As a public listed ASX Company Harvey Norman Holdings Limited is engaged in activities like integrated retail, digital and property enterprises and franchise business. It operates under the franchise system in Australia and delivers unparalleled offerings to the Australian customers consistently with extensive ranges of product, market leadership for key products and cutting edge technology. It grants franchise to the independent proprietors under 3 leading brands name as Domayne®, Harvey Norman® and Joyce Mayne®. Further, the proprietors sell the products in the categories of computerised communications, furniture, electrical goods, kitchen appliances, Manchester and bedding, bathroom and tiles, small appliances, carpets and floorings (Harvey Norman Australia 2018).
Woolworths Group –
Woolworths is the largest supermarket chain in Australia that is operating 995 stores all over Australia. It depends on 115,000 team members in its stores, support offices and distribution centre for delivering the customers with convenience, range, value and superior services. As one of the most innovative retailers in Australia the company understands the fact that the consumers always look for simple and new ways for shopping. Further, the consumers can shop from their comfort zone using computer at home, way back from office or at train while going to work through Woolworths Supermarket App. It sources 100% of the meats and 96% of the vegetables and fresh fruits from Australian growers and farmers (Woolworthsgroup.com.au 2018).
Purpose of assignment
The major purpose of the assignment is to advice Events Pty Ltd regarding investment of its surplus funds amounting to $ 100,000. As the analyst the investment opportunities will be analysed in two ASX listed well known companies in Australia that is Woolworths Group and Harvey Norman Holdings and will be suggested the best among the 2 for investment. For analysing the companies from the investment aspect various factors will be considered. These factors are the background of the companies. Their financial position and performance through analysing various ratios like profitability ratios, market performance ratios, solvency and liquidity ratios and operating efficiency ratios. Further, while making decisions apart from financial aspects other factors like competitors of the companies and other potential investment will also be suggested to Events Pty Ltd.
Financial analysis
Financial analysis is process of analysing the budgets, business and various other financial aspects for determining the stability and performance of the company. Generally, the financial analysis are used for analyzing whether the entity is solvent, stable, profitable or liquid enough to provide warranty for the monetary investment (Easton and Sommers 2018). Analyses are conducted through focussing on the balance sheet, income statement and the cash flow statement of the entity. Using the ratios for measuring the performance of the company is the most widely used method for conducting the financial analyses. For analysing the performances of Woolworths Group and Harvey Norman Holdings various ratios like profitability ratios, market performance ratios, solvency and liquidity ratios and operating efficiency ratios will be computed (Asx.com.au 2018).
Profitability ratio
Profitability ratios help in analysing the company’s ability to create income for its shareholders from the revenues after paying off the operational expenses, financial expenses and tax related expenses. Interest coverage ratio is computed by analysts and investors to measure the ability of the company to meet its interest obligations with the operating profit available to the company. It is calculated through dividing the operating income of the company by the interest obligation (Ajanthan 2013). It can otherwise be considered as the margin of safety for the creditors of the entity to determine whether the company may face difficulty in its financial aspect.
From analysis of both companies’ financial performance through the annual reports of respective companies for 3 years it can be stated that the interest coverage ratio of Harvey Norman has been increased from 18.20 to 32.88 from 2016 to 2017. However, it reduced to 21.12 in 2018. On the other hand, if the interest coverage ratio of Woolworths is considered it can be stated that the same for Woolworths Group is in enhancing trend and increased from 6.54 to 16.55 over the years from 2016 to 2018. Net profit margin is used for measuring the profit amount that can be extracted by the business from the amount of total sales.
It determines the revenue percentage left with the company after deducting all the expenses. Net profit margin are computed to look after the net profit closely as it reveals how good the company is while converting the revenues into profits that is available for the stockholders (Harris and Mazibas 2013). It can be stated after analysing the financial reports that the net profit margin of Harvey Norman has been increased from 19.56% to 24.71% from 2016 to 2017.
However, it reduced to 19.06% in 2018. On the other hand, if the net profit margin of Woolworths is considered it can be stated that the same for Woolworths Group is in enhancing trend and increased from 2.90% to 3.165 over the years from 2017 to 2018. However, during 2016 the company was not able to generate any positive earnings for its shareholders and it has profit margin of – 4.04% for the period.
Hence, if the overall profitability position of the companies are analysed it can be stated that though the profitability ratio of Woolworths are in enhancing trend for all the 3 years under consideration, profitability position of Harvey Norman is better as compared to Woolworths.
Operating efficiency ratio
Efficiency ratios are used for analysing how well the company is in using its assets and managing the liabilities internally. Efficiency ratios can also be used for analyzing and tracking the short-term performances of the company. Further, these ratios can be compared with the peers from the same industry and can identify whether the business are managed in well manner as compared to the peers. Asset turnover ratio establishes the ratio between the company’s sales value and asset value. It indicates the efficiency of the company with which it deploys its assets for generating revenue. Hence, it can be used for determining the performance of the company (Halili, Saleh and Zeitun 2015). Asset turnover ratio is company specific and varies for companies of different sector.
For instance, retail companies generally have lower base for assets and higher level of sales and therefore the asset turnover ratio will be higher as compared to the companies from other industries. It can be stated after analysing the financial reports that the asset turnover ratio of Harvey Norman has been increased from 0.41 to 0.44 from 2016 to 2017 and remained same for 2018. On the other hand, if the asset turnover ratio of Woolworths is considered it can be stated that the same for Woolworths Group is in reducing trend and reduced from 2.47 to 2.41 over the years from 2016 to 2018. Inventory turnover ratio indicates how many times the company was able to replace or sale its inventories within the period.
Inventory turnover ratio assists the businesses in taking better decisions regarding manufacturing runs, pricing, the way in which promotions to be leveraged for moving excess inventories and when and how to purchase the new inventories (He and Krishnamurthy 2013). It can be stated that the inventory turnover ratio of Harvey Norman has been reduced from 4.01 to 0.44 from 2016 to 2017 and increased again to 4.01 in 2018. On the other hand, if the inventory turnover ratio of Woolworths is considered it can be stated that the same for Woolworths Group is in increasing trend and enhanced from 9.05 to 9.54 over the years from 2016 to 2018.
Hence, if the overall efficiency status of the companies are analysed it can be stated that for all the 3 years under consideration, Harvey Norman is more efficient as compared to Woolworths.
Liquidity ratio
Liquidity ratios are used for evaluating the ability of the firm t pay the short term obligations of the entity. It shows the liquidity level of the company that is how much of their assets can be converted into cash on quick basis for meeting the obligations after becoming due. Current ratio that is also known as the working capital measures the relationship among current assets and the current liabilities. It measures the ability of the company to pay its current liabilities that is the liabilities due within the period of next 12 months (Altaf and Shah 2017). It can be stated that the current ratio of Harvey Norman has been reduced from 1.26 to 1.59 from 2016 to 2018. On the other hand, if the current ratio of Woolworths is considered it can be stated that the same for Woolworths Group is in reducing trend and reduced from 0.83 to 0.78 over the years from 2016 to 2018.
The quick ratio is also used for measuring the liquidity of the company, the only difference with the current ratio is that the quick ratio does not consider the current assets those assets take some time to get converted into cash like inventories (Heikal, Khaddafi and Ummah 2014). It can be stated that the quick ratio of Harvey Norman is in increasing trend and has been increased from 1.01 to 1.17 from 2016 to 2018. On the other hand, if the current ratio of Woolworths is considered it can be stated that the same for Woolworths Group for the periods under consideration has not been changed much and was revolving around 0.32 to 0.33;
Hence, if the overall liquidity status of the companies are analysed it can be stated that for all the 3 years under consideration, Harvey Norman’s liquidity position is better as compared to Woolworths.
Solvency ratio
Solvency ratio is the key metrics used for measuring the ability of the company to meet the debt and other obligations through measuring the capital structure. These ratios are used by the shareholders and creditors to make them assure that their investment is secured and they will be able to recover it. Debt equity ratio is the relationship of debt and equity raised by the company for financing its assets. The debts here are borrowed from outside sources whereas the equity fund is the amount invested by the investors (Albul, Jaffee and Tchistyi 2015). It can be stated from the calculation table that the debt equity ratio of Harvey Norman are in reducing trend and has been reduced from 0.65 to 0.56 from 2016 to 2018.
On the other hand, if the debt equity ratio of Woolworths is considered it can be stated that the same for Woolworths Group is also in reducing trend and reduced from 1.68 to 1.17 over the years from 2016 to 2018. Debt ratio of the company measures the extension of leverage and the debt proportion of the company against the assets (Akeem et al. 2014). To be more specific, it determines the asset percentage of the company financed through debt. It can be stated from the calculation table that the debt ratio of Harvey Norman are in reducing trend and has been reduced from 0.39 to 0.3 from 2016 to 2018. On the other hand, if the debt equity ratio of Woolworths is considered it can be stated that the same for Woolworths Group is also in reducing trend and reduced from 0.63 to 0.54 over the years from 2016 to 2018 (Chamberlains 2015).
Hence, if the overall solvency position of the companies are analysed it can be stated that though the solvency ratio of of both the companies are in reducing trend for all the 3 years under consideration, profitability position of Harvey Norman is better as compared to Woolworths.
Market performance ratio
Market performance ratios are used for comparing the current price of the shares quoted under the stock exchange. It is considered as an important measure as it helps to understand that the stock’s quoted price is not the actual price of the share. It is the price that the investors are ready to pay for purchasing the share of the company. Further, it is used to determine whether the share is overpriced or is underpriced in market. Earnings per share percentage of profit distributed to the shareholders on each of the share held by them.
It can be stated after analysing the financial reports that the EPS of Harvey Norman has been increased from 31.36 cents to 40.35 cents from 2016 to 2017 (Finance.yahoo.com 2018). However, it reduced to 33.71 cents in 2018. On the other hand, if the EPS of Woolworths is considered it can be stated that the same for Woolworths Group is in enhancing trend and increased from 119.40 cents to 132.60 cents over the years from 2017 to 2018. However, during 2016 the company was not able to generate any positive earnings for its shareholders and it has EPS of -97.70 cents for the period.
Price earnings ratio establishes the relationship between EPS and market price of shares (Sykes and Trench 2016). It reveals the expectation in the market and price investors must pay for each earning unit. It can be stated after analysing the financial reports that the P/E ratio of Harvey Norman are in reducing trend and has been reduced from 12.66 to 9.85 from 2016 to 2018. On the other hand, if the P/E ratio of Woolworths is considered it can be stated that the same for Woolworths Group is in enhancing trend and increased from 21.24 to 22.59 over the years from 2017 to 2018. However, during 2016 the company was not able to generate any positive earnings for its shareholders and it has P/E ratio of -21.40 for the period (Bodie, Kane and Marcus 2014)
Hence, if the overall market performance of the companies are analysed it can be stated that for all the 3 years under consideration, market performance of Woolworths is better as compared to Harvey Norman.
Additional information and other types of information
Wesfarmers – Wesfarmers is the Australian leading company listed under ASX. Focus of its diverse operations is delivering satisfactory return to the shareholders. Wesfarmers is in well place for delivering the sustainable growth with regard to earnings and improving returns to the shareholders. It is also focussed on leveraging the digital and data capabilities, developing great teams and driving initiatives to improve the returns. From the above it can be recognised that the net margin ratio of the company is in positive and it is efficient in using its assets for generating income and replacing its inventories. However, the liquidity position of the company is indicating that the company is not efficient in meeting its short term obligations (Wesfarmers.com.au 2018).
JB Hi-Fi Limited – it is the largest retailer for home entertainment in Australia. It is well known for the biggest brands, lowest prices, and wide range of products. From the risk prospective the company is not considered as highly risky as it is efficient in creating return for its shareholders on regular basis. Further, it can be identified from above table that net margin ratio of the company is in positive and it is efficient in using its assets for generating income and replacing its inventories. Moreover, the interest coverage ratio is indicating that the company has sufficient operating income to cover up its interest obligation and the liquidity position of the company is indicating that the company is efficient in meeting its short term obligations (Jbhifi.com.au 2018)
Bega Cheese Limited – it is engaged in processing, receiving, distributing and manufacturing and various other food related products all over Australia. It operates in 2 segments – Tatura Milk and Bega Cheese. It can be identified from above table that net margin ratio of the company is in positive and it is efficient in using its assets for generating income and replacing its inventories. Moreover, the interest coverage ratio is indicating that the company has sufficient operating income to cover up its interest obligation and the liquidity position of the company is indicating that the company is efficient in meeting its short term obligations.
Recommendation
From the above analysis it can identified that if Harvey Norman Holdings Limited and Woolworths Group are compared for the purpose of investing additional fund amounting to $ 100,000 by Events Pty Ltd it is suggested that Harvey Norman is better as compared to Woolworths Group. The reason behind this is that the profitability position, liquidity position and solvency position of Harvey Norman is better as compared to Woolworths Group. However, if the company considers additional companies for investment it may consider Wesfarmers, JB Hi-Fi Limited and Bega Cheese Limited (Bega Cheese 2018).
Reference
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