Ratio Financial Analysis and Evaluation: Woolworth LimitedCompany Background: Woolworths is a company that is based in Australia. The company mainly deals with liquor and food products used for resale in New Zealand and Australia supermarkets. The sales of the company have been increasing over the years. The increase in sales may be as a result of diversification of the company’s operations. The company does not base its operations in only one country and that increases the sales volume of the company. The sales volume of the company can also be associated with dynamic advertisingIntroduction: When potential investors embark on making relevant decisions pertaining to the form of a company’s portfolio in which to invest, it is safe that they seek services of a consultant or embark in conducting ratio analysis for the firm under consideration.
There are usually different types of ratios which can be used to conduct this process. It should be noted that the main focus of conducting the operation is on identifying the worthiness of the firm as well as its ability to create wealth. The fundamental objective of any given firm lies with maximizing the amount of its profits as well as minimizing the possible losses.
Nowadays, investors enjoy the variety of information which they use to make sound and safe investment options. The financial position of a firm is determined through a range of valid ratios which means that the process requires a substantial level of expertise. This means that there are certain possibilities for a company to depict irrelevant and negative ratios but in turn possess the credibility needed for worthwhile investment decisions. In this case, it is thus, wise for analysts to perform a substantial form of evaluation since computation of a few ratios might lead to insignificant decision pertaining the investment at hand. In that case, the research paper focuses on conducting the following operations: Valuation using Free Cash Flow of Woolworths: The use of conducting this operation is to determine the manner in which a firm conducts its operations in respect to its capacity to grow and translate sales volume to formidable profits which it can use to pay its shareholders.
As noted earlier within the paper, potential shareholders investment in those companies whose portfolio is proven worthwhile in either short-term or long periods depending with the specific need of the investor at hand. The formula for conducting this valuation technique is determined by the formula: FCR= Earnings before Interest and Tax* EBIT, (1- Tax Rate) + Depreciation & Amortization- Changes in Working Capital – Capital ExpenditureIn our case, the figures seem to reduce though in an insignificant manner.
This is depicted by the reduction from $ 1545.963 in the financial year period ending 2010 to $1329.229 in 2011.
The fact that there is a reduction in the amount of cash flow activities of the firm does not necessary mean that Woolworth is performing worse since there are profitable companies which operate under a negative cash flow activity. Valuation of the Constant Growth Rate Model: