Finance Analysis of Woolworth and Westfarmers Limited - Case Study Example

Running Head: Woolworth and Westfarmers limited Name Course Lecturer Date Ratio Formulae Woolworths Limited           Profitability Ratios   2011 2012 2013 Gross profit margin (Gross profit/revenue) x 100 (13,695.7/52,745.7)*100 25.97 (14461.0/54916.0)*100 26.33 (15761.5/58674.1)*100 26.86 Net income margin (Net income/revenue) x 100 (2,124.0/52,745.7)*100 4.03 (1816.7/54916.0)*100 3.31 (2259.4/58674.1)*100 3.85 Operating profit margin (Operating profit/revenue) x 100 (3254.4/52745.7)*100 6.17 (3346.4/54916.0)*100 6.09 (3594.6/58674.1)*100 6.13 Capital Structure Ratios               Gearing ratio Debt/shareholders funds             Debt-to-asset ratio total liabilities / total assets 12982.6/20828.4 0.62 13134.8/21581.1 0.61 12949.7/22250.2 0.58 Return on equity (ROE) Profit/equity 2124.0/7845.8 0.27 1816.7/8446.3 0.22 2259.4/9300.5 0.24 ROCE profit/capital employed 2124.0/12108.5 0.18 1816.7/13176.3 0.14 2259.4/13798.8 0.16 Debt utilization net income/total debt 2124.0/3410.2 0.62 1816.7/4988.2 0.36 2259.4/4455.2 0.51 Return on assets (ROA) net income/total assets 2124.0/20828.4 0.10 1816.7/21581.1 0.08 2259.4/22250.2 0.10 Liquidity Ratios               Current ratio Current assets/current liabilities 6326.9/8022.2 0.79 5802.1/6766.2 0.86 6226.1/6866.0 0.91 Quick ratio (Current assets-inventory)/current liabilities (6326.9-3736.5)/8022.2 0.32 (5802.1-3698.3)/6766.2 0.31 (6226.1-4205.4)/6866.0 0.29 Assets Efficiency Ratios               Total assets turnover total revenue/total assets 52745.7/20828.4 2.53 54916.0/21581.1 2.54 58674.1/22250.2 2.64 Net assets turnover total revenue/net assets 52745.7/7845.8 6.72 54916.0/8446.3 6.50 58674.1/9300.5 6.31 Current assets turnover total revenue/current assets 52745.7/6326.9 8.34 54916.0/5802.1 9.46 58674.1/6226.1 9.42 Return on fixed assets Profit/fixed assets             Total assets financing total assets/equity             Market Performance Ratios               Earnings per share Earnings to shareholders/weighted average shares 2124.0/1216.2 1.75 1816.7/1222.0 1.49 2259.4/1237.4 1.83 Price Earnings ratio stock price/ EPS 17.97 17.97 17.74 17.74 15.6 15.60 Golden Rule 1: Financial Health Ratio Formulae Wesfarmers Limited Profitability Ratios   2011 2012 2013 Gross profit margin (Gross profit/revenue) x 100 (17945.0/54875.0)*100 32.70 (19279.0/58080.0)*100 33.19 (19845.0/59832.0)*100 33.17 Net income margin (Net income/revenue) x 100 (1922.0/54875.0)*100 3.50 (2126.0/58080.0)*100 3.66 (2261.0/59832.0)*100 3.78 Operating profit margin (Operating profit/revenue) x 100 (3015.0/54875.0)*100 5.49 (3379.0/58080.0)*100 5.82 (3432.0/59832.0)*100 5.74 Capital Structure Ratios               Gearing ratio Debt/shareholders funds             Debt-to-asset ratio total liabilities / total assets 15485.0/40814.0 0.38 16685.0/42312.0 0.39 17133.0/43155.0 0.40 Return on equity (ROE) Profit/equity 1922.0/23286.0 0.08 2126.0/23286.0 0.09 2261.0/23290.0 0.10 ROCE profit/capital employed 1922.0/1342 1.43 2126.0/1423 1.49 2261.0/1523 1.48 Debt utilization net income/total debt 1922.0/4813.0 0.40 2126.0/3996.0 0.53 2261.0/5738.0 0.39 Return on assets (ROA) net income/ average total assets 1922.0/40814.0 0.05 2126.0/42312.0 0.05 2261.0/43155.0 0.05 Liquidity Ratios               Current ratio Current assets/current liabilities 10218.0/8722.0 1.17 10911.0/10747.0 1.02 10586.0/9572.0 1.11 Quick ratio (Current assets-inventory)/current liabilities (10218.0-4987.0)/8722.0 0.60 (10911.0-5006.0)/10747.0 0.55 (10586.0-5047.0)/9572.0 0.58 Assets Efficiency Ratios               Total assets turnover total revenue/total assets 54875.0/40814.0 1.34 58080.0/42312.0 1.37 59832.0/43155.0 1.39 Net assets turnover total revenue/net assets 54875.0/25329 2.17 58080.0/25627 2.27 59832.0/26022 2.30 Current assets turnover total revenue/current assets 54875.0/10218.0 5.37 58080.0/10911.0 5.32 59832.0/10586.0 5.65 Return on fixed assets Profit/fixed assets 1922.0/30596 0.06 2126.0/31401 0.07 2261.0/32569 0.07 Total assets financing total assets/equity 40814.0/23286.0 1.75 42312.0/23286.0 1.82 43155.0/23290.0 1.85 Market Performance Ratios               Earnings per share Earnings to shareholders/weighted average shares 1922.0/11.529694 166.70 2126.0/11.54180239 184.20 2261.0/11.54160286 195.90 Woolworth’s gross profit margin increased from 26.33 to 26.86 which is an indicator that the company is performing well, their debt to asset to ratio which is the extent to which the assets have been financed by debt also reduced from 61% to 58%, the extent to which the total assets contributed to the total income increased from 2.54 to 2.64 for years 2012 to 2013 respectively. The company’s earnings per share have increased from 1.49 to 1.83 meaning that there was an increase in the earnings attributable to shareholders. Therefore, Woolworth company posses a strong financial health as portrayed in the assessment of their favorable trend for 2012 and 2013. The net profit margin for Wesfarmers Limited Company increased from 3.66 to 3.78 from year 2012 to 2013 respectively. The net profit hence increased indicating improved efficiency in management of operations. In addition a similar trend is observed return on equity. The extent to which equity was used to generate income increased from 0.09 to 0.10, this is even better for total assets turn over where it increased from 1.37 to 1.39 in the same period. From the ratios calculated above, Woolworth Company and Wesfarmers limited posses a strong financial health (Agarwal, & Taffler,2008). Golden Rule 2: Management Assessment WestfarmerS limited ROA for year 2013 Return on assets (ROA) = net income/ average total assets = 2261.0/43155.0 = 0.05 ROE for year 2013 = Return on equity (ROE) = Profit/equity = 2261.0/23290.0 =0.10 EPS growth for year 2013 =195.90- 184.20 = 11.7/184.20 =6.4% Earnings per share growth = 6.4% Revenue growth for year 2013 =59,422 - 57,685 = 1737/57,685 = 0.03=3% Woolworths limited ROA for year 2013 Return on assets (ROA) = net income/total assets = 2259.4/22250.2 = 0.10 ROE for Year 2013 Return on equity (ROE) = Profit/equity = 2259.4/9300.5 = 0.24 EPS growth =17.74- 15.60 =1.80/17.74 = (10%) Revenue growth = 58674.1-54916.0 = 3758.10/58674.1 =6.4% Market capitalisation = share price X number of shares outstanding Woolworths limited =33.96 X 1,251.207303 million shares = $42,491M Woolworths operates in chain stores and distribution industry, it has several selling outlets all over the country. In addition, the company operates several hotels and gaming operations. Moreover, it produces and exports food stuffs, store liqueur and sells electronics and last but not the least, distributes petroleum products such as petrol. WestfarmerS limited = share price X number of shares outstanding = 41.99 X 1,006.69207million shares = $42,271M This company has a lot of divisions; these are chemical energy and fertilizers industry, industrial safety, construction industry. It can be concluded that this company has no specific industry in which it operates; rather it operates in several industries in Australia. Both companies have return on assets below the recommended benchmark indicator by Lincoln of 14%, this hence can be concluded that the quality of management is poor, the management is inefficient and it is not effective. Return on equity for both companies is still below the benchmark of 25%, the EPS growth, for both companies, is below the benchmark of 8% for the last twelve months, the EPS growth for Woolworth company is positive while for Westfarmer limited is negative. Both companies registered a positive growth in revenues agreeing with the Lincoln indicators benchmark. For the four items of evaluating the management quality, only revenue growth fulfills the benchmark for both companies. This is an indication that the company's management needs to improve their quality by harnessing revenue generation and efficiency in operations (minimizing operating expenses)(elb elbier, (2006) Golden Rule 3: Outlook/Forecast According to the Merrill Lynch financial forecast for Woolworth Company, it is very clear that the company will be able to sustain growth. This is backed up by the fact that the company have been experiencing growth in revenues from year to year. The company has been increasing the returns to the shareholders. Merrill Lynch indicates that the company revenues would continue to grow (4%); the annual growth rate of the company is also forecasted to increase. Merrill Lynch has also forecasted Wesfarmers Company to grow, the financial forecast indicate that the company's revenues will grow by 3%. This is very important, as the company is projecting increase in dividends payments. The growth forecast for this company is however lower than that of Woolworth company. Golden Rule 4: Share Price Value The most current share price of the Woolworth Company is 33.96. This is as per the current market information provided by the Australian stock exchange (ASX). This price is very close to the intrinsic value of the shares. Though the price is below the real (intrinsic value) value of the shares, they are very close. This indicates that the company is not overvalued, it is undervalued and it represents a good opportunity for investors to invest in the company. This in reinforced by the positive grow forecasts that have been forecasted by Merrill Lynch. In addition, the company has been experiencing growth over the last ten years, this is an indication that the value of the company will continue to increase as the growth increases. For WestfarmerS, the most current price of the shares is 41.99 per share. This is well below the intrinsic value of the shares. As with Woolworth Company, the shares are undervalued thereby giving investors an opportunity to invest in the company. Investing in these two companies will provide for good value for investment. The investment will experience growth as the companies continue to grow. Earnings multiplier approach Estimated price = P/E ratio X EPS Woolworth Company =15.60 x 1.83 =28.548 Wesfarmers’ limited =19.53x1.96 =38.2788 Golden Rule 5: Share Price Sentiment Woolworths share price performance for 2012 ranges between 30- 33. Comparing this with the performance of the All Ordinance index which is 34 then the company is worth investing in since the company’s stocks are not underperforming in the market.Wesfarmers share price performance is ranging between 28-30 in 2012, this is lower than the All Ordinance index which is 42, since the share price was undervalued then investing in the company is not worthwhile. Golden Rule 6: Liquidity and Size (ASX) website the daily volume traded in Woolworths is about 5, 037, 606, while that of Westfarmers is about 1,517,610. According to Lincoln Indicators the company shares are liquid since the traders can sell all their shares at ago because the volume traded is least five times the investor’s exposure level. Golden Rule 7: Principal Activities Woolworth is a company that generates its revenue from the diverse activities carried out. It operates supermarkets and grocery store that distribute different goods to its customers; they also deal with hospitality gaming and accommodation services. The company retails liquor and petrol to various customers. Included also in their operations is distribution of consumer electronics and operation of general merchandise stores that retail home improvement wares and hardware. There major competitor are among others the major grocery and supermarket operators, household merchandise distributors and most industries in the retail sector such as Westfarmers, Metcash limited and ALDI group. Wesfarmers is company operating in different segments. Their major activities include retailing services through supermarkets, general merchandize departmental stores and liquor and fuel outlets. They offer insurance services operate in the coal industry, manufacture chemicals and fertilizers, and distribute industrial safety equipment. They also supply household and office goods. The major competitors for this company are insurance companies, grocery and supermarket stores such as Woolworths limited, Caltex Australia limited and Commonwealth bank of Australia. Both Woolworths and Westfarmers have a wide range of products, good reputation, healthy financial position and favourable working environment all these strengths can sustain their business increasing their earnings. The companies also have opportunities to expand further by venturing in many other African countries as well as diversifying their activities further, this will increase their earnings. Their limited market for their products and high operating costs are the major weakness in the companies which if not dealt with may reduce their future earnings. The ever increasing technological advancement and the fluctuations in the economy are threats which when not well mastered will lower the companies’ earnings in the future Golden Rule 8: Price Sensitive Announcements The available news for the two companies have no negative impact on them since there is no expectation of decline in the share price and thus no shareholder will withdraw from the investment. The available news reveals that the company is performing well and will meet its target for increased earnings thus an increase in the shareholders wealth References Agarwal, V., & Taffler, R. (2008). Comparing the performance of market-based and accounting-based bankruptcy prediction models. Journal of Banking & Finance, 32(8), 1541-1551. elbier, R., Lirio Silva, J., & Pferdehirt, M. H. (2006). Impact of lease capitalization on financial ratios of listed German companies. Marc Henrik, Impact of Lease Capitalization on Financial Ratios of Listed German Companies (July 19, 2006). 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