Investments of Coles Myer Limited - Example

Coles Myer Limited xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Name xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Course xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Lecturer xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Date Investment Research Report of Coles Myer Limited Coles Myer Limited Background Coles Myer Limited is a company in retail business. George Coles incorporated it in Australia in 1914 and it initially traded as “Cole’s Variety Stores”. It later converted to public limited company. The company continued to experience steady growth to become the second largest retail business in Australia until 2007. The company has several retail chains all over Australia. In 2007, the largest retailer in Australia, the wesfarmers, acquired Coles Myer Limited and transferred its ownership on November 2007. Cole’s supermarkets are still the second largest retailer in Australia. The Company has more than 730 supermarkets in Australia. The company retails foodstuffs, beverages and drinks, liquor, banners, gas stations and convenience stores. The company also offers online grocery shopping thereby reaching many customers. The company o also operates more than 90 hotels under the brand name. The company is in the last phase of turnaround plan of five years. Presentation of Profitability, Asset Utilization, Liquidity and Debt Utilization Ratios Coles Myer Limited Analysis of Financial Ratios Ratio Formulae             Profitability ratios       Gross profit margin (Gross profit/revenue) x 100 (1311611/3144904)*100 41.71 Net income margin (Net income/revenue) x 100 (129877/3144904)*100 4.13 Operating profit margin (Operating profit/revenue) x 100 (214849/3144904)*100 6.83 ROCE EBIT/net assets 214849/905642 0.24 Selling & admin to sales selling and administration expense/ sales (794584+302178)/3144904 0.35 Cost of sales margin COGS/sales 1450678/3144904 0.46 Debt utilization ratios       Gearing ratio Debt/shareholders funds 420824/905642 0.46 Return on equity margin Net income/equity 129877/905642 0.14 Sales return Sales/capital employed 3144904/520216 6.05 Return on fixed assets Profit/fixed assets 129877/1460529 0.09 Debtors/ stock turnover (Trade debtors/sales) x 365 (24384/3144904)*365 2.83 Creditors turnover (trade creditors/purchases) x 365 (387673/1450678)*365 97.54 Interest cover EBI/interest 214849/29782  7.21 Liquidity ratios       Current ratio Current assets/current liabilities 479176/522729 0.92 Quick ratio (Current assets-inventory)/current assets (479176-363880)/522729 0.22 Assets utilization ratios       Assets turnover assets/net income 1939705/129877 14.93 Total assets turnover total assets/total revenue 1939705/3144904 0.62 Net assets turnover net assets/total revenue 905642/3144904 0.29 Current assets turnover current assets/total revenue 479176/3144904 0.15 Return on assets (ROA) Profit/total assets (129877/1939705)*100 6.70 Return on fixed assets Profit/fixed assets (129877/1460529)*100 8.89 Total assets financing total assets/equity 1939705/905642 2.14 The analysis of the financial ratios of this company has several strengths. The ratios are a very good indication of the financial stability of the company. The liquidity ratios indicate the position of the company in meeting the operational obligations as they fall due. The analysis indicates ability of the company to meet the short-term obligations, as the lenders require them (Demerjian 2007). This helps the company management to put in place the necessary measures to ensure that there is enough cash flow to the business in order to meet the requirements as they fall due. The ratios indicates to the management the company assets that easily convertible to cash. The ratios indicate the proportion of the company funding. It indicates the extent to which the operations of the business are funded by owners fund as well as borrowed funds. This helps to maintain a good balance between owners funding and debt financing. The ratios also help the management to compare the company performance against the industry performance. As such, it is in position to evaluate if it is within the right track or not. The lifeblood of a business is the cash flow. Analysis of financial ratios indicates the quality of the company earnings. It tells whether the company is generating enough revenues and cash to cover the needs of the business as well as make extra income for the owners of the business. Therefore, the analysis of the financial ratios indicates whether the company is able to sustain itself. The analysis of the ratios indicates the growth of the company as well as increase in the capital. Planning and performance are other important aspects of the company that the analysis of the ratios helps to necessitate as Tsay (2005) indicates. They provide not only guidance on the planning but also the actual position of the company. As such, ratio analysis helps in creating plans as well as in preparation of funding proposals from financial institutions. This indicates the strength of the ratio analysis. Strength of the ratios is giving investors a glimpse of the potential of the company using the industry trends. They indicate whether the company has fundamental strength to increase the value of their stock in the market (Kaskinen 2007). The asset utilization ratios indicate how the company is best utilizing the assets at its disposal to generate income. They indicate the efficiency of the company in utilizing the assets. The investors are interested to know how the management is best utilizing assets to generate income and therefore the ratios help them understand the efficiency of the management in allocation and utilization of assets. The financial strength of the company is an essential concern to the owners, the management, lenders, customers and the investors. Ratio analysis is very important in cost control and efficiency of the company. Cost control and efficiency are vital to the success of the company. The ratios help the management to monitor the financial strength of the company in respect to the marketplace on a continuous basis. In essence, increasing focus on the ratio analysis has positive impact on the bottom line and financial strength of the company. On the other hand, the analysis of the financial ratios presents some weaknesses as well. The management may not be able to interpret the ratios correctly. This is because, they may not have financial knowledge and they find it difficult to understand and interpret the financial ratios (Penman & Penman 2007). As such, they may not be able to make the right decisions as concerning the ratios and the necessary steps as the ratios indicate. This is a major concern as well. Equally, some investors have little or no knowledge of the ratio analysis and therefore it may not help them in making decisions or understanding the company performance. It is not possible to compare all financial ratios; it is limited to companies with comparable rice levels. In addition, only companies with the same accounting valuation bases and accounting methods can get comparison. Since companies engage in different businesses, comparison is also limited to firms that engage in similar activities. Ratio analysis tells about past data of the company and therefore indicates performance over the past years (Demerjian 2007). However, ratio analysis does not provide informational analysis such as it does not tell much about the status of the company among its competitors. It does not provide enough cross sectional analysis. To have a broader view of the company performance, it is important to evaluate five or more years of ratios. There are seasonal variations that must be attended to attentively. Ratio analysis is a special and essential analysis because it links together the income statement, statement of financial position and the statement of changes in equity produced by the company (Kaskinen 2007). The ratio analysis provides very useful figures for comparability across sectors and industries. As such, using the company's financial ratios, investors develop the attractiveness of the company basing it on its competitive position, profitability and financial strength. Potential Impact of Currency Fluctuations on MYR's Performance Currency fluctuations are the outcomes of floating exchange rate systems. The large economies experience the effects of the currency fluctuations the most. Considering Australia is one of the largest economies in the world, currency fluctuations will affect virtually all sectors of the economy; retail business is not an exemption. Currency fluctuations affect the demand of the currency, the rate of inflation, economic performance, and differentials in interest rates, technical support, cash flows and resistance levels. All this factors will affect Coles Myer Limited. Currency fluctuation increases the inflation rate (Tille 2008). This is because the demand for the two currencies increases and entities hold their currency reserves thereby increasing the inflation rate. On the other side, high inflation rate Increases the price of commodities and therefore reduces the purchasing power of the consumers. Consumers hold their money and therefore avoid spending. This lowers the business level of the company. As such, currency fluctuations have a long effect to the level of business of Coles Myer Company. As Teleki et al., (2006) underpins, currency fluctuations exerts a significant drag on the underlying business levels of Coles Myer company by rendering it uncompetitive and therefore reduction on the level of business. The company imports become expensive and therefore the company increases the price of the imported goods. High price of the goods reduces the bargaining power of the consumer. Currency fluctuations increase the cost of doing business because of uncertainty of the currency. Currency fluctuations will reduce the profits of the company. This is because there will be reduction in the level of business. It will affect the revenue growth of the company. Essentially, currency fluctuations decrease the bargaining and purchasing power of the consumer. This reduces the spending that a consumer can make and therefore reduction of business activities. Currency fluctuations also raise the price of commodities as individuals opt to withhold spending due to the fluctuations. A weak currency will make the important to be very expensive thereby making the company to increase the price of the imported goods in order to cover the costs. The company will reduce the volume of goods when purchasing because of increase in the cost of doing business. Investment Recommendations To counteract the currency fluctuations, Coles Myer Company should monitor the currency exposure closely (Cannon 2008). Currency fluctuations affect almost all large companies and therefore monitoring the situation would help the company to put in place measures to counteract the currency exposure. The company can hedge and lock the exchange rates for a fixed period by having a forward contract or through derivatives. The best method of protecting the company from currency fluctuations is having business practices. This will help the company recover losses made when there is fall in currency, it will be able to recover when the currency rises. The company therefore should all its currency transactions, including contracts in the local currency in order to protect against the currency fluctuations exposure. Comparative ratios Ratio Coles Myer Limited Industry average Gross profit margin 41.71 48 Net income margin 4.13 20 Operating profit margin 6.83 30 ROCE 0.24 0.3 Selling & admin to sales 0.35 0.1 Gearing ratio 0.46 0.3 Return on equity margin 0.14 0.2 Return on equity margin 0.14 0.2 Sales return 6.05 15 Return on fixed assets 0.09 10 Debtors/ stock turnover 2.83 10 Creditors turnover 97.54 50 Interest cover  7.21 10 Current ratio 0.92 1 Quick ratio 0.22 1 Assets turnover 14.93 20 Total assets turnover 0.62 0.6 Net assets turnover 0.29 0.3 Current assets turnover 0.15 0.15 Return on assets (ROA) 6.70 30 Return on fixed assets 8.89 35 Total assets financing 2.14 10 The comparative ratios above indicate that the company is below the average industry performance in almost all the ratios. The company has to improve the efficiency in order to get to industry performance. By averaging the industry performance, Coles Myer Limited will be very efficient. It is therefore recommendable to the company management to fast track the improvement of the company utilization of its resources to generate revenue (Saunders et al., 2006). This will give the investors maximum return on their investment. The company's financial performance indicate improvement from the previous financial period, however, the improvement is very small. The company needs to step up its efficiency. As such, the management should cut down on the operational costs in order to maximize the income (Tsay 2005). The operational profit of the company is far below the industry average indicating that it is inefficient in its operations. Operational or running costs accounts for a major part of the revenue and therefore the management should minimise the costs as much as possible. The asset utilization ratios indicate that the management does not utilize the assets to their full capacity. The company does not maintain enough working capital to cater for the current obligations. The company should increase the working capital in order to help it generate more revenue (Penman & Penman 2007). The gearing ratio of the company is above the industry average meaning that it is using a lot of debt to finance its operations. As such, it should reduce the use of debt in order to lower the gearing level of the firm. Coles Myer Limited is a good investment option as it indicates potential for improvement and growth. References Cannon, A. R. 2008. Inventory improvement and financial performance.International Journal of Production Economics, 115(2), 581-593. Demerjian, P. 2007. Financial ratios and credit risk: The selection of financial ratio covenants in debt contracts. School of Business University of Michigan. Accessed at: http://papers. ssrn. com/sol3/papers. cfm. Kaskinen, J. 2007. Creating a Best-in-Class KPI Program-One way to achieve continuous financial improvement is to establish a program of key performance indicators (KPIs) that lets you measure current performance. Strategic Finance,89(4), 29-33. Penman, S. H., & Penman, S. H. 2007. Financial statement analysis and security valuation. Saunders, A., Cornett, M. M., & McGraw, P. A. 2006. Financial institutions management: A risk management approach. McGraw-Hill/Irwin. Teleki, S. S., Damberg, C. L., Pham, C., & Berry, S. H. 2006. Will financial incentives stimulate quality improvement? Reactions from frontline physicians.American Journal of Medical Quality, 21(6), 367-374. Tille, C. 2008. Financial integration and the wealth effect of exchange rate fluctuations. Journal of International Economics, 75(2), 283-294. Tsay, R. S. 2005. Analysis of financial time series (Vol. 543). John Wiley & Sons. Read More