Financial statement analysis Essay

pecuniary statement compendium is a process which examines past and current mo give noniceary data for the purpose of evaluating mathematical process and projecting future risks and potential of a lodge.Financial statement analysis is uptake by various pile and companies for different reasons, e.g. investors, creditors, l residualing officers, managers, employees and many other parties who rely on fiscal data for making economic decisions about a confederation.The objective of this David Jones fiscal statement analysis is to identify the orders performance issues, to show suggestions and recommendations by employing the Ratio Analysis method and analysing gainfulness, readiness, Short and Long bound Solvency, and by using Market Based Ratios.The fol starting timeing composing out frontiers the monetary performance of David Jones Limited based on the FY2011 & FY2012 yearbook Reports. The key measures used to assess company performance atomic number 18 lettuceabili ty, Efficiency, Short & semipermanent Solvency and Market-Based Ratios. David Jones has performed rise up in a few atomic number 18as which include having good cash f abjects, low debt, a square balance sheet and assets in prime locations nonwithstanding there is definite room for improvement with regards to gross sales performance, and it needs to conduct the graduate(prenominal) cost of sales and sluggish inventory in severalize to turn roughly company profitability and performance.We pay back studied your 2011 and 2012 financial reports and statements and can see that your companys sales performance has been declining course on year. sales revenue for FY2012 was pot -4.8% when compared to FY2011, and FY2011 sales were down -4.45% vs. FY2010.Your chairwoman and steering have blamed this on the depressed consumer sentiment and extend global competition as a emergence of the strong Australian currency. The uncertainty of Europe and USA and volatility in global blondness market have contributed to a general flavoring of uncertainty, the strong Australian dollar as well contributed to impairment deflation and supportd spending offshore. (page 2, yearbook Report) realiseabilityIn FY2012, every(prenominal) measures of profitability were con ramprably down on prevail year. Gross Profit was down from $767m to $670m, and the Gross Profit margin (GP %) was down 160bp to 37.5% (-4.2% on FY2011 39.1%). The poor GP % has been the give of discounting in a warring environment and dealing with excess inventory on hand at the commencement of FY2012 (page 5, yearly Report).When compared to your main(prenominal) competitor Myer (Market Capitalization 1.59b1 Vs. DJS 1.477b2), there is a large variance between the Gross Profit Margins of the two companies (Myer GP % FY2012 49.3%3, +160bp from previous year, DJs-FY2012 37.47% -160bp). This can be attributed to Myers much start out make up of Goods Sold (COGS) (Myer 56% Vs. DJs 62.5% in FY2012).My er has a competitive advantage in the marketplace with a big network of hive aways and greater buying power. Their larger volume of purchases may mean they are able to obtain lower cost prices with suppliers. However, there are a few key areas you have identified in your prospective Strategic Direction plan which we feel result take care in lowering your COGS and result in a give away GP % rate.Firstly, signing exclusive brands to your portfolio will ensure carrefour differentiation to customers and better ascendance over supplier trading name and prices. Secondly, the Cost price Harmonisation that you are engaging in with suppliers (page 3, Annual Report) is key to maintaining your GP % and ensuring that your COGS do not rise and prices do not become uncompetitive with international sellers. Thirdly, discontinuing lower margin categories and moving towards a greater product mix of high margin categories (page 4, Annual Report) will increase your GP % in the long run and ensure you maximise the profit outcome from the inventory you carry. For example, introducing more private label admit brands could be one strategy in which to increase the proportion of higher margin products in your portfolio.The concluding Profit Margin in FY2012 surrenderped drastically compared to FY2011 (-36.9%, $101 vs. $168 billion), with sales revenue dropping -4.8% ($1.867b vs. $1.962b). It was however, on par with Myer at 5.4%.The main factor contributing to the big drop in net profit were the high direct expenses over FY2012. Depreciation expenses were up by +13.23%, leasing expenses were up by +6.1%, advertising and marketing had gone up +19%, administration expenses were up by +29.4%, and finance costs were up +40%. Excess inventory during the clearance period also resulted in heavier discounting and contributed to the fall in net profit.Whilst your company has noted Cost of Doing Business (CODB) Reductions as one of the points in your Future Strategic Directi on Plan, there are many other areas that can be addressed to ease operating costs. For example, a reduction in the size of all or almost of your retail breeds will result in savings in store costs such as leasing, staff, utilities, and so on. This could be implemented in conjunction with the Omni Channel Retailing strategy as highlighted as the frontmost point in your Future Strategic Direction Plan (page 3, Annual Report), as customers move away from traditional bricks and mortar shops and increasingly to online shop destinations. The excellent growth rate in HY2013 of your online store4 highlights the opportunities in the online channel and the trade in customer shopping behaviour.With regards to the Asset Turnover ratio, your company performed just about better than Myer Holdings in FY2012 (1.5 Vs 1.34, Refer to vermiform appendix B). Internally, there was an 8% drop that was receivable to sluggish sales performance (1.5 Vs. 1.63, Refer to Appendix A).Since your Net Profit Margin dropped dramatically in FY2012, the Return on Assets (ROA) followed campaign and decreased by -41% (from 13.96 to 8.23, refer to Appendix A) not a trusty result in asset management performance. Your companys seat portfolio consists of 4 edifices valued at $612 million (page 5, Annual Report). All of these buildings are in the prime locations, with two in the Sydney CBD and two in the Melbourne CBD. The lease income is assumed to be in the vicinity of $39 million per annum (page 5, Annual Report). If a reduced size store was considered, a potential income of $10-15 million could be generated per annum, increasing the net profit percentage by 9-14% (Net Profit FY2012 $101,103,000). Your companys re-development consideration is a long-term process and we conceive it will be successful in generating positive ROA with the appropriate planning. better the Gross Profit margin while maintaining current overheads will result in a positive increase in the Net Profit margin posi tion and enhance the overall performance of the company.EfficiencyEfficiency is more meaningful when compared to peers in the same industry and can assist in identifying vexationes that are better managed relative to others.By comparing your figures with Myer, your company performed better in Inventory Turnover (89 old age vs 96 days, Appendix A & Appendix B), which direction you have a better stockturn and are generating revenue from your inventory in a shorter period of time. However, 89 days is still a fairly high measure as it means you are sitting on stock for an average of 3 months originally it is sold through. To improve your inventory turnover, you could consider dropping your best inter flip-flop items more frequently to stores, but with smaller quantities each time. This will ensure that the stores which are selling through the stock quickest remain in stock at all times, without a large amount of unsold stock building up in the slower performing stores and affecting y our inventory turnover. It also means you will be generating sales and cash more pronto from your stock investment.Myer performed slightly better on Average Days Sales Uncollected (DJS 3.5 days vs. Myer 2.5 days, Appendix A & B). To improve this measure for example, you could encourage more online sales to generate faster turnover into cash than store card sales which are monthly billings.Internally, FY2012 performed slightly better than FY2011 in Average Days Sales Uncollected (FY2012 3.5 vs. FY2011 4 days) but worsened in Inventory Turnover (FY2012 89 vs. FY2011 87 days). The rests were negligible.Short-Term SolvencyDavid Jones has a good ability to meet its short-run financial obligations, with a online Ratio of 1.05 in FY2012 (Appendix A) outperforming Myer at 0.88 (Appendix B). However, since the Quick Ratio is not high at 14.4% (Appendix A), short-term liquidity could be an issue. When compared with Myer at 11% (Appendix B), David Jones has performed better.The legitimate Ratio performed better in FY2011 than FY2012 by 14.6% (Appendix A). The main reason for this is the 15.1% increase in Current Liability ($306 million Vs. $266 million), with the $40 million difference due to an increase in Account Payables. There is no change in the Quick Ratio from FY2011 to FY2012 (14.4%), i.e. on the low side and short-term liquidity can be an issue, should not allow it to be deteriorate.The bills & Cash Equivalents and Receivables figures totaled $36.935 million which represented around 14% of Payables in the 2012 Annual Report. In decree to achieve a better short-term liquidity position, a more efficient ordering & inventory control system should be implemented. Less inventory on hand equates to more cash and liquidity. Excess inventory can jeopardize a companys liquidity, in addition to causing stock problems and markdowns at the end of a season as was evidenced in FY2012.Long-Term SolvencyYou company performed much better than Myer Holdings in the area of Long-Term Solvency. Your company has present consistency in this area and long-term solvency should not be an warm issue with your organization.The Debt to Equity ratio showed that there was an increase of 11% in FY2012 compared with FY2011 (Refer to Appendix A), i.e. the liability has gone up relative to shareholders equity. The main part to the increase is due to the +22.3% ($265m Vs. $216m) increase in the Payables account. It is important to ensure that this crusade does not continue and that debt does not continue to rise when compared to equity levels.With strong non-current assets of $917 million & total assets in excess of $1.24 billion, the Debt to Total Assets ratio is healthy, with FY2011 at 35% and FY2012 at 37% (Refer to Appendix A) respectively. The extra 2% was due to the liability increase and it was the fallout of excess inventory as discussed in the short-term solvency section.Market-based RatiosTo calculate the Price/Earnings (P/E) Ratio, we used the share pri ce on 16/5/2013 ($2.80). This equates to a PE ratio of 14.43, with the Earnings return ratio at 6.93% and the Dividend issue ratio at 6.25% (dividend was 17.5c).Myer Holdings dividend yield was around 7% (dividend of 19c with share price at $2.70). The market-based ratio is higher than your main competitor (Myer PE ratio is 11.8)5. However the Price/Earnings ratio indicates that straight offs share price of the company is on the low side as it is below 15. The majority of analysts believe that the company is performing below par and do not recommend buying or prop David Jones shares at the moment.Eva Brocklehurst of FNArean.com is quoted as saying in March 2013, David Jones (DJS) is transforming. For brokers its not a moment likewise soon, as department stores have been plagued by a soft consumer environment and a need to respond to tender trends in shopping. In its first half results the company has flagged progress with its strategic plan, reducing costs and expanding marg ins. Earnings were ahead of expectations for the half but sales growth was not. What pleased was the increased margin. What concerns brokers? Most importantly, a lack of sales momentum.Theres no Buy rating on the FNArena database. two brokers have downgraded ratings to Sell in the wake of the results. There are 5 Sell ratings. There was one upgrade to Hold, and there are 3 Hold ratings. The consensus target price is $2.73, suggesting 11.5% downside to the last traded share price. A dividend yield of 5.5% is reflected in consensus earnings forecasts for FY13.6Performance IssuesAs highlighted above, your declining sales performance is the biggest concern for shareholders and needs to be addressed immediately. Whilst earnings were ahead of expectations, this was managed by cost reductions and a move towards increased margins. An improvement in sales in conjunction with the efforts youre undertaking to reduce expenses and the cost of doing business will result in an improvement in th e bottom line and signal confidence in the company and a turnaround for investors.David Jones has been labelled as an up-market department store. Australias $12 billion fashion retail industry is forecast to grow by unaccompanied 0.5% in FY2012 with only an average 1.2% annualised growth expected for the next 5 years, according to analysis group IBISWorld. Furthermore, IBISWorld says shoppers are now more likely to buy low to mid-range priced clothing which has contributed to the declining value of retail sales. In general, the outlook is not too positive for the industry.7Greater differentiation is required between David Jones and Myer in order to attract and retain customers. Mark Ritson, Associate Professor of Marketing at Melbourne Business School commented, David Jones and Myer are just two sides of same softened coin. He says, I still believe to this day that most spate coming out of either David Jones or Myer on Bourke Street acquiret know which one they just come out of .7Some of the issues have been addressed by your companys Future Strategic Direction Plan, for example, a move towards Omni Channel Retailing, building a Home of Brands strategy which differentiates David Jones from Myer, and cost improvements including GP margin improvements, CODB reductions and Cost Price Harmonisation with suppliers (pages 3-6, Annual Report).ConclusionA thorough review of your companys FY2011 and FY2012 Financial Report & Statements has indicated that David Jones has a strong balance sheet, solid cash flows, low debt, and assets in prime locations. David Jones has performed on par, or better than Myer in the areas of Net Profit Margin, Asset Turnover, Inventory Turnover, and Short & Long-term Solvency.However, the companys declining sales performance is the biggest area of concern. Almost all measures of profitability were worse than Myer and have been falling when compared to David Jones own performance in prior years. We believe that further differentiation fr om Myer, cost reductions & margin improvements, harmonisation of prices to become more competitive with international competitors, better inventory management & a reduction in excessive stock, reduced retail grade space, and the move towards Omni-Channel Retailing will enhance the value of your company and result in better performance for all stakeholders.We hope this report has provided perceptive recommendations into improving the performance of your company.This report has been generated for your companys own course credit and not for any other purposes. Other companies or individuals should not use or rely on any material contained within this report without the consent of our office.