Ratio Analysis of Woolworths Company Limited

This document provides a comprehensive analysis of the financial ratios of Woolworths Company Limited, including gross profit margin, current ratio, liquid ratio, debt ratio, and operating cash flow margin. It also includes recommendations for improving the company's financial performance.

RATIO ANALYSIS OF
WOOLWORTHS
COMPANY LIMITED

EXECUTIVE SUMMARY
Company Woolworths Limited in engaged in various retail sector operation and the main business is
procuring the products from the outside market and reselling the same to various customers.The
financial parameters of the company in terms of gross profit and net profit ratio is strong but the
financial parameters in terms of liquidity position is weak which needs to be focussed on in order to
gain long term growth and sustainability.

Contents
EXECUTIVE SUMMARY...........................................................................................................................2
INTRODUCTION AND OVERVIEW OF COMPANY....................................................................................4
ANALYSIS OF WOOLWORTHS GROUP LIMITED......................................................................................4
RECOMMENDATIONS............................................................................................................................6
COMPARATIVE RATIO ANALYSIS............................................................................................................6
CONCLUSION.........................................................................................................................................7
References.............................................................................................................................................8

INTRODUCTION AND OVERVIEW OF COMPANY
Woolworths Group Limited is an Australian based company which is engaged in the operation of
retail stores. The main principal segment of operations of Woolworths group limited includes
Australian Food, NewZealand food, Endeavour Drinks, BIG Hotels and other similar related
segments. The company Woolworths Group Limited was founded in the year 1924 with 201,522
employees working ( Bloomberg L.P, 2019)Its registered office is situated at Bella Vista, Australia.
The engagement of various segment described here in below:
a) Firstly, Australian Food segment who is primarily engaged in the buying the food products
from outside and reselling the same items to the consumers of Australia. This segment has
1,008 supermarket and stores all over the country. ( Bloomberg L.P, 2019)
b) Secondly, New Zealand Food segment who is primarily engaged in the buying the food and
drinks products from outside and reselling the same items to the consumers in New Zealand.
This segment has 1,81 supermarkets. ( Bloomberg L.P, 2019)
c) Thirdly, Endeavour Drinks segment who is primarily engaged in buying liquor products from
outside and reselling the same items to the consumers of Australia. This segment has 1,545
liquor stores all over the country. ( Bloomberg L.P, 2019)
d) Fourthly, BIG W segment buy and resell the discounted merchandise product to the
consumers of Australia.
e) Fifthly, Hotel offers various types of leisure services to the people of Australia.
ANALYSIS OF WOOLWORTHS GROUP LIMITED
The analysis of each of the ratio of Woolworths Group Limited and comparison of same with the
previous year are explained here in below:
1) Gross Profit Margin: It is nothing but the profitability ratio of the company and it measures
how properly the company is using its material and labour to sell off its products at profit.it
is a very important ratio as it depicts how well the company is functioning without
considering the indirect cost into account (MyAccountingCourse.Com, 2019).The Gross profit
percentage as computed is 29% for both the financial year 2017 and 2018.
2) Current Ratio: It is also known as working capital of the company. It is the ratio which
estimates the financial capability of the company to meet its short-term obligations in near
future. It is the ratio through which the weightage of current ratio versus current liability is
analysed. It also ascertains ho the company can maximise is assets to meets its liability in
time( CFI Education Inc., 2019).The Current Ratio as computed is 0.78 and 0.80 for both the
financial year 2018and 2017.This ratio indicates that the company does not have sufficient
assets to meet its liability in both years.
3) Liquid Ratio: It is also known as quick ratio of the firm. This ratio tells the ability of the
company to meet its short-term debt as and when it become due. This ratio also tells the
liquidity position of the entity as how fast the company can convert its assets into liquid
cash. These ratios are also used to analyse the credit rating of the company (Defmacro
Software Pvt. Ltd., 2019) .The Liquid Ratio as computed is 0.32 and 0.33 for both the

financial year 2018and 2017.This ratio is not an ideal ratio as the company is not highly liquid
and the ideal ratio is generally considered to be 1:1.
4) Debt Ratio: It is generally a solvency ratio that analyse the firm’s total liabilities as a
percentage of total assets. This ratio analyses the company ability meets its liability with the
available total assets of the firm. In gene earl words we can say that how much assets that
the company needs to sell off in order to pay off its liability. This ratio also indicates the
financial leverage of the company. The company which have high level of liabilities as
compared to its total assets of the firm are considered to be highly risky and highly
leveraged firm and riskier for lenders (MyAccountingCourse.com, 2019). The Debt Ratio as
computed is 1.21 and 1.38 for both the financial year 2018and 2017.This ratio is not an ideal
ratio as the company as excess liability in comparison to assets of the company.
5) Operating Cash flow Margin: The most commonly used profitability by the company is the
operating cash flow ratio which is also known to be profitability ratio of the firm. It also
depicts how much revenue the company is generating from per dollar sales the company is
bringing in. In another way we can say that how much efficient the company is in
transforming the operations of the company into cash. There is very simple formula in order
to arrive at the figure i. e Operating Cash Flow Margin=Cash Flow from Operations/Net Sales
of the entity. As a general rule higher is the operating ratio the better is the performance of
the company. If the same ratio increases over time it indicates that the company is
performing well over time and converting its sales into actual cash flow (Clarke, 2019) .The
Operating Cash flow percentage as computed is 5.14% and 5.67% for both the financial year
2018and 2017.This percentage of the operating margin is good for the company growth.
All the above ratio explanations and figures are summarised and plotted in the table below:
WOOLWORTHS GROUP LIMITED
Year 2018 2017
Particulars Percentage Percentage
Return on Equity 17.23%
Gross Profit % 29% 29%
Current Ratio 0.78088299 0.7954647
Liquid Ratio 0.32057416 0.32551385
Inventory Turnover 13.4988152
Debt Ratio 1.21257514 1.38221709
Operating Cash Flow Margin 5.14% 5.67%
Cash Return on Owners Equity 29%

RECOMMENDATIONS
Few recommendations which could help to increase the financial performance of the Woolworths
company limited are depicted here in below:
a) Reform in the trading hours which is the urgent requirement to do across Australia
according to the demand of customers and suite the lifestyle of the people around them.
This is very much necessary for the company as the company is mainly engaged in retail
sector and restrictions to operate the store should be very much limited so that the
customers can easily shop 24 hours a day without any restriction and can do a hassle free
shopping .therefore removing the trading hour criteria would relax the shopping of the
people in Australia and would increase the sales leading to growth in earning and profit. The
company should also increase the liquidity position of the company as when the demand
arises regarding the payment of liability the entity should be in a position to set off its
liability as when the situation demands.
b) The entity should improve its current ratio and quick ratio which is the working capital of the
company. As it indicates how much liquid the company is and how much within short span
the company can meet all its available liability with the assets available. To improve the
financial performance the company should also improve its debt ratio which is very bad at
the present moment for both the financial year 2018 and 2017.The debt ratio indicates how
much assets company is required to sell in order to meet its liability. The company has
greater liability comparison to assets of the company. These are the parameters which the
company should improve in order to improve the financial performance of the company.
COMPARATIVE RATIO ANALYSIS
Comparison of Woolworths Company Limited with About Life Pty Limited which belongs to the same
industry. The chosen ratio for both the company is return on equity. This return on equity measures
the profitability of the company and measures the ability of the company to generate profit from the
shareholders investment. It is the profitability ratio of the company. In general terms it means how
much profit each dollar of common equity shareholders generates. This is a very important ratio as
through the financial statement of the company the investors analyse how much there investment is
bringing them back the profit and how the money is utilised by the company in order to generate
the income (MyAccountingCourse.com, 2019)
It is also an indicator how efficiently the company is using the equity financing to fund the principal
operations of the company and working for the growth of the company. From investors point of
view they always want a high return on their investment and wants to higher ROE .Higher ROE are
always better compared to lower ROE (MyAccountingCourse.com, 2019).As every industry has
different types of investors and income level so ROE cannot be used to compare different types of
industry but it can be used to do comparison within the same industry as done in case of
Woolworths company limited and About Life Pty Limited .The ROE for Woolworths Company limited
for the financial year 2018 as computed is 17.23% and for the similar nature company is 15.67%.It
means Woolworth is performing well in the eyes of investors in terms of comparison of ROE.

CONCLUSION
Accordingly, we can conclude that the financial parameters in terms of profit is strong in comparison
to other similar industry. When compared to liquidity position with other similar industry the
parameters of the company are quite weak and needs to be focussed on.

References
Bloomberg L.P, 2019. Company Overview of Woolworths Group Limited. [Online]
Available at: https://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=874687
[Accessed 15 May 2019].
CFI Education Inc., 2019. What is the Current Ratio?. [Online]
Available at: https://corporatefinanceinstitute.com/resources/knowledge/finance/current-ratio-
formula/
[Accessed 15 May 2019].
Clarke, D., 2019. What is Operating Cash Flow Margin and Why is it Important?. [Online]
Available at: https://kashoo.com/blog/what-is-operating-cash-flow-margin-and-why-is-it-important
[Accessed 15 May 2019].
Defmacro Software Pvt. Ltd., 2019. Liquidity Ratio, Formula With Examples. [Online]
Available at: https://cleartax.in/s/liquidity-ratio
[Accessed 15 May 2019].
MyAccountingCourse.com, 2019. Debt Ratio. [Online]
Available at: https://www.myaccountingcourse.com/financial-ratios/debt-ratio
[Accessed 15 May 2019].
MyAccountingCourse.Com, 2019. Gross Profit Margin. [Online]
Available at: https://www.myaccountingcourse.com/financial-ratios/gross-profit-margin
[Accessed 15 May 2019].
MyAccountingCourse.com, 2019. Return on Equity (ROE) Ratio. [Online]
Available at: https://www.myaccountingcourse.com/financial-ratios/return-on-equity
[Accessed 15 May 2019].