Accounting for Managers: Horizontal Analysis and Financial Ratios of Woolworths
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This article provides a detailed analysis of Woolworths' income statement and financial ratios from 2013 to 2017. It includes horizontal analysis, profitability, efficiency, liquidity, financial gearing, and investment ratios. The article also discusses the implications of the findings and suggests measures for improvement.
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Running head: ACCOUNTING FOR MANAGERS Accounting for Managers Name of the Student: Name of the University: Authors Note:
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ACCOUNTING FOR MANAGERS 1 Table of Contents C. Preparing Horizontal analysis of the Income Statement for Five years:...............................2 D. Calculating financial ratios of Woolworths from 2013 to 2017:..........................................3 E. Commenting on the profitability, efficiency, liquidity, financial gearing and investment ratios of Woolworths from 2013 to 2017:..................................................................................9 Reference and Bibliography:....................................................................................................14
ACCOUNTING FOR MANAGERS 2 C. Preparing Horizontal analysis of the Income Statement for Five years: Horizontal Analysis of the Income Statement (New Year – Previous Year) / Previous Year (Year 2013- Year 2012)/ Year 2012 (Year 2014- Year 2013)/ Year 2013 (Year 2015- Year 2014)/ Year 2014 (Year 2016- Year 2015)/ Year 2015 (Year 2017- Year 2016)/ Year 2016 Particulars20132014201520162017 Operating Revenue5.83%9.94%9.79%5.11%0.41% Other Revenue336.35%327.65%379.52%373.55%316.72% Total Revenue Excluding Interest6.18%10.28%10.18%5.50%0.74% Operating Expenses6.97%11.30%10.97%8.42%3.70% EBITDA-2.17%-0.50%1.82%-25.34%-30.46% Depreciation6.72%8.56%47.44%31.80%31.23% Amortization24.74%38.23%-81.53%-82.49%-85.54% Depreciation and Amortization9.26%12.74%29.27%15.70%14.78% EBIT-4.74%-3.48%-4.37%-34.59%-40.66% Interest Revenue-17.16%-63.43%-100.00%-100.00%-100.00% Interest Expense28.84%-12.72%-19.95%-22.84%-39.18% Net Interest Expense33.07%-8.06%-12.59%-15.75%-33.58% Pretax Profit-7.78%-3.11%-3.71%-36.10%-41.23% Tax Expense12.38%19.40%18.43%-19.48%-26.51% Net Profit after Tax Before Abnormal-14.29%-10.38%-10.85%-41.47%-45.97% Net Income24.62%35.29%17.62%-229.20%-12.32%
ACCOUNTING FOR MANAGERS 3 The above table mainly represents the overall horizontal analysis of Woolworths Income statement from 2013 to 2017. In addition, base year for the evaluation of horizontal analysis is taken as 2012, which helps in understanding the progress made by Woolworths over the period of five years. From the evaluation it is understood that total revenue of the company has declined, which has forced the company to reduce its net income. Moreover, the continuous decline in expenses is witnessed for the organisation, which only indicates the measure is taken by the company in curbing the declining revenues. Hence, from the evaluation it is seen that the progress of Woolworths has declined immensely from the level of 24.62% in net income during 2013 to -12.32% in 2017. This mainly portrays the low financial capability of the company is maintaining the level of income and generating high rate of profits from operations. In this context, Saleh (2016) stated that investors with the help of horizontal analysis is able to identify the level of income, which a company could obtain over the period of time by conducting relevant actions. On the other hand, Berg and Bjarnegard(2016)criticisesthatduetotheunethicalactionsoftheorganisationin manipulating their annual report, the projections made by the investors become invalid. The management of Woolworths need to comply with the changing trend and amendment their operations to increase revenue and generate adequate income to support its expenses. The continuation of losses incurred during 2016 needs to be stopped by the management of Woolworths for smoothly conducing their operations. D. Calculating financial ratios of Woolworths from 2013 to 2017: Financial Ratios20132014201520162017 Return on total assets10.33%10.58%8.63%-9.61%6.87% Rate of return on ordinary equity25.52%24.80%19.74%-23.58%17.08% Operating profit margin3.84%4.02%3.50%-4.01%2.85%
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ACCOUNTING FOR MANAGERS 9 / 32.8135.66/ 27.39 / 20.56/ 25.36 Dividend yield4.05%3.84%5.07%3.75%3.31% E.Commentingontheprofitability,efficiency,liquidity,financialgearingand investment ratios of Woolworths from 2013 to 2017: Profitability Ratio: 20132014201520162017 -30.00% -20.00% -10.00% 0.00% 10.00% 20.00% 30.00% 40.00% Profitability Ratio The above figure mainly helps in depicting the profitability ratio for Woolworths, which has relevantly declined over the period of five years. in addition, the decline is due to the reduction in profits that has been achieved by the company over the period of time. Leaving the gross profit margin other ratios has relevantly declined, which indicates the high usage of administrative expenses, which has been conducted by the company. Therefore, the profitability section of the organisation is not adequate, where the operating profit margin is declining, while the gross profit margin of the company is increasing. This relevantly
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ACCOUNTING FOR MANAGERS 10 indicates that the company is controlling its expenses in cost of sales, while increasing its spending in administrative expenses (Soares and Pina 2017). Efficiency Ratio: 20132014201520162017 - 2 4 6 8 10 12 Effeciency The above graph represents the overall inventory period, which has mainly declined indicating the high time taken by the company in selling their inventory. In addition, the settlement period for the debtors has increased, which indicates that the debtors are providing with additional time to conduct payments for their credit purchases. This mainly indicates that Woolworths efficiency ratio is declining, as it is not able to maintain the level of liquidity in its operations. Atoom, Malkawi and Al Share (2017) stated that with the help of efficiency ratios investors are mainly able to understand the level of progress, which is made by the management in improving their cash position in the market. Liquidity Ratio:
ACCOUNTING FOR MANAGERS 11 20132014201520162017 - 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1.00 Liquidity Ratio The above figure helps in understanding the level of liquidity ratio of Woolworths from 2013 to 2017. In addition, the liquidity ratios such as current and quick ratio mainly indicates the current financial ability of Woolworths in conducting its operations after paying for all its short-term obligations. from the evaluation it is detected that both current and quick ratio of the organisation is not at desired levels, where the company is not accumulating adequate current assets to compliments its current liability during adverse time (Rey and Santelli 2017). The current ratios of the company have declined from 0.91 to 0.79 in five years, where it needs to be at the level of 2. Furthermore, the quick ratio of the company has improved over the period of five years, where the values has increased from 0.29 to 0.33, while the values is lower than the standard 1, which needs to be maintained by the organisation. Financial Gearing:
ACCOUNTING FOR MANAGERS 12 20132014201520162017 0% 200% 400% 600% 800% 1000% 1200% 1400% 1600% Financial Gearing The financial gearing ratio of Woolworths has mainly improved over time, where debt to asset ratio and interest coverage ratio has increased, while the asset turnover ratio has declined. In addition, the decline in debt to assets ratio indicates the low accumulation of debt, which is conducted by the company while conducting its operations in 5-year time. However,theoverallinterestcoverratiohasmainlyincreased,whichdepictsthat Woolworths has higher capability of obtaining debt to support its future operations. In addition, the assets turnover ratio has declined, which directly indicates the low income that is generated by the company over the period of time. Hence, financial gearing ratio of Woolworths is relevantly high, which depicts the financial progress made by the company in stabilizing its financial health and debt accumulation (Lakshan and Wijekoon 2017). Investment Ratio:
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ACCOUNTING FOR MANAGERS 13 20132014201520162017 (150.00) (100.00) (50.00) - 50.00 100.00 150.00 200.00 250.00 Investment Ratio Fromtheevaluationofabovefigure,investmentratioforWoolworthisbeen evaluated for the period of 5 years. In addition, from the evaluation it is seen that the EPS of the company has mainly declined over the period of 5 fiscal years, which relevantly indicates the low profits obtained by the company. Moreover, the negative EPS is witnessed during 2016, which occurred due to the loss incurred by the company during the fiscal year. The price-earningsratiocalculationisalsoconductedfromWoolworths,whichrelevantly increased from the level of 1815.48% in 2013 to 2132.49% in 2017. This indicates that investors are keen on buying shares of Woolworths, which is increases PE ratio of the company. Lastly, the overall dividend yield of the company has mainly declined from the level of 4.05% to 3.31%, which directly indicates the low level of dividends, which the company is paying to its shareholders. Hence, the investment ratio directly indicates the low opportunity for investors who can invest in Woolworths, as its dividend yield and Earnings per share has been declining (Wong and Joshi 2015).
ACCOUNTING FOR MANAGERS 14 Reference and Bibliography: Atoom,R.,Malkawi,E.andAlShare,B.,2017.UtilizingAustralianShareholders' Association(ASA):FifteenTopFinancialRatiostoEvaluateJordanianBanks' Performance.Journal of Applied Finance and Banking,7(1), p.119. Berg, A. and Bjarnegård, E., 2016. Dissecting gender imbalance: A horizontal perspective on when risk matters for the assignment of women to UN peacekeeping missions. Res Militaris, (2). Giordani, P., Jacobson, T., Von Schedvin, E. and Villani, M., 2014. Taking the twists into account: Predicting firm bankruptcy risk with splines of financial ratios.Journal of Financial and Quantitative Analysis,49(4), pp.1071-1099. Lakshan, A.I. and Wijekoon, W.M.H.N., 2017. The use of financial ratios in predicting corporate failure in Sri Lanka.GSTF Journal on Business Review (GBR),2(4). Le, H.H. and Viviani, J.L., 2018. Predicting bank failure: An improvement by implementing a machine-learning approach to classical financial ratios.Research in International Business and Finance,44, pp.16-25. Rey, A. and Santelli, F., 2017. The Relationship between Financial Ratios and Sporting Performance in Italy’s Serie A.International Journal of Business and Management,12(12), p.53. Saleh, S., 2016, July. Vertical and Horizontal Analysis of Crustal Structure of Southeastern Mediterranean and the Egyptian Coastal Zone, from Bouguer and Satellite Mission Data. In 41st COSPAR Scientific Assembly (Vol. 41).
ACCOUNTING FOR MANAGERS 15 Shaverdi, M., Ramezani, I., Tahmasebi, R. and Rostamy, A.A.A., 2016. Combining fuzzy AHP and fuzzy TOPSIS with financial ratios to design a novel performance evaluation model.International Journal of Fuzzy Systems,18(2), pp.248-262. Soares, J.O. and Pina, J.P., 2017. Macro-Regions, Countriesand FinancialRatios: A Comparative Study in the Euro Area (2000-2009).Revista Portuguesa de Estudos Regionais, (45), pp.84-92. Wong, K. and Joshi, M., 2015. The impact of lease capitalisation on financial statements and keyratios:EvidencefromAustralia.AustralasianAccounting,BusinessandFinance Journal,9(3), pp.27-44.