Accounting for Managers: Analysis of Financial Ratios of Retail Food Group

This article provides an analysis of the financial ratios of Retail Food Group, an international food and beverage organization headquartered in Queensland, Australia. The article includes a detailed analysis of profitability, efficiency, liquidity, financial gearing, and investment ratios of the company. The article also includes a horizontal analysis of the income statement of the organization for the years 2013-2017. The article is useful for students studying accounting and finance.

Running head: ACCOUNTING FOR MANAGERS
Accounting for Managers
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Table of Contents
Horizontal analysis of the income statement of Retail Food Group for the years 2013-2017:.......3
Calculation of the different types of ratios of Retail Food Group for the years 2013-2017:..........4
1. Return on total assets:..............................................................................................................4
2. Rate of return on ordinary equity:...........................................................................................4
3. Operating profit margin:..........................................................................................................5
4. Gross profit margin:.................................................................................................................5
5. Inventories turnover period:....................................................................................................5
6. Settlement period for debtors:.................................................................................................5
7. Current ratio:............................................................................................................................5
8. Quick ratio (acid test ratio):.....................................................................................................6
9. Debt to assets ratio:..................................................................................................................6
10. Interest cover ratio (Times interest earned):..........................................................................6
11. Assets turnover:.....................................................................................................................6
12. Earnings per share:................................................................................................................6
13. Price-earnings ratio:...............................................................................................................7
14. Dividend yield:......................................................................................................................7
Analysis of the profitability, efficiency, liquidity, financial gearing and investment ratios of
Retail Food Group:..........................................................................................................................7
References:....................................................................................................................................11

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Appendices:...................................................................................................................................12

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Horizontal analysis of the income statement of Retail Food Group for the years 2013-2017:
Retail Food Group (RFG) is an international food and beverage organisation
headquartered in Queensland, Australia and it is the biggest multi-brand retail franchise owner of
food products in the nation (Retail Food Group 2018). The horizontal analysis of the income
statement of the organisation has been represented below in the form of a table as follows:
From the above table, it is evident that RFG has managed to increase its overall revenue
over the years where it has reached its peak to $245,873,000 in 2017 from $45,086,000 in 2013.
This is further supported by rise in other operating revenue by 16.94% in 2014 and by 12.73% in
2015; however, it has declined by 12.82% in 2016 and by 6.20% in 2017. However, the total
income earned has gone larger considerably due to considerable increase from the rise in sales of
food and beverage products. Such considerable increase in revenue has been attributed to
sustained franchising operations of RFG during the five-year period. The past acquisitions of

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Brumby’s Bakeries Holding and Michel’s Patisseries in 2007 along with the further acquisitions
of the master franchise territories of Brumby and the franchise system of Esquire Coffee Houses
in 2010 have helped in boosting the operating revenue and in turn, the overall revenue (Robinson
et al. 2015). Significant fall in marketing expenses and selling expenses could be observed due to
the widespread popularity of the products in the Australian market. However, increase could be
observed in administration and other expenses, as RFG has to accommodate the newly recruited
staffs for their training and development (Wahlen, Baginski & Bradshaw 2014). As a result,
despite increase in certain types of operating costs, they are offset by the increased revenue base,
which has helped in increasing the overall profit of the organisation.
Calculation of the different types of ratios of Retail Food Group for the years 2013-2017:
Certain financial ratios are used for analysing the financial state of RFG and their detailed
computations are provided as follows:
1. Return on total assets:
2. Rate of return on ordinary equity:

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3. Operating profit margin:
4. Gross profit margin:
5. Inventories turnover period:
6. Settlement period for debtors:
7. Current ratio:

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8. Quick ratio (acid test ratio):
9. Debt to assets ratio:
10. Interest cover ratio (Times interest earned):
11. Assets turnover:
12. Earnings per share:

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13. Price-earnings ratio:
14. Dividend yield:
Analysis of the profitability, efficiency, liquidity, financial gearing and investment ratios of
Retail Food Group:
The above-computed ratios could be categorised under five types of ratio groups and
their combined interpretations are discussed as follows:
Profitability ratios:
From the above-computed ratios, the ratios falling in this category include return on total
assets, rate of return on ordinary equity, operating profit margin, asset turnover and gross profit
margin (Ibn-Homaid & Tijani 2015). The weighted average cost of capital is considered as the
suitable benchmark for evaluating the return on total assets of RFG, which is 10.40%
(My1.morgans.com.au 2018). In case of RFG, the ratio has been declining over the years and
hence, it has underperformed in contrast to the set benchmark over the past five years. There are
three factors driving the rate of return on ordinary equity, which are profit margin, asset turnover
and adjusted leverage. Out of these three factors, operating margin and adjusted leverage are the
primary engines behind the fluctuation of this ratio for RFG. Despite the improvement in asset

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turnover, it was not adequate to offset the plunge in operating profit margin; however, balanced
adjusted leverage has helped in maintaining stability in return on equity of RFG, as it is higher
than its cost of equity of 5.20% over the past five years (My1.morgans.com.au 2018).
Efficiency ratios:
The ratios computed that fall under this category include inventories turnover period and
settlement period for debtors. The inventories turnover period is reliant on two significant
performance components, which are stock purchasing and sales revenue. In case of RFG, it buys
large amount of inventories and it has managed to release such inventories quickly because of
adequate market demand. Moreover, sales have matched with inventory purchases, which imply
the presence of proper tuning between purchase and sales departments.
On the other hand, settlement period for debtors gauges the number of times an
organisation could gather its accounts receivable during the year (Brigham et al. 2016). In case
of RFG, the period has increased from 2013 to 2016; however, it has declined in 2017. This
implies that RFG has implemented stringent debtor terms in order to increase its cash balance for
investing in business operations.
Liquidity ratios:
The ratios computed that fall under this category include current ratio and quick ratio.
Current ratio helps in measuring the liquidity position of an organisation by taking into account
short-term assets and liabilities. In case of RFG, current ratio is observed to be fluctuating over
the years due to significant increase in accounts receivable over the years. The industrial
benchmark of current ratio is observed to be 2 and for the organisation, it has been above 2 only
in 2013 and 2014, after which it has experienced significant decline in 2015. This is due to the

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fact that large amount of accounts receivable could not be converted into cash due to the late
payment of the debtors.
Quick ratio, on the other hand, is considered to be a superior liquidity measure, as
inventories and prepaid expenses are excluded to analyse the liquidity position of an
organisation. In case of RFG, the ratio is observed to decline in 2015 followed by a slight
increase in 2016 and in 2017, it has declined again. However, it is to be borne in mind that the
ideal quick ratio is considered to be 1. For RFG, the ratio is above 1 all the years except in 2015,
as it has focused on maintaining appropriate inventory amount by assessing market demand
through considerable research activities (Retail Food Group 2018). Hence, in terms of liquidity,
RFG is enjoying competitive advantage over the other organisations operating in the food and
beverage sector of Australia.
Financial gearing ratio:
From the above-computed ratios, the ratios falling in this category include debt to total
assets ratio and interest cover ratio. Debt to total assets ratio helps in determining the portion of
assets of an organisation that are funded through debt. If the debt ratio is above 50%, it denotes
that the organisation has high leverage and if it is below 50%, it has low leverage containing
lower amount of risk. For RFG, the ratio has remained below in 2013 and 2014 with increase to
52% in 2015. However, it has remained at 50% in both 2016 and 2017, which implies that RFG
has maintained an appropriate mix of debt and equity in its capital structure in order to raise
funds.
Interest cover ratio denotes the ability of an organisation in clearing its interest expense
with the help of operating income. If the ratio is above 1, the firm is said to be in a stable

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position. For RFG, the ratio is well above 1 in all the years and hence, it has adequate amount of
profit in hand to settle its financing cost due to the increase in revenue generation capacity of the
organisation.
Investment ratios:
From the above-computed ratios, the ratios falling in this category include earnings per
share, price-earnings ratio and dividend yield ratio. The earnings per share of RFG are observed
to increase over the years; the only exception could be noted in the year 2015 where it has
experienced a slight decline. The reason behind the rise in this ratio is the increasing profit level
arising from increased market demand, which has helped in providing adequate returns on
investment to the shareholders (Jayawardhana 2017). However, decline in price-earnings ratio
could be observed from 2016 due to slight decline in operating margin over the year. Finally, in
terms of dividend yield ratio, the figure has remained almost identical from 2013 to 2016 with
significant increase in 2017. This denotes that the shareholders are paid with increased dividends
due to higher net profit. Another reason that could be identified behind the rise in this ratio is that
it has started to reduce its focus on retained earnings, which has increased the dividend paying
ability of the organisation. Therefore, in terms of investment, RFG is placed in a favourable
position in the Australian food and beverage sector.

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References:
Brigham, EF, Ehrhardt, MC, Nason, RR & Gessaroli J 2016, Financial Managment: Theory And
Practice, Canadian Edition, Nelson Education.
Crfonline.org 2018, Ratios and Formulas in Customer Financial Analysis, viewed 12 Aug 2018,
<https://www.crfonline.org/orc/cro/cro-16.html>.
Ibn-Homaid, NT & Tijani, IA 2015, ‘Financial analysis of a construction company in Saudi
Arabia’, International Journal of Construction Engineering and Management, vol. 4, no. 3,
pp.80-6.
Jayawardhana, A 2017, ‘Financial Performance Analysis of Adidas AG’, Journal of Business
and Management, vol. 8, no. 11, pp.79-80.
My1.morgans.com.au 2018, viewed 9 Aug 2018,
<https://my1.morgans.com.au/r.cfm/CF8884F0-1A78-407E-8A22-D158AC46EF90>.
Retail Food Group 2018, Annual Reports - Retail Food Group, viewed 9 Aug 2018,
<http://www.rfg.com.au/shareholder-center/annual-reports/>.
Retail Food Group 2018, Home - Retail Food Group, viewed 9 Aug 2018,
<http://www.rfg.com.au/>.
Robinson, TR, Henry, E, Pirie, WL & Broihahn, MA 2015, International financial statement
analysis, John Wiley & Sons.
Wahlen, J, Baginski, S & Bradshaw, M 2014, Financial reporting, financial statement analysis
and valuation, Nelson Education.

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Appendices:
Appendix 1: Income statement of Retail Food Group (RFG) for the years 2013-2017

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Appendix 2: Balance sheet statement of Retail Food Group (RFG) for the years 2013-2017

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Appendix 4: Detailed breakdown of the formulas for calculating ratios
(Source: Crfonline.org 2018)