FINANCIAL ANALYSIS WOOLWORTH COMPANY LIMITED

Financial Analysis: Woolworth Company Limited 4

FINANCIALANALYSIS: WOOLWORTH COMPANY LIMITED

TheName of the Class

Professor(Tutor)

TheName of the School (University)

TheCity and State

Tableof Contents

Introduction 3

Background of Woolworth Limited 4

The Stock Value Analysis 5

Financial Growth 6

The revenue growth 6

Earnings per share 7

The General Financial Growth 9

Net Profit after Tax (NPAT) 9

Shareholders’ Funds 10

The Total Assets 11

The Financial Ratios 11

Liquidity 12

Profitability, Debt Management and Asset Management 13

Profitability 13

Debt Management 14

Asset Management 14

Industry Comparison 15

Recommendation and Conclusion 16

References 16

Introduction

Infinancial management, there are various aspects of a firm that needsto be scrutinized. The analysis of performance of a company dependson the performance indicators such as liquidity, profitability andthe growth of revenues and stock among others. As manager, it isimportant to understand these performance indicators and provide arecommendation on the same. Most accompanies ace relied more on boththe qualitative and the quantitative analysis of their operations inorder to come up with substantial investment decisions. The decisionsrevolve on the performance of the various departments in relation tothe competitors. The comparison with the competitors helps thecompanies to understand the best way in which they can correct thedifference with a view to improving the overall performance of thecompany. The trend in growth of stock is very important in getting toknow the growth of equity and hence the wealth of the company. Thispaper looks into the performance standards of Woolworths Company. Onthe qualitative stance, the research takes a look at the placement ofthe company in the current industry and how its operations haveinfluenced its performance in the industry. This analysis would bedone through the scrutiny of the growth of the stocks in value forthe last five years. Additionally, the study seeks to understand theperformance of the management in trying to create value toshareholders. The research also dwells on the trends on theprofitability of the company with ken attention on ability of thefirm to meet its financial obligations in due time. Asset managementratios will also be scrutinized to check whether the companyoptimally utilizes its assets to earn more wealth to theshareholders. This analysis is mainly geared towards understandingthe financial soundness of this corporation and to give arecommendation on its economic viability in terms of investment.

Background ofWoolworth Limited

Woolworthis the best retailing companies in Australia that deals in many linesof operations. The firm was instituted in the year 1924 where itstarted as a retail business in Sydney Australia (David, 1989).Currently, the company has expanded its branches over 3000 that arespread across New Zealand and Australia. It has employed over 190,000employees which has made it to drive its agenda forward. Woolworth islisted in the stock exchange with the short code of WOW. In theindustry ranking, Woolworth is ranked second out of 2000 retailcompanies in this countries and this has made it have a high sense ofproduction stance especially in the lines of operations that it haschosen. At the present, the company has embarked on five distinctareas of production. These areas are General merchandise, Liquor,food and petrol Home improvement products Hotels and Supermarkets(Pritchard, 2000).The contributions in terms of revenues and profits for the fivesectors of operations are as shown in the pie charts below.

Fromthe above pie chart, it is evident that this company has investedmore on the food, liquor and petrol. This huge investment is followedby the supermarkets and general merchandise while the hotels and thehome improvement products take fewer portions of its operations.Additionally, the food liquor and petrol sector is seen to havehigher stance of profit margin than other sectors as well.

The Stock ValueAnalysis

Inaccordance to the Gordon growth model (dividend discount model) ofcalculating the value of stock is deemed to be (div1)/ (k-g) where

Div1= is the expected dividend for the subsequent year (2016) =$ 1.38*1.04

K= required rate of return for the Woolworth company = 9%

G= is the growth rate of the dividends of this company. = 4%

Thevalue of the stock therefore is expected to be 1.4352 / (0.09-0.04) =AUD 28.704

Theconcept behind dividend growth model is that the intrinsic value ofthe stock is deemed to be the present value all the dividends thataccrue due to the stock. In this prospect, it is assumed that thedividend will be received in perpetuity. Hence as long as the companyis still a going concern, it will give its shareholders thedividends. The growth percentage is subtracted from the requiredreturn since it has the effect of increasing the dividend value.

Thecurrent share price of Woolworth Company is AUD 20.76 and this meansthat the shares have been undervalued. For this reason, the shareshere are offered to the investors at a discount to mean that thecompany is deemed to have a higher intrinsic value for their stocks.Additionally, this is an indication that the investors believe thatthere will be high level of growth in terms of the returns to thestocks they have invested. Additionally, the required rate of returnis deemed to higher than the growth rate of the dividend, anindication according to the growth model that indeed the company’value of shares is expected to continue growing. The management ofthe stocks is therefore up to date since it is destined to growth fora longer period of time up to which the required rate of return wouldbe higher than the cost of shares.

Financial Growth

Thefinancial growth of Woolworth is explained by different performanceindicators which are expected depict the true position of the companyin terms of economic growth during the last five years. Theseperformance indicators includes the revenue growth, the earnings pershare and the capital structure trends among others as discussedbelow.

The Revenue Growth

Revenuegrowth is very essential in giving an understanding on the variousfacets of the economic status of the company because it carries withit the notion of profitability of the company (Petty et al., 2015).The revenue growth is an indicator that the company is making salesthat is able to drive some of its pertinent cost units such asdistribution, production and other cost of sales. The chart belowshows the trends in the revenue growth for Woolworth Company over thelast five years.

Fromthe trends of revenue growth above, it is evident that the revenuesfor the company have been growing since the year 2011. This growth isattributed to the expansion and profitable mergers that thecorporation has had over the last five years. It is important to notethat the revenue growth has stagnated between 2014 and 2015 which isan indication that the production is at its maturity stage. Some ofthe possible measures that Woolworth can possibly engage in are thenotion of rebranding and also investing in the newer markets to helpit continue gaining a high revenue growth. From the graph, it is alsoan indication that the revenues are above the industry revenuesmaking the firm to have a higher competitive advantage in terms ofhigher economies of scale than other companies.

Earnings per share

Theearnings per share of any company are a powerful economic indicatorof strength of the company in terms of how the shareholders’ wealthincreases or decreases. The main goal of any shareholder is tomaximize wealth of the company. The maximization of wealth is derivedfrom the earning that the shareholders get every year. For Woolworth,the trends of earnings per share are as shown below.

Fromthe graph, the year 2012 recorded the lowest earnings per share whilethe year 2014 recorded the highest earnings per share. The generallevel of earnings per share is high with the lowest being 149 AUD.This is a clear indication that the company has a high stability inits earnings that creates value for the investors. The propositionalrange in the earnings per share is staged at 50 AUD, which means thatthe corporation is deemed to have a high variation in its earnings.This high volatility is quite detrimental to the substantial growthof the firms since it can destabilize production due to unpredictedearnings per share. The company therefore should institute measuresthat would be geared towards stabilizing the growth of earning s foreach share. This could be done through the stabilization of theamounts of shares and making sure that efficiency is created for theproper utilization of the currently available capital.

The General Financial Growth

Thereare various aspects of the firm that depicts the financial growth ofWoolworth. These indicators transcends from the productivity of theemployees, to the change in the revenues, to the change in theshareholders’ funds (Richard et al., 2009). This next discussiongives a critical view on these indicators as depicted by the chart ontheir percentage change below.

Net Profit after Tax (NPAT)

Thegraph on the percentage change above clearly indicates that the netprofit after tax (NPAT) has been having irregular changes over thelast five years. The change was negative by the year 2012 due to thedecline in the sales and the increase in the operational cost in thisyear. This justification is still not enough since the company shouldcreate high level of efficiency as it expands its operations. Theirregular change in the NPAT is an indication that there is highlevel of fluctuations in the profits which makes the stability in thereturns questionable. The fluctuations in the NPAT has resulted intoa far much lower change in the NPAT over the four years which clearlyshows that the company is stagnating in terms of generation of theprofits which is quite delusional to the potential investor.

Shareholders’ Funds

Theshareholders’ funds have had positive change from the year 2012 to2014. This positive change is attributed to the increase in theearnings per share for these years. In this prospect, it is importantto note that the company is indeed on the forefront in making surethat the shareholders’ wealth is maximized. The higher positivepercentage change also gives an impression that the company isefficiently utilizing its capital resources in accomplishing thewhole context of maximizing the shareholders’ value in the company.The investors therefore have a high level of confidence in puttingtheir monies in this company and as such the company is deemed tohave a high reputational stance. The decline in the change for theshareholders’ fund in the year 2015 was due to the increase in thenumber of shareholders when the company offered some shares for thepublic to buy. The overall effect of this transaction is that thecompany shareholder base grew more rapid that their value.

The Total Assets

Thetotal assets for the company has been increasing from the year 2012at an increasing rate which shows that Woolworth is utilizing thecapital resources in the most appropriate way to increase the networth of the company. This claim is based on the foundation that asthe assets increase, it is only expected that the rates of assetturnover also increases making the investors have faith that indeedthe management is utilizing the assets well enough to create morevalue to their existing capital through profits and dividends. Fromthe graph above, it is evident also that the average change in theassets is around positive 7% which indicates that generally, theassets of the company are indeed increasing hence their propermanagement and utilization. In terms of employee growth, the companyhas tried to maintain the level of employee number even at the timewhen it is expanding its operations. This has been made possiblethrough the proper utilization of the technology which would reducethe number of workforce even as the company expands. This has madethe company to be at a higher competitive edge owing to the fact thatit gives much attention to the production efficiency while reducingthe operational costs. Additionally, the lower percentage change inthe employees means that the rate of employee turnover is quite lowmaking it quite easy for job satisfaction and skill development amongthe staffs to be quite high.

The Financial Ratios

Thefinancial ratios provide the grounds for which the company can bescrutinized in various aspects such as liquidity, profitability,asset management, debt management and market valuation among others.This section discusses these areas with keen intention of looking attheir trends in the past five years and comparing them with theindustry average.

Liquidity

Woolworthis known to be quite conservative in maintenance of its assets. Theliquidity of the company is depicted by the current ratio of thecompany, which indicates the ratio of current assets and currentliabilities. The table below reveals the trends for the liquidity forthe company.

Fromthe above liquidity graph, it is evident that the company is able tomeet its short-term financial obligations in quite efficiently. Thelowest current ratio stands at 0.8 which is considerably good whichmeans that the company can use the current assets to pay up itscurrent liabilities 0.8 times. this liquidity is deemed fit since itis not too high to increase the increase the opportunity costs ofkeeping liquid asset at the same time it is not too low to plunge thecompany into a short term financial crisis. The current ratio here isalso seen to be stable with minimal variations over the years, whichdepict a profound management of the liquid assets and liabilities forthe company.

Profitability, Debt Management and Asset Management

Thecalculations on the trends on these performance indicators have beensummarized in the table below.

Profitability

Fromthe graph above, it is evident that the return on revenue has beenstable at around 4% over the four years which depicts a high sense ofstability in production and sales. Additionally, the profit margin isquite stable over the years and slightly higher than the return onthe revenue. The stability in the profit margin and revenue returnmakes the production and investment into this company quitepredictable. This means that the risks involved here is deemed to bequite less and hence allows for the investors to put in their fundswithout worries of failure. The stability in the returns alsoindicates that the Woolworths Company is not going into bankruptcyany soon and for this reason, it boosts the reputation of the companyas well.

Debt Management

Thegraph above indicates that the gearing levels have been reducingsince the year 2012. The reduction is attributed to the growth in theretained earnings which are now used as a cheaper source of capitalthan the debt capital. Additionally, the range of gearing levels isdeemed to be quite stable since the company is good in planning onthe amount of investments that should be funded by the debt capital.The company is also keen not to vie off the industry average whichstands at 48.5%. Additionally, Woolworth has a debt payment period of41 days which slightly above the industry average of 32 days. Thisshows that the company is capable of meeting its short term financialobligations to the interest of the creditors. The debt collectionperiod for the company is 1.75 days which less than that of theindustry which stands at 4 days. This notion connotes that thecompany is keen to maximize the utilization of its asset value inorder to claim a higher stances of profits (Morellec, 2001).

Asset Management

Fromthe discussion on the liquidity, the company has maintained highstandards in managing its current assets by making sure that theymaintaining the appropriate cash flows that reduce the opportunitycost of holding cash to the minimum (Michalski, 2008). The graphabove shows that the company has a stable return on asset. The highreturn on asset over the years clearly indicates that the Woolworthefficiently manages its assets. The proper management of the assetsof the firm is also depicted in the stable increase in the return onthe shareholders’ funds over the years as depicted on the abovegraph.

Industry Comparison

Thecomparison of the company performance with that of the industryaverages depicts the ranking of the company in terms of national andglobal market performance. The table below shows the comparison ofthe Woolworth’s performance with the industry in accordance to someindicators.

Thedividend payout ratio for the company is slightly lower than theindustry average as shown in the graph above. This slight decrease isattributed to the fact that the company is conservative in itsdividend policy and would retain more profits to be used as source ofcapital which has proven to be quite cheap making it reduce theincidences of high interest expenses that accrue due to high amountsof debts (Petty et al., 2015). The dividend payout ratio is alsoreduced for the purposes of reducing the gearing levels of the firm(Rozeff, 1982). A closer look at the gearing levels, the debt ratiofor the company is higher than that of the industry average. In thisprospect, the company has been on the trend of reducing these highgearing levels as depicted by the earlier charts. The profit marginis at par with the industry average which means that that theinvestors are assured of higher financial gain at any point in time(Gill, Biger and Tibrewala, 2010).This notion is also reflected on the return on the shareholders’fund and the return on the assets which are higher than the industryaverage.

Recommendation andConclusion

Fromthe analysis above, Woolworth Company is a firm worth investing insince it assures high profitability and a maximum gain to theshareholder. Additionally, the value of the shares is deemed to growsince the shares are selling at a discount hence the shareholderswill gain more. I would recommend for an investor to invest in sharesrather than providing loan for the company. The main reason for thisis because the company has high gearing levels which it is trying toreduce while the values of its stocks are increasing. Additionally,the firm has maintained an appropriate liquidity which ensuresmaximum gain from the short terms assets and liabilities.Additionally, it endeavored to create high profitability stance bothto its revenues and to its assets.

Bibliography

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Pritchard,W.N., 2000. Beyond the modern supermarket: geographical approaches tothe analysis of contemporary Australian retailrestructuring.AustralianGeographical Studies,&nbsp38(2),pp.204-218.

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