Financial Analysis Of Woolworths Limited And Its Competitor, Wesfarmers Limited

Profitability analysis of Woolworths Limited in comparison to its competitor, Wesfarmers Limited

Discuss about the Financial Analysis of Woolworths Limited.

In the current competitive global business environment, financial analysis is of extreme significance, as it helps in examining the financial information for arriving at the business decisions as well as investment decisions. In this report, financial analysis of Woolworths Limited would be conducted and it would be compared with its key competitor, Wesfarmers Limited. Therefore, the use of various financial ratios has been made in relation to aspects like profitability, efficiency, liquidity and investment. The latter section of the report would shed light on evaluating the working procedure of Woolworths Limited to maintain the best interest of the organisation.

In order to conduct the profitability analysis of Woolworths Limited for the latest two years, it is compared with that of Wesfarmers Limited and the following ratios are taken into consideration:

Table 1: Profitability ratios of Woolworths Limited and Wesfarmers Limited for the years 2016 and 2017

(Source: Woolworthsgroup.com.au 2018: Wesfarmers.com.au 2018)

In accordance with the above figure, it could be stated that positive increase in gross margin could be found in case of both Woolworths and Wesfarmers in the year 2017. In this regard, Brigham et al. (2016) cited that gross margin is the percentage of earnings that an organisation makes before deducting its overhead expenses. The ratio for Woolworths has increased from 28.18% in 2016 to 28.71% in 2017, while the same for Wesfarmers has risen from 31% in 2016 to 32.27% in 2017. This is due to the fact that Wesfarmers has generated additional sales compared to Woolworths, which has helped in increasing its gross margin.

Another ratio that has been taken into consideration in this case is net margin. Net margin signifies the ability of an organisation in translating the percentage of the amount of revenue collected into profit (Brooks 2015). Thus, by assessing net margin, it is possible for any business organisation to determine the effectiveness of the existing practices and accordingly, the future profits could be forecasted. In case of Woolworths, net margin has increase considerably from -4.38% in 2016 to 2.87% in 2017. On the other hand, Wesfarmers has experienced an increase in net margin from 0.62% in 2016 to 4.20% in 2017. This is due to the fact that Wesfarmers has earned adequate revenue and lower operating expenses are incurred in contrast to the same.

Finally, ROCE is considered, which gauges the profitability as well efficiency of an organisation with which the employment of capital is made (Laitinen 2017). The higher the ratio, the better it is for the organisation. In case of Woolworths, increase in this ratio could be observed from 10.30% in 2016 to 16.51% in 2017, while the similar trend is observed for Wesfarmers as well from 4.43% in 2016 to 14.82% in 2017. Hence, it could be said that Woolworths is in a better position in terms of this ratio; however, in terms of profitability, the position of Wesfarmers is better than Woolworths in the consumer staples sector of Australia.

Return on assets

The calculations of the below-stated ratios are depicted in the form of a table as follows:

With the help of return on assets, it becomes easier for the managers of an organisation to ascertain the efficiency of the management in using its assets for generating earnings (Grant 2016). For both Woolworths and Wesfarmers, decrease could be observed in the year 2016; however, it has increased significantly in 2017. This is because of the increasing popularity of e-commerce in the Australian retail sector; however, Wesfarmers has generated more earnings in contrast to Woolworths. Thus, Woolworths needs to deploy its asset base more effectively so that higher earnings could be generated in future (Myšková and Hájek 2017).

In the words of Siddiqua et al. (2016), inventory turnover gauges the efficiency of an organisation in controlling its merchandise; therefore, it is significant to have a lower ratio in terms of days. In case of Woolworths Limited, the inventory turnover has increased from 39.37 days in 2015 to 44.66 days in 2016; however, it has declined again to 39.67 days in 2017. On the other hand, significant increase in this ratio could be observed over the years, which implies that Wesfarmers has experienced a fall in market demand. This is due to the fact that it has followed aggressive pricing structure. Hence, in terms of this ratio, Woolworths is placed in a better position in the consumer staples market.

According to the above figure, it could be stated that the ratio for Woolworths has remained almost identical over the years, while a significant drop in quick ratio could be observed from 2015 to 2017 for Wesfarmers. Quick ratio helps in measuring the liquidity of an organisation by representing its ability to clear current liabilities with the short-term asset base excluding inventories (Szucs 2015). The standard quick ratio for the industry is considered as 1. In this case, both the organisations have not performed to the desired standard, although Woolworths is placed in a better position in contrast to Wesfarmers.

According to Van Duijn et al. (2016), price-earnings ratio is a ratio that shows the association between the stock price of an organisation and its earnings per share, which helps the investors to gain better insight on the value of the organisation. For both Woolworths and Wesfarmers, decline could be observed in 2016 followed by an increase in 2017, which denotes positive returns to the shareholders. However, since the ratio is higher for Wesfarmers in 2017, it denotes that the investors could earn more returns by investing in the shares of Wesfarmers than Woolworths.

CG practices adopted by Woolworths are identified as the main approach to protect the investors and shareholders fund. In addition to this, the group is seen to be committed in terms of ensuring practices and policies are critical to the financial reporting, CG and remuneration report. The integrity aspect of the CG report is maintained by the company in terms of adhering to the recommendation as per the “ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations (3rd edition) (ASX Principles)” (Woolworthsgroup.com.au. 2018). The code of conduct within the organization is seen to be applicable to employees and directors which is set to confirm the expected standard and honesty. The overall CG report ensures that all the employees interacting with the customers, community and suppliers for enhanced result.

Woolworth Limited safeguards the interest of shareholders through “Audit Risk Management and Compliance Committee (ARMCC)”.This committee is depicted to be responsible for providing assistance to the board in terms of assisting the board. This is seen to be in compliance with the internal audit function, external audit function, compliance policies and accounting policies and practices, internal and external audit functions. The ARMCC is further seen to set out the framework in terms of the risk management and internal control system (Woolworthsgroup.com.au. 2018).The main plan for the risk management is depicted with direct access through the ARMCC. In addition to this, the CEO and management is depicted to maintain an effective policy for managing the risk and comply with the management frameworks of the company (Ibisworld.com.au 2018).

The financial reporting standards adopted by the company are depicted to be in compliance with the AASB having beginning on or after 27 June 2016. The company has further maintained certain provisions for the standards and amendments which are yet to be implemented into current period and any prior periods which are likely to be significantly affecting the reporting’s made in the future. The amendments pertaining to AASB 107 can be depicted to be one such standard which will be introduced with various types of the additional disclosures. The financial statement of the company further includes all the relevant ethical disclosures. The main components of the financial report is seen to include various types of the consolidated financial statement, disclosure of the group performance which is shown with the relevant segment disclosures taken from the continuing operations. The information pertaining to the asset and liabilities includes trade and other receivables, PPE, Intangible assets, income tax, trade and other payables (Australian Retailers Association 2018).

The main attitude of the management is depicted in form setting the policies which are based on the various types of the interpretation which are based on the preparation of the financial statement as per the guideline which are seen to be given as per the AASB. It needs to be further discerned that the various types of the consideration for the financial reporting for the company is seen to be depicted in terms of the disclosing the policies which are related to the information about the group structure. These are seen to be distributed into various categories which include the relevant information seen to be based on the operations which are discontinued operations, assets held for sale, subsidiaries, information on the parent entity and related party information. Some of the other disclosures are seen with the contingent liabilities, KMP and employee benefits (Sutton-Brady, Kamvounias and Taylor 2015).

The operations of the company are set with the intention for excelling in terms of the shareholders, SC and customers. The operations of the company are often known for its quality gods and services which are placed in various locations. The operations of a retail chain like Woolworths is comprised of the demand which is seen to be considered with the demand generated for the goods and services at the store by the customer who were intending to purchase according their taste and preferences. Some of the important activities of the SCM is depicted in form of the maintaining effective operations (Booth and Whelan 2014). The transportation operations are depicted with the services provided to the transport vendors, suppliers, credit and cash transfer. The present operations are distributed across 1000 stores in Australia. It is also seen to include 968 Supermarkets and 19 additional convenience stores. The online division of the company deals with the products such as Home Shop items which includes click and collect home delivery services (Bayly, Scollo and Wakefield 2015).

The company is discerned to be committed to a strong level of investment grade credit grade rating. Based on the evaluation of the portfolio of to empower the business the main strategies adopted by the company for investment is based on the implementation of a turnaround plan. In the FY 2018 the company will continue to become the sole investor for the BIG W, for improving the various types of the aspects such as shopping experience for the customers (Khooet al. 2017). The primary increase in the investment has been aimed with the Australian and New Zealand outlets. These investments are seen to be excluding the consideration for the incremental performance-based incentives and $ 35.3 million BIG W impairment. The gross profit has been seen to be incurred as a result of the performance driven by the material improvement kept in the stock of Australia and New Zealand (Al-Hawari 2015).

The net financing cost published in 2016 financial statement has been able to state that the there was a decrease of 21.2%. Some of the various types of the financing transactions which took place in 2017 have been seen with the components such as maturities and new transactions. The maturities have been included with the non-call period for the A $700 million Woolworths is included Notes II ended on 24 November 2016.In April 2017, USD 300 million matured in US notes. This amount was depicted to be repaid within the existing bank facilities which were previously established for this purpose. In May 2017, the group financed$ 400 million bank guarantee facility which matured in November 2017. These facilities were seen to be used by the company for the purpose of meeting the obligations which are related to the self-insurer. The group also issued bank guarantees in favour of the Australian work cover authorities which were underpinned by the international surety market (Mrasi, Mason and Jere 2018).

The retail market in Australia is expected to post a CAGR of close to 3% in 2018. The industry has shown several instances of growth in the past few years and regarded to be one of the top competitive markets across the globe (Vogel 2014). The retail market has been further seen to be offering a range of products as a result of the influx of the foreign entities in the market. The Australian consumers are depicted to be becoming more sophisticated and demanding and able to generate more growth opportunities for the companies in the changing market situation. It needs to be further understood that the retailers are increasingly providing more value-added services for the satisfaction of the customers and increasing the loyalty thereby attracting new customers (Conlon and Perkins2018).

The review of the top 20 retailers selected for the Australian top retailers has been included with analysis from secondary resources to determine the best in retail in the evolving sector. The top retailers are seen to include the companies such as Aldi, Big W, Bunnings Warehouse, Chemist Warehouse, Cotton On, Dan Murphy’s, David Jones, EB Games, Harvey Norman and IKEA. Some of the various types of the other competitors of the Woolworths can be depicted in terms of the Wesfarmers, JB Hi Fi, Kmart Australia, Myer, Officeworks, Spotlight, Supercheap Auto, Target, The Good Guys (Weisbrod, Mulleyand Hensher2016)

The total market share of the retail industry in Australia has been seen with 169 Billion with an annual growth of .7%. The consumer goods retailing has been depicted to be struggling with tough retail conditions in the last five years. The weak growth in the economy has led to unstable financial market with a tense time for the subdivision operations. The fall in the retail division has been considered with the various types of the players in the industry which arebased on the items such as recorded music, photographic equipment, newspaper, books and various types of the stationery goods (Bhakoo, Singh and Chia 2015).

Conclusion:

Based on the above evaluation, it could be stated that both Woolworths and Wesfarmers have maintained a stable financial position in the consumer staples sector of Australia. However, in terms of profitability and investment aspect, Wesfarmers is enjoying competitive advantage, while in case of liquidity and efficiency, the position of Woolworths is superior in contrast to Wesfarmers. Moreover, the corporate governance report of Woolworths states that the operations of the company are set with the intention for excelling in terms of the shareholders, SC and customers. The operations of the company are often known for its quality gods and services which are placed in various locations. The operations of a retail chain like Woolworths is comprised of the demand which is seen to be considered with the demand generated for the goods and services at the store by the customer who were intending to purchase according their taste and preferences.

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