The Financial Analysis of Woolworth Limited - Example

Executive Summary Woolworth Limited is in retailing line and has been performing well on a consistent basis. Their market has grown which is reflected by the growth in sales. There is even scope for the company to move further as this sector is showing improvement. The financial analysis also highlights some important fact related to liquidity and capital structure. The findings shows the positives and negatives of both based on financial analysis. The ratios like liquidity ensures to find liquidity and the capital financed by the company are demonstrated by capital structure ratios. The capital market ratio indicates the companies which are favoured by shareholders and also help to look into the future prospects of the company. The recommendations highlights areas where both the companies need to improve which will help them face competition and help in proper strategy execution. Woolworths as the company has shown stability and needs to withstand competition and capture a bigger market. This will help the company grow and earn higher profits. Content Purpose of the report 3 Assumption 3 Background of the company 3 Highlights of Annual Report 3 Purpose of auditing 4 Non-financial Information 4 Financial Information 5 Financial Statement Prepared 5 Financing of assets 6 Share Holding Pattern 6 Financial Analysis 6 Findings 9 Recommendations 9 References 10 Appendix 11 Purpose of the report To identify the key areas for Woolworths Limited and their effect on performance To find the financial performance of Woolworths Limited and identify areas of strength and weakness To identify the investment avenues for Woolworths Limited from the point of shareholders Assumptions Inflation and changes in price has not been accounted for which might be misleading Historical cost has been considered which might not be true in the present scenario as value changes with time Changes in technology for production, distribution, marketing has not been accounted for which might give different result Background of the company Woolworth Limited is performing in the retail business line. The company has its registered office as Woolworth Limited, Principal registered office in Australia, 1 Woolworths Way, Bella Vista, New South Wales, 2153 (annual report, 2010, pg 155) Highlights of Annual Report The annual report for the Woolworth Limited corresponds from 1st July 2008 to 30 June 2009. (Annual report, 2010, pg 34) There is much information highlighted in the report. The key point highlighted in the report is increase in net sales to $49.6 billion a growth of 7.5% on a comparable 52 week basics. Increase in earnings per share to 150.7 cents. Increase in net profits to $1835.7 million. Increase in dividend per share to 104 cents. All this area highlights growth which has helped the company grow. (Annual Report, page 3) The purpose of the highlighted statement is to provide the user of the accounting report to look into the areas where the company has performed well. This are the core areas that an investors looks into before investing into the shares of the company. Purpose of auditing The annual reports of Woolworths have been audited. It has been audited by Deloitte Touche Tohmatsu. The purpose of auditing is to provide a declaration by the auditor that the accounting statement has been verified and the accounting statements are true and fair and free from all biasness Non-financial Information The non financial information present is “New store growth is gaining momentum with 23 sites in the pipeline, three opening in FY10, New Zealand” (annual report, page 18) “The investment in our Big General Merchandise business continues to pay dividend with the Big General Merchandise offer well positioned to take advantage of the Federal Government stimulus package in financial year 09” (annual report, page 20) Financial Information The analysis of the annual report shows that total current assets is $4895.2 million (annual report, page 76). Total equity is $7075.3 million (annual report, page 76). There is cash inflow from investing activity of $(1806.2) million showing the company has invested in plant, property & equipment. (Annual report, page 77) Revenue earning per share is $150.7 (annual report, page 74). The profit for the company after tax is $1, 860 million (annual report, page 74). Cash & Cash equivalents amount to $1426.8 million. (Annual report, page 83) Total dividend paid is $1, 174.3 million (annual report, page 77) Financial Statement Prepared The financial statements prepared are as follows Income Statement: It helps to find the “profit or loss the company has made in an accounting year and contains all transaction the company has accounted for”. (annual report) Balance Sheet: It reflects “the financial position of the assets and liabilities on the financial date highlighting the future earning capacity” (annual report) Cash Flow Statement: It shows “the cash flow for the company from different activities like the investing, financing and operating and helps to understand the earning potential for the company” (annual report) Statement of changes in equity: It shows the “changes the company has accounted in the equity capital by further issuing shares or decreasing the capital by buying back shares”. (annual report) Remuneration report: It shows the “way in which the company has paid its directors, the increment which has taken place, the chairman and all other people who hold important position in the company” (annual report) Financing of assets The assets have been financed by raising money from by way of loan. Also some profits from the previous years have been used to finance the assets. This has helped the business continue in its operation and have assured that the normal course of the business is not affected. Shareholding Pattern The largest percentage of share in the company is held by employees and the directors as the company has exercised various stock option plans. Financial Analysis To calculate the financial health we need to look into certain ratios so that correct forecast can be made Net Profit Margin: “It is defined as the profit generated per dollar of sales and is calculated after all the direct and indirect expense has been considered”. (Kennon, 2010) Organisations prefer this to be high. It is calculated as “Earning before Interest and taxes (EBIT) / Sales X 100.” This has grown. It is 3.75% in 2009 as compared to 3.51% in 2008. This is a good sign. This ratio is very important for retailer segment. The ratio for Woolworths has improved signifying better management and control of cost. When we compare it to the gross profit margin it shows a huge dip signifying the amount of indirect expenses like marketing, distribution and other expenses the company incurs. It signifies improper management and strategies to cut cost is required. The gross profit ratio for 2009 is 25.66% as compared to 25.30% in 2008 Current Ratio: “It measures the ability to pay the short term liabilities out of short term assets”. (Financial Modelling Guide, 2010) This ratio helps creditors, suppliers and investor to identify the liquid position. It is calculated as “Current Assets / Current Liabilities”. The ratio is 0.76 times in 2009 as compared to 0.7 in 2008. Woolworths need to improve the ratio as it is a concern as the short term obligations are higher. This might make investors and suppliers stay away. The ratio shows that Woolworths need to improve the liquidity position. Woolworths on the other hand needs immediate strategy as it is showing the business in not liquid and facing obstacle. The positive for Woolworths is that they have improved it. They need to work more and ensure that it reaches around 2. Debt to Equity Ratio: “It determines the proportion of long term debt in relation to the shareholders fund and long term debt”. (Transtutor, 2010) This ratio helps to identify the financial soundness. It is calculated as “Long Term Debts / Equity X 100”. The ratio is 0.42 in 2009 as compared to 0.36 in 2008. The ratio indicates soundness. It shows that the company has a scope for more investment through debts. This is a good sign and shows the company has a space for future projects. Woolworths has increased its debt a lot by borrowing so that it can save on taxes. Woolworths need to ensure that it keeps with the industry standard. Return on Assets: “It is defined as the amount of profit generated for per dollar of asset”. (Joseph, 2010) It helps to identify whether the assets are utilized properly or underutilized. It is calculated as “Earning before Interest and Taxes (EBIT) / Average assets X 100). The ratio for 2009 is 10.88% compared to 10.53% in 2008. Here we see that the return on assets for Woolworths have improved in 2009 as compared to 2008. Woolworths has a better return showing proper utilization of assets. This has resulted in having proper utilization of assets. Woolworths on the other hand has a better return showing proper utilization of assets. The other important part to note is that retail players have huge assets which results in the ratio being lower. Still, on an overall basis we see that Woolworths need to improve their return as it is have very heavy assets and needs to improve it as compared to the competitors. Return on Equity: “It is defined as the profit earned as compared to the equity shareholders i.e. earning per dollar of equity”. (Joseph, 2010) It is calculated as “Net Profit available to ordinary shareholders / Average Equity (excluding minority interest and preference capital) X 100”. The ratio for 2009 is 26.35% as compared to 26.49% in 2008. The return for Woolworths has decreased. The return for Woolworths is very good which might lead to more shareholders investing in securities. Woolworths need to ensure such steps in the future. Earnings per Share: “It is defined as the profit attributed to the equity shareholders”. (Joseph, 2010) It is calculated as “Net profit available to ordinary shareholders / weighted number of ordinary shares on issue”. The ratio for 2009 is 150.71 as compared to 134.89 in 2008. The above ratio indicates soundness. The return for Woolworths has increased in 2009 as compared to 2008 which shows that the profit has increased. Asset Turnover Ratio: It is defined as “the total sales generated per revenue of assets”. (Joseph, 2010) It is calculated as “Sales Revenue / Average Total Assets”. The turnover ratio for 2009 is 2.9 compared to 3 in 2008. The ratio indicates decrease for Woolworths in 2009. Woolworths on the other hand shows soundness in the use of assets. It needs to continue similarly. Findings The overall stability ratio is good for investors. Short term obligation is good. Even the long term shows similar feature. Overall the data reveals the company is doing well. It poses a bright investing opportunity. The company can continue and can increase penetration. This will give better results. Overall the financial ratio seems satisfactory but to have a better interpretation it is important to compare with the industry. Still, individually the company is doing well. Recommendations Woolworths needs to improve its current ratio so that it reflects soundness in its policies and strategies Woolworths need to reduce the amount held in inventories as it is high leading to a lot of money being invested Woolworths need to take more debt so that they are able to save on the taxes References Annual Report, 2010, “Annual Report: Woolworths Limited”, Australia Financial Modelling Guide, 2010, “Liquidity ratios”, retrieved on August 20, 2010 from http://www.financialmodelingguide.com/financial-ratios/liquidity-ratios/ Invest Smart, 2010, “Woolworths Limited (WOW)”, Australian Finance Services, retrieved on August 20, 2010, from http://www.investsmart.com.au/shares/asx/Woolworths-WOW.asp Joseph K, 2010, “Analyzing an income statement: Return on Assets”, about.com guide, The New York Times Company Joseph K, 2010, “Analyzing an income statement: Return on Equity”, about.com guide, The New York Times Company Kennon J, 2010, “Analyzing an income statement: Gross Profit”, about.com guide, The New York Times Company Kennon J, 2010, “Analyzing an income statement: Net Profit Margin”, about.com guide, The New York Times Company Micro Strategy, 2010, “Financial Analysis”, retrieved on August 20, 2010 from http://www.microstrategy.com/financial-analysis/ Woolworths Website, 2010, retrieved on August 20, 2010 from http://www.woolworths.com.au Appendix 1. Calculation of Current Ratio for Woolworths Limited Current Ratio for 2008 = Current Assets / Current Liabilities = 4502.2 / 6424.4 = 0.7 Current Ratio for 2009 = Current Assets / Current Liabilities = 4859.2 / 6414.6 = 0.76 2. Calculation of Debt to Equity for Woolworths Limited Debt to Equity Ratio for 2008 = Long Term Debts / Equity = 2224 / 6235.3 = 0.36 Debt to Equity Ratio for 2009 = Long Term Debts / Equity = 2986.3 / 7057.3 = 0.42 3. Calculation of Gross Profit Margin for Woolworths Limited Gross Profit Margin for 2008 = Gross Profit / Sales * 100 = 11900.3 / 47034.8 *100 = 25.30% Gross Profit Margin for 2009 = Gross Profit / Sales * 100 = 12723.4 / 49594.8 * 100 = 25.66% 4. Calculation of Net Profit Margin for Woolworths Limited Net Profit Margin for 2008 = Net Profit / Sales * 100 = 1651.5 / 47034.8 *100 = 3.51% Net Profit Margin for 2009 = Net Profit / Sales * 100 = 1860 / 49594.8 * 100 = 3.75% 5. Calculation of Return on Assets for Woolworths Limited Return on Assets for 2008 = Net Income / Total Assets * 100 = 1651.5 / 15672.5 * 100 = 10.53% Return on Assets for 2009 = Net Income / Total Assets * 100 = 1860 / 17084.9 * 100 = 10.88% 6. Calculation of Return on Equity for Woolworths Limited Return on Equity for 2008 = Net Income / Equity * 100 = 1651.5 / 6235.3 * 100 = 26.49% Return on Equity for 2009 = Net Income / Equity * 100 = 1860 / 7057.3 * 100 = 26.35% 7. Calculation of Earning Per Share for Woolworths Limited Earning per Share for 2008 = Net Income / Outstanding shares = 134.89 (given in financial statement) Earning per Share for 2009 = Net Income / Outstanding shares = 150.71 (given in financial statement) 8. Calculation of Asset Turnover Ratio for Woolworths Limited Asset Turnover Ratio for 2008 = Sales Revenue / Average Total Assets = 47034.8 / 15672.5 = 3 Asset Turnover Ratio for 2009 = Sales Revenue / Average Total Assets = 49594.8 / 17084.9 = 2.9 Read More