Financial Analysis: Woolworths & Tesco - Case Study Example

FINANCIAL ANALYSIS: WOOLWORTH’S & TESCO By Student’s Name Code + Course Name Professor’s Name University Cite, State Date A. Financial Review: Five-Year Summary 1. Woolworth Stores & Type of Stores Growth The number of stores in Australia has increased significantly in the five year period from a total value of 823 to 931 in 2010 and 2014 financial years respectively. This indicates a 13.12% increase (Woolworth, 2014). The increase can be highly attributed to significant increase in the number of stores such Australian places as New South Wales & Australian Capital Territory, Queensland, and Victoria, with all of these three locations increasing their number of stores by at least 20 within the period. Notably, the extension of the firm in New Zealand also indicates a significant growth in the number of stores from 152 to 171 within the five-year periods, which signifies a 12.5% increase (Woolworth, 2014). The number of stores for Thomas Dux has remained unchanged within the five-year period at 11, which indicates zero growth. Freestanding Liquor stores has shown a significant increase of 24.2%that is 68 stores; ALH Group Retail Outlets showing an increase of a whole 263 stores; Caltex/WOW Petrol, which has shown no growth at all within the period under evaluation; WOW Petrol-Australia portraying an increase of 73 stores while that of WOW Petrol-New Zealand closing down its stores that previously stood at 22 in 2010 (Woolworth, 2014). Product Range The firm’s hotels including clubs operating under ALH Group indicates a product growth rate of 15.8%; the home timber and hardware product growth portrays a 71.4% significant growth within the period and the masters product growth is fairly positioned at least 100% within the period (Woolworth, 2014). 2. Tesco 3. Stores & Type of Stores Growth The company’s UK stores sales indicate a -1.7% negative within the period, which was highly attributed to the imminent closure of about 43 stores (Tesco, 2015). A decline in the level of sales for these stores is highly associated with a notable decline in the like-for-like sales as well as the immediate impact of past company initiatives. The Asian market portrays a sales decline of about -4.1% that also involves a further -3.2% impact that relates to foreign exchange (Tesco, 2015). The South Korea store levels was highly affected by the direct impacts exerted by DIDA regulations while the Malaysian market postulates an insignificant recovery with a substantial decrease in the number of stores, which is attributed to the rather poor consumer spending patterns that has remained redundant over the years (Tesco, 2015). In Europe, there has been a significant decrease in the level of stores. For instance, in Hungary, the recently updated requirements fostered an imminent closure of stores while others remained closed on all Sundays. The closure is also attributed to the recently introduced supervision fees that took effect as from 1st January of 2015 (Tesco, 2015). Most notably, there has been perceived integration in the operations into a single operating unit in Czech Republic, Hungary, Slovakia and Poland thereby reducing restructuring stores operations in order to develop substantial levels of buying and operational synergies. Product Growth The five year Tesco Bank operation has recorded a 2.1% growth in sales revenues, which is highly attributed to a rather stringent customer lending business activities. The firm has ensured to expand its product ranges to include such crucial elements as mortgage and loan-related products. The firm’s home insurance business segment has enjoyed a 3% significant growth within the period (Tesco, 2015). The growth is attributed to the widening of the underwriting providers base while at the same time ensuring to launch digital improvements in order to ensure effective customer experiences. B. Performance Analysis Woolworth’s Limited Comparative Statement of Financial Position As at 2014 Year ended 30 June 2014 (M) Common Size Statements (%) Current Assets: Cash and cash equivalents 922.6 922.6/24,205.2 3.8 Trade and other receivables 925.7 925.7/24,205.2 3.8 Inventories 4,693.2 4,693.2/24,205.2 19.4 Other financial assets 12.7 12.7/24,205.2 0.1 Assets classified as held for sale 620.6 620.6/24,205.2 2.6 Total current assets 7,174.8 7,174.8/24,205.2 29.6 Non-current assets: Trade and other receivables 108.2 108.2/24,205.2 0.4 Other financial assets 304.7 304.7/24,205.2 1.3 Property, plant and equipment 9,600.7 9,600.7/24,205.2 39.7 Intangible assets 6,335.0 6,335.0/24,205.2 26.2 Deferred tax assets 681.8 681.8/24,205.2 2.8 Total non-current assets 17,030.4 17,030.4/24,205.2 70.4 Total assets 24,205.2 24,205.2/24,205.2 100 Current liabilities: Trade and other payables 6,006.3 6,006.3/24,205.2 24.8 Borrowings 219.5 219.5/24,205.2 0.9 Current tax liabilities 158.9 158.9/24,205.2 0.7 Other financial liabilities 168.2 168.2/24,205.2 0.7 Provisions 1,005.3 1,005.3/24,205.2 4.1 Total current liabilities 7,558.2 7,558.2/24,205.2 31.2 Non-current liabilities: Borrowings 4,136.0 4,136.0/24,205.2 17 Other financial liabilities 1,155.2 1,155.2/24,205.2 4.8 Provisions 567.4 567.4/24,205.2 2.3 Other 263.0 263.0/24,205.2 1.1 Total non-current liabilities 6,121.6 6,121.6/24,205.2 25.3 Total liabilities 13,679.8 13,679.8/24,205.2 56.5 Net assets 10,525.4 10,525.4/24,205.2 43.5 Equity: Issued capital 4,850.1 4,850.1/24,205.2 20 Shares held in trust (218.9) (218.9)/24,205.2 -0.9 Reserves 198.2 198.2/24,205.2 0.8 Retained earnings 5,423.1 5,423.1/24,205.2 22.4 Equity attributable to equity holders of the parent entity 10,252.5 10,252.5/24,205.2 42.3 Non-controlling interests 272.9 272.9/24,205.2 1.1 Total equity 10,525.4 10,525.4/24,205.2 43.5 Tesco Comparative Statement of Financial Position As at 2014 Year ended 30 June 2015 (M) Common Size Statements (%) Current Assets: Cash and cash equivalents 4330 4330/88428 4.9 Trade and other receivables 4242 4242/88428 4.8 Inventories 5914 5914/88428 6.7 Derivative financial instruments 306 306/88428 0.3 Short-term investments 1186 1186/88428 1.3 Total current assets 23,638 23638/88428 26.7 Non-current assets: Property, plant and equipment 40,880 40,880/88428 46.2 Goodwill and other intangible assets 7542 7542/88428 8.5 Deferred tax assets 1028 1028/88428 1.2 Total non-current assets 64512 64512/88428 72.9 Total assets 88428 88428/88428 100 Current liabilities: Trade and other payables 19844 19844/88428 22.4 Borrowings 4016 4016/88428 4.5 Current tax liabilities 190 190/88428 0.2 Provisions 1342 1342/88428 1.5 Net current liabilities 15,704 15704/88428 17.8 Non-current liabilities: Borrowings 21302 21302/88428 24 Provisions 1390 1390/88428 1.6 Total non-current liabilities 34666 34666/88428 39.2 Total liabilities 50370 50370/88428 56.9 Net assets 14142 14142/88428 16 Equity: Issued capital 10188 10188/88428 11.5 Reserves (828) (828)/ 88428 (0.9) Retained earnings 3970 3970/88428 4.5 Equity attributable to equity holders of the parent entity 14142 14142/88428 16 Total equity 14,142 14142/88428 16 Comparative Analysis For both companies, property, plant and equipment hold a significant representation of the overall asset base with Woolworth, the value stands at 39.7% while for Tesco it represents 46.2% of the overall assets. Woolworth’s inventories covers 19.4% of the total asset base as opposed to 6.7% for Tesco in 2015 and 2014 respectively. Consequently, Woolworth’s long term liabilities fund 25.3% of all assets in comparison to a rather higher value of 39.2% for Tesco within their respective underlying periods. Woolworth’s trade and other payables stand at 24.8% as opposed to 22.4% for Tesco. Cash Flow Analysis Woolworth’s Limited Comparative Cash Flow Statement As at 2014 Year ended 30 June 2014 (M) Common Size Statements (%) Net cash provided by operating activities 3,472.7 3,472.7/3,472.7 100 Net cash used in investing activities (2,031.4) 2,031.4/ 3,472.7 58.5 Net cash used in financing activities (1,371.9) 1,371.9/ 3,472.7 40 Cash and cash equivalents at the end of the period 922.6 922.6/3,472.7 26.5 Tesco Comparative Cash Flow Statement As at 2015 Year ended 30 June 2014 (M) Common Size Statements (%) Net cash provided by operating activities 968 968/968 100 Net cash used in investing activities 4030 4030/968 416 Net cash used in financing activities 1628 1628/968 168 Cash and cash equivalents at the end of the period 4330 4330/968 447 Comparative Analysis Woolworth’s net cash used in investing activities represents 58.5% of all cash provided by its immediate operational activities as opposed to 416% for its counterpart: Tesco. Subsequently, a similar pattern is perceived when net cash used in financing activities as well as Cash and cash equivalents at the end of the period also assume higher percentages for Tesco in comparison to Woolworth their respective operational periods. C. Ratio Analysis Profitability i) Return on Equity(ROE)= profits available to owners/average owners equity Woolworth: 2,451.7 /10,525.4 *100%=23.3% Tesco: (11,482)/14,142*100% = -81.2% ii) Return on Assets: EBIT/Average total assets Woolworth: 3,775.2/ (24,205.2 +22,250.2/2)*100% =3,775.2/23,227.7*100%, 16.25% Tesco: (11,584)/94,378*100%= -12.27% iii) Gross margin= gross profit/loss/sales revenue*100% Woolworth: 16,477.6/ 60,952.2*100%= 27.03% Tesco: (4,224)/124,568*100%= -3.40% Asset Efficiency i) Asset turnover= sales revenues/average total assets Woolworth: 60,952.2/23,227.7=2.6X Tesco: 124,568/94,378= 1.3X ii) Days inventory ratio=average inventory/cost of sales*365days Woolworth: 4449.3/44,474.6*365 days= 36 days Tesco: 6533/128,792*365 days = 18 days Liquidity i) Current ratio=current assets/current liabilities Woolworth: 7,174.8/7,558.2= 0.9X Tesco: 23,638/15,704=1.5X ii) Quick asset ratio= current assets-inventory/current liabilities Woolworth: 7,174.8-4,693.2/7,558.2=0.3X Tesco: 23,638-5,914/15,704=1.1X Financial Stability i) Debt-to-equity=Total liabilities/ total equity Woolworth: 13,679.8/ 10,525.4= 1.3 Tesco: 50,370/14,142= 3.6 Analysis Woolworth profitability position is much more good and healthy as opposed to Tesco. The poor performance can be noted by Tesco’s negative profitability ratios meaning that the company is making significant level of losses. Woolworth’s high performance is attributed to its efficient marketing strategies as well as expansion models into new international markets like New Zealand. Woolworth’s asset turnover efficiency ratio is double that of Tesco meaning that the management of the company has devised effective ways of utilising their existing asset base to post enough profits. However, Tesco take less number of days to translate its inventory to sales revenues as opposed to Woolworth. On the contrary, Tesco, as opposed to Woolworth, is fairly positioned in regards to its liquidity position. It thus means that Tesco is able to meet its short-term obligations and stay in operations for the short term period (Fisher, Heinkel, & Zechner, 1989). Woolworth’s financial stability is much more improved in comparison to Tesco given that the firm has ensured to strike a balance between equity and debt funds, which has ensured that it is not overburdened by the obligation of paying-off high finance costs (Benninga & Oded, 1997). In a nutshell, Woolworth is fairly positioned in terms of its profitability and financial stability, which means that any potential investment could be used to generate more revenues as opposed to pay huge debts like in the case of Tesco; hence a possibility of earning high dividends in future (Covas & Haan, 2006). It is for this immediate reason that I would invest my $1000 with Woolworth. In essence, Woolworth has ensured to maintain a healthy operation while at the same making it certain to strike a necessary balance between debt and equity funds. References List Benninga, S, and Oded S, 1997, Corporate Finance: A Valuation Approach, McGraw-Hill, New York Covas, F & Haan, W, J. 2006. The Role of debt and equity finance over the business cycle, Bank of Canada Working Paper, Retrieved on May 21, 2014 from http://www.bankofcanada.ca/wp-content/uploads/2010/02/wp06-45.pdf Fisher, E, Heinkel, R & Zechner, J. 1989, Dynamic capital structure choice: Theory and tests, Journal of Finance, 44, 19–40 Tesco 2015. 2015 Annual report. Retrieved on October 17, 2015 from http://www.tescoplc.com/files/pdf/reports/ar15/download_annual_report.pdf Woolworth 2014. 2014 Annual report. Retrieved on October 17, 2015 from http://www.woolworthslimited.com.au/annualreport/2014/files/Woolworths_Annual_Report_2014.pdf Appendix Read More