Woolworths Ltd - Assignment Example

? Accounting for Decision Making: Financial ment Analysis and Report: Woolworths Ltd ID Introduction Woolworths Limited operates 1074 supermarkets in both Australia and New Zealand (Woolworths Ltd 2013a, p. 47). The company currently operates the largest chain of supermarkets in Australia where it currently has 872 stores (Woolworths Ltd 2013b). The aim of the company is to grow its business by increasing its leadership in the area of food and liquor, maximize shareholder value, continue its record of building new businesses, while putting in place enabling factors in order to facilitate a new growth era (Woolworths Ltd 2013b). During the year ended June 30, 2013 the company expanded its operations through the addition of 32 hotels, 22 home improvement stores, 25 supermarkets in Australia and 6 in New Zealand (including a franchise), 14 petrol outlets, 15 Dan Murphy’s, 14 BWS and 6 BIG W (Woolworth Ltd 2013a). The company’s main competitor is Coles- a supermarket chain operated by Wesfarmers Ltd. Analysis of Financial Performance According to BPP (2009) return on capital employed (ROCE) is considered to be one of the most important ratios and so it is not possible to assess profitability without relating it to assets employed. Woolworths’ ROCE was unstable for the most part, declining from 25.58% in 2011 to 22.59 in 2012 and then increasing to 23.75% in 2013 (See Appendix 1 for calculations). A return of over 20% is considered good when compared to current interest rates. When compared with Wesfarmers Ltd ROCE is also better. In fact, Wesfarmers’ ROCE indicates instability, increasing from 10.07% in 2011 to 11.24% in 2012 and then declining to 10.92% in 2013 (See Appendix 1 for calculations). This was so, although revenues increased every year with total group revenue of $59,198mn in 2013 (when normalised to 52 weeks - $58,081), 56,700.1mn in 2012 and 54,142.9mn in 2011 (See Woolworths’ Five Year Summary Income Statement on page 7 - Appendix 2). These increases in revenue were not sufficient to prevent a decline in the rate of growth in 2012 and 2013. Wesfarmers’ revenue was higher in all three years - $59,832 in 2013, $58080 in 2012 and $54,875 in 2011 (See Wesfarmers Five Year Financial History on page 19 - Appendix 3). Growth in Wesfarmers’ revenues were also much higher than Woolworths’ but similar declines over the period were evident. See Appendix 1 for details. Woolworths’ profit margin/earnings before interest and tax (EBIT) margin for the years 2013, 2012 and 2011 were 6.24, 6.11 and 6.05 respectively (See Woolworths Ltd Financial Summary on page 8 - Appendix 2). This indicates that Woolworths’ EBIT margin improved over the period. Woolworths’ EBIT margin compares favourably with Wesfarmers which increased from 5.88 in 2011 to 6.11 in 2012 but remained fairly stable in 2013 at 6.11 (See Appendix 1 for calculations). Earnings per share (EPS) - the earnings attributable to each share issued is found by dividing EBIT by the weighted average of the number of shares in issue. Woolworths’ EPS declined from $1.74 in 2011 to $1.48 in 2012 before increasing to $1.82 in 2013 (See Woolworths’ Income Statements for 2013 and 2012 on pages 11 and 15 - Appendix 2). The comparative EPS for Wesfarmers Limited shows EPS of $1.96 in 2013, $1.84 in 2012 and $1.66 in 2011 (See Wesfarmers’ Income Statements for 2013 and 2012 on pages 20 and 24 – Appendix 3). These figures indicate instability in Woolworths’ EPS and improvement in that for Wesfarmers’. Additionally, Wesfarmers EPS was higher for all three years. Analysis of Financial Position Statement An analysis of Woolworths’ financial position at year end 2011, 2012 and 2013 indicates that the group’s current ratio ranged between 0.79:1 and 0.91:1 over the period. (See Appendix 1 for details). While the ratio is improving, it suggests that the company is experiencing liquidity problems and may not be able to pay its debts as they fall due. The situation for Wesfarmers is a little better as the ratio was greater than 1 for all three periods. However, the acid test ratio indicates that Wesfarmers Ltd is in a similar predicament with ratios ranging between 0.55:1 and 0.60:1, although doing better when compared to Woolworths’ 0.29:1 and 0.32:1. (See Appendix 1 for details). The acid test ratio for both companies has been improving as shown in Appendix 1. The acid test ratio takes into consideration that inventory is the least liquid of all current assets and will therefore takes some time to be converted to cash (BPP 2009). In terms of long term solvency Woolworths’ debt ratio indicates that the company’s total debts represented between 58% and 62% of total assets for the period. Although, there is no absolute limit, a debt ratio of 50% is considered to be a safe limit (BPP 2009). Woolworths’ debt ratio though improving was above that limit. (See Appendix 1 for details). Wesfarmers’ debt ratio which ranges from a low of 37.94 to a high of 39.7 is much better than Woolworths’ and is also well below the limit. However, Wesfarmers Ltd seem to be getting into more debt which is suggestive of deterioration. (See Appendix 1 for details). If the company goes into bankruptcy debts have to be paid before shareholders receive anything and so investors pay close attention to this ratio. Additionally, assets may have to be sold for less than book value in a forced sale. Another ratio that is used to determine the level of indebtedness of a company is the gearing ratio. This ratio ‘relates the contribution of finance that requires a fixed return’ (such as borrowings) to the total long term finance of the business’ (Atrill et al 2012, p. 244). Woolworths’ gearing ratio ranges from a high of 38.18% to a low of 32.37%. Wesfarmers’ gearing ratios are much lower ranging from a high of 18.17% to a low of 15.22%. (See Appendix 1 for calculations). Although, Woolworths’ ratios are higher they have improved between 2011 and 2013. However, Wesfarmers’ suggests instability. Analysis of Cash Flows The Cash flow statement for the Woolworth group indicates that the two (2) largest operating activities relates to receipts from customers (cash inflows) and payments to suppliers (cash outflows). (See Woolworths’ Cash Flow for 2013 and 2012 on pages 13 and 17 - Appendix 2). Wesfarmers’ situation was quite similar to Woolworths’. (See Wesfarmers’ Cash Flow for 2013 and 2012 on pages 23 and 26 - Appendix 3). These two cash flows are important and it is good that receipts have been higher than payments for the three (3) years, thus contributing to a net inflow from operating activities for all three periods. In relation to investing activities the two largest activities on the cash flow for Woolworths are payments for fixed assets including property development (outflow) and proceeds from the sale of property (outflow). (See Woolworths’ Cash Flow for 2013 and 2012 on pages 13 and 17 - Appendix 2). The same was observed for Wesfarmers Ltd. (See Wesfarmers’ Cash Flow for 2013 and 2012 on pages 23 and 26 – Appendix 3). The payments for fixed assets and property development are important since they are necessary for expansion and renovation. The sale of businesses and property may be important if the businesses are loss making and do not contribute significantly to revenues. Both companies have been in the process of streamlining their businesses and adding new and profitable business lines. Woolworths’ two largest financing activities for the three years were proceeds from borrowings (inflow) and repayment of borrowings (outflow). See pages 13 and 17 – Appendix 2. Wesfarmers’ case was a little different with dividend payments in 2012 of $1789mn surpassing the figures for both proceeds from borrowings and repayment of borrowings (See Wesfarmers’ Cash Flow Statements for 2013 and 2012 on pages 23 and 26 - Appendix 3). Investing in Woolworths Ltd Two matters that are useful in making a decision to invest in Woolworths Ltd are the sustainability of the company’s prices and the economic situation in Australia. These two items are linked. If Woolworths’ prices are higher compared to its competitors then the company’s revenue is likely to fall as competition increases. Lowering prices would significantly reduce the company’s EBIT margin which was slightly higher than Wesfarmers’ over the period. Deterioration in the economic situation in Australia may require a reduction in expenses while holding dividends stable. Tensions between the ACCC and Woolworths Ltd have increased significantly since June 2013 over ACCC’s opposition to Woolworths’ purchase of a supermarket site in the suburbs of Sydney (Hartley 2013). This and future actions could stymie Woolworths’ growth plans. Conclusion The decision to invest involves paying attention to certain investment ratios including EPS and dividend per share. The EPS figures for Wesfarmers not only improved every year but were better when compared to Woolworths which were unstable. There was growth in the dividends per share for both companies but the growth rate for Wesfarmers was not only consistent but higher than Woolworths’. (See Notes to Financial Statements on pages 14 and 18 of Appendix 2 and 23 and 27 Appendix 3). Additionally, the liquidity, solvency and gearing ratios favour investing in Wesfarmers Ltd. Appendix 1 Financial Ratios     Woolworths Ltd   Wesfarmers Ltd   Formula 2013 2012 2011 2013 2012 2011 P&L ratios                   Revenues (See Financial Summary and or Income Statements for both companies)  59158 56700.1 54142.9 59832 58080 54875           EBIT Same 3653.2 3346.4 3276.4 3668 3549 3232           Growth in revenues Current year revenue/prior year's revenue 4.33 4.72 4.74 3.02 5.84     2013 normalized 2.36               EBIT Margin   6.24 6.19 6.05 6.11 6.11 5.89           Dividend per share See Notes to Financial Statements - Appendix 2 and 3 133 126.00 122.00 180 165 150                               Balance Sheet ratios         Total Current assets See Balance sheets and Financial Summary in Appendix 2 and 3 6226.1 5802.1 6326.9 10586 10911 10218 Inventory  Same 4205.4 3698.3 3736.5 5047 5006 4981 Current liabilities  Same 6866 6766.2 8022.2 9572 10747 8722           Interest bearing debt  Same 4451.9 4695.3 4844.9 5779 4602 4879 Shareholder's equity  Same 9300.5 8446.3 7845.8 26022 25627 25329           Total debts  Same 12947.7 13134.8 12982.6 17133 16685 15485 Total assets  Same 22250.2 21581.1 20828.4 43155 42312 40814           Current ratio Current assets: Current liabilities 0.91 0.86 0.79   1.11 1.02 1.17     0.91:1 0.86:1 0.79:1 1.11:1 1.01:1 1.17:1           Acid test ratio (Current assets - inventory): current liabilities 0.29 0.31 0.32 0.58 0.55 0.60     0.29:1 0.31:1 0.32:1 0.58:1 0.55:1 0.60:1           Return on capital employed EBIT/Total assets less current liabilities 23.75% 22.59% 25.58%   10.92% 11.24% 10.07%                     Debt ratio Total Debt/Total assets 58.19% 60.86% 62.33% 39.70% 39.43% 37.94%           Gearing ratio Interest bearing loans/Shareholders' equity+ Interest bearing loans 32.37% 35.73% 38.18% 18.17% 15.22% 16.15%                   Appendix 2 Excerpts from Woolworths Ltd Annual Report 2013 and 2012 Source: Woolworths Ltd Annual report – Five Year Summary, p. 110 Source: Woolworths Ltd Annual report – Five Year Summary, p. 111 Source: Woolworths Ltd Annual report – Five Year Summary, p. 112 Source: Woolworths Ltd Annual report – Five Year Summary, p. 113 Source: Woolworths Annual Report 2013, Income Statement, p, 117 Source: Woolworths Annual Report 2013 – Balance Sheet, p. 120 Source: Woolworths Ltd Annual Report 2013 Cash Flow Statement, p. 121 Source: Woolworths Ltd Annual Report 2013 – Note 6 Dividends, p. 149 Source: Woolworths Annual Report 2012 Appendix 3 Excerpts from Wesfarmers Ltd Annual Report - 2013 and 2012 Source: Wesfarmers Ltd Annual Report – Five Year Financial History, p. 182 Source: Wesfarmers Annual Report 2013: Income Statement, p. 96 Source: Wesfarmers Annual Report 2013 – Balance Sheet, p. 98 Source: Wesfarmers Annual Report 2013 – Cash Flow Statement, p. 99 Source: Wesfarmers Ltd Annual Report 2013 – EPS and Dividend Notes, p. 121 Source: Wesfarmers Annual Report 2012 – Income Statement, p. 88 Source: Wesfarmers Ltd Annual Report – Balance Sheet, p. 90 Source: Wesfarmers Annual Report 2012 – Cash Flow Statement, P. 91 References Atrill, P., McLane, E., Harvey, D and Jenner, M. (2012). Accounting: An Introduction. 5th ed. Australia: Pearson Education BPP (2009). F7 Financial Reporting (International). 3rd ed. London: BPP Learning Media Ltd Hartley, L. (2013). Australia: The UCCC ups the ante against Woolworths. Retrieved from: http://www.mondaq.com/australia/x/248242/Cartels+Monopolies/The+ACCC+ups+the+ante+against+Woolworths Wesfarmers Limited (2012). Wesfarmers Limited Annual Report 2012. Retrieved from: http://media.corporate-ir.net/media_files/IROL/14/144042/Wesfarmers_Limited_2012_Annual_Report.pdf Wesfarmers Limited. (2013). Wesfarmers Limited Annual Report 2013. Retrieved from: http://www.asx.com.au/asxpdf/20130926/pdf/42jmj0qyktzc2x.pdf Woolworths Limited. (2012). Woolworths Limited Annual Report 2012. Retrieved from: http://www.woolworthslimited.com.au/annualreport/2012/pdf/WW_AR12_Full.pdf Woolworths Limited. (2013a). Woolworths Limited Annual Report 2013. Retrieved from: http://www.asx.com.au/asxpdf/20130927/pdf/42jnlfh700y1zr.pdf Woolworths Limited (2013b) Woolworths Limited: Who Are We? Retrieved from: http://www.woolworthslimited.com.au/page/Who_We_Are/ Read More