Financial Statement Analysis Of Woolworths Limited Using Ratio Analysis

Executive Summary

Describe about the financial statement with the help of ratio analysis of Woolworths Limited?

The ratio analysis is a mechanism to determine the financial position of a company. In this case, a company named Woolworths Limited has been selected for the study of its financial statement with the help of ratio analysis. Different ratios have been computed and the economic situation of the company has been determined. The overall group profit of the company has been increased as per the financial statement, but there are cases from which it could be inferred that the performance of the company is still suffering from some major drawbacks like liquidity and solvency issues, as the current assets of the company is lesser than the current liabilities. The market based ratios whereas project a better earning capacity of the company by having increased dividends as well as earnings from the last financial year 2012-13. However, a diminishing financial efficiency has been observed while computing the efficiency ratios.

A growing operation of the company also have some constraints relating to internal control for which they are negotiating with the performance capability, they are addressed to be improved so that the risks relating to financial and operational efficiency could be mitigated, otherwise it would increase the cost of productions in future days.

The financial statement of a company concisely projects the financial position of the company. The shareholders or a third party get through to the economic and financial position of the company through the published financial reports. Financial Statements of a company consists of Income Statement, Balance Sheet and Cash Flow Statement of a particular financial year. Financial Statement Analysis is a tool to improve the business, the profit making ability of the company. While analyzing the financial statements of a company, more importantly balance sheet items like Cash, Accounts Receivable, Inventories, Loans and Liabilities and Profit and loss account items like Net profit from operations, Earnings per share etc are considered. There are several practices for analyzing the financial statement of a company, by determining Common Size Statements, Financial Ratios of a company that can be done. (Bajkowski, 1999) (Rogers)

The name of the company under our discussion is Woolworths Limited. The annual financial statement for the financial years 2012-2013 and 2013-2014 is considered for our discussion. The company does business in food, liquor, petrol, chain of departmental stores, hotels. The financial statement which is considered for analysis is the consolidated financial statement for the financial years 2012-2013 and 2013-2014. In the financial year 2013-14 the company has extended its business operation but has kept its traditional policies as well.

•    Some changes in the financial year 2013-14 includes, that there is no profit from discontinuing operation is the year as compared to financial year 2012-13.

•    In all cases (whether basic or diluted earnings per share, whether from continuing or discontinuing operation, the same has been increased in 2013-14 than the last year.

•    The company has widened its operation, which is evident from the revenue from sale of goods which has been increased by 3.86% in the financial year 2013-14.

Background

•    Receipts from tenants have been decreased than the previous year indicates either removal of some tenants or the tenancy period has been lapsed.

•    The interest received amount has been decreased by 55.86%, which is quite a negative attribute to the business although the cash flow from operation grossly has been increased.

•    The company has unfolded a better leadership approach to integrate the food, liquor industry, and streamlining all processes for the benefit of the customers.

•    The company also proposed a divestment amounting to $600 million on the portfolio of freehold sites of the hotels in order to benefit the shareholders.

•    The business of departmental stores, extension and changes in BIG W business has not come out profitably in the financial year 2013-14.

•    As the revenue from operations increased or sales revenue increased the cost relating to such revenue has also been increased.

•    An increase in the earnings before interest and tax is an example of strong performance in the current year as compared to the last year; the same has also been increased by 5.3%.

•    Increase in the sales also denotes a strong market growth from the previous year.

•    The sale of food, liquor increased by 4.7% and petrol also increased by 6%, but the price of the petrol was not reduced; it was 142.4 cpl in the year 2012-13 and became 151.1 cpl in FY 2013-14.

•    Woolworths Limited is also associated with online retailing, the performance of the same does also follow an increasing trend in the current year, the company has concentrated on the development of the retail marketing through online system and for that a number of changes have been made which shall be comfortable and beneficial to the customers.

•    The performance of the company has also been developed by institutionalizing new and innovative ideas into the process, for example the brands or products on which customers are more inclined towards, and they continued to produce those articles most.

•    Rebranding of the sites of business has taken place to satisfy and benefit the customer’s needs.

•    There are more proposals they are interested to undertake to benefit the farmers of the society. More places and business sites have opened for allocation of services amongst several cities of Australia.

Profitability Analysis

Profitability Analysis includes analysis through ratios. There have been annexed a file named “Annexure” and in the sheet name “Profitability Analysis”, we have computed a number of profitability ratios which includes Gross Profit Ratios or Gross Margin, Net Profit Ratios ( which includes EBITDAR ratios, EBIT ratios and net profit ratio considering the profit available to equity shareholders of Woolworths Limited).

Gross profit margin is the ratio consisting of total sales less the cost of sales to revenue from such sale. From this ratio it is evident to what extent the company would fetch by utilizing its resources like material and labour to the optimum. The gross profit margin over here has been increased from 26.94 to 27.11, which indicates an increase in the efficiency, with the higher rate of gross profit margin, the control in the cost (which is needed to incur) of production is expressed. The same has been reflected over here as well. (Robins, 2000)

Analysis of Company’s Operation and Performance

Net margin includes analysis of EBITDAR, EBIT, as well as another profit margin. EBITDAR margin stands for Earnings before interest, taxes, depreciation, amortization, rent to net sales revenue is not a computation which has been prescribed by Generally Accepted Accounting Principles. The analysis is done by the company to reflect the internal framework for its own benefit or analysis. This ratio is beneficial to shareholders or investors or any third party who are interested to invest in the company.

EBIT margin stands for Earnings before interest and tax to net sales revenue, this is also not notified by the Generally Accepted Accounting Principle, these ratios are useful for the credit rating agencies to analyze the internal system of a company. In this scenario, in the profit and loss weeks, EBIT margin has been decreased to 6.21 whereas it was 6.24 in the 53^rd week or in 2013. The same reflects a diminishing financial efficiency. EBITDAR margin has been increased to 10.98 whereas it was 10.91 in the 53^rd week or in 2013. This in turn reflects operational efficiency has been increased or upgraded.

Profit available to equity shareholder has been taken into account while calculating Profit margin in the same annexure file same sheet as mentioned above. The same has been increased from 3.86 to 4.03 indicating the proper allocation of resources and earning power of the entity, the amount considers the equity shareholder after considering payment to other parties (other than equity shareholders). (Bajkowski, EBT, EBIT, EBITDA: Will the Real Earnings Figure Please Stand Up?)

Du Pont Analysis: Du Pont Analysis includes four ratios which are, Net profit margin, asset turnover ratio, financial leverage and Return on Equity, it is a ratio which basically describes the shareholder’s net worth but also is a mean to analyze the profitability of a company. The asset turnover ratio is calculated by considering total sales which is divided by the average of opening and closing asset amount in both financial years 2013 and 2014. This ratio indicates how well the total assets in the business is used or allocated among several projects. A decrease in the rate indicates there is still room for improvement in the utilization of assets.  Financial Leverage of a company generally indicates whether the company is prone to bankruptcy or not, it may sometimes lead to increased shareholders return. The more the ratio the more the company is leading to bankruptcy. In this case, the same is reduced in the present financial statement. Du Pont analysis gives in detail which part of the business is not performing well. In the background of the example as well, there were food and liquor division which was performing better than the BIG W business. Return on equity indicates the net income of the equity shareholders from investing in the company. (Thomas J. Liesz, 2008)

Efficiency analysis and profitability analysis stands conjointly as they both explain how well the company is performing financially considering its assets, capital, inventories subsisting in the business. There have been annexed a file named “Annexure” and in the sheet name “Efficiency ratios”, we have computed a number of efficiency ratios.

Evaluation of Company’s performance with the help of ratio analysis

Accounts Receivable Turnover has been computed considering the cost of goods sold and not the total sales. The same has been decreased over the year. It is a measure from which the number of times in a year the debtors or receivable could be liquidated can be determined. For this reason it can be a measure for efficiency of the company as well the liquidity of the company.

Working Capital Ratio can also be called as current ratio, Current ratio stands for Current Assets in total divided by the total current liability. The ratio is also a measure for solvency or liquidity of a company. Working Capital ratio indicates how quick the current liabilities will be converted into current assets; the same has been decreased to 0.91 from 0.95. The optimum working capital ratio is 1, the ratio less than that indicates that the company is not ready to pay off its debts with the current assets available. (B Bagchi, 2012)

Asset turnover ratio is also a determinant of company’s efficiency as it determines the ability of the company to employ its assets or utilize its assets optimally to create sales. The asset turnover ratio has been decreased over the year in this company, indicates a lower level of utilization of assets that the FY 2013.

Inventory turnover ratio is calculated when cost of goods sold is divided by the average inventory (average of opening and closing inventory). This is a measure of company’s efficiency which reflects how well the company can utilize its commodities to fetch a higher return. It also helps the third party or investors to check how liquid the company’s inventory is, in this case inventory turnover has been fallen over the year, indicates a fall in the company’s efficiency to convert its inventory into cash quickly.

Short term solvency of a company means the position of the company’s assets to meet its short term loans or any short term obligations. This can be illustrated with the help of Current Ratio. Current Ratio has been computed before, which includes short term as well as long term assets and liabilities. This ratio considers how quickly the short term obligations of the company could be converted into liquid or how easily the company meets its short term obligations. The short term obligation for FY 14 is $219.5 m.

Long term solvency ratio measures the position of the company to meet its long term obligations. In this case, the long term obligations of the company for FY 14 are $4136.0 m. From the annual report published for the year 2013-14, it was observed that the company has employed some framework to mitigate the liquidity risk, as it suffers from low level of efficiency as found in the computation of current ratio.  (Qasim Saleem, 2011)

Market based ratios are earning per share, dividend yield ratio, dividend payout ratios, price cash flow ratio. The market based ratios have been computed in the file named “Annexure” under the ‘Market based ratios’ sheet.

Earnings per share of the company have been increased from financial year 2013 to financial year 2014. It is a measure of company’s position in the market, investors reply on the company’s earnings per share for decision making purposes. It is also a determinant of company’s profitability, as earning is dependent on the profit of the company. The earning that is considered in this calculation is the earning which is available for equity shareholders of the company.

Price earnings ratio is another market based ratio which is used to evaluate the position of firm’s stock. Again, it is helpful to the investors and it shows as if the stock is going to earn a reasonable return in future. A lower Price earnings ratio is good for the investment decision. (Gupta, 2010)

Dividend yield ratio also enables a shareholder to decide to invest in the stocks of a particular company. It also helps to decide whether to continue with the present stock or not. It is a measure of return to the investor. In this company the dividend yield in FY 26.03% and has increased from the last year.

Price to operating cash flow ratio considers market capitalization to the company’s operating cash flow. This ratio indicates the value of the company from the point of view of equity. The operating cash flow from the Cash flow statement has been considered, depreciation and non cash expenses are added back to net income for arriving at cash flows from operations. In this company, the price to operating cash flow ratio has been decreased over the years. (Pinkasovitch)

The company is suffering from efficiency problems which they have tried to mitigate by undertaking several frameworks as explained in the annual report. Long term and Short term assets could not be segregated so that different ratios relating to long term as well as short term solvency could be done. The company’s position in respect of certain ratios have considered in the above. However, a ratio analysis does not always reflect the true picture of the company as it only considers financial data and does not consider qualitative information. (tsy123, 2005)

•    The company needs to consider the strengthening of debts in order to mitigate the risks of bankruptcy. There should be a strong internal control for regulation of debts and long term obligations.

•    There should be some policies to curb the counter party risks involved in the company. Policies and regulations should be properly implemented so that no clash of sentiments and ego involves for maintaining the same.

•    In the Consolidated financial statement there are non availability of details of account heads in some cases, for example bifurcation of short term and long term current assets were not found, due care is to be taken in this regard.

•    No segregation of cash and credit sales were disclosed in the financial statement.

•    The company has increased its operation in the financial year 2013-14, a more improved financial control and regulatory issues will be required.

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