Discuss about the Financial Performance of Coles Limited and Woolworths Limited.
Coles Limited is one of the largest retail sector companies in Australia. The market capitalization of Coles Limited is larger to that of Woolworths Limited. Both Coles Limited and Woolworths Limited exhibit strong financial health (Wesfarmers.com.au. 2017). One of the study measures that the ability of these companies is to absorb shock to its operations that need to find out what went wrong at a ready or functional stage. In addition, companies with strong economic heath score mainly tend to have a healthy balance sheet as well as regular earnings that underpins by strong operating cash flow (Woolworthslimited.com.au. 2017). In the given patter, it is noted that both the business display high levels of total liabilities as compared to total tangible assets. Companies that exhibit a high total tangible assets ratio are considered to be more vulnerable to fiscal difficulties as an increase in borrowings that limit the skill for absorbing impact in the incident of the recession in trading activities (Wong and Yeung 2014).
Annual reports in conformity with conceptual framework and AASB standard requirements
Coles is a retail based company that strictly adheres with the AASB and conceptual framework (Wesfarmers.com.au. 2017). They properly follow the approaches that are mention in the Exposure Draft itself. This company follows the Exposure Draft requirements as presented in the financial statements and analyzed in the business systems and reports. Coles Limited accepts invitation and participates in IASB outreach programs such as recent lease projects (Weygandt, Kimmel and Kieso 2015).
On the other hand, Woolworths Limited is a company that provides opportunity to the investors where they discuss the matter as mentioned in the initial comment letter (Woolworthslimited.com.au. 2017). In that way, the comment letters actually deals with property leases in accordance to future rental standard. The business believes in treating all leases as financial alternatives that pertains to attainment of financial realism. This business follows IAS 17 for on-balance sheet identification of leases that is used specifically for secretarial action. It is all about looking at the economic aspect like continuing supply preparations and repair agreement (Weil, Schipper and Francis 2013).
Conceptual framework amendment including Prudence for addressing discrepancy in Corporate Reporting
Both Prudence and reliability in conceptual structure explain the concept after addressing the disparities that are mentioned in the corporate reporting likewise. There are several options that help in addressing the disparities and looking at the accountability options as well as presenting the financial statements in a fair way (Van Deventer, Imai and Mesler 2013). Companies need to apply strategies that best suit or align with the financial statement as it will improve the level of understanding by the financial users. It is noted that there are disparities in the financial statement that need proper attention after accounting issues and fair representation of financial statements. These need to be present by abiding with the rules of AASB Standards and IASB through IFRS (Wesfarmers.com.au. 2017).
To explain the concept of Prudence in detail, it is important to gain proper or reliable financial information that will help the potential financial users at the time of decision-making process (Woolworthslimited.com.au. 2017). In that way, Prudence in financial statements means presenting the financial statement in fair manner in relation to a given company. It is important that the financial declaration represents a true and fair view of monetary position and even the operational aspects for the companies for given point of time. It majorly relates with the corporate reporting as well as governance for companies (Robson, Young and Power 2017).
Comparing and contrasting figures from the annual reports of Coles and Woolworths Limited
Coles Limited enjoys net profit of 6.1% after excluding net asset sales. To that, the pre-tax earnings for the company arrive at $167 billion (Wesfarmers.com.au. 2017). Coles Limited occupies the topmost position in the retail sector and their supermarkets has enjoys profit percentage as a whole.
On the contrary, Woolworths Limited enjoys net profit that amounts to $60.8 billion (Woolworthslimited.com.au. 2017). The company eventually raises ways for the normalized earnings that deals with categories such as food, petrol and liquor. The liquor sale generates revenue at 4.6% that is worth $7.4 billion. As far as hotels are concerned, it delivers $1.47 billion for given period of time.
On comparison, it is noted that Coles Limited has shaded Woolworths Limited from the investment perspective in current financial years (Wesfarmers.com.au. 2017). It is in accordance to Stock Doctor Database where Coles Limited generates total return after dealing with the capital gains and adding up dividends that arrives at a percentage of 15.8 for previous months. Coles Limited, in a way actually delivers 20% starting from 1 year to 5 years of time span. On the other hand, Woolworths Limited generates revenue at 6.8% for 12-month returns for specific financial years. In that way, Coles Limited slumps at 23% and direct with the losses that are less than 2% on yearly basis (Miller and Shawver 2016).
Identification of disclosures of Coles and Woolworths Limited
The operating revenue of Coles Limited for the year 2016 rose by 3.7% to $62.4 billion that is drive by solid assistance from the supermarkets (Wesfarmers.com.au. 2017). Furthermore, in the headline growth, there need improvement to gain operational efficiency that denotes an augment in the earnings before interest and tax margin from 5.8% to 6.1% when it is compared to past consequent period. While looking at the margin improvements, it is observed that core operating segments of the company improves over the supply chain as well as get access to efficient management of working capital at the same time. In that way, earnings per share arrives at 16.8% as well as return on assets improved by 7.9% to 8.7% that reveals an increase in prepared competence (Wesfarmers.com.au. 2017).
Woolworths Limited, on the other hand, operating revenue declines by 0.14% to $60.87 billion because of petrol sales, hotel revenues as well as poor general merchandise that contribute to decrease in its headline result (Woolworthslimited.com.au. 2017). The net profit after tax of the company increased by 0.10% to $2.45 billion after normalizing the impacts of alteration costs as well as idleness expenses
In addition, the expenses eventually do not translate into getting asses to positive EPS growth that declines at 0.15% because of the shareholder base. As far as asset utilization is concerned, return on asset declines down from 14.52% to 13.79% that shows decrease in operational efficiency (Macve 2015).
The management teams for both the companies practically failed to supply the market with quantitative direction for the year 2016. Hence, the qualitative expectations could have been easily gleaned from supervision shareholder performance. At Coles Limited, the supermarket business aims at maintaining its relative outperformance after comparing it with the major peers. In that way, further investment can be done by lowering the prices that is expected and that can drive or look into the customer transactions as well as sales density and basket size. Improvement is needed at the store network of Coles Limited and online platform as it provides the backdrop especially for increased customer interaction. It give a sense of optimism while looking at Coles Limited as the company maintains a degree of prudence for the Industrial and Resources business that displays mixed presentation for the year 2016 (Wesfarmers.com.au. 2017).
Woolworths Limited, on the other hand, the outlook of the company remains more clouded. It is the management of the company that shows margins in the Australian, food, liquor and petrol division will actually gets negatively affected by the reinvestment into price as well as customer service with the investments of being most viable in the financial year 2016 (Woolworthslimited.com.au. 2017).
Coles Limited is trading in price earnings ratio of 16.5 times as compared to its industry average of 15.8 times. In that way, it makes the investors to be ready to pay for a trade that is higher on escalation forecast (Wesfarmers.com.au. 2017). On the contrary, Woolworths Limited is trading on price earnings ratio of 13.7 times. In this way, the reduction to the business explains the expectations of the market for lower future growth as margin compression from price deflation as well as increasing costs that forecasts to guide future working perspectives (Hoyle, Schaefer and Doupnik 2015).
Both Coles Limited and Woolworths Limited had maintained stable dividends that benefit the income-oriented investors by rendering reliable above-market yields (Woolworthslimited.com.au. 2017). Both the companies has the ability to retain high levels of dividends distributions in the near future where Coles Limited earning constancy prompts to suggest as a Star Income Stock (Beatty and Liao 2014).
Coles Limited announced a final dividend payment that is fully franked and brought as full-year ordinary dividend at 5.3% on the past corresponding year (Wesfarmers.com.au. 2017). It helps in translating to a grossed dividend yield of 7.3% that shows Coles Limited as attractive investments especially for the income-oriented investors. It is therefore believed that the level of distribution remains sustainable as it gives solid earnings as well as robust cash flows in the most appropriate way.
Woolworths Limited, on the other hand, declares a final fully franked dividend that brings about total distribution for 2016 from the past corresponding period (Woolworthslimited.com.au. 2017). It mainly highlights an above market yield of 8% where the lower expected earning help in translating into volatile cash flows. It mainly hampers the ability for paying reliable above-market distributions. The sale and leaseback will help Woolworths Limited for dealing with the cash as it translates to higher rental costs in the year 2016 and puts more pressure on cash flow. The low share price as well as high yield of Woolworths Limited indicates a dividend trap for unsuspecting investors (Hoskin, Fizzell and Cherry 2014).
On comparing both the companies based on last 12 months, Coles Limited delivers 10.56% loss and Woolworths Limited faced 29.92 losses after excluding the dividends. For a period of three years, Coles Limited outperforms Woolworths Limited that delivers 12.80% and 13.70% (Drury 2013)
Financial Health
Both Coles Limited and Woolworths Limited exhibit strong financial health. Both the companies actually shows narration of strong operational cash flows that counteract some of the balance sheet risk as increased liquidity allows for better liability for funding future capital expenditure as well as debt repayments. Both the companies are ranked strong in terms of financial health as well as display healthy productivity and cash flow ratios at the same time (Wesfarmers.com.au. 2017).
Management assessment
Coles Limited is the winner over Woolworths Limited because of financial performance of Coles Limited for the year 2016. Coles Limited had achieved healthy revenue growth. Woolworths Limited, on the other hand, achieved a result in line with administration leadership as well as modest earnings development in core food, petrol segment and liquor that was considered as offset by earnings that declines in general merchandisers and hotels and future losses for home development (Edwards 2013).
Outlook and forecast
Coles Limited wins over Woolworths Limited as Coles Limited experiences robust results from the sale of supermarkets that offset the weaker performances from industrial as well as resources. Woolworths Limited, on the other hand, the company faces management issues and deficit of the supermarkets and home development segment as it weight on short-term performance where the prospects of the company are likely to be constraint for the year 2016.
Share price value
Woolworths Limited wins over Coles Limited. The company is perceived to be underdog as well as optimistic structural changes may ensure when a new CEO is appointed. In addition, price discount is applicable that provide a chance for those who are willing to back a turnaround (Wesfarmers.com.au. 2017).
Total Returns
From dividend-yield perspective, Coles Limited wins over Woolworths Limited. Coles trumps Woolworths Limited by providing the shareholder with higher dividend yield as well as capital returns on specific scenario. Coles Limited leads from a total return standpoint in and across all periods that underscores the best investors that quality to staple earnings growth as well as sound capital organization (Gassen 2014).
Taxation
Coles Limited follows incentives metrics policies while Woolworths Limited follows redesigning of increased level of transparency.
shareholders should invest in Coles and Woolworths Limited
Both Coles Limited and Woolworths Limited are supermarket giants and faces tough competition from each other. It is not important to discuss that where should investment done, it is for Coles Limited or Woolworths Limited. On analysis, it is noted that Wesfarmers Limited is preferred by the customers when it comes to consumer staples. From price-to-value perspective, Woolworths Limited presents larger upside potential. On the contrary, Coles Limited indicates better historical working performance as well as dividend yield and returns to shareholders. It is believed that Coles Limited has the skill to convey higher earnings growth that would maintain its better dividend yield in relation to Woolworths Limited in the near future irrespective of any challenge faced in the business (Horton 2017)
Conclusion
Entire study highlights the facts and information about the retail sector companies based in Australia such as Coles Limited and Woolworths Limited. Comparison had been done at each section starting from financial performance, share price valuation, total revenues and management assessment. To each of the evaluation, proper recommendation had been made regarding which company proves to be best in the near future. The study even highlights about whether both Coles Limited and Woolworths Limited adheres by AASB Standards and Conceptual framework. Information had been gathered from annual reports of Coles Limited and Woolworths Limited for the year 2016 that is relevant, reliable and valid.
Reference List
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Wesfarmers.com.au. 2017. Reports. [online] Available at: https://www.wesfarmers.com.au/investor-centre/company-performance-news/reports [Accessed 14 Aug. 2017].
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & Managerial Accounting. John Wiley & Sons.
Wong, S.T. and Yeung, C.S., 2014. Advanced Financial Accounting. Pearson Education Asia Limited.
Woolworthslimited.com.au. 2017. Reports – Woolworths Limited. [online] Available at: https://www.woolworthslimited.com.au/page/Invest_In_Us/Reports/Reports [Accessed 14 Aug. 2017]
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