# Fundamental Analysis from Iced Earth



## iced earth (4 December 2011)

Hi Everybody,,,

I always interested in both Technical analysis and Fundamental analysis

In this topic I will try to focus on fundamental of few shares (Companies)

It will be more time consuming and boring than TA of course and I won’t be able to post as fast and as many as I am posting for TA...

I hope this topic would be useful but as always, regardless of my analyses,  I don’t have any suggestion for buying nor selling any shares ...all investors should decide and make their own decision themselves...

For the first try I will work on JBH (JB HiFi)

Regards
Mohsen


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## iced earth (4 December 2011)

Fundamental Analysis of “JB Hi-Fi Limited (JBH)” - Part 1 - 04/12/2011
================================================
General Information:

JB Hi-Fi Limited (JBH) is a specialty discount retailer of branded home entertainment products. The Group's products fall into consumer electronics, car sound systems, and music and DVDs and white goods. JBH does not operate a warehouse; instead all stock is delivered directly to each store and largely stored on the shop floor.

Company Strategy
Growth is driven by a store rollout program which adds around 13-15 sites per year with a long term goal of 214 national stores. The product mix is constantly revised to ensure competitiveness.

FY2011 financial statements:
Income statement Analysis:

Revenues:
Revenues in FY 2011 was 2,959 m$ compare to 2,731 m$ in FY2010 which shows 8% increment. Fig 1 shows that from 2003 to 2011, sales have been increased continuously. 
Consumer Electronics (CE) which represents around 75% of all sales grew by around 15% in FY2011.



Fig1 – Sales (Revenues)

Cost of goods sold and Gross margin:
In FY2011, the Gross margin was 22.03% compare to 21.76% in FY2010 which shows around 1% improvement. This consistency shows that JB HiFi has its own reliable supplier and has a Gross margin around 22% to follow. (Fig 2)



Fig2 – Gross Margin

Improving the gross margin , increased the gross profit of the company by 10% to 652m$ in 2011 from 594.2$ in 2010 (Fig 3) . (Combination of 8% improvement in Sales and 1% improvement in Gross margin)



Fig3 – Gross Profit

Operating Income:
As we saw sales was up only 8% in 2011 from 2010, because of the better gross margin, Gross profit was improved by 10%. Now we could see that operating income has been improved further by 12% in 2011 compare to 2010.It shows that company could successfully manage to keep the operating costs and cost of doing business  lower than before. (Fig4)



Fig4 – Operating Income

As we mentioned above, we see the operating margin which was 6.62%, improved by 3% from 6.40% in FY2010. This margin has been improved continuously from 2006 (fig5) which is very interesting.



Fig5 – Operating Margin
=============================
 End of Part 1


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## suhm (4 December 2011)

I've enjoyed your TA thread so good work trying to have a FA thread. At least I will probably be able to understand this thread a bit better.


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## iced earth (5 December 2011)

suhm said:


> I've enjoyed your TA thread so good work trying to have a FA thread. At least I will probably be able to understand this thread a bit better.




Thanks suhm

I am glad you have found my analyses useful
I welcome ant comment on my FA as well

Cheers
Mohsen


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## iced earth (6 December 2011)

Fundamental Analysis of “JB Hi-Fi Limited (JBH)” - Part 2 - 06/12/2011
==============================================
_*
Interest expense:*_
Interest expense was 6m$ in FY2011 compare to 5.4m$ in FY2010 (FIG 6). Company predicted that will have 13m$ -15 m$ interest expense.  This is because of “Share Buy-Back “plan that company had in 2011 and its long-term debt became increased. We will consider this in predicting FY2012 Company’s performance.as the result of this buy-back , number of “share outstanding” decreased which will increase EPS and ROE as we will study in details. 



 Fig6 – Interest Expense

_*Net Profit:*_
Net profit has been decreased by 8% from 118.7m$ in 2010 to 109.7 m$ in FY2011. We saw that operating income was up by 12% in 2011 from 2010. This unusual cut for net profit happens because of $33.35 m$ cost for “restoring Clive Anthonys stores”. This was only one-off charge and it is reasonable to take it out from the 2011 performance in order to compare it with previous years and FY2012 prediction. From now on we have the assumption that we exclude this charge from FY2011 performance. 

With taking out $33,352.00 for “restoring Clive Anthonys” expense which had after tax  effect on final profit by 24.72 m$, we would reach to Net profit of 134.4m$ in FY2011 which is improved by 13% compare to FY2010 (fig 7).
We also see continues improvement of Net profit of JB HiFi from 2003 to 2011 which is admirable and interesting. 



Fig7 – Net Profit

These outstanding results had been accomplished by increasing the “sales” and at the same time keep the “margins” improved. In Fig 8 we could see that Net profit margin has been improved from 2006 to 2011 continuously. This ultimate margin was 4.54 in FY 2011 compare to 4.35 in 2010 which shows considerable 5% improvement. This margin was merely 2.73% in 2006. (Fig 8)



Fig8 – Net Profit margin


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## iced earth (9 December 2011)

Fundamental Analysis of “JB Hi-Fi Limited (JBH)” - Part 3 - 09/12/2011

_*EPS:*_
EPS was 124.7 cents per share in FY2011 up 14% from 109.7 cents per share in FY 2010.
Fig 9 shows the EPS from has been increased from 2003 to 2011 which shows the success of JB HiFi business model. 




Fig9 – EPS

The 124.7 was accomplished because of the increasing the Net profit to 134.4 m$ and also reduction in “share outstanding “  due to company buy-back plan which reduced the average “shares outstanding” in FY2011. Fig 10 shows the “shares outstanding” from 2003 to 2011.But we should keep on mind that the average of the share outstanding has been used for EPS calculation for every FY. 
This new number of shares will be applied for FY2012 for EPS and DPS calculation.  Which will increase EPS and DPS but in the cost of increasing debt & interest expense and also reduction in shareholders’ equity which we will study in the following sections. 




Fig 10 – Shares Outstanding

_*DPS:*_
Dividend was paid to each share in FY2011 was 77cps , up 17% compare to 66cps in FY 2011. 
Fig 11 shows DPS paid to shareholders from 2003 to 2011, we could see continues improvement in DPS which shows a good return to investments during these years for shareholders. 
The company announced that it has paid 60% of its Net Profit (exclude one-off charge = 134.4m$). it means that company has paid around 80.64 m$ to its shareholders, with a simple math we could reach to the average number of shares equal to 104.7 million shares in 2011 which received dividends. This reduction in numbers of shares was due to buy-back program which happened in FY2011. 



Fig11 – DPS


_*
DPS/EPS:*_
JB HiFi has paid 62% of its EPS to shareholders in FY2011. In FY2010 this ratio was 60%.
Fig12 shows this ratio from 2004 to 2011. The board announced that they will grow dividends in line with earnings. We will assume that 60% of EPS will be given as dividend to shareholder in FY2012.



Fig12 – DPS/EPS


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## iced earth (12 December 2011)

*Fundamental Analysis of “JB Hi-Fi Limited (JBH)” - Part 4 - 12/12/2011*
==============================================
_*Balance sheet Analysis:*_
_*Assets:*_
The Asset part of JB HiFi balance sheet from 2008 to 2011 could be seen in Table-1.the changes from FY2011 from FY2010 is calculated in the last column.

​ _*Table 1 – Assets​*__*
Cash and the Equivalents:*_
The cash was 27.2 m$ which has been decreased by 47% in FY2011 compare to 51.7 m$ in fy2010. We could assume that part of this reduction was happened because of 33.35 m$ “restoring Clive Anthonys “charge.

_*Inventory:*_
Due to  the kind of business, Inventory is the most prominent number in Current asset for JB HiFi. This figure was 406.9 m$ increased by 22% from 334.8m$ in FY2010.(Fig 13)

​_*Fig13 – Inventory, Current and Total Assets (m$)​*_

The inventory has a direct relation with the number of the stores. When a new store is open, it will increase the inventory (products in hand which will be sold) . with normalising the inventories with store numbers we see that inventory value in FY2011 was very near to the average inventory normalised by shares numbers. (Fig 14)


​_*Fig14 – Inventor per Stores*_

Total current asset was 501.1 m$ in FY2011 compare to 454.5 m$ in FY2010 which shows 10% increment. Total assets was 767.1 m$ in FY2011 compare to 714.3 m$ in FY2010 (7% up) (Fig 13)

_*Liabilities:*_
The Liability part of JB HiFi balance sheet from 2008 to 2011 could be seen in Table-2.the changes from FY2011 from FY2010 is calculated in the last column.

​_*Table 2 – Liabilities​*_
The current liabilities has been reduced by 5% to 345.9m$ from 363.1 m$ in FY2010. But the total liabilities was up by hefty 46% in 2011 (From 421 m$ in FY 2010 to 614.8m$ in FY 2011). The reason for this as we could see in the table, was because of increment of Long-Term Debt from 34.7m$ in FY 2010 to 232.9m$ in FY2011 (up more than 570 %!). (Fig 15)

_*​*__*Fig15 – Liabilities (m$)​*_
The reason that Long-Term debt increased by 570% is due to company share  Buy-Back plan in 2011 which was completed by purchasing 10.8 million shares with 173.3 m$ value.
The fund for this buy back considers as Long-Debt.
The reduction in “Shares Outstanding “(Fig 9) will improve EPS, DPS and ROE (Return on Equity)  but at the same time Long-Term Debt and Interest expenses will be increased (as announced by company  FY2012 Interest expense will be in the range of 13m$ to 15m$ ). These should be considered in 2012 performance prediction.


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## iced earth (16 December 2011)

_*Fundamental Analysis of “JB Hi-Fi Limited (JBH)” - Part 5 - 16/12/2011*_
==============================
*Liquidity ratios:*
With calculating these ratios we could have an understanding of the company’s ability to liquid quick enough to pay its short term liabilities. 
_*
1-	Current ration and Quick Ratio:*_
In 2011 current ratio was 1.45 compare to 1.25 in FY2010 but quick ratio (which we have taken Inventory out of current assess) in FY2011 was 0.27 compare to 0.33 in FY2010.
 The most noticeable reason for this is increasing the inventory as we mentioned earlier. 

At the first look we might be worry about these low ratios, but when we compare these numbers with previous years and the averages, there is no unusual about these ratios. (Fig 16) .



*Fig16 – Current and Quick Ratios*

As a general rule when we want to compare liquidity ratios we should consider the kind of business. Also if this ratios are too high, it could show that company cannot utilise its assets (or not using enough borrowing, Leverage) in order to produce profit.  
_*

2-	Debt Ratio:*_
This ratio calculates as total debt dived by total assets and shows the leverage company has used. The more of this ratio is more risk company willing to accept in order to generate profit by utilising the leverage (Debt).
Debt Ratio was 80% in FY2011 compare to 59% in FY2010. This increasing was because of increasing of the Long-Term debt of the company due to its share buy-back plan in FY2011.
JB HiFi should be careful not to let debt increase more or the risk of company to repaying its debt would be increased.  (Fig 17)



_*Fig17 – Debt Ratio*_
To have better understanding of the company liquidity we calculate the “Cash Conversion Cycle”
_*

3-	Cash Conversion Cycle (CCC):*_
This could show the length of time (in days) that a company uses to sell the inventory, collect receivables and pay its accounts payable. 
To calculate CCC we should calculate below ratios first:
•	DIO (Days Inventory Outstanding) : this gives us how many days would take that Inventory turns  to sales (as cash or payment receivables)
DIO for FY2011 was 58.7 Days compare to 56.3 Days in FY2010. This was 59.7 Days in FY2009, shows that  JBHifi turns its inventory around 55-60 days to sales (average).
This only should  be compared with the same business if we want to have a valid comparison and  commentary, but it shows consistency on this figure. 
•	DSO (Days Sales Outstanding): this numbers give how many days would take (average) company to collect on sales that go to account receivables. 
For JBH , DOS in FY2011 was 1.3 days compare to 1.5 days in FY2010 which is very short time. This shows that most sales in JB HiFi have been done as cash sales and paid immediately. This eliminate the risk of having bad creditors and problems with too much and long-time Account Receivables.
•	DPO (Days Payable Outstanding) : this shows after how many days (average) company is paying its payables to suppliers
DPO was 21 days in FY2011 compare to 44.6 days in FY2010 and 50.4 days in FY 2009. It shows company is paying its payables to suppliers sooner than before. 
•	CCC(Cash Conversion Cycle) :
•	This could show the length of time (in days) that a company uses to sell the inventory, collect receivables and pay its accounts payable. 

CCC is combination of DIO,DSO and DPO. CCC was 81 days in FY2011 compare to 102.3 days in FY2010 and 112.1 days in FY2009.

This shows that company ability to sell its inventory is improving. Company has sold its inventory 20% quicker than 2010 which is a considerable improvement to turns its inventory to sales, collect receivables and pay its accounts payable. (Fig 18)



_* 
Fig18 – Cash Conversion Cycle (Days)*_

_*Profitability Ratios:*_
These ratios show how effectively company use its resources to generate profit. We already have studied the Gross margin, operating margin and Net profit margin. 
_*

ROA (Return on Assets):*_
This figure shows how profitable a company is relative to its total assets. ROA was 18.14% compare to 17.25% in FY2010 and 15.77% in FY 2009.
The company has a healthy and improving ROA. (Fig 19)



_*Fig19 – ROA*_


_*ROE (Return on Equity):*_
This figure shows how profitable a company is compare to its average shareholder equity.  ROE was 60.3% compare to 45.4% in FY2010. JB HiFi has always had a strong ROE. In FY2011 the outstanding improvement for this ratio was more because of Equity reduction due to Long-Term debt increment as share buy-back plan performed. So also the profitability compare to equity has improved but there was a cost of Long-Term debt increment. 
The company has a healthy and improving ROA. (Fig 20)



_*Fig20 – ROE*_


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## suhm (6 January 2012)

Excellent posts, much more detailed look at a companies financials than anything I do. I usually just eyeball it, but do you do any analysis based on the future of the company. JB HI-FI I reject almost instantly based on earning, free cashflow per share vs price off hand because it is at a premium to other retail stocks. This was warranted previously as it was expanding but is starting to saturate the market and other retail stocks are going to the dogs.


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## Garpal Gumnut (6 January 2012)

Thanks ie.

A good thread.

Keep it up.

In FA I find just visiting the sites useful as a week to week measure of cashflow.

gg


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## Boggo (6 January 2012)

iced earth said:


> Hi Everybody,,,
> 
> I always interested in both Technical analysis and Fundamental analysis
> 
> ...




Interesting numbers and analysis there Moshen, really shows the internals of what is happening from one annual report to the next.

I know that this will sound negative but it is an obvious question - what do you do with all of this, how can you use it to advantage, ie the horse has bolted and smart money is already in or gone long before the results hit the streets.

JBH is a stock that I was very familiar with when I was applying basic charting to a list of stocks that StockDoctor had identified as up and coming.
*Two that they highlighted in late 2005 were JBH and MND !!*

Do you see anything in this type of analysis that could be used on current flatliners that could be an indication of potential things to come ?

Some stocks try to force their way into a higher priced range by having consolidations etc (RED for example) before they ever get any results on the board.

Most of this fundamental analysis is on the ASX200 included stock, the real ability be it technical or fundamental is to be able to identify next years ASX200 new recruits.

I am 95% technical analysis nowadays but I do see rhe potential in fundamental analysis both as an entry (JBH being an example) and also an exit where the fundamentals just don't support the technical analysis (ONE being an example) and am not trying to discredit fundamental analysis with my post.
I have successfully used a combination of both technical and fundamental analysis but have found that since the GFC especially the fundamental aspect is way too far behind the action to be used successfully, especially the negative realities that arrive too late.

(PS - my StockDoctor subsciption is on hold at the moment until the markets find direction again, technical analysis on their up and coming Star Stocks was an absolute winner and hopefully will be again)


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## whitefang (7 January 2012)

I agree Boggo.

I am actually amazed how many people actually gamble money on the stock market without any clue about FA (and I am not even talking about interpreting notes and extraordinary items in annual reports, which makes such an analysis even more complex for the average investor)
While not helping you too much with real-time decisions, it gives you a foundation on which one can use more proactive tools to increase returns.

I suspect less people want to do FA , as more want quick returns, take speculative positions. Somehow a change we have seen in our society lately.

When I think about Michael Burry and The Big Short, while his approach may have appeared to many as being speculative, it had been in fact all FA from the very beginning. And what a return ! 

cheers,




Boggo said:


> Interesting numbers and analysis there Moshen, really shows the internals of what is happening from one annual report to the next.
> 
> I know that this will sound negative but it is an obvious question - what do you do with all of this, how can you use it to advantage, ie the horse has bolted and smart money is already in or gone long before the results hit the streets.
> 
> ...


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## suhm (7 January 2012)

My thoughts about fundamental analysis is that there is vast periods where you can be correct in your judgement and lose vasts amounts of money.

If you are Warren Buffet you can just buy the company out if you think it is undervalued but as a small investor you will take a position but if macro market is not good the stock will still get hammered down.

Look at BAU, for every $1 of stock you get $2 of cash + bauxite tenaments but I wouldn't touch it with a bargepole, management is ****e and from a TA point of view the stock is cactus.

For me TA gives me an understanding of what the market sentiment is but relying on it solely like relying on FA solely seems to me a bridge to far.


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## Boggo (7 January 2012)

suhm said:


> My thoughts about fundamental analysis is that there is vast periods where you can be correct in your judgement and lose vasts amounts of money.
> 
> If you are Warren Buffet you can just buy the company out if you think it is undervalued but as a small investor you will take a position but if macro market is not good the stock will still get hammered down.




Yes, and sometimes the technical supports the faulty fundamentals. Below is the daily chart of ONE, as you can see it had an amazing run up based on fundamental BS that even the Packers and Murdochs got involved in.
The interesting thing was that the people behind StockDoctor (Merv Lincoln in particular) advised clients that it was a house of cards and was doomed to failure around the same time that MacQuarie Bank valued it at 3.5 billion !

In this example it would have been possible to use technical analysis for entry and the ride up but also for the ability to recognise the first sign of the illusion being exposed, in other words to get the best of both worlds.

I am sure that similiar to some of threads on here there would have been those that were in for the long haul or saw it as a great investment because the believed the management spin.

For those on here who still put all their faith (and money) in many company management fundamentals I would suggest you read up on the history of this stock, some of us that have been around a while watched it happen.

I agree completely regarding Warren Buffet, unless you are going to buy the company and take it from the equivalent of operating knitting machines to investing in Coca Cola and Amex etc then you would have to be dreaming (not that there is anything wrong with that !).

Daily chart of ONE, where do you reckon that tech analyst would have got out and where do you think that a fundamentalist would have got out (assuming that any did).

(click to expand)


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## suhm (7 January 2012)

Not knowing the exact story there seems to be some event in December 99 that caused the price to go up. Feb to March 00 I would think something is going wrong would sell around the 1.50 mark. If I didn't sell at the point it would be down to about 80 - 100 cents before I would sell again as I generally don't exit positions in points of consolidation unless I am redeploying the capital, I usually wait for a 10-20% retrace from a new high if I think the stock is overpriced.

It is the finding of a better opportunity which usually causes me to exit positions as I cull whichever one I hold currently which I think is the weakest.

That little blip there in January 01 when it got back to the previous support area would have got me interested to look at the financials again as a blow out bottom, but something would probably still have been wrong with the company and I wouldn't have invested due to the risk of losing it all or there being a huge cap raising and would probably want there to have been a longer consolidation period but TA looks quite bad with the lower highs. I might have taken a small marking position so that I would be eligible to take a full position in the cap raising if I thought if it was looking like an attractive position.

My TA screen is a ruler and the ruler is pointing down. I possibly could also have bought on the false breakout in April 01.


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## quadfin (7 January 2012)

*Re: Fundamental Analysis*

Good to see a thread on FA, i scan on FA first to narrow the candidates Than use TA, everyone one should learn the important FA ratios & understand their use & meaning. A blind belief in TA is comical.


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## chrislp (8 January 2012)

whitefang said:


> I am actually amazed how many people actually gamble money on the stock market without any clue about FA




You seem to implying something in your statement; am I right?

What are you saying exactly?





			
				quadfin said:
			
		

> A blind belief in TA is comical.




With that attitude you should argue here.


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## Boggo (8 January 2012)

Interesting article that highlights the proven weakness and vulnerability of being totally dependant on what you are told.
The achille's heel of FA, our fundamentals are great, trust me, would I lie to you 

Fundamental Lies and Failures


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## whitefang (9 January 2012)

I am simply stating that I have met too many people who put money into the stock market just based on ...sentiment for example (including what the taxi driver or the neighbour is telling them). No understanding whatsoever of the business or company's financial position. 
One of them the other day was telling me that he buys shares based on volume, the most traded stock on ASX must go up (???) since there is so much interest in it. That was the only rule used in the decision.

Cheers,



chrislp said:


> You seem to implying something in your statement; am I right?
> 
> What are you saying exactly?
> 
> ...


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## chrislp (9 January 2012)

Fair enough, thanks.

I thought you meant differently but didn't want to state it in case I was wrong.

However there are a number of traders who don't look at fundamentals & have a technical strategy which can be profitable.


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## whitefang (10 January 2012)

chrislp said:


> Fair enough, thanks.
> 
> However there are a number of traders who don't look at fundamentals & have a technical strategy which can be profitable.




I do agree with this.
Just my view that most people doing TA have also a relatively good understanding of the FA, but rely mainly on their TA. The other way around is not true (again, my view).
Personally I find TA the next level to get into after getting a grip on the FA.
I know some people jump straight into TA, with different degrees of success.
I do respect any approach that gets the desired results, though.

cheers,


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