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Assessment 3: Case Study 2: JB Hi-Fi Limited
Student's name
Institution of Affiliation
,ASSESSMENT 3: CASE STUDY 2: JB HI-FI LIMITED 2
Executive Summary
With good fundamentals and excellent future development potential for investors, JB Hi-
Fi Limited's five-year study reveals a well-run company. New rivals and some other online
retailers like Amazon and Kogan are trying to retake market share, which might have a negative
impact on the company's future profitability. Since their low-cost business strategy limits their
price flexibility and their products are elastic, the company has a small Net Income Margin. This
is a problem management must always be on the lookout for. The low new debt mix and 65
percent dividend payment ratio of JB Hi-Fi, which is in a rapid growth stage of the company's
life cycle, ensure that profits are retained for future growth while also appropriately rewarding
shareholders. A greater debt expenditure might lower the effective tax rate for the company, and
it does not still have steady enough working capital to service more debt. Some of the many
reasons why JB Hi-Fi is acting in the best interests of all stakeholders include its award-winning
customer service, year-over-year earnings increases, and a consistent selection of projects that
return well above their cost of capital. These factors combine to make JB Hi-Fi an excellent
addition to a well-diversified portfolio.
,ASSESSMENT 3: CASE STUDY 2: JB HI-FI LIMITED 3
Contents
Executive Summary.........................................................................................................................2
Introduction......................................................................................................................................4
Risk and Return................................................................................................................................5
Calculation of historical risk factors............................................................................................5
Determination of Whether Its Sahre is Overvalued or Undervalued...........................................9
Debt Cost and Default Risk of JBH...........................................................................................10
Cost of Capital Estimation.........................................................................................................12
EARNINGS AND CASH FLOWS...............................................................................................13
Performance of Existing Investment..........................................................................................13
Evaluation of the competitive advantages' long-term viability.................................................16
JBH SWOT Analysis.............................................................................................................18
SOURCES OF FINANCING........................................................................................................20
Current Financial Conditions.....................................................................................................21
Debt Costs and Benefits.............................................................................................................22
Agency Cost...............................................................................................................................24
POLICY OF DIVIDEND..............................................................................................................24
Evaluation of JBH's Historical Dividend Policy........................................................................25
JBH’s Company Characteristics................................................................................................27
Cash Custodians.........................................................................................................................27
Peer Group Analysis..................................................................................................................30
Recommendations and Conclusion................................................................................................30
References......................................................................................................................................32
Appendix........................................................................................................................................35
, ASSESSMENT 3: CASE STUDY 2: JB HI-FI LIMITED 4
Introduction
The case study illustrates JB Hi-Fi Ltd, a home entertainment shop, to see how well it
operates and whether it is a good investment. The study is aided by five years of financial and
business data (FY 2012-2017), which are used to analyze the Company's current: Return and
Risk structure; Earnings and cash flows, Financing sources and dividend policies. This period
was chosen over a longer period because it better represents the firm's recent performance and is
far more suited, unlike a shorter time span since it is less impacted by important company
activities (Damodaran, 2015). The components of the analysis report include:
a) The Company's return and risk profiling will assess the firm's productivity compared to
the market and calculate the weight and cost of equity and debt to determine capital costs
of the Company's capital costs.
b) Cash flows and Earnings of the Company is assessed to identify the performance of
existing investment portfolios and if the Company possess any competitive potential
relative to all other competing companies in their sector.
c) The firm's present financing options will be evaluated to see if the proper balance of
equity and debt is being used, as well as the arising trade-offs that arise.
d) Lastly, the breakdown of the dividend policy is evaluated to examine if shareholders are
receiving enough remuneration for their contribution and in what manner.
The Company's Background
JB Hi-Fi deals with video musical, consumer, video, electronics, and home appliance
shop established in 1974 in Victoria by entrepreneur John Barbuto (JB). In the year 2000, senior
executives with private equity lenders bought the Company to extend its activities. According to
JB Hi-Fi (2018), by 2003, the business was listed in the Australian Stock Market (ASX), and
then in 2004, it purchased the Clive Anthony retail chain, that offered consumer electronics,
household appliances, and office equipment, and renamed it as JB Hi-Fi HOME. JB Hi-Fi
presently has 201 locations in New Zealand and Australia, with an additional 102 outlets
following the 2016 takeover of another firm called the Good Guys (JB Hi-Fi, 2017). Morningstar
Inc (2018) states that JBH market capitalization of $2,674.03 million at the end of June 2017,
with a hooping price of $23.37 million per share as well as $114.42 million in outstanding
shares.
Assessment 3: Case Study 2: JB Hi-Fi Limited
Student's name
Institution of Affiliation
,ASSESSMENT 3: CASE STUDY 2: JB HI-FI LIMITED 2
Executive Summary
With good fundamentals and excellent future development potential for investors, JB Hi-
Fi Limited's five-year study reveals a well-run company. New rivals and some other online
retailers like Amazon and Kogan are trying to retake market share, which might have a negative
impact on the company's future profitability. Since their low-cost business strategy limits their
price flexibility and their products are elastic, the company has a small Net Income Margin. This
is a problem management must always be on the lookout for. The low new debt mix and 65
percent dividend payment ratio of JB Hi-Fi, which is in a rapid growth stage of the company's
life cycle, ensure that profits are retained for future growth while also appropriately rewarding
shareholders. A greater debt expenditure might lower the effective tax rate for the company, and
it does not still have steady enough working capital to service more debt. Some of the many
reasons why JB Hi-Fi is acting in the best interests of all stakeholders include its award-winning
customer service, year-over-year earnings increases, and a consistent selection of projects that
return well above their cost of capital. These factors combine to make JB Hi-Fi an excellent
addition to a well-diversified portfolio.
,ASSESSMENT 3: CASE STUDY 2: JB HI-FI LIMITED 3
Contents
Executive Summary.........................................................................................................................2
Introduction......................................................................................................................................4
Risk and Return................................................................................................................................5
Calculation of historical risk factors............................................................................................5
Determination of Whether Its Sahre is Overvalued or Undervalued...........................................9
Debt Cost and Default Risk of JBH...........................................................................................10
Cost of Capital Estimation.........................................................................................................12
EARNINGS AND CASH FLOWS...............................................................................................13
Performance of Existing Investment..........................................................................................13
Evaluation of the competitive advantages' long-term viability.................................................16
JBH SWOT Analysis.............................................................................................................18
SOURCES OF FINANCING........................................................................................................20
Current Financial Conditions.....................................................................................................21
Debt Costs and Benefits.............................................................................................................22
Agency Cost...............................................................................................................................24
POLICY OF DIVIDEND..............................................................................................................24
Evaluation of JBH's Historical Dividend Policy........................................................................25
JBH’s Company Characteristics................................................................................................27
Cash Custodians.........................................................................................................................27
Peer Group Analysis..................................................................................................................30
Recommendations and Conclusion................................................................................................30
References......................................................................................................................................32
Appendix........................................................................................................................................35
, ASSESSMENT 3: CASE STUDY 2: JB HI-FI LIMITED 4
Introduction
The case study illustrates JB Hi-Fi Ltd, a home entertainment shop, to see how well it
operates and whether it is a good investment. The study is aided by five years of financial and
business data (FY 2012-2017), which are used to analyze the Company's current: Return and
Risk structure; Earnings and cash flows, Financing sources and dividend policies. This period
was chosen over a longer period because it better represents the firm's recent performance and is
far more suited, unlike a shorter time span since it is less impacted by important company
activities (Damodaran, 2015). The components of the analysis report include:
a) The Company's return and risk profiling will assess the firm's productivity compared to
the market and calculate the weight and cost of equity and debt to determine capital costs
of the Company's capital costs.
b) Cash flows and Earnings of the Company is assessed to identify the performance of
existing investment portfolios and if the Company possess any competitive potential
relative to all other competing companies in their sector.
c) The firm's present financing options will be evaluated to see if the proper balance of
equity and debt is being used, as well as the arising trade-offs that arise.
d) Lastly, the breakdown of the dividend policy is evaluated to examine if shareholders are
receiving enough remuneration for their contribution and in what manner.
The Company's Background
JB Hi-Fi deals with video musical, consumer, video, electronics, and home appliance
shop established in 1974 in Victoria by entrepreneur John Barbuto (JB). In the year 2000, senior
executives with private equity lenders bought the Company to extend its activities. According to
JB Hi-Fi (2018), by 2003, the business was listed in the Australian Stock Market (ASX), and
then in 2004, it purchased the Clive Anthony retail chain, that offered consumer electronics,
household appliances, and office equipment, and renamed it as JB Hi-Fi HOME. JB Hi-Fi
presently has 201 locations in New Zealand and Australia, with an additional 102 outlets
following the 2016 takeover of another firm called the Good Guys (JB Hi-Fi, 2017). Morningstar
Inc (2018) states that JBH market capitalization of $2,674.03 million at the end of June 2017,
with a hooping price of $23.37 million per share as well as $114.42 million in outstanding
shares.
