Analysis Of Financial Statements For Woolworths Group Limited

Limitations

This report has been prepared as requested and authorized by the board of directors of Woolworths Group Limited. The report is thus addressed to them for the corrective action to be undertaken.

This report specifically gives analysis from the study of the financial statements for the 5 year as given in the company’s website.

The report compares the financial performance of Woolworths Group Limited with focus on the;

• Profitability indicators of the company.
• The company’s Liquidity i.e. how well the company is set to repay its debt.
• The company’s efficiency in its operations.
• The company’s financial structure that determine its leverage level.

The report interprets the elements of the financial statement using ratio analysisthrough evaluation of critical elements in the statements that affect performance in one way or another.

The financial statements include:

• The income statement.

This financial statement is an important element as it shows how the revenue generated by the company over the 5 year period as well as enlisting the expenses that was incurred and ultimately states the profit that was made from operations.

• Balance sheet.

This financial statement stated the assets (What the company owns) and the liabilities (What the company owes others) as well as the shareholders stake or equity in the company. In brief it indicates the company’s financing structure.

• Cash flow statement.

This statement broke down the Company’s receipts (Money Received) and company’s payments made over given period of time. It indicates important financing, operating and investing activities incurred by a company for a given financial period.

Although evaluation of performance of a company for a number of periods is essential, the findings make more sense if the results are compared by another company in the same industry to determine whether it is operating profitably as far as the overall industry is concerned. The reports will thus asses the competitors in the industry that the industry belongs to (the retailing industry) and gives recommendations from the finding.

Woolworths Group Limited formerly known as Woolworths Limited is an Australian Company listed the Australian Securities Exchange and was founded in 1924. Woolworths Limited operates retail stores and thus falls in the category of retailing industry.

It is the second largest company in Australia in terms of revenue and the second largest in New Zealand. It operates more than 3200 stores in both New Zealand and Australia and is involved in the following businesses:

• Liquor stores such as BWS and Dan Murphy’s.
• Supermarkets under numerous banners such as Food town, Thomas Dux and Woolworths.
• Sale of gasoline.
• Runs consumer electronic shops under the brand names of Dick Smith and Tandy.
• It runs 165 odd general merchandise that operates the name of Big W.
• Operates nearly 300 hotels. Among others.

Woolworth’s group limited has Coles Supermarket, The distributors and ALDI Einkauf as some of its top competitors.

Woolworths Group Limited complies with ASX corporate governance principles which help them to achieve long term shareholder value.

It is governed by a board of directors which has a function to provide the strategic direction to be followed in the achievement of company goals. The board has the following committees that help them in carrying out there responsibility as well as gaining advice from them. This are:

• The Audit, Risk and Compliance Committee.
• The People Performance Committee.
• The Sustainability committee.
• The Nomination Committee.

These committees have specific set responsibility which they carry out and in the end contribute to the overall success of the board.  

The financial statements were interpreted in the following classes of ratios.

Profitability analysis was done by the use of the following profitability ratios;

• Return on assets (ROA)
• Net profit margin
• Gross profit margin

These ratios attempted to show how efficient the company has been in the utilization of the resources at its disposal to generate income relative to the expenses incurred (Balogh 2017).

Report Objective and Scope

This indicated the profits generated from the assets the company had.

ROA= Net Profit

Average Assets.

Average assets = Current years assets value + Previous Years Assets

2

ROA Calculations

2017= 1482000* 100 = 6.39%

23209000

2016= 840100    * 100 = 3.44%

24419500

2015= 2137400  * 100 = 8.63%

24771000

2014 = 2458400   * 100 = 10.58%

23227700

2013 = 2254900   * 100 = 10.29%

21915650 

The return on assets was highest in 2014 with a percentage of 10.58%. For the remaining 4 years the ROA went down meaning the company’s operations went down as far as ROA is concerned.

It can be said that the set ROA for the company for the 5year period as per the trend analysis was 10.58% and the company is at its best performance if it is operating at this value.

The average ROA for the company for the 5 year period was 7.866% and thus in years 2017, 2016 and 2014 the company was operating below its average and thus low performance.

To maintain and achieve this level of ROA the company should do an assessment on the productivity of its assets and do away with obsolete assets that do not aid in income generation (Collier 2015). It should also aim to generate more revenue and cut down on variable expenses as they directly affect the profits and result to low ROA levels.

This indicated what the company generated from its sales after deduction of its expenses.

Net Profit Margin = Net Profit

Sales (Revenue)

Calculations:

2017 = 1482000  * 100 = 2.66 %

             55668600

2016 = 840100     * 100 = 1.44 %

58275500

2015 =   2137400 *100 = 3.51%

  60868400

2014 = 2458400    * 100 = 4.03%

60952200

2013 = 2254900     * 100 = 3.84 %

58674100 

The average profit margin for the 5 year period was 3.096%.

 Thus it can be said that the Company’s operation went down in 2017 and 2016 which was below the Company’s average.

The Company’s best performance was in 2014 with 4.03% profit margin and the company should strive to achieve this set margin to be at its best performance. 

The company will maintain a high profit margin by increasing revenue value. This may achieved through review of prices to be at per with competitors, provide better quality goods as opposed to competitors so as to attract more customers. Expenses directly reduce the profit margin level and thus should be maintained at the lowest favorable level(Maynard 2017).

This indicated the profit the company’s income margins after deduction of the cost of sales.

Gross Profit Margin = Net sales (Revenue) – Cost of Goods

Net Sales (Revenue)

Calculations

2017 = 55668600 – 39739700   * 100 = 28.61%

55668600

2016 = 58275500 – 42676700  * 100 = 26.77%

58275500

2015 = 60868400 – 44344800   * 100 = 27.15%

60868400

2014 = 60952200 – 44474600   * 100 = 27.03%

60952200

2015 = 58674100 – 42912600    * 100 = 26.86%

58674100 

Since 2017 is the most current year, it can be said that the company has taken the right trend as the gross profit margin was at the highest with 28.61%.

Company Profile

The average profit margin for the five year period is 27.28%. The company thus operated below its average in the years 2015 and 2014.

The company can maintain the set Gross margin through sourcing for cheaper but better quality raw materials and labor as these components directly increase the cost of sales. It should also aim to achieve high revenue values (Immorlica et al 2017). 

These ratios indicated the ability of the company to repay both its short term debts using its liquid assets (Michael & Albert 2015). Ratios used to analyze included:

• Current Ratio
• Quick Ratio

3.2.1 Current Ratio

This indicated the ability of Woolworths Group limited to repay its short term obligation (Sekar& Saranya 2018).

Current Ratio = Current Assets

    Current Liability

Calculations

2017 = 6994200 = 0.79

8824200

2016 = 7427000 = 0.83

8992700

2015 = 7660900 = 0.84

9168600

2014 = 7174800 = 0.95

7558200

2013= 6226100 = 0.91

6866000 

The average current ratio for the company for the 5 year period was 0.87%. As a general rule current ratios should be greater than 1 to ensure that a company is in a position to discharge its liability as and when they arise.

According to the analysis of this ratio it is evident that the ratios for the 5 years were below the expected minimum and thus the default rate for short term liability payment was high.  

Just as the current ratio it evaluated ability to pay short term debt (Sari, Nurlaela&Titisar 2018).

Quick Ratio = Cash, Marketable Securities, Accounts Receivables( Quick assets)

Current Liabilities

Calculations:

2017 = 2911986 = 0.33

8824200

2016 = 2877664 = 0.32

8992700 

2015 = 2750580 = 0.3

9168600

2014 = 2494206 = 0.33

7558200

2013 = 1991140 = 0.29

6866000 

The quick ratio is relatively low and just as indicated by the current ratio the default rate is very high.

The company is thus advised to the following to enhance both its current and quick ratio.

• Dispose idle assets that don’t generate revenue to the company.
• Maintain an efficient system that ensures prompt and continuous collection of amount owed by the company by debtors.
• Negotiating long credit periods by suppliers to ensure that the company has enough time to prepare for payments to reduce defaults rates (Tomczak 2014).
• Maintaining overheads at the lowest manageable level to reduce cash wastage on daily routine expenses. 

These ratios indicated how well Woolworths Group Limited used its assets and managed its liabilities (Santosuosso 2014).

The ratios analyzed under this category was the Inventory Turnover ratio. 

This indicated the number of times inventory was utilized or sold in the company.

Inventory Turnover = Net Sales

Average Inventory

Calculations:

2017 = 55668600 = 13.64 Times

4081276

2016 = 58275500 = 12.78 Times

4559898

2015 = 60868400 = 12.49 Times

4873371

2014 = 60952200 = 12.99 Times

4692241

2015 = 58674100 = 13.95 Times

4206029 

The average turnover for the 5year period was 13.17. As per this analysis the inventory turnover was low in three years 2016, 2015 and 2014.

The higher the inventory turnover level the more efficient the operations were and thus the company was more efficient in 2013.

As indicated in a journal by (Kim, Na & Kim 2018) the turnover level can be enhanced through the following ways:

• Reduction of lead time.
• Reduce distribution costs to increase sales volume.
• Improved marketing activity in an attempt to expand the market.
• Proper forecasting for orders and deliveries to make. 

Long term Solvency Ratio

These ratios showed the extent long term debt capital had been utilized to finance the company operations.

Ratios analyzed included:

• Debt to Equity Ratio
• Debt to Total assets ratio 

Debt to Equity Ratio.

Formulae; Total Liabilities

Ratio Analysis

       Total Shareholders’ Equity

Calculations

2017 = 13039700 = 1.32

9876100

2016 = 14720300 = 1.67

8781900

2015 = 14204800 = 1.28

11132000

2014 = 13679800 = 1.3

10525400

2013 = 12949700 = 1.39

9300500 

The debt to equity ratio is too high and this shows that the company is at a high risk of default.  

Debt to total assets

This ratio indicated the extent to which company assets had been financed by debt. 

Formulae: Total Liabilities

      Total Assets

Calculations:

2017 = 13039700 * 100 = 56.9%

22915800

2016 = 14720300 * 100 = 56.06%

23502200

2015 = 14204800 * 100 = 56.06%

25336800

2014 = 13679800 * 100 = 56.51%

24205200

2013 = 12949700 * 100 = 58.2%

    22250200 

In all the 5 years analyzed it was evident that more than half of the assets of the company were financed through debt or by creditors.

This is very risky as any default by the company that may lead to repossession of the assets by the company will greatly affect the company’s operations. 

A company should ensure that it is in the position to solve both its long term and short term obligations. As for the calculations above more debt than equity is used to run the company and thus the company should try as much as it can to reduce the debt level by investing more on equity financing.

As was stated earlier, Woolworths group Limited belongs to the retailing industry. Despite the interpretation of the various ratios that indicated performance it was necessary to analyze the industry averages to concretely determine whether the performance was okay as per the company  or improvements had to be done.

The table below compares the performance of Woolworths Limited and the company averages and  gives comments of whose performance was better. 

Basis	Woolworths Limited	Industry
Gross Margin	29.33	27.19
Basic Earnings Per Share	1.23	1.61
Return On Assets	7.3	9.81
Return on Equity	19.79	24.37
Quick Ratio	0.32	0.3
Current Ratio	0.78	0.81

The gross margin level and quick ratio for Woolworths Limited indicate a favorable performance for the Company’s in comparison to the Industry as a whole.

The other aspects i.e. Earnings Per Share, Return on Assets, Return On Equity are below the recommended company averages and thus the Company should improve operations that affect those areas as recommended in the individual ratios to ensure performance is at par with the Industry.  

Conclusion

It is thus concluded that several elements contribute to the overall performance of the company and no element is less important. The company is thus advised to follow the recommendations given after each analysis to ensure that deviations identified are corrected.

The company is advised to be carrying routine analysis on the financial status and performance as well to ensure that deviations are identified andcorrected on time. The company should not only do an assessment on its own but compare results with the industry finding to ensure that their operations are not only profitable but are at par with the industry performance.  

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