Woolworth Limited Financial Analysis - Example

1. Profitability Ratios Year /Ratios 2011 2012 2013 2014 Gross Profit Ratio = (Revenues-COGS/Revenues) (25 841-16 683)/25 841 =0.35*100% =35% (28 813-18 419)/28 813*100% =36 35 399-21 674/35 399*100% =38 (39 944-24 209)/39 944*100% =39 Profit Margin = Net income/sales 1 647/25 841*100% =6.4% 2 059/28 813*100% =7.1% 2 638/35 399*100% =7.5% 2 990/39 944*100% =7.5% ROA =Net Income/total assets 1 647/9 065 =0.18 2 059/10 045 =0.20 2 638/12 203 =0.2 2 990/22 269 =0.1 ROE= net income/total equity 1 647/8186 =0.2 2 059/9084 =0.2 2 638/5 937 =0.4 2 990/6 952 =0.4 Profitability Analysis Woolworth Limited’s gross profit margin improves significantly from 35% to 39% in the four financial years, which indicates that it is executing its operations under a healthy environment. Furthermore, it signifies the fact that the company has improved its ability to access enough resource funds in order ensure that it pays for its immediate future expenses. The ability consequently, ensures that a greater level of the posted amount is secured for saving purposes. It is of greater importance that an entity’s gross profit remains relatively stable over a significant period of time and thus, should not yield to external pressures and external influences. In fact, possible pressure and influences might postulate that these pressure and external influences might render the firm incapacitated to pay-off its immediate future expenses. Woolworth Limited’s profit margin improves to some extent within the four year financial period from 6.4% to 7.5% in 2011 and 2014 respectively. The improvement is an indication that the firm operates in a healthy environmental level given that the entity’s immediate earnings from each level of revenues posted continued to increase over the aforementioned financial. Woolworth Limited’s return on assets (ROA) seems to have improved for the first three years from 0.18 to 0.2 but later drops significantly to a ratio value of 0.1 in the financial year ending 2014. The aforementioned decrease is considered to be unhealthy to the immediate future operations of the Woolworth Limited as it indicates that the management efficiency, knowledge, skills needed for the purposes of optimising the utilisation of its immediate level of assets to produce substantial levels of sales revenues and thus, profits has continued to fall tremendously. Woolworth Limited’s return on equity (ROE) is perceived to have improved tremendously in the four year financial course from a low of 0.20 to 0.4 in 2011 and 2014 respectively. The perceived improvement in the ratio value is an indication that Woolworth Limited has reasonably utilised its underlying equity reserves to ensure that there is increased levels of sales. It is important to note that in doing so, the entity conforms to the exclusive objective of maximizing shareholders wealth while at the same ensuring that there is a decreased level of costs incurred while conducting operations within the periods under analysis (Benninga and Oded, 1997). To sum the analysis above, it can be ascertained that the profitability ratio of the company continues to indicate a positive growth and development given that its management has formulated workable and efficient company policies directed towards ensuring that there is certainty for future production of sales revenues, which translates to immense levels of profits. Notwithstanding, it can be perceived that Woolworth Limited is able to sustain the capacity to ensure that there is an improved profit margin, which postulates that it is confident of being able to meet its future expenses, commitments made to other relevant stakeholders like suppliers as well as making sure that it can vehemently save certain amounts for future comittments. II. Asset Efficiency Ratios Year /Ratios 2011 2012 2013 2014 Asset turnover=revenues/total assets 25 841/9 065 =2.9 28 813/10 045 =2.9 35 399/12 203 =2.9 39 944/22 269 =1.8 Analysis Woolworth Limited’s asset turnover ratio remains at a constant value of 2.9 in the first three year period starting from 2011 to 2013 but the value later, falls to 1.8 in the financial year that ends in 2014. In essence, the decrease in the ratio postulates an unhealthy operational environment. The ROE is used to measure the effectiveness and efficiency of an entity in being able to employ asset to positive and useful use. Following this line of reasoning, it can be said that the capacity of the firm has ensured to put stringent measures in place in order to utilize both the long and short term assets in an optimal way so it can post substantial levels of sales revenues and thus, profits for the periods for which it conducts its immediate operations. III. Liquidity Ratio Year /Ratios 2011 2012 2013 2014 Current ratio-current assets/current liabilities 4 950/3 512 =1.4 5 034/4 296 =1.2 5 367/4 376 =1.2 14 077/13 399 =1.1 Analysis Woolworth Limited’s current ratio and thus, liquidity ratio indicates an unhealthy trend in the four year financial periods. It can be noted that the ratio decreases tremendously significantly from 1.4 to 1.1 in the financial periods that lie between 2011 and 2014. In consequence, it is important to postulate that a standard current ratio is always established to be 2:1, which means 2 assets for every 1 amount of liabilities held at any given moment in time. For this case, it can be perceived that Woolworth Limited’s liquidity position postulates that it is unfairly positioned in order to ensure that it meets or rather offset all of its existing as well as future short term commitments. IV Capital Structure Ratios Year /Ratios 2011 2012 2013 2014 Debt ratio=total liabilities/total assets 1 460+3 512/9 065 =0.6 4 296+1 177/10 045 =0.5 6 266/12 203 =0.5 15 317/22 269 =0.7 Debt to equity ratio= total liabilities/total stockholders’ equity 1 460/ 4 093 =0.4 4 296/ 4 572 =0.9 6 266/5 937 =1.1 15 317/ 6 952 =2.2 Analysis Woolworth Limited’s debt ratio is perceived to have decreased insignificantly within the four financial years under analysis from 0.6 to 0.7 in 2011 to 2014 respectively. It is crucial to comprehend that the improvement in the ratio postulates an unfavourable operational environment for the company since it means that the entity’s capacity to sustain a significant level of equity has fallen short and thus, Woolworth Limited is considered to be leveraged in its immediate financial position (Green and Hollifield, 1999). Woolworth Limited’s debt to equity ratio has continued to improve tremendously 0.4 to 0.2 in the financial period between 2011 and 2014 respectively. The perceived improvement in the level of this ratio is an indication that Woolworth has continued to formulate intensive levels of effort in order to ensure that it sustains an effective balance related to the amount of funds accessed in form of debt financing and equity from shareholders (Fisher, Heinkel and Zechner, 1989). Most importantly, Woolworth Limited has made efficient efforts to ensure that it is able to minimise its underlying level of debt financing as a way of eliminating the accountability meeting future interest expenses related to the company’s borrowings (Graham, 2000). V. Market Performance Ratios Year /Ratios 2011 2012 2013 2014 EPS=net income/No. of ordinary Shares 212.2 269.2 337.9 367.3 Analysis Woolworth Limited’s earnings’ per share has improved tremendously within the four financial years under analysis: from 212.2 to 367.3 cents in 2011 and 2014 respectively. It can be noted that the improvement is related to the entity being able to post relevant and substantial levels of profits, which are later saved for future operations especially in matters related to paying off dividends to existing shareholders (Marshall, McManus & Viele, 2008). Conclusion To sum the discussion above, it can be portrayed that Woolworth Limited’s profitability position is healthy in relation to the firm’s operations. In essence, the improved growth and development in the profitability placement of the entity is vehemently represented by the alternate growth in the level of its immediate earnings per share postings within the years under analysis. On the other hand, the entity’s asset efficiency ratios postulates an unhealthy operational environment, which stipulates the notion that the management team tasked with the responsibility of overseeing the overall operations of the company has failed to conform to substantial level of efforts and skills needed for the utilisation of the existing asset amounts in order to generate sales revenues as well as profits. The entity postulates an unfavourable representation its liquidity, which is perceived to having been unstable especially with the poorly placed current ratio. Moving forward, Woolworth Limited’s capital structure indicates that it is making intensive efforts to sustain a balance between its level of debt and equity financing while at the same time losing a significant amount of equity. For this case, the immediate recommendation that should be employed for the company’s management team and senior executives like the its board rests with improving its liquidity position by making sure that enough assets are sustained at industry levels so potential investors can go ahead and make informed decision on whether to make investments. References List Benninga, S, and Oded S, 1997, Corporate Finance: A Valuation Approach, McGraw-Hill, New York Fisher, E, Heinkel, R and Zechner, J. 1989, Dynamic capital structure choice: Theory and tests, Journal of Finance, 44, 19–40 Graham, R, J.2000. How big are the tax benefits of debt? The Journal of Finance, vol.LV, no.5: pp 1901-1942. Green, R and Hollifield, B. 1999, The personal tax advantages of equity, Working Paper, Carnegie Mellon University. Kokemuller, N. 2012.The advantages and disadvantages of debt and equity financing, Chron. Retrieved on May 21, 2014 from http://smallbusiness.chron.com/advantages-disadvantages-debt-equity-financing-55504.html Marshall, DH, McManus, WW& Viele, DF, (2008). Accounting: what the numbers mean, 8th Ed. McGraw-Hill/Irwin, New-York. Woolworth Limited. 2015. 2014 annual reports. Retrieved from http://www.woolworthsholdings.co.za/investor/annual_reports/ar2014/whl_2014_integrated_reprt1.pdf Woolworth Limited. 2012. 2012 annual report. Retrieved from http://www.woolworthsholdings.co.za/downloads/2012/2012_annual_financial_statements_report.pdf Read More