Financial Statements of Coles Myer Limited and Woolworths Limited - Research Paper Example

ID] [module and module number] Executive Summary This paper aims to analyse the financial ments of Coles Myer Limited and Woolworths Limited. From the analysis it has been found out that Coles-Myer's trends as regards its sales, costs, and profits figures are fluctuating. On the other hand, Woolworths' figures show an increasing trend over the course of 2004-2007. These companies have provided their owners with adequate returns, with Coles-Myers' ROE playing around 15-19% within the period, while Woolworths's ROE in 2005 is 37%, 32% in 2006 and 27% in 2007. These high ROE figures are effect of financial leverage that are employed by both companies: both companies utilize debt in more than 50% of their financing. Although this high level of debt provides higher level of ROE for the company, the debt levels are quite high thus entails very huge risks. A major recommendation for these companies is to conserve their funds instead of paying dividends, and use these in order to fund their growth instead of relying too much on debt. While the two companies remain profitable, the apparent weakness in their operation is their liquidity position, where in most instances they have less than a dollar in current assets, much less in quick assets to cover a dollar of current liability. Although the companies manage their assets well in terms of efficiency, a major recommendation is to retire current portions of debt by long-term debt in order to improve liquidity position. This decline in liquidity position, as well as the companies' aggressive capital structure policies create a perception of higher risks although both are profitable in their operations. Table of Contents I. Body 6 A. Coles Myer Limited 6 i. Operating 6 ii. Investing 7 iii. Financing 8 B. Woolworths Limited 10 i. Operating 10 ii. Investing 11 iii. Financing 13 C. Ratio analysis and comparison 15 i. Firm liquidity 15 ii. Operating profitability 16 iii. Financing decision 17 iv. Return on shareholders 17 II. Conclusions and Recommendations 18 I. Body A. Coles Myer Limited i. Operating Over the years, cash flow from the company's operations has been decreasing. For the period of four years, the cash flow in 2007 is at the lowest at 942.5. This cash flow results from the company's operations. The company's cost of sales has been relatively stable over the years, at 75% of sales in 2004 and 2005, to 76% in 2006 and 2007. Consequently, the company's gross profit figure is stable at 25% in 2004 and 2005, and 24% in 2006 and 2007. The company's expenses in relation to sales has also been at a relatively stable level over the course of four years. The company's marketing expenses are 19% of sales in 2004 and 2005, and 18% in 2006 and 2007. Coles Myer Limited spends 4% of its sales over the period of four years. After the expenses are deducted, the company's net profit figure plays around 2-3% from 2004 to 2007; 3% in 2004, 2% in 2005, 2% in 2006, and 3% in 2007 in proportion to sales. For every dollar of sales, the company receives an after-tax net profit of 0.02 cents over the course of four years. These figures result in a return on assets of 14% in 2004, 7% in 2005, 6% in 2006, and 8% in 2007. As regards the company's efficiency, the company has increased its inventory turnover over the course of the years: from 8.82 in 2005, down to 8.71 in 2006, then up to 9.08 in 2007. The company's frequency of collection has increased too, from 41.21 times in 2005, to 48.98 times in 2006, and up to 64.22 times in 2007. However, the performance of its assets in relation to sales has been decreasing over the years, from 3.94 in 2005, 3.7 in 2006, and 3.68 in 2007. ii. Investing From 2004 to 2007, Coles Myer Limited has increased its investments in property, plant and equipment-the company's biggest expenditure as regards its investing activities from 704.1 in 2004, to 925.0 in 2005, 1040.1 in 2006 and 1040.8 in 2007. This signifies some physical expansion on the part of the company. Apart from investing in property, plant and equipment, the company's investing activities include payments for purchases of businesses and controlled entities which amount to 145.2 in 2007, lower than its 2006 figure of 202.5, higher than the 2005 figure of 120.0, but lower than its 2004 figure of 192.0. Apart from these, the company has invested some of its cash by purchasing licenses in 2007 amounting to 8.0, and by purchasing the joint venture in 2006 which amounts to 0.9, and 7.3 in 2007. Coles-Myer has received cash from selling some of its property, plant and equipment-with its figure highest in 2007 at 169.8. In 2006, this figure only amounts to 19.9; 23.8 in 2005 and 80.3 in 2004. The company has sold some of its business and sales entities which amounts to 11.1 in 2007, 1309.9 in 2006, 3.9 in 2005 and 31.8 in 2004. The company has gained 9.9 in 2004 by selling Sydney Central Plaza. Another significant amount as regards the company's investing activities is the company's sale of investments in 2007 amounting to 158.5, and 13.3 in 2006. The company has received 15.7 from the repayment of loan from other entities in 2005, and 66.3 in 2004. The company has also sold some of its licenses in 2007 which amounts to 4.9. All in all, the company has invested 857.0 in 2007, received cash amounting to 96.6 in 2006, invested 1004.9 in 2005, and 710.5 in 2004. The company's liquidity position has been in constant decline before it goes up again in 2007: for every dollar in current liabilities, the company has 1.2 dollars in 2004, 1.09 dollars in 2005, 0.98 in 2006, and 0.99 in 2007. For every dollar of current liabilities, the company has 0.39 dollar in 2004, 0.28 in 2005, 0.22 in 2006 and 0.24 dollars in 2007. The company has very little liquid assets to finance its current obligations. iii. Financing Coles Myer has utilized both debt and equity in terms of raising funds over the course of four years. In 2004 and 2005, the company has raised capital by issuing shares and options which amounts to 37.1 and 108.0 respectively. Even though the company has used equity in those two years, the company has used more debt over the course of the year. Proceeds from borrowing amount to 1362.7 in 2004, 3171.7 in 2005, 8309.2 in 2006 and 5883.7 in 2007. The company received cash from contributions to equity, which amounts to 122.5 in 2006 and 76.9 in 2007. The company's uses of cash as regards its financing activities, the company's major outlay is its repayment of borrowing which amounts to 1,772.6 in 2004, 2691.7 in 2005, 8496.9 in 2006, and 5402.5 in 2007. The company has also paid dividends over the course of four years. These figures include payment of dividends of 307.8 in 2004, 436.8 in 2005, 453.1 in 2006, and 500.7 in 2007. Coles Myer has also spent some sum to buy back some shares which amount to 78.4 in 2007, 838.2 in 2006, and 704.4 in 2005. Overall, the company has spent more than it has received as regards its financing activities. Coles Myer Limited utilizes a lot of debt in financing its operations. The company's aggressive capital structure policy is apparent in its debt to equity ratio of 1.21 in 2004, 1.51 in 2005, 1.54 in 2006 and 1.49 in 2007. This means that debt, in 2004 finances 55% of the company's total assets; in 2005 debt finances 60% of the total assets; in 2006, 61%; and in 2007, 60%. This means that the company uses debt in more than half of its total financing mix. This increase in leverage enables the company to achieve a high return on its shareholders' equity although its return on asset figure is quite modest. Its return on equity is 17% in 2005, 15% in 2006 and 19% in 2007, the higher return compensates for the additional risks that its shares absorb by the increase in utilization of debt. The company's interest coverage ratio in 2004 is 12.3, 12.04 in 2005, 7.6 in 2006, and 9.64 in 2007. B. Woolworths Limited i. Operating Woolworths' cash flow from operations has been increasing healthily over the course of four years. The company's operations has grown from 1262.3 in 2004, 1221.0 in 2005, 1704.8 in 2006, and up to 2294.2 in 2007. The company's cost of sales is at a steady rate, being 77% of sales in 2004 and 2005, down to 75% in 2006 and 2007. Consequently, the company's gross profit is at a steady rate of 25%; the discrepancy is being addressed by the increase in other operating revenues. As for the company's other expenses, the company's marketing expenses, or branch expenses in relation to sales is relatively stable at 17% in 2004 and 2005, and 16% in 2006 and 2007. Woolworths's administration expenses as proportion of sales remain at a stable level of 5% over the course of the years. For every dollar of sales, Woolworths earns 0.04 in net profit, a level stable from 2004 to 2007. Thus, for every dollar of sales, the company's net profit after tax is 0.03, also on a steady level over the course of four years. These figures result in a return on assets for Woolworths of 10% in 2005, and 9% in 2006 and 2007. The company has increased before it decreased its inventory turnover over the course of the years: from 12.63 in 2005, up to 13.22 in 2006, then down to 12.59 in 2007. The company's frequency of collection has decreased too, from 22.34 times in 2005, to 11.45 times in 2006, and up to 22.34 times in 2007. However, the performance of its assets in relation to sales has been decreasing over the years, from 4.15 in 2005, 3.38 in 2006, and 3.06 in 2007. ii. Investing Over the years, Woolworths has constantly been investing in its property, plan, and equipment at an increasing rate until it declines in 2004. The company's investment in 2007 is 1113.4, lower than its investment in 2006 amounting to 1409.9, and its investment in 2005 of 1180.5. It is however higher than the investment in property, plant and equipment in 2004. Apart from investment in property, plant and equipment, the company has purchased businesses and controlled entities over the years as part of its investing activities, which results in an outlay of 56.4 in 2004, 1291.6 in 2005, 1643.9 in 2006, and 204.0 in 2007. Woolworths has also invested some of its cash in intangibles, which amount to 1.8 in 2006 and 17.6 in 2007. Another significant investing activity for the company is its purchase of additional investments which amount to 173.0 in 2007, 0.4 in 2005 and 26.8 in 2004; it does not spend on the purchase of investments in 2006. The company has invested in loans to related entities in 2004, amounting to 69.9. The company has received cash from selling some of its property, plant and equipment, with 2007 figure the highest among the four years at 778.2. It has sold some of it in 2006, the proceeds amount to 328.7; while in 2005 it has received 97.7, and 138.1 in 2004. Apart from these, the company has sold some of its investments in 2006 which amount to 1.0, and in 2005 which amount to 0.5. The company has received dividends from related entities: 4.7 in 2007, 6.1 in 2005, and 1.1 in 2004. Woolworths also received cash from advances of employee loans in 2005 which amounts to 15.3, and 14.9 in 2004. Apart from these, the company's receipt of cash includes cash from loans repaid by related entities which amounts to 153.4 in 2004. All in all, Woolworths has invested 725.1 in 2007-the amount is lower than the previous two years, 2725.9 in 2006 and 2352.9 in 2005, but higher than the 2004 figure of 564.3. As for the company's liquidity position, for every dollar of current liabilities, the company most of the time has less than a dollar of current assets to meet these obligations: 0.86 dollars in current assets in 2004, 0.82 in 2005, 0.85 in 2006, and 0.76 in 2007. For every dollar of current liabilities, Woolworths has 0.17 dollars in cash and accounts receivable in 2004, 0.25 in 2005, 0.35 in 2006, and 0.23 in 2007. The company is in a less liquid situation in meeting its current obligations. iii. Financing Woolworths limited utilizes both equity and debt in its total financing mix. The company has raised cash from issuing shares and options in 2004 which amounts to 28.0, also in 2005 which amounts to 104.7. The company has also issued equity securities in 2006, and activity which has provided it with cash amounting to 40.9, also in 2007, with a figure of 63.6. Apart from issuing shares and utilizing equity for its total financing, the company's major source of funding comes from its borrowings, with proceeds amounting to 9718.3 in 2004, 10882.7 in 2005, 11089.2 in 2006, and 10097.1 in 2007. The company has reaped 0.4 as proceeds from short-term deposits in 2004. These are the ways the company has raised cash in terms of its financing activities. The repayments of borrowings consist the largest cash outlay as per the company's financing activities. The company has paid 9850.4 in 2004, 10,882.7 in 2005, 11089.2 in 2006 and 11096.6 in 2007. Apart from these, the company has paid its shareholders some dividends over the course of the years, which amount to 346.9 in 2004, 201.9 in 2005, and 355.2 in 2007; it has not paid any dividend in 2006. The company has also paid 7.7 in dividends for minority interest in 2007. The company has paid 42.9 in 2004 for Wow income notes distribution. All in all, the company has raised cash from its financing activities in the year 2005 and 2006, with cash figures of 1215.3 and 1119.9 respectively. However, the company has spent more in its financing activities in the year 2004 and 2007, where its cash outflow from financing activities amounts to 636.4 in 2004, and 1298.8 in 2007. As the company utilizes both debt and equity in terms of its total financing, the company's debt to equity ratio is 1.99 in 2004, 3.08 in 2005, 2.13 in 2006, and 1.61 in 2007. These figures signify a high level of debt in contrast to equity. This is more apparent in the company's debt to total assets ratio, where it can be seen that Woolworths has utilized debt in more than 50% of its total financing: 67% in 2004, 75% in 2005, 68% in 2006, and 62% in 2007. This is quite an aggressive capital structure policy. As debt is utilized more than equity, the company employs financial leverage which increases its return on shareholders' equity dramatically. Although Woolworths only has modest return on assets figures of 10% in 2005, and 9% in 2006 and 2007, with financial leverage, the company's return on equity figures are 37% in 2005, 32% in 2006, and 27% in 2007; an apparent decline of 5% every year. C. Ratio analysis and comparison i. Firm liquidity Coles Myer (2007, 2006, 2005, 2004) Woolworths (2007, 2006, 2005, 2004) It can be seen that Coles Myer have more current assets for every dollar of current liabilities than Woolworths. In most instances, the former has more cash and accounts receivable to meet its current obligations than the latter. Coles Myer (2007, 2006, 2005) Woolworths (2007, 2006, 2005) In terms of asset efficiency, Woolworths fares better in terms of inventory turnover. However, Coles Myer collects from its debtors more frequently than Woolworths. In most instances, Coles Myer's assets perform better than Woolworths' as apparent in the asset turnover ratios. ii. Operating profitability Coles Myer (2007, 2006, 2005, 2004) Woolworths (2007, 2006, 2005, 2004) Woolworths' cost of sales ratio has been lower than Cole Myers in 2006 and 2007. The two companies' cost of sales in relation to sales are pretty much on the same level, with gross profit ratio also on the same level. Coles-Myer spends more on marketing as proportion of sales than Woolworths, but spends less than Woolworths in terms of administration expenses. Woolworths' net profit ratio is higher than Coles-Myer's, thus its net profit after tax ratio is also higher by 1%. iii. Financing decision Coles-Myer (2007, 2006, 2005, 2004) Woolworths (2007, 2006, 2005, 2004) Both companies utilize debt in more than 50% of their total financing. Woolworths, however, has a greater proportion of debt than Coles-Myer in financing total assets. Coles-Myer's interest coverage is higher than Woolworths; Woolworths's finance expenses in relation to sales are also higher than Coles-Myer. iv. Return on shareholders Coles-Myer (2007, 2006, 2005, 2004) Woolworths (2007, 2006, 2005, 2004) Woolworths has a higher return on assets than Coles-Myer. As both companies utilize financial leverage, their returns on shareholders' equity are also way higher than their return on assets, however, Woolworths's return are so much higher than Coles-Myer. This is also apparent in the higher EPS of Woolworths in contrast to Cole-Myer's. II. Conclusions and Recommendations Conclusions What are the sales trends' Profit trends' Cost trends' Coles Myer's sales, profit and cost trends are fluctuating over the course of the four years. Woolworths, on the other hand has an increasing trend for its sales, profit and costs figures. Is profit providing an adequate return to the owners' Both companies provide adequate returns to their owners. Coles-Myer has an ROE of 15-19% from 2005-2007. Woolworths has an ROE of 37% in 2005, 32% in 2006 and 27% in 2007. Are the businesses controlling their expenses' Both the companies' costs in relation to sales are on a relatively stable level over the years, which signifies an effort on the part of management in terms of controlling expenses. What are the financial strengths and weaknesses of these businesses' Both companies are definitely profitable; these companies' ability to maintain a level of sales is a financial strength. By looking at their income statement, both of them has the ability to control costs over the course of four years in order to come up with a stable level of net profit to sales ratio, and return on assets ratio. A major financial weakness of these companies lies in their liquidity position. These companies in some instances have a very low level of current assets, as well as quick assets to finance their current liabilities. Although they are both profitable, if they fail to meet these current obligations, they will face serious problems in its operations in the future. Are the businesses managing their inventories efficiently' Other assets' Both companies have high turnover figures. Although Woolworths has a higher inventory turnover than Coles-Myer; but Coles-Myer collects from its debtors more frequently. Are the businesses on a sound financial footing' If sustainability of operations, yes, both businesses are profitable enough to secure financial footing for themselves in terms of their retained earnings from operations. Is capital structure adequate' Are the debt positions acceptable' Both businesses have very high levels of debt which are perceived as too risky. The use of financial leverage can result in higher levels of loss when times are difficult for both companies, or the industry. Recommendations What are the financial strengths and weaknesses of these businesses' Both companies can increase the liquidity position by: 1) cutting the time it takes for the inventories to be turned into cash; 2) cutting the time it takes for receivables to be converted into cash; or 3) securing long-term debt to pay off its short-term debt Is capital structure adequate' Are the debt positions acceptable' Instead of declaring dividends, companies can use these funds to include in their retained earnings which they can use in financing their expansion. This will increase the proportion of equity, while keeping them from borrowing more. Could you make any suggestions about the way the information is presented' Is there any additional information which could be useful' Industry information can enhance the analysis as it will provide the benchmark to assess the performance of the two companies. Appendices Figure 1.1 Horizontal Analysis Figure 1.2 Horizontal Analysis Figure 1.3 Horizontal Analysis Figure 1.4 Horizontal Analysis Figure 2.1 Vertical Analysis Figure 2.2 Vertical Analysis Figure 2.3 Vertical analysis Figure 2.4 Vertical analysis Figure 3.1 Ratio analysis Coles-Myers Limited Figure 3.2 Ratio analysis Woolworths Limited Read More