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Woolworths Limited: Analysis of Financial Report


Task: Discuss the analysis of Woolworths Limited's Financial Report.


Executive Summary
Analysis of the ratio is a method for evaluating a business's financial status. For this report, the financial position of a company called Woolworths Limited is calculated by ratio analysis. Various factors were estimated and Woolworths' financial report was assessed. The company's total operating income has improved as per the quarterly report, however, there are instances from which one can conclude that the company's performance still suffers due to certain significant weaknesses such as profitability and liquidity problems, as the current business liabilities are higher than its resources. The industry-based proportions however by growing dividends and also profits during the last economic year 2012-13, the organization is predicting a stronger income potential. Nevertheless, a decline in economic output was reported while the performance ratios were evaluated.

Increasing business activity does have certain internal control restrictions to which they are negotiated with the efficiency potential, these are discussed to be strengthened to alleviate the threats regarding financial and operating profitability, otherwise, it could increase production costs in the long run.

The firm's financial statement concretely forecasts its financial condition. Through the released Woolworths financial reports, investors or a private entity get access to the financial and economic status of the company. A firm's reports comprise of a financial year's balance sheet, cash flows and income statement. Financial Statement Review is a tool to maximize the company's ability to make a profit. The profitability and the performance of a company can be drastically enhanced by assessing its financial report. The assessment is preferred so because it evaluates all the important comprising factors of economic development of the company such as its assets, liabilities, cash flow, inventory, balance sheet, earnings, loans, and all types of accounts including receivables, profits, and losses. There are several methods in assessing a company's annual statement by evaluating their Common Size Accounts and Financial Ratio Analysis. (Robinson, 2015) (Williams, 2017)

The company chosen for this analysis is Woolworths Limited In our review, the annual Woolworths financial reports for the 2012-2013 and 2013-2014 fiscal years are addressed. Woolworths is a brand chain which deals in commodities such as food, liquor, fuel stations, departmental stores and hotels. The corporation expanded its business activities in the year 2013-14, yet also maintained its conventional reforms.

Review of the functioning and value of the company

  • Several variations in the 2013-14 financial year include that, relative to the 2012-13 financial year, there's no benefit from suspending projects.
  • Throughout all respects, including simple or diluted net income per share, either through retained or suspended activities, the same was raised for 2013-14 compared to the previous year.
  • The organization observed a 3.86% rise in profits generated from the sale of goods, owing to its expansion in the year 2013-14
  • Invoices from occupants have also been lowered as shown in the preceding year, either the withdrawal of some occupants or the expiration of the lease period.
  • The interest obtained was reduced by 55.86 percent, and that's a significant negative aspect to the trade, however, the cash flow from the operation has grown strongly.
  • For the good of consumers, the firm has developed a strong management strategy to incorporate the food and alcohol industry to optimize all operations.
  • The corporation has announced a $600 million asset sale on the holdings of hotel property sites to support stakeholders.
  • In the financial year 2013-14, the earnings of departmental stores, growth and improvements in the BIG W business (a division of Woolworths) did not prove lucrative.
  • As operating revenue rose and sales revenue grew, the costs associated with these revenues were also improved.
  • The rise in revenues before tax and interest is an indication of stellar productivity in the present FY as compared with the previous FY; it was also raised by 5.3%.
  • Sales growth correspondingly reflects a strong increase in the field from the previous year.
  • Revenues of commodities like food, liquor improved by 4.7 percent and fuel also enhanced by 6 percent, but the cost of gasoline were not lowered; in 2012-13 it was 142.4 CPL and in the financial year 2013-14 it was 151.1 CPL.
  • Woolworths is also affiliated with internet or online sales, its output also follows a growing pattern in the present FY, the firm has focused on the advancement of retail promotion via the online portal, making numerous changes that will be convenient and valuable to consumers.
  • The firm's performance was also improved by systemizing unique and creative concepts into the framework, such as the labels and goods towards which consumers are more attracted, and the bulk of those items remained to be in production
  • Web portals have been rebranded to accommodate and serve the requirements of the consumer.
  • There are still several ideas that they are inclined to make to help the society's farmers. Several areas and company locations have been started up for resource distribution between different Australian towns.

Assessment of Woolworths financial report and Ratio Analysis
Analysis of Profits: Review of productivity requires a review of ratios. A document called "Profitability Analysis" has been added to the file "Annexure", and we had calculated a variety of productivity ratios including Gross Profit Ratios and Gross Margin, Net Profit Ratios (including EBITDAR ratios, EBIT ratios and net profit ratio, taking into account the return accessible to stakeholders).

Gross profit margin is the ratio of total sales minus selling costs to the revenue from the sales. It is apparent from this ratio, to what degree the organization will benefit by making optimal use of its capital such as raw material and workforce. The gross profit margin has enhanced to 27.11 from 26.94, reflecting growth in output, with the greater gross profit margin figure being reflected in terms of the price (which would be necessary to incur) of output. The same thing has also been expressed here. (Chua, 2015)

The EBIT margin corresponds to Earnings before Interest and Tax divided by net sales revenue, which also isn’t reported by the Generally Accepted Accounting Principle, these ratios prove to be beneficial for credit assessment activities to examine a firm's internal framework. In this situation, the EBIT margin was reduced to 6.21 in the profit and loss weeks, while it was 6.24 in the 53rd week or 2013. The same goes for a drop in financial performance. The EBITDAR ratio was raised to 10.98 while in the 53rd week it was 10.91. This, in turn, represents improved or updated operating productivity.

Profit applicable for investor equity was taken into consideration when measuring the profit margin in the same dossier as mentioned above in the annexure document. It rose from 3.86 to 4.03 implying the corporation's adequate capital distribution and earnings potential, the total sum taking into account the stakeholders' assets after acknowledging transaction to different business entities except for investors. (Reimsbach, 2014)

Du Pont Analysis: It involves 4 ratios: Net profit margin, asset turnover ratio, financial leverage and return on equity, a proportion that essentially identifies the present value of the stakeholder, as well as being a tool of analyzing a firm's profits. The asset turnover ratio is evaluated by taking into account net sales to the mean of opening and closing assets in 2013 and 2014 FY. This calculation shows the efficiency with which several projects use and distribute the total assets of the company. A drop in the pace shows that there is still scope of improvement in resource allocation. A firm's financial risk usually shows if the corporation is vulnerable to being bankrupt, it can in some situations result in higher returns to stakeholders. Bigger the number, greater the chance of the corporation to go bankrupt. In the current Woolworths' financial report, the same is decreased. In this way, the section of the business which is failing to show productivity can be identified with the help of Du Pont Analysis. There was also a food and liquor division in the context of the situation which did better than the BIG W company. Earnings per share reflect the investors' net income from the corporation. (Kim, 2016)

Analysis of Competency: Examination of productivity and performance are co-existing as both illustrate how well the corporation does financially given its resources, stakeholder personnel, and remaining market inventories. A folder named "Annexure" has been added, and we have measured a set of performance ratios in the document labelled "Efficiency ratios."

Using the price of the product sold instead of the total sales, account receivable turnover was estimated. Over the year, it was observed that it was declining. It is a way of measuring by which it is possible to estimate the number of times the debt holders or liabilities may be restructured in a year. That is why it can be an indicator of the firm's competency as well as the firm's solvency.

Working Capital Ratio (WCR) may be referred to as the present ratio, it is the ratio of Present Assets to the current total liabilities. The figure is also an indicator of a firm's liquidity or solvency. WCR shows how quickly existing resources would be turned into tangible assets; this figure has been lowered from 0.95 to 0.91. The optimal WCR is 1, a lower ratio would imply that the organization isn’t in the state to deal with its current liabilities with the available resources. (Jana, 2018)

Asset turnover ratio is an important factor in determining the profitability of the organization as it defines the firm's capability to use its resources and make efficient use of its capital to generate sales. In this organization, the asset turnover rate has been diminished over the year, suggesting a relatively low level of resource usage than the 2013 financial year.

The inventory turnover ratio (ITR) is determined when the total inventory (opening and closing inventory level) divides the price of the selling items. It’s a function of the productivity of the organization which represents how effectively the firm can use its resources to achieve a greater yield. It also allows third parties and shareholders to evaluate how fluid the inventory of the firm is, as per the Woolworths financial report analysis the ITR has dropped during the year, implies a decline in the capability of the firm to easily transform the inventory into income.

Review of Short-Term Liquidity: A firm's short-term liquidity requires the status of the assets of the company to satisfy its short-term debt and commitments. Using Current Ratio, this can be explained. The current ratio was previously measured, which covers short-term assets and liabilities and long-term assets This proportion takes into account how rapidly the corporation's short-term commitments might be turned to cash or how efficiently the firm fulfils its short-term liabilities. For the financial year of 2014, the short-term liability is $219.5 million.

Review of Long-Term Liquidity: The long-term solvency ratio analyses the firm's status to fulfil its long-term commitments. In the present situation, Woolworths' long-term liabilities for 2014 financial year were $4136.0 million. As per the annual Woolworths financial report released for 2013-14, it was noted that the organization has used several strategies to reduce the solvency threat because it struggles from the low-efficiency level observed in the current ratio estimation. (Alshatti, 2015)

Ratios Related to the Market: Revenues per share, dividend yield, dividend pay-out, cost cash flow ratios are related to the market. These are calculated under the sheet 'Market- Based ratios' in the "Annexure" file.

The firms' revenue per share grew from the FY 2013 to 2014 FY. It is an indicator of the status of the firm in the industry, shareholders are referring to the revenue per share of the firm for objectives of making business decisions. It is also a predictor of the competitiveness of the product since earning relies on the firm's revenue. The profits that are taken into account in this equation are the earnings available to the corporation's equity investors.

Cost earnings ratio would be another market-related ratio used to assess the company's equity status. It's beneficial for stakeholders, and it appears as if in the prospect the stocks will be receiving a positive advantage. For the investment strategy, a smaller price-earnings ratio is perfect. (Kedia, 2018).

Also, the dividend yield ratio allows an investor to choose to buy shares of a corporation. This also makes a difference in deciding whether or not to stick with the current stock. It is a representation of yield for the shareholder'. The dividend yield in the financial year was 26.03 per cent which has risen from the previous FY.

Price to cash flow ratio of operation compares market capitalization to the operating cash flow of the organization. This ratio reveals the firm's value from the investor perspective. The operational cash flow from the cash flow statement is taken into account, depletion and non-cash costs were reintroduced to turnover from activities to reach the cash flows. The cost to the operating cash flow ratio has been reduced in FY 2013-14 as per the Woolworths financial report. (Shakespeare, 2019).

The organization struggles from productivity issues that they have sought to address by implementing multiple initiatives as stated in annual Woolworths financial report. It was not possible to categorize long and short-term resources so that separate long-term and short-term solvency levels could be reached. The role of the organization with regards to such metrics has been taken into account in the report. A ratio evaluation, therefore, often does not represent the firm's real depiction as it only takes financial information into account and doesn't include qualitative details. (Arkan, 2016)

Scope of Enhancement

  • To tackle the threat of bankruptcy the organization needs to take into account debt reinforcement. Substantial domestic monitoring ought to be in effect for debt management and long-term commitments.
  • Some procedures must be in place to mitigate the firm's counterparty threats. Procedures and laws have to be executed so that there is no conflict of emotions or pride associated with keeping this.
  • In some cases, there is no provision of account head specifics in the summarized Woolworths financial report, for instance, short-term convergence or long-term current assets have not been identified, proper efforts have to be made in this respect.
  • The financial report did not reveal the differentiation of cash and credit transactions.
  • In FY 2013-14, the organization has expanded its activities, more economic control and regulatory requirements will be essential.

Alshatti, A. S. (2015). The effect of liquidity management on profitability in the Jordanian commercial banks. International Journal of Business and Management, 10(1), (p. 62.).

Arkan, T. (2016). The importance of financial ratios in predicting stock price trends: A case study in emerging markets. Finance, Rynki Finansowe, Ubezpieczenia, 79(1), 13-26.

Chua, J. H. (2015). A closer look at socioemotional wealth: Its flows, stocks, and prospects for moving forward. Entrepreneurship Theory and Practice, 39(2), 173-182.

Jana, D. (2018). Impact of working capital management on the profitability of the selected listed FMCG companies in India. International Research Journal of Business Studies, 11(1), 21-30.

Kedia, V. K. (2018). Portfolio Generation for Indian Stock Markets Using Unsupervised Machine Learning. Fourth International Conference on Computing Communication Control and Automation (pp. (1-5)). ICCUBEA.

Kim, H. S. (2016). A Study of Financial Performance Using DuPont Analysis in Food Distribution Market. Culinary Science & Hospitality Research, 22(6), 52-60.

Reimsbach, D. (2014). Pro forma earnings disclosure: the effects of non-GAAP earnings and earnings-before on investors’ information processing. Journal of Business Economics, 84(4), 479-515.

Robinson, T. R. (2015). International financial statement analysis. John Wiley & Sons.

Shakespeare, W. (2019). Fundamental Analysis of Equities. New Principles of Equity Investment, 95.

Williams, E. E. (2017). Financial statement analysis. World Scientific Book Chapters, 109-169.

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