This report provides an analysis of the financial performance of Woolworths Ltd., a leading supermarket chain in Australia. It includes profitability ratios, liquidity ratios, efficiency ratios, and cash management analysis.
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FINANCE FOR BUSINESS
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ABSTRACT For getting success within the business the most essential thing for the company is proper and efficient management of the cash. This is because of the fact that if the inflow of the cash is more as compared to the outflow of cash. Then this is a good option and success for the company and also this will assist the company in growing and developing the business. The current report stated that the management of finance is very essential for the company as without it not a single business activity can be undertaken. For this first the analysis of all the financial statement was done. After analysing the financial performance and position it is essential for the company as this will tell the company the areas where the company is lacking and where the company requires improving the working. Further it discussed about the fact that marketable securities are very a good source of managing the business and the finance within the business as well. This is due to the fact that marketable securities can be converted into cash with no time and very less energy. Also, after this the discussion took place over the different types of risk which the business can encounter as it operates within the dynamic business environment. Also, the sensitivity analysis was done and don’t use that mineral water. In the end it is concluded that the use of finance need to be done in very optimal manner and this will make sure that the finance is properly allocated within the business.
INTRODUCTION Financing referred as the practice of facilitating the funds for running the activities of the business smoothly, investing and making purchases. Financial institutions like bank are involved in business of facilitating the capital to the consumers, investors and the businesses in order to help them in attaining their goals or objectives in an effective and efficient manner. The present report is based on Woolworths Lt d, a largest Australian super market chain, operating as a retail sector organization in an entire Australia. Furthermore, the report highlights the financial performance by making use of the ratio analysis tool and also includes cash management assessment. Moreover, it also indicates the analysis of the proposal by way of computing the net present value and also depicts the systematic and the unsystematic risks associated with the investment or the project in which the company desires to invest. FINANCIAL ANALYSIS OF WOOLSWORTH 2.1 Description of company Woolworths is one of the leading and largest supermarket chains in Australia and owned the grocery stores. It has been founded in the year 1924, the company forms duopoly along with Coles of an Australian supermarkets, that accounts for around 80% of Australian market. The firm is specialized in the groceries, household products, magazines, baby supplies etc. The net revenueofWoolworthslimitedfor2019A$39.568billionandthecompanyprovides employment to more than 100,000 people globally. It is headquartered in Bella Vista, New South Wales, Australia and has expanded its retail stores in more than 1000 locations. It is a publicly listed company that provides good dividend to its shareholders annually. The store is famous for providing variety of goods to its customers; from groceries to beauty products everything is available. Moreover, the major reason behind the success of retail chain is its affordable and competitive prices that attract customers towards the store. In order to expand its customer base and market share, the company has also started loyalty schemes under which it offers exciting discounts and rebates to its customers; it has not only helped in adding new consumers towards the company but also retained the old consumer base effectively and efficiently. There are some private label brands that operate under the name of Woolworths like
Essentials, Gold, Delicious Nutritious, The Odd Bunch etc. that offers good quality goods & services at affordable prices. Thus, it is safe to say that Woolworths is Australia’s biggest supermarket chain and the enterprise is planning to expand its operations under the guidance and supervision of its CEO Brad Banducci. In 1982, Woolworths also acquired two overseas grocery brands called Roelf Vos and Purity which in 2000 become Woolworth’s stores. The company also purchased American Supermarket Giant Safeway in the year 1985. During the time of acquisition Safeway had 126 stores; later on all of them were renamed as Woolworths limited. The company also launched its slogan called 2012 ‘Australia’s fresh food people’ to promote the fact that 96% of products sold by the store are actually produced in the country itself. 2.2 Calculation and analysis of performance of company Woolworths Ltd. Profitability ratios ParticularsFormula201720182019 Gross profit15928.91670917442 Net sales55668.65694459984 Grossprofit ratio Grossprofit/Net sales*10029%29%29% ParticularsFormula201720182019 Net profit1593.416761559 Net sales55668.65694459984 Netprofit ratio Netprofit/Net sales*1003%3%3% Operational ratios Liquidity ratios ParticularsFormula201720182019 Current assets6994.270146298 Current liabilities8824.290298620 Current ratio Currentassets/Current liabilities0.790.780.73 ParticularsFormula201720182019 Current assets6994.270146298
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Inventory4080.442334280 Quick assetsCurrent assets-Inventory2913.827812018 Current liabilities8824.290298620 Quick ratio Quickassets/Current liabilities0.330.310.23 Efficiency ratios ParticularsFormula201720182019 Cost of goods sold39739.74023542542 Inventory4080.442334280 InventoryTurnover ratio Costofgoods sold/Inventory9.749.59.9 Net sales55668.65694459984 Average total assets22915.823,39123491 Asset turnover ratio Netsales/Average inventory2.432.432.55 Gross profit ratio- From the above analysis it has been interpreted that gross margin of Woolworths over the years is accounted as stable. This ratio states the profits earned by the company after meeting its cost relating to sales or variable cost. Higher the GP ratio better is the operational performance of an enterprise (Parkinson, 2018). This analysis shows that the GP ratio of Woolworths is equal in both the years which that the firm is gaining similar amount of profits and revenue which in turn means that the business operations of an entity are functioning smoothly. Net profit margin- The table depicts that NP ratio of Woolworths accounted as 3% in both the years which clearly reflects that the firm is generating stable income after paying off its liabilities, costs or expenses and tax obligations. It is the ratio that measures an ability of the firm in meeting all its expenses and costs by making use of its earnings. Higher the NP ratio better is the performance of the firm. As ratio of Woolworths resulted as same in both the year, this means that the profitability performance of an enterprise is better and shows that the firm is stable in an overall industry or the market. Current ratio-Current ratio is a liquidity ratio that helps in identifying an organization’s ability to pay its short-term obligations or those due within an year. The ideal current ratio is 2:1 which means that the assets must double current liabilities in order to become a sound financial
ratio (Trotman and Carson, 2018). From the above data it can be interpreted that the Current Ratio has declined from 0.78% to 073% which means that there is a 5% decline in the overall ratio during a period of 1 year. Thus, it can be analyzed that the firm’s ability to repay its debt is reducing and it can be difficult for Woolworths to meet its financial obligations in the near future. Quick ratio-The quick ratio is another liquidity ratio that helps in measuring a company’s liquidity. It is also called as acid test ratio and it measures the total cash and marketable securities then compare it to amount receivable from current liabilities. From the above data, it can be interpreted that Woolworths company’s quick ratio dropped from 0.31% in 2018 to 0.23% in 2019 which means that the company will struggle to pay its debts and it is more likely that it will have to sell its assets in order to make the repayment. Inventory turnover ratio-The ITR helps in identifying how many times a company has sold or replaced an inventory during a period of time (Flax, Bick and Abratt, 2016). It is imperative for every company to keep a check on its ITR as it helps in making better decision related to the purchasing and selling of inventory. From the above study, it is interpreted that the ITR has increased from 9.5% to 9.9% which means that Woolworths Company is selling its goods and services quickly and there still exists a good demand for its inventory in the market. Asset turnover ratio- Asset turnover ratio is concerned with a company’s capacity to generate sales from its assets by comparing net sales with average total assets. From the above table, it was interpreted that the asset turnover ratio of Woolworths Company increased from 2.43% to 2.55% which means that the business is using its assets more effectively and efficiently and is generating more sales with the help of these assets. 2.3 Cash management analysis The cash is the most important thing without which the company cannot run or exist in the highly competitive market. This is majorly because of the reason that if the cash is not proper in the business then the company will not be able to manage the operations of the company. The cash is the blood or the lifeline of the business (Mian and Sufi, 2018). This is due to the reason that without the use of the cash the business will not be successful. Thus, for this it is very essential for Woolworths to manage the proper flow of cash within the business. This is so
because of the fact that if the inflow of the cash is good then this will not be a problem but if the outflow of the cash will be more then this will be a problematic situation. Thus, for this it is essential for Woolworths to manage all the activities which bring in cash for the company and the activities which flow out cash from the company. For managing the flow of cash in effective manner it is the responsibility of the company to manage the marketable securities that is the securities which can be converted into cash anytime and anywhere. The major marketable security of Woolworths is the common stock and this is a good source of marketable security. This is very essential for the effective flow of the cash within the business and this is very good for the effective working of the company. This is a marketable security because as and when the company want they can convert the stock in the cash by selling it within the market. This is a good marketable security as this will assist the company to convert the stock into the cash. The stocks are the shares of the company which can be sold anytime and anywhere. Thus this will assist Woolworths to manage the work in proper and effective manner. Another major marketable security in the balance sheet of Woolworths is the commercial papers. This is also an important measure for the management of the cash because of the reason that when the company wants they can convert this commercial paper within the cash (Sun, Shi and Zhang, 2019). These are the most important liquid asset which can be converted within cash at any point of time. The commercial paper is a promissory note which is issued be different companies to take funds for meeting the short term requirements of the business. This includes the issue of the promise by the bank or the company which is providing money against of this commercial paper. Thus, whenever there is requirement of the cash Woolworths can sell for this commercial paper to some other parties for some discounted rate and this will assist the company in generating cash (Fernández-Amador, Gächter and Sindermann, 2016). Thus, this cash can be used in the business as and when they require cash and if they do not require the cash then this can be kept as a marketable security till there is no requirement of cash within the business. 2.4 Sensitivity analysis Income statement ParticularsUnit Per unit ($)Amount Sales270000184860000 less:Variable cost27000013.23564000
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Contribution2700004.81296000 Less: Fixed cost330000 Net profit before tax966000 less: Tax @30%289800 Net profit after tax676200 Working note : Particulars Per unit ($)Units Amount ($) Sales203000006000000 Revised sales unit : Decreasing unit by 10% Sales units300000 10% of sales units30000 Revisedsales units270000 Revised sales per unit : Decreasing by 10% Sales per unit20 10%ofperunit sales2 Revised sales per unit18 Revised sales : Particulars Per unit ($)Units Amount ($) Sales182700004860000 ParticularsAmount ($) Variable cost12 Revised variable cost : Variable cost12 Increasing by 10%1.2 Revised VC13.2 ParticularsAmount ($) Fixed cost300000 Revised fixed cost : Fixed cost300000 Increasing by 10%30000
RevisedFixed cost330000 Particulars Amount ($) Initial investment2000000 Years Cash inflows Discounting factor@ 10% Discounted cash inflows ($) 16762000.909091614727.3 26762000.826446558843 36762000.751315508039.1 414762000.6830131008264 Total of discounted cash inflows2689874 Less: Initial outlay2000000 NPV689873.8 Interpretation- The above results shows that the proposed project would be profitable for Woolworth Ltd as the net present value of this company resulted as 689873.8 which seems as positive. It is been recommended to the firm to choose or go for this project by making investment as it would generate large amount of returns for the firm. 2.5 Systematic and un- systematic risk which can affect the performance of company The risk is the uncertain event which may occur within the future and this may impact the performance of the company in negative manner. The risk will have a great impact over the working of the company as these are some negative aspect which affects the working of the company to a great extent. In the similar manner the risk is categorised in two different manners that is systematic risk and the unsystematic risk. The systematic risk is the one which is also known as market risk and this occurs due to changes in the working of the market. On the other side the unsystematic risk is the one which is specific to the changes within the company itself or within the industry. The major risk of both type that is systematic and unsystematic risk faced by Woolworths is as follows- Systematic risk- the major systematic risk is as follows-
Changes in the law- this is the most common and frequent risk which may occur within the legal structure of the economy. This is majorly due to the fact that there are many different changes taking place in the external environment and forces the economy to make certain changes within the whole legal structure of the economy. Thus, all these changes need to be adapted by Woolworths as if they will not adapt to these changes then the company will not be able to work in proper and effective manner. Interest rate hikes- this is another major risk which can occur anytime and at anywhere within the economy. This is majorly because of the reason that the working of the economy is very dynamic and frequently changing thus, this can have many different changes within the interest rated being charged by the banks (Sidek, Mohamad and Nasir, 2016). This is majorly because of the reason that when the interest rates within the economies are high the company also has to pay high interest rates to the loans taken from the banks and other institution. Unsystematic risk- the major unsystematic risk faced by Woolworths is as follows- Strike by the employees- this is the major unsystematic risk which can be faced by Woolworths by working in the highly competitive world (Tenca, Croce and Ughetto, 2018). This is majorly because of the reason that if the need and requirement of the employees are not considered by the company then they can go for strike and this can a huge impact over the working of the company. Thus, there is always the risk that the employees of the company can go for strike and lockdown of working and operations of the company anytime and on any terms and condition. Financial risk- this is also a type of unsystematic risk as this risk is also internal to the company and the outside or the economic changes has no impact over this risk. The financial risk is the one which includes the risk of getting the finance. This can be in both ways that is one in which the company has given loan or money to some other people then will it come back on time or not. On the other side another risk is that of the company has taken loan from other company or financial institution then the risk is that whether they will be able to pay it off back or not. 2.6 Dividend pay- out ratio and policy of dividend The dividend pay- out ratio is the type of ratio which is helpful for the company in calculating the total amount of the dividend which is payable to the shareholders in relation with the net income earned by the company. This is also referred to as the percentage of earning paid to the shareholders in form of the dividend over their amount which is being invested. The major reason behind the name pay- out ratio is because of the fact that this ratio suggests the amount
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which is being paid out to the shareholders against the amount which they have invested within the business. Since past 3 years the dividend being provided by the company is very high is on increasing trend only. Thus, this suggests that the profit of the company is also at the increasing trend. This is majorly because of the reason that the dividend is being paid after all the expenses of the company are deducted and then what remains in given to shareholders in form of dividend. Thus, if the dividend are paid out high then this suggest that the profitability and growth and development of company is in positive manner and this assist the business in managing the work in more secured and safe manner (Bouleau, 2017). In the recent time the dividend pay- out ratio is 89 % which states that the company is paying out maximum of the profit which they are earning (Woolworths Group Ltd, 2020). Thus, this will be very much helpful in creating the good image of the company among the market and also the goodwill of the company will be increased if the dividend will be given high (Biekpe, Cassimon and Mullineux, eds., 2017). This is due to the fact that if the company will give more payment to the shareholder then it states that the profit of the company are very high and this will create a really good image of the company within the highly competitive market. Hence, the major importance of high dividend pay- out ratio is that this assist the investor in making out the fact that whether the company is good for the purpose of investment or not. This is helpful because of the reason that if the dividend pay- out ratio is high then this will state that the company gives more of the earning to the shareholders and less keeps it with the company itself. Also, another major importance of the analysis of this ratio is that this will also increase the market capital and market share of the company. This is majorly because of the fact that the company will have goodwill in the market if they will pay high payment to the shareholders of the company in form of dividend. This is majorly due to the fact that when the dividend payment is high then this will assist the company in attracting more of the shareholders and this will increase the popularity of the company among the consumers. Also, this will attract more of the people to invest more money in the company. This is majorly due to the fact that if the company will pay of more dividends then this will attract more of the investors and they will freely invest their money within the working and operations of the company.
RECOMMENDATION From the above all discussion it is clear that management of finance is very essential for successful running of the company. This is majorly because of the fact that finance is the lifeline of the business. If the finance will not be managed in successful manner then the company might face many of the problems. Thus, for this some of the major recommendations for the company are as follows- The first and foremost important suggestion for Woolworths is to manage and control all the unnecessary expenses which the company faces at time of managing the business in this highly competitive environment. This is majorly because of the reason that when it comes to expenses then this decreases the profits of the company and this might result in losses for the company (Young and Pagliari, 2017). Another major recommendation for the company is that they must try to increase the number of marketable securities within the balance sheet of the company. This is majorly because of the reason that when the company has more of the marketable securities then the liquidity of the company will be much high. This states that as the company has requirement of cash then instantly these securities can be sold. CONCLUSION In the end it is said that the management of money or the finance is very essential for the company in getting successful. This is majorly because of the reason that if the finance or cash will not be managed in proper manner then the company might face many different problems and difficulty in managing the business. The current report discussed about the financial statement of Woolworths and the areas where it was lacking. Also, the different marketable securities of company were discussed like commercial paper and many other different types of liquid assets. Further the different risk like legal changes, interest changes and many others was discussed. In the end the different dividend pay- out ratio and the importance of it was discussed for the company.
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