Financial Analysis of Retail Companies

The assignment analyzes the financial performance of Super Retail Group (SRG) and Retail Food Group (RFG), two Australian retail companies. It provides a detailed comparison of their financial ratios, including liquidity, profitability, and efficiency ratios. The study also examines the impact of macroeconomic factors on the companies' financial performance and offers recommendations for improvement. A thorough analysis is conducted using current assets, inventory, and prepaid expenses to determine the strengths and weaknesses of each company.

Principals of Financial Market

EXECUTIVE SUMMARY
Principles of financial market lay high level of emphasis on diversification, risk
minimization and generation of higher returns. In this, top down and bottom-up analysis is
carried out with the motive to get information about overall economic condition as well as
financial performance of the companies. For this purpose, consumer discretionary sector of
Australia has been selected. In addition to this, two companies namely Super Retail Group (SRF)
and Retail food group (RFG) have been selected pertaining to the retail sector of Australia. From
evaluation, it has been assessed that economic environment and fundamentals have significant
impact on the firm’s performance. It can be depicted from bottom-up analysis that RFG is
performing well in financial terms over others. Hence, SRG needs to exert control on expenses
and make focus on promotional aspects which in turn helps it in improving the profitability
aspect to a great extent.

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
Conducting a top down analysis of an overall economic environment.......................................1
Presenting a bottom-up analysis to assess the company’s current financial position..................4
CONCLUSION..............................................................................................................................11
RECOMMEDATIONS..................................................................................................................11
REFERENCES..............................................................................................................................12

INTRODUCTION
Financial market implies for the place where investors deal in securities and other
commodities. The main motive of investors behind making investment is to generate higher
return which in turn aids value in the capital. In this, it is highly required for the investors to
make evaluation of market trends and company’s performance. This in turn provides quick
indication to the investors about the extent to which company and specific sector is performing
well. The present report is based on Super Retail Group and Retail Food Group that are one of
the leading business organizations of Australian retail sector. Both the companies are listed on
the recognized stock exchange of Australia such as ASX. In this, report will provide deeper
insight about top down and bottom up analysis. Thus, it will highlight the manner in which
changes take place in the economic fundamentals can be forecasted through the means of top
down analysis. Besides this, it also depicts the extent to which financial position as well as
performance of Super Retail Group and Retail Food Group Ltd.
Conducting a top down analysis of an overall economic environment
Bottom-up analysis places emphasis on highlighting the biggest picture of the market or
related sector on a prior basis and then pay attention to the smaller components. On the basis this
aspect, after making evaluation of macro factors or trend investors initiate to analyze potential
companies. In such kind of analysis, investors look big picture and make use of macro variables
namely GDP, trade balances, currency fluctuations, inflation, interest rates etc. This in turn
facilitates effectual asset allocation (Yan and Zheng, 2017). For instance: In case, when trend of
an asset is upward and there is an existence of bullish momentum then trader evaluates 15
minutes chart with the motive to assess suitable entry for long position. Hence, in a bottom-up
analysis investors primarily make focus on choosing a specific sector as well as company,
thereafter evaluates its financial health and other factors that have an influence on performance
level. Thus, in top-down analysis, after making evaluation of the picture around the world
analysts do examination of different sectors to select the one that are estimated to outperform the
market. In this section, for performing top down analysis consumer discretionary sector of
Australia has been considered.

Overview of Australian retail sector
In the recent times, retail market of Australia is growing with a moderate level. From
assessment, it has been identified that CAGR of such sector will be 3% at the end of 2020.
There are several factors due to which Australia is becoming one of the major target market
includes high spending power of customers, quality, infrastructure etc. Further, growth that took
place in the Australian retail market is highly significant over the former times. Thus, it becomes
a top competitive market across the globe. Along with this, customers of Australia also become
more sophisticated and demanding after the influx of foreign players. Retailers are also engaging
in the activities such as providing customers with value added services that evolve high level of
satisfaction among them. In addition to this, it has been found that 80% people make use of
smart phone to purchase retail products or service. In the year of 2013, size of Australian market
accounted for $122 USD. This aspect shows that online retailing is increasing in Australia with
the very high pace. Hence, by considering the overall analysis, it can be said that growth of
Australian retail sector is tremendous.
Bottom-up analysis of Australian retail sector
In order to evaluate the impact of economic fundamentals on the performance of
companies such as SRG and RFG of retail sector following factors are considered.
 GDP: In 2016, GDP of Australia accounts for AUD $1.205 trillion, whereas total wealth
of the country was $8.9 trillion. The below mentioned graph clearly presents that in 2016,
GDP of Australia decreased which is not a good indicator and have direct influence on
market. It is one of the most effectual indicators which in turn assist in gauging the health
of country’s economy (Karna, Richter and Riesenkampff, 2016). The rationale behind,
GDP includes all the factors such level of employment, per capita income etc which in
turn has influence on the purchasing power of customers. Thus, lower level or decreasing
GDP may result into less profitability of SRG and RFG.

(Source: Australia GDP, 2017)
 Interest rate: It is another major factor that has an impact on the performance of SRG
and RFG. Moreover, when interest rate increases then associated expenses also move in
upward direct which in turn affects margin of the firm negatively.
 Currency value: In the current times, value of 1 AUD is .81 as compared to US dollar.
Hence, fluctuation that takes place in the currency value in terms of appreciation or
depreciation has an impact on profitability of SRG and FRG due to importing as well as
exporting aspects. Thus, fluctuation takes place in currency value impacts firm’s
profitability and thereby market share as well (Damodaran, 2016).
 Inflationary trends: Graphical presentation shows that from July 2016 to Jan 2017
inflation rates increased to the significant level. On the other side, in July 2017, inflation
rate decreased from 2.1 to 1.9. Hence, economic conditions have higher impact on the
purchasing power of customers and thereby profitability of firms. Moreover, individuals
prefer to spend more on quality products when they have high disposable income and
vice versa (Joos, Piotroski and Srinivasan, 2016). It shows that inflationary trends closely
influence the financial health and performance of SRG and RFG.

(Source: Australia inflation rate, 2017)
Thus, all the above mentioned factors clearly entails that changes take place in economic
fundamentals such as interest rate, GDP, inflation, exchange rate etc. highly influences
Presenting a bottom-up analysis to assess the company’s current financial position
With the motive to conduct bottom-up analysis two companies have been undertaken
such as SRG and RFG. Both the companies belong from the retail sector of Australia whose
mission and vision are:
Retail food group:
Vision: To become a multi-food franchise of Australia through the means of cutting edge,
innovation, technology and people (Retail Food Group, 2017).
Mission: This statement of RFG tends to make more focus on becoming a market leader
and market leader in the field of retail food systems management. Hence, the main motive of
firm is to provide all the stakeholders with the benefits through enhancing complimentary
opportunities and delivering value to the customers.
Vision and mission of Super retail group:
Vision: SRG vision focuses on inspiring people to live their passion. Hence, company’s
main goal is to become 5th largest Australian retail company.

Mission: To provide customers with the high quality and cost effective products or
services that makes their most of time leisure (Super Retail Group, 2017).
Ratio analysis tool has been employed by an analyst to conduct bottom-up analysis.
Moreover, the main motives behind conducting bottom-up analysis are to make evaluation or
analysis of individual stock (Shi and et.al., 2017). Such kind of analysis is performed when
investors tend to make focus on evaluating the performance of specific companies rather than the
industry from which it belongs. By keeping all such aspects in mind ratio analysis tool has been
selected which in turn helps in assessing and evaluating the financial performance of SRG and
RFG. Moreover, ratio analysis technique is highly significant which in turn helps in evaluating
the various aspects of an organization such as profitability, liquidity, solvency and efficiency.
Profitability ratio analysis
Super Retail Group
Retail Food
Group
Profitabilit
y ratios Formulas
Industry
average 2016 2017 2016 2017
Gross profit 1050 1101 203 180
Operating
profit 106 156 94 89
Net profit 63 102 61 62
Sales
revenue 2422 2466 309 348
GP ratio
Gross profit /
net sales * 100 42.9% 43.4% 44.6% 65.7% 51.7%
OP ratio
Operating profit
/ net sales * 100 15% 4.4% 6.3% 30.4% 25.6%
NP ratio
Net profit / net
sales * 100 10.3% 2.6% 4.1% 19.7% 17.8%

2016 2017 2016 2017
Super Retail Group Retail Food Group
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
GP ratio
OP ratio
NP ratio
Interpretation: The above depicted table shows that in the year of 2016, GP margin of
Super Retail Group and Retail food group accounts for 43.4 % & 65.7% respectively. On the
other side, GP margin of SRG and RFG reached on 44.6% & 51.7% at the end of 2017. This
aspect shows that gross profitability aspect of SRG increased in 2017 but still it is lower as
compared to RFG. Further, through comparison of the GP margin of SRG and RFG in against to
the industry average it has found that gross profitability of both the companies are good.
Operating profit ratio presents that in both the years such as 2016 and 2017 SRG failed
to comply with the industry average. In contrast to this, op margin of RFG was 30.4% & 25.6%
significantly. It shows that as compared to 2016, RFG failed to make effectual control on
operating expenses in 2017. However, in comparison to industry average such as 15%, it can be
said that operating margin of RFG is good over others. Hence, for making improvement in the
profitability aspect SRG is required to exert control on expenses through the means of strategic
framework.
Net profit margin of SRG and RFG is 4.1% & 17.8% in the year of 2017. It clearly
exhibits that net profitability aspect of RFG is sound over others and higher than the industry
average. By taking into account all such aspects it can be presented that RFG is managing
indirect expenses effectually. On the contrary to it, NP margin of SRG is highly lower as
compared to industry average and RFG.

Liquidity ratio analysis
Super Retail Group
Retail Food
Group
Liquidity
ratios Formulas
Industry
average 2016 2017 2016 2017
Current
assets 560 544 89 135
Current
liabilities 330 323 50 91
Inventory 502 482 16 28
Prepaid
expenses 25 23 3 3
quick
assets 33 39 70 104
Current
ratio
Current assets /
current
liabilities 2.01 1.70 1.68 1.78 1.48
quick ratio
Current assets –
(stock + prepaid
expenses) /
current
liabilities 1.03 0.10 0.12 1.40 1.14
2016 2017 2016 2017
Super Retail Group Retail Food Group
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2
Current ratio
quick ratio
Interpretation: Graphical presentation entails that current ratio of both the companies
such as SRG and RFG decreased in the year of 2017 over the former times. In the financial year

2017, current ratio of SRG and RFG accounts for 1.68:1 & 1.48:1. Hence, as compared to the
industry average and ideal standard such as 2:1 it can be said that liquidity position of both the
companies are good but not sound (Dona and et.al., 2016).
Tabular presentation depicts that quick ratio of SRG was .10:1 and .12:1 in 2016 & 2017.
Apart from this, quick ratio of RFG during 2016 & 2017 accounted for 1.40:1 & 1.14:1
significantly. Thus, by doing comparison of quick ratio of both the companies with industry
average it has been identified that liquidity position of RFG is good over SRG. Hence, it can be
presented that SRG is not in position to clear current obligations via quick assets.
Solvency ratio analysis
Super Retail
Group
Retail Food
Group
Solvency
ratios
Industry
average Formulas 2016 2017 2016 2017
Debt 410 389 207 246
Shareholder
s’ equity 735 757 434 465
Debt-equity
ratio 0.50
Long term
debt /
shareholders
equity 0.56 0.51 0.48 0.53
2016 2017 2016 2017
Super Retail Group Retail Food Group
0.42
0.44
0.46
0.48
0.5
0.52
0.54
0.56
0.58
Debt-equity ratio
Debt-equity ratio

Interpretation: Outcome of ratio analysis presents that debt-equity ratio of SRG
decreased from .56:1 to 0.51:1 at the end of 2017. Further, ratio pertaining to the extent to which
financial needs were fulfilled by RFG from debt and equity implies for .48:1 & .53:1. By
keeping in mind the average and standard figures it can be said that capital structure of both the
companies are optimal (Ostroumova and et.al., 2016). This in turn helps in getting financial
benefits and thereby contributes in the attainment of organizational goals.
Efficiency ratio analysis
Super Retail Group
Retail Food
Group
Efficiency
ratio
analysis 2016 2017 2016 2017
Assets
turnover
ratio 1.54 1.58 0.45 0.43
Inventory
turnover
ratio 2.72 2.78 5.74 7.53
2016 2017 2016 2017
Super Retail Group Retail Food Group
0
1
2
3
4
5
6
7
8
Assets turnover ratio
Inventory turnover ratio
Interpretation: It has been assessed from ratio analysis that asset turnover ratio of SRG
increased from 1.54 times to 1.58 times. In contrast to this, assets turnover ratio of RFG was .45
& .43 times significantly. By considering this, it can be entailed that SRG has made use of assets
effectually while performing business activities and functions. Thus, RFG is required to make

modifications in the existing framework that assist them to make use of assets to the full extent
and generating higher sales.
Inventory turnover ratio of SRG was 2.72 and 2.78 times in the financial year 2016 &
2017. On the other side, stock turnover ratio of RFG was 5.74 and 7.53 times during the period
of 2016 & 2017. From such overall evaluation, it can be depicted that RFG managed its
inventory in an effectual way over others. Hence, to strengthen the financial position and
enhancing efficiency performance SRG needs to lay emphasis on employing stock management
techniques (Kural and et.al., 2016). By doing this, firm can make improvement in the inventory
turnover ratio to the significant level.
Investment ratio analysis
Super Retail Group
Retail Food
Group
Particulars Industry average 2016 2017 2016 2017
Earnings per
share .46 0.32 0.51 0.37 0.35
Dividend
per share .45 0.59 0.61 0.35 0.42
Payout ratio
(in %) 111.10 104.6 127.8 131.8 99.8
Interpretation: EPS, DPS and payout ratios are the main indicators which in turn provide
deeper insight to the potential investors about the returns offers by the concerned company.
Results of ratio analysis show that EPS of SRG and FRG is .51 & .35 in 2017. As compared to
2016, EPS offered by both SRG and RFG to the investors decreased in 2017. Further, in
comparison to industry average such as .46, RFG offered less returns to the investors which in
turn places direct or negative impact on brand image and decision making aspect of investors.
In addition to this, DPS of SRG was .59 and .61 respectively in the financial year 2016 &
2017. Apart from this, dividend offered by RFG to the investors in the year of 2016 & 2017
is .35 and .42. Along with this, companies which are operated in consumer discretionary sector
offers .45 as DPS. On the basis of such aspect, it can be stated that SRG is offering dividend to
the investors with increasing rate. In contrast to this, RFG is providing shareholders with lower

dividends irrespective of the aspect that its profitability aspect is good. Thus, for building as well
as maintaining effectual image in mind of investors it is highly required for RFG to offer
dividend to the shareholders with increasing rate.
CONCLUSION
From the above report, it has been concluded that macro factors such as interest rate,
inflation, GDP level, currency fluctuation etc. highly impacts financial performance of the
companies like SRG & RFG. Besides this, it can be inferred that profitability aspect of RFG is
sound over SRG. It can be seen in the report that both the companies are able to meet their
obligations on time by using current assets. Further, it has been articulated that solvency position
of both the companies undertaken for the study is good. It can be summarized from bottom-up
analysis that RFG needs to develop competent framework for making improvement in the
efficiency and investment ratios. Thus, it can be concluded that financial position of RFG is
sound over SRG.
RECOMMEDATIONS
 It is recommended to RFG to undertake budgeting technique which in turn helps in
controlling both direct and indirect expenses. Through this, firm would become able to
improvise its profitability aspect.
 Further, on the basis of the outcome of ratio analysis it is suggested to SRG to make
focus on maintaining current assets except inventory and prepaid expenses. This in turn
strengthens the liquidity position of firm and helps it in fulfilling obligations on time.

REFERENCES
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Yan, X. and Zheng, L., 2017. Fundamental Analysis and the Cross-Section of Stock Returns: A
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Online
Australia GDP. 2017. [Online]. Available through:
<https://tradingeconomics.com/australia/gdp>. [Accessed on 12th September 2017].
Australia inflation rate. 2017. [Online]. Available through:
<https://tradingeconomics.com/australia/inflation-cpi>. [Accessed on 12th September 2017].
Retail Food Group. 2017. [Online]. Available through: < http://www.rfg.com.au/index.php/107-
general-pages/about-us/141-our-philosophy>. [Accessed on 12th September 2017].
Super Retail Group. 2017. [Online]. Available through: < http://www.superretailgroup.com.au/>.
[Accessed on 12th September 2017].