Ratio Analysis Essay

ASSIGNMENT COVER SHEET (to be completed by the student) AIB student ID number:  Student name:  Course name:  Subject name:  Subject facilitator:  Teaching Centre:  No. of pages:  Word count:  DECLARATION A12855  ADRIAN MARK BISRAM  MBA FINANCE  712 SFI – STRATEGIC FINANCIAL ISSUES  MS. RENEE POPPLEWELL  SCHOOL OF HIGHER EDUCATION LIMITED  9  1638

I, the above named student, confirm that by submitting, or causing the attached assignment to  be  submitted,  to  AIB,  I  have  not  plagiarised  any  other  person’s  work  in  this  assignment  and  except where appropriately acknowledged, this assignment is my own work, has been expressed  in my own words, and has not previously been submitted for assessment. 1 ASSESSMENT SHEET (to be completed by the examiner) Student name:  Course name:  Subject name:  Assessor/marker: COMMENTS

Principles learnt (for example, number and understanding of principles referred to, their influence on the structure of this paper,  number and correct citations of references, use of appropriate jargon) Application of principles. That is, the analysis and evaluation of the example problem based on the  principles, including the final recommendations and their justification /4 /8 How well the example problem was described, including the extent and depth of information  (including the data) about it that was accessed /4 Structure and presentation /2 Style, grammar  and language /2  Total  Less penalties GRAND TOTAL /20 General comments

FOR MODERATOR’S USE ONLY I agree with the assessor’s assessment   I disagree with the assessor’s assessment and the new mark is as follows for  the following reasons: /20 Moderator: 2 Title: Evaluation of Company Performance through an Analysis of Financial Statements. Case Scenario: You are a managerial accountant who has been asked to analyse the latest Annual Report and Financial Statements of a publicly listed company that is listed on the Australian Stock Exchange. You must use the publicly listed company and produce a comprehensive report for distribution to the company’s management to comply with the requirements listed below.

Requirements: 1) An analysis of the information contained in the latest Annual Report and Financial Statements of the company, commenting on the strengths and weaknesses of the company over two years by applying ratio analysis. 2) Suggestions or recommendations for improving the business, based on the analysis. 3) Full referencing of your sources of information, which may include any external sources such as the financial press, commentators and the internet that you may have used to strengthen your analysis.

Word Count (from introduction to conclusion): 1638 Executive Summary: The objective of this report is to analyse the performance of Woolworths Limited for the years 2010 and 2011 though its 2011 Annual Report, through the use of ratio analysis. This paper firstly looks, in brief, as to why ratios are used and their limitations. It will also provide a short overview of Woolworths Limited. The ratios will then be analysed and possible reasons for their increases or decreases over the two year period as well as against their nearest competitor, Wesfarmers for comparison, will be presented.

Strengths and Weaknesses of the company will then be highlighted based on the information presented. Lastly possible recommendations will be proposed for the weaknesses determined through the ratio analysis. 3 Table of Contents 1. Introduction…………………………………………………………………………. 5 1. 1 Woolworths Limited…………………………………………………………… 5 2. Analysis of business performance………………………………………….. 5 2. 1 Profitability……………………………………………………………………….. 2. 2 Efficiency………………………………………………………………………….. 6 2. 3 Short-Term Solvency………………………………………………………….. 6 2. 4 Long-Term Solvency………………………………………………………….. 7 2. 5 Market Based…………………………………………………………………….. 7 3. Strengths and Weakness……………………………………………………….. 7 4. Recommendations……………………………………………………………….. 5. Conclusion………………………………………………………………………….. 9 6. References…………………………………………………………. ……………….. 9 Appendix I – Ratio Analysis for Woolworths June 26 2011 Appendix II – Ratio Analysis for Wesfarmers June 30 2011 Appendix III – Wesfarmers Annual Report 2011 p. 88 Appendix IV – Wesfarmers Annual Report 2011 p. 90 Appendix V – Wesfarmers Annual Report 2010 p. 70 Appendix VI – Woolworths Limited Annual Report 2011 4 1. Introduction.

Ratio analysis gives the user a quick and simple way to analyse the financial status of a company. They eliminate the inability to compare companies of different scales of operations in the same sector by making comparisons or relations as direct comparison may be misleading, profits for example (Atrill & McLaney 2006, p168). The ratios are grouped into the following: Profitability; Efficiency; Short-Term Solvency; Long Term Solvency and Market Based, all of which will be used to analyse the performance of Woolworths Limited with emphasis on its Australia and New Zealand operations. 1. Woolworths Limited Woolworths Limited first started in 1924 in Sydney’s Imperial Arcade. In 1927 it became a chain and by 1959 it opened its 100th store. Today it comprises seven major brands comprising not only its core supermarket business also petrol, liquor, consumer electronics, financial services, hotels and home improvement. It employs over 190 000 persons and has a management team with a combined experience of over 100 years. 2. Analysis of business performance: 2. 1 Profitability. Net profit margin remained stable at 3. 92%, whilst Gross profit margin increased by 0. 12% to 26. 03% in 2011.

This showed that the operating costs of the company are high in both years, however based on the industry and a direct comparison to Wesfarmers net profit margin is on par (Wesfarmers net profit margin was 4%). However, in spite of increased sales of Woolworths, net profit after tax only increased by 5. 1% between the years 2011 and 2010 as opposed to an increase of 10% between 2009 and 2010. This can be attributed to subdued consumer confidence and spending levels as well as the natural disasters in both New Zealand (Christchurch Earthquake February 2011) and Australia (Flooding December 2010 and January 2011).

Losses incurred by these were not all covered by insurance and was cited in the annual report 2011 to be AU$38 million which affected the net profit after tax results as well. Sales were also impacted 5 negatively by performances of Big W and Consumer Electronics New Zealand, which were not only affected by the natural disasters but also by deflation brought about by a strong Australian dollar and increased competition. 2. 2 Efficiency Efficiency ratios calculated showed a slight increase, in terms of inventory turnover (an increase of 0. 59 days) and debtor turnover (an increase of 1. 2 days). This indicates that inventory movement is slowing down slightly as stock is held longer and that debtors are taking longer to pay. It should be noted however that whilst a high inventory turnover in the food and beverage industry is expected, the other interests of Woolworth (Big W and Consumer Electronics) will not turn stock as fast. In light of the performances of both it can be ascertained that the increase in inventory and debtor turnover can be attributed in part to this (based on revenue/sales Big W and Consumer electronics account for 11%).

Creditor turnover remained somewhat stable and had a slight decrease of 0. 20 days. It should be noted that the average days for Woolworth to pay on their credit purchases is 39. 10 in 2011. In the absence of data it is assumed that Woolworths is receiving a 30 day credit and as such are paying their creditors late. 2. 3 Short-Term Solvency Short term solvency increased slightly (current ratio increased by 0. 07:1 and quick ratio increased 0. 10:1), however both were well below the optimum 2:1 ratio. This indicated that at a moment’s notice Woolworth would be unable to meet its current liabilities.

The difference between the current and quick ratios of 0. 46 for 2011 indicates that most of their assets are in inventory. This was also the case for Wesfarmers, who while being slightly better had a quick ratio for 2011 of 0. 60:1. While this in most instances would indicate that there is an issue it should be noted the type of industry Woolworths is in, namely their core business is food and beverage, neither of which is held long in inventory and can be converted into cash quickly thus being able to pay its creditors.

However in spite of this the ratio is still low. 6 2. 4 Long-Term Solvency Long term solvency also saw a slight increase (debt to equity increased by 0. 34 and debt to assets increased by 0. 05). Long term debt attributed mainly through the increase in long term securities though the placement of senior notes maturing in 2015 and 2016 (Woolworths Limited Annual Report 2011, p119). Thus in 2011 most of the financing for Woolworths was done via debt. Debt to Assets indicated that 0. 63 of assets were financed by borrowings.

One factor that attributed to this was the acquisition of the Cellmasters Group in April 2011. The consideration paid was AU$343. 6 million (Woolworths Limited Annual Report 2011, p161). 2. 5 Market Based. The price/earnings ratio however fell by 1. 10. This reflects how much the market is willing to pay for every dollar of profit. Thus is can be ascertained that market confidence in Woolworths fell slightly. One contributor of this can be in the announcement and resignation of its CEO Mr.

Michael Luscombe, who during his five year tenure increased company profits and brought in more than 7 billion for its shareholders (Woolworths Limited Annual Report 2011, p11). His replacement, Mr. Grant O’Brien, while having over 24 years in the business is still to be proven as an efficient leader as his predecessor. Earnings Yield had a slight increase of 0. 42% which meant that they had increased their earnings per share at the current market price. 3. Strengths and Weakness. One of the major strengths of Woolworths Limited is its name and brand.

It is known not only in the Far East but in Western countries as well. The Woolworths brand is synonymous with fresh food and in Australia it supports its local farmers and local people Its ability to turn its inventory quickly is also one of its strengths and lends to the fresh food promise. In comparison Wesfarmers took an average of 48. 21 days as opposed to Woolworths 32. 59 days in 2011. Thus with a faster inventory turnover it will receive payments faster and being able to either re-invest or meet some of its short-term obligations. 7 One of its weaknesses is that its sales affected by consumer confidence.

Even though it was stated in their annual report that deflation affected their business a look at the consumer price index for 2011 showed an increase of 6. 1% in its food prices which is its core business (Australian Bureau of Statistics June 2011, p1). Indeed a look at Australia’s macro-economic environment IMF stated that “it was one of the few advanced economies to avoid a recession in recent years” (International Monetary Fund October 2011, p4) Another weakness that can be ascertained from the ratios is the creditors’ turnover period which for 2011 is 39. 10 days.

It was assumed that they only have a 30 day credit. With this in mind paying over 30 days puts the company at risk of losing its credit facilities. Its short term solvency can also be viewed as one of its weaknesses. In the event that they are called upon to clear their current liabilities they will be unable to do so. 4. Recommendations. One of the factors that come into being with the drop in consumer confidence is the direct competition with Coles (Wesfarmers). Coles has embarked on an aggressive innovation drive which has put Woolworths in a reactionary stance (Bartholomeusz January 2011).

In order to counter this Woolworth can look at revitalising project refresh throughout the group thus improving on efficiencies as this project will bring supply chain improvement thus lowering costs which can be passed on to the consumer. It must also look to innovations, the online services were a good start but they must also look at the stores themselves and look at in-store upgrades and or promotions. New products in terms of hormone free or natural produce can also be increased as this was also part of the strategy used by Coles in response to customer preferences (Wesfarmers Annual Report 2011, p18).

All these and other options can be used to increase consumer confidence and loyalty (promotions, cost savings and new trends). It should be noted that even though the economic climate was stated as being one of the contributing that affected consumer confidence, direct competition as outlined above also had a part to play. Creditor turnover days must also be reduced as this would ensure that they are not under risk of losing lines of credit. The cash flow position should be looked at as well as ways to convert

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