Every organization aims to maximize profit while minimizing costs. The operations of an organization in each business environment are aimed at ensuring that the organization achieves its objectives. The financial performance of an organization is important for investors. However, it is not the only measure of the performance of an organization. This study examines the performance of RCG Corporation Ltd, an organization that operates n the apparel industry in Australia. The study will focus on the financial performance of the company with recommendations on whether to invest in the company or not.
RCG Corporation Ltd is an Australian company that operates in the investment sector. It is the owner of The Athlete’s Foot Australia Pty Ltd. The company secured licenses to distribute different brands of athletic footwear. The organization is divided into four major sections include the corporate section that is responsible for managing the organization, the superstar of shoe section that is responsible for selling branded comfort footwear. Others are the section of Athlete’s foot that is responsible for selling general sportswear for the organization and the RCG brands that are responsible for wholesales of the Merrell brand.
Financial performance is one of the measures that are used by organizations to measure the performance of the firm. Financial ratios are financial tools that accompany other financial measures to measure the financial performance of an organization. According to Hansen (2000), financial ratios indicate the financial situation of an organization at a given period. Financial ratios are used to predict the future performance and bankruptcy of an organization. Various classifications of financial ratios exist. However, this study will focus on calculating profitability ratios, efficiency ratios, solvency ratios, and market-based ratios (Ison & Griffiths, 2001).
Profitability ratios are used to indicate the financial performance of an organization in terms of profit realized. The ratios can also be applied in the comparison of the performance of the organization with other industry players. These ratios are discussed in the next section (Bloomberg, 2010).
The Gross margin: This ratio is an indicator of the money that a company earns on its sales. The only cost that is considered during its calculation is the cost of sales and no other expense. The gross margin is calculated as:
Gross profit margin = (sales – cost of sales) / sales
The gross margin of RCG Corporation Ltd is 73.09 for the 2010 financial year.
Return on Assets: this ratio measures the income that an organization realizes on all of its assets. Using this ratio, an organization can determine the profitability of its assets and make informed decisions on future investments. The ratio is calculated as ROA = net income / total assets. The ROA of RCG Corporation Ltd is 14.4 for the 2010 financial year.
Return on equity: equity is the interest in an organization that is represented by the stock or the investment made by shareholders. Shareholders invest in firms that maximize returns and profit. ROE measures the returns on the shareholders’ investment in an organization. It is calculated as:
ROE = Net income / shareholders’ equity.
The ROE of RCG Corporation Ltd for the 2010 financial year was 18.83.
Efficiency ratios measure the effectiveness of an organization in utilizing its assets and liabilities. The ratios are used to calculate the turnover of an organization on its receivables, the repayment period on its liabilities, and the general use of the company’s stock. In addition, they help in determining the quantity and use of equity. Some of the common efficiency ratios of an organization are as indicated below.
Accounts receivable turnover: the ratio measures the speed at which an organization collects the receivable accounts (Mowen, 2000). The ratio is calculated as:
Accounts receivable turnover: (Annual credit sales / Accounts receivable) * 365
This ratio is usually provided in terms of the number of days taken to collect credit accounts. The accounts receivable ratio for RCG Corporation Ltd was 9.7.
Assets turnover: this ratio measures the income that an organization realizes from its assets. Therefore, the ratio measures the existing relationship between the assets and revenue. The ratio is calculated as:
Asset Turnover = Revenue / Total Assets
The assets turnover for RCG Corporation Ltd for the 2010 financial year was 0.8. According to Duchac (2008), most organizations that usually register low-profit margins usually tend to have a high asset turnover and vice versa. The ratio is very useful to firms that are growing in checking their revenue if growing or not concerning sales.
Inventory turnover: this ratio measures the income realized on the stock of an organization. It is calculated as:
Inventory turnover = cost of sales / Average inventory.
The inventory turnover for RCG Corporation Ltd for the 2010 financial year was 4.7.
These ratios are applied in many organizations to gauge the ability of the firm to settle long-term obligations. The ratios measure the income of the organization after-tax fewer expenses that are not in cash form such as depreciation and compared to the debt of the company. By the organization being able to meet its long-term obligations, its going concern will be assured (Bloomberg, 2010). The ratios include:
A debt ratio: is a ratio that indicates the ability of an organization to settle its debt using its assets.
Debt to equity ratio = total debt / total equity
The debt/equity ratio for RCG Corporation Ltd was 0.
Price-earnings ratio: this ratio evaluates how attractive the stock price of an organization is to investors. It is one of the easiest ways to establish whether a stock is traded based on investment or speculation. The ratio is calculated as
price Earnings Ratio = common stock /earnings per share
Price / sales ratio = The price/sales ratio of RCG Corporation Ltd for the 2010 financial year is 20.74 (Bloomberg, 2010).
As indicated above, profitability ratios indicate the level of profitability in an organization. The ratios calculate the income that an organization earns on its assets, inventory, and overall net income of the organization. The gross profit margin and the ROA and ROE are the most commonly used ratios. As indicated in the first section, the gross profit margin of RCG Corporation Ltd for the 2010 financial year is 73.09. This is a high figure indicating that eh firm realized high income on its sales. It may also indicate that the company used cheap inputs or low-quality cheap inputs (Hansen, 2000).
The ROA for the company was 14.4. This is a high figure for the company when compared to the performance of the industry. A high ROA indicates the high income of RCG Corporation Ltd compared to the industry. High returns on assets are an indicator of the good overall performance of the company because ROA contributes to the net income of the company. An ROE of 18.83 is also an indicator of the high income of the company on the shareholder investments in the organization. This is a good indicator for investors because it signifies higher returns on their capital in the firm (Duchac, 2008).
These ratios indicate the effectiveness of the organization in utilizing the assets of the company to offset the liabilities and the ability of the company to minimize the liabilities. The accounts receivable turnover for RCG Corporation Ltd for the 2010 financial year was 9.7. This ratio is high indicating a large period for collecting accounts receivables. The company should strive to reduce this period to be below the industry’s average. The asset turnover ratio for RCG Corporation Ltd was 22.9. When compared to the industry, the company’s ratio is high and therefore favorable to the organization. The inventory turnover indicates the income that an organization realizes from its inventory. The ratio was 4.7 for RCG Corporation Ltd. This is not favorable because it indicates that company income from stock is quite low.
These ratios indicate the ability of a firm to settle its obligations as they occur in the long term. The debt/equity ratio of RCG Corporation Ltd was 0. A low debt/equity ratio indicates that RCG Corporation Ltd has been financing its investment activities with less debt and therefore there is a guarantee of continuous rather than volatile earnings for the company.
These ratios indicate the performance of the organization in terms of its stock. The ratios are utilized in the determination of the attractiveness of the company stock (shares) to an investor. The price-earnings ratio of RCG Corporation Ltd was 20.74 indicating that the company had high per-share earnings. The other ratio is the price per sales ratio that was 5.08. This signifies the better performance of the share price of the company compared to the industry (Mowen, 2000).
Trend analysis is the analysis of the performance of an organization for a given period. For instance, a trend analysis of an organization can be of 3 years, five years, or even ten years using financial ratios. The trend analysis of RCG Corporation Ltd involves financial ratios of the organization studied for three years.
Trend analysis of the net profit margin indicates an increase in the profit of the firm from 13.6% in 2008, to 14.3% and 22.5% in 2009 and 2010 respectively. This is an indicator of the increasing profitability of the company. The debt/equity ratio remained at a low rate of almost zero. This trend indicates a constant in the debt of RCG Corporation that is used to finance its investment activities (Bloomberg, 2010).
Return on equity reduced from 25.9 in the 2008 financial year to 21.1 in 2009 and 18.83 in the year 2010. The decrease is an indicator of unfavorable returns on the investments made by shareholders in the organization. Lastly, the trend analysis of ROA indicates an increase from 12.2 in 2008 to 13.5 and 14.4 in 2009 and 2010 respectively. The income realized on the assets of RCG Corporation Ltd increased gradually for the three years. In summary, the trend analysis indicates an overall improvement in the company’s performance (Bloomberg, 2010).
Other financial performance measures
The vertical analysis below indicates that the total assets of RCG Corporation Ltd increased gradually over the three years from AUD 41.26 in 2008 to AUD 45.9 in 2009 and AUD 49.5 in 2010. In addition, the total shareholders’ equity increased. The benefit of the vertical analysis is that it enables the comparison of the company assets over the years and with other competitors in the industry (Ison & Griffiths, 2001).
|Millions of Australian Dollars||2010||%||2009||%||2008||%|
|Cash and Equivalents||19.5||68.42||31.9||91.66||22.1||73.42|
|Total cash & short term investments||19.5||68.42||31.9||91.66||22.1||73.42|
|other current assets||0.3||1.05||0.1||0.28||0||0|
|Total current assets||28.5||100||34.8||100||30.1||100|
|Gross property plant & Equip.||3.1||6.26||2.2||4.79||2.8||6.69|
|Net property plant & Equip.||1.4||2.82||0.4||0.87||0.8||1.91|
|Deferred tax assets, long term||0.9||1.81||1||2.17||1.2||8.37|
|Current & long term debt leases||0|
|Current capital lease obligation||0|
|current income tax payable||1.4||22.58||1.9||12.75||0.9||16.66|
|other current liabilities||4||64.51||12.1||81.20||3.4||62.96|
|Total Current Liabilities||6.2||100||14.9||100||5.4||100|
|Long term debt|
|pension 7 other post-retirement benefits||0.1||0.20202||0.1||0.217865||0.1||0.23|
|other non-current liabilities||1||2.02||0.2||0.43||0.2||0.47|
|Comprehensive income & other||1.5||3.03||1.3||2.83||1||2.39|
|total Common equity||42.2||85.25||30.8||67.10||36.1||86.36|
|Total Liabilities and equity||49.5||100||45.9||100||41.8||100|
The horizontal analysis provides a comparison of the balance sheet items in line with the totals for the base year. The comparison reveals that the total assets for RCG Corporation Ltd increased by a margin of 7.84% (3.6) in 2010 when compared with 2009. The shareholder’s equity increased by 37.01% in the year 2010. Using horizontal analysis helps the firm compare its balance sheet assets with its competitors in the industry.
|Millions of Australian Dollars||2010||2009||Horizontal analysis|
|a year and 2010 and 2009|
|Cash and Equivalents||19.5||31.9||-12.4||-38.8715|
|Total cash & short term investments||19.5||31.9||-12.4||-38.8715|
|other current assets||0.3||0.1||0.2||200|
|Total current assets||28.5||34.8||-6.3||-18.1034|
|Gross property plant & Equip.||3.1||2.2||0.9||40.90909|
|Net property plant & Equip.||1.4||0.4||1||250|
|Deferred tax assets, long term||0.9||1||-0.1||-10|
|Current & long term debt leases||0||0||0|
|Current capital lease obligation||0||0||0|
|current income tax payable||1.4||1.9||-0.5||-26.3158|
|other current liabilities||4||12.1||-8.1||-66.9421|
|Total Current Liabilities||6.2||14.9||-8.7||-58.3893|
|Long term debt||0||0|
|pension 7 other post-retirement benefits||0.1||0.1||0||0|
|other non-current liabilities||1||0.2||0.8||400|
|Comprehensive income & other||1.5||1.3||0.2||15.38462|
|total Common equity||42.2||30.8||11.4||37.01299|
|Total Liabilities and equity||49.5||45.9||3.6||7.843137|
Given the above financial analysis of RCG Corporation Ltd, it is evident that the company is performing well. It is profitable given its profitability ratios, it is has been able to finance its long-term investment activities using less debt and its turnover ratios are good compared to the industry. It implies that the shareholders can reap from their investments after they invest in the company. It is therefore recommended that investors invest in the company because the company has the potential for good future performance.
Strengths and weaknesses of the Entire Analysis
This study has focused on the examination of the RCG Corporation Ltd using financial measures such as ratios, trend analysis, horizontal and vertical analysis. The utilization of this measure to establish the performance of the organization is that it has provided the true financial picture of the organization as of the end of the 2010 financial year. Using the ratios, the study has been able to compare the company and industry performance in terms of profitability, efficiency, solvency, and market performances. Based on this analysis, an investor can decide to invest in the organization (Duchac, 2008).
Despite the importance of using financial measures to establish the financial performance of RCG Corporation Ltd, this measure does not provide the performance of the whole organization. For instance, the internal environment of the firm is not considered. It is not clear whether the clients of the organization are satisfied with the products and services offered by the company. Moreover, the employees of the company have not been considered. A good financial tool for measuring the entire firm is the balanced scorecard that measures the organization from four perspectives. This study, therefore, recommends the use of a balanced scorecard to provide a fulfilling report on the performance of the entire organization (Kaplan & Norton, 2002).
Bloomberg, (2010) RCG Corp Ltd (RCG: ASX), Web.
Duchac, J. (2008) Managerial Accounting for Decision-Making, Boston, MA: Pearson international.
Hansen, W. (2000) Financial Management, New Jersey, NJ: Prentice Hall.
Ison, S. & Griffiths, A., (2001) Business economics. London, UK: Heinemann publishers.
Kaplan, S.R. & Norton, D.P., (2002) The balanced scorecard. New York, NY: Harvard Business School Press
Mowen, P. (2000) Financial accounting as a tool for Decision-Making process, Chicago, CH: Routledge.
|Profit Margins %||Company|
|Net Profit Margin||22.51|
|Current P/E Ratio||20.74|
|Investment Returns %||Company|
|Return On Equity||18.83|
|Return On Assets||14.4|
|Return On Capital||15.5|