ACC701 : Accounting for Managers : Financial Performance of the Compan

Introduction: 

Financial statement analysis is a procedure of evaluating and examining the financial performance of the company for a particular period of time. It involves critical assessment of the financial data presented in the statements which are been prepared at the end of accounting year. Conducting such analysis is very important for the investors and management as it helps them to know about the overall financial position of the entity and assist the potential investors in taking their investment decisions. There are several methods through which an analyst can analyze the financial statements and derive the reliable outcome (Parrino, Kidwell and Bates, 2011).

This report is focused on the financial analysis of Woolworths Group Limited for the past two years. It involves calculation of various categorized ratios and preparation of common size statements in order to support the analysis. Furthermore, a trend analysis of the figures of revenue and net profit after tax has also been done to make the analysis more reliable and relevant. The scope of the report is that it covers all the quantitative data related to Woolworths that reflected its performance and position in the past two years. It provides insights about the liquidity, profitability, solvency and other situations of the company which helps the group of investors to decide whether to invest in it or not. The main objective of the report is to give recommendations to the potential investors about the financial position of Woolworths.

Company Overview 

Woolworths is an Australia based company involved in the business of retailing. It is the second largest retailer of the country after Wesfarmers. Apart from Australia, the company also has its operations in New Zealand. It was founded in 1924 as the largest supermarket chain in the country functioning through segments like BIG W, Endeavour Drinks and others. Woolworths is also considered as the largest take away retailer of liquor in Australia. It solely covers 39% of the Australian grocery market having prime focus on trading of food and liquor. Other business activities of the company involve providing various hospitality services under the name Australian Leisure and Hospitality Group. It is listed on ASX with a ticker ASX: WOW (Bloomberg. 2018).

The contribution done by Woolworths in the retail industry of Australia reflects that the corporation has achieved a significant and dominant position in Australian retail industry. The main reason behind this achievement is the core business strategies formulated and followed by the company. It strategies of expanding and growing its operations according to the plans, prioritizing the strategies in context of extending leadership in all market segments, maximizing the shareholders’ value and focusing on the overall growth of business has lead the company to become the second largest retailer of the country. Moreover, the bargaining power of consumers and suppliers is also significantly higher because of the huge number of supermarkets operating in the country (Woolworths. 2017). However, the retail industry was affected by the economic market conditions as decline in the same has affected the performance of the company. Also, it has made a loss of $1235 million in 2016 due to the failure of its Masters Business and Big W business. As far as environmental factors are considered, the company’s petrol and wine making business are leaving an adverse impact on the environment which in a way affected its profitability to a great extent.

According to Woolworth’s chairman words, the company was focused on modifying its strategies in 2017. It exited the Masters Business and reset the strategy for BIG W. Though the company has made progress but has faced threats from traditional competitors and discounters. In addition, Woolworths has also brought culture in its working and was focused on improving the health and care of its employees and other individuals working in the organization. In 2017, it has also laid more emphasis on managing its capital appropriately and has declared a dividend of 84 cents during the year, reflecting an increase of 9.1% in the same. Overall, the performance and position of the company has increased in 2017 as compare to 2016 (Woolworths. 2017).

Analysis and discussion

Ratio analysis 

Profitability ratios

• Net profit ratio: It measures the amount of net income or profit earned by the company out of its total revenue. The figure is expressed in term percentage of total sales. A high NPR is favourable as it indicates high profitability of the entity (Bragg, 2012). 

In case of Woolworths, the NPR was -2.12% in 2016 which increased to 2.76% in 2017. This was due to the loss made by the firm in 2016 which turned out to be a profit worth $1534 million in 2017. The strong generation of cash and profit derived from Home Improvement result in the increased profitability of the company. However, it was still below the industry average of 4.10% (Woolworths. 2017).

• Gross profit ratio: It evaluates the amount of profit made by the entity after paying its cost of sales from its total revenue. It is also expressed as a percentage of revenue (Bragg, 2012). 

Same trend has been noticed in the GPR of Woolworths as it rose from 26.77% to 28.61% in 2017 but it was lower than the standard ratio of 35.09%. This was because of the significant reduction in firm’s cost of goods sold from $42677 million to $39740 million. This has boosted up the ratio last year.

• Asset turnover: It shows the sales generated by the company with the efficient utilization of its average total assets (Gibson, 2011). 

Woolworths’ ATR increased from 2.39 to 2.40 in the past year and was also more than the industry average of 1.10. This increase was due to the overall decrease in its average total assets in 2017. The sale of inventories and PPE has generated revenue for the company and boosted up the ratio.

• Return on Assets: It indicates the amount of profit made by the firm by employing its assets and other resources in the business (Godwin and Alderman, 2012). 

The ROA of Woolworths was -5.25% in 2016 which turned to 6.69% in 2017. The reason was the increased profits and decreased total assets of the company. Also it was more than the average of 3.67% reflecting that the profitability of the firm has improved last year (Appendix 1).

• Return on equity: It identifies the capability of the company in paying returns to its shareholders on the capital invested by them in the business. Generally, entities having high ROE are more profitable and attractive to the investors (Higgins, 2012). 

The same trend has been shown in the ROE of Woolworths as it rose from -14.58% to 16.10% in 2017. Further, it was higher than the industry standard of 9.77%. In 2016, the company made loss due to the failure of its Masters Business and BIG W but the trend got reversed last year and Woolworth quitted its Masters Business. Moreover, it changed the strategy for BIG W in order to book high profits. As a result, profit was generated and the ratio turns high and positive (Woolworths. 2017).

• Earnings per share: It is another financial metrics which is also an indicator of organization’s profitability. It shows the portion of profit allocated to each outstanding share of the company.

Woolworths’ EPS also increased from -0.98 to 1.19 as the firm earned profits in 2017. A high EPS reflected that WOW was capable of declaring significant amount of dividends to its investors. It also indicated improved profitability position of the company.

Apart from the above discussed ratios, Woolworths interest expense reduced from 0.42% to 0.35% and its Net margin before after-tax cost of interest rose from -1.82% to 3%. This means the finance cost has been reduced last year.

Efficiency ratios

• Debtor turnover ratio: It is an activity ratio which measures how efficiently a firm uses its assets to make turnover (Jenter and Lewellen, 2015).

The ATR of Woolworths was 114.49 times and 131.92 times in 2016 and 2017 respectively. It is way more than the average of 68.71 times. The reason for the upsurge in the ratio was the reduction in company’s accounts receivable from $434 million to $410 million in 2017. An increased ratio indicates that the firm collects its receivables on time and also the average time taken was 3 days in the past two years. This means WOW is efficient enough in managing its receivables (Appendix 1).

• Inventory Turnover ratio: It shows how quickly a firm can convert its inventory into cash and how efficiently it manages the same (Kimmel, Weygandt and Kieso, 2010).

The ratio has been increased in case of Woolworths as its inventory reduced from $4558 million to $4080 million. However, it is below the industry average of 14.7 times. Furthermore, WOW’s inventory days also decreased from 40 days to 39 days in 2017, indicating a better management of inventory.

Liquidity ratios

• Current ratio: It is one of the short term solvency ratios which measure the ability of the firm to meet its current liabilities with its current assets. The ideal CR is 2:1 (Saleem and Rehman, 2011).

The CR of WOW has reduced from 0.83 to 0.79 in 2017 and was lower than the average of 1.18. This was due to the significant reduction in cash balance and an upsurge in the amount of company’s creditors. This overall reduced the ratio (Appendix 1).

• Quick ratio: It is another liquidity ratio which measures the same as current ratio but the only difference is that it takes into account the most liquid assets of the company (Lee, Lee and Lee, 2009). 

The QR shows a reverse trend as it rose from 0.28 to 0.29 in 2017 but still lower than the industry standard. The slightest increase was due to the increase in company’s quick assets as compare to its liabilities.

• CFOCL: It measures the operating cash flow of the firm against its current liabilities. Though Woolworths CFOCL is less than 1 but it has been increased during the past two years. This means company has generated more cash flows against its CLs.

Long term solvency ratios

• D/E ratio: It measures the total debt of the company against its owner’s equity. A high D/E ratio indicates high financial risk.

In case of WOW, the ratio has been reduced to 1.41 in 2017 from 1.77 in 2016. Further, it was way less than the average of 50.73. This reduction was due to the overall decline in company’s total liabilities and increase in its shareholders’ equity. Woolworths’ short and long term debt reduced to a great extent which eventually lowers its financial risk (Appendix 1).

• Interest coverage ratio: It shows the number of times a company can make interest payments out of its EBIT (Nikolai, Bazley and Jones, 2009). 

The ratio was negative because Woolworths reported operating loss in both the years. However, its interest expense has reduced from $246 million to $194 million last year.

Beside from this, the debt ratio has also reduced from 0.64 to 0.58 due to the reduction in total liabilities of the firm. In addition, its leverage ratio has also declined along with the increase in its operating cash flow against its total obligations. Overall, company’s financial risk has reduced in 2017.

Market value ratios

• P/E ratio: It measures the stock price of the company with its earnings per share. The P/E ratio of WOW increased from -21.04 to 21.29 last year and was almost equal to the industry average of 21.58. As the ratio became positive, it reflects that investors are looking for higher growth in future (Appendix 1).
• Dividend yield: It shows how much dividend is paid by the company in relation to its share price. In case of WOW, the ratio reduced from 3.75 to 3.31 but it was higher than the average of 1.58. This reflected that company has declared high dividends to its shareholders.

Common Size statements 

The common size analysis of a balance sheet keeps the total of assets and liabilities as a base and expresses the other items as their percentage. In 2016 and 2017, the cash and receivables comprises of 4% of the total assets whereas the portion of inventory reduced from 19% to 18%. PPE at cost was 81% of TA in 2016 and the same increased to 83% in 2017. In case of liabilities, creditors comprised of 19% and 22% of total liabilities and stockholders’ equity in 2016 and 2017 respectively. The portion of total CL increased from 35% to 38% whereas Non-CL reduced from 24% to 19% in last two years. The LT debt in 2017 contributed 12% as compare to the prior year. The owners’ equity has shown a significant increase from 33% to 41% in 2017. This was majorly contributed by rise in common stock and retained earnings (Appendix 2).

Looking at the income statement, the figure of revenue is taken as a base for both the years. The amount of cost of sales comprises of 73% of total revenue which reduced to 71% in 2017. This boosted up the gross profit from 27% to 29%. However, SGA expenses increased from 22% to 24% along with the overall upsurge in operating expenses to 45% in 2017. This resulted in an operating and net loss of 16% and 2% in 2016. However, in 2017 the company made profit which was 3% of the total sales. Overall, Woolworths’ profitability and long term solvency improved during the last year (Appendix 2).

Trend analysis