Financial Performance Analysis Of Woolworths

Company Description

Financial management of an organization is done by the financial department of an organization. In the report, financial management process of Woolworths has been evaluated. In the report, firstly, the description about the company has been given. Further, the structure of the ownership and the stakeholders has been evaluation. In order to assess the financial position and financial performance of the company, performance ratios of the company have been evaluated. The stock price of the organization has also been evaluated to recognize the market place of the company. Lastly, the WACC, divided policy and debt ratios of the company has been calculated to measure the performance of the company.

Description of company:

Woolworths limited is an Australian company. The company is registered in the Australian stock exchange. The symbol ticket of the company is “WOW”. The company is operating its business in the retail industry of Australia. It has been established in 1924 by 5 founders Percy Christmas, Stanley Chatterton, Cecil Scott Waine, George Creed and Ernest Williams. The current headquarter of the company is in New South Wales, Australia. Mainly, the company is serving its services in Australia, New Zealand and India (Home, 2018). The annual report (2017) of the company explains that the total number of employees of the company is 2,05,000. The main divisions of the business are petrol, liquor, supermarkets, home improvements, general merchandise, hotel and gambling etc. The net income and net profit of the company is $ 55669 million and $ 1534 million in 2017.

1. Ownership governance structure:

Ownership government structure of a business explains about the system of rules, processes and practices which is used by the companies to control and direct the process of the company. Corporate governance involves essentially in balancing the company’s interest in managing the stakeholders of the company such as management, shareholders, customers, suppliers, government, financiers and community. In case of ownership structure, the shareholders interest in an organization is evaluated. The ownership governance structure is as follows:

1. Main Substantial stakeholders:

Annual report (2017) of Woolworths limited explains that only one shareholder have more than 20% interest in the total stock of the business. The main stockholder of the company is HSBC Custody Nominees (Australia) limited which has 22.22% ownership in the business. It is a company which is not directly related with the operations and the people of the company.  

In addition, it has been identified that 4 stockholders are there in the organization who has more than 5% ownership in the total stocks of the Woolworths. Moreover, the balanced stockholder of the company which are 16, have less than 5% ownership into the stock of the company

1. Main people:           
2. Gordon Cairns is the chairman of the Woolworths. The chairman is the person who handles all the activities and the legal services of the company.
3. Gordon Cairns, Brad Banducci, Jillian Broadbent, Holly Kramer, Siobhan McKenna, Scott Perkins, Kathee Tesija and Michael Ullmer are the BOD member of Woolworths.

• Brad Banducci is the chief executive officer of the company.

1. There is only one stockholder of the company who is not directly related with the operations and the people of the company (AFR, 2018).
2. Further, it has been found that the top 4 stockholder who has more than 5% ownership of the company are not among the key members of the company.
3. Performance Key ratios:

Ownership-Governance Structure

Ratios are the tool of an organization which explains about the financial performance of an organization. Ratio study is evaluated by the financial analyst and the financial manager of the company to measure the performance of the organization so that the relevant changes could be done in the organization for the betterment of the business.

In the report, performance key ratios of Woolworths have been evaluated to measure the performance of the company. Short term solvency position, asset utilization position, profitability ratios, long term solvency position and market value ratios have been calculated to measure the performance of an organization. The performance ratios of the company are as follows:

1. Short term solvency position:

Short term solvency ratios of a business express about the short-term debt obligation of the business. It evaluates that whether the organization is able to meet all its short term debt obligation of the company at the time of liquidation. This ratio measures the liquidity position of an organization.

   In case of Woolworths, current ratio and acid test ratio have been calculated to measure the short term solvency position of the business. Current ratio measures the current assets and current liabilities of the company to measure that whether the company would be able to meet all its short term debt obligation according to the current assets. The current ratio of the company briefs that the current ratio level of the company has been lowered in 2017 to 0.79. It express that the organization is required to improve the level of current assets to administer the risk position (Hogarth and Makridakis, 2011).

   Further, quick ratio measures the liquidity position of an organization on the basis of quick assets of the company. It measures that whether the company would be able to pay all the current liabilities on the basis of those assets which could be liquidated at any times. The acid test ratio of the business explains that company’s position has been better from last year. However, the organization is still required to administer the liquidate position through increasing the level of current assets of the company.

Liquidity Ratios		2017	2016
Current Ratio
Current Assets /		6,994	7,427
Current liabilities		8,824	8,993
Answer:		0.79	0.83
Acid test ratio
Current Assets – Inventory /		2,914	2,869
Current Liabilities		8,824	8,993
Answer:		0.33	0.32

1. Long term solvency position:

Long term solvency ratios of an organization express about the long term debt obligation of the company. It evaluates that whether the organization is able to meet all its long term debt obligation of the company at the time of liquidation. This ratio measures the capital structure position of an organization (Higgins, 2012).

Performance Ratios

   In case of Woolworths, gearing ratio and interest coverage ratio have been calculated to compute the long term solvency position of the company. Gearing ratio measures the level of long term liabilities of an association on the basis of capital employed of the business. The gearing ratio of the organization briefs that the long term liabilities of the company have been lowered in context of the total capital in 2017in context with 2016. It express that the company is required to enhance the level of long term liabilities to manage the cost position as well as the long term solvency position of the company.

Further, interest coverage ratio measures the long term solvency position of an organization on the basis of earnings before interest and taxes and net finance cost of the company. It measures that whether the company would be capable to pay the entire interest amount on the basis of its EBIT. The interest coverage ratio of the organization depicts that the company’s position has been improved from last year. However, the company is still requisite to increase the debt amount to administer the capital structure of the company.

Capital Structure Ratios		2017	2016
Gearing ratio
Long term liabilities /		4,566	6,039
Capital employed		14,092	14,509
Answer:	%	0.324	0.416
Interest Coverage Ratio
EBIT /		2,132	1,360
Net Finance Costs (used net interest expense)		194	246
Answer:	times p.a	10.99	5.53

1. Asset utilization:

Asset utilization ratios of an organization express about the efficiency and effectiveness of the company in context with managing the resources of the company. It evaluates that whether the company is able to manage all its daily activities and operations in the minimum working capital (Gibson, 2011). This ratio measures the efficiency position of an organization.

   In case of Woolworths, inventory turnover, trade payable payment period ratio and receivable turnover ratio have been calculated to measure the efficiency position of the company. Inventory turnover measures the total time period in which the inventory would be ordered by the company again. The inventory turnover ratio of the company briefs that the inventory of the company would be turned back in 37.47 days which has been lowered in last 2 years (annual report, 2017). It express that the company is required to invest less money is inventory as the inventory would not be hold back for the company for longer period.

   Further, receivable turnover and payable turnover days measure the efficiency position of an organization on the basis of its policies to manage the resources and the efficiency position of the company. The trade payable payment period ratio of the company explains that the payment days of the company have been enhanced and now the less working capital is required by the company. Further, the receivable turnover days of the company has also been lowered which explains about huge working capital requirement.

Significant Factors Influencing Share Price

On the basis of the above analysis and below table, it has been recognized that the performance of the company is competitive. Company is managing all its resources in lesser working capital and thus the efficiency position of the company is quite competitive. 

Asset Efficiency Ratios		2017	2016
Trade payable payment period ratio
Accounts payable/		5,068	4,809
Cost of sales		39,740	42,677
Answer: (note the above needs to be x 365)		46.55	41.13
Inventory Turnover (days)
Average Inventory /		4,080	4,558
Cost of Sales	# days	39,740	42,677
Answer:  (note the above needs to be x 365)		37.47	38.98
Receivables Turnover (days)
Average trade debtors /		410	434
Sales revenue  (note used operating revenue)	# days	55,669	58,276
Answer:  (note the above needs to be x 365)		2.69	2.72

1. Profitability ratios:

Profitability ratios of an organization express about the profit generation capabilities of the company. It evaluates that how the company is performing in the market and how much profit is generated by the company according to the available resources of the company. This ratio measures the profitability position of an organization (Koller, Goedhart and Wessels, 2010).

   In case of Woolworths, return on capital employed (ROCE), gross profit margin (GM) and operating profit margin (OM) have been calculated to measure the profit generation capability position of the company. Return on capital employed measures the operating profit and capital of the company to measure that how much profit could be generated by the company on the basis of the available resources. The profitability ratio of the business briefs that the profit ratio level of the company has been improved in 2017 from 9.13% to 15.13% (Morningstar, 2018). It expresses that the profit position of the company is quite competitive.

   Further, gross profit margin (GM) and operating profit margin (OM) evaluates the gross profit and operating profit of an association on the basis of sales turnover of the company. It measures that how much profit is generated by the company on the basis of its revenue. The gross profit margin ratio of the business explains that the position of the company has been better from last year as well as the operating profit margin ratio of the company has also been improved.

Profitability Ratios:		2017	2016
Return on Capital employed
Operating profit /		2132	1360
Capital employed (total assets – current liabilities)		14,092	14,509
Answer:	%	15.13%	9.37%
Gross Profit Margin
Gross profit /		15,929	15,599
Sales Revenue (note used operating revenue)		55,669	58,276
Answer:		28.6%	26.8%
Operating profit margin
Operating profit /		2,132	1,360
Sales Revenue	%	55,669	58,276
Answer:		3.83%	2.33%

1. Market value ratios:

Market value ratios of an organization express about the market position of the company. It evaluates that how the company is performing in the market and what is the total worth of the company in the market. This ratio measures the investment and market position of an organization (Kaplan  and Atkinson, 2015).

   In case of Woolworths, Earnings per share and dividend coverage ratio have been calculated to measure the market position of the company. Earnings per share ratio (EPS) measures the net income and weighted average share outstanding of the business to measure that how much earnings have been generated by the company per shareholders. The Earnings per share ratio of the business brief that the EPS level of the business has been improved in 2017 to 1.195 (Yahoo Finance, 2018). It expresses that the company managing a great position in the market.

Calculation of Expected Rates of Return using CAPM

   Further, dividend coverage ratio measures the net income of an organization on the basis of total dividend amount of the company. It measures that how much dividend are paid by the company from the net income of the company (Reuters, 2018). The market value ratio of the business explains that the company’s position has been improved from last year.

Market value Ratios		2017	2016	2015
Earnings per share
Net income		1,534	-1,235	2,146
Weighted average shares outstanding		1,284	1,264	1,257
Answer:		1.195	-0.977	1.707
Dividend coverage ratio
Net income /		1,534	-1,235	2,146
Dividend paid to shareholders		562	1,217	1,567
Answer:		2.730	-1.015	1.369

The above given figure 2 explains that the movement in the stock price of WOW and AORD both are quits fluctuate in nature. On the basis of the above figures, it has been evaluated that the both stocks are getting change rapidly. With the increment in the stock price of WOW, the stock price of AORD has also been higher and with the decrement changes into the WOW, the stock price of AORD has also been higher.   

The calculation briefs that the covariance among both the stock price movement is 0.007 which explains that the covariance among both the stock are quite competitive. The movement in the stock price of both the stocks explain that the volatility of the stock is quite higher and the changes into the stock price of WOW directly affect the stock price of AORD.

1. Significant factors:

For identifying the busines performance and the fianncial position of WOW, various nws articles, fianncial analyst report, jounral articles and recente books have been studied.  On the basis of these study material, it has been found that the stock price of the company is highly volatile in nature in last 2 years. Currently, the stock price of the company is $ 28.74 which has been higher from $ 19.1 in 2016. Howvere, the various ups and downs have come into the stock price of the company in last 2 years.

Such as, on 30-4-2017, the WOW stock price has been lower due to the chnages into the economical factors (FT, 2018). Further, it has been recognized that on 30-9-2017, the stock price of the company has been enhnaced by 5.59% due to the announcement of the dividend amount in the market (AFR, 2018). Further, on 31-1-2018, the stock price of the company has been enhanced by 5.45% and the AORD prices have been lowerd by -0.48% which has taken place due to few internal chnages into the company  (Bloomberg, 2018). In adiition, it has been found that all of these movements have taken place due to continuos chnages into the internal and external factors of the industry (Yahoo finance, 2018). 

1. Calculation of CAPM and beta values:

Beta:

            Beta of an organization explains about the risk position of the company in context with the market index. In case of Woolworths, the beta of the company is 1.235.

Required rate of return:

            Further, the cost of equity of the business has been measured which is 6.84%.

Calculation of cost of equity (CAPM)
RF	2.41%
RM	6.00%
Beta	1.235
Required rate of return	6.84%

                                                            (Morningstar, 2018)

Conservative company:

            On the basis of the above evaluation, it has been found that the risk of the company is 1.235 and the return from the stock of the company is 6.84%. It explains that the company is a conservative business as the risk of the business is lower than the return of the company. The association is a good choice for the investment.  

1. WACC calculations:
2. WACC calculations of the company are as follows:

Calculation of WACC
	Price	Cost	Weight	WACC
Debt	2,775	3.50%	22.56%	0.0079
Equity	9,526	6.84%	77.44%	0.05299
	12,301	Kd	6.09%
Calculation of cost of debt
Outstanding debt	2,775
interest rate	5.00%
Tax rate	30.0%
Kd	3.50%
Calculation of cost of equity (CAPM)
RF	2.41%
RM	6.00%
Beta	1.2347
Required rate of return	6.84%

Weighted Average Cost of Capital (WACC)

Implication on WACC:

             The calculation brief that the WACC of the company is 6.09% out of which 3.5% is the total cost of debt of the business and the cost of equity of the business is 6.84%.  It explains that if the company is planning to invest into any new project than the internal rate of return of the project must be higher than 6.09%. Only in that situation, company would be able to generate the profits.

1. Debt ratios:

Optimal capital structure:

            Optimal capital structure of an organization is the position where the risk and cost of the business could be lower. According to the calculations on the debt ratios of the business it has been found that the debt ratios of the company have been lowered from last year. The changes express that the capital structure of the business is not stable. Further, it also explains that the debt level of the business has been lower by a great level.  

		2017	2016
A.	Debt Ratios =	Total Liabilities/ total assets	Total Liabilities/ total assets
		13390/22916	15032/23502
		58.43%	63.96%

Gearing ratios:       

                 Gearing ratio also briefs about the total liabilities in context with the total capital. Gearing ratio of the business has been enhanced which says that the borrowings of the business has been lower and the directors have explained that they would reduce the level of risk by a great level so that the profit of the company could be used at right place annual report, 2017)

		2017	2016
B.	Gearing ratios =	Total Liabilities/ Capital employed	Total Liabilities/ Capital employed
		13390/(22916-8824)	15032/(23502-8993)
		95.02%	103.60%

1. Dividend policy:

In addition, it has been identified that the company has announced a lower amount of dividend in 2017 in context with the 2016. The amount of dividend has been lowered by the company to enhance the retained earnings for the future investment of the company. It explains that the Woolworths are following the relevant dividend policy, this policy explains that the company should pay a great amount of dividend to attract them towards the investment in the company (Annual Report, 2018). Company is following the same. However, few amounts is kept by the company for the retained earnings in order to manage the funds for future investment.r

recommendation and Conclusion:

To,

Client.

Subject: Recommendation about investment

Date: 15 May 2018.

Dear Client,

This letter is to inform you about your enquiry regarding the Woolworths and the investment into the company. According to the research and evaluation, it has been identified that the Woolworths is performing well in terms of financial activities as well as non financial performance of the company is also good. The balance in the risk and return of the stock of the company is also good. Hence, Woolworths is a good option for the purpose of investment.

          Thus, it is recommended to you to make an investment into Woolworths for better position of the return.

References:

Home. 2018. Woolworths Limited. 

AFR. 2018. Woolworths Limited. 

Annual report. 2018. Woolworths Limited. 

Bloomberg. 2018. Woolworths Limited. 

1. 2018. Woolworths Limited.

Gibson, C.H., 2011. Financial reporting and analysis. South-Western Cengage Learning.

Higgins, R.C., 2012. Analysis for financial management. McGraw-Hill/Irwin.

Hogarth, R.M. and Makridakis, S., 2011. Forecasting and planning: An evaluation. Management science, 27(2), pp.115-138.

Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.

Koller, T., Goedhart, M. and Wessels, D., 2010. Valuation: measuring and managing the value of companies (Vol. 499). john Wiley and sons.

Madura, J., 2011. International financial management. Cengage Learning.

Morningstar. 2018. Woolworths Limited. 

Reuters. 2018. Woolworths Limited.

Yahoo Finance, 2018. Woolworths Limited.