David Jones is an Australian company that deals in the area of department store retail trade. The analysis of annual reports of this company for fiscal years 2008 and 2009 reveals that David Jones experienced considerable changes in its performance results over this period and, although its nominal revenues decreased in 2009, all other essential factors show that David Jones grows in a proper direction, modifies its capital structure, implements the policies of asset replacement and hedging, and increases its net equity amounts annually.
The company selected for the analysis in the current paper is David Jones, an Australian business entity operating a wide network of department stores in New South Wales, Victoria, Queensland, South and Western Australia. The company was founded in 1838 by David Jones, an immigrant from Wales who settled in Australia some years before. In 2008, David Jones celebrated 170th anniversary of its successful performance under the same name, which is a rather unique case for a department store in the modern world. The CEO of David Jones, Mark McInnes, positions the modernization and high quality of goods and services as foundations for the company’s current strategy (David Jones, 2010).
Thus, the valuation of the selected company can be carried out in two major approaches: book value approach and value of earnings method. More specifically, the book value approach allows calculating the firm’s value using the formula (Penman, 2009, Ch. 3):
- Book value = Total assets – Total liabilities
Accordingly, the valuation of David Jones for fiscal years 2008 and 2009 will look as follows based on the data of the company’s annual reports (David Jones, 2010):
- 2008: Book value = 1,529,645 – 909,855 = 619,790
- 2009: Book value = 1,127,217 – 439,832 = 687,385
Further on, the value of earnings method uses the following formula to valuate David Jones (Penman, 2009, Ch. 3):
- Equity value = PER (price earning ratio) x earnings (net income)
- PER = share’s price / earning per share
2008: PER = 2.81 / 0.3 = 9.37
- Equity value = 9.37 x earnings (net income)
- Equity value = 9.37 x 96,773 = 906,763
2009: PER = 3.77 / 0.3 = 12.57
- Equity value = 12.57 x 156,522 = 1,967,481
Thus, the valuation of David Jones carried out by two most commonly used methods reveals that growth of the company’s value between 2008 and 2009, and the income statements and balance sheets of the company prove this point (see Appendices 1 and 3).
Cash Flow Analysis
Operating Cash Flow
Cash flow analysis is one of the basic elements of a company’s valuation, and examining the operations of David Jones it is also necessary to consider operating, investing, and financing cash flows in their dynamics in 2008 and 2009 fiscal years. Thus, the operating cash flow for a period of time is calculated using a formula:
- Operating cash flow = EBID + Depreciation – Taxes,
where, EBID represents the earnings of the company before paying the taxes. Accordingly, this formula allows seeing the operating cash flows of David Jones for 2008 and 2009:
- 2008: Operating cash flow = 270,840 + 41,544 – 68,919 = 201,963
- 2009: Operating cash flow = 215,574 + 43,979 – 68,026 = 191,527
Investing Cash Flow
Cash flow from investing activities for 2008 is comprised from investment expenses and proceeds from sale of property. Payment made by David Jones amount to 73,627, while the proceeds allow reducing it by 42,000 to the level of 31,627. In 2009, the investing cash flow of the company amounted to 99,083 and was comprised by expenses only as far as the company did not have any proceeds of its payments (David Jones, 2010). Thus, the investing cash flow increased by 312% in 2009.
Financing Cash Flow
Finally, the financing cash flow was at the level of 266,440 in 2008, while in 2009 it decreased by 120,537 to the rate of 145,903. This decrease was mainly associated with the emergence of proceeds from the assignment of storecard and credit reserve receivables, which alone amounted to 374,311 and had not been observed in the company’s 2008 cash flow statement (David Jones, 2010).
Financial Statements’ Analysis
According to Penman (2009, Ch. 9), the basis of financial statements’ analysis is the reformulation of such fundamental documents as the income statement and balance sheet for the purposes of a deeper understanding of the company’s investment and financing policies and preferences. So, the reformulation of the income statement can be carried out by:
- Separating the operating items from financing ones;
- Separating the operating income from sales from other income items;
- Allocating tax to statement components, excluding the after-tax ones.
Further on, the balance sheets of David Jones can be formulated with the help of the following set of formulae:
- Net Operating Assets (NOA) = Operating Assets (OA) – Operating Liabilities (OL)
- Net Financial Obligations (NFO) = Financial Obligations (FO) – Financial Assets (FA)
- Common Shareholder’s Equity (CSE) = NOA – NFO
Accordingly, using the data from David Jones’ 2008 and 2009 annual reports, the balance sheets of the company can be reformulated as follows:
2008: NOA = 747,305 – 603,533 = 143,772
- NFO = 909,855 – 1,529,645 = – 619,790
- CSE = 143,772 – (- 619,790) = 763,562
2009: NOA = 293,979 – 304,234 = – 10,255
- NFO = 439,832 – 1,127,217 = – 687,385
- CSE = – 10,255 – (- 687,385) = 677,130
Thus, the reformulated 2008 and 2009 balance sheets of David Jones will now look as follows:
|NFO||– 687,385||NFO||– 619,790|
|NOA||– 10,255||NFO+CSE||– 10,255||NOA||143,772||NFO+CSE||143,772|
Financial Ratios’ Analysis (Du Pont Analysis)
Further on, the analysis of the financial statement of David Jones for 2008 and 2009 allows developing the following operating ratios:
- Efficiency ratio = operating expenses / revenue
- 2008: Efficiency ratio = 790,003 / 2,205,516 = 0.36;
- 2009: Efficiency ratio = 694,162 / 2,050,028 = 0.34;
The decrease of efficiency ratio meanings illustrates the point that David Jones performed with the smaller efficiency in 2009 that it did in 2008.
- Inventory turnover ratio = net sales / inventory
- 2008: Inventory turnover ratio = 2,098.0 / 6,923 = 0.30;
- 2009: Inventory turnover ratio = 1,985.5 / 7,189 = 0.28;
The inventory turnover ratio also proves that 2009 was a less successful year for David Jones as the rate of inventory turnover faced a slight decrease of 0.02.
- Current ratio = total current assets / total current liabilities
- 2008: Current ratio = 747,305 / 603,533 = 1.24;
- 2009: Current ratio = 293,979 / 304,234 = 0.97;
This ratio reveals that in 2009 David Jones had $0.97 of current assets to cover every $1 of liabilities, while in 2008 there was $1.24 for $1 of liabilities, which evidence again the decreasing efficiency of David Jones’ performance.
- Quick ratio = total quick assets / total current liabilities
- 2008: Quick ratio = 1,529,645 / 603,533 = 2.54;
- 2009: Quick ratio = 1,127,217 / 304,234 = 3.71;
At the same time, the quick ratio reveals that in 2009 the amount of money in quick assets used to cover current liabilities has increased from $2.54 to $3.71.
The investment ratios are preferably calculated using the Du Pont analysis method, according to which return on investment and return on equity ratios are calculated through the use of the following three-component formulae:
- ROI = (net income / sales) x (sales / total assets) = net income / total assets
- ROE = (net profit / sales) x (sales / assets) x (assets / equity)
- 2008: ROI = (147,286 / 2,098.0) x (2,098.0 / 1,529,645) = 147,286 / 1,529,645 = 0.1
- ROE = (147,286 / 2,098.0) x (2,098.0/ 1,529,645) x (1,529,645 / 619,790) = 0.17
- 2009: ROI = (156,522 / 1,985) x (1,985 / 1,127,217) = 156,522 / 1,127,217 = 0.14
- ROE = (156,522 / 1,985.5) x (1,985.5 / 1,127,217) x (1,127,217 / 687,385) = 0.23
Balance Sheet Items
The debt structure of David Jones consists of both balance-sheet and off-balance-sheet items. The former include all the liability items that amounted to 909,855 in 2008 and 439,832 in 2009. The off-balance-sheet items include lease, rent, depreciation, and amortization expenses. The balance-sheet elements of the company’s debt structure display being on the steady decrease, which is also reflected in the general capital structure of David Jones as in 2008 it included 15.3% of debt, while in 2009 this figure fell to 11.3%.
Off-Balance-Sheet Items: Leases
David Jones treats leases with all the attention and responsibility that a business company should pay to one of the major elements of its debt structure. According to David Jones’ 2008 and 2009 annual reports, the company spent on leases and occupancy needs 170,906 and 156,548 respectively. It is necessary to notice that the rate decrease is the manifestation of the overall capital structure change, rather than the diminishing attention of David Jones to its debt structure elements.
Extent of Capitalization
Scholars like Correia (2007, p. 38), Mian (2002, p. 29), Penman (2009, Ch. 12), and Van Horne (2008, p. 186) call the market capitalization of a company one of the basic factors, according to which investors can judge about the credibility of this firm for long-term initiatives. The formula for calculating the market capitalization, or market cap, is:
- Market cap = price per share x number of shares
Accordingly, the extent of capitalization is increasing proportionately to the increase of the market cap value. For David Jones, the market cap is:
- 2008: Market cap = 3.34 x 451,021,398 = 1,506,411,469.32
- 2009: Market cap = 5.05 x 483,452,861 = 2,441,436,948.05
Thus, the extent of capitalization of David Jones has almost doubled in 2009 as compared to 2008, which proves the proper development of the company.
The major depreciation method used by David Jones is the inclusion of depreciation expenses to the income statements on the basis of the duration estimates for useful lives of the company’s assets, like building, plants, and equipment. The duration of useful lives for computers is at the range of 3 – 5 years, while buildings are expected to serve David Jones for at least 75 years.
Asset Age Analysis
The age of David Jones can be calculated by dividing the accumulated depreciation of the company by its annual depreciation expenses. Thus, for David Jones’ assets the age decreased between 2008 and 2009 for 1.2 years:
- 2008: Asset age = 670,687 / 41,544 = 16.5 years
- 2009: Asset age = 670,687 / 43,979 = 15.3 years
Asset Replacement and Capital Expenditure (CAPEX)
David Jones adopts a sequential asset replacement policy according to which the company carries out regular reviews of the assets’ conditions, updates and/or replaces the assets that display any performance issues, and accounts properly for these procedures (David Jones, 2010). As for the CAPEX trends, the 2008 and 2009 annual reports allow seeing the drastic increase in capital expenditure commitments of David Jones from 10,199 in 2008 to 25,033 in 2009, which is a proof of proper strategies developments taking place in David Jones.
Hedging and Use of Derivatives
To protect itself from foreign exchange rate fluctuations, David Jones company uses hedging and provides considerable funds for the development of its instruments. In 2008, David Jones spent 2,782 on its hedging instruments, while in 2009 this sum decreased to 1,153, which was the market of greater stability in the international market. Derivatives are among the hedging instruments David Jones uses in its policies; their recognition is based on the decision of the Board of Directors and special committee that is created every time when an issue of a derivative contract arises.
Thus, to conclude the current report, it is necessary to state that David Jones, one of the oldest and largest department store companies in the world, faced considerable changes in its financial performance between 2008 and 2009. Though the company’s revenue decreased over the period, the net profit after tax payments grew. The capital structure of the company also changed and moved to a more asset-based one in 2009 than it had been in 2008. The net equity of David Jones also grew considerably (about 15% between 2008 and 2009), and these factors evidence that David Jones is on the proper way of its strategic development.
Appendix 1: Income Statements
|Revenue from sale of goods||1,985,490||2,097,999|
|Cost of sales||(1,199,344)||(1,268,227)|
|Employee benefits expenses||(338,892)||(347,460)|
|Lease and occupancy expenses||(156,548)||(170,906)|
|Depreciation and amortisation expenses||(43,979)||(41,544)|
|Advertising, marketing and visual merchandising expenses||(45,521)||(54,439)|
|Net financing expenses||(9,243)||(41,178)|
|Profit before income tax expense||217,432||209,615|
|Income tax expense||(60,910)||(62,329)|
Profit after income tax expense attributable |
to equity holders of the parent entity
|Basic earnings per share (cents per share)||31.5||30.6|
|Diluted earnings per share (cents per share)||30.3||30.0|
Appendix 2: Cash Flow Statements
|Operating activities’ cash flows|
|Receipts from customers (inclusive of GST)||2,207,818||2,378,346|
|Payments to suppliers and employees (inclusive of GST)||(1,981,762)||(2,123,152)|
|Borrowing costs paid||(9,294)||(41,279)|
|Income tax paid||(68,026)||(68,919)|
|Net cash flows from operating activities||191,527||201,963|
|Investing activities’ cash flows|
|Payments for property, plant and equipment||(94,437)||(73,289)|
|Payments for software||(4,646)||(338)|
|Proceeds from sale of property||–||42,000|
|Net cash flows used in investing activities||(99,083)||(31,627)|
|Financing activities’ cash flows|
|Dividends paid on ordinary shares||(107,128)||(85,204)|
|Proceeds from the assignment of storecard |
and credit reserve receivables
|Repayment of receivables funding||(241,000)||–|
|Repayment of borrowings||(170,000)||(180,000)|
|Purchase of shares for LTI Plan||(2,168)||–|
|Interest paid on RPS||–||(1,333)|
|Proceeds from loan repayments under employee share plan||82||97|
|Net (decrease)/increase in cash and cash equivalents||(53,459)||(96,104)|
|Cash and cash equivalents at end of the financial year||11,745||65,204|
Appendix 3: Balance Sheets
|Cash and cash equivalents||13,615||66,564|
|Total current assets||293,979||747,305|
|Property, plant and equipment||724,080||670,687|
|Deferred tax assets||69,590||73,910|
|Total non-current assets||833,238||782,340|
|Interest bearing liabilities||1,870||242,360|
|Current tax liabilities||3,349||22,997|
|Total current liabilities||304,234||603,533|
|Interest bearing liabilities||100,000||270,000|
|Total non-current liabilities||135,598||306,322|
|Retained earnings/(Accumulated losses)||152,520||128,989|
Correia, C. (2007) Financial Management. Juta and Company Ltd.
David Jones. (2010) Official Corporate Web Site. DJ. [online] David Jones. Web.
Mian, M. (2002) Project Economics and Decision Analysis: Deterministic models. PennWell Books.
Penman, S. (2009) Financial Statement Analysis and Security Valuation. McGraw-Hill/Irwin.
Van Horne, J. (2008) Fundamentals of Financial Management. Pearson Education.