopt different methods
of accounting, the ratios may not be comparable. We have also seen that many of the reported
accounting numbers involve estimations (e.g. doubtful debts), so it is important to consider how such
estimations affect the ratios.
Many of the ratios that we calculated relied on asset, liability or equity numbers reported in the
balance sheet. Remember that this statement reflects the financial position of an ongoing entity at
a particular date and may not be representative of the financial position at other times of the year.
For example, an entity may sell (buy) substantial assets close to the end of the reporting period.
Using the figures at year-end will therefore overstate (understate) the return on assets, all else being
equal. We have tried to compensate for this by using average balances when comparing stock and
flow items. However, such an averaging process is an approximation, and for assets sold (purchased)
close to year-end, the averaging process used will understate (overstate) the ‘real’ average asset
balance.