Comprehensive Financial Analysis Report of Woolworths Group

This report provides a comprehensive financial analysis of Woolworths Group, a listed Australian company with extensive retail operations in Australia and New Zealand. The analysis includes a review of the company's financial statements for the past two years, highlighting revenue growth, expense management, and overall profitability. Pro-forma financial statements are developed for the upcoming year, projecting a 10% growth rate in sales and cost of goods sold. Key financial ratios are calculated and analyzed, covering liquidity, solvency, asset management, and profitability. The report also assesses the company's Return on Equity (ROE) using the DuPont system, revealing a strong performance above industry trends, and evaluates the Economic Value Added (EVA), indicating positive value creation by the management. The conclusion summarizes the findings, noting the company's positive cash flows and improved asset position, while also addressing potential liquidity concerns and debt management. Finally, the report identifies financial risks associated with Woolworths Group's international operations, including foreign exchange fluctuations, interest rate changes, and political and market risks, recommending hedging strategies and proactive risk management measures.

FINANCE
ASSIGNMENT

1
By student name
Professor
University
Date: 25 April 2018.
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Contents
Background and Abstract............................................................................................................................3
Introduction.................................................................................................................................................3
Discussion and Analysis...............................................................................................................................3
Financial Statement Review....................................................................................................................3
Pro-Forma Financial Statements.............................................................................................................6
Ratio Analysis...........................................................................................................................................8
Calculation of the Return on Equity.........................................................................................................9
Assessment of Economic Value Added....................................................................................................9
Conclusion...................................................................................................................................................9
Synopsis of the findings and the recommendations................................................................................9
Financial risks associated with operating internationally......................................................................10
References.................................................................................................................................................11
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Background and Abstract
A report has been prepared on one of the listed companies in Australia and the background information
and the financial performance of the company has been analysed over the past 2 years. The proforma
financial statements have also been prepared for the upcoming year based on the past year’s financials.
The report also highlights the ratio analysis for all the major categories that will enable decision making.
The return on equity as well as the economic value added by the company has also been calculated to
analyse the management performance and finally the conclusion and recommendation has been given
so as to whether to invest in the company or not (Arnott, Lizama, & Song, 2017). The financial risks in
case of the international operations have also been highlighted towards the end.
Introduction
The company which has been selected for analysis is Woolworths Group. It is one of the listed
companies in Australia and has an extensive retail chain all across Australia and New Zealand. It is
second largest revenue generating company in Australia after Wesfarmers and the 2 nd in terms of
revenue in New Zealand as well. The company has a history of more than 90 years and employs more
than 200000 people in the country. Furthermore, the company’s main operations include supermarkets,
liquor retailing, departmental stores, hotels and pubs across Australia and New Zealand (Alexander,
2016).
Amongst the very recent news, it was observed that the company posted a huge loss of $1.235 Billion in
2016 and the same was the biggest loss in the last 20 years for the company since it has been listed. The
main reason for the same was write down of the failed Master businesses and continuous losses in the
Big W business. The company has had many acquisitions in the past (Bromwich & Scapens, 2016).
Discussion and Analysis
Financial Statement Review
The company has been performing evenly over the past few years and forms the part of life of almost all
the people in Australia considering the business in which it is placed. The balance sheet and the income
statement of the company has been shown below and we can see that the company has been able to
improve upon the revenues by 3% whereas the cost of sales has increased in less quantum. The other
expenses including the branch expenses and the administration expenses have all increased as
compared to the last year (Trieu, 2017). The finance costs have decreased marginally whereas the tax
expenses have increased. Altogether, there has been increase in profits for the company as compared to
the last year and thus it indicates growth for the company.
In terms of the balance sheet status, the cash and cash equivalents of the company has increased by 364
Mn whereas the other current assets has increased marginally. Similarly, the property, plant and
equipment has increased as compared to last year whereas the intangible assets has decreased. Overall
there has been an increase in the assets position of the company. In terms of liabilities, the current trade
payables as well as the borrowings has increased whereas the other current liabilities have remained
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almost constant (Goldmann, 2016). In terms of non-current liabilities, the borrowings as well as the
provisions has decreased considerably indicating that the company has made the repayment of the
loans. Overall, there has been an increase in the net assets. Lastly, in terms of equity, the retained
earnings has improved courtesy the profit and company also raised money through equity. Therefore,
overall the performance of the company has improved and it has been constantly growing (Fay &
Negangard, 2017).
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Pro-Forma Financial Statements
The proforma financial statements of the company for the upcoming year considering the 10% growth
rate in the sales as well as cost of goods sold has been shown below. There have been several
assumptions which have been taken which are enlisted below:
1. The branch expenses, administration expenses and the interest expenses all have been assumed
to have been grown at the rate of 10% as well.
2. The tax rate has also been considered to be same as last year at the rate of 30%.
3. The profit from discontinued operations has been assumed to be the same as that of last year
and the amount of the same is $ 119 Mn (Choy, 2018).
4. The profit earned in 2019 has been assumed to be cash profit and has been adjusted in retained
earnings.
Woolworths Limited
Consolidated statement of profit or loss
Particulars 2018 2019 Est.
$m $m
Continuing Operations
Revenue from the sale of goods and services 56,726 62,399
Other operating revenue 239 263
Total operating revenue 56,965 62,662
Cost of sales (40,256) (44,282)
Gross profit 16,709 18,380
Other revenue 222 244
Branch expenses (10,854) (11,939)
Administration expenses (3,529) (3,882)
Earnings before interest and tax 2,548 2,803
Financing costs (154) (169)
Profit before income tax 2,394 2,633
Income tax expense (718) (790)
Profit for the period from continuing operations 1,676 1,843
Discontinued Operations
Profit from discontinued operations, after tax 119 119
Profit for the period 1,795 1,962
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Woolworths Limited
Consolidated statement of financial position
Particulars 2018 2019 Est.
$m $m
Current assets
Cash and cash equivalents 1,273 3,235
Trade and other receivables 801 801
Inventories 4,233 4,233
Other financial assets 53 53
6,360 8,322
Assets held for sale 821 821
Total current assets 7,181 9,143
Non-current assets
Trade and other receivables 93 93
Other financial assets 522 522
Property, plant and equipment 9,026 9,026
Intangible assets 6,465 6,465
Deferred tax assets 271 271
Total non-current assets 16,377 16,377
Total assets 23,558 25,520
Current liabilities
Trade and other payables 6,960 6,960
Borrowings 604 604
Current tax payable 110 110
Other financial liabilities 50 50
Provisions 1,451 1,451
9,175 9,175
Liabilities directly associated with assets held for sale 21 21
Total current liabilities 9,196 9,196
Non-current liabilities
Borrowings 2,199 2,199
Other financial liabilities 61 61
Provisions 942 942
Other non-current liabilities 311 311
Total non-current liabilities 3,513 3,513
Total liabilities 12,709 12,709
Net assets 10,849 12,811
Equity
Contributed equity 6,055 6,055
Reserves 353 353
Retained earnings 4,073 6,035
Equity attributable to equity holders of the parent entity 10,481 12,443
Non-controlling interests 368 368
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Total equity 10,849 12,811
Ratio Analysis
The ratio analysis for the given company has been shown below:
Woolworths Limited > Ratios Analysis
Name of the ratio Formulas 2018
Liquidity Ratios
Current Ratio or Working Capital
Ratio Current Assets / Current Liabilities 0.78
Quick ratio or Acid test ratio (Current Assets - Inventory) / Current Liabilities 0.31
Financial Leverage Ratios
Equity Ratio Equity / Total Assets 46.05%
Interest Service Coverage ratio Operating Profit / Interest 16.55
Asset Management Ratios
Fixed Assets Turnover Sales / Net Fixed Assets 6.31
Assets Turnover Ratio Sales / Total Assets 2.42
Profitability Ratios
Gross Profit Margin Gross Profit / Sales Revenue *100 29.50%
Profit Margin Profit (loss) / Sales Revenue *100 4.50%
Market Value Ratios
Book Value per share Book Value per share 6.01 AUD
Market Value per share Market Value per share 28.74
AUD
Debt Ratios
Debt to total assets Ratio Debt / Total Assets 53.95%
Debt Equity Ratio Debt / Equity 117%
Per Share Ratios
Earnings per Share Earnings per Share 123.4
cents
Dividend per share Dividend per share 103 cents
Measures of Relative Value
P/E Ratio Market Price per share / Earnings per share 23.29
P/B Ratio Market Price per share / Book value per share 4.78
Activity Ratios
Inventory Turnover Cost of goods sold (COGS) / Average inventory 9.51
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Debtors Turnover Sales / Average Debtors 63.72
Cash Flow Ratios
Cash Flow to Sales Cash Flow from operating activities / Sales Revenue
*100 5.14%
Cash Realization ratio Cash Flow from operating activities / EBIT 101%
Calculation of the Return on Equity
As per the DuPont system, the return on equity of the company can be decomposed into three parts
namely the profit margin, the asset turnover ratio and the financial leverage. Mathematically, the same
can be shown below as:
ROE = (Net Income / Sales) X (Sales / Total Assets) X (Total Assets / Average Shareholder’s Equity)
ROE = 4.5% X 2.42 X 2.17 = 23.6%
This shows that the company is having the return on equity of 23.6% which is well above the industry
trend and is a measure of the fact that the company is flourishing and meeting the shareholder’s
expectations (Linden & Freeman, 2017).
Assessment of Economic Value Added
Economic Value Added is calculated by the following formula:
EVA = Net Operating Profit after Taxes (NOPAT) - Invested Capital * Weighted Average Cost of Capital
(WACC)
Net Operating Profit after Taxes (NOPAT) = (16709-10854-3529)*70% = 1628.2
Invested Capital = Total Assets - Current Liabilities = 23558 – 9196 = 14362
Weighted Average Cost of Capital (WACC) = 6.03%
EVA = 1628.2 – (14362 * 6.03%) = 762.17 Mn, which is positive and hence it shows that the company’s
management has positive value and is creating and adding value to the company (Heminway, 2017).
Conclusion
Synopsis of the findings and the recommendations
From the above discussion and analysis, we can see that the company has been performing well in terms
of increasing the top line as well as the bottom line. It has had positive cash flows and the asset position
of the company has improved over time (Mubako & O'Donnell, 2018). However, the rate of growth has
been slow and low. In terms of the liquidity of the company, it is having low current and liquid ratio
indicating that the company may default in case it is asked to meet all its short term liabilities. The
company is having an ideal debt equity ratio but in case the proportion of debt is increased further, it
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may prove to be detrimental in the interest of the company as there will be dilution of the power
(Jefferson, 2017). The other ratios seems to be in line except for the few which calls for improvement.
Furthermore, the company also has a good return on equity and the management of the company has
been able to add economic value to the company. So, all in all it is a good prospect and an ideal
company to invest in for long term basis.
Financial risks associated with operating internationally
The company has international operations in many countries and especially in New Zealand, India and
the nearby countries. There are a number of financial risk that the company faces as a part of the
international wing. Some of them include the fluctuations in the foreign exchange every now and then
which makes it difficult for the company to predict the revenues and the costs and make proper
estimates (Gooley, 2016). There is also a change in the interest rates by the banks abroad which has a
direct impact on the business. Amongst the indirect risk, the major risks include the political risk in the
international location and the market risk in terms of tastes, preferences and the fashion which might
change any time and impact the business big time. In order to guide or stay protected against the same,
it is necessary for the company to be hedging the foreign exchange risk and to take appropriate steps in
advance against the other ones (Marques, 2018).
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References
Alexander, F. (2016). The Changing Face of Accountability. The Journal of Higher Education, 71(4), 411-
431.
Arnott, D., Lizama, F., & Song, Y. (2017). Patterns of business intelligence systems use in organizations.
Decision Support Systems, 97, 58-68.
Bromwich, M., & Scapens, R. (2016). Management Accounting Research: 25 years on. Management
Accounting Research, 31(1), 1-9.
Choy, Y. K. (2018). Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview
Analysis. Ecological Economics, 145. Retrieved from
https://doi.org/10.1016/j.ecolecon.2017.08.005
Fay, R., & Negangard, E. (2017). Manual journal entry testing : Data analytics and the risk of fraud.
Journal of Accounting Education, 38, 37-49.
Goldmann, K. (2016). Financial Liquidity and Profitability Management in Practice of Polish Business.
Financial Environment and Business Development, 4(3), 103-112.
Gooley, J. (2016). Principles of Australian Contract Law. Australia: Lexis Nexis.
Heminway, J. (2017). Shareholder Wealth Maximization as a Function of Statutes, Decisional Law, and
Organic Documents. SSRN, 1-35.
Jefferson, M. (2017). Energy, Complexity and Wealth Maximization, R. Ayres. Springer, Switzerland .
Technological Forecasting and Social Change, 353-354.
Linden, B., & Freeman, R. (2017). Profit and Other Values: Thick Evaluation in Decision Making. Business
Ethics Quarterly, 27(3), 353-379. Retrieved from https://doi.org/10.1017/beq.2017.1
Marques, R. P. (2018). Continuous Assurance and the Use of Technology for Business Compliance.
Encyclopedia of Information Science and Technology, 820-830.
Mubako, G., & O'Donnell, E. (2018). Effect of fraud risk assessments on auditor skepticism: Unintended
consequences on evidence evaluation. International Journal of Auditing, 22(1), 55-64.
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