Ramon V.

Del Rosario College of Business

Management and Organization Department

RFM CORPORATION FINANCIAL ANALYSIS

Submitted by:

GROUP 3
Aljon Tope
Anne Riel Escaran
Danelyn Gomez
Mary Rose Mauleon
Patricia Alyanna Hamoy

Submitted to:
Dr. Robert Ramos, CFA, CAIA, CIPM

As Partial Requirement for

Financial Management 3rd Term, AY 2018-2019

August 10, 2019

I. INTRODUCTION

Republic Flour Mills (RFM) Corporation is one of the leading and reputab​le food &
beverage ​companies in the Philippines. It was incorporated in 1957 as Asia’s pioneer in the
flour-milling industry and has diversified into various lines of business including food and
manufacturing. Currently, the flour milling business is still operational as it serves the needs of
several bakeshops and other makers of flour-based products. Among its popular brands are
Royal and Fiesta Pasta, White King Cake Mix, and Selecta, a joint venture with Unilever. RFM’s
President and CEO, Jose Ma. A. Concepcion III, remains committed to offering quality,
innovative, and world-class products for Filipinos at affordable prices. As stated in the
company’s website, the driving forces behind ​their success include “product excellence,
aggressive marketing, keen management, and good governance.”

With the ongoing expansion of manufacturing companies in the country, RFM has made
its mark by providing quality products and reliable service for every Filipino consumer. By
providing or creating innovative ideas towards the business process, RFM Corp. has proven
themselves to be one of the top manufacturing companies. Its direct competitors with the likes
of URC, SMB and Century Pacific have also been thriving in the industry. Though surrounded
by bigger manufacturing companies, RFM Corp. still has surpassed the competition and moved
towards better and bigger goals.

Our group aims to review and analyze the 5-year financial performance of RFM
Corporation and identify potential areas for improvement. In addition, a comparative analysis
was done among RFM’s top competitors to give us a wider view of the industry performance.
With this, our group intends to make valuable recommendations to address challenges and take
advantage of opportunities using Financial Management concepts and strategies.

II. RELEVANT RATIOS: INDUSTRY ANALYSIS

A. Quick Ratio
B. Current Ratio

C. Inventory Turnover

D. Accounts Receivable Turnover

E. Return on Asset

F. Return on Equity

G. Debt Ratio
H. Debt to Equity Ratio

III. RELEVANT RATIOS: COMPETITOR ANALYSIS

A. Quick Ratio

B. Current Ratio
C. Inventory Turnover

D. Accounts Receivable Turnover

E. Return on Asset
F. Return on Equity

G. Debt Ratio

H. Debt to Equity Ratio

IV. RATIO ANALYSIS: INDUSTRY AND COMPETITORS
Ratio
Quick Ratio - ​indicator of a
company’s short-term liquidity
position; ability to meet its
short-term obligations with its
most liquid assets.
Current Ratio - measures a
company’s ability to pay for short
term obligations. It helps
investors understand the current
situation and how to maximize
current assets on the balance
sheet.
Inventory Turnover - shows
how many times a company has
sold and replaced inventory
during a given period.
Accounts Receivable Turnover
- ​used to check a company’s
ability or efficiency to collect
receivables or money owed.
Return on Asset - ​measures or
indicates a company’s profitability
with its total assets.
Return on Equity- ​indicates or
measures performance of firm by
dividing net income by
shareholder’s equity.
Debt Ratio - ​indicates a firm’s
leverage. Ratio of total debt to
total assets expressed in
percentage or decimals.
Debt to Equity - ​used to evaluate
a firm’s financial leverage. It
calculates the weight of total debt
against the total shareholder’s
equity.
RFM Performance
Although RFM’s quick ratio is
fluctuating in the period of 5 years, it is
always above the industry ratio of
1.04.
This shows liquidity and good financial
position for RFM as there is less
challenge in paying debts.
In 2014, RFM has the lowest ratio at
1.38 while reaching highest at 1.62
after two years. It can also be noted
that for the next consecutive years, it
went down to 1.43
This shows how RFM may pay short
term obligations the same with the
competition.
The industry ratio is 6.06 and RFM
plays between 3-6 for the past 4 years
while it drastically increased from 4.93
to 7.01 in 2018.
A low turnover may imply weak sales
or excess inventory while a high ratio
may either represent improved sales
or insufficient inventory.
I​n 2014, RFM gradually declined its
percentage of turnovers in the last 5
years.
Though declining, it was not seen
being volatile hence RFM has
continuously been
RFM has a low Return on Asset ratio
which means that the company is not
quite efficient in generating earnings
from its asset.
ROE ratio of RFM is too low which
means that the firm has a lower ability
to generate profit from shareholders’
investments.
RFM’s Debt Ratio is double the
industry standard of 16.32, which
means it has to pay such amount in
every peso owe to creditors.
The debt to equity ratio of RFM is
ranging from .43 to .56 which means
that this is an area they can improve
on.
Comparison with Competitors
The position of competitors is
almost the same with RFM
(fluctuating) although URC has
generally higher quick ratio
compared to the others.
With industry staying at 1.53,
competition has stayed stable for
the last 5 years in paying short term
obligations the same with RFM.
RFM has shown a satisfactory
performance on its inventory
turnover compared to the other
companies. URC was consistently
below the industry ratio within the 5
year period.
RFM and its competitors had the
same range of AR turnovers despite
being below standards.
Like RFM, its competitors have low
ROA.
SMB has slightly higher ROE ratio
among other competitors. However,
it is still less than 1.
The key competitors' debt ratios are
also above industry standards which
can be seen as they are all getting
their funds from borrowings for
expansion and acquisitions of
different businesses.
The Debt to Equity of the
competitors is slightly higher than
RFM.
V. FINANCIAL RATIOS
Debt to Equity Ratio: This represents the amount of debt a company is using to finance its assets
relative to the value of shareholders’ equity. RFM’s financial statement shows a relevant amount of
accounts payable and other current liabilities. A high debt to equity ratio generally means that a company
has been aggressive in financing its growth with debt which may be related to the expansion strategies of
RFM. A high debt to equity ratio signifies that a business firm utilizes debt to finance its growth. Those
that have high investments in assets and operations would often reflect a higher debt to equity ratios. In
the perspective of lenders and investors, having a high ratio equates to an investment that is riskier
because it denotes that the company may not be able to fulfill its debt obligation. Furthermore, if the debt
to equity ratio is lower, or maybe close to zero, it would often translate that a business does not solely rely
on borrowings.

Debt Ratio: ​RFM continuously expands its business which could be the reason for the high debt ratio.
Debt to equity ratio is one of the solvency ratios which is more focused on the ability to pay or sustain
long term dues. Currently, RFM has a higher debt ratio when compared to its industry which can be
harmful to the company as it may expose itself at risk of default on its loan if scenarios such as
high-interest rates suddenly increase.

VI. RECOMMENDATIONS:

1. Increase in Revenue
RFM needs to increase its revenue to keep the ratio in a steady state. If there is an increase in
sales, it will add up to the company’s assets or a means to pay off their debt. The firm may need
to invest further in its marketing strategies along with an increase in the number of innovative
product lines that will enable them to cope with the very tight competition in the market. Stability
in sales should be a priority for RFM as an increase in debt to equity ratio would mean RFM, can
choose to use more debt financing to leverage a positive return on equity. This would be easier
for RFM as this would lead to an increase in budget and would provide for the operations costs of
the firm.
The increase in sales revenue can be attributed to both in price and in volume. Since RFM
acquired Royal Pasta and it also owns Fiesta Pasta, this had made RFM a market leader in pasta
brands. RFM can use this as an advantage to increase the price of the product or use its power to
its supplier to purchase inventories at a cheaper cost. Marketing team will play a key role in
promoting the products and identify the most suitable pricing for the products.
Increasing sales and reducing the revenue will yield more profit which effectively increase the
retained earnings. Increase in retained earnings will decrease the debt to equity ratio. Increase in
profit will also help RFM to have more funds which can be used in future acquisitions.

1. Inventory Management
RFM needs to improve its inventory management. Effective inventory management will help the
firm manage its working capital. Since it is in the manufacturing industry, it is expected that they
are keeping stocks for continuous production of goods; however, if the stock levels which are not
effectively managed, it may increase the cost of manufacturing the products or incur additional
expenses in keeping them in the warehouse. Inventories comprise a huge portion of the current
assets, if effectively managed, it will have a good current ratio, quick ratio, and improved
inventory turnover.
 Some of the ways to manage inventory are vendor managed inventory, just it time, accurate
forecast and automating some processes. Vendor managed inventory is an agreement whereby
the vendor/supplier will supply the raw materials when needed, therefore, reducing stocking
costs. Another way of managing inventory is implementing just-in-time production, this will
increase efficiency and decrease waste in production. Raw materials will be received when
needed and effectively reducing inventory costs. Reduction in inventory costs is one way of
increasing the profit.

2. Financial Structure - Restructuring of Debt

In the result of unfavorable debt ratio and debt to equity ratios of RFM, the company may seek to
improve its debt restructuring given that the company has been financing its daily operation and
expansion through borrowings. Through debt restructuring, the company may seek to change its
financial structure from more loans to issuing more of common stocks to lessen the interest
expense that amounted to 19.57M PHP for the year 2018 of RFM. Restructuring of debt may also
help the company from putting itself at risk of default from its loans if a sudden increase in interest
rates arise. Debt restructuring will help RFM manage its available resources which can be used in
its operation. Restructuring is favorable since the interest rates are getting lower and RFM will
have a longer payment term.

REFERENCES
Charm, N. (n.d.). RFM income up 6% in 2018. Retrieved August 8, 2019, from
https://www.bworldonline.com/rfm-income-up-6-in-2018/

FINANCIAL STATEMENT. (n.d.). Retrieved August 8, 2019, from ​ ​http://www.rfmfoods.com/Home.aspx

Maverick, J. (2019, May). Strategies Commonly Used to Reduce a Company's Debt-To-Capital Ratio. Retrieved
August 8, 2019, from
https://www.investopedia.com/ask/answers/040715/what-are-some-strategies-companies-commonly-use-reduce-their
-debt-capital-ratio.asp

Titman, S, et al (2014). Financial Management: Principles and Applications (12th edition)