Retail Food Group Limited reports profit growth: Is it time to buy?

What: Retail Food Group Limited (ASX: RFG) is a leading Australian retail food franchisor owning brands such as Donut King, Brumby’s and Crust Gourmet Pizza Bar.

The firm has just reported a 10.1% rise in underlying revenue and a 15.2% increase in profit. Over the past year RFG also boosted its franchised outlet numbers in Australia and New Zealand to 1,417, practically halved its gearing ratio to 16.6% and raised the full year dividend by 11.4% on the prior year to 22 cents per share.

The group has been a consistent performer since listing on the ASX in June 2006 and the market has again been pleased with what it has seen, sending the share price up towards its 52-week high. In fact, since listing RFG has produced a net profit after tax (NPAT) cumulative average growth rate of 25.5%!

So what: While the headline results of double-digit growth in revenues and earnings are undeniably impressive, for investors it’s more appropriate to consider the per share figures. On this score, RFG’s results don’t look as exciting with earnings per share (EPS) only increasing by 1.9%.

Now what: RFG certainly owns a number of appealing brand assets and it is well positioned to continue to grow both organically and via acquisitions which it can bolt on to its existing business model. Recent acquisition activity has seen the group acquire the La Porchetta brand and the Cafe2U brand.

The combination of underlying growth coupled with acquisitive growth has led management to forecast that it could achieve growth in underlying NPAT for FY 2015 of around 20%. A growth rate of 20% is obviously very impressive and would certainly justify the FY 2014 price-to earnings ratio of 17.7x if this 20% growth flows through to EPS. If it doesn’t flow through however, the market may re-evaluate this multiple.

Don't miss our analysts' top stock for 2014

Retail Food Group's growth has been outstanding but on a per share basis it recently slowed significantly. It's still a high quality business but its outlook may not be as bright as our Top Stock. The Motley Fool has issued a firm "BUY" rating on this small but ultra promising ASX company... and you can get the name and code FREE right now. Click here for your free copy of "The Motley Fool's Top Stock for 2014."

Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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