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Measuring Inventory Turnover In Distributive Trade

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Question:

Discuss about the Measuring Inventory Turnover in Distributive Trade.
 
 

Answer:

Introduction

Woolworths operates mainly in New Zealand and Australia with around 3,827 stores and about 205,000 staffs. The primary activities are retail operations across New Zealand operating around 184 countdown supermarkets and wholesale operations that supplies further 64 stores, Australia petrol and food operation around 992 Woolworths’ supermarkets, 530 petrol canopies and five Thomas Dux stores (Woolworths Limited 2016). In addition, the company activities include hotels operating around 331 hotels including dining, accommodation, bars and gaming operations. The company also has some online operations for its fundamental trading divisions. Woolworths is always competitive on price since it believes that good prices assist in ensuring everybody live and eat well. Its low price promise means that clients could always get low prices on several products they purchase. With these considerations, this report aims to present comparison of financial analysis of Woolworths and Reece Limited Group for the past two years in order to draw conclusion and recommendations. Basically, this report presents analysis of Woolworths’ financial performance for the past two years which would help the organization in making decision as to whether it should diversify its shares investment to Woolworths. In essence, the analysis would assist in making recommendations as to whether Woolworths would be a better or attractive investment opportunity for the organization.

Gross profit margin is the profitability ration which compares an organization’s total sales with sales remaining after subtraction of sales costs. It measures how much of an organization’s sales are kept as income or profit (Penman & Penman 2007). This metric is a signal of financial viability and success of a specific product. It is usually computed by dividing an organization’s gross profit by total sales. With these considerations, gross profit margin ratio for the year 2015 and 2016 for Woolworth is as follows;

Based on the above analysis, it is evident that Woolworth gross profit margin experienced a decreasing trend for the last two years moving from 27.20% in the year 2015 to 26.78%. This level of profitability of the company is not acceptable at all since it is not clear whether the same trend would be experienced in the coming year. The changes in gross profit margin are mainly attributed by significant decrease in its sales level over the years as from 58,812 in 2015 to 58,085.7 in 2016. In essence, the change in gross profit margin in Woolworths was mainly attributed by a decrease of 1.2% in sales in the fiscal year 2016 as a result of lower sales in petrol. Furthermore, the change in gross profit margin was mainly due to underlying earnings from the Australian Food and Petrol decreasing by 40.8% on 2016, indicating a lower sales growth due to its investments in lower prices as well as a decrease in items per the basket (Chung & AAP 2017).

 

Net Profit Margin Ratio of Woolworths for 2015 and 2016

Net profit margin is usually the financial ratio of the net income to sales for an organization. It is usually expressed as the percentage and it displays how much every dollar collected by an organization as sales is translated into profit (Bernstein & Wild 1998). It shows how well an organization converts sales into income. With these considerations, net profit margin of Woolworths for the financial years 2015 and 2016 would be as follows;

From the above analysis, it is clear that Woolworths’ net profit margin decreased as from 5.59% in 2015 to 2.33% in 2016. This level of profitability of Woolworths is not acceptable. This is mainly due to the fact that it is relatively low causing some worries as to what would be expected in the coming years. The change in net income margin is mainly attributed by an increase in operating and impairment expenses over the years with branch expenses increasing as from 10,079.2 in 2015 to 11,010.7 in 2016 while administrative expenses increased as from 2,691.4 in 2015 to 3,260.4 in 2016. In essence, the change in net profit margin for Woolworths was mainly attributed by its recent act of taking around $2.628 billion of the write-downs which was mainly related to its departure from hardware industry as well as its underachieving Big W stores. The decrease in net profit margin was also as a result of lower prices and decrease in the items per basket (Chung & AAP 2017).

Current Ratios and Quick Ratios of Woolworths for 2015 and 2016

Total current assets for the financial years 2015 and 2016 were 7660.9 and 7,427 respectively whilst total current liabilities for the years 2015 and 2016 were, 9,168.6 and 8,992.7 respectively (Woolworths Limited 2016). Thus, given that current ratio is usually equal to total current assets subdivided by the total current liabilities, the current ratio of Woolworths for the years 2015 and 2016 is as follows;

Based on the current ratio analysis above, it can be stated that for the past two years, Woolworth current ratio decreased as from 0.84 in 2015 to 0.83 in 2016. These figures are far below 1 meaning that for the past two years the company has been experiencing some difficulties in settling its short-term debts using its short-term assets. In essence, the figures show that the level of liquidity of the company is not acceptable since it means that if not checked the company would liquidate or become bankrupt.

Further, based on the figures, it is evident that Woolworth quick ratio experienced an increasing trend moving from 0.304 in 2015 to 0.319 in 2016. Despite this increase in quick ratio, the figures are too low meaning that the level of liquidity is relatively low for the company. In addition, the level of liquidity is not acceptable since it is relatively low meaning that the company has been experiencing some difficulties in settling its short-term liabilities using its most liquid assets.

 


In essence, the decrease in the current and quick ratio for Woolworths is mainly attributed by a significant increase in the company’s current assets as from 9,168.6 in 2015 to around 8,992.7 in 2016. Furthermore, the recent events with the Masters Home Improvement has also attributed to the change in current and quick ratio over the years.

Total current assets for the financial years 2015 and 2016 were for Reece Limited Group were 756,720 and 858,230 respectively whilst total current liabilities for the years 2015 and 2016 were, 374,761 and 420,006 respectively (Reece Limited Group 2016). With these aspects, current ratio for the company for the years 2015 and 2016 is as follows;

As from the above results, it is evident that Reece Limited current ratio increased as from 2.02 in 2015 to 2.04 in 2016. This is a signal that for the last two years, Reece Limited Group has been having an easy time in settling its short-term liabilities using its short-term assets. This implies that the organization does not have any risk of being bankrupt in future.

Based on the above results, it is clear that Reece quick ratio increased as from 1.044 in 2015 to 1.077 in 2016. This is a clear signal that Reece has been not struggling to repay its short-term debts using its most liquid assets.

Inventory Turnover and Inventory Turnover in Days for Woolworths and Reece Limited for 2015 and 2016

Inventory turnover in days is usually the number of days divided by inventory turnover ratio. It is the manner of measuring average time needed for an organization to convert inventories to sales (Gaur, Fisher & Raman 2005). With these considerations, inventory turnover in days for Woolworths for the year 2015 and 2016 would be as follows;

Inventory turnover is usually the financial ratio used in measuring the rate at which an organization purchases as well as resells its products to consumers (Kari?, Kristek & Vidovi? 2013). In essence, inventory turnover is the efficiency ratio that is used in calculating number of times an organization sells as well as replaces its whole batch of the inventories. It is usually computed by dividing cost of the goods sold by its inventories (Schreibfeder 1997).With these considerations, inventory turnover for Woolworth for the financial years 2015 and 2016 were;

Based on the above analysis, it is evident that Woolworths’ inventory turnover in days decreased while Reece Limited inventory turnover in days increased over the years. This is a clear indication that Woolworths spend fewer finances in forming inventories while Reece Limited is spending huge amount. Furthermore, based on inventory turnover of the two companies, it is evident that Reece Limited was more efficient in turning its inventories to sales as compared to Woolworths which was taking more time to convert its inventories.

 


Comparison of Level of Liquidity between Woolworths and Reece Limited Group

Based on the current ratios for Woolworths and Reece Limited Group, it is evident that Woolworths is less liquid as compared to Reece Limited. This is based on the fact that Woolworths current ratios for the past two years was relatively low as compared to Reece Limited and was even far below 1 meaning that Woolworths was experiencing some difficulties in settling its short-term debts using its short-term assets contrary to Reece Limited which had higher current ratios meaning that it was having an easy time in settling its short-term debts. In addition, Woolworths is less liquid since its quick ratio for the past two years was lower than that one of Reece Limited and that it was far below 1 meaning that it was experiencing difficulties in settling its current liabilities using its most liquid assets contrary to Reece Limited. In essence, the level of liquidity of Woolworths is not acceptable to me since it is quite low as compared to its competitor and it is relatively below 1 meaning that the company is at risk of liquidating or being bankrupt.

Debt to Equity and Debt to Total Assets of Woolworths and Reece Limited for 2015 and 2016

Debt to equity is usually equal to total liabilities divided by the total shareholder’s equity (Hovakimian, Opler & Titman 2001). Thus, the debt to equity for Woolworth Reece for the years 2015 and 2016 would be as follows;

Further, debt to assets ratio is usually equal to total debts/total assets. Hence, debt to assets ratio for Woolworth would be;

Based on the above calculations, it is evident that the level of long-term solvency of Woolworths is not acceptable at all. This is based on the fact that Woolworths has a higher debt to equity ratio which is above one meaning that it relies more on debt financing instead of its shareholder’s equity. In addition, the level of long-term solvency for Woolworths is not acceptable since its debt to assets shows an increasing trend over the past two years as meaning that it might increase in future. The change of debt to equity as well as debt to asset ratio was mainly attributed by an increase in the company’s level of total liabilities and its decrease in the level of total assets and total shareholder’s equity in year 2016.

 

Conclusion

In conclusion, I would not recommend the employer purchase of the Woolworths shares. This is based on the fact that the Woolworth has higher debt to equity ratio, meaning that it heavily depends on debt financing instead of equity in financing its primary operations. In addition, given the fact that Woolworths has higher debt to assets ratio for the past two years as compared to Reece Limited Group, it is not recommended for the employer to purchase Woolworth shares since it means that the company rely on debt finances in financing its assets as compared to Reece Limited Group. Therefore, based on the above analysis, I would not recommend my employer to purchase Woolworths’s shares since in the first place the company has poor liquidity level as well as unacceptable long-term solvency level meaning that it is at risk of being bankrupt or liquidating in future.

 

References

Bernstein, LA & Wild, J 1998, Financial statement analysis: theory, application, and interpretation. Irwin Professional Publishing.

Chung, F & AAP 2017, Woolworths unveils $1.235 billion loss; Viewed at 6th May 2017 from; https://www.news.com.au/finance/business/retail/woolworths-unveils-1235-billion-loss/news-story/5a6cd1f33658f536b47d95b305c5bc67

Gaur, V, Fisher, ML & Raman, A 2005, ‘An econometric analysis of inventory turnover performance in retail services,’ Management science, 51(2), 181-194.

Hovakimian, A, Opler, T & Titman, S 2001, ‘The debt-equity choice,’ Journal of Financial and Quantitative analysis, 36(1).

Kari?, M, Kristek, I & Vidovi?, M 2013, ‘Measuring the inventory turnover in distributive trade,’ In Business Logistics in Modern Management, 13th international scientific conference.

Penman, SH & Penman, SH 2007, Financial statement analysis and security valuation (p. 476). New York: McGraw-Hill.

Reece Limited Group 2016, Reece Limited Group annual report 2016; Viewed at 6th May 2017 from; https://www.reecegroup.com.au/assets/Uploads/F2016-Reece-Limited-Annual-Report.pdf 

Schreibfeder, J 1997, ‘Why is inventory turnover important,’ Effective Inventory Management Inc., Coppel TX.

Woolworths Limited 2016, Woolworths Limited annual report 2016; Viewed at 6th May 2017 from; https://wow2016ar.qreports.com.au/home/pdf/download-centre.html

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