Business Finance - Woolworths Company Financial Analysis - Case Study Example

Woolworths Company Financial Analysis Instructor’s Name: Course Code: Student’s name: Institution’s Name Submission Date Introduction The analysis of the financial statement of Woolworth Company involves the assessment of financial statements such as income statement and balance sheet to determine its ability to generate enough returns to the shareholders (Brassington & Pettitt, 2006). The examination also involves the determination of the value of shares which is then compared with the market value. The company should introduce strategic financial management to helps it improve the utilization of the financial resources of the company. This is because the success of the company depends on the ability to manage the available resources effectively (Housden, 2010). It is also important to consider the interests of the different stakeholders so that they can be managed hence work towards achieving the goals and objectives of the company (Alex 2010). General background of the Firm Woolworths Limited is a retail business that focuses its activities in supermarket business. It also does other operations such as BIGW discount department stores, home enhancement and also involves Caltex alliances and hotel activities (Jorg & Roth, 2013). It has been operating efficiently in Australia and this made it to be considered one of best performing company in the country. In terms of market capitalization and sales it is considered the largest in Australia and New Zealand. This company was listed in the stock exchange in 1993 and from this date it became the most successful company. Its success depended on the use of low price strategy and fresh food people strategy as this improved its earnings above the average growth rate. The company has achieved its cost savings strategy above $8.0bn within ten years and this improved cost of doing business to sales ratio to 20% (Jobber & Fahy, 2012). This company was formed in 1924 and its first store was established in Sydney’s Imperial Arcade. It conducted daily advertisement where it discovered that it was essential to open a store in every city in order to maximize returns. This company was started by Stanley Edward Chatterton, Harold Percival Christmas, Ernest Robert Williams, George William Percival Creed and Cecil Scott Waine. During the formation only 15,000 shares were issued to the public where the number of shares which was subscribed was 11,707 only by 29 potential shareholders. From the incorporation the company has experienced a good business environment resulting from an increase in population which increased its sales revenues annually. The company generates its income from the sale of food and groceries, liquor, petrol and the company has more than 197,000 employees and has over 3,000 stores in Australia. The company located its head office in Bella Vista, New South Wales. There has been an increase in sales volume by 4.8% which also influenced the increase in earnings before interest and tax to be 9.4% (Brassington & Pettitt, 2006). The success of this company depended on the incorporation of corporate social responsibility into the management. Woolworths limited became successful because it encourages the management to use corporate responsibility leadership (William, 2010). This enables the community to support its operations by focusing on four primary areas of sustainability, environment, health and well being of all the stakeholders. The company has been experiencing a positive growth annually by recording an increase in earning per share and dividend growth rate (Housden, 2010). The success of this business organization increases because it considers the satisfaction of the customers and motivates loyal customers as its main business offer. Capital Structure of the Firm This is the manner in which the business organization funds its investment assets by the use of a group of sources of finance such as debt, equity and bank loans (Kavaljit, 2010). It is therefore the proportion at which the firm uses the combination of sources of finances. In relation to Woolworths Limited, it uses a mix of capital structure which is composed of debt and equity to finance its investment assets. The company must ensure that its capital comprises of both debt and equality so that the company can also benefit from interest tax shield and also enjoy the benefits of equity capital. The largest Fund Raised by the Company over the last Five years The largest sources of finance which the company received over the last five years are debt capital. They obtained long term debt in the form of debenture and long term loan to finance its expansion and performance objectives (William, 2010). The company also acquired equity capital from the shareholders where each existing shareholders were invited to buy the existing shares where only 15000 shares were sold to the general public. The advantage of using this source of capital is its ability to provide a permanent source of capital that is not payable even if the company becomes insolvent. The purpose of the Funds Raised The above funds were raised to increase the performance of the management and to finance other investment projects which are aimed at increasing company profitability. This finance was also raised for the purpose of transforming Woolworths Company for the future. This is because the company has identified other opportunities that it can use to improve the value of its customers. There is also an objective of the company to improve the income of the company. This forced them to expand their direct global sourcing and work closely with the suppliers to produce goods and services at a low cost (Baker, 2007). The expansion purpose of the acquisition of debt is to open more investment opportunities such as 34 hotels which the company open in 2014 and 16 retail liquor outlets. The aim of these expansion strategies is to increase the net income of the company in the long run. The source of finance was also raised to increase the number of countdown networks where the company opened 8 news retail stores and shun down three of them (Housden, 2010). This made the company to maintain 166 stores. There finance was also raised to refurbish the latest formats of the stores. The purpose for raising debt capital was also to increase improves and finance online business operations. Current the business can sell its products online where it expects to increase its online trade by 29%. The supply chain is also expected to be improved by this fund (William, 2010). This will reduce the cost of supermarket service hence improve customer service efficiency. The balance of the fund raised is to improve or develop more franchise networks. The finance made the company to improve 20% of the franchises network where they currently operate in new formats. The Initial Announcement Date of the Issue The initial announcement date of the issue is 14 September 2010 and the final announcement date is 27 September 2014. The number of years which the investment generated income is three years. The computation of the returns earned by the Company Sales $m $m Australian Food and Liquor 34,675 New Zealand Supermarkets 5,185 New Zealand Supermarkets 4,131 Petrol 5,481 Supermarket division 4,287 BIG W 4,193 Consumer Electronics ANZ 1,530 India 1,530 General Merchandise 5,975 Hotels 1,102 Home Improvement 330 Group sales 51,694 EBIT Australian Food and Liquor 2,492.5 New Zealand Supermarkets 232.2 New Zealand Supermarkets 190.4 Petrol 99.5 Supermarket division 2,782.4 BIG W 200.0 Consumer Electronics Australia and New Zealand 30.2 India 1.3 General Merchandise 231.5 Total trading result 3,190.6 Property expense 2.5 Central overheads (111.0) Other significant items 17.0 Group EBIT 3,082.1 Market Return from the corresponding periods The calculation of market return from the corresponding periods is done by the use of Compound Annual Growth Rate which is determined by first finding the simple average of the investment returns (William, 2010). The fact that investment of Woolworths Company takes one full year and then come down to half a year. Its simple average returns would be (100%-50%)/2 = 16.5%. The formula used to compute market returns = (1 + rave) 2 - StdDev2   =   (1 + CAGR) 2. Because the simple average is 25% the standard deviation is 66.5% because the period lies at 66.31% away from the simple average. Standard deviation =10.78% and growth rate is 1.8% and true CARG is 15.78%. Compare (iv) and (v) and comment on how the market perceived this issue The market perceives the shares of this company to be of high value (Kavaljit, 2010). This is because the company is able to produce high investment returns that can satisfy the investor’s goal of profit and wealth maximization. This led to the increase of the number of investors who are willing to buy the shares of the company (Housden, 2010). In comparison of the market returns and actual returns it is important to note that the value of the company returns is higher than that of the market and this is a strong sign that the company has high potential of generating high investment returns to the investors. The public still perceive that the price of these shares can still increase since the value of shares of this company has a constant growth rate in perpetuity. The availability of high value of shares attracted high number of potential investors to buy its shares. Recent Financial crisis which affect the capital structure The financial crisis which affected the capital structure of the business is the effect of inflation which reduces the purchasing power of money (Kavaljit, 2010). This altered the value of debt which the company has acquired over the last three years. There is also change in interest rates which makes the company to purchase capital assets at a higher price than expected. This therefore makes the cost of investment to appear to be higher than expected (Hoffman & Douglas, 2009). The depreciation of fixed assets also makes the value of assets to be low but when the assets are valuated the value of debt taken reduces and hence this affects the capital structure of the company (Kotler, 2012). The capital structure of this company is also affected by business and financial risk. The change in capital structure is influenced by technological change, high competition, labour disputes and change in weather condition. The capital structure changes from 0.8 to 0.76. This indicates that there is a change in debt to equity ratio. Debt to equity ratio is a ratio which shows the relationship between debts to equity and provides information about the level of debt or equity which the company uses in its capital structiure. Valuations This is the process of finding the present value of a bond or a financial institution due to the available information (Broederlijk, 2009). The availability of the required information is because of the disclosure requirement of the enacted policies. There are different methods which can be used to attain the value of a bond (Housden, 2010). They include dividend yield, earning method, super normal profit method, capital asset pricing method, and net asset basis and capitalization method. The value of shares for the last three financial years The method which is used to determine the value of shares in this case is super normal growth (Gropelli & Ehsan, 2009). This is because the dividend per share of this company is likely to grow in super normal in the first year and declines to have a normal growth in the rest of the years. The growth rate of earnings per share in 2010 is 8.8% and in the 4.8%. Year Expected Dividend PVIF 12% PV 2010 7.1(1+8.8) = 7.725 0.8989 6.94 2011 7.1(1+8.8)2 = 8.40 0.7972 6.7 2013 8.40(1+8.8)/12-8.8 = 283.5 0.7118 201.8 The value of shares 215.4353 Comparison of the valuation results with actual currently given by market price The value of these shares is of good value compared to the actual values computed from market price. There is overpricing of the shares of this company because the company is able to produce high investment returns hence more potential investors are willing to buy its shares at a high price (Beaney, 2011). The variation in share prices is also a result of the reputation of the company. This company has been making high profit margins and makes the investors to enjoy their goal of both profit and wealth maximization. This forced the company directors to sell its shares at a very high price than the market price (Graham & Harvey, 2013). The valuated result indicates that the company has shares which have high value but the actual result has a small negative variance. Conclusion Woolworths Company is a very stable company that sells its shares at a price which is slightly higher than the market price. This is because it has high earnings which make it to attract high number of potential investors. Its annual earnings are higher than the market earnings and this indicates that it has high potential to provide high investment returns to its shareholders. The value of shares of Woolworth Company is also high and this resulted from the high profit margin and the ability of the company to generate high returns at the end of the year. The best valuation method which can be used to value its share is super normal method since its shares has a constant growth rate in the initial year and increase at 8.8% in perpetuity. References Alex, C. M 2010, "A Handful of Sand in the Wheels of Financial Speculation*" Working Paper, University of Northern British Columbia. Beaney, S 2011, Defining corporate finance in UK, Corporate finance faculty, Prentice Hall Bodie, Z & Alan, J 2011, Essentials of investments, McGraw-Hill Lrwin Broederlijk, D 2009, "A Tax on Financial Speculation Background Paper", (Bart Bode) Oxford University Press Compass Group plc 2014, retrieved on 7th October 2014 from Brassington, F & Pettitt, S 2006, Principles of Marketing, Prentice Hall, 4th Edition. Baker, M. J 2007, Marketing Strategy and Management. 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