Financial Statement Analysis of Woolworths

The report focuses on the financial performance of Woolworths and evaluates its liquidity ratio, gearing ratios and economic outlook. The company has shown tremendous progress in 2017 and has made the best utilization of its investments. The report also provides recommendations for investors.

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Financial Statement Analysis

Woolworths
Executive Summary
Woolsworth and its line of action and business are to be mainly focused on in the below
report along with the ratio analysis. With the help of ratio analysis, it becomes easier to
understand and evaluate the financial performance of the organization in the future. The
following report will not only highlight the financial outlook of the business but will also
bring the financial performance of the organization into notice. It is very much clear from the
report that the company’s financial performance was noteworthy. Comparing to 2016,
Woolsworth made tremendous progress in the following year 2017. The company seems to
have put a huge focus on its business which is clearly understood by its financial ratio.
Woolsworth has also allowed for investments in certain business opportunities and has made
the best utilization out of them. The company has taken the best financial decisions as seen in
the reports.
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Contents
Introduction...........................................................................................................................................3
1. Business and background..............................................................................................................3
2. Evaluation of the company............................................................................................................4
 Present financial performance, financial statements, and economic outlook...............................4
3. Liquidity ratio.................................................................................................................................5
 Discussion......................................................................................................................................5
4. Gearing ratios................................................................................................................................6
Recommendation for investors.............................................................................................................6
Conclusion.............................................................................................................................................9
References...........................................................................................................................................10
Appendix.............................................................................................................................................11
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Introduction
The Australian economy has witnessed a tremendous change in the last 5 years. Australian
supermarket is a duopolistic economy. Wesfarmers (Coles) and Woolworths are one of the
most dominant participants in the Australian supermarket holding not less than sixty percent
of the market share. Daily necessities such as grocery and other regular items are one of the
reasons behind such growth and development of the Australian supermarket. The core
component of the Australian economy is the food market that prospers with every passing
day (Woolworths limited, 2017).
The company also made room for newer innovations and technologies. Woolsworth attained
the better position in the industry owing to its call for higher promotional activities. It is
observed that in 2017, WOW overcame its drawbacks and minimized its loopholes of 2016
by means of strong measures and excellent decision making as what seen from analysing the
ratios. The assets were utilised in the best way possible. The net profit margin in 2017 is also
higher as compared to 2016 (Woolworths limited, 2017). The company’s liquidity seems to
be average and certainly there is fewer or no risks at all. But the overall liquidity position
needs to be taken well care off by the management of the company so as to overcome any
uncertain risk (Needles & Powers, 2013). The company has declared dividend to its
shareholders that reflects it is earning sufficient profits. It can be clearly understood from the
report that WOW has performed excellent in the year 2017 overcoming all its shortcomings
and excelling at its business as compared to 2016
1. Business and background
Woolworths is based in New Zealand and Australia and its businesses comprise of segments
like gaming poker machine, hotels, and takeaway retailer operations in Australia. The
company has obtained its listing on the Australian Stock Exchange and has more than three
thousand consumers all around New Zealand and Australia. Woolworths is considered the
second largest revenue making company after Wesfarmers Ltd. Moreover, the company has
more than 3700 stores that allows it to diversify its operations and cater to a huge base of
customers. Nevertheless, it even intends on offering home enhancement services to the
customers that includes acquiring services of home items.
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2. Evaluation of the company
 Present financial performance, financial
statements, and economic outlook
The sales growth of the supermarkets of Woolworths is primarily driven by transactions on
the part of customers with an enhancement of number of products per basket in the upcoming
tenure. The company intends on focusing its operations on optimization of their overall
network of stores to attain organizational effectiveness. For such purpose, it has completed 72
renewals in the year 2017 and opened nineteen new stores under the renewal scheme as well.
Further, closure of 22 stores has been undertaken too during 2017 owing to an extensive
review of network in the year 2016. The board has also announced a final dividend of fifty
cents each share, thereby making the total dividend for the year to be reported at 84 cents per
share. Moreover, tin the ascertainment of final dividend, the company has also accounted for
the enhancement of its trading performance in the second half of the year. This has resulted in
a strong generation of cash during the tenure resulting in a potential reduction of net debt. In
addition, the $134 million NPAT (net profit after tax) for Home Improvement segment is also
reduced by the company in the second half of the year. Nonetheless, the company remains
primarily focused on a firm investment grade credit rating (Woolworths limited, 2017).
Moreover, its sales speed of Australian food also remained firm in the fourth quarter with
Easter aggregate sales enhancement of 7.8% and comparable growth of Easter sales of 6.4%.
Further, there was a comparable growth in customers’ transactions by 5.2% and an
enhancement in the products per basket also facilitated in enhancing comparable product
growth by 5.6% in the last quarter. The company’s sales for the year of $36.4 billion also
exaggerated by 4.5% whereas the comparable sales enhanced by 3.6%. In addition, the online
sales also increased by 14.8% for the same year with a 18.7% increment in the second half of
the year. Woolworths has also attained enhancements in the performance-based bonuses in
the present year when compared to the last year (Woolworths limited, 2017). Further, the
company has also invested in renewal programs, training, and IT measures that has facilitated
in the higher depreciation. Besides, this has resulted in the decline of EBIT by 2.4% for the
year, thereby paving a path for the full-year margin of EBIT to arrive at 4.41%. In addition,
the second half of the company’s EBIT enhanced by 13.2% that did not include incentive
payments for the incremental teams. Overall, the powerful management of working capital of
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the company facilitated in a potential decline in the employment of average funds during the
year that has in turn paved a path for an enhancement of 32.7 points in the reported ROFE.
3. Liquidity ratio
(see appendix for
computations)
2016 2015 Industry average
Current ratio 1.85 1.44 1.08:1
Quick ratio 1.28 0.78 -
 Discussion
Liquidity ratio plays a key role in determining the financial capability of a company to repay
its short-term debt obligations. Further, such ratio is also called as the working capital ratio
that can be utilized to determine the liquidity or solvency of a company’s business. In
addition, such ratio offers a solution to the question whether a company has ample amount of
current assets to repay its debt obligations in the upcoming tenure (Deegan, 2011). Moreover,
a higher current ratio is beneficial for the company because it signifies liquidity and ability to
address all short-term obligations. Nevertheless, the standard current ratio stands at 2:1
meaning that a company must have $2 of current assets in comparison to $1 of entire current
liabilities.
In relation to Woolworths Ltd, it can be observed that the company has a current ratio
proportion of 1.85 in the year 2017 and 1.44 in the year 2016 respectively. This sheds light on
the fact that since the current ratio of the company has been above one during both the years,
it implies power to repay the short-term obligations in both the years. Having values denote
that the company can repay the obligations and will not encounter complications and issues
while addressing the same. Nevertheless, considering the business affairs of the company, it
has great prospects for the future and can easily outperform these issues in the future (Davies
& Crawford, 2012).
In relation to quick ratio of a company, the same is also a significant part of liquidity ratio
because it is primarily a measure of a company’s liquidity and it can assess the level of assets
that can be converted into cash, thereby facilitating in the repayment of short-term
obligations. Moreover, such ratio can be considered a better aspect of liquidity as it does not
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account for inventories while computing liquidity (Choi & Meek, 2011). Nevertheless, a
higher quick ratio is more desirable for companies because it signifies pursuance of a strong
liquidity that can address all short-term obligations effectively. Besides, the standard rate of
quick ratio stands at 1:1 meaning that all the current liabilities of a company can be easily
catered to by their current assets without affecting the level of inventories (Ross et. al, 2014).
The company’s quick ratio reported at 1.28 in the year 2016 whereas it stood at 0.78 in the
year 2016 that was greater than the current year.
4. Gearing ratios
2015-06 2016-06 2017-06
Industry
average
Debt Equity Ratio 1.33866 1.77452 1.40563 29.86%
Debt Ratio 0.5724 0.63961 0.58431 15.82%
Equity Ratio 0.4276 0.36044 0.41569
The debt equity ratio has declined from 45% to 31% in the year 2016 that is not a bad
indicator for the company because it highlights its ability in decreasing its liabilities properly.
The same can be witnessed in the case of debt ratio that is a positive sign (Carmichael &
Graham, 2012). Further, the cash debt coverage ratio and equity ratio has enhanced in
comparison to the last year that also sheds light on the company’s ability to manage its
resources in an effective manner (Needles & powers, 2013). In addition, the interest coverage
ratio has also enhanced from 5.29 times in 2015 to 10.1 times in 2016 respectively. This
means that Woolworths is properly placed to address its interest liabilities in the current
tenure. However, the debt ratio being more than 0.5 is a stressful scenario as it denotes
complications in the capital structure (Deegan, 2011). In other words, higher dependence on
debt financing can create massive tension for the company and therefore, it must rely more on
equity financing as a part of its corrective action (Woolworths limited, 2017).
Recommendation for investors
The company has been in an effective position and it must continue the same in the upcoming
tenure so that it can sustain in such competitive environment. Further, even though it has
attained immense losses in the past year, yet the present situation sheds light on its ability to
outperform all other competitors in the way. Nevertheless, the influence of competition can
be observed in the way that Woolworths must be regularly innovative in its approach to
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address the requirements of customers (Brigham & Daves, 2012). Besides, it must consider
all external factors and unwanted situations while progressing towards its objectives. In
addition, such fundamentals have remained stagnant throughout the operations and therefore,
upcoming issues, if any, can be encountered with ease (Bodie et. al, 2014). Overall, few
ratios are improper but there are immense opportunities to rise in the future.
Compared to 2016, it is observed that the company has outperformed in 2017 and has
definitely overcome its shortcomings. Woolworths also made certain investments in business
opportunities that is seen to be best utilised and in the best interest of the company. All the
heads of the company may it be Board, top personnel, team members and store managers are
seen to have participated in the best possible way and has thorough level of commitment
towards the company’s prosperity (Woolworths limited, 2017).
The company is sure to survive the future owing to its excellent decision making skills and
prioritizing its consumers needs and make continuous improvement in customer satisfaction
skills. The company also benefitted from the promotional activities that helped the business
to grow and attain a better position in the industry amongst its competitors (Bodie et. al,
2014). Financial year 2017 highlighted certain prominent achievements of the company along
with the fidelity to perform better in the best interest of its people (Woolworths limited,
2017). The company considers its people, plane and prosperity as the main pillars and has
made it a point to perform keeping these pillars in mind.
The company is planning to invest in New Zealand food and wishes to balance sales in
financial year 2018. WOW is meeting all the current obligations and its chances of mergers
and acquisitions are hardly there. Though the company has entered the BIG W Strategy, and
has outperformed but there are more targets that needs to be achieved. Customer building,
sustainable performance in food, endeavour drinks so as to sustain in a highly competitive
market are its key priorities. The company also wishes to become a lean retailer.
Woolsworth should focus on keeping up with its decision making skills so as to sustain its
primary position in the industry. The company has ERR of 80 percent. This means that the
indigenous employees are still working with the company which also shows its dedication
towards treating its personnel rightly (Woolworths limited, 2017).
The company has survived an extremely competitive market and enjoys a primary position
owing to its investments in innovations and customer satisfaction.WOW has taken well care
of its financial, strategic and compliance risks. This shows that WOW has opted for best risk
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mitigation strategies.Unsteady market environment and the global economic forces are the
external factors that the company needs to beware of. Year 2018 will depict the strategies of
the company taken in order to provide better solution products, favourable consumer
response to low prices and offer a better shopping experience.
WOW manages its capital structure in such a way so as to enhance the long term shareholder
value by means of optimizing its weighted average COC and at the same time holding
financial viability so as to make investments in business opportunities. So, it is wise to invest
in WOW.
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Conclusion
It is required for Woolsworth to take best financial decisions so as to maintain its primary
position in the industry. As it has overcome most of its drawbacks of 2016 and outperformed
in 2017, it has upgraded its position in the industry amongst its rivals and surpassed potential
threats and dangers. The company suffered from huge losses in 2016 but in 2017, it has made
optimum profits and has also declared dividends to its shareholders.
In order to survive the neck to neck competition in the industry, it is required for Woolsworth
to involve itself in continuous innovations and work in the best interests of its consumers.
Unsteady market conditions and global economic forces are the external factors that are
required to be taken well care off. Ratios of WOW depict the signs of recovery and the
principles of the company are not broken. The company needs to work on certain ratios
otherwise it WOW will definitely outperform in the coming period.
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References
Bodie, Z., Kane, A. and Marcus, A. J. (2014) Investments. McGraw Hill
Brigham, E. & Daves, P. (2012) Intermediate Financial Management. USA: Cengage
Learning.
Carmichael, D.R. and Graham, L. (2012) Accountants Handbook. Financial Accounting and
General Topics, John Wiley & Sons.
Choi, R.D. and Meek, G.K. (2011) International accounting. Pearson .
Davies, T. and Crawford, I. (2012) Financial accounting. Harlow, England: Pearson.
Deegan, C. M. (2011) In Financial accounting theory. North Ryde, N.S.W: McGraw-Hill
Fundamentals of Corporate Finance, 7th ed. North Ryde: McGraw-Hill Australia Pty Ltd.
Gay, G. and Simnet, R. (2015) Auditing and Assurance Services. McGraw Hill
Leo, K. J. (2011). Company Accounting. Boston:McGraw Hill
Needles, B.E. & Powers, M. (2013) Principles of Financial Accounting. Financial
Accounting Series: Cengage Learning.
Ross, S., Christensen, M., Drew, M., Bianchi, R., Westerfield, R. And Jordan, B.(2014)
Vaitilingam, R. (2014) The Financial Times Guide to Using the Financial Pages. London: FT
Prentice Hall.
Woolworths limited. (2017) Woolworths limited Annual Report and accounts 2017. [online]
Available from:
http://www.woolworthslimited.com.au/icms_docs/182381_Annual_Report_2015.pdf
[Accessed 6 September 2018]
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Appendix
Debt Equity Ratio
2015-06 2016-06 2017-06
Total Debt 14503 15032 13390
Total Equity 10834 8471 9526
Debt Equity Ratio 1.338656083 1.774524849 1.405626706
Debt Ratio
Total laibilities 14503 15032 13390
Total Assets 25337 23502 22916
Debt Ratio 0.572403994 0.63960514 0.584307907
Equity Ratio
2015-06 2016-06 2017-06
Total Equity 10834 8471 9526
Total Assets 25337 23502 22916
Equity Ratio 0.427596006 0.36043741 0.415692093
Liquidity Ratio
Current Ratio
2017 2016
Current Assets 21056 17714
Current Liabilities 11,366 12,340
Current Ratio (Current Assets/Current Liabilities) 1.85 1.44
Acid Test Ratio
2017 2016
Current Assets 21056 17714
Inventory 764
Current Liabilities 11,366 12,340
Acid Test [(Current Assets-Inventory)/Current Liabilities)] 1.28 0.78
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