Woolworths Financial Analysis: Profitability, Efficiency, Liquidity and Solvency

This report provides a comprehensive financial analysis of Woolworths over a period of five years. The analysis covers profitability, operational efficiency, liquidity and solvency, and market performance. The report suggests that the company needs to improve its profit margin, audit minor costs, and reduce labour and operation costs. It also recommends that the company improve its mechanisms to sell inventory, collect cash from debtors, and maintain an ideal fixed to assets turnover ratio. The report further suggests that the company needs to increase its current ratio, improve its quick ratio, and revamp its policies to maintain a low interest coverage ratio.

Running Head: WOOLSWORTH FINANCIAL ANALYSIS
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Woolworths Financial Analysis

Running Head: WOOLSWORTH FINANCIAL ANALYSIS
Table of Contents
Introduction................................................................................................................................2
Profitability.............................................................................................................................2
Return on assets......................................................................................................................2
Return on Equity.....................................................................................................................2
Gross profit margin.............................................................................................................3
Operating Profit Margin......................................................................................................3
Operating efficiency...............................................................................................................3
Inventories turnover period.................................................................................................3
Settlement period of debtors...............................................................................................3
Fixed Assets Turnover Ratio..............................................................................................3
Total Assets Turnover Ratio...............................................................................................3
Liquidity and solvency...........................................................................................................3
Current Ratio.......................................................................................................................4
Quick Ratio.........................................................................................................................4
Debt to asset Ratio..............................................................................................................4
Interest coverage Ratio.......................................................................................................4
Market performance...............................................................................................................4
Earnings per Share..............................................................................................................4
Price earnings Ratio............................................................................................................4
Conclusion..................................................................................................................................4

Running Head: WOOLSWORTH FINANCIAL ANALYSIS
References..................................................................................................................................5

Running Head: WOOLSWORTH FINANCIAL ANALYSIS
Introduction
The commonly known Wollies, one of the biggest Australian Company is the Woolworths
supermarkets. This is owned by the Woolworths Limited. The company was established in
the year 1924 with the business of the fruits and the vegetables and increased the segments to
packaged foods also. The company is also engaged in the business of magazines, health and
the products of the beauty and the household materials. This report is prepared to do the ratio
analysis of the company over the period of the five years. The ratios have been segregated
into four major categories such as profitability, operational efficiency, Liquidity and solvency
and the market performance (Luiz, 2016).
Profitability
Profitability is one of the majors that can be utilised to measure the performance of the
business. The profit margin of the Woolworths Company is decreasing all together, taking all
the ratios into consideration. The five major ratios of that can depict the profitability of the
business is Return on total assets, Return on Equity, Operating Profit Margin, Net Profit
Margin and Gross Profit margin (Mwangi and Murigu, 2015).
Return on assets
It is the measure that determines the company’s earnings before taxes and interest which are
relatively compared against the total assets. The ratio indicates of how efficiently the
company is able to utilise its assets and generate the earnings to pay back the obligation of
the company. The performance of the company decreased from 6% in the year 2014 to 2% in
the year 2016, to 4% again in the year 2018. Many factors are the probable reasons due to
which are under utilization of fixed assets, high working capital, and reduced profit margin
(Laitinen, 2017).

Running Head: WOOLSWORTH FINANCIAL ANALYSIS
Return on Equity
The return on equity basically helps to depict the measure of how the company can generate
the money with the shareholders the company has invested. From the table and the graph
below the return on equity of the company reduced to 10% in the year 2015 in comparison to
the previous year (Zeitun and Tian, 2014). The return on equity became negative in the year
2016 due to the lacklustre returns on the investments. This ultimately depicts the declined
performance of the company in terms of stock. Therefore it is recommended to the company
to improve the profit margin and distribute the left over cash to the shareholders. Moreover
the tax component shall also be reduced (Öztürk and Karabulut, 2017).
2014 2015 2016 2017 2018
Profitability
Ratios
Return on total assets
EBIT 6% 5% 2% 4% 4%
Sales
Rate of return on ordinary equity
Net income - preferred dividends 12% 10% -7% 8% 8%
Average ordinary shareholders equity
Operating profit Margin
EBIT*10
0 6% 5% 2% 4% 4%
Sales
Gross profit

Running Head: WOOLSWORTH FINANCIAL ANALYSIS
margin
Gross
profit 27% 27% 27% 29% 29%
Sales
Gross profit margin
The gross profit margin of the Woolworths is consistent for the past three years and there
after increased by 1%. In the year 2014 the gross profit margin was 27% till the year 2016,
and for the year 2017 and 2018, the gross profit ratio turned out to be 29%. The decline in the
margin occurs majorly because of the shrinking revenue which is relative to the volume of
the sales or the higher cost of goods sold. Henceforth, it is advised to the company to cut
down the cost of revenue (Whitehouse, 2006).
Operating Profit Margin
Operating profit margin indicates how much profit remains after the company makes a
payment of variable costs such as wages, raw materials and direct costs. The operating profit
margin basically advice to the company to control the costs (Methner, Hamann, and Nilsson,
2015). The current operating margin ratio of the company is 4% which got reduced from the
year 2014 with the 6% margin. As can be observed from the graph, the company also had a
2% operating margin which is lowest. Therefore it is recommended to the company to audit
the minor costs that are hidden and not disclosed at times and also to reduce the labour and
the operation costs (O’Neill, Sohal and Teng, 2016).

Running Head: WOOLSWORTH FINANCIAL ANALYSIS
2014 2015 2016 2017 2018
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Gross profit margin
Operating profit Margin
Rate of return on ordinary
equity
(Source: By Author)
Operating efficiency
The efficiency ratio of the company measures the ability of the company to manage the assets
and the liabilities of the company effectively and the efficiency ratios of the company
includes the inventories turnover ratio, debtors ratio, fixed assets turnover ratio and the total
assets turnover ratio (Law, 2018) .
Operating Efficiency 2014 2015 2016 2017 2018
Inventories turnover period
Inventory * 365 38.52 40.10 38.99 37.48 38.38
Cost of goods sold
Settlement period of debtors
Trade debtors *365 3.69 3.50 2.72 2.69 2.69
Revenue
Fixed Assets Turnover Ratio
Fixed Assets 0.31 0.33 0.33 0.34 0.26
Sales
Total Assets Turnover Ratio

Running Head: WOOLSWORTH FINANCIAL ANALYSIS
Total assets 1.47 1.53 1.51 1.44 1.41
Revenue
Inventories turnover period
Inventories turnover period shows the cycle of how many times a company has sold and
replaced the inventory during the period. The inventory turnover ratio compares as to how
fast the company sells the inventory and compare it with the industry averages. The high
inventory turnover ratio generally means the sales are strong or the large discounts are
offered by the company (Barak and Modarres, 2015).
As per the table it can be observed that the inventories turnover period of the Woolworths is
increasing and decreasing at the same time. The fluctuations are mainly because of the
outflow of the cash. The inventory turnover ratio was 38.52 days and it increased to 40.10 in
the next year. Thereafter the ratio came to 38.38 days in the current year. From the above
analysis it can be said that the company shall improve the mechanisms to sale the inventory
as soon as possible (Woolworths, 2018).
Settlement period of debtors
The settlement period of the debtors is basically the process which indicates how much the
company is able to collect form the debtors on time. This also gives the outlook of how the
company uses it assets wisely. The period of the debtors is mainly decreasing from 3.69 in
the financial year 2012 to 3.50 in the next year (Ehiedu, 2014). Moreover the debtor’s period
decreased even more and came down to 2.69 in the current year and the main thought behind
this result is that the company is not able to collect the cash easily and the debtors are turning
into bad debts. Therefore the company shall see that the debtor’s period is improved
(Woolworths, 2018).

Running Head: WOOLSWORTH FINANCIAL ANALYSIS
Fixed Assets Turnover Ratio
The fixed asset turnover ratio of the Woolworths Company is 0.31 in the year 2014 and it
increased to 0.33 in the year 2017, over the period of the five years. The fixed assets turnover
ratio basically indicates how much fixed assets are used to generate the sales. The company
was performing consistently from the year 2014 to 2017; however, in the year 2018 the
company faced a decline in the business and was over invested in the plant. Therefore it is
advised to the company to maintain an ideal fixed to assets turnover ratio so that the investors
can invest in the company knowing the fact that the company can generate the sales and more
income (Bond, Govendir and Wells, 2016).
2014 2015 2016 2017 2018
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
45.00
Inventories turnover
period
Settlement period of
debtors
Fixed Assets Turnover
Ratio
Total Assets Turnover
Ratio
(Source: By Author)
Liquidity and solvency
The liquidity ratios of the company determine the ability of the company to pay off the
obligations with the help of the assets of the company. The liquidity ratio includes the current
ratio, quick ratio, debt to assets and interest coverage ratio.

Running Head: WOOLSWORTH FINANCIAL ANALYSIS
Liquidity and Solvency
Ratios 2014 2015 2016 2017 2018
Current Ratio
Current assets 0.95 0.84 0.83 0.79 0.78
Current Liabilities
Quick Ratio
Quick assets 0.20 0.21 0.15 0.15 0.18
Current Liabilities
Debt to assets ratio
Debt 0.18 0.19 0.19 0.13 0.12
Total assets
Interest coverage ratio
EBIT 12.65 12.04 5.54 11.01 15.55
Interest Expense
Current Ratio
The current ratio of the company depicts how well a company’s assets are able to generate
the enough cash to pay back the current obligation on time. The Woolworths current ratio
was 0.95 in the year 2012 and it increased till 2016 and amounted to 0.83.furthermore, in the
year 2017 and 2018 the ratio was consistent to 0.78 but reduced in comparison to the
previous year. The ideal ratio is 2:1, however, the current ratio shall be more so that the
company is able to pay the cash to the current liable people out there and the credibility of the
company remains constant (Woolworths, 2018).

Running Head: WOOLSWORTH FINANCIAL ANALYSIS
Quick Ratio
The quick ratio of the company is decreasing constantly as can be observed from the table
above, the ratio fell down from 0.20 to 0.18 in the year 2018, but that could mean that either
the company is relying on too much of inventories which have been consistent in the past five
years as can be observed form the balance sheet of the Woolworths and the second reason
could be the company is not able to convert the assets into the liquid state easily
(Nimtrakoon, 2015).
Debt to asset Ratio
The debt to equity ratio of the Woolworths Company is 0.18 in the year 2012 and the 0.19 in
the next consecutive years. Further, the ratio is 0.12 in the year 2018. This is the perfect
scenario for the company and it suggests that the company is able to generate the cash to
satisfy its debt obligations. This also suggests that though the company is having low income
yet it possess the stronger equity position.
Interest coverage Ratio
Interest to coverage ratio shall be low otherwise there are high chances that the company is
going to fall with heavy debt and there is a high range of possibility of the bankruptcy. As it
can be observed from the table and the graph the Woolworths Company’s ratio was 12.65 in
the year 2014 and thereafter it reduced to 5 in the year 2016. This suggested that the company
improved its policies however; again there was a sudden increase in the year 2017 and
ultimately it reached to 15.55 in the current year. Therefore it is advised that the company
needs to revamp the policies of the company.

Running Head: WOOLSWORTH FINANCIAL ANALYSIS
2014 2015 2016 2017 2018
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
Debt to assets ratio
Current Ratio
Quick Ratio
Interest coverage ratio
(Source: By Author)
Market performance
The market value ratios are used to evaluate the current share price. The ratio is employed by
current as well as the potential investors to determine whether the company’s share price is
overvalued or undervalued (Knox, 2015).
Market
Performance 2014 2015 2016 2017 2018
Earnings per share
Net profit after
tax 2.39 1.98 -1.46 1.61 1.64
No of shares outstanding
Price earnings ratio
Price per share 31.10 25.02 24.1 27.5 28.7
Price per share 2.39 1.98 -1.46 1.61 1.64
EPS
13.01 12.63 -16.53 17.08 17.45

Running Head: WOOLSWORTH FINANCIAL ANALYSIS
Earnings per Share
Earnings per Share are basically the portion of the profit of the company and its outstanding
share of common stock. Earnings per share serve as the indicator of the profitability of the
company. The EPS of the company was 2.39 in the year 2014 the EPS fell to negative in the
year 2016. The EPS of the company however increased from the negative EPS in the year
2017. The good news for the investors is that the average earnings per share have almost got
into the positive notch.
Price earnings Ratio
The price earnings ratio of the Woolworths Company is17.45 in the current year and it has
been improved as compared to the previous year. The company’s Price earnings ratio was
negative in the year 2016 which ultimately increased the negative thoughts of the investors.
The lower P/E ratio determines the stock to fall soon. Therefore it is advised to the company
is to increase the confidence of the investors and by diversifying the portfolio so as to have
the effect of both the debt as well as the equity component (Rothaermel, 2015).
2014 2015 2016 2017 2018
-20.00
-15.00
-10.00
-5.00
0.00
5.00
10.00
15.00
20.00
Earnings per share
Price earning ratio

Running Head: WOOLSWORTH FINANCIAL ANALYSIS
(Source: By Author)
Conclusion
From the above ratio analysis it can be conclude that on the overall basis the company
performed satisfactorily and there is more scope to the fact that they can improve the
profitability of the business which affects the major resources of the company. From the
above financial as well as the industrial analysis the company is having the financial strengths
as well as the weaknesses. The brand name and the high product quality are given by the
Woolworths Limited. However, there are some drawbacks such as negative ROE and the
collection of cash is slow that eventually increases the liability of the company. Last but not
the least the woollies will capture the greater market share as compared to its competitors like
Wesfarmers, by implementing the strategies and policies. It is also recommended to get the
quarterly audit done to find out the variances if any in the mid of the moth which can be
rectified on an early basis.

Running Head: WOOLSWORTH FINANCIAL ANALYSIS
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Running Head: WOOLSWORTH FINANCIAL ANALYSIS
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