Enhancing Revenue Earning Capacity and Operational Efficiency

The assignment content discusses the financial performance of Coles Limited and Woolworths Limited, two companies in the same industry. The report analyzes their debt-to-equity ratio, net operating margin, and return on capital employed to understand their financial health. It recommends that Coles Limited expand its business to enhance revenue earning capacity, while Woolworths Limited should focus on enhancing operational efficiency to retain a greater share of revenue earnings after expenses. The study reveals that Woolworths Limited has a stronger revenue earning capacity than Coles Limited, but Coles Limited has higher operational efficiency.

Financial Reporting

Table of Contents
Introduction:....................................................................................................................................3
a. Introduction:.............................................................................................................................3
b. Identification & Evaluation of the sources of finance:............................................................7
c. Analysis & comparison of the companies.................................................................................10
d. Summary of interesting findings and recommendation.............................................................11
Conclusion:....................................................................................................................................11
Reference:......................................................................................................................................12

Introduction:
The financial report has been prepared to describe how the financial performance of a company
can be described logically through collection of crucial information regarding the company and
also through the application of the different financial tools like ratio analysis. The tools of ratio
analysis is mainly based on the balance sheet (describes the asset liability position of the
company at a particular date) as well as the profit and loss statements of the company (Biddle et
al., 2009). The analysis of the financial health of the company helps the investors and creditors
of the company to assess their level of risk in the company.
a. Introduction:
Company Name: Coles
Year of Establishment: On 9th April, 1914, Mr GJ COLES opened the first store in Collingwood
Victoria. Till then the company is successfully serving the Australian households by delivering
grocery items and readymade foods to them for a period of over 100 years(Invest SMART,
2017). Currently the company is operating as Coles supermarkets in Australia and is one of the
largest companies of Australia (Coles.com.au, 2017). The online operation of the company stared
in the year of 1999.Coles group is listed in ASX (Australian stock exchange) with code CGJ
Major operations of the company:
 Main operation of the business is to meet the grocery needs of the Australian
households through online stores [named as Coles online] and offline supermarket
platforms and retail outlets.
 The business is also involved in the operations of offering lucrative loyalty programs
[“flybuy”] to their existing buyers by making partnership with other retailers. Under
this “flybuy” loyalty program, whenever a customer buys products or services from a
retail partner of Coles, then points are automatically added to the account of a customer

which he has opened with Coles. These flybuy points offer lot of discounts and
advantages during future shopping either with Coles or their partners.
 The company offers credit cards and digital wallet service to the customers to offer
easy payment option to the customers(Financialservices.coles.com.au, 2017).
Products of the company:
 Wide range of Grocery products
 Variety of Liquor products[Liquor products are available under the barands of
“Liquorland”, “Vintage Cellars”, “1st Choice Liquor Superstore”] (liquorland.com.au,
2017)
 Financial & Insurance service with respect to home, car & land
 Specialist tyre and car repair service provided under the “Kmart Tyre & Auto Service”
 Mix apparel range
Company Name: Woolworths Limited:
Year of Establishment: The Company Woolworths Limited was established in September 1924,
originally under the name "Wallworths Bazaar Ltd. The company became a highly attractive
grocery chain to the Australian consumers after 1924, when the company took the initiative to
open several retail grocery stores across Australia. The products sold by the company became
very attractive to the consumers as the company offers quality product at the cheapest price with
money back guarantee in case a bad quality product is sold to a consumer. Currently the business
appears as a trusted partner to thousand of local farmers and manufacturers. The business serves
over 29 million Australians via more than 3000 retail outlets. Current stock price of the company
is around AUD $ 25.21 and the outstanding shares of the company in the market is around 1294
million. The company is listed in the ASX as WOW.AX(U.S., 2017).
Major operations of the company:
Under the Food group or food business the company in regulating the super markets and offers
loyalty program to the existing customers of the company.

Besides, the business also regulates the petrol outlets under the brand “CALTEX
WOOLWORTHS” along with the partnership of Caltex Australia Petroleum Pty Ltd
The business offers the financial services under the brand “Woolworths Money” for better
management of individual finances. The company offers credit cards, reloadable master cards
under this service
The business is also involved in selling the widest range of liquor though retail outlets and also
through home delivery options and also hold auction of the fine wines.
The business is also involved in merchandise selling (Brand-Big-w) and hotel services under the
ALH group.
Products of the company:
 Woolworth Food group: Under this brand the company offers fresh food and grocery
products to the Australian households through their super market outlets
 Financial Services:
The company provides the financial services in the name of Woolworth money and the
service help the customers to manage their money.
 Endeavour Drinks: Under this brand the company offers variety of drinks & liquor
outlets
 Portfolio Businesses:
Under this brand the business offers a variety of general merchandise and hotel services
to the Australian customers
Organizational structure:
Coles

Organizational chart of Coles Group limited (Group, 2017)
Woolworths Limited:
Figure-1
Organizational chart of Woolworth Group limited (www.wowlink.com.au, 2017)
ChiefExecutiveOfficer[JohnDarkan]CFO[Financialdirector](TonyBuffin)ActiveFinanceDirectorHeadofFinace[Property,StoreReset,Marketing]ChiefcustomeroffocerChiefInformationOfficerGeneralManager[ColesBrand]HeadofColesbrand&StateMarketingGroceryDirectorHead[Marketing,Financialservices,LoyaltyProgram,DigitalMarketing]MerchandiseDirectorRetail&SupplyChainDirector

Business Achievement:
Coles
One of the best business achievements of Coles is that the Australian super market chain has
achieved the first Green Star rating for a supermarket; with Coles Hallam in south east
Melbourne. The Coles Hallam super market store was being awarded by a 4 Star Green Star
rating by the Green Building Council of Australia (GBCA) (gbca.org.au, 2017).
Woolworths Limited:
A key achievement of the company is that the total group sustainability measurement score of
the company has reached to 86% by 2016.
b. Identification & Evaluation of the sources of finance:
Evaluation of Financial sources of the company:
Coles:
The financial sources of the company are the interest bearing debts, credit from the customers
and the share holder’s equity. Credit risk of the company along with financial loans and advances
are managed by the company through established policies and procedures.
Woolworths Limited:
Capital structure of the company:
Coles:
In 2015 the maximum approved credit exposure of the country was around 51.7% and in 2016 it
has become 54.4%.This indicates high degree of exposure of the company towards loans and
credit which is for than 50%.Therefore the company is a highly levered company. Rest of the
capital is expected to collect from the share holders Equity. The current stock price of the

company is AUD $15.25 and the company is currently holding 1200 million shares in the
market. Current market capitalization value of the company is around AUD $18305 million.
Woolworths Limited:
The basic two sources of finance of the company are debt or loan and equity. The study of debt
to equity ratio of the company reveals that the debt to equity ratio in 2017 is stable around
30.60.This indicates that the debt of the company is 30.60 times more than the equity of the
company(Macroaxis.com, 2017). The value of the ratio delivers the insight that as the value of
debt of the company is more than the value of asset, therefore the creditors are having more
stakes in the company rather than the stock holders of the company.
Loan or borrowing of the company was around AUD$ m 3079 in 2015 & AUD$ m 3870 in 2016
The equity capital of the company was around AUD$ m 5065 and that of AUD$ m 5347 in 2015
& 2016 respectively.
Financial Ratios of the company:
Coles:
Year 2014 2015 2016
Revenue(AUD $
million) 37391 38201 39242
EBIT(Earning
before interest tax,
or operating
income) (AUD $
million) 1672 1783 1860
Ratios
Net operating
margin(NOM) 4% 5% 5%
Return on capital
employed(ROCE) 10.30% 11% 11.20%

Net Operating Margin (NOM): The ratio measures the proportion of “revenue earned” is left
after paying for the variable cost that is associated with production. This ratio describes the
pricing strategy and efficiency of the company (Wesfarmers.com.au, 2017). As Coles’ pricing
strategy is based on providing quality grocery products with minimum profit margin that is why
the company has only managed to attain a growth of 1% with respect to NOM from 2014-2016.
Return on capital employed (ROCE): Measures the return achieved by the company with
respect to the total capital employed by the company in terms of both debt and equity. Coles can
be described as a financially sound company as the ROCE of the company is more or less stable
and demonstrating a steady rising trend over years. That is the company is the return generating
capacity of the company over the total capital employed is increasing over years in a stable pace
Woolworths Limited:
Year 2014 2015 2016
Revenue(AUD $
million) 60773 60679 60186
EBIT(Earning
before interest tax,
or operating
income)(AUD $
million) 3775 3973 2564
Ratios
Net operating
margin(NOM) 6% 7% 4%
Return on capital
employed(ROCE) 27% 26% 22.20%
The net operating margin of the company is declining over years. In 2015 though it increased by 1%
over that of 2014(6%), but again in 2016 the ratio has become 4%.This indicates weak efficiency in
managing the operating expense of the company(Wow2016ar.qreports.com.au, 2017). As a result of
which the company is losing larger share of the revenue earned while managing the operating
expenses over years(Woolworthsgroup.com.au, 2017).

The declining ROCE over years indicates that the return generating efficiency of the company is
declining over years. This indicates the management inefficiency of the company (Higgins, 2012).
c. Analysis & comparison of the companies
From the above discussion it can be observed that the capital structure of both the companies is
more or less same. Both the companies are heavily relying over the debt financing.
In case of Woolworth limited the overall debt-to-equity ratio is 30.60.Therefore as the debt
volume of the company is 30.60 times of the equity volume of the company, therefore the
creditors of the company is at high risk.
On the other hand the Coles limited rely more on credit purchase rather than direct exposure to
the debt capital. Thus Coles limited may have to bear a lower volume of interest burden but the
volume of credit payable of both the companies is quiet high. So Coles limited is also under huge
amount of credit burden
Another noticeable similarity is that, both the companies belong to the same industries of grocery
retailing, liquor business and the financial services.
But a stinking dissimilarity is observed in terms of the financial reporting format of the
companies. The underlying reason behind this dissimilarity is that the Coles limited operate as a
group company under the Wesfarmers group of companies. As a result the financial statements
as well as key financial figures of the company are only available in a very brief format under the
Wesfarmers groups’ financial report. Mostly the financial figures related to Coles limited are
presented under the consolidated financial statements of Wesfarmers group.
On the other hand the Woolworths Limited functions as an individual standalone company and
sales products and services in different business segment. That is why the financial data and
financial statements of this company is readily available in the annual financial reports of the
companies.

d. Summary of interesting findings and recommendation
If we look at the financial performance of the companies then it can be observed that revenue
earning per year of the Woolworth limited is much higher than that of Cole’s limited. Therefore
Woolworth limited has a much better revenue earning capacity compared to Coles limited as the
operational activities of Woolworth limited is much wider than the Cole’s limited. But the
declining net operating margin ratio & return-on capital employed ratio of Woolworth limited
indicates the sheer operational inefficiency and weak pricing strategy of the company. But the
same ratios for Coles limited indicates presence of operational excellence in the company
Recommendations:
 Coles limited should expand their business to enhance the revenue earning capacity of the
Company
 Woolworth limited should take measures to enhance the operational efficiency of the
company. Because enhancement of operational efficiency will help the business to retain
greater share of revenue earnings after making the possible expenses of the company
Conclusion:
This financial report describes the facts and figures that are to be collected and discussed for
understanding the financial performance of a particular company. For instance in case of
Woolworths Limited & Coles limited data has been collected regarding the debt equity ratio, net
operating margin and on return on capital employed to understand the financial performance of
each of the two chosen companies and how the two chosen companies that are chosen from the
same industry are performing with respect to each other(Armstrong et al.,2010). The study of the
financial health of the companies reveals that Woolworths Limited has a stronger revenue
earning capacity than Coles limited, but the operational efficiency of Coles limited is much
higher with respect to Woolworths Limited.

Reference:
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