The question asks us to compare and evaluate JB Hi-Fi’s calculated ratio report, with that of the retail industry ratio report (Potter, Libby, Libby, Short p. 1133). The retail ratio report is comprised of a basket of listed companies which operate under the retail banner, which makes it relevant to use as a comparison to JB Hi-Fi.
1. Liquidity ratios are a class of financial metrics that is used to determine a company's ability to pay off its short-terms debts obligations. Generally, the higher the value of the ratio, the larger the margin of safety that the company possesses to cover short-term debts.
Table 1: Current Ratio Current ratio: This ratio measures whether or not a firm has enough resources to pay its debts over a twelve month period, comparing its current assets, with its current liabilities. | 2010: 1.25 | 2011: 1.45 | Industry: 2.67 |
Comparison: The industry average of 2.67 indicates that for every dollar owed, companies, on average will have $2.67 available in assets to convert into cash in the short term. From the JB Hi-Fi data calculated, it is interesting to note that current ratios of 1.45 in 2011 and 1.25 in 2010 are significantly below the industry average. However, this is not too concerning because JB Hi-Fi still have a ratio above 1, and therefore would still be able to meet their current obligations. The lower figure may be explained by the fact that JB Hi-Fi may have a high turnover of current assets, such as stock, which if sold before accounts payable become due, would decrease the current ratio.
Table 2: Quick Ratio Quick ratio: This ratio examines a firm’s ability to use its quick assets to extinguish its current liabilities immediately. Inventory or stock is generally excluded from this equation in order to produce a more accurate account of the firm’s ability to meet its short term obligations | 2010: 0.33 | 2011: 0.27 | Industry: 1.92 |
Comparison: The quick ratio measure’s an