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Woolworths Ltd Financial Analysis

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Question:

Discuss about the Woolworths Ltd Financial Analysis.
 
 

Answer:

Introduction

The emergence of the organization financial evaluation or analysis management is the procedure which is associated to the change in organization scenario, socio-economic and brought about by the advancement of computer and information technology, emergence   of multi product and multi division corporations with complex and dynamic organization set-ups (Berk and DeMarzo, 2007).  Thereby financial management is about managing the organization performance and understanding organization’s strategic objective and goals based on underpinning service quality and accountability as much as managing company finance resources including currency in efficient manner.      

Thereby present aim of this assessment is to analyze and evaluate the financial statement of the company of last five year using quantitative as well as qualitative methods. In addition to this quantitative analysis involves ratios calculation and its analysis.  Furthermore, present assessment deals with the analyzing and evaluation of the financial performance.

Qualitative Analysis of the Company 

Company Background

In order to assess the financial analysis most effective and efficient manner student selects Woolworths ltd. The company Woolworths limited is Australian based organization and listed in the Stock exchange with extensive retail sectors. The organization is the second largest organization in the Australia by profits and revenue.

As per the given data it has been seen that the company at the end of 2015 financial year earned A$60.68 billion and profits earned in 2015 FY is A$2.45 billions that indicates the present performance of the company well as compare to other organizations in same sectors. Moreover, the company offered one billion shares and the issues oversubscribe by approximately more than 2.60 billion share applications that represents that the company market share as well as brand values are better compare to their competitors and due to this more shareholder wants to invest money in this company (woolworths, 2016).   The organization revenue growth has been increased at constant rate from the FY2010 to 2015, improve in organization sales has been consistent from $51,918 to $60868 in FY2015. The launch of the Everyday low price and project refresh strategies represented with a focus of restructuring end to end and line items super market, supply chain enhancement. On the other hand the company implements cost savings and supply Chain efficiencies that indicates that in the past 10 years the company  save its cost approximately $0.8 billion. Furthermore, cost of goods sales in the year of 2011 is $40,049.7 and in year of 2015 is $43,990.5 that represents that increase in sales in effective manner (woolworths, 2016).   Instead of this, it has been seen that with organization i.e. Woolworths online available to approximately more than 84% of Australian people that could Cleary indicates that the company generate an effective consumer base eventually resulting in more profits.                 

Thereby as per the qualitative analysis and interpretation, it has been gained that the company always aimed at earned more profits to its shareholders. With better growth rate, as well as continue expansion the company Woolworth’s has increased into an effective brand within the stock market. Thus, form the analysis it has been intended that the company generating better market values and achieving better customer’s satisfaction. Thereby, Strength of the company revenue growth over the past five years has make sure that value creation of its shareholder or investors and profitability of the organization.

 The company has to take advantage of on the market opportunity of capture and strengthen its position within the market. An improve in profits as well as sale of goods give the company to initiate huge scale expansion planning which the company has introduce its market in global such as china, south Africa and India. 

 

Quantitative Analysis of the Company

Ratios analysis is the effective tools and techniques help the company to analyze and evaluate organization performance in most effective manner. Financial performance identification as well as evaluation of organization weakness and strengths has been done in successful manner with the help of financial tools and techniques i.e. ratios analysis. In order to assess the performance of the company student use, liquidity ratios, profitability ratios, capital structure as well as market values.          

Liquidity Ratios

Liquidity ratios helps the organization to determine the capacity of the business to fulfills it financial responsibilities and requirements in short period of time.      

Ratio

Computation

Formals 

Values of last five years

Liquidity ratios

 

Current ratio 

Current Assets ÷ Current Liabilities

2011

.80

2012

.86

2013

.91

2014

.95

2015

.84

Current Ratios

As per the calculation of current ratios, analysis and interpretation it has been gained that in organization improve its current ratios constantly from FY 2011 to FY2014. In the year of 2014, the company loses their current ratios and its values degraded approximately .12 from FY 2014 to FY 2015.  Thereby as per the current ratios analysis it has been observed that current ratios of 2:1 is effective for the company it should be considerable.  As per the above figure change occur from FY2014 to FY 2015 and main reason behind that their competitor performing well and providing same goods and services in fewer prices with quality (woolworths, 2016). Thereby in such situation, it has been suggested that company needs to implements an effective cost cutting strategies; this helps them to increase liquidity ratios in successful manner.  Overall organization current ratios below one; this shows that company may have problem in paying money in time.   Therefore from the calculation it has been said that    company current ratios is not much effective than the industry average rate and thus in has states that company are not performing well and not to be effective to pay short term obligations (Bodie and Merton, 2000). 

 

Profitability Ratios

Profitability ratios help the company to determine whether, or not organization produces effective returns for its shareholders as well as owners by making high revenue as compared to expenses (Fridson and Alvarez, 2002).

Ratio

Computation

Formals 

Values of last five years

Profitability ratios

 

Net profit margin  

Net income ÷ Net sales

2011

3.89

2012

3.28

2013

3.85

2014

4.02

2015

3.53

 

Return of total assets

Net income /average total assets

10.73

 

8.51

10.31

10.56

8.66

Net Profit Margin

Net profit margin helps the company is to determine how much profits the company earned in financial year. A less net profits margin of the company shows that a less margin of safety where as a higher profit margin shows that company gain more profits and performed well within the market. As per the computation of the net profit margin it has been seen that organization net profits margin were 3.89%, 3.28%, 3.85%, 4.02%, 3.53% respectively in FYs 2011,2012,2013,2014 and 2015 (woolworths, 2016). Values of the change has been occurred from the FY 2014 to FY2015 and this represents that company pay more operating expenses such as utilities, salaries as well rents thereby to increase them in effective manner management of the company requires to implements an effective monitoring strategies that helps them to increase profits most effective manner.     Thereby this figure indicates that the company has better net profits margin as compare to average trend of other organizations in same sectors. Thereby this figure represents that the company in better in terms of pricing strategies, operating efficiencies as well as cost control strategies.          

Return on Total asset 

The company use ROA in order to measure efficiency of the organization as well as market values. Thereby as per the calculation of return on total asset using net income divided by average total assets it has been gained that in year of 2011, 2012,2013,2014 and 2015 are 10.73,8.51,10.31,10.56 and 8.66 respectively.  Thereby from the FY2012 to FY2014 Company ROA has been increased effectively and in year of FY2015 company errand less ROA compare to FY2014 (woolworths, 2016). Thus as per the analysis it has been said that company ROA ratios are indicates upward trends. Thereby as ROA calculation, it has been said that company performing effectively and earning better revenues (Tripathi, 2008).

Capital Structure 

Ratio

Computation

Formals 

Values of last five years

Capital structure ratios

 

Debt ratios   

Total Liabilities  ÷ total assets

2011

0.64

2012

0.58

2013

0.49

2014

0.43

2015

0.44

 

Interest cover ratios

EBIT/interest expense

10.85

 

11.19

12.21

13.58

11.94

Debt Ratios

This ratio helps the company to determine the extent to which long term finance of the company is sourced from the debt. Ratios below 50 percentages considered higher ratios and optimum decease lender confidence and hamper opportunity borrowers. As per the calculation, it has been gained that at the end of FY2015 company debt ratios is 0.44, which is higher than previous financial data. In add ton to this figure represents that company generating better debt ratios from last five years and from available data, it has been intended that the company’s resources are sufficient to fulfill its obligations and this shows underutilization of sources of finance that may represents restricted growth. 

 

Interest Cover Ratio

Interest coverage ratio helps the company to determine that company’s capability to make interest pay on its debt in effectively as well as timely manner. As per the above represented figure it has been gained that company interest coverage ratios has been increasing order from FY2011 to FY2014. At the end of FY2015, the company, interest coverage ratio has been decreased from 1.64. As per the data and it has been seen that company interest coverage ratios is much better and this indicates that company afford to make principle payment in successful manner. This figure indicates that companies has extremely liquidity and not have any issues getting a loan to capture and expend market operations and functions (Tripathi, 2008). 

Market Values 

Ratio

Computation

Formals 

Values of last five years

Market values

 

Price earning ratios

Market values per share ÷ Earnings per share

2011

15.82

2012

17.94

2013

18.05

2014

18.01

2015

15.83

Price Earnings Ratio

The price earnings ratios help the company to measure the company share price to the yearly net income achieved by the company per share.   Thereby as per the calculation and observation, it has been seen that company has higher rations that indicates that company performance is well and prove better investment.  The main reason to change the values form FY 2014 to FY2015 is that company competitor provides its goods and services in fewer prices (Robinson, 2009).    In addition to this above figure also indicates that company growth in future is well and this means organization generating better profits. 

 

Calculate Values of Stock using Dividend Growth, Rate Model

Aim of the present topic is to calculate stock return, divided growth rate as well as current price of the company. Procedure used to determine the estimation such as capital asset pricing model.

Growth rate calculation

g=ploughback ratio*ROE

Ploughback ratio=1-payout ratios

g=(1-0.8528)*0.2722=4.01%

In order to determine accurate growth rate average is taken from 2010 to 2015 as given in the financial report represent in appendix.

g=7.68%

Determination of current share price

With the help of using constant dividend growth model current share price is repressed in below;

Dividend payment in 2014 is $67+59 i.e. 41.26 per share that is do and growth rate is estimated 7.68%.

Dividend payment in 2014=1.26*(1+7.86) =$1.36 that is the total dividend for 2015.          

Determination of expected current stock price

Current stock price is to be calculated with the help of constant dividend growth ratio model that is Gordon’s growth model (Berk and DeMarzo, 2007).

p0=current share price

d1=dividend payment for previous year

RE=required rate

g=growth rate

d1=1.36*(1+7.68%) =$1.46

As per the data dividend yield =3.88%,

RE=3.88+7.68=11.56%

p0=1.46/ (11.56-7.68)

=$37.63   

Recommendation and Conclusion

As per the above analysis and evaluation it has been said that Financial analysis is the procedure of analyzing organizations, budgets, project and other financial entities to identify organization suitability for investment. In addition to this from above calculation, it has been intended   the management of the organization to evaluate whether organization is stable, liquid and beneficial uses financial analysis. In addition to this, it has been seen that organization primary purpose to improve profitability and this can be effectively obtained using enhancement of profit margin as well as return of total assets. Meanwhile, main propose of use of financial analysis by the management is to focuses upon the income, cash flow statement as well as balance of the company in financial years.  In present section student is a deal with the company background and its performance using qualitative analysis.  Thus, it has been recommended that to achieve more profits in effective manner company need to enhance market position with help of expansion of business operations (Fridson and Alvarez, 2002). From the calculation, it has been observed that company achieving better gross margin thereby this figure indicates that company has surplus values at the end of financial year 2015 thus it has been suggested that company requires investing these money in those area from where they earn profits and improve market share in effective manner (Tripathi, 2008).

 

References

asx. (2016). asx.. [online] Available at: https://www.asx.com.au/asx/research/company.do#!/WOW [Accessed 11 Jul. 2016].

Berk, J. and DeMarzo, P. (2007). Corporate finance. Boston: Pearson Addison Wesley.

Bodie, Z. and Merton, R. (2000). Finance. Upper Saddle River, NJ: Prentice Hall.

Fridson, M. and Alvarez, F. (2002). Financial statement analysis. New York: John Wiley & Sons.

Robinson, T. (2009). International financial statement analysis. Hoboken, N.J.: John Wiley & Sons.

Tripathi, M. (2008). Auditing and finance management. New Delhi: Navyug Publishers and Distributors.

woolworths. (2016). woolworths. [online] Available at: https://www.woolworths.com.au/ [Accessed 11 Jul. 2016].

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