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Financial performance is the most critical factors that need to be consider before making investment in the company. There are multiple risks associated with the investment that has to be taken care of before making the wise choice of investing in the company. Financial performance can be measured in multiple ways such as performing ratio analysis together with trend analysis, vertical and horizontal analysis and many other financial tools (Sagner, 2010). Financial ratios are keys to measure the financial performance of any organisation in view to make comment on the profitability, liquidity, asset efficiency and capital structure of such company.
In this financial report, financial performance of the Woolworth Limited has been performed to make available this report to the directors of the investment company. Investment Company looks forward to make the investment in the Australian economy due to its emerging market. Therefore, to help the management in taking this tough decision, this report will guide them through. While performing such analysis other important factors has also been consider such as trend analysis in the ratios, competitor analysis and other important factors that might affect the decision of the investment company.
In this section of the report, financial performance of the Woolworth has been evaluated for the years 2015 and 2016. The competitor selected for making the industry evaluation or competitor’s analysis is Reece Limited. Trend analysis will help to check the increase or decrease in the ratios.
All the ratio calculations are performed in excel and table has been attached in appendix.
Profitability analysis helps to focus on the income earning capability of the company during the accounting period. Profitability is the most important factor that every investor wants to know about before implementing the investment decision. Profitability of any company gets impacted with wide variety of reasons such as expected increase in cost of good sold, increase in operating expenses and decrease in sales as budgeted. Gross profit ratio and net profit ratio has been calculated to report on the profitability position of Woolworth in year 2015 and 2016 (Annual report of Reece Limited, 2016).
Gross profit margin or gross profit is the amount of income left behind after deducting all the expenses linked with the cost of goods sold in the period for such income belongs. Gross profit ratio is important as it tells any undue increase in cost of good sold during the particular period (Sagner, 2010).
As per the calculation made in excel it has been noticed that Woolworth has earned the gross profit of 27.29 % in year 2015 that got reduced to 26.85% in year 2016. So it can be said that there has been decreasing trend in this ratio and to be more precise there was actual downfall of 1.60 % (Annual report of Woolworth Limited, 2016). On the other hand the gross profit ratio of Reece Limited was 32.98 % in year 2015 and 33.34% in year 2016. It indicates that there was 1.09 % increase in the gross profit ratio. Competitor’s analysis indicates that gross profit ratio of Reece Limited was much better as compared to the Woolworth Limited (Annual report of Reece Limited, 2016).
Overall analysis indicates that profitability position of the Woolworth can be accepted despite of decrease in the gross profit percentage in year 2016 as compare to year 2015 it is because change in gross profit ratio was only an absolute change not wholly impacting the earning capability of the company. The change in income and expenses was due to many reasons like increase in cost of the goods sold that has impacted price of product to increase.
This ratio provides percentage of profit left after meeting all the expenses related to the one financial year like operating expenses, administrative expenses etc. Net profit ratio of Woolworth was 5.61 % and it got reduced to 2.34% in year 2016, representing decrease of 58.24 percent in year 2016 as compare to year 2015(Annual report of Woolworth Limited, 2016). So the decreasing trend in the profitability position of the company makes to think about taking as opportunity for investment purpose. Reece Limited has earned the net profit of 11.43 % in year 2015 and 12.30% in year that indicates the Reece Limited has properly managed the expenses related to cost of good sold and operating functions as compare to Woolworth Limited (Annual report of Reece Limited, 2016).
On conclusion it can be said that profitability level of Woolworth is not acceptable due to unwanted increase in expenditure and for not maintaining growth in sales in year 2016 (Bull, 2007).
Current ratio tells the short term solvency position of the company as it measures level of current assets company posses to pay the current liabilities (Sagner, 2010). Woolworth Limited has a current ratio of 0.84 times in year 2015 and it remained almost same in year 2016. The ideal current ratio for any company is between 1.5 to 2 times but in case of Woolworth it was below the ideal benchmark that shows poor liquidity position of the company (Annual report of Woolworth Limited, 2016). On the other hand the current ratio of Reece Limited was 2.02 times in year 2015 and it got increase by 1.20 % to 2.04 times in year 2016. The liquidity position of the Reece Group was very strong as compare to Woolworth Limited (Annual report of Reece Limited, 2016).
This ratio was similar to current ratio but this ratio is more precise than current ratio as it ignores such current assets that are not easily convertible into cash and cash equivalents during the one accounting year (Annual report of Woolworth Limited, 2016). Quick ratio of Woolworth was 0.30 times in year 2015 and it got increased be 7.29% to 0.33 times in year 2016. It shows that major part of current assets is composed with the inventory. Quick ratio of Reece Group was 1.04 times and 1.08 times in year 2015 and 2016 respectively (Annual report of Reece Limited, 2016).
Complete analysis of the liquidity position of the company indicates that it is mot acceptable for the investors to apply for the Woolworth for the investment purpose.
This ratio tells the number of times the inventory has exhausted to be converted as the sale revenue. The inventory turnover ratio of Woolworth was 8.82 times and it has been increased to 9.36 times in year 2016 that indicates that there was increasing trend of 6.20 % in the inventory turnover ratio (Annual report of Woolworth Limited, 2016). Competitor’s analysis indicates that inventory turnover ratio of Reece Group was less than the inventory turnover ratio of Woolworth (Annual report of Reece Limited, 2016).
It reflects the inventory turnover ratio in days despite of number of times. It is calculated by dividing number of days in year i.e. 365 by the inventory turnover ratio. (Annual report of Woolworth Limited, 2016) Day’s Sales in Inventory ratio of Woolworth was strong as compared to its competitor the Reece Group Limited.
The overall analysis of the asset efficiency of the Woolworth it can be said that company was able to utilize all its resources properly as compared to its competitor Reece Group Limited.
This ratio tells times the debt capital compare to equity capital. Capital structure of Woolworth Limited consists of 0.28 times the debt capital as against the equity capital and it was increased to 0.44 times in year 2016 that indicates that in year 2016 company has taken major debt loan to finance the working capital or for expansion purpose. Reece Limited was leverage than the Woolworth Group Limited as it 0.17 times in year 2015 and 0.12 times in year 2016 (Annual report of Reece Limited, 2016).
This ratio provides the level of debt part compare to total assets of the company. Calculation to this ratio indicates that Woolworth was more leverage than the Reece Limited in both the years (Annual report of Woolworth Limited, 2016). So it is not acceptable to accept the solvency position of Woolworth due to rapidly increase indebt capital with no change in equity capital (Annual report of Reece Limited, 2016).
On the basis of above analysis of various ratios related to Woolworth in year 2016 as compare to 2015, it can be said that financial position of Woolworth was not strong enough to be chosen for major investment in the current year as the future profits are not predictable. As seen above there has been negative growth in the company that might continue further years making huge loss on investment.
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.
Financial performance is the most critical factors that need to be consider before making investment in the company. There are multiple risks associated with the investment that has to be taken care of before making the wise choice of investing in the company. Financial performance can be measured in multiple ways such as performing ratio analysis together with trend analysis, vertical and horizontal analysis and many other financial tools (Sagner, 2010). Financial ratios are keys to measure the financial performance of any organisation in view to make comment on the profitability, liquidity, asset efficiency and capital structure of such company.
In this financial report, financial performance of the Woolworth Limited has been performed to make available this report to the directors of the investment company. Investment Company looks forward to make the investment in the Australian economy due to its emerging market. Therefore, to help the management in taking this tough decision, this report will guide them through. While performing such analysis other important factors has also been consider such as trend analysis in the ratios, competitor analysis and other important factors that might affect the decision of the investment company.
In this section of the report, financial performance of the Woolworth has been evaluated for the years 2015 and 2016. The competitor selected for making the industry evaluation or competitor’s analysis is Reece Limited. Trend analysis will help to check the increase or decrease in the ratios.
All the ratio calculations are performed in excel and table has been attached in appendix.
Profitability analysis helps to focus on the income earning capability of the company during the accounting period. Profitability is the most important factor that every investor wants to know about before implementing the investment decision. Profitability of any company gets impacted with wide variety of reasons such as expected increase in cost of good sold, increase in operating expenses and decrease in sales as budgeted. Gross profit ratio and net profit ratio has been calculated to report on the profitability position of Woolworth in year 2015 and 2016 (Annual report of Reece Limited, 2016).
Gross profit margin or gross profit is the amount of income left behind after deducting all the expenses linked with the cost of goods sold in the period for such income belongs. Gross profit ratio is important as it tells any undue increase in cost of good sold during the particular period (Sagner, 2010).
As per the calculation made in excel it has been noticed that Woolworth has earned the gross profit of 27.29 % in year 2015 that got reduced to 26.85% in year 2016. So it can be said that there has been decreasing trend in this ratio and to be more precise there was actual downfall of 1.60 % (Annual report of Woolworth Limited, 2016). On the other hand the gross profit ratio of Reece Limited was 32.98 % in year 2015 and 33.34% in year 2016. It indicates that there was 1.09 % increase in the gross profit ratio. Competitor’s analysis indicates that gross profit ratio of Reece Limited was much better as compared to the Woolworth Limited (Annual report of Reece Limited, 2016).
Overall analysis indicates that profitability position of the Woolworth can be accepted despite of decrease in the gross profit percentage in year 2016 as compare to year 2015 it is because change in gross profit ratio was only an absolute change not wholly impacting the earning capability of the company. The change in income and expenses was due to many reasons like increase in cost of the goods sold that has impacted price of product to increase.
This ratio provides percentage of profit left after meeting all the expenses related to the one financial year like operating expenses, administrative expenses etc. Net profit ratio of Woolworth was 5.61 % and it got reduced to 2.34% in year 2016, representing decrease of 58.24 percent in year 2016 as compare to year 2015(Annual report of Woolworth Limited, 2016). So the decreasing trend in the profitability position of the company makes to think about taking as opportunity for investment purpose. Reece Limited has earned the net profit of 11.43 % in year 2015 and 12.30% in year that indicates the Reece Limited has properly managed the expenses related to cost of good sold and operating functions as compare to Woolworth Limited (Annual report of Reece Limited, 2016).
On conclusion it can be said that profitability level of Woolworth is not acceptable due to unwanted increase in expenditure and for not maintaining growth in sales in year 2016 (Bull, 2007).
Current ratio tells the short term solvency position of the company as it measures level of current assets company posses to pay the current liabilities (Sagner, 2010). Woolworth Limited has a current ratio of 0.84 times in year 2015 and it remained almost same in year 2016. The ideal current ratio for any company is between 1.5 to 2 times but in case of Woolworth it was below the ideal benchmark that shows poor liquidity position of the company (Annual report of Woolworth Limited, 2016). On the other hand the current ratio of Reece Limited was 2.02 times in year 2015 and it got increase by 1.20 % to 2.04 times in year 2016. The liquidity position of the Reece Group was very strong as compare to Woolworth Limited (Annual report of Reece Limited, 2016).
This ratio was similar to current ratio but this ratio is more precise than current ratio as it ignores such current assets that are not easily convertible into cash and cash equivalents during the one accounting year (Annual report of Woolworth Limited, 2016). Quick ratio of Woolworth was 0.30 times in year 2015 and it got increased be 7.29% to 0.33 times in year 2016. It shows that major part of current assets is composed with the inventory. Quick ratio of Reece Group was 1.04 times and 1.08 times in year 2015 and 2016 respectively (Annual report of Reece Limited, 2016).
Complete analysis of the liquidity position of the company indicates that it is mot acceptable for the investors to apply for the Woolworth for the investment purpose.
This ratio tells the number of times the inventory has exhausted to be converted as the sale revenue. The inventory turnover ratio of Woolworth was 8.82 times and it has been increased to 9.36 times in year 2016 that indicates that there was increasing trend of 6.20 % in the inventory turnover ratio (Annual report of Woolworth Limited, 2016). Competitor’s analysis indicates that inventory turnover ratio of Reece Group was less than the inventory turnover ratio of Woolworth (Annual report of Reece Limited, 2016).
It reflects the inventory turnover ratio in days despite of number of times. It is calculated by dividing number of days in year i.e. 365 by the inventory turnover ratio. (Annual report of Woolworth Limited, 2016) Day’s Sales in Inventory ratio of Woolworth was strong as compared to its competitor the Reece Group Limited.
The overall analysis of the asset efficiency of the Woolworth it can be said that company was able to utilize all its resources properly as compared to its competitor Reece Group Limited.
This ratio tells times the debt capital compare to equity capital. Capital structure of Woolworth Limited consists of 0.28 times the debt capital as against the equity capital and it was increased to 0.44 times in year 2016 that indicates that in year 2016 company has taken major debt loan to finance the working capital or for expansion purpose. Reece Limited was leverage than the Woolworth Group Limited as it 0.17 times in year 2015 and 0.12 times in year 2016 (Annual report of Reece Limited, 2016).
This ratio provides the level of debt part compare to total assets of the company. Calculation to this ratio indicates that Woolworth was more leverage than the Reece Limited in both the years (Annual report of Woolworth Limited, 2016). So it is not acceptable to accept the solvency position of Woolworth due to rapidly increase indebt capital with no change in equity capital (Annual report of Reece Limited, 2016).
On the basis of above analysis of various ratios related to Woolworth in year 2016 as compare to 2015, it can be said that financial position of Woolworth was not strong enough to be chosen for major investment in the current year as the future profits are not predictable. As seen above there has been negative growth in the company that might continue further years making huge loss on investment.
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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