Financial Analysis Of The Reject Shop: Profitability, Efficiency, Liquidity, And Investment Performance

Profitability Ratios

The Reject Shop carries on the business of the product related to the retail sector of discount variety in Australia and serves wide range of the value conscious customers. These customers are attracted towards convenient location for shopping, low priced items and the opportunity for bargaining while purchasing the goods. The company offers wide range of general merchandise for consumers particularly focussing on the daily needs like cosmetics, toiletries, personal care products, home wares, basic furniture, kitchenware, household cleaning products, seasonal and lifestyle merchandise and snack foods and confectionaries (Rejectshop.com.au, 2018).

The ratio calculation of the company is as follow –

Profitability ratios are the financial metrics that depicts the profitability status of the company with regard to its sales. As these ratios measures the profit earning capabilities of the company with the help of its sales it is known as the profitability ratios. Profitability ratios are the useful tools for understanding the inefficiencies or efficiencies of the company which in turn assist the owners and management to adopt corrective measures (Vogel, 2014). The investors and financial analysts compute these ratios to analyse the profit earning capabilities of the entity.

Gross profit margin is the ratio that is used for analysing how much cost is incurred for manufacturing of the product and and the amount left from the sales revenue after the payment of manufacturing cost. It assists in evaluating the company’s efficiency and the way in which the resources of the company are used to manufacture the product and generating profit through passing the costs that is incurred for the product (Babalola & Abiola, 2013).  Looking into the gross profit margin of the company for the year ended 2016 and 2017 it can be identified that the gross profit margin of the company has been increased from 42.25% to 42.35% over the years. Therefore, the company is maintaining its profitability at same level over the past 2 years.

Net profit ratio is the most used profitability ratio for evaluating the company’s profitability position. Net profit is the remained amount after deducting all the losses, expenses, bad debts and provisions. It measures the capability of the company to earn out of every dollar spend on the business operation (Nan & Wen, 2014). For instance, if the net profit is 5% it states that on each dollar of investment the company is earning 5 cents. Looking into the net profit margin of the company for the year ended 2016 and 2017 it can be identified that the net profit margin of the company has been reduced from 2.14% to 1.55% over the years. Therefore, the company’s profit earning capability has been reduced over the past 2 years (Kahneman & Tversky, 2013).

Operational Efficiency

One of the most useful and popular financial ratios is the operational efficiency ratios as it concentrates on the core activities of the business of the company. It is also used to evaluate the ability of the company to use its liabilities and assets. Further, these ratios are used for analyzing and tracking the performance of the company to assess the efficiencies with regard to the assets and inventories (Morellec, Nikolov & Zucchi, 2014).

Asset turnover ratio is used to measure the revenue or sales of the company that is generated with regard to the assets value. It can be used as the indicator of efficiency with which the company can deploy the assets for generating the revenues. If the company can generate more amounts of sales with lower amount of assets it will have higher turnover ratio that states that the company is good as it is deploying its assets efficiently (Pervan & Kuvek, 2013). On the contrary the lower ratio states that the company is able to deploy its assets optimally. Looking into the asset turnover ratio of the company for the year ended 2016 and 2017 it can be identified that the asset turnover ratio of the company has been increased from 3.49 to 3.53 over the years.

Inventory turnover ratio is used to measure the efficiency of the company with regard to the time taken by the company to sell or replace the inventories of the company. Low turnover states that the company has lower sales and excess level of inventories. On the contrary, the higher ratio states that the company is efficient in generating sales. Looking into the inventory turnover ratio of the company for the year ended 2016 and 2017 it can be identified that the inventory turnover ratio of the company has been increased from 4.65 to 4.78 over the years. Therefore, both the efficiency ratios of the company are stating that the company has improved its efficiency over the last 2 years (Chen, Cheng & Lo, 2013).

Liquidity ratio of the company states the ability of the company to pay off its short term obligation with the available short term assets of the company. The term liquidity states the company’s ability to meet the short term financial obligation after they become due. Current ratio as well as quick ratio both the liquidity ratio measures the company’s ability to pay off the short term liabilities. The major difference between the 2 is that the quick ratio does not take into consideration the current asset those take considerable time to convert into cash like inventories. The liquidity ratio of 1 or more than that states that the company’s liquidity position is good and it is efficient in meeting its short term obligations (Brigham et al., 2016) Looking into the liquidity ratio of the company for the year ended 2016 and 2017 it can be identified that the current ratio of the company has been increased from 1.49 to 1.63 over the years. However, the quick ratio has been reduced from 0.31 to 0.27.

Liquidity

Gearing ratio is the fundamental analysis of the long term debt of the company as compared to the capital employed. It compares the level of debt of the company as compared to its equity. The debt to equity ratio of the company reveals the liabilities of the company as compared to the equity. Generally, the ratio of 40% or 0.4 is considered healthy for the company. Through the debt to equity ratio of the company for the year 2016 was 0.70 the company was able to improve the position and reduced the ratio to 0.60 in 2017. Further, the debt ratio states the proportion of asset obtained through borrowing and the proportion obtained through equity (Delen, Kuzey & Uyar, 2013). For both the years the debt ratio of the company stating that higher proportion of the asset is obtained through equities as compared to debt.

General investment performance ratios are used for measuring the performance of the company with regard to the ability of the company to provide returns to the investors and stakeholders. The earnings per share indicate the ability of the company to generate the net profits for the common stakeholders. Looking into the earning per share of the company for the year ended 2016 and 2017 it can be identified that the EPS of the company has been reduced from 59.30 cents to 42.80 cents over the years. Further, looking into the dividend payment by the company for the year ended 2016 was 44.00 cents and for the year ended 2017 it was 24.00 cents (Omar et al., 2014). Therefore, even if the return provided to shareholders has been reduced over the past 2 years, the company is regular in providing return to its shareholders through dividend and through generating profit for them.  

From the above analysis it can be concluded that the financial performance of The Reject Shop over the last 2 years that is 2016 and 2017 is good with regard to its profits, operational efficiency, liquidity and leverage position. It has been found that the company has improved its profitability position as the net profit as well as gross profit of the company increased in 2017 as compared to 2016. Further, the efficiency ratios and gearing ratios have been improved in 2017 as compared to 2016. However, as the EPS and dividend per share of the company has been reduced in 2017 as compared to 2016 the company shall take corrective actions to minimize the expenses wherever possible which in turn will improve the net profit of the company. It will further improve the EPS and dividend payment of the company.

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