Horizontal And Ratio Analysis Of Retail Food Group Limited In An Essay.

A. Access the annual reports for your allocated company for the years 2013, 2015 & 2017. These reports are usually available on the company’s website under “Investors”. Alternatively, if you cannot locate each of the years, you should be able to access them at asx.com.au. 
B. The annual reports will provide you with six years of financial statements for 2012, 2013, 2014, 2015, 2016 & 2017. 
C. Prepare a horizontal analysis of the Income statement for the five years 2013 - 2017. Comment on the changes over the five years.
D. Calculate the following ratios for the five years 2013 - 2017 (2012 financial information will assist you in calculating averages, where necessary). 
1. Return on total assets (not in text - search in Google and cite your findings) 
2. Rate of return on ordinary equity 
3. Operating profit margin 
4. Gross profit Margin 
5. Inventories turnover period 
6. Settlement period for debtors 
7. Current ratio 
8. Quick ratio (acid test ratio) 
9. Debt to assets ratio (not in text - search in Google and cite your findings) 
10. Interest cover ratio (Times interest earned) 
11. Assets turnover (not in text - search in Google and cite your findings) 
12. Earnings per share 
13. Price-earnings ratio (refer to Blackboard for stock price history for five years). 
14. Dividend yield (refer to Blackboard for the dividend history for five years).
E. Given the ratios over five years, comment on the company’s profitability, efficiency, liquidity, financial gearing and investment ratios.

Horizontal Analysis of Retail Food Group Limited

Horizontal Analysis of Retail Food Group Limited

Income Statement of RETAIL FOOD GROUP LIMITED
Particulars	2013	2014	2015	2016	2017
	Amount in $ ' 000
Revenue from sale of goods	100.00%	124.75%	267.86%	365.61%	545.34%
Cost of sales	100.00%	129.04%	330.70%	428.91%	736.71%
Gross Profit	100.00%	120.38%	203.73%	301.01%	350.02%
Other revenue	100.00%	116.94%	131.82%	114.92%	107.79%
Other gains and losses	100.00%	0.00%	-2536.36%	227.27%	-55472.73%
Selling expenses	100.00%	188.27%	136.52%	120.79%	79.08%
Marketing expenses	100.00%	115.35%	112.30%	15.46%	10.30%
Occupancy expenses	100.00%	80.24%	429.73%	297.14%	311.11%
Administration expenses	100.00%	110.18%	295.91%	334.22%	424.95%
Operating expenses	100.00%	108.72%	158.16%	162.37%	155.13%
Finance costs	100.00%	64.89%	98.78%	129.57%	129.38%
Other expenses	100.00%	85.39%	547.70%	568.12%	607.09%
Profit before tax	100.00%	115.85%	106.26%	168.19%	192.42%
Income tax expense	100.00%	117.47%	104.72%	174.61%	189.89%
Profit for the year from continuing operations	100.00%	115.17%	106.91%	165.48%	193.49%

(Annual Report, 2013, 2015 and 2017)

Comment on the changes for 5 years

On the basis of analysis it has been found that revenue from the sale of goods increased more than 5 times in year 2017 as against year 2013 which means company is progressed a lot in recent years. The increase in cost of goods shows that company fails to manage the cost expenses as cost has increased a lot as compared to proportionate cost. Gross profit shows increasing trend from year 2013 to year 2017 that indicates excellent profitability position of Retail Food Group Limited in the current year. Apart from the revenue from sale of regular goods, company also depends upon the other revenue and it is essential part of total income earned by the company. The trend analysis of profit before tax shows increasing trend in all the years which means company has been successful in maintaining the required growth in profit (Damodaran, 2011).

The overall profitability position of Retail Food Group Limited has been very excellent in current year as compared to past years. So it can said that there is increasing trend in all the financial components of income statement which means company has been moving in right direction and has been successful in turning its assets into revenue (Brigham and Michael, 2013).

Ratio Analysis of Retail Food Group Limited

Ratio Analysis of Retail Food Group Limited
Particulars	2013	2014	2015	2016	2017
Return on total assets	8.62%	9.26%	5.03%	7.03%	6.66%
Rate of return on ordinary equity	13.31%	11.89%	8.47%	14.08%	13.31%
Operating profit margin	124.14%	106.93%	59.92%	62.77%	47.04%
Gross profit Margin	49.49%	47.75%	37.64%	40.75%	31.76%
Inventories turnover period (In days)	70.79	94.84	75.11	68.30	47.98
Settlement period for debtors (In days)	142.27	132.87	95.85	90.88	92.34
Current ratio	2.34	2.66	0.93	1.92	1.48
Quick ratio (acid test ratio)	2.08	2.13	0.71	1.57	1.17
Debt to assets ratio	0.35	0.22	0.41	0.50	0.50
Interest cover ratio (Times interest earned)	7.16	12.00	7.63	9.00	10.16
Assets turnover	0.121	0.141	0.178	0.219	0.264
Earnings per share	$  0.260	$  0.265	$  0.221	$  0.323	$  0.357
Price-earnings ratio	15.19	17.13	24.57	17.12	13.17
Dividend yield	4.68%	4.63%	4.19%	4.48%	6.22%

(Annual Report, 2013, 2015 and 2017)

Profitability Ratios

The ratios help in determining the extent to which a business yields profitability or financial gain. The profitability position of the company can be accessed by the use of following ratios:

Return on total assets (ROTA): It indicates the effectiveness of a company in utilizing its assets for revenue realization and is calculated by the use of following formula:

ROTA= Earnings before interest and taxes (EBIT)/total net assets

The ROTA of the company in context is having a decreasing trend over the year 2013-2017 indicating that its ability to utilize assets for generating earnings has been reduced (Arnold, 2013).  

Rate of Return on Ordinary Equity (ROE): This ratio will help in determining the ability of a company to realize profits from the investments made by the shareholders and is calculated by the use of following formula:

ROE=Net Income/Average Shareholder’s equity

The ROE ratio of the company is good as it is high over the year 2013-2017 but the ratio is not having an increasing trend over this time-period. The ratio has decreased from the year 2013-2015 but has increased them from the year 2016-2017.

Operating Profit Margin: The ratio determines the percentage of profit realized by a company after meeting all its operational expenses and is calculated by the use of following formula:

Operating Profit Margin=Operating earnings/Revenue

The operating profit margin of the company has decreased from the year 2013-2017 indicating that there is increase in its operational expenses which has lead to decline in its operating earnings.

Gross Profit Margin: It determines the amount of money realized from the overall revenue after meeting up the cost of goods sold and is calculated by the following formula:

Comment on the changes for 5 years

Gross Profit Margin=Gross Profit/Revenues

This ratio has decreased subsequently from the year 2013-2017 indicating that its ability to generate revenue after covering the expenses incurred in cost of goods sold has reduced.

It can be stated from the overall analysis of profitability ratio’s that it is having a high profitability over the year 2013-2017 but it has been declined over the years as indicated from the results of different ratios.

Efficiency Ratios

It provides a measurement of the ability of the company to utilize its assets and managing its liabilities efficiently.

Inventories turnover period: It measures the number of times an inventory is sold in a specific time-period and is calculated by the use of following formula:

Inventories turnover period: Cost of goods sold/Average inventory

The ratio has increased over the year from 2013-2014 but has reduced then in the consecutive years from 2015-2017. This indicates that the sales of the company have reduced in the years over 2015-2017 which implies excess inventory and low inventory turnover period (Arnold, 2013).

Settlement period for debtors: The ratio indicates the time required for realizing the amount owned by the trade debtors and is calculated by the following formula:

Settlement period=Amount owned by trade debtors/Annual sales on credit

The ratio has shown a decreasing trend for the company over the year 2013-2017 which is not good as its ability to realize the amount owned by debtors has reduced considerably.

The efficiency of the company has weakened over the selected time-period implying that its efficiency to manage its assets and liabilities is reducing.

Liquidity Ratio

It determines the ability of a company to meet its current debt obligations with its liquid assets. The liquidity position of the company can be accessed by the following ratios:

Current ratio: It is a liquidity ratio that measures the ability of a company to meet its financial liabilities and is assessed by the following ratios:

Current ratio=Current assets/Current liabilities

The current ratio has decreased over the period 2013-2017 which states that its ability to meet its financial obligations from the liquid assets has reduced.

Quick Ratio: It determines the ability of a company to meet its financial obligations from meeting its most liquid assets and is calculated with the use of following ratios:

Quick Ratio= (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities

The ratio has declined over the financial period from 2013-2017 indicating that its cash inflows have reduced with decline in its liquid assets.

Financial Gearing Ratios

Debt to asset ratio: This ratio provides information about the leverage effect on company as it defines total amount of debt as against the assets. If higher the ratio higher will be degree of leverage (Ross, Jaffe and Kakani, 2008).

Formula: Total Debt (Total liabilities) / Total assets

The debt to total asset ratio of Retail Food Group Limited has been 0.35 times in year 2013 that indicates 35 % of assets has been financed from the debt capital but in year 2017 this ratio has increased to 0.50 times that shows that degree of financial leverage has increased in current year as compared to past years.

Interest Coverage Ratio: This ratio defines the gearing impact of finance cost on the company as it tells how many times company can bear the liability of finance cost.

Formula: EBIT / Finance Cost (Interest Expenses)

Interest coverage ratio has been increased from 7.16 times in year 2013 to 10.16 times in year 2017 that indicates better profitability position of company in current year as company can pay 3 times more its finance liability in current year as compared to year 2013.

Asset Turnover Ratio: This ratio defines the efficiency of company to use the assets for earning the revenue. This ratio measures the value of company sales as generated relative to the assets of the company (Weston and Brigham, 2015).

Formula: Net Revenue / Total Assets

On the basis of analysis of this ratio for last five years it can be there has been increase in this ratio in current year as compared to previous years that indicates better efficiency of company in using the assets to turn them into net revenue.

Investment ratios

Earnings per Share: This ratio tells net income earned by the company per shareholder. This ratio is important from the investor’s point of view.

Formula: Profit attributable to shareholders/number of shareholders

There has been increase in earnings per share in current year as compared with previous year that shows better profitability position of company.

Dividend Yield: This is the important investment ratio as it tells percentage of dividend paid by the company as relative to the share price (Moles and Kidwekk, 2011).

Formula: Annual Dividend per share/Price per share

There has been increase in this ratio in current year as compare previous year that indicates better market position of company and ability to attract more investors. 

References

Annual Report. 2013. Retail Food Group Limited. [Online]. Available at: https://www.rfg.com.au/shareholder-center/annual-reports/ [Accessed on: 11 August, 2018].

Annual Report. 2015. Retail Food Group Limited. [Online]. Available at: https://www.rfg.com.au/shareholder-center/annual-reports/ [Accessed on: 11 August, 2018].

Annual Report. 2017. Retail Food Group Limited. [Online]. Available at: https://www.rfg.com.au/shareholder-center/annual-reports/ [Accessed on: 11 August, 2018].

Arnold, G., 2013. Corporate financial management. Pearson Higher Ed.

Brigham, F., and Michael C. 2013. Financial management: Theory & practice. Cengage Learning.

Damodaran, A, 2011. Applied corporate finance. John Wiley & sons.

Moles, P.  and Kidwekk, D. 2011. Corporate finance. John Wiley &sons.

Ross, A., Jaffe, J. and Kakani, R.K. 2008. Corporate Finance. Pearson.

Weston, J.F. and Brigham, E.F., 2015. Managerial finance. Hinsdale, IL: Dryden Press.