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Critical Analysis On Coles Group Financial Performance

Question

Task:
Case: You are hired by a client to conduct an analyst service for Coles Group as they are thinking of buying some shares for that company and become their investors. They asked for your help to conduct an analysis of Coles Group’s financial statements and give them some recommendation at the end whether to invest in the business or not.
Required:
Refer to Coles Group financial statements 2019 and 2018 and make a formal report to your client and use the below questions as a guideline for you to make a recommendation.
1. Comment on their financial performance for the period ended 2019? Do a horizontal analysis for the profit and use 2018 as the base year. Is it better or worse than 2018? Why do you think it happened? Comment on their overall financial performance in 2019compared to 2018.
2a. Calculate their Current ratio and Quick ratio for 2019 and 2018. Compare those twoyears and give comment whether the current ratio is better or worse in 2019. Find some reasons why the current ratio is better worse. 
2b. Explain what are the differences between current ratio and quick ratio. What can you tell about the quick ratio in Coles group compare to their current ratio? Do some research on the industry average and comment whether it is normal for Coles to have those numbers for their ratios. 
3. Have a look at the Statement of Cash Flow of Coles group in 2019. What does it mean by operating, investing and financing activities in the statements? Briefly comment on Coles group performance in those 3 activities in 2019. 

Answer

Introduction
The present study is focused on analyzing the Coles Group financial performance in a detailed manner. Coles Group Limited operates in the retail industry of Australia and deals in wide range of products such as fresh food, grocery items, household products, liquor and fuel through on both physical and online platform. Also, the company is engaged in the provision of various financial services. Coles Group is listed on Australian Stock Exchange. It operates its business through three major segments: Coles Supermarkets, Coles Convenience Stores and Coles Liquor (Reuters, 2019). In the present report the Coles Group financial performance will be analyzed referring to its annual report for the period 2019 using the help of key financial techniques and tools such as ratio analysis, horizontal or trend analysis wherein the Coles Group financial performance of 2019 and 2018 will be evaluated.

The overall profitability position of the company seems to have declined in 2019 as compared to that of 2018 by 9.13% on account of various factors such as decrease in sales revenue, increased administrative and other expenses, significant increase in financing costs and reduced profit from discontinued operations. However, the profitability position considering the ordinary business activities and continuing business operations has improved in 2019 from 2018 which is evidenced by improved gross profit margin, net profit margin and earnings per share in 2019. Following results depicts the changes in the key parameters of profitability position of the company and all the three parameters showcases the improved state of profitability of Coles Group

 Key Profitability Ratios

2019

2018

Changes

Remark

Gross Profit= Gross Profit/Sales

24.13%

23.18%

4.07%

Positive

Net Profit Ratio= Net Profit/Sales

2.82%

2.63%

7.47%

Positive

Earnings per share

0.81

0.77

5.38%

Positive

(Refer to Appendix)

One of the major reasons of improved profitability position of Coles Group in year 2019 with respect to 2018 is the increased sales revenue and other incomes for the business (Coles Group Limited, 2019). The improved profitability position indicates the increase in the quantum of profits generated out of the business and thereby increased capacity of the company to offer higher returns to its shareholders and other investors. While analyzing the overall Coles Group financial performance it is important to take into account all its aspects which are profitability, liquidity, solvency and efficiency of the business. The liquidity position of the business could be analyzed using two main financial ratios called as current ratio and liquid ratio. Following table shows the state of liquidity in both the years under consideration:

 

2019

2018

Changes

Remark

Current Ratio= Current Assets/Current Liabilities

0.79

0.53

50.88%

Positive

Quick Ratio= (Current Assets-Inventories)/Current Liabilities

0.34

0.14

135.17%

Positive

(Refer to Appendix)

From the above table it is apparent that the liquidity position of Coles Group financial performance has improved in 2019 as compared to 2018 as both the ratios have increased to a certain extent towards the ideal liquidity state. Hence, it can be said that the company must be managing to invest more in its current assets to meet its short term debt obligations. Moving on solvency position of Coles group, it can be said that the solvency condition of the business in both the years is critical as it is facing more financial leverage due to higher proportions of debt in overall capital structure which implies that it is under high financial risk because of excessive external borrowings in place of internal financing. The debt equity ratio is 2019 shows that company has somehow reduced its external borrowings but still it is not maintaining optimum capital structure and hence it is facing high insolvency risk (Fridson & Alvarez, 2011). Therefore, the overall Coles Group financial performance can be said satisfactory except in terms of solvency in 2019 as it has managed to improve its financial performance in other main aspects since 2018.

The current ratio and quick ratios are calculated in the previous section of the report and the said ratios clearly shows that the liquidity position of Coles Group has improved in 2019 as compared to 2018 in-spite of the fact that there is reduction of total current assets up-to 27.92% in 2019 from that of 2018 mainly on account of simultaneous reduction in the total current liabilities (primarily the trade payables) of around 52% in 2019 as compared to 2018. The above fluctuation in current assets and liabilities has resulted in better current ratio of Coles Group financial performance. The major difference in the current ratio and quick ratio is that current ratio takes into account all the current assets while analyzing the liquidity position of the business. However, the quick ratio merely counts those assets as the liquid assets which are easily and readily converted into cash as and when required by the business. Hence, quick ratio do not include inventories as a part of company’s liquid assets as inventories are those current assets which are held for sale during the normal course of business and hence they cannot be converted into cash on the quick basis whenever there is an urgent requirement of cash in the business. The quick ratio is lower than the current ratio on account of exclusion of inventories from the current assets while calculating the former ratio. While evaluating the Coles Group financial performance, ideal quick ratio is 1:1 and current ratio is 2:1 (Williams & Dobelman, 2017). However, both the rations in current financial year 2019 are lower than the ideal ratios but at the same time they seem to improve with respect to year 2018. Further, average current ratio in the industry in which Coles operates is 0.91 whereas the company has 0.79 as its current ratio which shows that Coles is not having sound liquidity position as compared to its peer competitors. However, the average industry quick ratio is 0.33 and that of Coles is 0.34 which shows that the company maintains similar quantum of its quick assets which are maintained in the industry (Investing.com, 2019).

The cash flows statement of Coles Group shows the flow of cash from three of the prime activities undertaken by it which are named as Operating, Investing and Financing activities. In 2019, Coles Limited has generated cash inflows from its basic business operations by way of its customers and viva energy segment and as a part of its business it has paid out for certain business expenses such as payment made to the suppliers and to its employees. Also, it has paid its interest and income tax expenses for its business profits. As a net result it has generated net cash inflow of $ 2275.4 million in 2019.

As a part of investing activities and enhancing Coles Group financial performance, the company has purchased various property plants and other intangible assets. Also, it has invested its business funds in setting up new joint ventures and acquisition of few businesses.  The said activities have resulted in the outflow of cash from the business against which it has generated certain cash inflows from the sale of certain property, plant and equipment along with some controlled entities sales. The entire investment functions have resulted in the net cash outflow of $ 279.8 million in 2019.

As a part of Coles Group financial performance, the company has raised certain amount of funds from the external borrowings and borrowings from related parties and redeemed its preference shares and as a result of these activities it has generated cash inflows. Besides this, Coles Group has also made repayment of certain borrowings to the external parties and other related parties, purchased some shares under Equity Incentive Plan, distributed certain profits share to Wesfarmers and resultantly there is a net cash outflow of $ 1611.2 million in 2019.

Conclusion and Recommendations
From the above report it can be said that the overall Coles Group financial performance has improved in 2019 as compared to that of 2018. The profitability, liquidity and solvency positions seem to have improved and it is depicted by the key financial ratios. Hence, it would be better for the potential investors to purchase its shares in the company. Also, it could be recommended to the existing shareholders to retain its shares as the share price of Coles Group is likely to improve in the next coming years looking at the past trends.

References
Coles Group Limited. (2019). Annual Report, 2019. Coles Group financial performance Retrieved from: https://www.colesgroup.com.au/FormBuilder/_Resource/_module/ir5sKeTxxEOndzdh00hWJw/file/Coles_Annual_Report_2019.pdf

Investing.com. (2019). COL Ratios. Retrieved from: https://in.investing.com/equities/coles-group-ltd-ratios?period_type=fiscalYear

Reuters. (2019). About Coles Group Ltd. Retrieved from: https://www.reuters.com/companies/COL.AX

Fridson, M. S., & Alvarez, F. (2011). Financial statement analysis: a practitioner's guide (Vol. 597). John Wiley & Sons.

Williams, E. E., & Dobelman, J. A. (2017). Financial statement analysis. Coles Group financial performance World Scientific Book Chapters, 109-169.

Appendix

 

2019

2018

Changes

Sales

38175.8

38934.4

-1.95%

Other Income

288.4

211

36.68%

Total Operating Revenue

38464.2

39145.4

-1.74%

Cost of Sales

29253.4

30119.3

-2.87%

Gross Profit

9210.8

9026.1

2.05%

Other Income

427.7

168.7

153.53%

Administration Expenses

8031

7731.7

3.87%

Other Expenses

145.8

0

 

Share of net profit of equity accounted investments

5

16.3

-69.33%

Earnings before interest and tax (EBIT)

1466.7

1479.4

-0.86%

Financing costs

41.5

0.1

41400.00%

Profit before income tax

1425.2

1479.3

-3.66%

Income tax expense

347

456.1

-23.92%

Profit for the year from continuing operations

1078.2

1023.2

5.38%

Profit from discontinued operations after tax

356.5

555.6

-35.84%

Profit for the year

1434.7

1578.8

-9.13%

       

Weighted Average Number of Shares

1333.9

1333.9

 
       

 

2019

2018

Changes

Gross Profit= Gross Profit/Sales

24.13%

23.18%

4.07%

Net Profit Ratio= Net Profit/Sales

2.82%

2.63%

7.47%

Earnings per share

0.81

0.77

5.38%

       
       
       
       
       

Assets

 

 

 

Current Assets

 

 

 

Cash and cash equivalents

940.4

686.1

37.06%

Trade and other receivables

359.7

497.2

-27.65%

Inventories

1964.7

3442.3

-42.92%

Non-current assets held for sale

94.1

 

 

Other assets

47

99.5

-52.76%

Total current assets

3405.9

4725.1

-27.92%

Non-current assets

 

 

 

Property, plant and equipment

4119.2

5223

-21.13%

Intangible assets

1540.6

1965.7

-21.63%

Deferred tax assets

364.9

540.3

-32.46%

Equity accounted investments

212.3

 

 

Other assets

134.1

90.6

48.01%

Total non-current assets

6371.1

7819.6

-18.52%

Total assets

9777

12544.7

-22.06%

 

 

 

 

Liabilities

 

 

 

Current liabilities

 

 

 

Trade and other payables

3379.9

8008.5

-57.80%

Income tax payable / (receivable)

0.1

-25.3

-100.40%

Provisions

742.9

819.3

-9.33%

Other

167.6

178.4

-6.05%

Total current liabilities

4290.5

8980.9

-52.23%

Non-current liabilities

 

 

 

Interest-bearing liabilities

1460

0

 

Provisions

598.4

272.4

119.68%

Other

71

41.8

69.86%

Total non-current liabilities

2129.4

314.2

577.72%

Total liabilities

6419.9

9295.1

-30.93%

Net assets

3357.1

3249.6

3.31%

 

 

 

 

Equity

 

 

 

Contributed equity

1627.8

2192.6

-25.76%

Reserves

42

38.8

8.25%

Retained earnings

1687.3

1018.2

65.71%

Total equity

3357.1

3249.6

3.31%

       

 

2019

2018

Changes

Current Ratio= Current Assets/Current Liabilities

0.79

0.53

50.88%

Quick Ratio= (Current Assets-Inventories)/Current Liabilities

0.34

0.14

135.17%

       

 

2019

Industry Average

 

Current Ratio

0.79

0.91

 

Quick Ratio

0.34

0.33

 
       

Debt Equity Ratio= Long Term Debt/Equity

1.91

2.86

 

 

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