Financial Analysis Assignment Evaluating Financial Performance of Woolworths

Question

Task: You are asked to choose a company which follows International Accounting Standards (IASs) and International Financial Reporting Standards (IFRSs) pronouncements and use accounting ratios to assess its profitability, liquidity, gearing, efficiency and investment ratios for the last TWO consecutive financial years and undertake a strategic and financial analysis. Please make sure to provide a copy of the published statements (which you use to calculate ratios) by way of an appendix at the end of your assignment. Your financial analysis assignment should be structured as follows:

a. Describe the profile of the company / industry. In answering this part, you are expected to give a brief background of the industry and business sector within which the chosen company operates.
b. Calculate ratios and organise them in appropriate categories: e.g. profitability, liquidity, efficiency, gearing and investor performance. Note that it is not possible to work out all template ratios for all companies. For some companies, e.g. banks you may find it useful to add on another category suitable only for that particular industry. Show all your workings.
c. Provide a financial analysis with appropriate interpretation of the ratios calculated in part (b) above in relation to the performance and position of the company.
d. Use a management model with which you are familiar to undertake a strategic analysis of the company e.g. SWOT / PESTLE and consider the strategy adopted by the company within that model.
e. Advice, with reasons based on the financial and strategic analysis carried out in parts (c) and (d), whether or not a rational investor would invest in the company.

Answer

Executive Summary
The aim of the report on financial analysis assignment is to introspect the performance of a company that follows IFRS and conducts a financial analysis thereon. The report is based upon the computation of different ratios such as profitability, liquidity, efficiency, gearing, and investment ratio. Through the ratio computation, it came to the observation that the company’s performance was higher in 2018 as compared to 2019. The ROA and ROE of the company posted a better number and hence indicates good profitability. The liquidity of the company is weak because the current ratio ranks below the standard ratio. The debt level of the company has increased indicating that the company has undertaken more debt. However, going by the structure of the company it can be commented that the fundamental of the company is intact and will be able to perform in a better fashion. The report initiates with the introduction where the background of the company is discussed together with the business followed by the computation of various ratios that strikes upon the financial scenario of Woolworths. The financial interpretation is followed by the PESTLE analysis and on the basis of the analysis, the conclusion of the analysis is drafted.

Background and business
Woolworths Limited is a pioneer in the field of retail business and has its headquarters situated in Sydney. The company runs with an employee strength of more than 2,05,0000 and hence the strength of the company can be observed in the diverse geographical area of Australia and New Zealand with a coverage of more than 3000 stores (Woolworths 2019).

The organization is able to cater to the requirement of approximately 29 million customers each week through the presence of the stores. Woolworths is working effectively for the creation of better tomorrow (Woolworths 2019). The framework of the company is designed in a manner that is dedicated to better operations and customer betterment followed by the community benefit. The main objective of the organization is to enhance the product quality that is being sold by it and to provide the best experience to the customers (Woolworths 2019). Woolworths Group performs in the food, liquor and merchandise sector as a major retailer and even has its presence in the hospitability and gaming sector. The vital business operations is segregated as below:

Australian Food – the company has its operations in 1052 branded super markets
New Zealand Food – It operated in more than 182 stores of grocery across NZ and is related with the wholesale sales in further 70 stores. The aim of the report is to conduct an evaluation of financial performance by considering the last two years of financial performance. The report will evaluate the ratio of Woolworths and the performance is ascertained with the help of profitability, liquidity, efficiency, and gearing. The comparison between the years 2018 and 2019 indicates the trend in the performance and provides an in-depth analysis of the performance. For the conduct of the study, the data has been acquired through the secondary source that is the website of the company and the annual report of the company. Financial performance The Supermarket, as well as the grocery industry in Australia, contains the most fierce competition. But, the price-based competition has declined over the last three years. The inclusion and entry of ALDI and Costco have influenced the industry giant Woolworths and Coles o to enter into a price-competitive war. This has led Coles and Woolworths to further enhance the private label product range (Woolworths 2019). The smaller supermarket has struggled to keep the competition on. It is the main reason why the industry profit margin has declined over the past five years because operators have recorded a significant rise in wage and capital investment in a view to gain an advantage over the competitors. However, there is a stable trend observed in Australia’s retail sector. There is hardly any enhancement in the salaries and the debts too have been rising for most of the households yet there is a positive growth witnessed by the country so far. The Australian retail sector embarked a positive growth rate of 2.6 percent, 3 percent, and 5 percent that is strongly recorded in South Africa, Victoria, and New South Wales (Woolworths 2019). The real estate industry too has witnessed strong growth as it is immensely supported by a low-interest rate and a noticeable rise in the household credit which has largely influenced the buyers’ purchasing power.

The overall performance of the company is intact as compared to other year performance. The Sales were satisfactory whereas the EBIT growth is reflected at 3.4 and 5 % for the F.Y. As per the annual report, it is indicated that the company has earned profit from the business of petrol (Woolworths 2019). Woolworths further denoted an increment in the level of stock. The increment in the level of stock is mainly due to an increment in the level of closing inventory in New Zealand. The company’s closing inventory has declined to 37.2 days from 0.9 days whereas the average inventory in days has declined to 38.8 days. The sales of the company from the day to day operations have increased by 5.3 percent and 3.4 percent.

Woolworths largely focuses on improving the overall quality of its goods and services. This is one of the main reasons that have enabled the afore-named company to perform better in the last few years. The success of the company is evident from the fact that it has successfully earned its buyers back from CGL (Coles Group Ltd.). A 6 percent increment in the company’s sales amounting to AUS$32.4 billion from its regular business operations has been observed in the year 2019. The online sales of the company too are enhancing as there is a 31.6 percent rise in the same as compared to the last year. The 31.6 percent rise in the online sales of the company amounts to AUS$1.65 billion and even though it might constitute merely 5% of the total sales yet it has a large impact on the afore-named company’s financial performance. Coles Group Ltd, Aldi, and Costo have been a huge competition for Woolworths. However, the management of Woolworths has been successful in managing and overcoming the constant competition faced by the afore-named giant companies and this is one of the supreme reasons behind its success in the industry.

Ratio Analysis & Interpretation
• Profitability ratios
Profitability ratios can be defined as a relative measure to ascertain the skills of the business to reap earnings (Shuli 2011). Such ratios are deemed to be useful and favourable as the increment in the same tends to create a better prospect for the company as a whole. The comparison of the ratio with another year or with a competitor brings a clear picture. In this scenario, the profitability of Woolworths has been done with the help of NPM, GPM, ROA, ROE, and DPS. Such ratio helps in understanding the performance of the assets, generation of profit over net sales, and the manner in which the shareholder’s funds are utilized (Madura & Fox 2011). Return on Assets (ROA) is a relative measure whereby the efficiency of the company in terms of assets management is known (Sherman 2015). Through the comparison between 2018 and 2019, it is seen that the company has made significant results posting a ratio of 1.77% in 2019 in comparison to 7.67% in 2018. The significant addition made to assets amounting to $2040 helped the company to enhance the sales.

ROE is a major concern considering the investor's view point. It projects the shareholder's efficiency to generate income (Sherman 2015). From the calculation, ROE has enhanced from 16.55% in 2018 to 25.64% in 2019 hence signifying 2019 was better in terms of performance. The company performed effectively as both ROE and ROA have shown a better performance. The NPM and GPM tend to be in the positive zone and the performance is intact owing to the growth of sales.

• Investment Ratios
The higher earnings are reflected through the EPS and PE. The EPS of Woolworths has moved to 206.2 in 2019 from 132 times in 2018. Hence, from the profitability viewpoint, it can be commented that Woolworths is a better prospect.

• Efficiency ratio
Efficiency ratio helps users in ascertaining accurate information on how a company manages its liabilities and utilizes its assets (Peirson et al 2015). For determining the efficiency of the afore-named company, aspects like cash ROA (return on assets), fixed asset turnover, and asset turnover have been taken into consideration for computation purposes. There is a marginal change observed in the ATO of the company. The asset turnover has a noticeable marginal change as the same was 2.43 times in the year 2018 and is currently at 2.55 times. This signifies that every single dollar worth of assets yields a revenue of $2.55. The revenues projected by the company in the year 2019 are higher as compared to the year 2018 and a 5.3 percent rise amounting to $59,984 million has been observed. Fixed asset turnover signifies the capability and efficiency of an organization in utilizing its assets for generating wealth. It is always recommended for an organization to have a positive fixed asset turnover as it signifies optimum usage.

• Liquidity ratio
It is very essential for an organization to maintain a suitable level of liquidity as it largely helps the same in taking care of its debt obligations. This aspect allows the users in learning about the capability of an organization in fulfilling its short-term and long-term debt obligations using its liquid funds (Mersland & Urgeghe 2013). The quick and current ratio of the company in question will allow the users in assessing its liquidity. The CR of the company signifies the skills of the company in honoring its short term debt obligations. Woolworths is not much capable of fulfilling its debt obligations as its current ratio stands at 2:1 instead of a desirable ratio which is 1:1.

The quick ratio of an organization signifies its ability in honouring its debt obligations by using quick assets. In this context, it can be said that Woolworths has failed to achieve a desirable quick ratio in the year 2019 due to various reasons like stock exclusion, etc. Currently, the company has only $0.23 assets against $1 liabilities. Woolworths should focus on the proper maintenance of its quick assets for ensuring better coverage of its liabilities.

• Gearing ratio
Gearing ratio indicates the long-term ability of an organization in honouring its debt obligations and remaining in business for a longer period of time. An organization can go bankrupt and collapse if it has a higher debt level as compared to its equity level (Carlon 2019). It can become difficult for the company to earn sufficient profits with a higher debt level. It is very much important for a company to balance its debt and equity in a desirable manner and the failure to do so can harm its financial wellbeing. When the debt to equity ratio is higher than 1, it means that the level of equity is lower as compared to the debts owed by the company. In the case of Woolworths, higher capital expenditure is the prime reason for the rise in debts in 2019.

The debt ratio of Woolworths is higher than 50 percent in 2018 and 2019. This indicates that the organization is utilizing a higher level of debt. Around 57 percent of the company’s funds are backed up by debts and this can be supremely critical if its liquidity does not support its business operations. As the debt level is enhanced, the equity ratio has lowered down.

Financial measures such as dividend and earnings rates are used with market prospect ratios for comparing the performance of publicly traded entities. The afore-named ratios are used by investors for analyzing the stock price trends and figuring out the current and upcoming market value of a stock.

These ratios allow the investors in understanding what they can expect from their overall investment. Investors can use these ratios for predicting the prices of the stock in the future depending on the current earnings and dividend measurements.

PESTLE Analysis
Political
The operation of the company is on a widespread scale and hence is vulnerable to different political scenario. The slowdown of the business can be traced owing to the recent plastic ban. Hence, it became expensive, as well as time consuming for the company to select a better and an alternate method for the single-use plastic (Fiolleau & Kalpan 2016). Further, there have been high changes considering the company to ensure higher profits. The trade war between Australia, as well as competitor like USA and China even comes in the company way for receipt of more investment in the share capital by the investors.

The trade war poses an imminent threat because the foreign investors are hesitant to invest in the ventures of Australia. Apart from this fact, the retail market has stability to the changing political scenario hence making Woolworths more stable in its host country.

Economic Factors
The increment in the competition has led to immense challenge in the industry and every company is affected by it. In lieu to it, the company has come up with different loyalty program that is directed to retain and attract new customers. The loyalty program were strong however did not work because it did not work in favor of the company. Woolworths faces a huge issue because Aldi has obtained a market share of fifteen percent (Woolworths 2019). It has become a major challenge for the group to enhance the position and hence it has been able to create a niche in the market. The company has reflected a 3.4 percent decline in the profit that was owing to the heavy loss in the stock. Woolworths faces huge challenge in the management of the input and financial burden. As per the current scenario, the group is present to face any challenge that might crop up due to the increment in the cost of inputs and increased financial pressure due to liquid assets locked up in the new ventures (Fatin 2019). The company is working towards the attainment of the momentum that it lost owing to the various factors that impact everyday’s operation.

Social factors
Woolworths is best known for the customer’s needs and it has been realized by the company that the customers are more concerned regarding the health and hence the company adjusted the trend of the supply by changing it and ensuring that the vegetables and fruits is provided with ease (Guest 2017). The product offered by the company attained a rating of 3.5 and above implying that the company has worked towards the betterment of the customers. New reward system was introduced to build more customers (Woolworths sustainability 2019). For the increment in the sales, the company hired wine experts at the wine stores. Hence, it can be commented that Woolworths is ensuring the latest trend and adjusting to the customer needs. The presence of ‘discover’ driven range, service, as well as convenience has led to the compliance with the customer needs. Through an analysis, the localized requirement of various region, Woolworths has ensured retaining of customers by the introduction of reward point schemes (Woolworths sustainability 2019). Hence, through picking the latest trend, prevailing among different societies Woolworths is able to cash on different opportunities and provide relentless service to the consumers while maintaining the status in the market.

Technological Factors:
Woolworths understands the requirement of staying updated in terms of technology so that it can embrace the high end technology and provide competent service. The group has ensured a major revolution in the overall industry through the introduction of the smart stores and ensuring shopping is delight for the customers (Hogan 2019). The presence of those smart stores provides better surveillance through iPads and robots with the presence of installed cameras at the end. Further, the group has ensures various subscription program where the subscribers can purchase monthly, quarterly, half yearly and annual plan through payment of nominal subscription fee (Woolworths sustainability 2019). The subscribers will be provided ample advantages in terms of free delivery of goods at the stores of the company. The introduction of technology in the smart stores has been a major revelation as it has helped the customers to shop and go that helps in minimization of the shopping hassle. Hence, the aim of the company is to bring a major change in the industry.

Legal factors
The performance of different organization was influenced by the introduction of variation in the ASIC. Woolworths ensures that all the tasks are done diligently and comply with all the statutory requirements. The group is influenced by different legal scenario like customer protection, employment laws, health norms and money laundering. Hence, the legal team should ensure that the norms are regularly updated and there appears no flouting of the laws. The company aims to provide 100% compliance that will help in attaining a significant result. Woolworths adhere to the rules and regulations however they are needed to ensure that the stocks are continuously updated, avoidance of any legal claims against the products. The taxation, as well as employee regulations is a major component of the retail industry. Additionally, the food licensing requirements are vital in the food business because the retail companies needs to abide by it. The food quality present at the store needs to be in tune with the regulations of the country. Moreover, the new venture of outlets requires permission from the concerned government authority and the plans needs to be relevant to the legal needs.

Environmental factors
The introduction of system of integrated trans-critical and Co2 system in the stores has been a major landmark for the company in terms of reduction of the carbon footprint. More than fourteen stores were integrated with the system of HVAC and CO2 system (Woolworths sustainability 2019). The company even ensured that attainment of sustainability if the major concern and this has been done with the aid of smart stores. The company is trying to attain Built V1.2 certification for the smart stores (Woolworths sustainability 2019). Further Woolworths even aim to update the technology and install newer ones that will help in performance of the stores. Moreover, the company even research in the industry of refrigeration to lead to significant improvement in the process of sustainability. The organization is actively participating in activities of recycling to reduce the wastage amount in landfill while ensuring the recyclable materials are made useful through proper processing.

Advise and Strategic management
There is a significant rise in the profits earned by the company as it has been effectively using its assets and equity for generating returns. The liquidity of the company is low in 2019 as compared to the year 2018. The functioning of the company can be largely impacted in the nearing time if the management fails to lower the existing level of debts and simultaneously enhance liquidity levels. In this context, it can be said that the financial performance of the company in the year 2018 has been way better compared to its financial performance in the year 2019. The performance of Woolworths in the retail sector of Australia has been amazing but the company is yet to embark on its positioning in the leading retail players of the country. A lot of factors have been attributed to the undisputed success of Woolworths. The key factor that has bought success for the company is the way it has been managing its main supply chain. Woolworths has ventured into online business a long time back and has installed best-in-class IT systems for enhancing its online services. Recently, Woolworths has even come up with a variety of healthy options for its health-conscious buyers. “Fresh food for People” is one of the prime strategies taken by the company for providing fresh veggies and fruits to health-conscious buyers. The implementation of this strategy attracted over 13 billion customers to Woolworths’ supermarkets across the country. Woolworths is also known to provide its buyers with competent after-sales services and this justifies its strong customer base. The company’s profit earning ability has profoundly increased in the last few years. There is an 11.4% and 15.7% rise in the EBIT and NPAT of the company during the initial six months of 2019 (Woolworths 2019). There is a rise in the dividends declared and paid to the shareholders of the company since 2016. In the last year, the company distributed AUS$1.03 per share as a dividend to its shareholders and will supposedly declare better dividends in the upcoming financial year. The success of the company is guaranteed as it deals with essential goods and services. Without any doubt, Woolworths has the potential to grow in the future and investors can consider investing in the stock of the same.

Woolworths acts as a responsible corporate citizen. The company constantly contributes towards causes that are associated with the wellness of the society and country at large. The company makes it a point to fulfill the expectations of its stakeholders and aligns its actions in the best interest of the society and community it operates in. The organization must continue enhancing its relationship with the stakeholders by introducing and implementing internal as well as external policies. The success of the company is destined for the future as well if it continues to prioritize its stakeholders’ interests and fulfill their expectations with effective business strategies. The management of Woolworths even stresses having a problem-solving approach for providing an additional boost in order to maximize the output.

Conclusion
The performance of Woolworths in the Australian retail industry is unbeatable and the company has crafted a niche for itself in the retail sector. The success of the company can be attributed to innumerable factors. One of the major advantages or the factor that supported its advancement is the maintenance of the supply chain. The company has established its supply chain because it understands the importance of the supply chain. Further, it has known the importance of digitalization in the past years and hence been able to utilize the opportunity through the empowerment of the online business.

Further, an update of the IT system regularly will help the business in attaining a formidable position. The company is aware of the fact that the current age customers are more inclined to include a healthier option in comparison to the other options. Hence, it is the main reason why the company included the strategy of “Fresh food for People”. With this strategy, the company has been able to provide fresh fruits and vegetables to the customers. The domination of Woolworths is through providing various products. With a diverse range of products like footwear, accessories, and clothing it has been able to cement its footstep in the market. One of the major advantages possessed by the company is the low-cost production that provides the products at a reasonable price. The strategy has provided an edge to the company that led to the goods and services improvement. Further, it can enhance the after-sales service thereby providing a wide range of products and hence been able to surpass the business of Coles.

References
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Appendix

Ratio

Investment ratio

Liquidity Ratio