Question

What are the answers to the following ratios for company JB-HIFI 2017 and 2016 with explanation and workings.

ANNUAL REPORT: https://www.jbhifi.com.au/Documents/2017%20Annual%20Report.pdf

EQUATIONS:

Times Interest Earned Ratio

Return on Total Assets

Thanks prior.

Answer 1

Times Interest Earned = EBIT/Interest Expense

In 2017:
Profit Before Tax = $259.2 million
Interest Expense = $9.6 + $0.7 = $10.3 million
EBIT = $259.2 million + $10.3 million = $269.8 million

Times Interest Earned = $269.8 / $10.3 = 26.19417

In 2016:
Profit Before Tax = $217.8 million
Interest Expense = $3.5 + $0.3 = $3.8 million
EBIT = $217.8 million + $3.8 million = $221.6 million

Times Interest Earned = $221.6 / $3.8 = 58.31579

Times Interest Earned ratio reveals the capacity of a firm to pay its interest liability. For JB Hi-Fi, the ratio in 2016 was 58.31579, which means it earned almost 58 times of its interest expense. In 2017, it was 26.19417, which means it earned almost 26 times of its interest expense. This indicates that the company has earned enough to meet its interest liabilities.

Return on Total Assets = Net Income / Total Assets

In 2017:

Total Assets = $2,452.3 million
Net Income = $172.4 million

ROA = $172.4 / $2,452.3 = 7.03%

In 2016:

Total Assets = $992.3 million
Net Income = $152.2 million

ROA = $152.2 / $992.3 = 15.338%

Return on Total Assets tells how much return a firm generated on the total assets it has. This is a profitability indicator. As calculated above, the ration in 2016 was 15.338% which was dragged down to 7.03% in 2017. This clearly shows a deterioration of the performance, if analyzed in isolation. However, when we see the level of assets, we find a sharp increase in 2017. This means that company has invested a huge amount into assets during year and all the assets has not started generating profits.