RATIO ANALYSIS

Ratio analysis: Rugby Football Union



Ratio Analysis: Rugby Football Union

Introduction

The rugby football union (RFU) is the national governing body for working class and privileged rugby in England with 1900 rugby clubs as members. As per the RFU annual report, 2011 has been the most successful year in financial terms. The company has achieved record revenues and operating profit to match with the very satisfactory season for England team.

Ratio analysis

According to Dwi (2009), ratio analysis can aid the investor in predicting the performance of the organization and make investment decision accordingly (Dwi, 2009, p. 45). Ratio analysis can be cross-sectional as well as time series. In a cross sectional analysis ratios of a company are compared to other companies in the industry while a time series analysis refers to examining the current performance of the company in comparison to the past periods. The financial ratios that satisfy the needs of various users can be classified into following categories:

Liquidity ratios

Turnover ratios

Solvency or leverage ratios

Profitability ratios

Investor ratios

Let us review each category of these ratios to have a better understanding of the usefulness of these ratios in decision making.

Liquidity ratios

According to Nenide (2007), “liquidity ratios and measures of cash flows from operations are the best predictors of the future success of a business” (Nenide, 2007, p. 7). Liquidity ratios measure the potential of a company to pay its near term commitments (Chesnick, 2000, p. 11). These ratios reflect the short term financial solvency of the firm.

According to Chesnick (2000), liquidity ratios are the most commonly used ratios for assessing the firm's liquidity (Chesnick, 2000, p. 11). Current ratio is simply determined by dividing current assets by current liabilities and measures the short term solvency. Current ratio of RFU for the calendar year 2011 is 1.2 which means that it has 20% extra current assets at its disposal to honor its short term obligations. Although a current ratio of 2 is considered ideal, the current ratio of RFU has improved from last year which was 0.52.

According to Anon (2012), the quick ratio is also “acid test ratio” The quick ratio on the other hand is a more narrow approach and includes only quick assets i.e. cash, marketable securities and receivables. This reduced amount is the divided by current liabilities to provide a ratio between two amounts (Kirkham, 2012, p. 2). Quick ratio for RFU for 2011 is 1.17, a significant improvement from the last year quick ratio of 0.49. There is not much difference in the RFU's current ratio and quick ratio which means that the company has large percentage of quick assets in its portion of current assets.

Turnover ratios or Activity ratios

According to Monea (2010), activity ratios measure the capacity of the company to use its assets and capital efficiently. These are the financial ratios that help the management and financial statement users to generate the level of output generated by assets (Monea, 2010, p. 2). The ratios that are used as an indicator of ...