Overview Of Woolworths Group Limited: History & Financial Report

Year of Establishment

Organization name: Woolworths Group Limited

Year of Establishment: The Company came into existence with the opening of its first store on December 5^th, 1924. History & Background: When the company was opened, it started with a share capital of just one hundred and eighty-five thousand pounds which were subscribed a little over six hundred people which includes its five founding members. By 1929, the company expanded its operations in New Zealand and opened its first store in the country in the city of Wellington (Belton, 2017). The company had a landmark moment in the year of 1955 when it opened its 200^th store. In the year 1981, the company introduced itself in the electronics retail market by acquiring Dick Smith. From the 1970‘s to the late 1980’s the company began a transition phase of moving from variety stores to supermarket stores. By 1985, Woolworths had transformed itself into the largest food retailer in the country of Australia. The company entered into the fuel supply market in the year 1996 by opening petrol outlets. It expanded itself into liquor business by acquiring Dan Murphy in the year 1998. In 2005, Woolworths Group ventured into the hotel business by the acquisition of ALH group (Alexander, 2016).

In 2011, Woolworths came up with its first home improvement store. They offer furniture, bathroom fittings and other varieties of home furnishing items.

Going through the contents page, it can be concluded that the business review and the financial report are the two sections that overwhelmingly dominate the entire annual report.

The business review majorly entails the performance of the different verticals of the business namely the Food divisions in Australia and New Zealand, its liquor division of Dan Murphy, Retail giant Big W and hotels (Bromwich & Scapens, 2016). Highlights of the balance sheet, cash flows are also given. This part also contains information on the operations that have been discontinued and the expansion plans of the company.

The financial report comprises of the auditors as well as the directors report and the financial statements of the entity.

Base on the Director’s report section of the annual report, the four main directors of the entity are:

• Gordon Cairns (Also the chairman of the board)
• Michael Ullmer (Also Chairman of the audit, risk management & compliance               committee)
• Holly Kramer (Also the Chairman of the People Performance Committee)
• Scott Perkins (Also the chairman of the sustainability Committee)

The initial page of the report states the gender composition of the board (comprising of half male and half female members), the average tenure of the board members ranging between zero to nine years and the pie charts depicting the experience of the members of the board in different areas like Finance, retail, risk management among others. The report also highlights the experience and backgrounds of the directors and other executive committee members (Choy, 2018). The reports enlist the main business activities that the group undertakes. It also gives director wise details for both executive and non-executive details of the number of meetings of the board and various committee meetings that they have participated in throughout the year. This is a disclosure required from a corporate governance perspective. The report names the two company secretaries of the company. The report contains a declaration on the compliance of environment regulation and director’s indemnity against lawsuits. It states that certain non-audit services were rendered by its auditors which are within the compliance purview of the Code of ethics for auditors (Das, 2017). A significant part of the director’s report is the remuneration report of the key managerial personnel and directors. The report covers the financial and other performances of the company Vis a Vis the remuneration paid. It covers the fixed as well as other short term and long term incentives paid to the directors and key managerial personnel. It has details about the set targets for the executive KMP and how much of it has been achieved and its comparison with the actual remuneration received by them during the year. The report has a financial year 2019 outlook on the payments to be made to them. Among other things the remuneration report lays down policy guidelines related to the minimum shareholding requirement of the independent directors, restrictions on securities trading for the senior executives and the roles and responsibilities of the people performance committee (Dichev, 2017).

The statutory auditors of the company are Deloitte Touché Tohmatsu. AV Griffiths is the signing partner from Deloitte for the company. As per the opinion stated in the report, the financial statements of the group depict a true and fair view of the view of the financial performance of the company. The report states that in preparing the financial statements, the regulation of the Corporations Act 2001 and the Australian accounting standards have been complied with. In the Basis for opinion paragraph, the auditors state that the basis of their opinion is the statutes under the act and the audit evidences obtained during the audit which are sufficient and appropriate (Gooley, 2016). The report covers three key audit matters that were significant in the audit of the financial statements. The three major matters include:

• Valuation of the Property, plant and equipment of Big W and the consideration of provisions related to onerous lease.
• Evaluation of the accounting methodologies used for the accounting of rebates.
• Testing of IT controls(Vieira, et al., 2017).

Compared to the previous year figures, the sales have increased. The reason for the change in sales could be attributable to the following:

• There has been a 4.3 percent increase in the revenues from the Australian food division and 4.5% growth in Endeavour drinks which has been the major driver in pushing the sales figures upwards.
• Another reason for the increase in sales was the first full year comparable growth since financial year 2009 in the segment Big W. Lower prices and improved product ranges triggered the growth in this division(Werner, 2017).

The net cash inflow from operating activities for the company stands at 2,930 million dollars.

In terms of money there has been a decline of 192 million dollars $2930 million for the current period as against $ 3122 million in the preceding reporting period. In percentage terms the decline is 6.15% as compare to the previous reporting period (Kuhn & Morris, 2016).

The closing retained earnings for the year stands at $4,073 million. It had an opening balance of $3,554 million and a further $1,724 million was added to it as net income for the year. After paying $1,208 million its balance stood at the above-mentioned closing figure.

Yes, the company has borrowings. The borrowings comprise of both short term and long-term commitments. The total borrowings sum up to 2,804 million out of which $604 million are short term and the remaining being Long term. Bank Loans comprise a major segment of the borrowings while some of it are unsecured securities (Heminway, 2017).

Computation of Profitability Ratios

Return on Asset Ratio: The formula for calculating it is Net Income/Total Assets

Net income = $ 1,795 million

Total Assets = $ 23,558 million

Return on Asset Ratio = 1,795/23,558 = 0.0761 or 7.61 %

Return on Capital Ratio: The formula for computing is

Earnings before Interest and Taxes /Capital Employed. For computing capital employed we have to deduct Current Liabilities from Total Assets.

Earnings before Interest and Taxes = $ 2,548 million

Capital Employed = 23,558 – 9,196 = 14,362 million (Goldmann, 2016)

Business Review

Return on Capital Ratio = 2,548/14,362 = 0.1774 or 17.74 %

Return on Equity Ratio: Net income/Shareholder Equity

Net income = $ 1,795 million

Shareholder Equity = 10,849 million

Return on Equity = 1,795/10,849 = 0.1654 = 16.54 %

Return on Common Equity: Computed by the formula: Net Income/Common Equity

Common Equity: Contributed Equity + Non-Controlling Interest

= 6,055+368 = $ 6,423 million

Return on Common Equity = $ 1,795/6,423 = 0.2795 or 27.95 %

Computation of Asset Turnover:

Total Asset Turnover: We can compute this as

Net Sales/Average Total Assets 

Net Sales = 56,965 million (Jefferson, 2017)

Average Total Assets = (Opening Total Assets + Closing Total Assets) /2

= (23,043+23,558)/2 = $ 23,301 million

Total Asset Turnover = 56,965/23,301 = 2.44x

Fixed Asset turnover: It can be computed using the formula

Net Sales/Average Fixed Assets

Average Fixed Assets = (Opening Fixed Assets + Closing Fixed Assets)/2

Fixed Assets comprises of Property, Plant & Equipment and Intangible Assets

Average Plant Property and Equipment = (9,026+8438)/2 = $ 8,732 million

Average Intangible Assets = (6,465+6,533)/2 = $ 6,499 million

Therefore, Average Fixed Assets = 8,732+6,499 = $ 15,231 million

Fixed Asset Turnover = 56,965/15231 = 3.74x

Accounts Receivable Turnover = it is computed by the formula:

Net Credit sales/ Average Accounts Receivable

Since there is no information on credit sales, hence this ratio can’t be computed.

Inventory Turnover Ratio: It is computed by the formula

Cost of Goods Sold/Average Inventory

Cost of Goods Sold = $ 40,256 million

Average Inventory = (Opening Inventory + Closing Inventory)/2

= (4,207 + 4,233)/2 = $ 4,220 million

Inventory Turnover Ratio = 40,256/4,220 = 9.54x

Leverage Ratios:

There are three kinds of leverage ratios to be calculated.

Long-term Debt/Equity Ratio:

Long term Debt = 2,199 million

Equity = 10,849 million

Long Term Debt-Equity Ratio = 2,199/10,849 = 20.27 %

Debt Ratio: This is computed by dividing total liabilities by total assets

Total Liabilities = 12,709 million

Total Assets = 23,558 million

= 12,709/23,558 = 53.95 %

Earnings before Interest and Taxes/Interest expense:

Earnings before Interest and Taxes = $ 2,548 million

Interest expense = $ 154 million (Knechel & Salterio, 2016)

= 2,548/154 = 16.55x

Liquidities Ratios:

In this we need to calculate the following:

Current Ratio: This is obtained by dividing the Current Assets by Current Liabilities

Current Assets = 7,181 million

Current Liabilities = 9,196 million

= 7,181/9,196 = 0.78x

Quick Ratio: We calculate this by the equation:

(Total Current Assets – Prepaid expenses – Inventory) / Current Liabilities

= (7,181 – 381 – 4,233) / 9196

=0.28x

Cash ratio: It is derived by the following equation

Cash and Cash Equivalents/Current Liabilities

Cash and Cash Equivalents = 1,273 million

Current Liabilities = 9,196 million

Cash ratio = 1273/9196 = 0.14x

Comment on the financial health of the company based on the ratios calculated:

• Three out of the four profitability ratios are in double digits indicating that the margins of the company and the gains made are very healthy
• The Asset turnover ratios are good indicating the company is successfully utilizing its fixed assets to generate revenues. Especially a significantly healthy Inventory Turnover ratio is suggesting that the company is efficiently managing its inventory to generate revenue(Linden & Freeman, 2017).
• The debt equity ratio has gone down from last year signifying that the company is having the enough profits to repay its loans. This will eventually boost the credit rating for the company enabling it to get cheaper loans in the future. Also, the risk perception of the company would improve as the debts decrease.
• From 57.14 % in the last year to 53.95 % this year, this ratio has improved. Lowering of Debt ratio signifies the portion of assets of an organization that are financed by debt. A high ratio would indicate that the risks associated with the company’s activities of business are greater. A lower ratio indicates that borrowings in the future can happen at lower risks.
• The interest coverage ratio has shot up significantly from 11.99 % last year to 16.55 % in the current year. This is a very good sign as this ratio depicts the ability of the company to pay for its interest obligations for the year. If the ratio rises, it suggests that the company is in a better position than before to pay for the interest on borrowings(Sithole, et al., 2017).
• There is a marginal decrease in the Current liabilities from 79.5 % last year to 78 % this year. Since the fluctuation is very little, it is not making much of a difference. However, attention should be paid on this ratio as this shows the ability of the company to repay the current obligations of the company using current assets. However, this minor impact is more or less taken care of by the improvement in the Cash ratio from 10.15 % last year to 14 % this year. This shows that the company’s liquid assets are on the rise and hence speedy settlements can take place.

References

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Belton, P., 2017. Competitive Strategy: Creating and Sustaining Superior Performance. London: Macat International ltd.

Bromwich, M. & Scapens, R., 2016. Management Accounting Research: 25 years on. Management Accounting Research, Volume 31, pp. 1-9.

Choy, Y. K., 2018. Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview Analysis. Ecological Economics, p. 145.

Das, P., 2017. Financing Pattern and Utilization of Fixed Assets – A Study. Asian Journal of Social Science Studies, 2(2), pp. 10-17.

Dichev, I., 2017. On the conceptual foundations of financial reporting. Accounting and Business Research, 47(6), pp. 617-632.

Goldmann, K., 2016. Financial Liquidity and Profitability Management in Practice of Polish Business. Financial Environment and Business Development, Volume 4, pp. 103-112.

Gooley, J., 2016. Principles of Australian Contract Law. Australia: Lexis Nexis.

Heminway, J., 2017. Shareholder Wealth Maximization as a Function of Statutes, Decisional Law, and Organic Documents. SSRN, pp. 1-35.

Jefferson, M., 2017. Energy, Complexity and Wealth Maximization, R. Ayres. Springer, Switzerland. Technological Forecasting and Social Change, pp. 353-354.

Knechel, W. & Salterio, S., 2016. Auditing:Assurance and Risk. fourth ed. New York: Routledge.

Kuhn, J. & Morris, B., 2016. IT internal control weaknesses and the market value of firms. Journal of Enterprise Information Management, 30(6).

Linden, B. & Freeman, R., 2017. Profit and Other Values: Thick Evaluation in Decision Making. Business Ethics Quarterly, 27(3), pp. 353-379.

Sithole, S., Chandler, P., Abeysekera, I. & Paas, F., 2017. Benefits of guided self-management of attention on learning accounting. Journal of Educational Psychology, 109(2), p. 220.

Vieira, R., O’Dwyer, B. & Schneider, R., 2017. Aligning Strategy and Performance Management Systems. SAGE Journals, 30(1).

Werner, M., 2017. Financial process mining – Accounting data structure dependent control flow inference. International Journal of Accounting Information Systems, Volume 25, pp. 57-80.