Financial Management Woolsworth Ltd.

Question: Discuss about the Financial Management for Woolsworth Ltd. Answer: Introduction Woolsworth Ltd is one of the major Australian retailers with its business spread throughout Australia and New Zealand. It is the second largest company in Australia in earning revenue also the second largest in New Zealand. It is the largest Australian Liquor Takeaway Retailer, and was named worlds largest Liquor takeaway retailer in 2008. Woolsworth has more than 3000 stores which are spread across Australia and New Zealand. They are retailers of food, liquor, petrol, general merchandise, home improvement and hotels. It has an employee base of around 198,000 people (Wesfarmers Limited, 2015). Few of the brands owned by Woolsworth include Endeavour Drinks Group, Big W, Masters Home Improvement, ALH Hospitality Services, etc. this company is regarded as a down to earth and a family oriented company, which strongly believes in ethical values and hard working culture with responsibility. It follows a transparent policy by keeping the customers as the heart of business and decision makin g. In our analysis below, we have studied the qualitative and quantitative details of the company which are supported by important financial ratios, which will the investor to decide if they should or they should not invest in the aforementioned company. Financial statement analysis of the company Woolsworth Ltd - 5 year income statement Particular 2015 2014 2013 2012 2011 Revenue 60,868 60,952 58,674 55,441 54,280 Cost of revenue 44,345 44,475 42,913 40,792 40,186 Gross profit 16,524 16,478 15,762 14,649 14,093 Operating expenses Sales, General and administrative 3,499 10,063 9,616 8,989 8,728 Other operating expenses 9,983 2,882 2,798 2,358 2,316 Total operating expenses 13,482 12,945 12,414 11,348 11,043 Operating income 3,042 3,532 3,347 3,301 3,050 Interest Expense 255 278 410 318 300 Other income (expense) 281 260 278 85 265 Income before income taxes 3,068 3,515 3,215 3,068 3,015 Provision for income taxes 930 1,057 960 885 875 Minority interest -9 7 5 - 16 Other income -9 7 5 - 16 Net income from continuing operations 2,137 2,458 2,255 2,183 2,140 Net income from discontinuing ops 10 -366 Other 9 -7 -5 - -16 Net income 2,146 2,452 2,259 1,817 2,124 Net income available to common shareholders 2,146 2,452 2,259 1,817 2,124 From the above data it is evident that Woolsworth ltd that the revenues of the company have been consistently improving every year. Also, the net profits have continued to follow the trend which is in line with the revenues of the company (Wesfarmers Limited, 2015). The gross profit of the company has maintained its trend of being near to 27%. Also, the company is taking steps to maintain its debt portion of the capital structure; this has been evident from decreased interest expenses in the five years. Following the 5 year details of Woolsworth Balance Sheet: Particulars 2015-06 2014-06 2013-06 2012-06 2011-06 Assets Current assets 7,661 7,175 6,226 5,802 6,593 Non-current assets 17,676 17,030 16,024 15,779 14,502 Total assets 25,337 24,205 22,250 21,581 21,094 Liabilities and stockholders' equity Liabilities Current liabilities 9,169 7,558 6,866 6,766 8,288 Non-current liabilities 5,334 6,394 6,356 6,627 5,213 Stockholders' equity 10,834 10,252 9,028 8,188 7,593 Total liabilities and stockholders' equity 25,337 24,205 22,250 21,581 21,094 From the above extract it is clearly visible that the total assets of the company have increased over the period of five years. This is because of increased operations of the company. There has been a shift of classification of long term and short term liabilities in the current year. The increase in current liabilities is due to increased operations. It can also be seen that the company is trying to reduce its debt ratio, in order to maintain its leverage (Horngren, 2013). Following is the History of earnings of Woolsworth for last five years: Particular 2015 2014 2013 2012 2011 Net income available to common shareholders 2,146 2,452 2,259 1,817 2,124 Earnings per share Basic 1.70 1.97 1.83 1.49 1.73 Diluted 1.70 1.95 1.82 1.48 1.73 Weighted average shares outstanding Basic 1,257 1,248 1,237 1,222 1,216 Diluted 1,260 1,253 1,243 1,228 1,216 EBITDA 4,465 4,789 4,590 4,270 4,173 The earnings history of the company Woolsworth Ltd has been consistent. It has shown growth from the years 2011 to year 2014, but there has been a decline in the earnings in the year 2015. The overall performance of the company has been considerably been good (Wesfarmers Limited, 2015). Ratio Analysis Ratio analysis is an important tool, which is helpful in making investing decisions. Following are the few important ratios for Woolsworth Limited which may help the investor in taking the right decision. Current ratio Current ratio is a type of liquidity and efficiency ratio. It helps the firms to calculate if they have sufficient current assets which can be used to fulfill the obligations of short term liabilities. Current assets are the assets which can be readily converted in to cash, that is, they can be converted into cash within a period of three months. This is not only an effective tool to calculate companys efficiency, but it also helps to have a check on the working capital of the company (Horngren, 2013). Working capital is the blood of an organization. Lack of working capital may halt the production and result in huge losses for the company. An acceptable current ratio is industry based. Usually it lies from the range of 1.5 to 3. In case the current ratio falls below 1, it shows low liquidity and future possibilities of cash crunch for the company. Current Ratio 2015 2014 2013 2012 2011 Current Assets 7,660.90 7,106.10 6,226.10 5,802.10 6,593.00 Current Liabilities 9168.60 7489.50 6866.00 6766.20 8288.30 Current Ratio 0.84 0.95 0.91 0.86 0.80 From the above it is clearly evident that the current ratios of the company from last five years have been below 1. This shows that the company has low liquidity. Though the company is meeting with its liabilities on a timely manner, the company may any point of time have cash crunch which may affect the working of the enterprise. The company showed an effort to bring a positive change in the current ratio in the year 2014 and 2013. But again in the year 2015 the ratio fell to 0.84, which is not very healthy. The company should take measures to improve its liquidity position and its current ratio. P/E ratio The price earnings ratio is the ratio which helps the investor to calculate the price of the share of the company in terms of its earnings. It represents how many times of the earnings of the company is the investor willing to pay for the share of the company. Higher the ratio, it represents investors trust and confidence in the company. It is more of in industry comparison tool among the companies. It can also be said as; the amount the investor is willing to pay for the company per dollar earnings of the company. This helps the investor to calculate the maximum amount it can pay for a companys share. Price Earnings Ratio 2015 2014 2013 2012 2011 Price 26.96 35.22 32.81 26.80 27.75 Earnings for the year 1.71 1.97 1.83 1.49 1.75 Price Earnings Ratio 15.78 17.92 17.97 18.02 15.89 The price earnings ratio of Woolsworth showed an increase in the years 2013 and 2012 but it showed a sudden decline in the year 2015. The price of the share of the company is not only affected by matters which take place inside an organization but it is also affected due to market forces. The price of wools worth was highest in the 2014 with a PE ratio of 17.92. But in the year there was a decline in this ratio, and it reached to the level of 15.78. The company can improve its ratio by improving its operating effectiveness and increasing earnings per share (Spiceland et. al, 2011). Net Profit Margin ratio The net profit margin ratio helps to calculate the percentage of net profit earned on total sales made by the company. It is calculated by dividing the net profits of the company by total sales of the company (Melville, 2013). The level of net profit margin depends on the industry. For example, the information technology industry has a high net profit margin, but that of the retailing sector is very low. Net Profit Margin 2015 2014 2013 2012 2011 Net Income 2137.40 2458.40 2254.90 2179.20 2140.30 Sales Revenue 60,679.10 60,772.80 58,516.40 54,777.10 54,142.90 Net Profit Margin 3.52 4.05 3.85 3.98 3.95 The revue from sales of Wools worth has considerably increased over the period of five years. A steady increase has been seen from the years 2011 to 2014, but a sudden decline in the year 2015 was seen. This decline was evident not only in the net profit margin, but also in the total sales revenue of the company. But the investors need not consider this as a step back as the decline was not too heavy, a little variance may be noticed due to market forces and government policies (Parrino et. al, 2012). Return on Total Assets Return on total Assets Ratio more popularly known as ROTA, is a financial ratio which helps to calculate EBIT as a percentage of total assets of the company. This ratio calculates how efficiently the company is making use of its assets. Higher ratio indicates more efficient use of assets, and lower indicates that the company is not using its operating efficiency totally (Davies Crawford, 2012). Return on Total Assets 2015 2014 2013 2012 2011 Net Income 2137.40 2458.40 2254.90 2179.20 2140.30 Total Assets 25,336.80 24,136.50 22,250.20 21,581.10 21,094.50 Return on Assets 8.44 10.19 10.13 10.10 10.15 The company has maintained its ROTA of approximately 10 every year for four years, but a sudden decline of ROTA to 8.44 was seen in the year 2015. This shows that the company has not efficiently utilized its assets in the current year. It needs to take measures so that the assets can be best put to use. Better utilization of assets will generate better returns and low wastages for the company in future. Debt ratio This ratio helps the investors and the company to calculate the percentage of assets which are financed by funds which are not owned by the company. The lower the ratio, better it is for the company. The company needs to maintain its leverage so that it does not have to face future burden of meeting with its obligations (Brealey et. al, 2011). Debt Ratio 2015 2014 2013 2012 2011 Total Liabilities 14,204.80 13,611.10 12,949.70 13,134.80 13,248.70 Total Assets 25,336.80 24,136.50 22,250.20 21,581.10 21,094.50 Debt Ratio 56.06 56.39 58.20 60.86 62.81 The debt ratio of Woolsworth Ltd has declined over the last five years. The company has maintained its trend and the debt ratio have reached from 62.81% in 2011 to 56.06% in year 2015. This is a positive sign and depicts that the company is trying to lower its debt ownership. This will result in lower interest expenses for the company, increasing its earnings (Northington, 2011). Dividend Discount Model valuation of stock The dividend discount model calculates the share price based on dividend paid by the company and its growth prospects along with the rate of return required by the investors (Albrecht et. al, 2011). It takes into consideration all this information in order to calculate the expected share price of the company. It ascertains the stock price by the following formula: P0 = D1 Re-G In this formula, P0 = Current price of share, D1 = Expected dividend, Re= Current market rate and G= Growth Rate (Albrecht et. al, 2011). In the year 2015 the dividend of Woolsworth was 139 cents, that is $1.39. The growth rate of this dividend is expected to be 5% and the rate of return required is 10%, using this information we calculate the expected share price of Woolsworth Ltd. We get, P0 = 1.39*1.05 = 29.19 0.10-0.05 The share is currently trading at $21.34, the share is trading cheap and the investor should go long. As per the Dividend discount model the value of shares of Woolsworth are $29.19, but in the market it being traded at $21.34. The investor should invest now in the shares of Woolsworth as the price is expected to go up to $29.19 (Needles Powers, 2013). Recommendation The investor should go long on the shares of the shares of Woolsworth. The overall performance of Woolsworth has not been very remarkable in the year 2015, but still the company is expected to generate huge returns in future. The performance of the company has been more or less in level with the other companies in this industry. Therefore, based on all the information above, it is recommended to invest in Woolsworth Ltd. Conclusion As per the information and analysis above, it is clear that though the performance of the company has not been up to the mark in the year 2015, it is expected to generate huge returns in future. The company has the capacity to utilize its assets in more efficient manner in the future which will generate returns for the company (Williams, 2012). Hence, the strong performance of the company is expected to continue in future with growth possibilities. References Albrecht, W., Stice, E. and Stice, J 2011, Financial accounting, Mason, OH: Thomson/South-Western. Brealey, R., Myers, S. and Allen, F 2011, Principles of corporate finance, New York: McGraw-Hill/Irwin. Davies, T. and Crawford, I 2012, Financial accounting, Harlow, England: Pearson. Horngren, C 2013, Financial accounting, Frenchs Forest, N.S.W: Pearson Australia Group. Melville, A 2013, International Financial Reporting a Practical Guide, 4th edition, Pearson, Education Limited, UK Needles, B.E. Powers, M 2013, Principles of Financial Accounting, Financial Accounting Series: Cengage Learning. Northington, S 2011, Finance, New York, NY: Ferguson's. Parrino, R., Kidwell, D. and Bates, T 2012, Fundamentals of corporate finance, Hoboken, NJ: Wiley Spiceland, J., Thomas, W. and Herrmann, D 2011, Financial accounting, New York: McGraw-Hill/Irwin, University Press Wesfarmers Limited 2015, Wesfarmers Limited Annual Report and accounts 2015, viewed 13 July 2016, https://www.asx.com.au/asx/research/company.do#!/WEShttps://www.wesfarmers.com.au/ Williams, J 2012, Financial accounting, New York: McGraw-Hill/Irwin.