Profitability Analysis
Question:
Discuss about the Financial Analysis of Woolworth.
Now-a-days every investor perform the investment analysis before making an investment in the organization and it is important as failure to make such analysis will lead to undue risk and less return as required on the investment. Analysis or interpretation of the financial performance of any company requires reporting on the financial condition of the company in regards to profitability, liquidity, asset efficiency and other important market conditions that impacts investor’s decisions. Every investor wants that their investment provides them maximum returns with minimum risk but it must be noted that good returns are possible where there are some risk associated.
In this particular report, financial performance of the Woolworth Limited has been evaluated in detail and this report has been provided to the directors of the company who want to make investment in the rapid growing Australian economy. For this purpose, ratio analysis has been performed for Woolworth Limited and in order to make the industry analysis, the competitor of Woolworth limited, The Reece Group. The main purpose of this financial performance report is to help the directors of the company in taking the wise decision regarding investment in the Woolworth Limited.
In this segment of the assignment, various ratios have been calculated and their trends for year 2015 and 2016 have been noted to understand the increase or decrease in the performance during the year 2016.
Profitability is the most important criteria for any investor to choose any company because if company profitability is in increasing trend than it will provide good returns and market price of investment will also increase providing required return on the investment. In this category, ratios like gross profit ratio and net profit margin ratio has been calculated to understand the profitability performance of the company (Sagner, 2010).
Gross profit margin refers to the revenue left after meeting all the expenses related to the cost of goods sold. Generally this profit is not the profit that has been hold for the equity share holders as there are other expenditures that need to be paid before arriving at the actual profit. All the ratio calculations are provided in the appendix section of this assignment.
According to the calculation made the gross profit margin ratio the company has earned gross profit of 27.29% in year 2015 and it has been decreased to 26.85% in year 2016, reflecting the downfall of 1.60% in year 2016 (Annual report of Woolworth Limited, 2016). The profitability position of Woolworth is acceptable but it is important to look over the change sin the trend and also requires to be compared with the competitor, The Reece Group. The cost of sales of Woolworth in year 2015 was 42,950 million dollars and reduced to 42,676.7 in year 2016. Same has also happened with the sale revenue of Woolworth Limited that causes the decrease in gross profit of the company in year 2016.
Gross Profit margin ratio of Reece Limited in year 2015 was 32.98% and it got increased to 33.34% in year 2016 that shows an increase of 1.09% in the gross margin ratio in year 2016. So it can be said that profitability position of Reece Limited was better as compared to Woolworth or Vice Versa (Annual report of Reece Limited, 2016).
Liquidity Analysis
Net profit margin can is termed as the revenue left after meeting all the expenses related cost of sold, operating expenses, administrative expenses, selling and distribution expenses and other expenses. It is calculated as net profit before tax divided by the net revenue of the company in the same period (Sagner, 2010).
In year 2015, the net profit of the Woolworth Limited was 5.61% which was reduced to 2.34 % in year 2016. This overall decrease in net profit ratio is about 58.24 % in year 2016 as compare to year 2015(Annual report of Woolworth Limited, 2016). So it can be said that there is decreasing trend in the net profit ratio of the Woolworth Limited. It can be seen that there was increase in operating and administrative expenses despite of decrease in revenue in year 2016 when compared with figures of year 2015.
The net profit ratio of Reece Limited was 11.43 % in year 2015 and has increased to 12.30 %in year 2016 that show the 7.60 % positive trend in net profit ratio. So it can be said that level of profitability of Woolworth is not acceptable for the investment purpose because both the profitability ratios shows decrease in profit and increase in expenditures that will lead to more negative trend in profitability of the company (Annual report of Reece Limited, 2016).
Liquidity analysis means short term capability of the company to pay the liabilities of the company. Current ratio and quick ratio are two important ratio used to calculate the liquidity of the company (Sagner, 2010).
Current ratio measure the normal liquidity position of the organization as it tells level of current assets to pay off the current liabilities. The current ratio of Woolworth Limited was 0.84 times in year 2015 and it remained almost same in year 2016. Calculations show that there is overall 1.12 % increase in the current ratio in year 2016. It can be seen that company was not able to meet up all the current liability expenses in both the years (Annual report of Woolworth Limited, 2016).
Current ratio calculations in regards to Reece Limited show that company has current assets of 2.02 times in year 2015 and it has increased by 1.20 %in year 2016 to 2.04 times. So it can be said that overall liquidity position of Reece Limited in much better than the Woolworth Limited in both the years (Annual report of Reece Limited, 2016).
Quick ratio is absolute measure of liquidity position of the company as it measures liquidity through ignoring the assets that are not easily convertible into cash. Quick ratio of Woolworth was 0.30 times in year 2015 and it has increased to 0.33 times in year 2016 resulting increase of 7.29%. The short term liquidity position of Woolworth limited was worth in both the years as company has only 30 % of real cash to pay the current liabilities (Annual report of Woolworth Limited, 2016).
On the other hand, the liquidity position of Reece Limited was very strong as company has quick assets of 1.04 times in year 2015 and 1.08 times in year 2016 (Annual report of Reece Limited, 2016).
Asset Efficiency
Analyzing overall liquidity position of Woolworth in year 2015 as well in year 2016 it can be said that liquidity position of the company is not acceptable despite of increase in trend. It is because as per ideal current ratio the current assets of the company must be between 1.5 to 2 times the current liabilities but it is less the current liabilities.
Asset efficiency means how efficiently the resources of the company are being used to earn the revenue (Bull, 2007).
Inventory turnover ratio indicates the how many times the average inventory has been sold to earn the revenue. The inventory turnover ratio of Woolworth Limited was 8.82 times in year 2015 and 9.36 times in year 2016. It indicates inventory has been properly utilized by the company in year 2016 as compare to 2015 showing the increase in trend of 6.20 % (Annual report of Woolworth Limited, 2016).
On the other hand, Reece Limited has poor inventory turnover ratio in both the years that reflects that company was unable to utilize the inventory to earn the revenue (Annual report of Reece Limited, 2016).
This ratio provides inventory turnover ratio in days of year. More precisely it provides how many days company needed to turn all inventory into sales. In year 2016, Woolworth has taken 39.99 days to convert the entire inventory into sales whereas Reece Limited has taken 97.63 days to convert all inventories into sales (Annual report of Woolworth Limited, 2016).
Overall analysis of asset efficiency it can be said that Woolworth has utilized its assets more precisely as compared to Reece Limited (Annual report of Reece Limited, 2016).
This analysis helps to check the capital structure of the company as well as it also check the leverage position of the company (Bull, 2007).
Debt to equity ratio shows the presence of overall long term debt as against the overall equity. Debt equity of Woolworth was 0.28 times in year 2015 and it further increased to 0.44 times in year 2016 that indicates company has become more leverage in year 2016 as compare to year 2015.
On the other hand the debt equity ratio of Reece Limited was 0.17 times in year 2015 and it reduced to 0.12 in year 2016 reflecting payment of debt loan in year 2016.
This ratio provides level of debt as against the total assets. Overall analysis indicates that Woolworth contains satisfactory level of debt as against the total assets of the company. In year 2016 there is some increase in debt capital of the company.
It can be said that long term solvency position of the company is acceptable despite of increase in debt capital in year 2016 because the level of debt was below 0.50 times of equity that indicates company is not highly leverage (Annual report of Reece Limited, 2016).
On the basis of overall analysis I did not recommend to the company to invest in Woolworth Limited due to bad profitability position in year 2016 and poor liquidity position in both the years.
References
Annual report of Reece Limited 2016. [Online]. Available at: www.reecegroup.com.au/assets/Uploads/F2016-Reece-Limited-Annual-Report.pdf [Accessed on: 5 May 2017].
Annual report of Woolworth Limited 2016. [Online]. Available at: www.woolworthsgroup.com.au/page/investors/our-performance/reports/Reports [Accessed on: 5 May 2017].
Bull, R. 2007. Financial Ratios: How to use financial ratios to maximize value and success for your businesses. Elsevier.
Sagner, J. 2010. Essentials of Working Capital Management. USA: John Wiley & Sons.
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