RFG Financial Analysis and Market Evaluation

The provided assignment involves a comprehensive financial analysis of Retail Food Group (RFG), focusing on its capital structure, dividend payments, market value, and risk assessment. The evaluation compares RFG's performance with the Australian Stock Exchange (ASX) and assesses the company's attractiveness in the market for investment. The document cites relevant references from academic literature and provides a conclusion that summarizes the key findings.

Running head: PRINCIPLES OF FINANCE
Principles of Finance
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

1PRINCIPLES OF FINANCE
Table of Contents
Introduction:....................................................................................................................................2
Answer to Part i:..............................................................................................................................2
Answer to Part ii:.............................................................................................................................5
Answer to Part iii:............................................................................................................................8
Answer to Part iv:..........................................................................................................................10
Conclusion:....................................................................................................................................12
References:....................................................................................................................................13

2PRINCIPLES OF FINANCE
Introduction:
The current report would focus on analysing the capital structure of Retail Food Group
(RFG), which is a popular food and beverage organisation in Australia. In addition, it supplies
greater quality coffee products and it has become emerging leader in dairy processing, wholesale
bakery and foodservice sectors of the nation (Retail Food Group 2018). The first section of the
report would focus on analysing the capital structure of the organisation for the past five years.
The second segment would evaluate the dividend history over the past five years as well for
enabling the shareholders to provide an overview about the earnings of the shareholders. The
third section would lay stress on evaluating the trend in share price over the past five years.
Finally, the report would shed light on evaluating the attractiveness of the shares of RFG for
investment purpose.
Answer to Part i:
For analysing and commenting on the capital structure of Retail Food Group, the
following capital structure ratios have been taken into consideration, which are illustrated in the
form of a table as follows:
Particulars Details 2013 2014 2015 2016 2017
Total liabilities A 131 88 276 267 464
Total equity B 240 310 404 434 465
Total assets C 371 398 680 702 930
Current liabilities D 20 19 97 50 91
Debt-to-equity A/B 54.58 28.39 68.32 61.52 99.78

3PRINCIPLES OF FINANCE
ratio % % % % %
Debt ratio A/C
35.31
%
22.11
%
40.59
%
38.03
%
49.89
%
Equity ratio B/C
64.69
%
77.89
%
59.41
%
61.82
%
50.00
%
Capital gearing
ratio
(A-D)/(C-
D)
31.62
%
18.21
%
30.70
%
33.28
%
44.46
%
Table 1: Capital structure ratios of Retail Food Group for the years 2013-2017
(Source: Retail Food Group 2018)
2013 2014 2015 2016 2017
0.00%
20.00%
40.00%
60.00%
80.00%
100.00%
120.00%
Capital structure ratios of RFG
Debt-to-equity ratio
Debt ratio
Equity ratio
Capital gearing ratio
Figure 1: Capital structure ratios of Retail Food Group for the years 2013-2017
(Source: Retail Food Group 2018)

4PRINCIPLES OF FINANCE
According to the above figure, it could be observed that the debt-to-equity ratio of RFG
has fallen drastically from 54.58% in 2013 to 28.39% in 2014; however, it has increased to
68.32% in 2015 and the trend is declining again to 61.52% in 2016. The increase is significant to
99.78% in 2017, which denotes that the organisation is highly reliant on debt for raising funds
for its capital projects and investments in existing operations. As commented by Brooks (2015),
debt-to-equity ratio is a capital structure ratio that denotes the soundness of long-term financial
policies of the organisation. A ratio of 100% denotes that both the creditors and shareholders’
contribute to the business assets. From the perspective of the creditors, low ratio is favourable, as
greater protection is ensured for their money. However, the shareholders intend to seek benefits
from the funds that the creditors provide and hence, they prefer higher debt-to-equity ratio. A
ratio of 100% is considered ideal for the food and beverage industry of Australia and in case of
RFG, the ratio is closer to the ideal standard in 2017 and thus, it is maintaining optimal balance
of debt and equity.
Debt ratio gauges the financial leverage of an organisation, which enables the creditors
and the investors to evaluate the debt burden on the organisation along with firm’s liabilities to
pay off its debt in future (Ferran and Ho 2014). A ratio of 50% is considered favourable, since it
helps in maintaining optimality in the capital structure of the firm. In case of RFG, the trend is
fluctuating over the five-year period and finally, the ratio stood at 49.89% in 2017. It is closer to
the above-stated ideal ratio, which denotes that the asset base of the organisation is as twice as its
liabilities. Hence, the debt ratio denotes the optimal capital structure of RFG as well.
Equity ratio could be denoted as the capital structure ratio that gauges the asset amount
owned on the part of the owners by contrasting total equity in the organisation to total assets
(Gitman, Juchau and Flanagan 2015). The lower ratio is always favourable, since it denotes that

5PRINCIPLES OF FINANCE
greater portion of the assets is funded with the help of equity. For RFG, fluctuations could be
observed during the years and in 2017, it stood at 50%, which is the ideal ratio considered in the
sector.
Capital gearing ratio is the level of debt at which the firm raises funds for acquiring assets
or financing its operations (Gullifer and Payne 2015). The lower the ratio, the better it is for the
organisation, since a high ratio denotes risky investment that might minimise the dividend
payout. In case of RFG, fluctuations could be seen until 2015 after which there is significant
increase in this ratio. However, it is not above 50% in 2017 that implies that RFG is low-geared
organisation and higher dividend payouts could be expected from the firm in future.
Answer to Part ii:
For analysing the dividend history of Retail Food Group, the following ratios have been
taken into consideration, which are illustrated in the form of a table as follows:
Particulars Details 2013 2014 2015 2016 2017
Dividend per share A 0.1025 0.1125 0.1175 0.145 0.15
Earnings per share B
0.2
6
0.2
7
0.2
2
0.3
7
0.3
5
Market price per share C 4.2 6.17 4.52 6.44 1.955
Total liabilities D 131 88 276 267 464
Cash and cash
equivalents E 17 18 24 26 10
EBITDA F 54 59 59 104 107
Dividend payout ratio A/B 39.42 41.67 53.41 39.19 42.86

6PRINCIPLES OF FINANCE
% % % % %
Dividend coverage ratio B/A
2.5
4
2.4
0
1.8
7
2.5
5
2.3
3
Dividend yield ratio A/C 2.44% 1.82% 2.60% 2.25% 7.67%
Net debt to EBITDA
ratio
(D-
E)/F 2.11 1.19 4.27 2.32 4.24
Table 2: Dividend ratios of Retail Food Group for the years 2013-2017
(Source: Retail Food Group 2018)
2013 2014 2015 2016 2017
-
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
Dividend history of RFG
Dividend payout ratio
Dividend coverage ratio
Dividend yield ratio
Net debt to EBITDA ratio
Figure 2: Dividend ratios of Retail Food Group for the years 2013-2017
(Source: Retail Food Group 2018)
Dividend payout ratio represents part of the yearly earnings per share of an organisation,
which are incurred as cash dividends per share (Chandra 2017). An organisation that distributes

7PRINCIPLES OF FINANCE
nearly 50% of its earnings is stable, since earnings could be generated in long-term. On the other
hand, the companies paying higher dividend payout ratio above 50% might struggle to maintain
their dividends over long-term. In case of RFG, the dividend payout ratio has remained stable
over the years below 50%; the only exception could be observed in 2015 where the organisation
has made greater net income.
Dividend cover ratio denotes the number of times an organisation could pay dividends to
the common shareholders by using its net income over a particular year. A higher ratio is more
preferable, since greater dividend stock payments are estimated in future. If the ratio is above 1,
it is expected that the organisation is financially stable to ensure higher returns to the
shareholders (Damodaran 2016). In case of RFG, the dividend cover ratio is above 1 all the
years, which denotes that the organisation has adequate stability in the market.
The above figure clearly denotes that the dividend yield ratio of RFG has increased
significantly in 2017, which implies greater amount of dividends has been earned on each dollar
of investment. The higher ratio denotes that maximum amount of the dollar earned is not utilised
for reinvestment in business operations to make capital gains (Frank and Keith 2016). Thus, in
case of RFG, decline might be observed in dividend payments to the shareholders in future;
however, the other pertinent factors need to be taken into consideration.
As commented by Ihori (2016), net debt to EBITDA ratio gauges the leverage of an
organisation and its capability of clearing the overall debt obligations (Kane 2018). A lower ratio
is always preferable for the investors, since a higher ratio indicates that the organisation might
minimise its dividend in future. In this case, a significant increase in the ratio could be observed
for RFG in 2017, which denotes that the dividend payments could be minimised in future.

8PRINCIPLES OF FINANCE
Answer to Part iii:
Date RFG share price ASX share price
1/31/2012 2.75 29.08
2/29/2012 2.65 29.80
3/31/2012 2.72 30.76
4/30/2012 2.7 28.64
5/31/2012 2.65 28.38
6/30/2012 2.6 29.45
7/31/2012 2.91 27.10
8/31/2012 2.96 28.96
9/30/2012 3.18 28.93
10/31/2012 2.98 28.26
11/30/2012 3.17 28.98
12/31/2012 3.39 30.73
1/31/2013 3.61 34.42
2/28/2013 3.59 34.34
3/31/2013 3.98 35.30
4/30/2013 3.84 36.62
5/31/2013 3.95 32.06
6/30/2013 4.2 32.94
7/31/2013 4.23 34.33
8/31/2013 4.3 34.20
9/30/2013 4.36 34.01
10/31/2013 4.44 36.00
11/30/2013 4.6 35.00
12/31/2013 4.2 35.26
1/31/2014 4.51 34.21
2/28/2014 4.37 35.62
3/31/2014 4.18 34.66
4/30/2014 4.23 35.04
5/31/2014 4.54 35.10
6/30/2014 4.68 35.21
7/31/2014 4.74 35.22
8/31/2014 4.94 35.49
9/30/2014 5.57 34.07
10/31/2014 5.65 35.14
11/30/2014 5.76 34.99
12/31/2014 6.17 36.05
1/31/2015 7.56 38.00
2/28/2015 7.06 41.16
3/31/2015 6.95 41.10
4/30/2015 6.65 40.85
5/31/2015 5.43 39.19
6/30/2015 5.34 39.94
7/31/2015 5.28 37.83
8/31/2015 4.14 36.66
9/30/2015 4.63 38.12
10/31/2015 4.48 39.25
11/30/2015 4.63 39.28
12/31/2015 4.52 37.40
1/31/2016 4.31 38.40
2/29/2016 5.16 40.65
3/31/2016 5.5 40.65
4/30/2016 5.52 43.01
5/31/2016 5.53 43.43
6/30/2016 5.77 45.65
7/31/2016 6.87 48.58
8/31/2016 6.97 47.16
9/30/2016 6.77 46.71
10/31/2016 6.19 44.57
11/30/2016 7.02 47.19
12/31/2016 6.44 48.54
1/31/2017 5.55 49.38
2/28/2017 5.33 48.87
3/31/2017 5.46 48.56
4/30/2017 5.14 50.64
5/31/2017 4.7 49.40
6/30/2017 4.85 51.41
7/31/2017 5 52.00
8/31/2017 4.28 51.81
9/30/2017 4.4 52.15
10/31/2017 4.51 53.75
11/30/2017 2.47 53.99
12/31/2017 1.955 54.09
Correlation
Average return 4.66 38.94
Risk 1.29 7.53
0.45

9PRINCIPLES OF FINANCE
Table 3: Share price trend, correlation, average return and risk of RFG and ASX for the
years 2012-2017
(Source: Retail Food Group 2018)
1/1/2012
5/1/2012
9/1/2012
1/1/2013
5/1/2013
9/1/2013
1/1/2014
5/1/2014
9/1/2014
1/1/2015
5/1/2015
9/1/2015
1/1/2016
5/1/2016
9/1/2016
1/1/2017
5/1/2017
9/1/2017
0
10
20
30
40
50
60
Share price trend of RFG and ASX
RFG share price
ASX share price
Figure 3: Share price trend of RFG and ASX for the years 2012-2017
(Source: Retail Food Group 2018)
According to the above table, it could be observed that the share price of RFG has
positive correlation with the ASX share price, which denotes that the rise in the share price of
ASX would result in increase in the share price of RFG as well. In this context, Kevin (2015)
commented that having positive correlation with the index market is a positive signal for the
investors, as they could expect stable return on their investments. In case of RFG, the share price
is fluctuating over the years in tandem with ASX share price. However, it needs to be borne in

10PRINCIPLES OF FINANCE
mind that even though both the stocks have provided positive returns to the investors over the
year; however, significant risk is inherent in both the stocks. This is because a stock having
standard deviation of above 1 is considered risky for the investors, as the return could be
minimised significantly due to inflationary effects (Mahakud and Mishra 2014). Therefore, as
per the share price analysis trend, it could be stated that RFG is maintaining a stable financial
position in the food and beverage industry of Australia. However, it needs to focus on
maximising its retained earnings due to higher level of risk in the stocks for combating with any
unforeseen events like inflation or fall in sudden market price in order to ensure regular returns
to its shareholders (Titman, Keown and Martin 2017).
Answer to Part iv:
For evaluating the financial attractiveness of Retail Food Group, the following ratios
have been taken into consideration:
Particulars Details 2013 2014 2015 2016 2017
Market value per
share A 4.20 6.17 4.52 6.44 1.955
Earnings per share B 0.26 0.27 0.22 0.37 0.35
Market value of
equity C 240 310 404 434 465
Market value of debt D 131 88 276 267 464
Cash and
investments E 17 18 24 26 10
Price/earnings ratio A/B 16.15 22.85 20.55 17.41 5.59

11PRINCIPLES OF FINANCE
Enterprise value C+D-E 354 380 656 675 919
Table 4: Price/earnings ratio and enterprise value of RFG Limited for the years 2013-2017
(Source: Retail Food Group 2018)
As laid out by Peirson et al. (2014), price/earnings ratio signifies the amount that an
investor could expect to invest in an organisation for earnings a single dollar of its earnings. A
ratio above 1 is considered feasible for the organisations running their business operations in the
food and beverage industry of Australia. In this case, even though there is significant decline in
the ratio from 17.41 in 2016 to 5.59 in 2017, it is still above the ideal standard. In addition,
increase in enterprise value could be observed for RFG over the years as well. Hence, it denotes
the organisation is highly attractive in the market for making investments. This could be
elaborated in a better way by relating with the efficient market hypothesis.
According to Titman and Martin (2014), efficient market hypothesis states that the stock
market could not be beaten, since stock market efficiency causes the current share prices to
incorporate and include all pertinent information. This theory assumes that stocks are traded at
fair values in the market. As a result, the investors find it difficult to buy undervalued shares or
sell securities at overvalued prices. In case of RFG, it could be observed that the market value of
the shares of the organisation is rightly valued, since its risk is high as well. In addition, the
return provided has increased in tandem with ASX as well. Hence, it could be stated that the
investors might find high prospects by investing in the shares of RFG, since their returns are
expected to be maximised over the years.

12PRINCIPLES OF FINANCE
Conclusion:
Based on the above evaluation, it could be stated that RFG has maintained optimal capital
structure by proper balance of debt and equity. The dividend payments for the organisation are
consistent as well over the years; however, it is expected to be minimised in future. It could be
observed that the market value of the shares of the organisation is rightly valued, since its risk is
high as well. In addition, the return provided has increased in tandem with ASX as well. Hence,
it could be stated that the investors might find high prospects by investing in the shares of RFG,
since their returns are expected to be maximised over the years.

13PRINCIPLES OF FINANCE
References:
Brooks, R., 2015. Financial management: core concepts. Pearson.
Chandra, P., 2017. Investment analysis and portfolio management. McGraw-Hill Education.
Damodaran, A., 2016. Damodaran on valuation: security analysis for investment and corporate
finance (Vol. 324). John Wiley & Sons.
Ferran, E. and Ho, L.C., 2014. Principles of corporate finance law. Oxford University Press.
Frank, K.R. and Keith, C.B., 2016. Investment analysis and portfolio management.
Gitman, L.J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson
Higher Education AU.
Gullifer, L. and Payne, J., 2015. Corporate finance law: principles and policy. Bloomsbury
Publishing.
Ihori, T., 2016. Principles of Public Finance. Springer.
Kane, D.R., 2018. Principles of international finance. Routledge.
Kevin, S., 2015. Security analysis and portfolio management. PHI Learning Pvt. Ltd.
Mahakud, J. and Mishra, C.S., 2014. Security Analysis and Portfolio Management.
Peirson, G., Brown, R., Easton, S. and Howard, P., 2014. Business finance. McGraw-Hill
Education Australia.

14PRINCIPLES OF FINANCE
Retail Food Group., 2018. Annual Reports - Retail Food Group. [online] Available at:
http://rfg.com.au/shareholder-center/annual-reports/ [Accessed 11 May 2018].
Retail Food Group., 2018. Home - Retail Food Group. [online] Available at: http://rfg.com.au/
[Accessed 11 May 2018].
Titman, S. and Martin, J.D., 2014. Valuation. Pearson Higher Ed.
Titman, S., Keown, A.J. and Martin, J.D., 2017. Financial management: Principles and
applications. Pearson.