Financial Analysis of Woolworth Limited - Case Study Example

Content Purpose of the report 2 Background of the company 2 Highlights of Annual Report 2 Auditors and purpose of auditing 3 Non-financial Information 3 Financial Information 3 Different Financial Statement Prepared 4 Share Holding Pattern & financing of assets 4 Financial Analysis 5 Findings 7 References 8 Appendix 10 Purpose of the report To identify financial and non financial information by analyzing the financial statement Identifying the purpose for creating different type of financial statement Background of the company Woolworth Limited is in retailing line of business. (Annual report, 2010, pg 2) The company is registered as Woolworth Limited, Principal registered office in Australia, 1 Woolworths Way, Bella Vista, New South Wales, 2153 (annual report, 2010, pg 155) Highlights of Annual Report Various important points are highlighted in the annual report. The reason for highlighting the information is that the users of the financial statement can base their decision after looking at the financial information. Analyzing the statement will help the investor to identify the growth pattern, the risk involved, the policies and disclosure principle being adopted by the company. This will thus act as a guide for investors, government, suppliers, customers, employees and society thereby helping every one associated with the company. The annual report covers from 1st July 2008 to 30 June 2009 completing an accounting year. (Annual report, 2010, pg 34) The highlights for Woolworths Limited are that the net sales have grown by 7.5% to reach $49.6 billion. The growth in the EPS is by 11.7%, net profit has grown by the tune of 12.8%, dividend paid per share has grown by 13% and all this are after normalizing hotel and property profits. (Annual report, 2010, pg 3) Auditors and purpose of auditing The reports of Woolworths have been audited by Deloitte Touche Tohmatsu and it helps the users to gauge the validity of the financial statement. (Annual report, 2010, pg 55) Since, the auditor gives a declaration that the information is true and the auditor will be held liable for any misgivings ensure that the financial information is correct. This thus, will help the investor to believe that information provided is correct. Non-financial Information The non financial information present in the statement is The consumer electronics has shown excellent result as they have repositioned their strategy to create new brands and store formats. (annual report, 2010, pg 20) “The hotels business despite the slowdown in growth has shown better performance as the company focussed to reduce cost thereby enabling them to fight adverse conditions” (annual report, 2010, pg 22) Financial Information The financial information available for Different Financial Statement Prepared Woolworths Limited had prepared various financial statements and the purpose they serve for the company are as follows Income Statement: This helps to “find the profits attributed by the company due to the normal operation of the business”. (annual report, 2010, pg 66) Balance Sheet: It shows “balances of assets and liabilities and help in the future to generate revenue” (annual report, 2010, pg 66) Cash Flow Statement: It shows “the cash flow due to investment, operation and financing activity and gives a more detailed explanation of the manner in which the company employed its resources” (annual report, 2010, pg 67) Statement of changes in equity: It reflects the “changes in owner’s capital i.e. share capital due to issue of share, change in minority interest and other factors which affects the owners’ capital”. (annual report, 2010, pg 68) Remuneration report: It shows the “compensation paid to the managers, employees, chairman and the manner in which it is accounted for” (annual report, 2010, pg 44) Share Holding Pattern & financing of assets The share holding pattern is very distributive but the largest shares are held by employees due to stock options. To finance the assets the company has raised money by borrowing and also issuing shares. These have helped the company to look for external sources. Financial Analysis Financial analysis helps a business unit to understand the manner in which it has performed and also helps to “plan, forecast for the future so that the company is able to deliver on the promises”. (Petroff, 2000) It helps the business units to identify the strengths and areas which will help them grow. The ratios for Woolworths are as follows Net Profit Margin: “It is the profit which is calculated after all the expenses has been accounted for and is based on the sales achieved by the organisation”. (Net Profit margin, 2010) A high ratio shows high profits for the owners. It is calculated as “Earning before Interest and taxes (EBIT) / Sales X 100.” The ratio for Woolworth is 3.75% in 2009 as compared to 3.51% in 2008. It shows that the company has been able to earn more profits. This can be attributed to the good management being demonstrated by Woolworth to cut cost. But a comparison with gross profits shows a different view. The gross profit stands at 25.66% in 2009 as compared to 25.30% in 2008. The huge fall in net profit shows increasing indirect expenses. Woolworths need strategy to reduce it so that it is able to earn more profit. Current Ratio: “It helps to whether the firm is able to meet its current liabilities out of its current assets”. (Ward, 2010) It helps to plan for the short term. It is calculated as “Current Assets / Current Liabilities”. The ratio for Woolworths is 0.76 times in 2009 as compared to 0.7 in 2008. The performance shows improvement but there is still a worry as the current liabilities are higher and the current assets are not sufficient to meet those. Woolworth needs to look at ways to improve their short term planning and looks towards raising the ratio to around 2. This will help more investor to invest as there will be safety of funds. Debt to Equity Ratio: “It helps to find how much percentage long term debt are in proportion to equity fund”. (Debt to equity, 2010) It shows the soundness of the business firm. It is calculated as “Long Term Debts / Equity X 100”. The ratio is 0.42 in 2009 as compared to 0.36 in 2008. The ratio for Woolworths has improved but need to increase it so that they are able to save tax. Also it demonstrates that the firm has borrowing ability which will help them finance their future projects. Woolworths need to see that the debt rises to a certain extent so that they are able to get the benefit of debt-equity in their finance. Return on Assets: “It is the profit attributable to assets in per dollar term”. (Cleveland & Alim, 2007) It helps business to analyze the manner in which assets are used. It is calculated as “Earning before Interest and Taxes (EBIT) / Average assets X 100). The ratio for 2009 is 10.88% compared to 10.53% in 2008. The return for Woolworth has improved showing better utilization of the assets. It also demonstrates proper management and shows that the business is having assets that are sufficient to meet its demand. This shows proper forecasting but the business still needs to improve it as it has been doing showing proper management. Return on Equity: “It is defined as the profit attributed to the shareholders after all expenses have been paid for”. (Little, 2010) It is calculated as “Net Profit available to ordinary shareholders / Average Equity (excluding minority interest and preference capital) X 100”. The ratio for 2009 is 26.35% as compared to 26.49% in 2008. The findings show that the return has fallen but very slightly. This is due to the fact that the company had issued shares and is not a worry. Instead, the business needs to continue similarly as it shows that the investors are getting good money and will favour the company. Earnings per Share: “It is the profit which is attributed to each individual share”. (Little, 2010) It is calculated as “Net profit available to ordinary shareholders / weighted number of ordinary shares on issue”. The ratio for 2009 is 150.71 as compared to 134.89 in 2008. The ratio shows growth as the return has grown substantially. It shows that the policies of the companies are favouring the shareholders and is a good place to invest. Asset Turnover Ratio: It is defined as “sales which is generated due to the manner in which assets are used”. (Asset Turnover ratio, 2010) It is calculated as “Sales Revenue / Average Total Assets”. The turnover ratio for 2009 is 2.9 compared to 3 in 2008. The findings show that the ratio has decreased slightly but is not a concern as the ratio still indicates proper utilization of its assets. The business needs to continue similarly. Findings The performance seems sound but there is room for improvement as the company needs to raise more money through debt, improve their short term ratio i.e. current ratio. On the whole the company has strong foundation and based on it the company can grow but they need to improve their management process which will help them perform better. References Annual Report, (2010), “Annual Report: Woolworths Limited”, Australia Petroff J, (2000) “Financial analysis’, retrieved on August 28, 2010 from http://www.peoi.org/Courses/Coursesen/finanal/FN501EN.html Invest Smart, (2010), “Woolworths Limited (WOW)”, Australian Finance Services, retrieved on August 28, 2010from http://www.investsmart.com.au/shares/asx/Woolworths-WOW.asp Net profit Margin, (2010), “Net Profit Margin”, retrieved on August 28, 2010from http://www.bized.co.uk/compfact/ratios/profit4.htm Gross profit Margin, (2010), “Gross Profit Margin”, retrieved on August 28, 2010from http://www.bized.co.uk/compfact/ratios/profit3.htm Ward S, (2010), “Is Your Business Sick: Current Ratio”, about.com Guide, The New York Times Company Debt to equity, (2010), “Debt to equity ratio”, retrieved on August 28, 2010 from http://www.valuebasedmanagement.net/methods_debt_to_equity_ratio.html Cleveland D & Alim W, (2007), “Return on Assets”, about.com Guide, The New York Times Company Little K, 2010, “Understanding Return on equity”, about.com Guide, The New York Times Company Little K, 2010, “Understanding Earning per share”, about.com Guide, The New York Times Company Asset Turnover Ratio, (2010), “asset turnover ratio”, retrieved on august 28, 2010 from http://www.buzzle.com/articles/asset-turnover-ratio.html Woolworths Website, (2010), retrieved on August 28, 2010 from http://www.woolworths.com.au Appendix Ratios Formula 2008 2009 Current Ratio Current Assets / Current Liabilities 4502.2 / 6424.4 = 0.7 4859.2 / 6414.6 = 0.76 Debt to Equity Ratio Long Term Debts / Equity 2224 / 6235.3 = 0.36 2986.3 / 7057.3 = 0.42 Gross Profit Margin Gross Profit / Sales * 100 11900.3 / 47034.8 *100 = 25.30% 12723.4 / 49594.8 * 100 = 25.66% Net Profit Margin Net Profit / Sales * 100 1651.5 / 47034.8 *100 = 3.51% 1860 / 49594.8 * 100 = 3.75% Return on Assets Net Income / Total Assets * 100 1651.5 / 15672.5 * 100 = 10.53% 1860 / 17084.9 * 100 = 10.88% Return on Equity Net Income / Equity * 100 1651.5 / 6235.3 * 100 = 26.49% 1860 / 7057.3 * 100 = 26.35% Earning per Share Net Income / Outstanding shares 134.89 (given in financial statement) 150.71 (given in financial statement) Asset Turnover Ratio Sales Revenue / Average Total Assets 47034.8 / 15672.5 = 3 49594.8 / 17084.9 = 2.9 Read More