Analysis Of Retail Food Group – Capital Structure, Dividend History, Share Price Trend And Investment Potential

Capital Structure Analysis

1. Analyse and comment on the capital structure of the company in the past 5 years (2013-2017). Is it optimal? Why or why not?

2. Analyse the company’s dividend history in the past 5 years (2013-2017), and provide a critical evaluation of the company’s dividend history.

3. Provide an analysis of share price trend for the past five years (2012-2017).

4. In the light of your analysis above, evaluate the attractiveness of company’s ordinary shares for investment. Include in your analysis a discussion of the weaknesses / limitations of your analysis, and any key risks that may affect the attractiveness of the company as an investment, and how you have factored these risks into your attractiveness analysis and valuation. Do you think that the firm is correctly valued by the market? Discuss.

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.

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:

Table 1: Capital structure ratios of Retail Food Group for the years 2013-2017

(Source: Retail Food Group 2018)

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.

Dividend History Analysis

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 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.

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:

Table 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 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.

Share Price Trend Analysis

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.

Table 3: Share price trend, correlation, average return and risk 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 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).

Evaluation of Attractiveness for Investment

For evaluating the financial attractiveness of Retail Food Group, the following ratios have been taken into consideration:

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.

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.

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.

Retail Food Group., 2018. Annual Reports – Retail Food Group. [online] Available at: https://rfg.com.au/shareholder-center/annual-reports/ [Accessed 11 May 2018].

Retail Food Group., 2018. Home – Retail Food Group. [online] Available at: https://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.

Order an Essay Now & Get These Features For Free:

Turnitin Report

Formatting

Title Page

Citation

Outline

Place an Order