Financial Management Project Report: Woolworths Limited Analysis

This report presents a comprehensive financial analysis of Woolworths Limited, examining its performance over a five-year period. The analysis includes a trend analysis of profitability ratios (Return on Equity and Return on Assets) and capital structure ratios (Debt Ratio and Interest Coverage Ratio), comparing Woolworths to its competitor, Wesfarmers. The report also delves into the cash conversion cycle and explores the implications of potential changes in capital structure, such as issuing bonds or equity. Furthermore, the report incorporates a reflective component, discussing ethical considerations in financial management, referencing an article on banker's pay and aligning it with the goals of financial management and the importance of ethical decision-making in a corporate setting.

Running Head: Financial Management
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Project Report: Financial Management

Financial Management
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Contents
Introduction.......................................................................................................................3
Trend analysis...................................................................................................................3
Competitor analysis..........................................................................................................5
Capital structure and profitability ratio analysis...............................................................6
Cash conversion cycle......................................................................................................6
Changes in capital structure..............................................................................................7
Conclusion........................................................................................................................8
Part B................................................................................................................................9
References.......................................................................................................................11
Appendix.........................................................................................................................12

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Introduction:
Financial managers of an organization are supposed to procure and manage the funds
of the company in such a way that the cost level and risk level of the company could be
reduced and the overall performance and market position of an organization is improved. A
financial manager is required to manage the capital structure in such a way that solvency
level and cost of capital of the company could be minimal (Damodaran, 2010). Along with
that, it is also important for a financial manager to identify the different key financial aspect
of the business such as net profit margin, current liquidity ratios, debtor’s turnover days etc to
measure the operation management and efficiency management level of the business.
The report focuses over the financial performance of Woolworths limited on the basis
of last 5 years financial statement of the business and the industry position of the company. In
order to measure the overall financial changes and current performance of Woolworths, ratio
analysis, capital structure etc study has been conducted. The report mainly depicts that
whether the company is enough efficient to manage the overall performance of the business
or not.
Trend analysis:
Woolworths limited is operating its operations in Australian market. The previous 5
years financial data of the company has been gathered and analyzed in this section to identify
the changes into the financial performance and overall position of the company in the market.
Initially, the profitability ratios of the company have been measured. Profitability ratios
define about the profit generation and management capability of the business against various
other independent financial factors such as sales, total equity, total assets etc of the business
(Koropp, Kellermanns, Grichnik & Stanley, 2014). In case of Woolworths limited, return on
equity and return on assets of the business has been measured and found that in the year of
2014, ROE and ROA of the company was 23.91% and 10.1% respectively which has been
reduced to 16.45% and 7.3% in 2018. In last 5 years, various changes have occurred into
profitability position of the business. The calculations of the same are as follows:
Woolworth's Ratio calculations
Ratio Calculations 2014 2015 2016 2017 2018
Profitability
Ratios: 2014 2015 2016 2017 2018

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Return on equity
Net profit / 2,451,700 2,146,000 -1,234,800 1,533,500 1,724,000
Total equity
10,252,50
0
10,834,20
0
8,470,60
0
9,526,00
0
10,481,00
0
Answer: % 23.91% 19.81% -14.58% 16.10% 16.45%
Return on assets
Net profit / 2,451,700 2,146,000 -1,234,800 1,533,500 1,724,000
Total assets
24,205,20
0
25,336,80
0
23,502,20
0
22,915,80
0
23,558,00
0
Answer: 10.1% 8.5% -5.3% 6.7% 7.3%
(Morningstar, 2019)
On the basis of profitability analysis, it has been found that the position of the
company has been lowered in the year of 2016 because of the economical and industry
changes. Further, company has managed to improve the performance again. Currently, the
level of operating expenses could be reduced further to improve the profitability level of the
business.
Further, the capital structure ratios of the company have been measured. Capital
structure ratios define about the management of financial resources and financial obligations
of the company against the total equity managed by the business. In case of Woolworths
limited, debt ratio and interest coverage ratio of the business has been measured and found
that in the year of 2014, Debt ratio and interest coverage ratio of the company was 0.58 and
8.33 respectively which has been changed to 0.56 and 16.73 in 2018. In last 5 years, various
changes have occurred into capital structure position of the business. The calculations of the
same are as follows:
Capital Structure Ratios 2014 2015 2016 2017 2018
Debt ratio
Total debt /
13,952,
700
14,502,
600
15,031,
600
13,389,
800
13,077,
000
Total assets
24,205,
200
25,336,
800
23,502,
200
22,915,
800
23,558,
000
Answer: % 0.58 0.57 0.64 0.58 0.56
Interest Coverage Ratio
EBIT /
2,313,3
90
2,407,8
50
2,499,7
10
2,481,9
80
2,576,1
00
Net Finance Costs (used net 277,80 254,80 245,60 193,60 154,00

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interest expense) 0 0 0 0 0
Answer:
times
p.a 8.33 9.45 10.18 12.82 16.73
(Morningstar, 2019)
On the basis of Capital structure analysis, it has been found that the position of the
company has been almost constant in last few years along with a great improvement in the
interest coverage ratio. It indicates about way better performance of the company in terms of
solvency level and cost managements level.
Competitor analysis:
Further, the performance of the company has been compared with the main
competitor of the business i.e. Wesfarmers. Profitability ratio of Wesfarmers indicates that
the performance of the company has been improved at great extent from 2014 in 2018.
However, still the ROE and ROA level of the company is 11.44% and 7.1% which is quite
lower of the Woolworths profitability position. It indicates that Woolworths is performing
well in the market. Woolworths is just required to focus on the return on assets level as little
reduction in the assets level could improve the ROA level of the business.
Ratio
Calculations 2014 2015 2016 2017 2018
Profitability
Ratios: 2014 2015 2016 2017 2018
Return on
equity
Net profit / 1,605,000 2,440,000 407,000 2,873,000 2,604,000
Total equity
25,987,00
0
24,781,00
0
22,949,00
0
23,941,00
0
22,754,00
0
Answer: % 6.18% 9.85% 1.77% 12.00% 11.44%
Return on assets
Net profit / 1,605,000 2,440,000 407,000 2,873,000 2,604,000
Total assets
39,727,00
0
40,402,00
0
40,783,00
0
40,115,00
0
36,933,00
0
Answer: 4.0% 6.0% 1.0% 7.2% 7.1%
(Morningstar, 2019)
Further, the capital structure ratios of Wesfarmers indicate that the debt ratio of the
business has been improved from 2014 in 2018 along with the interest coverage ratio.

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However, still the debt ratio of the company is quite lower than the Woolworths capital
structure position. It indicates that Woolworths is performing well in the market. Woolworths
is just required to focus on the solvency level and capital structure level of the business more
to manage the overall performance of the company.
Capital Structure
Ratios 2014 2015 2016 2017 2018
Debt ratio
Total debt / 13,740,000 15,621,000 17,834,000 16,174,000 14,179,000
Total assets 39,727,000 40,402,000 40,783,000 40,115,000 36,933,000
Answer: % 0.35 0.39 0.44 0.40 0.38
Interest Coverage
Ratio
EBIT / 3,336,000 3,143,000 2,700,000 3,587,000 3,813,000
Net Finance Costs
(used net interest
expense) 346,000 315,000 308,000 264,000 211,000
Answer:
times
p.a 9.64 9.98 8.77 13.59 18.07
(Morningstar, 2019)
Capital structure and profitability ratio analysis:
In case of Woolworths, it has been defined that the ROA and ROE level of the
company is quite impressive along with better solvency level of the business. Study defines
that ROA and ROE level of a business depends upon the total assets and equity managed by
the business. On the basis of the study, it has been found that improvement in the capital
structure elements reduced the profitability position of the business as company has to
distribute the earned profit among more people. Such as if an organization has issued 10000
shares and the profit of the business is 1000 than per share earnings of the business would be
$ 0.10. Further, if more stock is issued by the company than per share earrings of the business
would be hampered (Ernst & Häcker, 2012).
Hence, it is easier for the financial managers to identify the relation among the
profitability ratio and capital structure ratio. They have inverse relationship. Along with the
improvement in capital structure level of a business, the profitability position of the business
gets hampered.
Cash conversion cycle:

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Cash conversion cycle is a process in which the total time taken by a business to
covert its investment into cash is measured. It basically identifies that how much time would
it be taken by an organization to convert the short term assets and obligations into cash. In
case of Woolworths limited, it has been measured that cash conversion cycle of the company
was 3.99 days in the year of 2014 which has been reduced to -7.12 days because of the
changes into creditor turnover policies and inventory management level of the business.
Earlier, the company used to pay back the amount to creditors in lesser time and now the
policies have been changed by the company (Appendix). The current CCC level of business
defines that it is a simple way for business to manage the operations through interest
freeways. In this, company generates the revenue from the suppliers initially and then
payback it to the creditors. Less working capital is required by the business in this way.
The CCC of the company has been compared with the Wesfarmers limited and found
that CCC of Woolworths is quite better than the Wesfarmer’s limited as CCC of Wesfarmers
limited is positive and defines that the company has to invest working capital in the business
to run the business smoothly.
Changes in capital structure:
Further, the case explains that company is planning to make the changes into its
capital structure. Company has two alternatives either issues the bonds in the market or issue
new shares in the market. Initially, the bond worth of the company has been studied and
found that in case of 12% yield, the bond price of the company would be $ 259.69. Further, in
case of 15% yield rate, price would be $ 260.01. It further indicates that yield rate defines
about the risk involved in the business, the higher the risk of the bond would be, and the
higher the price would be. In case of 12% and 15% yield rate, the bond price of the business
would be higher.
Price of bond Price of bond
Bond-
1
Bond-
2
Face value 1,000 Face value 1,000
Coupon (half yearly) 7.00% Coupon (half yearly) 7.00%
Maturity (semi
annually) 20
Maturity (semi
annually) 20
Yield 12.00% Yield 15.00%
Valuation of bond Valuation of bond

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259.69 260.01
Further, in case of equity issue, it has been found that stock price of the share would
be $ 18.51. Below are the calculations of the same:
Dividend Discount Model
Dividend expected 1.30
Growth rate 8.00%
Discount rate 15.00%
Intrinsic Value 18.51
On the basis of Woolworth’s capital structure, it has been estimated that long term
debt could be issued by the business in the market to manage the capital structure level of the
business (Madura, 2014).
Conclusion:
To conclude, Woolworths is performing very well in the market. Company is just
required to focus over the capital structure level to improve the overall performance of the
business. The industry performance and current performance of the company is quite better
and attractive among the investors.

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Part B:
Bartholomeusz (2019) explained that it is important for each of the organization to
maintain the ethical consideration. Along with better financial and market performance of the
business, it is also important for the businesses to maintain the CSR policies and perform all
the activities for the betterment of the employees and other external stakeholders of the
business. Through this article, I have understood that a business and the top level
management of the business must consider the internal and external users interest and put
them above their self interest while making any decision.
In part A, I have studied that how the financial aspects impact a lot over the overall
performance of the business and how it is important for an organization to consider various
profitability and capital structure factors to make decision about overall performance of the
company. However, along with that, a business is also required to perform all its activities for
the betterment of all the parties instead of the top level management and board of directors of
the business.
Annual report (2018) of Woolworths define that company has set a board of non
executive directors who basically identifies the unethical activities in the business and
identifies that if there is any activity or process which could impact over the substantial
interest of the shareholders and other stakeholders of the business. Bartholomeusz (2019)
defines into his article that it is important for the business to discover the common goals of
the business to make a decision. In order to fulfil the personal interest of the managers,
shareholder wealth and valuation of the business must not be hampered.
Through the article and the study over task 1, I have understood the important of
ethical consideration in an organization. If unethical practices are applied by the management
in an organization then it could only offer benefits to them for short term and it could hamper
the management as well as the business at high level (Lamberton & Lapeyre, 2011). Hence, it
becomes important for the business to look over all the factors, aspects, process and other
factor before making the decision and place the business goals and stockholder's interest
above the short term profitability of the business.
It is important for the management to offer the transparent performance and data of
the business so that it could be cross checked by the stakeholders that here are no unethical
practices involved in the business. It also explains that a business should prepare the financial

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reports and annual meeting announcement letter in such a way that all the relevant
information could be conveyed to the stakeholders of the business and it could improve the
overall performance of the business. It further indicates that there are huge chances in front of
an organization to manage the ethical change and improve the overall performance of the
business.
In case of Woolworths, it has been found that the company has followed proper
AASB, IFRS and GPRS rules to prepare the annual report and represent it in front of the
stakeholders of the business. It further focuses that there are huge chances in front of the
business to identify whether the company is involved in any kind of unethical practices and
how it could be overcome.
To conclude, on the basis of article and the task 1 study, I have found that
management of ethical practices is one of the major elements of the business. It must be
prepared and followed by the business in better way in order to save the business from any
kind of hazards and improve the overall performance of the business.

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References:
Annual report. (2018). Woolworths limited. [online]. Retrieved from:
https://www.woolworthsgroup.com.au/icms_docs/195396_annual-report-2018.pdf
Bartholomeusz, S (2019), ‘APRA rolls up its sleeves on bankers’ pay ’, The Sydney Morning
Herald, 28 March, pp. 29–30.
Damodaran, A. (2010). Applied corporate finance. John Wiley & Sons.
Ernst, D., & Häcker, J. (2012). Applied international corporate finance. Vahlen.
Koropp, C., Kellermanns, F. W., Grichnik, D., & Stanley, L. (2014). Financial decision
making in family firms: An adaptation of the theory of planned behavior. Family
Business Review, 27(4), 307-327.
Lamberton, D., & Lapeyre, B. (2011). Introduction to stochastic calculus applied to finance.
Chapman and Hall/CRC.
Madura, J. (2014). Financial Markets & Institutions. US: Cengage Learning.
Morningstar. (2019). Wesfarmers limited. [online]. Retrieved from:
https://www.morningstar.com/stocks/XASX/WES/quote.html
Morningstar. (2019). Woolworths limited. [online]. Retrieved from:
https://www.morningstar.com/stocks/XASX/WOW/quote.html

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Appendix:
Refer to attached spreadsheet