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Financial analysis is the process of evaluating businesses, projects, budgets and the other financing activities in order to determine the financial position of the company. It is required for the company to evaluate the financial position in order to take any financial decision. There are several ways which are used to analyze the financial position such as ratio analysis, common size analysis and the others (Robinson, Henry, Pirie, & Broihahn, 2015). These techniques can be implemented on the historical data of the company in order to compare its performance from previous years. In this report, the discussion is made on the of financial analysis. Woolworths has been taken into consideration to evaluate the financial position in the market. In this paper, the financial structure of the company will be discussed by evaluating the current ratio, debt ratio, and interest coverage ratio of the company.
Woolworths is an Australian supermarket which is owned by Woolworths Group. It was founded in the year 1924. It modestly delivers the groceries product such as meat, vegetables, fruits, packaged food and the others. Woolworths is additionally has high whole image within the market. By developing technology, the company develops its own website in order to sell its product online and the name of website is “Home Shop”. The company currently operates the business in various places and there are 1000 stores across Australia and 976 Supermarkets and an additional 19 "Metro" convenience stores which carrying the similar logo in the Australian market (Woolworths Group, 2019). It clicks and collects and residential searching delivery services. The company operates the business in supermarket industry as this industry has high demand of consumers to buy the product of supermarket. The main slogan of the company is “the fresh food people”.
Ratio Analysis |
|
|
|
Woolworths |
|
|
|
|
2015 |
2016 |
2017 |
2018 |
2019 |
Current ratio (a/b) |
Current assets |
7660000 |
7,427,000 |
6,994,200 |
7,181,000 |
6,298,000 |
|
Current liabilities |
9168000 |
8,992,700 |
8,824,200 |
9,196,000 |
8,620,000 |
|
|
0.84 |
0.83 |
0.79 |
0.78 |
0.73 |
Quick ratio (a/b) |
Quick assets |
1421500 |
1083500 |
4989800 |
5506000 |
1198000 |
|
Current liabilities |
9168000 |
8,992,700 |
8,824,200 |
9,196,000 |
8,620,000 |
|
|
0.16 |
0.12 |
0.57 |
0.60 |
0.14 |
Net Profit Margin |
Profit of the year |
2137000 |
-1234800 |
1533500 |
1724000 |
2693000 |
|
Total revenue*100 |
60679000 |
58275500 |
55668600 |
56726000 |
59984000 |
|
|
3.52% |
-2.12% |
2.75% |
3.04% |
4.49% |
Debt (to assets) ratio (a/b) |
Total Liabilities |
1420500 |
14720300 |
13039700 |
12709000 |
12822000 |
|
Total Assets |
2533700 |
23502200 |
22915800 |
23558000 |
23491000 |
|
|
56.06% |
62.63% |
56.90% |
53.95% |
54.58% |
Debt Equity |
Total Debt |
5036000 |
5727600 |
4215500 |
3513000 |
4202000 |
|
Total Asset*100 |
2533700 |
23502200 |
22915800 |
23558000 |
23491000 |
|
|
1.99 |
0.24 |
0.18 |
0.15 |
0.18 |
Interest Coverage Ratio |
EBIT |
3322000 |
1327700 |
2081800 |
2087000 |
2065000 |
|
Finance costs |
255000 |
245600 |
193600 |
154000 |
126000 |
|
|
13.03 |
5.41 |
10.75 |
13.55 |
16.39 |
As per the above evaluation, it has been seen that the net profit margin of the company is increasing from the last years in 2019 as, “in 2015”, it is 3.52% and “in 2019”, it is increased by 4.49%. The profit margin of the company has been increases which depicts that the company generate the high revenue.
The rule of thumb of Debt equity ratio, the higher the debt to equity ratio means the more risk taken by the company. The high debt to equity ratio depicts that the company finance the operating activities through debt. The Debt ratio of the company depicts that the company finance the operating activities by borrowing money or issuing the shares. It is observed that the company issues the shares with the high amount in order to financing the operation through equity instead of debt. But it has been seen that the ratio of issuing the shares is decreasing in the continuous manner. In the year 2015, the ratio of debt to equity is 0.45 and it has been increases by 0.68 in 2016 but in the year 2018, it has been decreases as it is 0.34. But suddenly, it issues the shares again by 0.41which is high from the last year. It can be said that the choices of the company to issues the shares is fluctuated (Woolworths Group, 2019).
The rule of thumb of liquidity ratio is that the ratio should be 1:1. It is minimum acceptable level of liquidity which means the company paid all short term expenses by using current assets. Current ratio and quick ratio of the company represent the liquidity position which is determined on the basis of capability of the company to pay its short term obligations. As per the current position of the company, it is observed that the company capability to pay short tern expenses is not strong as it has high current liabilities as compare to current assets. From the year 2015 to 2019, the current ratio of the company has been decreases such as “in 2015”, the current ratio of the company is 0.84 and in 2019, it is 0.73. It is a challenge for the company to pay its all short term expenses or operate smoothly in the market. It depicts that the liquidity position of the company is not too strong. The company invests in fixed assets instead of current assets due to which its liquidity position has been affected (Schroeder, Clark, & Cathey, 2019).
According to rule of thumb, the company has to own a stock that has an interest coverage ratio under 1.5. The coverage ratio below 1.0 depicts that the business face the challenges in generating cash to pay the interest obligations. Interest coverage ratio defines the company ability to cover all interest expenses in a specific period of time. According to the interest coverage ratio, it has been found the earnings before interest and tax of the company are decreasing from 2015 to 2018. The earning amount of the company has been decreasing due to which it takes more time to cover all the interest expenses with the earning revenue. The finance cost (interest expenses) of the company has been decreases which is beneficial for the company. In the year 2015, the amount of interest expenses is 255000 and now in the year 2019, it is 126000. The interest coverage ratio of the company is increasing which means the company takes more time to recover its interest. In 2019, it takes 16.39 to recover the amount of interest and the other years, it takes more time to recover it as its earning amount has been reduces. Earning amount of the company has been reduces due to which the company take more time to recover the amount of interest.
Non-current asset defines the fixed assets of the company (Boyas, & Teeter, 2017). As per the financial statements of the company, the non-current assets of the company have been increased by 16377000 in the year 2018 from the previous year 2017 as it is 15921600. After the year 2018, the value of non-current assets of the company has been increases such as 17193000. As per the evaluation of non-current assets of the company, it is observed that the company start investing in fixed assets instead of current assets due to which its capability or ability to pay short term expenses have been reduces. But due to increasing the non-current assets of the company, the capacity of Woolworths has been increases to pay the long term expenses (Laitinen, 2018).
There are different items have been recorded by the company under the heading of non-current assets such as trade and other receivables, borrowings, provisions, current tax payables, and other financial liabilities. These items of non-current assets of the company have been increases from the previous year’s 2018, 2017, 2016, and 2015. Trade receivables of the company have been increased from 2018 to 2019 by 93 to 145 (Woolworths Group, 2018). Property, plant and equipment are useful for the company especially for generating the high revenue. The value of property, plant and equipment has been increases from 9026 to 9519. It has been seen that the value of fixed assets can be used by the company to financing the operation by taking the loan on guarantee from the different sources. At the end, it can be said that the value of fixed assets has been increases which is beneficial for the company in terms of long term survival (Williams, & Dobelman, 2017).
From the above evaluation, it is observed that Woolworths operate the business efficiently and effectively. Woolworths have high brand image in the market due to its excellent service. In this report, financial structure of the company has been analyzed by evaluating the financial ratios. As per the financial ratios of the company, it has been seen that the net profit margin of the company has been increases which is beneficial for it. But it has been evaluated that the liquidity position of the company has been affected as it have high current liabilities as compare to the current assets. It also takes more time to cover the interest amount which is not beneficial for the company as its operation activities have been affected. According to the valuation of non-current assets of the company, it has been seen that the value of fixed assets is increasing which is beneficial for it to pay the long term expenses. At the end, it is concluded that it will earns the high revenue and achieve the high success in business.
Boyas, E., & Teeter, R. (2017). Teaching Financial Ratio Analysis using XBRL. In Developments in Business Simulation and Experiential Learning: Proceedings of the Annual ABSEL conference (Vol. 44, No. 1).
Laitinen, E. K. (2018). Entry-based financial statement analysis for small firms. International Journal of Management and Enterprise Development, 17(1), 36-52.
Robinson, T. R., Henry, E., Pirie, W. L., & Broihahn, M. A. (2015). International financial statement analysis. John Wiley & Sons.
Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2019). Financial accounting theory and analysis: text and cases. John Wiley & Sons.
Williams, E. E., & Dobelman, J. A. (2017). Financial statement analysis. World Scientific Book Chapters, 109-169.
Woolworths Group. (2019). Annual Report 2019. Retrieved From: https://www.woolworthsgroup.com.au/icms_docs/195582_annual-report-2019.pdf
Woolworths Group. (2015). Annual Report 2015. Retrieved From: https://www.woolworthsgroup.com.au/icms_docs/182381_Annual_Report_2015.pdf
Woolworths Group. (2018). Annual Report 2018. Retrieved From: https://www.woolworthsgroup.com.au/icms_docs/195396_annual-report-2018.pdf
Woolworths Group. (2019). About Us. Retrieved From: sshttps://www.woolworthsgroup.com.au/page/about-us
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