Profitability Analysis
Financial analysis is the evaluation of financial performance of the business of the entities. In the present report, the financial performance of two leading food corporations of Australia is analyzed using the examination of financial statements contained in the annual report of both the companies for the financial year 2017.The techniques used for the analysis are horizontal analysis, the vertical analysis and ratio analysis. The ratio analysis is carried to comment on the profitability, solvency, liquidity as well as efficiency of the business of the company. Along with the discussion on financial performance of the business, the non-financial performance of the business has also been assessed as consideration of non-financial performance of business helps in better evaluating the firm’s effectiveness.
Profitability is the important aspect of firm’s financial performance. It determines the profits generated through the business operations after meeting all the costs and expenses related to the business. In the present case, the profitability position of businesses of Freedom Foods and Retail Food Group is determined using various ratios such as return on equity, return on assets, gross profit margin, net profit margin and the cash flow to sales ratio. The results of ROE of the both the companies are showing that Retail Group is generating more returns for its shareholders through the effective utilization of funds invested by them in the company. Also, the ROA ratio of both the companies are significantly varying and showing that the Retail Group is generating higher profits out of business by utilizing its total assets efficiently. Further the GP ratio of Retail Group is higher than that of Freedom Food even though the sales revenue of Freedom Foods is more than Retail Group. It reflects that Retail Group has incurred less cost of production. Even the net profitability of Retail Group is significantly higher than that of Freedom Foods because Freedom Foods has incurred huge cost for its operating expenses and hence it is able to generate very less returns for the owners of the business.
Profitability position of Retail Food Group is much better than of Freedom Foods as the former company is generating higher returns of its shareholders (Higgins, 2003).
Efficiency refers to the appropriateness of the utilization of business assets for the purpose of business only. To measure the asset efficiency of the company various ratios have been used such as asset turnover, inventory turnover ratio, days inventory, days debtors and debtor turnover ratio. The asset turnover ratio of Freedom Food is higher than that of Retail Group. It signifies that Freedom Food is utilizing its total assets in the better way than Retail Group. Day’s inventory ratio shows the number of days a firm requires to turn down its average into sales. Freedom Foods is consuming more time to convert its inventory into sales and this shows that the inventory management practices of Retail Group is better than that of Freedom Group. The inventory turnover ratio in times shows the number of times company has utilized its average inventory to serve its customers. Higher inventory turnover times is generally preferred and hence it can be said that ITR of Retail Group is better than Freedom Food Group Further, the lower days debtor ratio of Freedom than that of Retail Group is showing that Freedom Group has efficient and effective trade credit policies in respect of collecting cash from its trade customers. Hence the Freedom Food has better cash cycle than that of Retail Group. Therefore the times’ debtor ratio of Freedom Food is better than that of Retail Group (Retail Food Group, 2017).
Efficiency Analysis
Hence it can be said that from asset utilization efficiency point of view, Freedom Food is performing better than Retail Food Group.
The liquidity position of the business is said to be strong when the firm has sufficient amount of current assets to meet its current liabilities which falls due in short term. To assess the liquidity position of both the companies in the present case use of prominent liquidity ratios have been made such as current ratio, quick ratio and cash flow ratio. Current Ratio measures the ability of the company to meet all its current obligations though the utilization of all its current assets. Quick ratio determines the quantum of liquid assets held by business in relation to its total current liabilities. Liquid assets are those assets which can easily be converted into cash as and when it is required. The liquid ratios of Freedom Group are indicating the poor liquidity position of the business. However, the liquidity position of Retail Group is far better than that of Freedom Foods and hence it can be said that Retail Group is able to meet its short term debt obligations as and when they become due (Freedom Food Group, 2017).
Retail Food Group is having the better short term credit risk as it has sufficient amount of current assets and especially the liquid assets to meet its short term credit obligations.
The capital structure of a firm comprises of its debt and equity components. Debt element represents the quantum of funds raised by company from the external sources. The equity portion represents the quantum of funds raised through internal sources of finance such as retained earnings and equity financing. Hence, it can be said that Retail Group is facing more financial risk than Freedom Group. The total liabilities to equity ratio show the quantum of debt held by the business in relation to the equity. The higher the proportion of equity, the lesser is the chances of liquidity of the company. However, excessive reliance on equity imposes the risk of loss of ownership of the company as shareholders are the owners of the company and they have voting rights also in the company.
Hence, in long run, Freedom Food is found to be more stable than Retail Group.
The capital structure of Freedom Foods is better than of Retail Group because there is lower proportion of debt in the overall capital structure of the company and higher proportion of equity (Higgins, 2003). Hence, it can be said that Freedom Food is facing lower degree of financial leverage and it is more stable than the Retail Group. Also, from the asset efficiency, Freedom Food is better than Retail Group. However, since investors are more interested in determining the profitability of the company as it allows them to gauge the return potential of the business. So, from the profitability point of view, Retail Group is performing way better than Freedom Food. Also, the liquidity position of Retail Group is healthier than the Freedom Group. From, the long term perspective, Freedom Food is a better option for the investment but from the short term view point Retail Group is an appropriate option for the investment as it will offer higher returns to the (Retail Food Group, 2017).
Financial statement analysis is carried by applying various tools and techniques to the financial statements of the company. Financial statements contain necessary information about the transactions and that takes during a particular year. However, financial statement analysis only helps the managers to assess their financial performance. But the overall performance of the business is based on both financial as well as non-financial performance of the company. Non-financial performance can be assessed using the sustainability report and by examining its initiatives towards corporate social responsibility.
Further, financial statement analysis only takes into account the quantitative information about the entity. However, it is necessary to assess consider the non-financial performance of the business. Non-financial information is also very important for the decision making process undertaken by the top management of the company. There are various non-financial matters must be considered while making strategic decisions in favour of company (Foster, 2004).
The Freedom Food and also Retail Group have been carrying out its sustainability and corporate social responsibilities in the most effective manner. The companies have spent necessary amount of their earnings in taking up the necessary corporate social responsibility activities. Also, both the companies are undertaking their production processes in such ways that minimum harm to the environment could be made (Freedom Food Group, 2017).
Conclusion
From the above report on the analysis of performance of Freedom Foods and Retail Food Group, it can be said that performance of any business must be measured from both the perspectives i.e. financial as well as non-financial. Mere consideration of financial results for the performance evaluation does not provide the holistic picture of company’s overall performance and hence the non-financial matters must also be taken into account while assessing the business performance and also the annual reporting in respect of business performance must be done on the basis of its financial and non-financial matters. The reporting on both the concerns allows the stakeholders of the company to better understand and evaluate the effectiveness of the firm’s business.
References
Foster, G., 2004. Financial Statement Analysis, 2/e. Pearson Education India.
Freedom Food Group, 2017. Annual Report: 2017. Available at: https://www.rfg.com.au/wp-content/uploads/2018/02/RFGLAnnualReport2017.pdf Accessed on: 04.10.2018
Higgins, R.C., 2012. Analysis for financial management. McGraw-Hill/Irwin.
Innocent, E.C., Mary, O.I. and Matthew, O.M., 2013. Financial ratio analysis as a determinant of profitability in Nigerian pharmaceutical industry. International journal of business and management, 8(8), p.107.
Retail Food Group, 2017. Annual Report: 2017. Available at: https://www.rfg.com.au/wp-content/uploads/2018/02/RFGLAnnualReport2017.pdf Accessed on: 04.10.2018
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