Financial Analysis Of Woolworths Company: A Professional Report For Investors

Description of Woolworths Company

The financial analysis is the process to evaluate and analysis the financial performance of organization. The financial structure, liquidity position and profitability of company play pivotal role in the business success of organization. In this report, Australian company, Woolworth has been taken to analysis the financial performance throughout the three years. This report emphasis upon how company has maintained effective financial leverage in context with the profitability which could increase the overall return on capital employed and lower down the business sustainability loss of company.  In this report, ratio analysis has been used to measure how well company has performed since last three years. It will not only assists in determining the weak financial points of company but also assist in identifying how company could strengthen its financial performance by making some possible changes in its capital structure and liquidity position.  After that the main focus has been made to analysis the capital structure of company to determine the financial leverage. In the end, discussion about the quality of the financial statements has been done.

Woolworths Company is an Australian supermarket company which is indulged in providing supermarket store chain to satisfy clients. It was founded in 1924 and having its headquarters in Bella Vista, Australia. The current revenue of company is AUD $ 3,655.93 Billion in 2017 which is 12% higher as compared to last three years. The current market share of company is 45% which has increased with the drastic rate throughout the time (Woolworths Company, 2017).

The ratio analysis is used to measure the financial performance of company by setting up the relation between two financial factors (Flannery, 2016).

FINANCIAL STATEMENT ANAYLYSIS – Woolworths Company
Company name: Woolworths Company Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper
Company ticker: WOOl
Student  name :
Ratios and  Other Analysis Measures	Year  End  (3 years)
2015	2016	2017
ROE  and DuPont Ratios
ROE   (NI / OEavg)	22%	22%	29%
Profitability (NI / Sales )	6%	7%	8%
Efficiency (Turnover = Sales / Assets avg)	2	5	7
Leverage (Leverage = Assets avg  / OEavg)	4	6	7
Additional Profitability Ratios
Gross Profit Margin % [(net Rev – COGS)  / net Revenue]	41%	41%	40%
Selling General &Administration % (SG&A  expense / net Revenue)	31%	30%	30%
Important Expense Percentage* (Important Expense / net Revenue)	20%	25 %	34%
Additional Efficiency Ratios
AR Turnover (Sales / ARavg)	0 .39	0	0
Days Receivables Outstanding (DRO) [ARavg / (Sales /365)]
Inventory Turnover (COGS  / Inventoryavg)
Days Inventory (DI)  [Inventoryavg / (COGS/365)]
AP Turnover (Purchases / APavg)
Days Payables Outstanding (DPO) [365  / (Purchases / Accts  Payableavg)]	49.73	27.77	24.17
CASH CONVERSION CYCLE (DI – DPO  + DRO)
PPE Turnover (Sales / Net PPEavg)
Additional Leverage Ratios
Debt-to-Equity (total Liabilities / total OE)	1.91	1.49	1.36
Times Interest Earned (Earnings  before Interest  Expense and Taxes  / Interest  Exp)	5.6	4.9	4.9
Return on Financial Leverage (ROE – ROA)	1	1.2	1.3
LT Debt-to-Assets (LT Debt,  including current portion / total Assets )	1.9	1.49	1.36
Cash  Liquidity  and  Cash  Sources & Uses
Working Capital (CA – CL)
Current Ratio (CA / CL)	-807	-638	-304
Quick Ratio [(Ca s h + ST Securities + AR) / CL)]	.26	.29	.31
OCFCL (Operating CF / CL)	2.3	2.4	2.5
OCFCX (Opera ting CF / Ca pi ta l Expenditures )	4.5	4.2	4.8
Free Cash Flow (Ca s h from Ops  – Net Ca p. Expend.)	31.75	33.45	16.67
Growth
Sales growth [(cy net Rev – py net Rev)/  py net Rev]	4%	5%	5.5%
NI Growth [(cy NI – py NI )/ py NI ]	3.5%	3.8%	4.2%
*Choose the most “important” non-SG&A expense.

This ratio evaluate the profitability of company such as net profit ratio, gross profit, return on assets and return on equity available to equity shareholders. This ratio measures company’s ability to measure the profitability of company throughout the time. Woolworth Company has maintained stable profitability since last three years. It has been observed that company had 6% net profit margin in 2015 which increased to 8% in 2017. This has increased by 2% as compared to last three year data. It divulged that company has increased its overall profitability even if the market was sluggish (Mwangi, and Murigu, 2015).

Description	Formula	WOOLWORTHS HOLDINGS LTD  (WHL)
		2013-08	2014-08	2015-08	2016-08	2017-08	Average industry ratio
Net profit Margin	Net profit/revenues	7%	7%	6%	7%	8%	8%
Gross profit Margin	Gross profit/ Sales	38%	39%	41%	41%	40%	22%
Administrative expenses ratio	Administrative expenses/ Sales	29%	29%	31%	30%	30%	85%
Return on equity	Net profit/Equity	46%	44%	22%	22%	29%	24%
Return on assets	Net profit/ Total sales	7%	7%	6%	7%	8%	8%
Earnings per share	Net profit/ Share outstanding	0.50	0.25	.1.5	0.65	0.45	0.85

The gross profit margin of company has also been stable since last three years and increased to 41% in 2017 which is just 1% higher. However, company has lower down its operating expenses by adjusting its expenses. The administrative expenses ratio of company has been stable and increased with the increase in the overall production.  The return on equity of company reveals the amount of earning available to equity shareholders.  The return on equity has increased by 2% since last three years (Kallala, et al. 2015).

Ratio Analysis and Other Analysis Measures

This efficiency ratio has also known as activity ratio as it divulges how well company has managed its capital or funds in its business activities to have maximum output. This ratio reflects company’s ability to deploy its funds in its assets turnover, receivable and payable turnover ratio.  The assets turnover ratio company has increased to 243.6 points in 2017 which is 20 points higher as compared to last three year data. It has reflected that company has decreased its assets turnover ratio by 20 points since last three years. It has divulged that company has managed to lower down its overall investment with a view to increase its overall return on capital employed. The receivable turnover ratio of company has also been zero as company has kept the zero amount of receivable since last three years. It has shown that company has been non-efficient in its capital funding and blocking more funds in its business (Ehiedu, 2014). The payable turnover ratio of company has also one of the major aspect which reflect that company has increased its cash outflow from its business operation and increased its overall cost of capital throughout the time.  The account payable turnover has been decreased by 25 points in 2017 as compared to last three year data. The inventory turnover ratio has reflected that company has high blockage of funding in its business operations. It has been observed that the inventory turnover ratio of company has been quite high (Ibn-Homaid, and Tijani, 2015). 

The liquidity ratio divulges company’s ability to meet its short term and long term liabilities out of the available current assets.  This ratio has reflected that company has kept less capital blocked in its current and quick assets. Woolworth has maintained .94 current ratio which is 10 points lower as compared to last year data. It has shown that company has lower down its current assets with a view to lower down its cost of capital.  The current ratio of company has decreased to .97 points in 2017 which is 10 points lower as compared to last three year data. Nonetheless, quick ratio of company has decreased with the decrease in the investment in the cash and other cash items (Boardman, Greenberg, Vining, and Weimer, 2017).

 The capital structure ratio helps in identifying financial leverage and time interest coverage of company.  This capital structure ratio has been divided into following parts which is given as below.

Assessment of the Company’s Performance

The debt to capital ratio measure the debt and equity portion in the capital structure of company. The debt to capital ratio of company has reflected that company has kept high financial leverage and at the same time availing the benefit of low cost of capital. This will not only assist in increasing the overall return on capital employed  but also helps company to lower own the overall business costing. The debt to equity capital has been 1.36 which is 50 points lower as compared to last three year data. Nonetheless, Woolworths company needs to lower down its debt capital more with a view to increase its overall return on capital employed (Maina, and Sakwa, 2017).

This ratio assists in measuring the interest coverage of company out of the available earnings before interest and tax. It has been observed that company has managed its interest payment out of the available net profit. Nonetheless, with the changes in time, company has increased its interest payment and it might be difficult for Woolworths to cover the interest expenses out of the available earning.

In this task, the long term solvency of company would be measured to identify the sustainability and long term growth of company.  It is analyzed that the long term solvency of company assists in evaluating the financial leverage and profitability of company in the long term.  (Vogel, 2014).

The long term solvency of company determines the sustainability of the organisation in long run. The financial leverage and profitability plays pivotal role in determination of the long term solvency of the company.  It is analyzed that company has kept the debt to equity ratio to 76% in 2017 which reflects that company has kept high debt portion in its capital structure. This high debt capital structure poses high amount of financial leverage to company.  The financial leverage reflects that company might face issue to cover its interest payment out of its available earnings before interest and tax (Woolworths Company, 2017).

Description	Formula	Woolworth Company
		2013-08	2014-08	2015-08	2016-08	2017-08	Average industry ratio
Times interest earned	EBIT / Interest expenses	0.0	0.0	0.0	5.6	4.9	5.0
Cash coverage ratio	EBIT + non-cash expenses / interest expenses	–	–	–	–	7.00	858
Debt to Equity Ratio	Debt/ Equity	1.17	2.36	1.91	1.49	1.36	3.7

The long term solvency of company measures how well company has been managing its profitability, efficiency and financial leverage throughout the time. The Woolworth Company has kept the moderate financial leverage since last three years which divulges that even if the market shows the sluggish factors, company will be able to survive in long run.  The moderate financial leverage is one of the main positive point for Woolworths company to manage its business in long run. It has reflected that company has increased its business outcomes throughout the time but has to face high cost of capital due to the low amount of debt capital in its capital structure. It is easy to evaluate that if company has high debt portion in its capital then the overall cost of capital of company will be low and vice-versa. It has reflected that company needs to manage its business and need to increase its overall debt portion (Sujan, et al. 2017). In addition to this, company has high profitability and increased business outcomes which divulge that if company increase its overall interest payment by increasing its debt portion then company could easily meet its interest coverage. Nonetheless, the provision for income tax and provision for depreciation of company have been too high and treated as charge on the assets. Woolworths also have to lower down its blockage of funds in its inventory turnover (Miller-Nobles, Mattison, and Matsumura, 2016). After evaluating the profitability of company, it is analyzed that company have good amount of profitability in its business which could easily cover the interest payment. Company should focus on increasing the debt portion in its business with the increase in its profitability. It will surely not result to increase financial leverage in business but lower down the overall cost of capital in effective manner (Waemustafa, and Sukri, 2016),

Evaluation of Long-term Solvency

Now after assessing all the details and financial factors of company, it is inferred that company has high profitability and effective business. Therefore, due to the low financial leverage and high profitability, company has good long term solvency. Nonetheless, in order to lower down the cost of capital and increasing the overall efficiency, company should focus on increasing the overall debt portion in its business which will lower down the overall costing of the business.  Firstly, management needs to focus on changing the capital structure with a view to increase the overall efficiency of business.  In addition to this, liquidity position of company should also be managed to meet the future current liabilities in long run.

It is analyzed that with the increasing ramified economic demand of market, company needs to manage its liquidity position in effective manner. The liquidity position of company determines the flow of cash in business. It is analyzed that in order to measure the liquidity position of company, current ratio and quick ratio of company need to be computed. These both ratio reflects how well company has invested its capital in its operating business cycle.  However, it is hard to determine the exact point of liquidity position of company which might assist in meeting the future liabilities of clients. Nonetheless, after analysing the type of business, nature, complexity of the process and demand of market, managers could determine the point at which the liquidity position of company should stand. If company blocks higher capital in its liquidity position then it will directly impact the overall cost of capital of company if it does use its liquidity assets in its business (Meena, and Dhar, 2016).

The liquidity position of company measures its ability to cover its short term and long term debts out of its available funds. It is analyzed that in case if company has higher demand in market and highly fluctuated business, then it should have higher liquidity position in market. The liquidity position of company is divided into two main pars named as current ratio and quick ratio (Dey, and Choudhury, 2018).  The following information have been drawn by analysing the annual report of company.
Current ratio

This ratio shows how well company has managed its liquidity assets to meet its short term and long term liabilities.

The current ratio of company has been increased with the increase in its operating activities. The current ratio of company has been increased to .97 points in 2017 which is .06 points higher as compared to last three year data. Company has managed high liquidity position with a view to meet its fluctuated short term and long term demand of market (Rani, Yadav, and Jain, 2015).

Description	Formula	Woolworths plc
		2013-08	2014-08	2015-08	2016-08	2017-08	Average industry ratio
Current ratio	Current assets/current liabilities	1.24	1.05	0.91	0.94	0.97	1.25
Quick Ratio	Current assets-Inventory/current liabilities	0.57	0.79	0.26	0.29	0.31	0.89

Assessment of Liquidity Position

Quick ratio

The quick ratio divulges company’s immediate cash position and liquid cash assets which Woolworth could deploy to meet its short term and long term debts. It is analyzed that the quick ratio of company has decreased to .31 points in 2017 which is .07 points lower as compared to last three year data. However, company has high capital investment in its inventories which has resulted to high differences in current ratio and quick ratio (Goel, Chadha,  and Sharma, 2015).

Woolworths Company has strong brand image and increased operational business activities which reflects that company should high liquidity position.

In order to strengthen the liquidity position of company, management needs to keep high working capital which will divulge that company has kept good amount capita invested in its operating activities (Goldmann, 2017).

The financial statements of company are accompanied with the balance sheet, income statements and other notes to accounts of company. Woolworth Company is listed company and having several sub units. Therefore, company needs to file consolidated financial statements. It has been observed that company has followed IFRS rules and standards to prepare and report the financial statement with the authority. The main objective of financial reporting and accounting standards followed by company is based on the reason of keeping the business more transparent to its shareholders.  The financial statement of Woolworths company has been prepared after following all the accounting concepts and principles. As per the annual report of company, it is analyzed that company has charged the impairment loss on its assets and liabilities booked in the financial statements. It is further observed that as per the IAS -136, company has computed the impairment loss after analysing the book value of the assets and market value of the assets.  In addition to this, all the financial statements have been prepared after following the IFRS 101 which requires company to follow the consolidated financial statements (Hunjra,. and Bashir, 2014).  The quality of the financial statements prepared by company is high and it has strengthened the transparency of all the details noted in the financial statements. In addition to this, internal control department also check any kind of discrepancies in preparing the reporting of financial statements. It is further observe that the auditors of company also have indulged in checking the rightness of the financial statement. In the audit of the financial statements, Auditors of company gave their qualified report stating the fact that company needs to establish the harmonization in its domestic and reporting frameworks.  It is analyzed that directors and mangers needs to check the viability of the accounts an reporting frameworks and focused on integration, quality of the financial parts. It is analyzed that in order to strengthen the quality of the financial statement, management and other higher authority has issued the management representation latter with the financial statements while communicating the required information to auditors and accounts. It will not only increase the genuinely of the financial statement but also assist company to keep its financial reporting framework more true and fair.  It is analyzed that shareholders and investors may face issue and high losses due to the insider trading acts. Therefore, in order to curb these types of acts, company has kept its financial statements more transparent and include all the details and other key information. The auditor’s unqualified report passed by auditors has also reflected that company has passed with the all the applicable domestic and international rules which strengthen the overall quality of the financial reporting frameworks and also strengthen the financial reporting frameworks.  In the financial statements prepared by company, it has been observed that company have cut down all the impairment information from its financial statements to keep it easier to understand for its stakeholders.  Now in the end, it could be inferred that company has complied with the IFRS rules and standards and established harmonization in its reporting framework to increase the quality of the financial statement on sustainable basis (Al Nimer, Warrad,. and Al Omari, 2015). 

Analysis of Capital Structure and Financial Leverage

Conclusion 

The financial statement of company is accompanied with the incomes statement, balance sheet, cash flow statement and other details which is reported to reporting authority and keeping the business more transparent for its stakeholders. After analysing all the details and key information, it could be inferred that Woolworths Company has kept moderate financial leverage and the profitability of company is already way too high to cover the interest payment to its charge holders. In addition to this, company has been facing high cost of capital due to the low deb funding. Woolworths Company needs to issue more debts in market to lower down the overall cost of capital. It is analyzed that company if in case find any issue in complying with the IFRS rules and domestic accounting standards while preparing the financial statements then in this case, IFRS rules will override the domestic accounting standards.

References

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Woolworths, 2017, Annual report. [Online]., Available at https://www.woolworthsgroup.com.au/page/investors/our-performance/reports/Reports/Annual_Reports, , , [Accessed 16^th, August, 2018]