The primary objective of this report is to analyze the financial statement of Woolworth group and Coles group limited. To help a prospective investor, it is essential to conduct a ratio analysis of the company so that the right decision can be taken for investing within the company. Ratio analysis is considered a crucial part of interpreting results revealed through the financial statements of the organizations. By conducting ratio analysis users can get crucial financial information of the entity as well as it helps the user by pointing out areas that require thorough investigation. This report is compartmentalized into different headings and subsections. For our analysis, we have chosen two company that is Woolworth group and Coles group ltd. Both this company belongs to the same category of industry. They have a business of running a chain of supermarkets and groceries stores in Australia. In our report we have conducted ratio analysis, fundamental analysis as well as determined the organization’s overall outlook for the future taking into consideration the relevant factors including those of industries. For conducting ratio analysis, we have used different categories of financial ratios that include profitability ratio, liquidity ratio, efficiency ratio, capital structure ratios, and market performance ratio. We have conducted a thorough analysis of all the given ratios for both the company by using their past financial data. Based on the analysis result recommendation is given to investors whether to invest in Woolworth group or Coles group limited company.
As discussed above we have taken into consideration two company that is Woolworths group and Coles group limited for conducting our analysis. Woolworth group which is colloquially known as “Woolies” in Australia is a company having a chain of supermarkets and grocery stores that is wholly owned by Woolworths Group (DBpedia, 2022). This company was founded in 1924, that today become one of the biggest supermarket chains in Australia with a 37% market share as of 2022. This organization is publicly listed in the Australian stock exchange that derives revenues from different sources consisting of making a retail sale of supermarket food and through general merchandise stores. Woolworths group operates nearly 995 stores all over Australia. with 115000 team members working in various stores, distribution centres, and support offices. The organization provides its customers wide range of services with superior values and convenience (Woolworthsgroup.com.au, 2022). The organization has headquartered in Bella Vista, New South Wales. Woolworth group categorize their business into different division consisting of Australian food, New Zealand Food and BIG W that discount departmental stores in various parts of Australia retailing stationery books, hardware, homewares, toys, clothing, sporting goods, beauty products, etc (Ibisworld.com, 2022). Another company that we have considered for conducting our analysis is Coles group limited.
Coles Group Limited is also one of the largest retailing companies in Australia. This organization has more than 2480 stores in Australia. Coles group limited was established on 9th April 1914 by G.J. Coles who opened the first Coles store in Smith Street, Collingwood, Victoria. The organization has more than 120000 employees working in different convenience outlets, supermarkets, liquor stores, and hotels which aims to provide online shopping and financial services to its customers. Coles group limited has headquarters in Hawthorn East and the entity is publicly listed on the Australian stock exchange (www.dnb.com, 2022).
The company mainly deals in everyday products that include groceries, fresh food, liquor, general merchandise, fuel, and financial services through its chain of networks and online platforms. There are three segments through which the organization operates its business that is Supermarket, Liquor, and Express. The supermarket segment of the entity offers fresh food, groceries as well as general merchandise retailing, including Coles Online and Financial Services. The Liquor segment provides different brands of liquor to the customers such as Vintage, Liquorland, First Choice Liquor, etc. On the other hand, the Company’s Express segment of the entity offers different convenience store operations and commission agents for fuelling their retail sales (www.reuters.com, 2022).
Financial analysis is generally used to signify the selection and interpretation of an organization’s financial data used for evaluating the operating performance of the organization and hence evaluating the financial condition of the organization. Analysts use different types of tools, quantitative analysis and ratio analysis for determining the position of the business.
One such analysis tool is ratio analysis which helps the business owners and managers in determining the progress against their predetermined goals, competitors as well as the overall industry. Besides this ratio act as a powerful tool for measuring the trend of the firm’s performance thereby allowing the business owners to examine the relationship between the product as well as help in measuring the extent of that relationship (Almansoori and Nobanee, 2019).
For conducting our analysis, we have categorized the ratios into five parts that are profitability, liquidity, efficiency, capital structure ratio, and market performance ratio.
Profitability ratios are generally defined as financial metrics used by various analysts and investors for measuring and evaluating the organization’s ability to generate profit about the revenue, assets, operating costs, and shareholders’ equity at a particular period. These ratios help their user to show how well an organization has utilized its assets for generating a profit and creating value for its shareholders (Corporate Finance Institute, 2022). For our analysis, we have used two profitability ratios that are discussed below.
Net Profit margin ratio – This ratio is obtained by dividing the net income of the entity by its total revenue. The net profit margin ratio provides a final picture of how much profitable an organization is after meeting all its expenses, including the interest and taxes.
Return on asset – Return on assets ratio help in comparing the value of an organization’s assets with the net profit of the organization that it produces during a particular period.
Liquidity ratio – Liquidity ratio is another category of ratio used for determining the ability of the organization to interact assets that can easily be convertible into cash. For our analysis, we have considered two common liquidity ratio that includes:
Current ratio – The current ratio of the organization provides a quick outlook of the current assets and current liabilities of the organization. This ratio helps in determining the ability of the organization to meet its short-term obligations. A current ratio of greater than 1 is considered an ideal ratio (osou.ac.in, 2022).
Quick ratio- Quick ratio or acid test ratio is another liquidity ratio used for estimating the ability of the organization to meet short-term obligations by using its most liquid assets excluding the inventories (Kumoro et al, 2020).
Efficiency ratio- An efficiency ratio is an analysis tool used for measuring an entity’s short-term ability to convert current assets into income (masterclass.com, 2022). There are multiple ratios used in the world of corporate finance for measuring the operational efficiency of the organization, for the analysis we have used asset turnover and accounts receivable ratio as our efficiency measurement tool for the company.
Asset turnover ratio- The total asset turnover ratio determines the ability of the organization to use its total assets for generating sales. (Kieso, Weygandt, Warfield,2001). This ratio considers all assets. A higher asset turnover ratio means that the entity is achieving greater profit by utilizing its assets.
Accounts receivable days – This is used to determine the average collection period an entity may take to collect cash from its customers. A higher account receivable day is an indication that the credit policy of the entity is not properly framed.
Capital structure ratio- Another category of ratio used for determining the Capital structure of the entity consists of debt ratio and debt to equity ratio. Capital structure ratio is very important for analysing financial statements as it helps the user to understand the consequence of the best and worst-case scenario (Managementstudyguide.com, 2022). The following are the two categories of ratios we have used for determining the capital structure of the entity.
Debt ratio- Debt Ratio helps in measuring the amount of leverage an organization use in terms of total debt to total assets. it is considered as one of the important tools for measuring the financial performance of the organization. Generally, a debt ratio of below 1 is considered ideal.
Debt to equity ratio- This is a simple measure used to determine how much debt an entity use in their business operation (Sadi’ah, 2018). This ratio tells the user how much debt an entity has for every one dollar of equity (Harvard Business Review, 2022).
Market performance ratio- The market performance ratio or market value ratio is considered a very important tool for management, investors, etc since this ratio is used for deciding whether there is an undervaluation of shares, overvaluation of shares or it is at par with the market. This is used for making investment decisions in stocks of the organizations, we have considered two market ratios that is
Price-earnings ratio- The PE ratio is used to find out whether the shares are overvalued or undervalued in comparison to the earnings potential of the organization.
Dividend pay-out ratio- The dividend pay-out ratio generally reflects the proportion of earnings an entity paid out in the form of a dividend to their shareholders (Faruk & Habib, 2010)
The result of our analysis showed that during the year 2021 return on asset of Woolworth group has increased from 3.88% to 5.51% this is because total assets, as well as sales of the company, has increased. It is also revealed that during the year 2020 significant decline is observed due to a sudden decline in sales of the company. Coles group, return on asset ratio has decreased a little bit in the year 2021 due to some problem thus if we compare both company ratio, we can say Woolworth group is at standard position. Though ROA is a useful calculation, it cannot be considered as the only measure for determining the efficiency since it gets influenced by many other factors such as market condition and demand, and fluctuating cost of assets thus we have used another important ratio that is net profit margin ratio. This ratio showed that the ratio of Woolworth group in 2021 has increased from the previous year whereas net profit margin ratio of Coles group limited has declined a little bit. By observing the trend, we can conclude that the Coles group ratio is showing a declining trend, can see during the year 2019 Coles group had the highest net profit margin ratio of 3.73% but after that, it starts decreasing. Declining net profit is not a good sign for the financial health of the business this may cause problems in various operation areas that may range from employee management to methods used for producing goods. Thus, based on the profitability ratio we can conclude that Woolworth group is in a better position since the higher the profitability ratio the better it is for the investors.
As discussed above liquidity ratio is a very important tool for measuring the efficiency of the organization. In our analysis, we can see that during the year 2019 Woolworth group has the highest current ratio whereas in the year 2020 it decreases and then again increases this means that entity is trying to increase its efficiency. On the other hand, the Coles group’s current ratio is showing a declining trend which means that they do not have sufficient cash to meet their short-term obligations. Another ratio that is the quick ratio of Woolworth group is showing the highest ratio in the year 2021 this means that organization has increased its liquidity position without depending on inventories. The result showed an increasing trend whereas if we look at the Coles group limited ratio it is showing a declining trend. During the year 2019 quick ratio of the company was highest but after that, it continues to decline. Thus, we can infer that Woolworth group can maintain its liquidity making it better than Coles group limited in terms of maintaining liquidity.
In our analysis, we can see that there is a gradual decline in the asset turnover ratio of both the company. The ratio was 1.70 in the previous year but declined to 1.43 in the year 2021 for the Woolworth group. Generally, an asset turnover ratio of above 1 is good for the company. If we look at the Coles group limited ratio, we can infer that the Coles group has a better asset turnover ratio than Woolworth group but considering the past figures, it is showing a declining trend. This decline in the ratio may be an indicator of the pricing strategies of the company as an entity with a high-profit margin may have a low asset turnover ratio. Another measurement tool that is account receivable days of the Woolworth group showed that they usually take 4 to 5 average days to collect their receivables from the customers whereas the Coles group takes 3 to 4 average days. We know that the lesser will be the collection period the better it is for the entity thus based on the given fact we can say that Coles group is at the standard position than Woolworth group since it takes less time for collecting their receivables and thus reducing the risk of bad debt involved in collection of receivables.
Our analysis result showed that the debt-to-equity ratio of the Woolworth group is highest in the year 2021. Thus, showing an increasing trend which indicated that Woolworth is more dependent on debt. Most of the funds used in the business come from creditors, generally, a ratio of more than 1 indicates that creditors are more than the portion of assets provided by the equity shareholders. Investors often prefer to choose a company with a low debt-to-equity ratio because a lower ratio indicates greater protection of their money. The debt-to-equity ratio of Coles decreases from the previous year this means that organization is less dependent on creditors thus showing a better position than Woolworth group. If we look at the debt ratio of the company, we can see that the debt ratio of Woolworth group has increased from the previous year’s result but the debt ratio of Coles group limited has declined a little bit. If the debt ratio of any company decreases day by day, then it is a good financial indication but if it increases it means that the entity is becoming more dependent on the debt of the company which may cause difficulties in meeting financial obligations and reduces the profit of the entity.
The result of our analysis indicated that concerning the price earnings ratio of Woolworth groups and Coles group limited, PE ratio of Woolworth group declined significantly in the year 2021 in comparison to past years however it is showing the higher figure in comparison to Coles group ratio. The PE ratio of the Coles group increase a little bit from its past year result thus showing overvaluation of shares, this indicates that investors have a higher expectation for earnings in the future however a declining PE ratio is indicative of the fact that the entity may have weak current as well as future performance. Looking at the dividend pay-out ratio it is visible that the proportion of dividend pay-out ratio decline in the year 2021 for both the company but Coles group dividend pay-out ratio is showing the lesser proportion of decrease in the ratio in comparison to Woolworth group. Thus, based on the market performance Coles Group is at a standard position but it is also not to be ignored that it is often difficult to predict a growth stock and thus resulting in a lot of pressure on the organization to justify its higher valuation. Hence investing in growth stock are likely to be riskier.
Since we all know that the retail industry continues to make changes rapidly, Woolworth group is committed to making changes in line with the changing environment. The entity has made good progress by forming a strategic partnership, making a new investment, and opening new businesses. the group aims to expand its food offering in the new market. Leveraging data and analytics is very important in the retail industry thus Woolworth has increased their ownership of Quantium and formed a new partnership with Q-Retail to accelerate the advanced analytics capabilities (Woolworthsgroup.com.au, 2022).
On the other hand, Coles group ltd after completing their second year of strategy, they are now focusing on enhancing their investment in the business, as well as enjoying the benefit of the opportunities created by a swiftly changing consumer environment, strong balance sheet, and advancement in technology. The entity committed that Shareholders can expect to see enhanced differentiation around Coles Own Brand, Ocado online, and Witron efficiencies in the upcoming years (Colesgroup.com.au, 2022).
After making a thorough analysis of the financial statement of both the company by using different financial ratios it is recommended to the investors to invest in Coles group limited. Since investors often make an investment in a company with low debt it is better to invest in Coles group ltd because it has a lesser debt-to-equity ratio and debt ratio. Besides this Coles group take lesser time for collecting their receivable thus increasing the cash position. The asset turnover ratio of the company is also better than the Woolworth group indicating that the organization is using its assets efficiently for generating sales. If we look at the market performance ratio, we can see that the PE ratio of Coles group limited is better than the Woolworth group because it shows an increase in the current year. The profitability ratio of Coles group limited is showing lesser growth thus it is recommended to the organization take steps to increase their profitability position by making advancements in technology or by increasing the price of the product besides this Coles group should take steps to increase their liquidity position to meet their short-term requirement.
Conclusion
Thus, we can conclude that ratio analysis plays a vital role in determining the financial performance of the organization. This report provides a detailed analysis of ratios of Woolworth group limited and Coles group limited. This enables us to determine the company which is better for investing. After analyzing the ratio of different categories, it has been found that the profitability ratio and liquidity position of Woolworth group is better than Coles group limited however other categories of ratios indicated that it is better to make an investment in Coles group limited since it has lesser debt burden, increasing efficiency as well as better market performance. This concise report also provides us with an outlook of both the organization that indicates the future goals for making development.
Reference
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