The current assignment deals with critical evaluation of the financial statements of Woolworths Limited for the past six years. Woolworths Limited is a major Australian firm having extensive retail interest throughout Australia and New Zealand. This is the second largest organisation in Australia and New Zealand in terms of revenue after Wesfarmers Limited (Woolworthsgroup.com.au, 2017). Along with this, it is the largest liquor retailer in Australia. The main operations of the organisation include supermarkets (Woolworths brand in Australia and Countdown brand in New Zealand), liquor retailing (as BWS and Dan Murphy’s in Australia), pubs and hotels under the Australian Leisure and Hospitality Group (ALH) and discount departmental stores and umbrella under Big W in Australia. However, the organisation has declared loss of $1.235 billion in 2016 due to write down off $2 billion in the big W business. Therefore, the assignment sheds light on evaluating the financial statements of Woolworths Limited and the external factors not included in the financial statements with the help of ratio analysis.
From the income statement of Woolworths Limited, it has been found that the net income of Woolworths Limited has been ($2,347.90) million in 2016. In addition, it has been identified that the revenue margin of Woolworths Limited has started to decline from 2014 to 2016. Hence, the following three significant items in the income statement of the organisation has been chosen and they have been interpreted with the help of horizontal analysis (Refer to Appendices, Appendix 1):
In the words of Abdulrehman (2016), operating revenue is the amount generated from the daily business activities and it has been selected because it is necessary for the organisation to stay viable, since such revenue is sustainable from one year to another.
The percentage change in other operating revenue has been highly increasing from 2012 to 2014; however, it has started to increase at a lower rate in 2015 and it has fallen massively in 2016. The possible reason identified behind such low increase is the slow economic movement like fluctuations in business cycles. As a result, it has declined in overall operating sales of Woolworths Limited. However, the major reason identified behind the increase in other operating revenue is due to the lower amount of sales returns and discounts allowed until 2014.
As commented by Bergevin, MacQueen & Mitchell (2015), the financial income is denotes all realised revenue subtracted from the allowable expenses, which depicts the income before taxes. This item has been selected, as it provides a picturesque of the organisational performance in a particular year to the users of the financial statements.
Woolworths has experienced a sharp fall in financial income over the six-year period. The possible reason identified behind such fall is the sharp increase in branch expenses and administrative expenses over the years. In addition, the fall in overall revenue and increase in cost of sales have been another reason of such trend in the financial income of Woolworths Limited.
As indicated by Cheng, Green & Ko (2014), the loss/profit from discontinued operations takes place when a specific product line of a business has been disposed off or sold and the same is reported on the income statement of the organisation by separating the income from continued operations. This ratio is extremely useful for the investors to gain an overview of the amount of money that the organisation would earn in future.
According to the above figure, Woolworths Limited has experienced significant losses from its discounted operations over the subsequent years. The possible reason identified behind such declining trend in the item is the exit from the disastrous Masters Hardware business. In addition, the organisation has undertaken strategic decision to separate Big W and EziBuy because of the material complexities related to labour conditions and ensuring human rights in its supply chain process. As a result, it has reduced the overall net income of the organisation and the result is inherent in 2016 revealing net loss.
The balance sheet statements of Woolworths Limited depict a fluctuating trend for the years 2011 to 2016. It could be observed that the overall assets have increased from 3.61% in 2012 to 8.79% in 2014; however, it has fallen significantly to -7.24% in 2016. The highest amount of total assets have been observed as $25,336.80 million in 2015
One of the primary aims of Woolworths Limited is to raise the overall cash availability of the organisation for meeting its short-term dues along with carrying out its day-to-day operations in an effective manner (Woolworthsgroup.com.au, 2017). The main reason of choosing this item is that cash is the lifeline of a business and without sufficient cash, a business would find it troublesome in conducting its daily activities and meeting its expenditures. In addition, with the help of cash, the organisations are often involved in buyback of shares (Gibson, Michayluk & Van de Venter, 2013).
it could be identified that the cash availability of Woolworths Limited has shown an increasing trend from 2012 to 2015; however, it has fallen significantly in 2016. From 2012 to 2014, the organisation has not repurchased shares, which has increased its cash availability. However, from 2015, Woolworths Limited has used its cash both for repayment of short-term borrowings and share buyback, which has minimised its cash base largely. Due to such decline in cash amount, the total current assets have declined as well in 2016.
According to Grant (2016), provisions are items in the balance sheet statement, which are kept apart for combating with future losses.
It has been evident from the above figure that the amount of provisions has started to decline from 13.35% in 2012 to 3.31% in 2014; however, it has started to increase from 2015 and such increase is massive as 130.63% in 2016. The possible reason behind such increase is the increasing amount of debt burden on Woolworths Limited, which has compelled the organisation to increase its provisions. This implies that the management has been struggling to maintain its solvency position in the Australian retail industry.
As pointed out by Groenewald & Powell (2016), issued capital is the amount of authorised shares, which are sold to the shareholders of an organisation. With the help of this item, market capitalisation could be ascertained, which would help in gauging the value and overall performance of the organisation.
Woolworths Limited has maintained a stable rate in issuing equity capital over the years. However, despite such increase, the debt burden of the organisation has increased massively, which has resulted in poor leverage position (Henry & Robinson, 2015).
Woolworths Limited intends to have an operational cash flow, which needs to be greater compared to the funds distributed in the form of dividends. Woolworths Limited has failed to maintain a stable cash flow position over the years, since cash at the end of the period has fluctuated over the stated period
As stated by Heymans & Van Heerden (2014), receipts from customers are cash sales, which an organisation takes in during an accounting year. These receipts help in ascertaining the amount of money available to the organisation in meeting its financial obligations.
it is inherent the cash receipts from the customers have been on the declining trend for Woolworths Limited. The possible reason identified behind such decline is the fall in revenue margin and product demand in the Australian market. This has reduced the overall cash base of the organisation (Konchitchki & Patatoukas, 2013).
The advances or repayments of property-related receivables refer to the amount earned or incurred from the disposal or purchase of property (Lin et al., 2015). This item is significant to determine the exposure of value risk.
it has been found that Woolworths Limited has incurred sufficient amount on repaying the property-related receivables due to the increase in asset base. Although it has increased the overall asset base of the organisation, the debt burden has increased simultaneously as well.
According to Magalhães (2014), dividends paid refer to the amount that an organisation pays to its shareholders in return for their investments. This is particularly important, as it helps in determining the future performance of the organisation.
it could be evaluated that Woolworths Limited has ensured a stable dividend payout to its shareholders from 2012 to 2014; however, it has started to fall from 2015. This is because the organisation has experienced a significant fall in net profit in 2016, which denotes that the organisation might struggle to distribute adequate dividends to its shareholders in future.
The two profitability ratios selected include net margin and return on capital employed and the detailed breakdown of their computations are depicted in the form
the net margin of Woolworths Limited has remained stable from 2012 to 2015; however, it has declined severely in 2016 due to sharp fall in revenue and rise in operating expenses. As a result, it could be said that the organisation has been struggling to maintain its profitability position in the Australian market.
Return on Capital Employed (ROCE):
it could be stated that ROCE of the organisation has varied from 21.96% to 25.41% in 2015; however, it has fallen drastically to 11.06% in 2016. This denotes that Woolworths Limited has failed to generate sufficient returns from the investments of the shareholders and thus, it is struggling in terms of profitability.
The two leverage or solvency ratios selected include debt-to-equity ratio and times interest earned ratio and the detailed breakdown of their computations are depicted
the ratio has remained above 1 over the years and the maximum has been 1.68 in 2016. In this context, Van Duijn et al., (2016) cited that the ratio above 0.5 is considered to be extremely risky for an organisation. Therefore, it could be stated that Woolworths has huge amount of debt burden in contrast to its equity value.
he ratio has declined from 2011 to 2013; however, it has increased in 2014 and then, it started to fall again in the next two years. This ratio denotes the ability of an organisation to meet off its interest expense with its operating income (Scott & Walker, 2017). In this case, Woolworths has maintained the ratio above 1, which indicates effective solvency position.
Creditors’ payment period:
Two items not included in the financial statements of Woolworths Limited:
It has been observed that the rate of exchange has effects on the return on investments, sales and market share (Parkinson & Parkinson, 2016). Woolworths has chosen to convert their financial values into USD for gaining advantage within their future investors and stakeholders. With the help of the existing strength of USD, the organisation has greater chance of generating higher revenue along with paying higher dividends to its shareholders.
Woolworths Limited has Moody’s credit rating of BAA-2. This shows that Woolworths has sufficient parameters for protection and it has the capability to meet its financial commitments (O’Byrne & Daymon, 2014). Therefore, the credit risk for the organisation is moderate; however, it has issues relating to its short-term debt obligations.
Conclusion:
From the above discussion, it has been found that Woolworths Limited is struggling to maintain its competitive position in the Australian retail industry. This is due to the fall in revenue due to low market demand and increasing operating expenses. The ratios evaluated have denoted the similar trend as well. Finally, the two external factors affecting Woolworths Limited include credit rating and currency exchange.
References:
Abdulrehman, S. A. (2016). An analysis of how the firm objective debate is reflected in financial textbooks and in the MVV statements of JSE TOP40 firms (Doctoral dissertation, University of Cape Town).
Bergevin, P., MacQueen, M., & Mitchell, L. (2015). Financial Statement Analysis: Content and Context. BVT Publishing.
Cheng, M. M., Green, W. J., & Ko, J. C. W. (2014). The impact of strategic relevance and assurance of sustainability indicators on investors’ decisions. Auditing: A Journal of Practice & Theory, 34(1), 131-162.
Gibson, R. J., Michayluk, D., & Van de Venter, G. (2013). Financial risk tolerance: An analysis of unexplored factors. Financial Services Review.
Grant, R. M. (2016). Contemporary strategy analysis: Text and cases edition. John Wiley & Sons.
Groenewald, D., & Powell, J. (2016). Relationship between sustainable development initiatives and improved company financial performance: a South African perspective: original research. Acta Commercii, 16(1), 1-14.
Henry, E., & Robinson, T. R. (2015). Chapter 1. Financial Statement Analysis: An Introduction. CFA Institute Investment Books, 2015(2), 1-35.
Heymans, A., & Van Heerden, C. (2014). A Risk-Adjusted Evaluation Of The JSE Top 40 As An International Investment Option. Journal of Applied Business Research, 30(6), 1639.
Konchitchki, Y., & Patatoukas, P. N. (2013). Taking the pulse of the real economy using financial statement analysis: Implications for macro forecasting and stock valuation. The Accounting Review, 89(2), 669-694.
Lin, C. C., Chiu, A. A., Huang, S. Y., & Yen, D. C. (2015). Detecting the financial statement fraud: The analysis of the differences between data mining techniques and experts’ judgments. Knowledge-Based Systems, 89, 459-470.
Magalhães, M. M. C. (2014). Value investing and financial statement analysis (Doctoral dissertation).
O’Byrne, S., & Daymon, C. (2014). Irresponsible engagement and the citizen investor. Journal of Public Relations Research, 26(5), 455-473.
Parkinson, M. M., & Parkinson, M. M. (2016). Corporate governance during financial distress–an empirical analysis. International Journal of Law and Management, 58(5), 486-506.
Scott, P., & Walker, J. T. (2017). Barriers to ‘industrialisation’for interwar British retailing? The case of Marks & Spencer Ltd. Business History, 59(2), 179-201.
Van Duijn, A. P., Beukers, R., Cowan, R. B., Judge, L. O., Van der Pijl, W., Ro?mgens, I., … & Steinweg, T. (2016). Financial value-chain analysis (No. 2016-028). LEI Wageningen UR.
Woolworthsgroup.com.au. (2017). Retrieved 1 May 2017, from https://www.woolworthsgroup.com.au/page/investors/our-performance/reports/Reports
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