Question

The following table provides a historical summary of key financial ratios for Reza Corporation.

Ratio	2017	2018	2019
Return on Equity	10.8%	-3.1%	-1.4%
Return on assets	3.0%	-0.8%	-0.3%
Cost of sales to sales	75.6%	78.5%	74.8%
R&D expenses to sales	6.3%	6.9%	6.6%
Earnings before interest, tax and depreciation to sales	10.2%	2.3%	5.6%
Debt to total assets	72.4%	75.3%	76.9%

Required:

1. With reference to the appropriate ratios, analyse the trend in Reza Corporation’s profitability providing plausible reasons for any changes. (6 marks)

2. Explain what an inventory turnover ratio is measuring and how inventory turnover impacts on Reza Corporation’s profitability. (6 marks)

c. Reza Corporation publishes on its website and discloses key corporate social responsibility (CSR) activities and important topics of interest to stakeholders. Describe an environmental performance indicator and a social performance indicator that may be of interest to Reza Corporation’s stakeholders.

Answer 1

(a): The trend with regards to Reza Corporation’s profitability is that the company’s profitability declined in 2018 but then slightly improved in 2019. This can be seen from the provided ROE and ROA numbers. We can see that both the numbers declined in 2018 when compared to its 2017 levels. In 2018 both were negative. In 2019 both the figures improved, compared to 2018 figures but the numbers were still negative indicating that even though they improved in 2019 the company, most probably, made losses even in 2019. However the quantum of losses was pared down in 2019.

The plausible reason for the changes can be because of change in cost of sales which increased in 2018 and then again declined in 2019.

(b): An environmental performance indicator that may be of interest to Reza’s stakeholders is the energy consumption metric. This metric will show how the company is reducing its energy consumption by making its operations more sustainable and greener. This will be of interest to stakeholders as besides determining sustainability of the company’s operations they will also be able to determine the positive impact on the costs and hence profits of the company.

A social performance indicator that may be of interest to Reza’s stakeholders is community development and philanthropy. Community development is a way of giving back to the society and stakeholders will be interested in this metric as they will want to determine whether the company is socially responsible or not.