Accounting Essay Example

Executive Summary

Woolworth Limited is a company based in Australia and deals in a variety of retail product. The company has grown its presence over the entire country due to the franchise model which has helped them. The report looks into the financial analysis of Woolworth by drawing important analysis from various ratios.

The financial analysis of Woolworth shows current ratio and acid test ratio to be very low signifying high short term obligations. The profits for the organization seem sound but reduction of indirect expense which occurs due to franchise agreement will further bolster the profits. The efficiency ratios also show efficiency apart from creditors’ days which are very weak and show poor credit management policy. The company has also managed the equity and debt well and the entire performance look sound. The only area that needs to be look into is improving the credit policy so that suppliers and creditors fine the situation comfortable.

Table of Contents

Introduction 3

Purpose of the Report 3

Financial Analysis 3

Outlook for Suppliers & Creditors 10

Conclusion 10

References 11

Appendix 12

Introduction

Woolworth Limited which is an Australian based company performs in the retail market. The company performs as “liquor, hotels, petrol, consumer electronic, everyday requirements and home improvements” (Woolworths Website, 2011). The company has relied on the franchise model and grown its presence. The company has worked towards ensuring low cost and has grown which is seen by continuous increasing sales. This will further be substantiated through the financial analysis which will bring forth areas of strength and areas the company need to work on.

Purpose of the Report

  • To conduct a financial analysis and find the performance of Woolworth

  • To find out the future prospects for external people like creditors, suppliers and others

  • To measure the effectiveness of the company

Financial Analysis

Financial Analysis looks towards evaluating the financial statement and provides important insights which will help the company to forecast better. This will help to improve the planning process and help the company is the long run. The financial analysis for Woolworth is as follows

Profitability Analysis

The profitability analysis of Woolworth’s looks as follows

FORMULAS

Gross profit margin

Gross profit / Sales Revenue * 100

9,628.1 / 37,006.9 * 100 = 26.01

9,105.3 / 35,607.0 * 100 = 25.57

Net profit margin

Net profit / Sales Revenue * 100

1,617.2 / 37,006.9 * 100 = 4.36

1,448.3 / 35,607.0 * 100 = 4.06

Return on shareholders’ equity

Net profit / Shareholder equity * 100

1,617.2 / 5,842.6 * 100 = 27.67

1,448.3 / 5,526.2 * 100 = 26.20

Return on Assets

Net Profit / Total Assets * 100

1,617.2 / 18,452.5 * 100 = 8.76

1,448.3 / 17,600.0 * 100 = 8.22

The same ratios has been depicted through a graph which looks as

Accounting

The profitability analysis reveals a healthy gross profit margin for both the year signifying that the production process is well controlled. Any good manufactured on an average has 25% profit showing proper execution of the factory responsibilities. This also shows that the materials used to manufactured goods are procured at low cost thereby helping them to project as a low cost provider. A contrasting effect is seen in net profits for both the year. The profits reflect a huge dip showing rising indirect cost. This is an area which needs to be looked into as the indirect cost could arise due to the franchise model the company has followed. Looking into the agreement in relation to profit sharing, cost sharing and the model worked upon will help to understand the reasons for low net profit.

Despite low net profits the return for the shareholders is high which shows low equity in the company. This will be substantiated in the equity and debt ratio which will show the equity and debt component in the company. Low net profits for both the year has also translated into low return on assets due to high asset holding which has occurred due to various franchise agreement the company has agreed into. The overall analysis looks sound and looking into the franchise agreement which has resulted in rising indirect cost will help to improve the overall return for the company.

Liquidity Analysis

The liquidity analysis of Woolworth looks as

FORMULAS

Current ratio

Current assets / Current liabilities

4,372.2 / 9,247.4 = 0.47

4,231.7 / 8,531.2 = 0.49

Quick Asset Ratio

Current assets — Inventory / Current liabilities

4,372.2 -2,354.9 / 9,247.4 = 0.25

4,231.7 — 2,285.9 / 8,531.2 = 0.22

The same ratios has been depicted through a graph which looks as

Accounting 1

The liquidity analysis highlights fear for external parties as the company has a very low current ratio in both the years. The company has very high short term obligations making the position of the company dicey in the short run. The situation further becomes worse when we look at the quick ratio as the short term obligations further increase. It has been witnessed that companies which follow a similar business model have a low current and quick ratio but have a substantial low ratio is an area of concern.

The analysis also brings forward an area which needs to be looked into. The company needs to find out the reason for high inventory. This could arise due to decrease in demand, the prevalent condition in the economy, inflation rate, the franchise agreement and similar other reasons. Identifying the reason for high inventory will help to find the reason for low quick asset ratio and help the management to find ways to improve the position from 25 cents to something better. This still haunts the company with a low current ratio and rising short term liabilities. One of the reason attributing towards it could be the fact that the company pays its creditors after 100 days which could result in high creditors. This is an aspect that the company needs to work on and improving the creditor days will help Woolworth to a large extent to reduce their external liabilities.

Efficiency Analysis

The efficiency analysis of Woolworth looks as

FORMULAS

Asset turnover

Sales Revenue/ Total Assets

37,006.9 / 18,452.5 = 2.00

35,607.0 / 17,600.0 = 2.02

Days Inventory Turnover

Average Inventory / Cost of Sales * 365

2,354.9 / 27,460.6 * 365 = 31.36

2,285.9 / 26,586.1 * 365 = 31.38

Days Debtor

Avg account debtors / Sales revenue * 365

1,451.4 / 37,006.9 *365 = 14.31

1,254.4 / 35,607.0 * 365 = 12.85

Days Creditor

Average account creditors / Cost of sales * 365

7,656.8 / 27,460.6 * 365 = 101.77

7,468.1 / 26,586.1 *365 = 102.52

The same ratios has been depicted through a graph which looks as

Accounting 2

The efficiency analysis shows that the daily operations of the company have made it possible for them to revolve the assets twice. This seems sound but looking into the franchise agreement that the company enters into will further help to improve this ratio. The company by looking into a model which helps to share assets will be able to improve its efficiency and ensure better asset utilization. The inventory turnover ratio shows that the company revolves its inventory around 12 times a year showing very little obsolete stock. This puts forth a point that the company should have low inventories but this is not the case as seen from quick asset ratio. This could be due to one reason that the company has a variety of products and a lot of franchise agreement. So, supplying goods to all the franchise could results in better inventory turnover and higher inventory.

The policy of the company also shows that it collects its money from the debtors and then pays the creditors for both the year. The company has been able to collect money in around 15 days but pays after 100 days. This is an area which Woolworth needs to look into as paying creditors after such a long period could hamper the image. Creditor supplying goods to the company would want higher profits but it seems a difficult proposition considering the competition prevalent in the world. Also working on it will help to reduce the external short term liabilities and help to improve the quick and current ratio.

Financial Stability Analysis

The financial stability analysis of Woolworth looks as

FORMULAS

Debt to Equity Ratio

Debt(liabilities)/equity

12,609.9 / 5,842.6 = 2.15

12,073.8 / 5,526.2 = 2.18

Debt Ratio

Debt / Total Assets

12,609.9 / 18,452.5 = 0.67

12,073.8 / 17,600.0 = 0.69

Equity Ratio

Equity / Total Assets

5,842.6 / 18,452.5 = 0.32

5,526.2 / 17,600.0 = 0.30

The same ratios has been depicted through a graph which looks as

Accounting 3

The financial stability analysis shows soundness in policy when it comes to managing debt and equity. This is seen in the debt equity ratio which has a ratio of 2:1. This shows that the company has been able to use external sources for finance and ensure that the equity holders are able to enjoy a major chunk of the profits. This has also helped the company to use advantage of the tax policy and save on taxes that had to be paid otherwise as interest on borrowed funds is considered an expense. This also brings forth an area which needs to be looked into. Identifying the authorized share capital will help to understand whether the company has done it because of a low authorized capital or kept that source of finance for the future.

Woolworth has managed a good match of equity and debt and ensured that they are able to take advantage of the tax policies and ensure that the company is able to use the internal source of finance in the future. The overall analysis seems sound and shows a bright prospect for Woolworth in the future.

Outlook for Suppliers & Creditors

The outlook for suppliers and creditors doesn’t look very bright as the company pays its external liabilities 100 days which is more than 3 months. This is further on the backdrop that the company collects money from its debtor in 15 days signifying that the company is not able to handle its creditors well. Having such a match could be due to the fact that the creditors enjoy a very high profit or the company has a very strong goodwill or a very sound current and quick ratio. The above three situation seems unlikely as the stiffness in competition is making it difficult for the creditors to earn high profits. The current and quick ratio also shows very illiquid position thereby making the company a very risky one for the creditors. The goodwill for the company is sound which the creditors can look to bank upon but having such a credit policy will back fire in the long run as creditors and suppliers will hesitate to supply goods in the long run. Creditors thus need to evaluate their profits and return based on the risk involved in the company before taking any actions that involves association with the company.

Conclusion

The financial analysis shows that the franchise model has helped Woolworth to grow and needs to concentrate on improving the agreement. The profits look sound and the company has been able to manage its asset well. The company needs to look towards improving the credit outlook of the company by improving the creditors’ days and ensure a better image with the external parties. Woolworth has been able to grow due to the franchise agreement and will be able to increase its reach in the future.

References

Annual Report. (2011). Woolworth Annual Report. Retrieved on July 17, 2011 from http://www.woolworthslimited.com.au/phoenix.zhtml?c=144044&p=irol-reportsannual

Woolworths Website. (2011). Retrieved on July 17, 2010 from http://www.woolworths.com.au

Appendix

Calculation of Ratios

FORMULAS

Gross profit margin

Gross profit / Sales Revenue * 100

9,628.1 / 37,006.9 * 100 = 26.01

9,105.3 / 35,607.0 * 100 = 25.57

Net profit margin

Net profit / Sales Revenue * 100

1,617.2 / 37,006.9 * 100 = 4.36

1,448.3 / 35,607.0 * 100 = 4.06

Return on shareholders’ equity

Net profit / Shareholder equity * 100

1,617.2 / 5,842.6 * 100 = 27.67

1,448.3 / 5,526.2 * 100 = 26.20

Return on Assets

Net Profit / Total Assets * 100

1,617.2 / 18,452.5 * 100 = 8.76

1,448.3 / 17,600.0 * 100 = 8.22

Current ratio

Current assets / Current liabilities

4,372.2 / 9,247.4 = 0.47

4,231.7 / 8,531.2 = 0.49

Quick Asset Ratio

Current assets — Inventory / Current liabilities

4,372.2 -2,354.9 / 9,247.4 = 0.25

4,231.7 — 2,285.9 / 8,531.2 = 0.22

Asset turnover

Sales Revenue/ Total Assets

37,006.9 / 18,452.5 = 2.00

35,607.0 / 17,600.0 = 2.02

Days Inventory Turnover

Average Inventory / Cost of Sales * 365

2,354.9 / 27,460.6 * 365 = 31.36

2,285.9 / 26,586.1 * 365 = 31.38

Days Debtor

Avg account debtors / Sales revenue * 365

1,451.4 / 37,006.9 *365 = 14.31

1,254.4 / 35,607.0 * 365 = 12.85

Days Creditor

Average account creditors / Cost of sales * 365

7,656.8 / 27,460.6 * 365 = 101.77

7,468.1 / 26,586.1 *365 = 102.52

Debt to Equity Ratio

Debt(liabilities)/equity

12,609.9 / 5,842.6 = 2.15

12,073.8 / 5,526.2 = 2.18

Debt Ratio

Debt / Total Assets

12,609.9 / 18,452.5 = 0.67

12,073.8 / 17,600.0 = 0.69

Equity Ratio

Equity / Total Assets

5,842.6 / 18,452.5 = 0.32

5,526.2 / 17,600.0 = 0.30