Financial Analysis Of The Reject Shop For Profitability Ratio

The Reject Shop Limited

Discuss about the Financial Analysis of the Reject Shop for Profitability Ratio.

With the ramified economic changes, and complex busienss structure, each and every organization needs to put extraordinary efforts to achieve the set of goals and objectives. In this report, financial analysis tool, (Ratio analysis) have been used to evaluate the financial performance of company. The ratio analysis is accompanied with the liquidity ratio, profitability ratio, solvency ratio, market ratio which will assist in evaluating how company has been performing in the market. In this report, The Reject Shop Limited has been taken into consideration.

It is an Australian Discount variety stores chain founded in 1981 and running its busienss on international level. This company is listed on the Australian Stock Exchange and the market capitalization of the company has been increased to 149 billion which has increased by 23% since last five years.

The financial analysis of company is done by using the ratio analysis of company.  Ratio analysis helps in evaluating the financial performance of company by establishment of nexus between two financial factors. In this report, liquidity ratio, profitability ratio, solvency ratio, market ratio of The Reject Shop has been computed to identify the past and future performance of company.

This ratio analysis The Reject Shop Company analysis its ability to pay off its short term and long term debts out of the available current assets.  

The current ratio shows how well company could pay off its short term and long term debts out of the current assets (Delen, Kuzey, and Uyar, 2013).

The current ratio of company has decreased its current ratio to 1.63 in 2017. It is observed that company has lower down its investment in its current assets which have resulted to decrease in the current ratio.

Quick ratio of The Reject Shop reflects the immediate ability to pay off its short term and long term liabilities. Quick ratio of company has also  decreased to .26 points in 2017 which is .09 point low as compared to last year data.  It reflects that company has lower down its investment in its current assets apart from the inventory assets.

This ratio reveals company’s ability to earn profit from its overall revenue.  This ratio assists in evaluating whether The Reject Shop is earning good amount of profit on its investment or not.

The net profit margin ratio shows company’s ability to earn profit out of its earning. The net profit margin of The Reject Shop Company increased to 2.13% in 2016 which was .28% higher as compared to last year. In addition to this, after that the net profit margin of company decreased to 1.51% in 2017 which is 1 % lower as compared to last three year data (Robb, and Robinson, 2014).

Financial analysis of company

The return on equity of company divulges company’s ability to render good amount of return available to equity investors. The return on equity of company has also gone down to 8.89% in 2017 which is 2% lower as compared to last year. The main reason of reducing the overall return on equity is related to reduce profitability (The Reject Shop, 2016).

The return on assets of company reveals that how well company has been earning on its assets.  The return on assets of The Reject shop has decreased to 5.48% in 2017 which is 1% lower as compared to last two year data. It reveals that company increased its overall net profit in 2016 and after that return on assets of company decreased in 2017.

The solvency ratio of company reveals the financial risk of The Reject Shop Company. It is analyzed the debt to equity ratio of company has also reduced to .62 points in 2017 which is .08 points lower as compared to last year. However, in 2016, the reject Shop has maintained its debt equity ratio stable in both years 2015 and 2016 (Ehiedu, 2014).

The efficiency ratio shows how well company deploys its assets in order to create value on its investment (Flannery, 2016).

The creditor’s turnover ratio has decreased to 23.26 times as company has lower down its creditors. However, as compared to last two year data, creditor turnover ratio has decreased by 10 points. It might increase the overall cost of capital of business (Grant, 2016). 

The inventory turnover ratio of company has increased to 209.16 times in 2016 which is  7 times higher as compared to last year data. It reflects that company has increased the inventory investment which has also increased the inventory turnover (Jordan, 2014).

The assets turnover ratio of company has been stable since last three years. It has shown that company has effectively used its resources to manage its busienss which has also lower down its cost of capital throughout the time.

This ratio reveals how well company has created value on its investment.

The market price of company is AUD $ 6 which reflects that company has increased the value of its shares in market. However, PE ratio of company has been increased to 74 points in 2017 which is 20 points higher as compared to last three year data.

The dividend payout ratio is the amount of dividend payment given to The Reject Shop Company. It has been observed that company has increased its dividend payout to 10% in 2017 which is 5% higher as compared to last year data (Mwangi, and Murigu, 2015). 

The Reject Shop Company has been planning to increase its investment in other busienss units which might increase the overall outcomes in determined approach.

There are several key points which have been found in this report.

• Company has increased its dividend payment which reflects that company wants to attract more investors to invest capital in its business (Weygandt, Kimmel, and Kieso, 2015).
• The financial leverage of company is too high which might be the negative indicators for the sustainable future of organization.
• The profitability of company is low in 2015 and 2017. However, in 2016, Company had maintained good profitability due to the effective market condition.
• The invested capital in the busienss may increase the overall costing of busienss or may result to negative business impact on the business sustainability of organization.
• The general investment proposal of company is very positive. After evaluating the annual report, it could be inferred company want to invest its capital in opening more chains which might positively impact the business growth (White, Sondh, and Fried, 2015). 

If investors want to invest their capital in The Reject shop then they should invest their capital in long run as investing capital in the reject Shop for short term purpose may negatively impact the return on capital employed.

Company will grow effectively within 5 years therefor; investing capital at this point of time in The Reject Company will create value on the investment.

Conclusion

After analyzing all the detail and financial performance of The Reject Shop, it could be inferred that company will perform well in long run. However, company needs to lower down its financial leverage by lower down its interest gearing and debt portion in its busienss. Investors are also advised to keep their money invested in The Reject Shop for long run if they want to create value on their investment.

References

Delen, D., Kuzey, C. and  Uyar, A., 2013. Measuring firm performance using financial ratios: A decision tree approach. Expert Systems with Applications, 40(10), pp.3970-3983.

Ehiedu, V.C., 2014. The impact of liquidity on profitability of some selected companies: The financial statement analysis (FSA) approach. Research Journal of Finance and Accounting, 5(5), pp.81-90.

Flannery, M.J., 2016. Stabilizing large financial institutions with contingent capital certificates. Quarterly Journal of Finance, 6(02), p.1650006.

Grant, R.M., 2016. Contemporary strategy analysis: Text and cases edition. John Wiley & Sons.

Jordan, B., 2014. Fundamentals of investments. McGraw-Hill Higher Education.

Mwangi, M. and Murigu, J.W., 2015. The determinants of financial performance in general insurance companies in Kenya. European Scientific Journal, ESJ, 11(1).

Mwangi, M. and Murigu, J.W., 2015. The determinants of financial performance in general insurance companies in Kenya. European Scientific Journal, ESJ, 11(1).

Robb, A.M. and Robinson, D.T., 2014. The capital structure decisions of new firms. The Review of Financial Studies, 27(1), pp.153-179.

The Reject Shop, 2015, Annual report, Available at https://www.rejectshop.com.au/aboutus/investorinformation/financialreport., Accessed on 2^nd June, 2018,

The Reject Shop, 2016, Annual report, Available at https://www.rejectshop.com.au/aboutus/investorinformation/financialreport., Accessed on 2^nd June, 2018,

Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & managerial accounting. John Wiley & Sons.

White, G.L., Sondh, A.C. and Fried, D., 2015. Analysis of Financial Statement. Analysis.

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