Business entities tend to develop the financial reports on an annual basis to facilitate the decision-making process of investors. In this context, this report is developed for examining the financial performance of an ASX listed entity by evaluation of the financial information presented in its financial reports.
The company selected for evaluation is Woolworths Group limited of Australia. This is carried out by extracting the latest year’s financial reports of the selected company for calculation of the financial ratios of liquidity, leverage, efficiency turnover, profitability and market value ratios.
In addition to this, the information extracted from the ASX website is used for developing a graph to depict the movements in the monthly share prices over the last two financial years. This is followed by providing an analysis of comparing the movements in the share prices of the selected company with the All Ordinaries Index to determine the volatility and correlation of its share prices. The use of constant dividend growth rate model us done in the report for determining the value of selected company stock and comparing it with the current stock market price for identifying and explaining the differences. Lastly, the report provides a summary of the overall findings presented in the report.
Part 2: Description of the Companies
Woolworths Group Limited is a well-known retail brand of Australia and is involved in providing its retails services to about millions of customers on everyday basis. It is known to be second largest company in Australia in terms of revenue and second largest in New Zealand. The company manages some of the most recognized brands within Australia and endeavors to create a world-class experience for the consumers across its stores and platform.
The core activities of the company include supermarkets, liquor retailing, hotels, and pubs and discount department stores. The company has achieved a distinctive competitive position in the market by placing people first and taking care of their different needs and requirements. The company has a competitive team of manufactures, suppliers and producers dedicated to serve million of customers every day with high quality products and services.
Woolworths is known to operate in a highly competitive retail sector of Australia and has gained distinctive competitive position by placing customer need at priority across all its brands. The company has established its following priorities since its origination that is responsible for sustaining its growth and development that are stated as follows:
The company has also developed and established a rigorous Code of Conduct for ensuring that its business operations is carried out by compliance with moral, ethical and legal systems of values and principles. The development of an ethical code of conduct ensures the creation of a workplace that is focused on embracing diversity in all its forms (Woolworths Group Limited, 2017).
Part 3: Calculation and analysis of performance ratios
Ratio analysis can be regarded as a quantitative analysis of information contained within the financial statements of a company. The financial data extracted from the general purpose financial reports is used for examining the various aspects of the operating and financial performance of a company. As such, the technique of ratio analysis is used for analyzing the efficiency, liquidity, profitability and solvency position of the company (Papadopoulos, 2011). The financial data obtained from the current financial statements of the selected company for calculation of the ratios for examining the financial performance of the company is carried out as follows:
Calculation of ratios of Woolworth Group
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Financial Data of Woolworth used to perform the ratio analysis |
|||
|
Particulars |
2015 |
2016 |
2017 |
|
|
$ ‘Million |
$ ‘Million |
$ ‘Million |
|
Net profit |
$ 2,137.40 |
$ (2,347.90) |
$ 1,593.40 |
|
Net Sales or revenue |
$ 59,001.30 |
$ 53,473.90 |
$ 55,475.00 |
|
Shareholders’ Equity |
$ 11,132.00 |
8781.9 |
9876.1 |
|
Current Assets |
$ 7,660.90 |
$ 7,427.00 |
$ 6,994.20 |
|
Current liabilities |
$ 9,168.60 |
$ 8,992.70 |
$ 8,824.20 |
|
Inventory |
$ 4,872.20 |
$ 4,558.50 |
$ 4,080.40 |
|
Quick Assets |
$ 2,788.70 |
$ 2,868.50 |
$ 2,913.80 |
|
Total Liabilities |
$ 14,204.80 |
$ 14,720.30 |
$ 13,039.70 |
|
Total Assets |
$ 25,336.80 |
$ 23,502.20 |
$ 22,915.80 |
|
Account receivable |
$ 885.20 |
$ 763.90 |
$ 744.70 |
|
Average accounts receivable |
$ 824.55 |
$ 754.30 |
|
|
Cost of goods sold |
$ 42,950.90 |
$ 38,538.60 |
$ 39,739.70 |
|
Average Inventory |
$ 4,715.35 |
$ 4,319.45 |
|
|
Profit attributable to equity shareholders |
$ (1,234.80) |
$ 1,533.50 |
|
|
Number of Equity Shares |
$ 1,263.50 |
$ 1,283.90 |
(Annual Report, 2017 and Annual Report, 2016)
|
Calculation of Financial Ratios |
|||
|
Ratios |
Formula |
2016 |
2017 |
|
Short Term Solvency Ratios (Liquidity Ratios) |
|
||
|
Current Ratio |
Current Assets /Current Liabilities |
0.83 |
0.79 |
|
Quick Ratio |
Quick Assets/Current Liabilities |
0.32 |
0.33 |
|
Long Term Solvency Ratios (Financial Leverage ratios) |
|
||
|
Debt Equity Ratio |
Total Liabilities/Shareholder’s Equity |
1.68 |
1.32 |
|
Debt ratio |
Total Debt or Liabilities/ Total Assets |
0.63 |
0.57 |
|
Asset Utilization ratio (Efficiency or turnover ratios) |
|
||
|
Accounts receivable turnover ratio |
Net Revenue/Average account receivable |
64.85 |
73.55 |
|
Inventory Turnover Ratio |
Cost of Goods Sold/Average Inventory |
8.17 |
9.20 |
|
Profitability Ratio |
|
||
|
Return on Equity |
Net income after tax/Shareholder’s Equity |
-26.74% |
16.13% |
|
Net profit Ratio |
Net income after tax/Revenue |
-4.39% |
2.87% |
|
Market Value Ratios |
|
||
|
Earnings per Share |
Profit attributable to equity shareholders/No. of Equity Shares |
$ (0.977) |
$ 1.194 |
|
Dividend Payout Ratio |
Dividend per Share / Earnings per Share |
0 |
37.40% |
(Brigham and Michael, 2013)
Short-term solvency (Liquidity ratios)
These ratios are calculated for examining the financial performance of the company to meet its current financial obligations that are due within a short period of time. It is evaluated using following ratios:
Current Ratio: This is a liquidity ratio used for evaluating the ability of the company to meet its current liabilities using its current assets. The ratio is calculated using following ratios:
Current Ratio=Current Assets/Current Liabilities
As depicted from the ratio analysis results, the current ratio of the company has experienced a slight decrease from the year 2016-2017. This indicates that its ability to meet its current liabilities from its current asset has declined. The ratio calculated for both years is also negative indicating that its liabilities are greater than assets and the existence of a financial risk to unable to pay off its short-term obligations as they become due (Szydlowska, 2018).
Quick Ratio: Quick ratio is used for examining the ability of a company to meet its short-term obligation with the use of most liquid assets. The ratio is calculated with the use of following formula:
Quick Ratio= (Cash+ Marketable Securities+ Accounts Receivable)/Current Liabilities
The quick ratio of the company from the year 2016-2017 is less than 1 indicating that it has insufficient liquid asset base for meeting adequately its financial obligations that are due to be met in short-term.
Long-term solvency (Leverage Ratios)
The financial leverage ratio’s is used for examining the ability of a company for having sufficient cash flow for meeting effectively both its current and long-term financial obligations. The leverage position of Woolworth’s is evaluated with the use of following ratios:
Debt-Equity Ratio: It measures the leverage position of a company by examining the proportion of debt and equity present in its capital. It is calculated with the use of following formula:
Debt-equity ratio=Total Liabilities/Shareholder’s Equity
The debt-equity ratio of the company has declined from the year 2016-2017 from 1.68 to 1.32 indicating that there is relative decrease in the debt in the year 2017 reflecting the improvement in its leverage position. Also, the debt-equity ratio is greater than 1 indicating that it has large debt burden and there is a financial risk that the company is not able to pay back its interest payments (Grier, 2007).
Debt Ratio: The ratio indicates the proportion of debt that is financed by debts and is calculated with the use of following formula:
Debt Ratio=Total Debt/Total Assets
The debt ratio for the company has significantly decreased from 0.63 to 0.57 over the last two financial years of 2016-2017. This indicates that the company is adopting the use of lesser debt for financing its debt in the current year as compared to the previous year of 2016.
Asset Utilization Ratio (Efficiency Turnover Ratio)
The asset utilization ratio indicates the overall revenue realized by a company by utilization of its assets. These ratios indicate the effectiveness of a company to generate sales using its asset base. The efficiency of the company is calculated with the use of following ratios:
Accounts Receivable turnover ratio: The ratio is an indicator of the efficiency of a company to utilize its asset base efficiently for generating sales. It is calculated with the use of following formula:
Accounts receivable turnover ratio=Net Revenue/Average account receivable
The accounts receivable turnover ratio of the company has increased from 64.85 to 73.55 over the financial year of 2016-2017 indicating that it is utilizing its asset base more efficiently for sales generation. The higher ratio of the company indicates that its credit policies are efficient enough for collecting funds from its customer.
Inventory turnover ratio: The ratio is an indicator of the ability of a company to manage its inventory effectively for realization of higher sales and is calculated with the use of following formula:
Inventory turnover ratio=Cost of Goods Sold/Average Inventory
The inventory turnover ratio for the company is higher and has also improved from the year 2016-2017 from 8.17 to 9.20 indicating that the improvement in its efficiency to manage inventory levels adequately for realizing higher sales.
Profitability Ratio
These ratio measures the ability of a company to generate income by meeting all its expenses and other significant costs involved in the income generation efficiently. The profitability position of a company can be examined effectively with the use of following ratios:
Return on Equity (ROE): The ratio provides an evaluation of the measurement of the ability of a company to generate income by effective use of shareholder’s equity. The formula for its calculation is as follows:
ROE=Net income after tax/Shareholder’s Equity
The company’s ROE is negative for the year 2016 (26.74) indicating that it has resulted in creating financial loss for the shareholders and depicts that it has a financial distress. However, the company has improved its ROE position in the year 2017 to 16.13 that depicts it has improved its ability to create value for the shareholders.
Net Profit Ratio: The ratio reflects the ability of a company to measure the net income realized by it from its business operations and is calculated with the use of following formula:
Net Profit Ratio=Net income after tax/Revenue
The net profit ratio of the company is negative for the year 2016 (4.39) indicating that it has incurred a net loss on its business operations. However, it has significantly improved its net income position in the year 2017 as reflected by a positive net profit ratio of 2.87. This indicates that company need to take measures for improving its profitability position in the future for maintaining its continued growth and development (Fabozzi, 2008).
Market Values Ratio
These ratios are used for examination of the current share price of a company to determine its relative worth in the market. The market value of the company is assessed with the use of following ratios:
Earnings per Share:
The ratio helps in determining the profit of a company allocated to each its outstanding share of common stock. It is calculated with the use of following formula:
EPS=Profit attributable to equity shareholders/No. of Equity Shares
The EPS ratio of the company has significantly improved from the year 2016 to 2017 from $0.977 to $1.194. The PS is negative for the year 2016 while it is positive for the year 2017 that depicts that market potential of the company has improved over the last two financial years depicting the increase in the total earnings available to common shareholders (Tracy, 2012).
Dividend Payout Ratio:
It indicates the total amount of dividend that is paid out to the shareholders in comparison to the net income realized by a company. It is calculated with the use of following formula:
Dividend Payout Ratio=Dividend per Share / Earnings per Share
The company has not paid dividend in the year 2016 as it has negative EPS for the year and has not created any profit for the shareholders. The company has paid a dividend in the year 2017 as reflected by the positive value of divided payout ratio of 37.40%. This indicates the improvement in the ability of the company to create value for the shareholders (Palepuand Healy, 2007).
Part 4: Graphs and comparison of share price movements
Share price movement of Woolworth Group Share Price during the last two years
(Yahoo Finance: Woolworth, 2018)
On the basis of above graph it can be said that there was very high movement in the share price of Woolworth Group during the last two years. The lowest share price of Woolworth Share has been found on 31st October, 2016 i.e. $22.89, whereas highest share price of Woolworth Group was $30.52 on 31st May, 2018.
The standard deviation between the share price movements of Woolworth Group was 1.92 that indicates share price of Woolworth does not very much in relation to their mean. Standard deviation is good indicator of velocity and it measures the absolute variability of a distribution from their mean. So, higher the dispersion of data, higher will be the standard deviation (Madura, 2014).
Comparison of movement of share price of Woolworth Group and All Ordinaries
(Yahoo Finance: All Ordinaries, 2018 and Yahoo Finance: Woolworth, 2018)
On the basis of above information it has been found that there was positive correlation of 0.92 between the movement of share price of Woolworth Group and All Ordinaries. The positive correlation of 0.92 indicates that share price of both the selected stock and index moves in same direction or they are highly correlated.
The price of index is highly volatile as compare to price of selected stock. The standard deviation (velocity) of All Ordinaries was 2.69 whereas standard deviation (velocity) was 1.92 that clearly indicates price of All Ordinaries varies more as compare to stock price of Woolworth. Looking at the trend line in Woolworth stock price and All Ordinaries it can be said that there is increasing trend in both which is an indicator of positive correlation (Lumby and Jones, 2007).
Part 5: Share valuation
Calculation of intrinsic value of Woolworth using the constant dividend growth rate model
Formula: D/(k-g) (Schlichting, 2013)
Where k required rate of return
g dividend growth rate
D dividend per share next year
|
Current Share price of Woolworth Group (31 Aug) |
$ 28.30 |
|
Required Rate of Return (k) |
9.00% |
|
Dividend growth rate (g) |
4.00% |
|
Current Year Dividend (2018) |
$ 0.93 |
|
Expected Dividend (D) |
$ 0.97 |
|
Intrinsic value of Share (Gordon Model) |
$ 19.34 |
The intrinsic value of Woolworth Group is $19.34 whereas current share price of Woolworth as on 31 August, 2018 was $28.30 that indicates current price of stock is overvalued. The difference in current stock price and intrinsic price of Woolworth is due to irregular dividend payment. The constant dividend growth model assumes that dividend increases by fixed percentage but in real situation it is not possible to maintain fixed percentage of dividend every year (Schlichting, 2013).
Conclusion
It can be stated from the overall analysis held in the report that Woolworths Limited has a negative financial performance in the year 2016. However, its financial performance has improved in the year 2017 as reflected by improvement in its profitability and market value position. The use of financial ratios to predict the performance of the company helps to provide to investors with all the information they need to make the economic decisions regarding the investment in the company. Ratios analysis has helped to provide insight view of profitability performance, liquidity position, long term solvency position, market valuation, and asset utilization performance of the company.
The analysis of share price movement clearly indicates there was positive trend in movement of stock price of Woolworth and there was positive correlation between the Woolworth and Market Index. The constant dividend growth model clearly indicates that stock price of Woolworth is overvalued. On the basis of overall financial performance and analysis of share price data for last years it is strongly recommended to the institutional investor from overseas to invest in Woolworth as it is expected that company will provide positive holding period return in future. However the financial performance was not good in year 2016 but in year 2017 company has tried to lift and able to generate positive results.
References
Annual Report. 2016. Woolworth. [Online].
Annual Report. 2017. Woolworth.
Brigham, F., and Michael C. 2013. Financial management: Theory & practice. Cengage Learning.
Fabozzi, F. 2008. The Complete CFO Handbook: From Accounting to Accountability. John Wiley & Sons.
Grier, W. 2007. Credit Analysis of Financial Institutions. Euromoney Books.
Lumby,S and Jones,C. 2007. Corporate finance theory & practice. Thomson.
Madura, J. 2014. Financial Markets and Institutions. Cengage Learning.
Palepu, K. and Healy, P. 2007. Business Analysis and Valuation. Cengage Learning EMEA.
Papadopoulos, P. 2011. Investment Report – Fundamental Analysis/ Ratio Analysis: Comparative Approach between two FTSE 100 corporations Vodafone plc and British Telecom Group. GRIN Verlag.
Schlichting, T. 2013. Fundamental Analysis, Behavioral Finance and Technical Analysis on the Stock Market. GRIN Verlag.
Szydlowska, K. 2018. Ratio analysis. Financial Position of a company. GRIN Verlag.
Tracy, A. 2012. Ratio Analysis Fundamentals: How 17 Financial Ratios Can Allow You to Analyse Any Business on the Planet. RatioAnalysis.net.
Woolworths Group Limited. 2017. [Online].
Yahoo Finance: All Ordinaries. 2018. Historical Prices.
Yahoo Finance: Woolworth. 2018. Historical Prices.
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