ACC701 Financial Management for Woolworths Company

1. Write a report about Woolworths Ltd to a group of potential investors, using the retail industry’s operating, competitive, and strategic environments as context for your discussion. On pp 335-337 of your textbook there is a case study which has some suggestions about how to interpret financial data and its analysis, follow its advice to first understand the business by reading the Chairman’s report, and other information provided about performance, operating environments, strategic direction, competition and other factors that might impact Woolworths’ performance in the future.

2. Now use your own analysis to discuss Woolworths’ profitability, efficiency, solvency and liquidity, and stock market performance. The goal of your report is to make a recommendation to the investor group about whether to invest in this company, and why or why not.

3. In your discussion take care that any conclusions you derive are in the context of industry and operating environment; if you draw a conclusion make sure that you have argued why and how you come to this conclusion, also use relevant industry benchmarks that you can obtain from internet sources. Do not resort to ‘rules of thumb’ from textbooks or any other source, as support for your conclusions. Industry benchmarks will be highly regarded, ‘rules of thumb’ will not, and may result in loss of marks unless their use can be justified as being relevant in this case.
 

Introduction

This report reveals the key information and financial analysis of company which could strengthen the financial investment decisions of company. In this report, financial performance of Woolworths has been assessed which will help in determining whether the invested capital could be used to create value on the investment. The ratio analysis and shareholder value analysis is the most effective tool which could be used to assess profitability, liquidity, efficiency and share price fluctuation of company in long run. In the starting, financial performance analysis is made. After that share price value analysis has been done by using the share price valuation tool. Afterward, CAPM method is used to identify the cost of capital and weighted average cost of capital of company. It will assist organization to determine whether it has performed well in market. After that, discussion about the share valuation and financial position of company has been made by analysing the data. Investors needs to assess the financial performance of company before investing their money so that they could identify whether the invested capital will provide return to company or not.

Description of Woolworths Company

It is an Australian company which is engaged in providing the super market services to clients so they could get all types of goods from only single one store chain. The headquartered of company is in Bella, Vista, Australia. The share price value of company has increased by 14% since last three years which reflects higher amount of business growth and sustainability in long run (Woolworths Limited, 2017).

Assess the company’s performance over the last two years

The ratio analysis of company is made to establish the relation between two financial factors. It would assist in assessing the profitability, liquidity, efficiency and share pri

Liquidity Ratios

The liquidity ratio is used to analysis whether company is able to meet its short term and long term liabilities. It is analyzed that company has good amount of cash blockage in its current assets (Delen, Kuzey, &Uyar, 2013). This company has decreased its cash blockage in its current assets with a view to lower down its cost of capital. It is analysed that company has reduced its investment in its current assets which might negatively impact the business growth of the organization. It is analyzed that company could easily reduce the cost of capital if it effectively manages its liquid assets. With the changes in time, it has lower down its cash blockage but it might negatively impact the business functioning of organization if there is high demand in market (Goldmann, 2017). As compared to market industry ratio, it has maintained higher liquidity in its business.

Profitability Ratios

This ratio divulges the profit earning capacity of company in long run. It measures company’s earning capacity which will assist in determining how well company has performed throughout the time. It is analyzed that Woolworths Company has increased its net profit margin to 8% in 2017. It has increased due to the increase in its overall turnover. It has been reflected that company has improved its profitability by increasing the overall sales. In context with the gross margin, Woolworths has faced high decrease in its gross profit margin and resulted to 22% GP margin in 2017. It has decreased its gross profit margin by 20% since last three years (Goldmann, 2017).

The returns on assets have been stable since last three years. However, company did not increase its investment amount and maintained stable return on its investment. As compared to market industry ratio, it has maintained higher equal profitability in their net profit and return on earning, capital investment is higher. 

Description	Formula	WOOLWORTHS HOLDINGS LTD (WHL)
		2013-08	2014-08	2015-08	2016-08	2017-08	Average industry ratio
Net profit Margin	Net profit/revenues	7%	7%	6%	7%	8%	8%
Gross profit Margin	Gross profit/ Sales	38%	39%	41%	41%	40%	22%
Administrative expenses ratio	Administrative expenses/ Sales	29%	29%	31%	30%	30%	85%
Return on equity	Net profit/Equity	46%	44%	22%	22%	29%	24%
Return on assets	Net profit/ Total sales	7%	7%	6%	7%	8%	8%
Earnings per share	Net profit/ Share outstanding	0.50	0.25	.1.5	0.65	0.45	0.85

The return on equity of company has increased to 24% which is 2% higher since last three years. This reflects that company has more earning available to distribute to its equity shareholders (Woolworths Limited, 2016).The earning per share of company has also decreased with the decrease in its overall profit. These all things have reflected that company has lower down its profitability. In order to improve the profitability, company must lower down its operating expenses and increase its overall revenue (Goel, Chadha, and Sharma, 2015).

Effeciency Ratio or Activity Ratio

The efficiency ratio divulges the way company has invested its capital in the business activities. It is analyzed that receivable turnover ratio of company has increased to 35 times which is 20 times higher as compared to last three year. It is the negative indicator and may reflect the negative impact on the cost of capital. The assets turnover ratio has also gone up to 243.6 times in 2017 which is 20 points higher if it is compared with the last three year data (Woolworths Limited, 2017). The inventory turnover ratio of company has increased to 112.21 times which is 30 times higher since last three years. This reflects that company has more blocked more of its capital in its business activities. It is further analyzed that receivable turnover ratio of Woolworths has been marked as zero. The main reason of zero receivable turnovers is based on the zero blocked funds in its receivable in its books of account. It is evaluated that company will have low amount of cost of capital in its business due to befewer blockages of funds in its business (Goldmann, 2017). The market industry ratio, is quite higher and due to its zero receivables it has maintained effective use of resources and it does not have to wait for the cash conversion cycle.

Description	Formula	WOOLWORTHS HOLDINGS LTD (WHL)
		2013-08	2014-08	2015-08	2016-08	2017-08	Average industry ratio
Efficiency ratio
Receivable turnover	Receivables/ Total sales*365	-	-	-	-	-	55.55
Inventory turnover	Inventory / cost of goods sold *365	48.85	51.80	64.35	67.27	62.63	45.25
Accounts Payable ratio	Payables/ Total sales*365	39.76	42.51	49.73	27.77	24.17	32.55

Debt to capital ratio

The debt to equity ratio shows the relation between the debt and equity of company. Woolworths needs to manage its debt and equity in its business effectively so that it could manage its financial leverage and cost of capital. If company have high debt capital in its capital structure then it will also result to higher financial leverage. The debt to equity of Woolworths is 1.36 which is .60 points higher as compared to last three year data. It shows that company needs to reduce its debt portion in its business for some time as it is facing downfall in its profitability. The downfall in its profitability will destruct the business if it fails to cover the financial leverage (Hunjra, and Bashir, 2014).

Time interest ratio

Time interest ratio is used to measure the how well company has managed its interest payment. The interest payment of company should not be more than the profit earning capacity. If company fails to pay off its interest payment then it will destruct its business and result to loss of business in long run (Maina, and Sakwa, 2017).

Long -term solvency of the company over the last three years

The long term solvency of the Woolworths could be measured by evaluating the debt and equity of company and it’s gearing ratio which could be available to cover up its interest payment. The long term solvency of company is good. However company has kept 36% debt portion and 64% part of the capital is equity. Nonetheless, due to the low profitability, it might negatively impact the financial leverage and may result to destruction of the business (Meena, and Dhar, 2016).

Trend analysis of Woolworths Company

The trend analysis is used to analysis the financial performance of company in the future. It is used to analysis the trend of the company and how it has been increasing its net profit and revenue (Miller-Nobles, Mattison, and Matsumura, 2016).

Trend analysis of the Revenue

The trend analysis is used to analysis the changes in the revenue of the Woolworths Company (Ehiedu, 2014). However, as per the basis of the last year data, company has it has been analysed that company has been increasing its overall revenue throughout the time (Woolworths Limited, 2017).

Trend analysis of Woolworth Company
Particular	2013	2014	2015	2016	2017	2018	2019	2020	2021	2022
Revenue	$ 35,227.00	$ 39,707.00	$ 56,506.00	$ 65,004.00	$ 67,411.00	$ 79,670.50	$ 88,637.00	$ 97,603.50	$ 106,570.00	$ 115,536.50

This graph reflect that Woolworths Company has increasing revenue in its business which reflects that it could have increased business outcomes if it consistently perform like its previous year. However, there might be possible changes which could have faced throughout the time (Mwangi, and Murigu, 2015).

Trend analysis of the net profit

Trend analysis of Woolworth company
Particular	2013	2014	2015	2016	2017	2018	2019	2020	2021	2022
Net Profit	$ 2,597.00	$ 2,888.00	$ 3,116.00	$ 4,344.00	$ 5,446.00	$ 5,824.40	$ 6,539.80	$ 7,255.20	$ 7,970.60	$ 8,686.00

This analysis reveals that Woolworths would have increasing profit earing capacity which reflects positive indicator for the future growth and sustainable business practice (Rani, Yadav, and Jain, 2015).

This trend analysis has reflected how well company has created value on its investment and increased its business outcomes. It is further analyzed that company will also have increased revenue which will eventually impact positively on the business outcomes throughout the time. 

Share price analysis of Woolworths

The share price analysis is used to identify the ups and down related to financial performance of Company. It is analyzed that the share price value of company has been increasing throughout the time (Sujan, Islam, Azad, and Rayhan, 2017).Nonetheless, the increasing share price movement has reflected that Woolworths will grow effectively with the increase in the movement of the capital outcomes. The share price analysis of the Woolworths company could be made by using the below given graph. This graph has been prepared on the basis of the share price changes of the company since last three years. However, after analysing the historical changes in the share price of the company it is found that Woolworths Company has faced high loss in its business in 2017 and faced downfall in its share price movement (Woolworths Limited, 2017). It is analyzed that company has increased its share price in 2016 and after ending of the 2016 the share price of company started to go down. This reflects how well company has been performing. In 2017 due to the downfall in its profitability, low business efficiency, it has faced high loss in its business and resulted to decreased business outcomes (Vogel, 2014).

Recommendation to investors

After analysing the financial performance and business digits of Woolworths, it could be inferred that due to the strengthen sustainability and strong financial performance, investors may have good amount of value creation if they invest their capital in long run. There are several recommendations given as below for the betterment of the investment decision made by the investors (Waemustafa, and Sukri, 2016).

• The financial leverage of company is high it might be risky for the investors to get back their money if company fails to earn profit and goes into liquidation. It is advised that those investors who are afraid to take risk should not invest their capital in Woolworths.
• Investors should invest their capital in Woolworths only for long run. If they invest their capital in Woolworths for short term then they will end up having high amount of business loss in their business. Nonetheless, there are some chances when investors could invest their money in short run and could create value on their investment.
• The share price fluctuation of Woolworths is high. It could be beneficial for the organization as if they uses the proper investment tool then they could find out some of the situation when the share price of company will rise and down. Investors should wait for the right moment and right financial tools to create value on its investment (Woolworths Limited, 2017).
• The ratio analysis of company is made to establish the relation between two financial factors and reflects that company will have sustainable busienss practice and more return on capital employed in future.
• The assets turnover ratio has also gone up to 243.6 times in 2017 which is 20 points higher if it is compared with the last three year data (Woolworths Limited, 2017). This is the good indicator which will positively impact the future growth and increased business outcomes of organization (Delen, Kuzey, &Uyar, 2013).
• The increasing profitability and return on capital employed is the positive indicator for the investors to create value on their investment.
• The capital structure of company is the main critical point which helps organization to determine how well it could manage its cost of capital and financial leverage. After evaluating the annual report of company, it is analyzed that company has kept high debt to equity ratio which may negatively impact the business if there is no profitability throughout the time (Woolworths Limited, 2016).
• As compared to other rivals such as Wesfarmers, Tesco and Morrison, It has maintained high liquidity which might be negative indicator in context with high cost of capital.

Conclusion

After analysing the financial details of Woolworths, it could be inferred that Woolworths Company has increasing revenue in its business which reflects that it could have increased business outcomes. In addition to this, investors could create value on its investment if they invest their capital in long run instead of short term investment. Investing money in short term will result to reduced investment value and may destruct the capital investment by them. In the end, it could be inferred that Investors should use invest their capital in Woolworths only after assessing the financial trend. The above given trend reflects that investors should invest their capital in Woolworths if they want to create value on their investment.

References

Delen, D., Kuzey, C. and Uyar, A., 2013. Measuring firm performance using financial ratios: A decision tree approach. Expert Systems with Applications, 40(10), pp.3970-3983.

Ehiedu, V.C., (2014). The impact of liquidity on profitability of some selected companies: The financial statement analysis (FSA) approach. Research Journal of Finance and Accounting, 5(5), pp.81-90.

Goel, U., Chadha, S. and Sharma, A.K., (2015). Operating liquidity and financial leverage: evidences from Indian machinery industry. Procedia-Social and Behavioral Sciences, 189, pp.344-350.

Goldmann, K., (2017). Financial liquidity and profitability management in practice of polish business. In Financial Environment and Business Development (pp. 103-112). Springer, Cham.

Hunjra, A.I. and Bashir, A., (2014). Comparative Financial Performance Analysis of Conventional and Islamic Banks in Pakistan. Bulletin of Business and Economics (BBE), 3(4), pp.196-206.

Maina, F.G. and Sakwa, M.M., (2017). Understanding financial distress among listed firms in Nairobi stock exchange: A quantitative approach using the Z-score multi-discriminant financial analysis model.3(4), pp.196-206.

Meena, A. and Dhar, J., (2016). An empirical analysis and comparative study of liquidity ratios and asset-liability management of banks operating in India. International Journal of Social, Behavioral, Educational, Economic, Business and Industrial Engineering, 8(1), pp.342-348.

Miller-Nobles, T.L., Mattison, B. and Matsumura, E.M., (2016). Horngren's Financial & Managerial Accounting: The Managerial Chapters. Pearson.

Mwangi, M. & Murigu, J.W., (2015). The determinants of financial performance in general insurance companies in Kenya. European Scientific Journal, ESJ, 11(1).

Mwangi, M. and Murigu, J.W., (2015). The determinants of financial performance in general insurance companies in Kenya. European Scientific Journal, ESJ, 11(1).

Rani, N., Yadav, S.S. and Jain, P.K., (2015). Financial performance analysis of mergers and acquisitions: evidence from India. International Journal of Commerce and Management, 25(4), pp.402-423.

Sujan, M.H.K., Islam, F., Azad, M.J. and Rayhan, S.J., (2017). Financial profitability and resource use efficiency of boro rice cultivation in some selected area of Bangladesh. African Journal of Agricultural Research, 12(29), pp.2404-2411.

Vogel, H.L., (2014). Entertainment industry economics: A guide for financial analysis. Cambridge University Press.

Waemustafa, W. and Sukri, S., (2016). Systematic and unsystematic risk determinants of liquidity risk between Islamic and conventional banks.

Woolworths, (2017), Annual report. [Online]., Available at https://www.woolworthsgroup.com.au/page/investors/our-performance/reports/Reports/Annual_Reports, , , [Accessed 20^th September 2018]