Financial Markets And Institutes For Business Incorporation

Background of the Industry

Discuss about the Financial Markets and Institutes for Business Incorporation.

Before investing into the business, it is always desirable to analyze “top down” and “bottom-up” approaches. The “top down analysis” helps to assess “big picture” related to the business, incorporating the finer details such as micro-economic factors, industrial trends and so on (Vyatkina et al. 2016). On the other hand, the “bottom up analysis” is beneficial for assessing a stock based on the attributes of the company individually (Guerrero et al. 2015). The firm’s performance, thus, can be measured by addressing the accounting ratios by the approach of a “bottom-up analysis”. The objective of this report is to understand the overall economic environment for taking decision about the future performances of the company. The aim of the conventional analysis is to identify factors that are likely to influence the course of changes of a company corresponding with its share prices.

The report will incorporate macro and micro information of two companies considering the same industrial background. The ASX listed two companies are Coles and Woolworths. Both companies are operating under the retail framework. In this assignment, the research will find the economic as well as the financial details for forecasting the future conditions of both the companies. In the first section, the researcher will conduct “Top Down Analysis” to understand the changes in economic fundamentals. On the other hand, the financial performances of companies will be analyzed with the help of fundamental accounting ratios by conducting the “bottom up analysis”.

Retailers are intermediaries between consumers and producers (Uechi et al. 2015). Their effective and efficient market operations ensure highest consumer access to the greatest choice of the goods at the best prices considering the changing preferences. This retail industry is one of the major service industries of Australia. This provides Australian to buy goods at the most convenient location ensuring the best price with the matching of the appropriateness to their needs. The retail industry is one of the largest employers of Australia. There are almost 140000 retail businesses associated with this industry along with the participation about 1.2 million people or 10.7 per cent of the total working populations of the nation.

The mission statement of Coles is to make the best retailer in every market the company operates.  Thus the retail supermarket is continued to serve better. On the other hand, Woolworths stated aim to be attract the large community and being recognized as the best loved retailer for home, family leisure and kids.

Top-down Analysis

The steady consumer consumptions of the retail business of Australia have largely contributed in the nation’s GDP growth rate (Goodman,  Neamtiu and Zhang 2013). In 2015, the GDP of the nation has been grew by 1 percent which can be considered one of the strongest economic expansion since the June quarter 2012. Presently, the annual growth of the GDP has been reaching an all time high of 4.40 percent Fornelli et al. 2013) This has been identified that the Australian economy is dominated by its service sector, yet the economic growth is comprehensively depends on the Australian’s mineral resources and agriculture. In the developed economic condition, the expenditure has been increased by 1.9 percent. Needless to say, the growing contribution of the service industry refers the extended growth of the GDP by 1.1 percent in March quarter of 2016. Major industrialists of Australia anticipates that the economic condition would remain resilient and stable across the world in terms of market capitalization and the growth of the Australian dollar in the international market.

Currently, retailing in Australia experienced positive growth in 2015. The positive wealth influence supports a strong housing market with the low interest rates (Guerrero et al. 2015). Furthermore, a strong credit growth encouraged consumers to spend more in their daily lives. On the other hand, much of retailing in Australia is changing in response to the growing competition arising from the popularity of online shopping. However, the Australian retail industry has previously struggled with unstable consumer sentiment and the delicate economic growth due to the volatile Australian financial market conditions. Now the industry inspired with the higher “household savings ratio”. The key performance industry indicators are the increasing competition, the mature nature of the consumer goods and the associated costs pressures. Though it is already mentioned that the majority of the country people of Australia are employed in this industry, the retail section of the business, thus, makes a significant contribution to economic output of the nation. The current retail turnover of the country is 25040.2 $m as on June 2016.

(Source: Bierman Jr and Smidt 2012)

The economic trend estimates .1 percent growth in July 2016. It is interesting fact that the industry follows a rise of .1 percent in the month of June 2016 and simultaneously the month of May, 2016.  In addition, most of the sub-division of the retail industry has positively contributed and rose in trend terms in July 2016. For instances, sub-divisions of the industry ensure steady growth in trend terms in July 2016: retailing of foods (.1%), clothing and accessories (.6%), café, take away food services (.5%), departmental services (.2%) and so on.

Bottom-up Analysis

In the last hierarchy of the “Top down”, the discussion will cover both company-specific. Woolworths has positively influence the retail supply chain, and made it more sustainable and reduce carbon footprints. In the sustainability strategy 2007-2015, Woolworths concentrated five key areas and improved the sustainability and reduce its impact on the environment (Woolworths Online 2016). The core environmental factors of Woolworths are carbon emission and climate change, waste and recycling, local sourcing, packaging, and water mechanism. Based on the projected growth level by experts, the company has achieved a landmark with the reduction of carbon emissions from their departmental stores by 40 percent in 2015 (Lee et al. 2016). The company has implemented innovation for their stores in the areas of light and air conditioning, refrigeration which certainly enhanced the end-delivery retail services of the company. Currently, the company has achieved 25 percent reduction in carbon emission per square metre for their new supermarkets (Coles.com 2016). The company has made an effort in terms of additional packaging to protect materials during transportations. On the other hand, Coles, has largely contributed in the success of home growers by incorporating into their supply chain process.  Currently 96 percent fresh produce sold at Coles which are home growing products.  Furthermore, this company provides frozen vegetables from Tasmania and contributed in over $37 million to the economy of Tasmania. Thus the company is the equal contributor both in the economic sector of Australia and other part of the country. 

With the “bottom down analysis”, firms can assess the financial environment of the firm (Bartram and Grinblatt 2015). In the broader sense, the researcher can evaluate by estimating potential sales in order to determine the net sales figure. In other words, the researcher can compare their products with the help of the present sales that can be curve out. To measure the firm’s performance, the ratios have been evaluated.

The ratios can be evaluated by the different perspectives such as “liquidity”, “efficiency”, “solvency”, “profitability” and many others. In this analysis, the researcher discusses the three perspectives. The liquidity is all about the company’s ability to meet its short term obligation.  As per the calculation suggests, the current ratio of Woolworths is lower than one. It signifies that Woolworths is struggling a bit and concerned about the short-term liabilities which needs to mitigate with the help of the short term assets of the company (Woolworths Online 2016). This ratio greater than or equal to one assumes that the company will be able to satisfy near term obligations. Based on the last five years liquid figures of Woolworths, it has been evaluated that the company never achieved it liquidity figure more than one year. In a nutshell this can be said that Woolworths is currently facing issues related to the liquidity. In addition, the working capital of the company is also showing negative balance over the last five years.

On the other hand, Coles, the retail section of Wesfarmers has represented their financial position in their group’ annual report, It has been ascertained that this company is holding far better liquid position compare to Woolworths. However, the current ratio is lower compare to the previous year. However, Coles has enough working capital to manage the short-term obligations of the company (Coles.com 2016). Furthermore, the quick ratio is the also healthy over the last five years. This ratio is always desirable if it is higher. The higher quick ratio means Coles will be ride out any future uncertainties related to their retail operation.

The entire financial market depends on the financial performances of the firm. With the help of the financial ratio, the researcher can understand the profitability factor of the chosen business. The total revenue of Woolworths has been increasing over the years. The current net revenue has been AU$60868 at the end of 2015 (Woolworths Online 2016). The gross profit of the company is also increasing over the years. The “gross profit margin”, thus, is healthy. However, Woolworths was failed to sustain the figure till the end of the fiscal year and hence, Woolworth has not shown the same growth in order to realization of the net income.  Furthermore, this has been investigated that the operating expenses of the company has been accelerated over the years. In the year of 2011, Woolworths invested AU$11348 to ensure the smooth retail operation. This figure has been increased by AU$14271 in 2015. This signifies that the company needs to control their operational expenses in the future years. This will also improve the net income figure in the next financial year. Generally, investors are interested in the “dividend payout” ratio because it indicates the company’s ability to give returns to their investors against paying out a reasonable portion of net income.

Conversely, the total revenue of Wesfarmers has been positively increased over the last five years. The gross profit margin is also stable as well as the net profit. The dividend payment ratio has also been accelerated.  The parent group of Coles has given more dividends in the year of 2015 compare to the previous month. The improved profitability is largely responsible for reduced operating expenses of the company. This is the reason the operating margin of the company is lower compare to the Woolworths.

The efficiency ratio is normally used to analyze the behavior of assets and liabilities internally (Breyer et al. 2013). It gives the clear idea about the turnover of receivables, the usage and volume of equity, the measurement of the repayment of liabilities and so on.   Thus, the report incorporated this ratio to analyze the commercial performance of the company.

The current inventory ratio of Woolworth is 9.27 which indicate the company’s effectiveness for managing the inventory for a period which needs to compare with the costs of goods sold.  This ratio is significant because the total turnover depends on two main components of performance. The initial segment is the purchasing of stock and the second one is sales. Woolworths’s costs of goods sold has certainly been increased with the enough exposure of their retail volume, however, it is positive that the net sales is also increasing. It is indeed a fact that the new sales volume is obstructed for the less adequate liquid position of the company. The “assets turnover ratio”, on the other hand, shows the efficiency which can be utilized for the generation of sale from its assets by comparing the total sales with the assets (average) of the company. The “assets turnover ratio” of Woolworths is stable. This indicates that the company is efficiently generating sales by utilizing the assets of the company.

On the contrary, the efficiency ratios of Coles tales the different story compare to Woolworths. The “inventory ratio” of the company is reducing which signifies that the company can manage their inventory and successfully converted it to their net sales (Coles.com 2016).  It is also positive that the company is positively uphold the sales figure and accelerated with each year.

Compare to both company’s financial performance with the financial ratios, this can be evaluated the Woolworths is concerned with liquid position of the company whereas Coles is positively maintained stable liquid condition over the last five years and  helps to mitigate the short-term obligation of  the company. On the other hand, the profitability position of Wesfarmers is better compare to the other selected retail giant of Australia. Here Woolworth is more concerned about increased operating expenses in each year of financials. Lastly, Woolworths is far behind than Coles in terms of the efficiency ratios.  The “assets turnover ratio” of Coles  is much higher than the Woolworths.

As per the trading analyst’s assumptions, the retail sales in Australia are expected to be 1.86 percent by the end of 2016. In the long term, the Australia retail sales are projected around 3.60 in the next four years.  The growing online retail trend has become popular day by day which increases a lot of retailing opportunities. On the other hand, the physical distribution of consumable goods is also improved for the better access through online. In the broader sense, the government of Australia is positively contributed towards the growth of the retailing business. In a nutshell, the “top down analysis” suggests that the Australian economy is quite supportive and can have the economic potentiality for the future growth in this sector. However, there are some recommendations which need to be considered for the future growth of the selected organizations.

This has been observed from the “bottom line” analysis that Woolworth’s financial condition is not stable compare to Coles. The company is struggled with increased operating expenses and in sufficient liquid financial condition. The financial growth may also struggle due to the scarce working capital of the organization. To improve the liquidity of the firm, Woolworths needs to assess their operational costs and see if there are any scope to decrease them. Furthermore, Woolworths needs to reduce the unproductive assets from their statements of financial. By monitoring the figure of account receivables, the improved billing processing and prompt payments can be ensured.  On the other hand, Woolworths needs to improve their inventory efficiencies to generate more revenue in the future year.

In short, investing in Coles would be better option for future investors because the company gives the higher dividend to their existing shareholders. On the other hand, this company can easily mitigate their short term obligations by the utilizing their short term assets of the company. Though the retail growth of Coles is inspiring for the economic development of the nation, but it needs to be faster. For this, the company needs to increase its efficiencies and profitability. 

References

Bartram, S.M. and Grinblatt, M., 2015. Fundamental Analysis Works.Available at SSRN 2479817.    

Bierman Jr, H. and Smidt, S., 2012. The capital budgeting decision: economic analysis of investment projects. Routledge.   

Breyer, C., Birkner, C., Meiss, J., Goldschmidt, J.C. and Riede, M. 2013, “A top-down analysis: Determining photovoltaics R&D investments from patent analysis and R&D headcount”, Energy Policy, vol. 62, pp. 1570-1580.   

Coles.com, (2016). [online] Available at: https://www.coles.com.au/ [Accessed 13 Sep. 2016].

Fornelli, L., Parra, J., Hartmer, R., Stoermer, C., Lubeck, M. and Tsybin, Y.O., 2013. Top-down analysis of 30–80 kDa proteins by electron transfer dissociation time-of-flight mass spectrometry. Analytical and bioanalytical chemistry, 405(26), pp.8505-8514.     

Goodman, T.H., Neamtiu, M. and Zhang, F., 2013. Fundamental analysis and  option returns. Available at SSRN 1974753.  

Guerrero, A., Lerno, L., Barile, D. and Lebrilla, C.B., 2015. Top-down analysis of highly post-translationally modified peptides by fourier transform ion cyclotron resonance mass spectrometry. Journal of The American Society for Mass Spectrometry, 26(3), pp.453-459.   

Lee, A.E., Geisâ€ÂAsteggiante, L., Dixon, E.K., Miller, M., Wang, Y., Fushman, D. and Fenselau, C., 2016. Preparing to read the ubiquitin code: topâ€Âdown analysis of unanchored ubiquitin tetramers. Journal of Mass Spectrometry,51(8), pp.629-637.   

Uechi, L., Akutsu, T., Stanley, H.E., Marcus, A.J. and Kenett, D.Y., 2015. Sector dominance ratio analysis of financial markets. Physica A: Statistical Mechanics and its Applications, 421, pp.488-509.   

Vyatkina, K., Wu, S., Dekker, L.J., VanDuijn, M.M., Liu, X., Tolić, N., Luider, T.M., Paša-Tolić, L. and Pevzner, P.A., 2016. Top-down analysis of protein samples by de novo sequencing techniques. Bioinformatics, p.btw307.

Woolworths Online. (2016). Woolworths Supermarket – Buy Groceries Online. [online] Available at: https://www.woolworths.com.au/[Accessed 13 Sep. 2016].