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Analysis of David Jones Concise Annual Report. Study of issues from both Director's and Banker's perspective.

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Analysis of David Jones Concise Annual Report Study of issues from both Director's and Banker's perspective This report is a review on the current and future prospects of David Jones from both the Director's and Banker's perspective. Information in this report consists of data from David Jones website and the common size industry. The initial section addresses the issues from a Director's perspective and the later section dwells on focus areas from a Banker's view. Conclusion includes evaluation on the identified issues and analysis on the future prospects for David Jones. (All figures stated in the report are in thousands ('000), unless otherwise specified.) EXECUTIVE SUMMARY (FY03 Financial Performance in brief) David Jones reported net profit after tax is $42.7 million in FY 2003. It is an increase of 20.2% compared to the previous year's NPAT of $35.5 million. The full year earnings before interest (EBIT) along with significant items for the department store and credit card businesses were $69.6 million. This signifies a 2.3% increase on the EBIT. The Total sales figures reported were $1.711 billion, depicting an increase of 2.6 % from $1.668 billion in FY 2002. Profits are generated from the core businesses consisting of the department store and credit card business. Final FY2003 result is impacted by a number of difficult decisions made during the three months strategic review on getting the company back on track to generate sustainable earnings growth and long-term value for the share holders. Cost Efficiencies Program was introduced in 2003 to target non-customer service related areas to achieve an estimated saving of $17million in FY2004. Excellent Inventory Management allows maintaining the aged stock inventory levels below 5% of the total inventory, avoiding the need for future discounting and mark-down sales on a build up of excess or aged stock. Proper screening and well-managed interest free program focuses on developing the credit card business to achieve more revenue in the FY2004. ...read more.


The issues include costs, market positioning and differentiation, revenue growth and margin preservation. Addressing the above-mentioned issues enables to improve the quantity and quality of the company's earnings in FY 2004 and thereafter. Part 2 Procedures on evaluation of loan applications differ with various banks. The key factors banks consider are: 1. Financial health of the firm 2. Ability of the firm in servicing interest payments 3. Ability of the firm to repay the principal amount at maturity Most banks would evaluate loan application in stages. A fundamental evaluation will be carried out to determine if the risk level falls within the banks' risk appetite. If the firm's application passes the first stage, the evaluation will proceed to the next stages where more complex issues are reviewed. Failing the first stage of evaluation the loan application would be rejected. The first stage incorporates the analysis on the six financial ratios, which are described below in order of importance. 1. Altman's bankruptcy formula 2. Debt ratio 3. Current ratio 4. Times interest earned ratio 5. Return on invested capital 6. Free cash flow Assumptions made to this term-loan are: Principle amount: AUD 120 million Tenure: 5 years fixed term Purpose of loan: Capital expenditure to support business growth Annual interest payment: $120m at 6.0% p.a. = $7.2m Payment of principal amount: End of the 5th year. 1.0. Altman Bankruptcy Formula This formula enables us to assess the financial health of David Jones. The z-value is computed by using the following formula: z-value = 1.2 X1 + 1.4 X2 + 3.3 X3 + 0.6 X4 + 1.0 X5 X1 = working capital / total assets X2 = retained earnings / total assets X3 = earnings before interest and taxes (EBIT) / total assets X4 = market value of equity / total liabilities X5 = sales / total assets If the z-value is: - below 1.81 - credit risk between 1.81 and 3.00 - financial health is questionable above 3 - financially healthy Based on the 2003 ...read more.


However, we will need David Jones to provide the cash flow budget covering the loan period to determine if it has a high financial risk. The 2003 Free Cash Flow is 0.13 times higher (16.9/127.2) above the outstanding principal amount and yearly interest ($127.2m). 7.0.Summary The 6 six ratios provide status of the firm's financial health, its ability to service interest expenses and its degree of liquidity. It also provides us with a guideline of the security of the banks loan to the firm. This is not a conclusive evaluation and further evaluation will be carried out if the results reflect a standard benchmark established by each individual bank. Assuming that X bank has the following benchmark compared against David Jones initial evaluation. Ratio Our Benchmark David Jones Ratio (FY 2003) Benchmark z-value Not less than 2.5 2.96 Debt ratio Not more than 0.45 0.00 Current ratio Not less than 2 1.69 X Times interest earned Not less than 4 3.9 X ROIC Not less than 10% 5.7% X Free cash flow Must be at least 3 times the principal + interest* 0.13 X *This condition must be met at the time of evaluation. As David Jones's ratio did not meet most of the benchmark set, we recommend proceeding with the next stage involving a more detailed evaluation and investigation of its loan proposal. 8.0.Conclusion The use of ratios in the analysis of financial health of a company is not completely objective. It should incorporate considerations for differences in accounting classifications, manipulations and other factors involving the source of information. Barring these limitations, comparisons with industry norms and same measurement in prior periods provide useful indications of financial standing. In the case of David Jones, the issues highlighted are relevant in the continuation of growth with respect to the many issues that the company has to overcome. Not withstanding the liquidity of the company, the loan requested by David Jones may be considered by X Bank. ...read more.

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