REA Group Ltd: An Overview Of Financial Performance And Plans

Introduction to REA Group Ltd

Question:

Discuss about the Analysis of REA Group.

REA group Ltd is one of the multinational digital advertising firms specialising in real estate development. The company advertises property as well as property-related on mobile application and websites in Europe, Asia and Australia. Its chief segment comprises of Europe, Asia, Australia and North America. REA Group operates commercial and residential property sites, realcommercial.com.au as well as realestate.com.au in Australia (Financial Times 2017). It operations are disruptive and innovative (REA Group 2016). On the other hand, the company independent auditor is Ernst & Young Australia, which is responsible in auditing REA Group financial statements to ensure that they are presented in accordance with Australian Accounting Standards. According to their audit, the statements or reports of the company were compliant with set Act of 2001 including providing fair and true view of its financial position as at June 2016 and complying with relevant Corporations Regulations 2001 as well as Australian Accounting Standards (REA Group 2016). It share prices are up with around 1000% over the last ten years, with the most recent price as of 11^th September 2017 being at $67.90, an increase of 0.67% from the previous day (Richardson 2017). Its dividend per share increased with around 11.66% to 0.91 (Financial Times 2017).
Industry Situation and REA Group Plans
The industry face stiff competition for the customers. Despite the stiff competition, in the industry, REA Group have continued to experience increased growth which is viewed as an abundant achievement based on the current market environment. In spite of the overall volume of the property listing recording flat rate in the year 2016, REA Group operation in Australia have seen around 17% growth in its revenue to approximate $555.2 million (REA Group 2016).

To place REA Group on top of the map, the company future plans entail complementing its European operations by supporting its development of the new products (Financial Times 2017). It also plans to launch Spacely, the new listing site which would make it a bit easier for the Australians to look for the short-term commercial rentals and the co-working spaces which could meet their needs. REA Group is also planning to expand internationally by acquiring more online companies in order to increase in its revenue (Richardson 2017).

As from Appendix 1 below, it is clear that the company net profit experienced a significant increase for the past three years. The increase is as a result of increase in its total sales and so forth. Furthermore, From Appendix 2 below, it is clear that the company had an attractive trend in its total liabilities, assets as well as total equity. In essence, for the last three years, it could be derived that total assets were all equal to total equity and total liabilities. This is evidence by the fact that total liabilities for 2014 was 21.39 and its total equity was 78.61% adding up to a total of 100% as the total assets margin.

Industry Situation and REA Group Plans

From the Appendix 3 below, it could be stated that REA Group was expanding in its investing activities. This is based on the fact that cash flow originating from the investing activities shows a tremendous increase over the past three years. Furthermore, from the analysis, it is evident that REA Group’s key source of financing was from dividends paid to the shareholders. In addition, based on the above outcome, it is evident that the company cash decreased in 2015.

Ratios are crucial aspect in analysing financial performance of an organization in various sections of its operations. In addition, ratios are crucial in comparing company’s financial performance within a given industry averages (Chen & Shimerda 1981). In this case, profitability ratios, cash flow adequacy, Liquidity, market strength as well as long-term solvency ratios are used in analysing REA Group financial performances for the last three years starting from year 2014 to 2016.

As from above analysis, the company seems to enjoy relatively high working capital in 2014 as compared to 2015 and 2016. This shows that the company was efficient in the year 2014 and 2015 in comparison to the year 2016.

From above results, it is clear that REA Group was experiencing smooth times in settling its short-terms debts using its most liquid assets. In essence, with relatively high current ratio, it could be stated that the company is at peace with making huge returns for its shareholders.

The outcome above, indicates that REA Group receivable turnover increased as from 7.60 to 7.64 and then to 7.61. This sign in the company shows that the company is efficient in collecting its credits.

As from the outcome above, it is clear that REA Group average days’ sales uncollected decreased and increased over time. This trend shows that the company would receive its cash from its sales in a short-term period.

Profitability ratios:

Based on the above analysis, it is clear that profit margin for the company experienced an increasing and decreasing trend as from 34.26% to 37.94% and then to 37.77%.

From the above analysis, it is evident that REA Group asset turnover decreased for the past three years. This means that for the last three years, the company management was not efficient enough.

From above analysis, REA Group seems to have experienced asymmetric trend in its ROA for the last three years. This is a clear picture that the firm has been able to efficiently use its assets to generate income.

Financial Analysis of REA Group

As from the results above, it is evident that REA Group ROE increased in 2015 but in 2016 it experienced a slight decrease. Despite the decrease, the ROE for the past three years is relatively high meaning that the company was able to use its equity to generating income.

Long term solvency ratios:

From the above ratio, it is evident that for the past three years, REA Group debt to equity experienced a decreasing and increasing trend. This trend is a clear indication that the company is using too much debt or money from creditors in financing its operations instead of using its shareholder’s equity.

In the above results, it could be indicated that for the last three years, the company has been experiencing some difficulties in settling its interest expenses using its EBIT.

Cash flow adequacy

As from the above results, it is clear that REA Group experience a decreasing trend in its cash flow yields. The decrease show that the company has been experiencing some hitches in generating cash from its present undertakings.

Based on the outcomes, it could be stated for the past three years, REA Group cash flow to the sales decreased. This shows that the company has been experiencing some difficulties in turning its revenue or sales to cash.

From above outcomes, it could be indicated that REA Group cash flow to the assets decreased for the past three years. This indicates or displays that the firm has been experiencing some difficulties in turning its assets to cash.
Free cash flow

As from the above analysis or outcomes, it can be stated that REA Group free cash flow increased for the past three years.

Market strength Ratios

Price/earnings per share

Based on the above outcomes, it is clear that REA Group P/E ratio experienced a decreasing trend for the last three years.

Dividends yield

From the above outcomes, it could be stated that REA Group dividend yield experienced relative increase over the last three years.

Conclusion

In conclusion, it is evident that for the last three years REA Group was financially stable. This is evident by relatively high profitability ratios such as high and increasing trends in its ROE, asset turnover and ROA. Furthermore, with the fact that the company free cash flow increased over the past three years, it is evident that REA Group was financially stable and was efficient enough in maintaining its competitiveness in the market. In essence, based on the above analysis, I would consider REA Group as a strong performer and therefore, would prefer investing in its in future.

Altman, EI 1968, ‘Financial ratios, discriminant analysis and the prediction of corporate bankruptcy,’ The journal of finance, 23(4), 589-609.

Barnes, P 1987, ‘The analysis and use of financial ratios: a review article,’ Journal of Business Finance & Accounting, 14(4), 449-461.

Chen, KH & Shimerda, TA 1981, ‘An empirical analysis of useful financial ratios,’ Financial Management, 51-60.

Financial Times 2017, Equities, REA Group Ltd ASX; Viewed at 11^th September 2017 from; https://markets.ft.com/data/equities/tearsheet/financials?s=REA:ASX

Higgins, RC 2012, Analysis for financial management. McGraw-Hill/Irwin.

Lev, B & Sunder, S 1979, ‘Methodological issues in the use of financial ratios,’ Journal of Accounting and Economics, 1(3), 187-210.

REA Group 2016, REA Group Limited annual report 2016; Viewed at 11^th September 2017 from; https://www.rea-group.com/annualreport/2016/files/assets/common/downloads/REA%20Group%20Limited%20Annual%20Report%202016.pdf

Richardson, T 2017, Why the REA Group Limited share price just hit a record high: Viewed at 11^th September 2017 from; https://www.fool.com.au/2017/07/21/why-the-rea-group-limited-share-price-just-hit-a-record-high/

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