• Internal Code :
  • Subject Code : FINA600
  • University : Laureate International Universities
  • Subject Name : Financial Management

Financial Analysis

Contents

Introduction.

Analysis of Ratios.

Liquidity Ratios.

Profitability Ratios.

Efficiency Ratios.

Capital Structure Ratios.

Woolworths Success or Failure.

Company’s business structure.

Woolworths: Financial Health.

Woolworths: SWOT Analysis.

Conclusion.

Reference.

Introduction

Woolworths Group is one of the major companies in Australia. The company is engaged in the business of retailing throughout New Zealand and Australia. Woolworths Group is the second biggest company in Australia by revenue after Wesfarmers. Also, it is the biggest liquor retailer within the territories of Australia. The typical business of the company is operating and managing supermarkets, general merchandise consumer stores, and procurement of liquor and food products. It is also operating various hotels including accommodation, gaming operations, and pubs. Woolworths is a recognizable brand of Australia, and the Group includes various other well-known and well-established Australian brands like Dan Murphy's, BWS and BIG W (Woolworth, 2020).

The report will conduct a financial analysis of Woolworths to determine the financial health of the company. A detailed ratio analysis will be performed which measures the liquidity, profitability and efficiency of the company. In the later sections, the report will determine the reasons behind the success or failure of Woolworths, its global and countrywide positioning and make justifications using a SWOT analysis.

Financial Analysis

Every investment decision whether made in any security requires preplanning and a little research, it will help in evaluating the returns that are going to be generated from the particular investments. It also determines the level of risks the investor is exposed to. In simpler words, acknowledgment about the risk-return measures will result in the most beneficial investment decisions (Schroeder, Clark & Cathey, 2019).

A ratio analysis compares various items of financial statements of a company including income, position, and cash flow statements. It can be used to evaluate various measures like profitability, liquidity, efficiency, and capital structure ratios. The ratio analysis is not able to provide relevant and material information if conducted in isolation, therefore it is required to conduct a comparative ratio analysis which can be done internally with the periodical figures of the company, it can be compared with the peer competitor companies and the comparison can be done with the industry average.

Ratio Name

Formula

2019

2018

Industry Average

Liquidity Ratios

Current Ratio

Current Assets / Current Liabilities

0.71

0.78

0.81

Quick Ratio

Cash Equivalents + ST Invest + Accounts Receivables / Current Liabilities

0.20

0.19

0.30

Operating Cash Flow Ratio

Operating Cash Flow / Current Liabilities

0.33

0.33

NA

Profitability Ratios

Net Profit Margin

NP / Net sales

4.5%

3.0%

-1.5%

Return on Assets

Net income/ Total Assets

11.43%

7.37%

-4.97%

Return on Equity

Net income/ Shareholder's Equity

26.66%

16.45%

-1.72%

Shareholder’s Equity

Total Assets - Total Liabilities

10101.00

10481.00

NA

Efficiency Ratios

Asset Turnover Ratio

Net Sales / Total Assets

2.54

2.43

2.44

Inventory Turnover

COGS / Total Inventory

9.94

9.51

9.14

Capital Structure Analysis Ratios

Debt to Equity

Total Debt / Total Equity

28.26%

20.98%

50.73%

The Price Earnings Ratio

Market Price / EPS

25.17

24.42

21.58

Dividend Yield Ratio

Dividend per share / Market Price

3.1%

3.0%

5.3%

Dividend Payout Ratio

Dividend per share / EPS

77%

74%

NA

Table 1: Woolworths: Ratio Analysis

Source: (Woolworth, 2020)

Analysis of Ratios

Based on the ratios calculated, an analysis is done to determine whether Woolworth’s performance is worsening or improving. The analysis has been made in the following points:-

Liquidity Ratios

For the company to run its business operations, liquidity is required. A company can pay off its short term obligations using its liquid assets on an immediate basis, in other words, the company has ample availability of liquid funds. There are three major components of liquidity ratios including quick ratios, current ratios and operating cash flow ratio (Campbell, D'Adduzio, Downes & Utke, 2019).

The Acid Test Ratio or Quick Ratio of Woolworths: It is continuously less than 1 and continuously falling, from FY 2018 (0.19) to FY 2019 (0.20). An acid test ratio of less than 1 indicates that the particular company (Woolworths in this case) does not have sufficient liquid assets for the payment of its current liabilities. Such companies can face substantial liquidity issues and are required to be treated with caution (Woolworth, 2020). The current liabilities of Woolworths are decreasing YOY but the CA and inventory values are also decreasing and at a faster pace. This results in the formation of a lower trend in the acid test ratio. The quick ratio of the company is even less than the industry average of 0.3 for FY 2019 (Cucchiella, D’Adamo & Gastaldi, 2015).

The Current Ratio: It is used to assess the ability of a company to pay back its short term obligations using its liquid assets. An ideal CR is considered to be 2:1. However, the CR of the company is even less than 1, the CR remains 0.71 for FY 2019 and 0.78 for FY 0.78, worsening YOY. It indicates that the company will not be able to pay off its ST liabilities using its liquid assets like cash pool etc. The CR is even less than the industry average of 0.81 which is totally against the financial health of the company.

Profitability Ratios

Profitability ratios measure the ability of a business to generate earnings. The different types of profitability ratios are NP & OP margin, ROA, ROE, etc.

Return on Assets: The returns on assets are substantially good and in an increasing trend. It was 4.72% in FY 2018 and increased to 6.91% in FY 2019. The ratio of ROA determines the earnings that have been generated by the company by employing its assets into use. The total assets of Woolworths are significantly similar throughout the previous few years; hence all the volatility in ROA is arising due to the heavy fluctuation in net income values. Where the industry ROA is negative, the ROA of the company is positive, high and increasing (Jalbert, 2017).

Return on Net Salesor Operating Profit Margin: It is used for the evaluation of the operational efficiency of the company. The operating profit margin is substantially stable at the levels of around 4% throughout the previous 3 financial years. The ratio of return on sales determines the efficiency of a company to generate profits from the top-line areas of revenue. It helps in measuring the performance of a company. The RONS is however stable but there is a steep fall in the margins during FY 2019 (3.9 %) as compared to FY 2018 (4.5 %). This is not a good indication as a decrease in profit margins indicates lower efficiency and with lower efficiency, the company will not be able to provide sufficient returns to its investor.

All other profitability measures including net profit (NP) margin and return on equity (ROE) of the company are in an increasing trend, only the operating profit (OP) margin is decreasing by a little margin of 0.5% YOY. Also, all the profitability industry averages show negative figures, while company profitability is positive and increasing (Gabric, 2018).

Efficiency Ratios

Efficiency Ratios are important measures that determine the ability of a company in generating earnings using its various available resources. Common efficiency ratios include asset turnover ratio and inventory turnover ratio.

A higher ratio is always good for the company when the efficiency ratios of Woolworths are compared with industry, the company seems to be more efficient as compared to other major players of the industry. The ATO ratio of the company for FY 2019 is 2.54 which has increased YOY and greater than the industry average of 2.44. A similar fashion can be witnessed for the inventory TO ratio (Pierson & Thompson, 2015).

Capital Structure Ratios

The capital structure ratio determines how a company finances its overall operations and growth by using different sources of funds.

Debt to Equity ratio: It indicates the proportion of debt as compared to equity funds used to finance its assets. A high DE ratio means that a company has been aggressively financing its growth using debt funds. It can cause volatile earnings due to additional interest expense. The DE ratio of the company remains 28.26% for FY 2019, the ratio increased from FY 2018 where it was 21%. The DE ratio is much lower than the average industry ratio of 50.73%. It indicates that where other players of the industry have financed half of their assets using debt funds, Woolworths have used a quarter of debt funds (Woolworth, 2020).

PE ratio: The PE ratio of the company is 25.17 times for FY 2019, the ratio increased from FY 2018 where it was 24.42 times. There might be two reasons that either the price has been increasing and the other that the earnings have been decreasing. After studying the financial statements and historical price data that both earnings and market prices have been increasing, but the price increased at a higher rate. The PE ratio of Woolworths determines that an investor has to pay AU$ 25 to become a claimant in earnings of AU$ 1 of the company. Woolworths has a higher PE ratio shows that higher price has to be paid for Woolworths as compared to other companies of the industry (Woolworth 2020).

Dividend Yield: It determines the amount a company is paying out in dividends per year concerning its share price. The average dividend yield prevailing in the industry is 5.27 %, where Woolworths's dividend yield is just 3.1 % for FY 2019 which is less than 2 %. This means that the company is paying a very lower dividend to the shareholders of the company or the share price of the company is very high, both the factors are not in the favour of investing in the company.

Woolworths Success or Failure

Company’s business structure

The business structure of Woolworths is the key reason behind the achieved success and the reason that it will continue the success graph. Woolworths Group is primarily engaged in the business of retailing throughout New Zealand and Australia. The typical business of the company is operating supermarkets, general merchandise consumer stores, and procurement of liquor and food products, thereby, comprising largely essential items and precuts. The shares of Woolworths Group are generally considered to be defensive investments as its share price has shown substantial buffer against the economic depressions due to the nature of its primary business activities which mainly includes essential items and products, and even in an economic downturn like the country and world is going through, there will be a huge demand for essentials like food products, toiletries, etc (Gabric, 2018).

Woolworths: Financial Health

The market capital value of the company is whooping AU$ 46.51 billion and It is the second biggest company in Australia by revenue after Wesfarmers and the biggest liquor retailer in Australia and New Zealand. The below table demonstrates the top 5 Australian companies in the Fortune Global 500 list 2019. The list has ranked the largest companies of Australia and their world ranking by annual revenue (in US$) (Fortune, 2020).

Australian

World

Name

Industry

Revenue

Profits

Employees

Headquarters

 Rank

Rank

   

(USD millions)

(USD millions)

   

1

195

Wesfarmers

Conglomerate

53985

927

217000

Perth

2

233

Woolworths Group

Retail

47842

1336

201522

Sydney

3

246

BHP

Mining

45809

3705

27161

Melbourne

4

373

Commonwealth Bank

Banking

33186

7228

45753

Sydney

5

433

Westpac

Banking

29027

6151

35029

Sydney

Table 2: Financial Details of Top 5 Australian companies in the Fortune Global 500 list 2019

Source: (Fortune, 2020)

Woolworths: SWOT Analysis

Strength

· Strong Brand Portfolio: Woolworths has built a strong brand image and portfolio over the years. It helps the organization in expanding into new categories of products.

· Automation of activities: It brings consistency in the quality of services and products and enables the company to adjust based on the demand in the market (Gürel & Tat, 2017).

· High returns on capital: Woolworths has remained relatively successful in executing various new projects which helped it in generating higher returns on capital by creating new revenue streams.

Reliable suppliers: Woolworths has created a strong base of suppliers for raw and finished material. The company, therefore, can overcome the bottlenecks in the supply chain.

Weakness

· The product range offered by the company is limited and has huge gaps. It can provide a foothold to its competitors in the market.

· The business structure is compatible with just the prevailing business model and limits the expansion in other product segments.

· Limited success outside core business: Woolworths is a leading business in its industry but has faced challenges and failures in other product segments (Woolworth, 2020).

· Also, the company's business is majorly limited within the territories of Australia and New Zealand

Opportunities

· New market exposure after government agreement: Government free trade agreement and the adoption of new technology standards have provided the company with huge opportunities to enter into the emerging markets.

· The new taxation policy: It can highly impact business operations and increase profitability (Jalbert, 2017).

· Economic uptick: It will lead to an increment in customer spending. The country is going through a slow growth rate in the industry and recession. If the economy grows then Woolworths can make new customers and enhance its market share.

Threats

· Global Economic Slowdown and Corona Pandemic: The possibility of an economic recession in the global market which is going to be enhanced due to the Corona pandemic is going to highly affect the growth of the company.

· Lack of innovative products: The company continuously develops new products but in response to the counter other players. Also, the supply of such newly developed products remains irregular which results in low and high swings in the sales volume over a period of time (Pierson & Thompson, 2015).

· The rising cost of raw material can result in a bigger threat to the profitability of the Woolworths Group.

· The company has been facing various lawsuits in the markets of operations. The difference in laws and fluctuations of the product standards can cause problems.

Conclusion

In this report, the financial health of the company has been discussed in detail using regressive ratio analysis. The financial health of Woolworths seems to be fine and growing year on year. As per the above financial and ratio analysis of Woolworths, its overall performance is up the mark. The company can generate sufficient levels of profits and the levels are increasing YOY. It has efficiently employed its overall asset pool to generate higher levels of profits. The return on assets ratio has witnessed a significant rise indicating higher efficiency. The return on net sales is also satisfactory and shows a high percentage indicating lower profitability. All the profitability measures are higher than the industry averages, moreover, the where the industry averages are negative; the company's ratios are not only positive and high but also increasing year on year.

The other positive point derives from the analysis comes from capital structure ratio which is indicating that Woolworth has very lower debt liability as compared to the industry average and therefore the company has lower interest payment obligations. Also, the company has huge earnings as compared to interest expenses and there will be no issue in the payment of this fixed obligation. The single point that goes against the financial health of the company is related to the short term liquidity. The liquidity measures including current ratio and quick ratio, all remain below the ideal levels that indicate that the company will not be able to pay off its liquid or short term liabilities using its liquid assets. The liquidity measures of the company are even less than the industry average.

Reference

Campbell, J. L., D'Adduzio, J., Downes, J., & Utke, S. (2019). Do Investors Adjust Financial Statement Ratios when Financial Statements Fail to Reflect Economic Substance? Evidence from Cash Flow Hedges. Evidence from Cash Flow Hedges (April 2019).

Cucchiella, F., D’Adamo, I., & Gastaldi, M. (2015). Financial analysis for investment and policy decisions in the renewable energy sector. Clean Technologies and Environmental Policy, 17(4), 887-904.

Fortune (2020). Fortune 500. Retrieved from https://fortune.com/fortune500/

Gabric, D. (2018). Determination of Accounting Manipulations in the Financial Statements Using Accrual Based Investment Ratios. Economic Review: Journal of Economics and Business, 16(1), 71-81.

Gürel, E., & Tat, M. (2017). SWOT analysis: a theoretical review. Journal of International Social Research, 10(51).

Jalbert, T. (2017). A Model for Forecasting Small Business Financial Statements and Firm Performance. Business Education & Accreditation, 9(2), 61-84.

Pierson, K., Hand, M. L., & Thompson, F. (2015). The government finance database: A common resource for quantitative research in public financial analysis. PloS one, 10(6).

Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2019). Financial accounting theory and analysis: text and cases. New Jersey: John Wiley & Sons.

Woolworth (2020). Annual Report 2019. Retrieved from https://www.woolworthsgroup.com.au/icms_docs/195582_annual-report-2019.pdf

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