Analysis of Stock Price

Question: Discuss about theAnalysis of Stock Price. Answer: Evaluation of the Stock Price Changes of JB Hi-Fi Limited In order to analyse the performance of a stock, it is essential to evaluate the changes in the price of the stock over a time period and track the reasons for such changes. The reasons for change in the price of stock range from micro to macro economic factors such as companys profitability, performance, and overall economic and political environment in the country in which the company operates (Moyer, McGuigan, and Rao, 2014). In the context of this, the changes in the stock price of JB Hi-Fi Limited have been evaluated taking a period of 10 years. The graph showing movements in the stocks price of JB Hi-Fi Limited over the period of 10 years is shown below: Figure 1: JB Hi-Fi Limited Stock performance From the trend line shown in the graph, it can be observed that the price of the stock increased rapidly from the year 2006 to 2010. This was due to the high growth in the revenues and the net profits achieved by the company during this period. The revenues of the company grew to $2.73 billion in the year 2010 from $1.83 billion in the year 2008. Further, the net profit increased up to $118.70 million in the year 2010 from $65.10 million in the year 2008 (Annual Report of JB Hi-Fi, 2012). Since, the company does not have global presence outside Australia and New Zealand, therefore, the impact of export/ import policy and inflation is expected to be minimal on the stock price of the company. However, the political environment and the overall economic environment affect all the company operating in the country. The political environment in Australia and New Zealand has always been observed to be stable and liberal for the business concerns (Australian Government, 2016). Further, the economy of Australia was also observed to be booming during 2006-10, which is evident from the 23.62% and 23.31% growth in the gross domestic product in 2008 and 2010 respectively (Trading Economics, 2016). After the year 2011, there was observed a heavy downfall in the stocks price in the year 2012 and 2013, which was mainly due to industrial downturn. During this period, the entire retail industry faced challenging conditions. One of the major competitors of JB Hi-Fi Limited namely Dick Smith collapsed due to discovery of frauds by the management (Mitchell, 2015). This sudden collapse of Dick Smith also affected the stock prices of JB Hi-Fi Limited because the investors lost faith in retail industry and sold out their holdings. Evaluation of the Competitive Strategy of JB Hi-Fi Limited The level of competition in the market has a great bearing on the financial performance of a company. Thus, it becomes essential for a company to analyse the competitive forces and enforce suitable policies to challenge the competition and achieve the sustainable growth. In order to analyse the competition and frame suitable policies to challenge it, the five forces prescribed by the Porters model are considered to be suitable. These five forces are threat of new entrants, threat of substitute, bargaining power of the buyers, bargaining power of the suppliers, and industry rivalry (Hill and Jones, 2009). JB Hi-Fi Limited is engaged in retailing the home consumer products through retail stores as well as through online marketing platforms in Australia and New Zealand (Annual Report of JB Hi-Fi, 2012). The industry, which the company operates in, is highly competitive in not only in Australia and New Zealand, but across the globe. In Australia, Woolworth Limited, Wal-mart Stores Inc., and Tesco Plc are the major global competitors of JB Hi-Fi Limited (listovative.com, 2016). Further, the company is also facing stiff competition from the Australian local retailers such as WOW Sight Sound and Dick Smith. In order to survive in this competitive outlook of the retail industry, the company has adopted suitable strategies over the period of last 10 years. The company has been focusing on the high quality services to the customers with the aim to achieve 100% customer satisfaction. The high quality in services laid the competition to go down for many years, but in the recent few years, with the introduction of the new entrants with the reduced prices, the company is facing problems. In order fight with the new entrants, the company reduced prices of its products to match up the competitors prices, which is evident from the downfall in the gross profit margin of the company in the financial year 2012 (Annual Report of JB Hi-Fi, 2012). The gross profit margin for the financial year 2012 was down by 0.09% as compared to the previous year 2011. The CEOs report explained that reduction in the prices is the primary reason for downfall in the gross margin in the year 2012 (Annual Report of JB Hi-Fi, 2012). Accounting Analysis of JB Hi-Fi Limited The analysis of the accounting framework that the company employs in preparation of financial statements is crucial in taking investment decisions prudently. The risk averse investors put much emphasis on the historical financial performance of the company, thus, it is very important for them to know the accounting policies and the framework used by the company in preparing its financial statements (Cahill, 2013). The accounting policies may differ from organisation to organisation and from period to period. The adoption of different accounting policies in the same areas of accounting may completely change the whole picture regarding financial performance of the company. For example, one company may compute depreciation on straight line basis, while, the other may apply written down value method. The amount of depreciation in both the cases would be different affecting the net profit of the companies (Cahill, 2013). In the context developed above, the accounting framework and the policies of JB Hi-Fi Limited have been analysed here. It has been observed that the company applies the framework in preparation of its financial statements as prescribed by the Australian Accounting Standard Board (Australian Government, 2016). However, there are certain areas in which a company may adopt different accounting policies, such areas for JB Hi-Fi Limited, have been identified as the stock valuation, depreciation, treatment of goodwill, retirement benefits, and valuation of investments. As per the impendent auditors report, the company has complied with the requirements of the Australian accounting standards, however, the areas such depreciation on plant and equipment, leases, and treatment of derivatives and hedging activities requires special attention of the investors. Therefore, these areas should be inquired into detail by the investors before taking any decision regarding making investment decision (Cahill, 2013). References Annual Report of JB Hi-Fi. 2012. Financial Summary. [Online]. Available at: https://www.jbhifi.com.au/Documents/Annual%20Reports/119_2012-09-14_11-11-23.pdf [Accessed on: 24 August 2016]. Australian Government. 2016. Australian Accounting Standard Board. [Online]. Available at: https://www.aasb.gov.au/Pronouncements/Conceptual-framework.aspx [Accessed on: 24 August 2016]. Australian Government. 2016. Charts from the Benchmark Report. [Online]. Available at: https://www.austrade.gov.au/International/Invest/Why-Australia/Business [Accessed on: 24 August 2016]. Cahill, M. 2013. Financial times guide to making the right investment decisions: how to analyse companies and value shares. Pearson UK. Hill, C. and Jones, G. 2009. Strategic management theory: an integrated approach. Cengage Learning. listovative.com. 2016. Top 15 Worlds Biggest Retail Giants. [Online]. Available at: https://listovative.com/top-15-worlds-biggest-retail-giants/ [Accessed on: 24 August 2016]. Mitchell, S. 2015. Why the Dick Smith disaster has JB Hi-Fi worried. [Online]. Available at: https://www.smh.com.au/business/retail/why-the-dick-smith-disaster-has-jb-hifi-worried-20151201-glc9jh.html [Accessed on: 24 August 2016]. Moyer, R.C., McGuigan, J.R., and Rao, R.P. 2014. Contemporary financial management. Cengage Learning. Trading Economics. 2016. Australia GDP. [Online]. Available at: https://www.tradingeconomics.com/australia/gdp [Accessed on: 24 August 2016].