Woolworth Financial Statement Analysis - Example

WOOLWORTH FINANCIAL STATEMENT ANANLYSIS Name: Course: Instructor: Institution: City: Date Introduction Trend analysis involves analyzing a company financial data over a given period. It involves analyses of items in the statement of financial position and income statement (Robison et. al, 2003). Analysis of the trend over several years is done by calculation of the trend percentage, that is, current year divided by the base year. This report analyses the financial statements of Woolworth Company. Taking 2011 as the base year, trend analysis of the operating income and net sales is as follows Equation Trend percentage = Current year ÷ Base year Woolworth Company Percentage Trend Analysis (Amount in millions of South Africa Rand) 2014 2013 2012 2011 Sales 39707 35227 28604 25582 Trend Percentage 155% 138% 112% 100% Operating Income 3533 3347 3301 3050 Trend Percentage 116% 110% 108% 100% Figure 1 Trend percentage of operating income and sales are calculated by dividing the current year and the base year (2011). For instance, percentage trend in operating income for year 2014, is given by The percentage changes are in relation to base year (2006). The trend analysis shows an increasing trend in the percentage of sales and the operating income. Relative to 2011, operating income in 2012 increased by 8%, 2013 increased by 10% and in 2014 increased by 16%. Relative to 2011, Sales increased by 12% in 2012, by 38% in 2013 and by 55% in 2014. Analysis of the trend percentage from 2011 to 2014 shows that, the percentage increase in operating income of 16% was less than the percentage increase in sales of 55% over the same period. This therefore is an indication that during this period increase in Woolworth’s operating expenses outpaced the increase in sales. Equation Percent change = (Current year amount – Base year amount) ÷ Base year amount Liquidity Ratios Current Ratio = 2011 2012 2013 2014 Current Assets 4950 5034 5347 6201 Current liabilities 3512 4296 4376 5523 Current Ratio The higher the current ratio the more liquid the firm is. The current ration of Woolworth Company was higher in 2011 at 1.409 lower in the other years, 2012 was 1.172, 2013, 1.221 and in 2014 the current ratio was 1.123. The current ratio measures the capability of company current assets to cover the current liabilities (Troy, 2008). A higher ratio indicates that current assets are able to cover the current liabilities (Wiehle, 2005). The company’s current assets include inventories, trade and other receivables, cash and cash equivalents and derivative financial instruments. Some of the company’s current liabilities include, trade and other payables, provisions, interest bearing borrowing and tax (Troy, 2008). Analysis of Woolworth current ratio indicates a ratio more than one. This shows that the company is able to cover for its current liabilities. Debt Ratio = 2011 2012 2013 2014 Total Assets 9065 10069 12203 14393 Total Liabilities 5258 5337 8298 7917 Debt ratio 5.8 5.3 6.8 5.5 Debt ratio measures the portion of asset that has been financed by borrowed funds (Tyran, 1986). A high debt ratio shows a company’s exposes it to high financial risk, that is, the inability to meet its debt obligation (Wiehle, 2005). Analysis of Woolworth ratio between 2011 and 2014, indicates a higher ratio in 2013, 6.8. This is an indication that the company borrowed more in 2013 in order to finance its operating activities. Profitability Ratios Gross Profit Margin = 2011 2012 2013 2014 Gross Profit 8899 10185 13553 15498 Sales 25582 28604 35227 39707 Gross profit margin The higher the gross profit margin the higher profitable a company is (Troy, 2008). Analysis of Woolworth gross profit margin shows an increasing trend from the year 2011 to 2014. In 2011, the margin was 34.79%, 2012 recorded margin is 35.61%, 2013 the margin was 38.47% and in 2014 the company’s margin was 39.03%. This is an indication that the company’s sales and gross profit increased from 2011 to 2014. The company attributes its increase in sales to proper inventory management Return on Investment Return on Investment = 2011 2012 2013 2014 Net profit after tax 1647 2059 2638 2990 Total Assets 9065 10069 12203 14393 ROI Return on investment shows how a company effectively uses its total assets to generate return (Fridson, &, Alvarez, 2011). The higher the return on investment the more effective a company is in generation of returns (Robinson et al., 2003). The net profit after tax and total assets of Woolworth has increased from 2011 to 2014. Analysis of Woolworth returns on investment for the four years clearly indicates that it rose to 20.45% in 2012 from 18.17% in 2011. In 2013, the company recorded an increase in its return on investment to 21.62 from 20.45 in 2012. However, in 2014 return on investment dropped to 20.77% compared to that of 2013, 21.62%. Return on Equity = 2014 2013 2012 2012 Return on Equity 45.1 50.4 47.1 44.1 Figure 2 A higher percentage of owners’ equity indicates that the company is making high profits. Return on equity shows how the shareholders’ funds were used to generate the company’s net income. In 2011 the return on equity of Woolworth Company was 45.1%, this increased in 2012 to 50.4%. The company associates this increase to increase in the company’s operating income. However, in 2013 the Company’s return on equity dropped to 47.10% compared to 2012 valu of 50.4%. The drop was also noticed in 2014, as the company recorded 44.10% return on equity. The company noted that this was due to increase in the company’s operating expenses that caused a decline in the net income. Asset Efficiency Total Assets Turnover = 2011 2012 2013 2014 Sales 25582 28604 35227 39707 Total Assets 9065 10069 12203 14393 Total Assets Turnover Total asset turnover shows how Woolworth uses its total assets to produce sales. The total assets of the company rose by 11.08% in 2012 and in 2013, it increased by 21.19% and by 17.95%. Total sales rose by 11.81% in 2012-it rose by 23.15% and in 2014, it rose by 12.71%. Analysis of the total assets turnover shows an increasing trend from 2011 to 2013 and then a slight drop in the year 2014. A slight increase in the company’s sales and assets in the year 2014 resulted into a drop in the total assets turnover. However, the rising trend in the early years shows how effectively the company utilizes its total assets to generate its sales. Therefore, the company’s assets are very efficient in the generation of its sales. The higher the total assets ratio the more effective the company assets are in generation of sales. Market Performance Market Capitalization Market capitalization is used to measure the value of a company at a given time Bergevin, 2002). It is calculated by the use of the outstanding shares and the value of the share in the market. Market capitalization facilitates comparison of financial statements with other firms or a single company comparing its statement over a given period (Bergevin, 2002). Market capitalization = Number of outstanding shares * Market Price per Share. 2011 2012 2013 2014 Number of outstanding shares 755231337 745709140 753417723 759 547 848 Market price per share 0.15 0.15 0.15 0.15 Market Capitalization 113284701 111856371 113012658 113932177 The market capitalization of Woolworth Company decreased in year 2012, 111856371 compared to 113284701 in 2011. This increased in 2013, 113012658 and in 2014, 113932177. Market capitalization is also referred to as market cap. There exists three types of market cap namely, small cap, medium cap and large cap. Companies that their market capitalization is less than 1billion are known as small cap, while those that their market capitalization fall between $1 billion and $12billion whereas the market value of companies with market capitalization of more than $12billion are known as large cap (Fridson, &, Alvarez, 2011). In all the four years of comparison, the value of market capitalization falls below $1billion. Therefore, Woolworth falls within the small cap since is market capitalization is below $1billion. Price Earnings Ratio Price Earnings ratio = 2011 2012 2013 2014 Market price per share 0.15 0.15 0.15 0.15 Earnings per share 212.2 269.2 332.4 367.3 Price earnings ratio 0.0007 times 0.0006 times 0.0005 times 0.0004 times Price earnings ratio is used to measure the amount of premium investors of a company are ready to pay for the company’s shares in relation to its earnings (Beaver et al., 2011). A higher price earnings ratio (Beaver et al., 2011) is an indication that investors that the future earnings expected by investors will be high, whereas a low price earnings ratio indicates a moderate future earnings. Woolworth’s earnings per share in the year 2011 are 212.2. This increased by 26.9% in the year 2012 to 269.2. An increase in earnings per share was also noted in 2013 and 2014. In 2013, earnings per share increased by 23.47%, that is from 269.2 in 2012 to 332.4, while in 2014 it increased by 10.5% that is from 332.4 in 2012 to 367.3 in 2014. Analysis of the price earnings ratio indicates that in 2011 investors of Woolworth were willing to pay 0.0007 times the earnings of Woolworth stocks, whereas in 2012 they were willing to pay 0.0006 times the earnings of Woolworth stock. In 2012, investors were willing to pay 0.0005 times the stock of the company and in 2014; the investors were willing to pay 0.0004 times the stock of the company (WHL, 2015). However, what the investors are willing to pay decreases yearly within the for years of comparison, with each year recording a decline of 0.0001. Conclusion Analysis of a company’s financial statements enables its stakeholders to evaluate its performance. Creditors and shareholders of Woolworth Company are interested in the evaluation of company’s financial statements in order to determine its profitability over a given period. The ratios used in profit evaluation include profit margin ratio, return on investment, return on equity and the earnings per share. Creditor and suppliers are interested in company’s financial statements in order to evaluate whether Woolworth is able to meet its obligations. The ratios applied in evaluation of a company’s liquidity comprises of receivable turnover ratio, current ratio and cash ratio. Long-term financial providers are interested in the financial statements in order to determine whether a company is able to meet its long-term obligations. These include the financial institutions and the bondholders. The ratios used in evaluation of long term are the debt turnover debt to equity and debt to assets. In addition, analysis of the market value of a company helps the shareholders to assess whether there company has a promising future. The ratios used to analyze a company’s market value include price earnings ratio and market capitalization. References Beaver, W. H., Coria, M. M., & Nichols, M. (2011). Financial statement analysis and the prediction of financial distress. Boston, Now. Bergevin, P. M. (2002). Financial statement analysis: an integrated approach. Upper Saddle River, N.J., Prentice Hall. Fridson, M. S., & Alvarez, F. (2011). Financial statement analysis workbook step-by-step exercises and tests to help you master financial statement analysis. Hoboken N.J., Wiley. http://www.books24x7.com/marc.asp?bookid=43202. Robinson, T. R., Munter, P., & Grant, J. (2003). Financial statement analysis: a global perspective. New York, Pearson Education. Troy, L. (2008). Almanac of business and industrial financial ratios. Chicago, IL, CCH. Tyran, M. R. (1986). Handbook of business and financial ratios. Englewood Cliffs, N.J., Prentice-Hall. WHL Financial Results (2015) Available at http://www.woolworthsholdings.co.za/investor/financial_results.asp Wiehle, U. (2005). 100 IFRS financial ratios. Wiesbaden, Cometis AG. Read More