Hc1010 Financial Performance Answers | Assessment Answer

Answer:

The report is developed to provide an analysis of the organizational performance of a selected company listed on ASX. It provides an evaluation of the financial performance of the selected company with analyzing its profitability position. This is carried out by providing comparison of the current year financial figure of the company against the previous years and also from its competitors taken from the same industry. In addition to this, the evaluation of the cash flow and balance sheet of the company is undertaken to examine its financial position. 

This is followed by calculation of the financial ratios of the company for the last three years on the basis of information provided in the annual report. The financial performance of the selected company is mainly analyzed on the basis of the performance ratios of rerun on assets, inventory turnover, quick ratio, and price-earnings ratio. Also, the ethical standards implemented by the management for carrying out the business operations are analyzed in the report by examining its corporate governance framework. The selected company in this context is Woolworths Limited, a supermarket giant in Australia that is regarded as one of the top most retail company within the country.

Section 1: Evaluation of the financial standing of the company

In order to evaluate the financial standing of the company there is need to evaluate the financial strength through use of financial ratios, trends in the financial statements and through analyzing the variances in the financial items (Papadopoulos, 2011). In this segment of the report there is need to evaluate the financial standing of Woolworth for last two years and its performance has been compared with the financial performance of Wesfarmers. Wesfarmers also belong to the same industry and it is the main competitor of Woolworth.

Profitability of Woolworth in current year (2017) as compared to previous year (2016)

Income Statement

Woolworth Group

 AUD in millions except per share data.

Financial Items

2016

2017

Increase/Decrease

 

 

 

In amount

in %

Revenue

 $  58,276.00

 $ 55,669.00

 $ (2,607.00)

-4.47%

Cost of revenue

 $  42,677.00

 $ 39,740.00

 $ (2,937.00)

-6.88%

Gross profit

 $  15,599.00

 $ 15,929.00

 $       330.00

2.12%

Operating expenses

 

 


 

 

Sales, General and administrative

 $  12,964.00

 $ 13,134.00

 $       170.00

1.31%

Other operating expenses

 $  12,033.00

 $ 11,686.00

 $     (347.00)

-2.88%

Total operating expenses

 $  24,997.00

 $ 24,820.00

 $     (177.00)

-0.71%

Operating income

 $  (9,398.00)

 $ (8,891.00)

 $       507.00

-5.39%

Interest Expense

 $        246.00

 $       194.00

 $       (52.00)

-21.14%

Other income (expense)

 $  11,004.00

 $ 11,217.00

 $       213.00

1.94%

Income before income taxes

 $    1,360.00

 $    2,132.00

 $       772.00

56.76%

Provision for income taxes

 $        520.00

 $       650.00

 $       130.00

25.00%

Minority interest

 $  (1,113.00)

 $          60.00

 $   1,173.00

-105.39%

Other income

 $  (1,113.00)

 $          60.00

 $   1,173.00

-105.39%

Net income from continuing operations

 $        840.00

 $    1,482.00

 $       642.00

76.43%

Net income from discontinuing ops

 $  (3,188.00)

 $       111.00

 $   3,299.00

103.48%

Other

 $    1,113.00

 $       (60.00)

 $ (1,173.00)

-105.39%

Net income

 $  (1,235.00)

 $    1,534.00

 $   2,769.00

224.21%

Net income available to common shareholders

 $  (1,235.00)

 $    1,534.00

 $   2,769.00

224.21%

Earnings per share

 

 

 

 

Basic

 $          (0.98)

 $            1.19

 $            2.17

221.43%

The profitability performance of Woolworth has been much better in year 2017 as compared to year 2016. It can be said because in year 2016 Woolworth has suffered a loss of $1235.00 million and in year 2017 it has net profit of $1534 million dollars, reflecting a rise in profits by 224.21%. It has been noted that there is decrease in revenue in year 2017 by 4.47% as compared to previous year 2016. The decrease in revenue has been marked with decrease in cost of goods sold by 6.88%. The actual rise in gross profit of company was 2.12% in year 2017 as compared to year 2016.

It has been noted that there was major leap in the income before income taxes by 56.76% that has increase to the EBT to $2132 dollars in year 2017 as compared to $1360 dollars in year 2016. With the rise in income before taxes, the taxes have also increased by 25%. The EPS of the Woolworth was negative $ 0.98 in year 2016 and it was increased by 221.43% to $1.19. So, overall profitability of the Woolworth was much better in year 2017 as compared to 2016 (Woolworths Limited: Annual Report, 2017).

Comparison of profitability performance of Woolworth with its competitor Wesfarmers

(Wesfarmers Pty Ltd: Annual Report, 2017) & (Woolworths Limited: Annual Report, 2017).

Analysis of cash flow statement of Woolworth Group

Financial Items of Cash flow statement

Cash Flow Activities

2017

2016

Change

% Change

Cash Flow/(Used) in operating activity

3,122.00

2,357.50

 $        764.50

32.43%

Cash Flow/(Used) in investment  activity

-1,431.40

-1,266.70

 $     (164.70)

13.00%

Cash Flow/(Used) in financing  activity

-1,729.30

-1,474.90

 $     (254.40)

17.25%

Net increase/(decrease) in cash and cash equivalents

-38.7

-384.1

 $        345.40

89.92%

Cash flow statement provides the information of cash inflow or outflow from three main activities that are carried out in company. These three main activities are operating activity, investing activity and financing activity. The cash generated from the operations are utilized for investing activities and to repay the financial cost of funds raised under financing activity.

In this part of report cash flow position of Woolworth has been analyzed to report on cash flow position. On the basis of above chart it can be said that overall cash flow position of Woolworth in year is much better than the cash flow position in year 2016. The possible reason for such change can be increase in sales volume, increase in efficiency level of management to collect the debts, reduction in cash expenses and control on cash used under investing and financing activity. The cash flow operating activity has been increased by $764.50 million in year 2017 indicating a total rise of 32.43% as compared with previous year.

The cash expenditure in investing activity and financing activity has also increased by 13% and 17.25% respectively. The main reason for such increase could be increased investment in assets and repayment of borrowings. The net change in cash and cash equivalents was positive 89.92% that shows in year 2017, management has improved the cash flow policies so that cash can be used in much better way (Woolworths Limited: Annual Report, 2017).

Analyses of financial position of the company (Balance Sheet)

Balance Sheet

Woolworth Group

 AUD in millions

Financial Items

2016

2017

Increase/Decrease

 

 

 

In amount

in %

Cash and Cash Equivalents

 $        948.10

 $       909.40

 $       (38.70)

-4.08%

Inventories

 $    4,558.50

 $    4,080.40

 $     (478.10)

-10.49%

Total Currents Assets

 $    7,427.00

 $    6,994.20

 $     (432.80)

-5.83%

Property, plant and equipment

 $    8,262.80

 $    8,437.50

 $       174.70

2.11%

Total non-current assets

 $  16,075.20

 $ 15,921.60

 $     (153.60)

-0.96%

Total Assets

 $  23,502.20

 $ 22,915.80

 $     (586.40)

-2.50%

Total Current Liabilities

 $    8,992.70

 $    8,824.20

 $     (168.50)

-1.87%

Total non-current liabilities

 $    5,727.60

 $    4,215.50

 $ (1,512.10)

-26.40%

Borrowings (Long term Borrowings)

 $    3,870.90

 $    2,777.00

 $ (1,093.90)

-28.26%

Total equity

 $    8,781.90

 $    9,876.10

 $   1,094.20

12.46%

The above chart reflects the changes in main financial items of Balance sheet over the year (2016 to 2017) (Woolworths Limited: Annual Report, 2017). But in order to analyse the cash flow position in much better way there is need to calculate some of balance sheet ratios such debt equity ratio, debt ratio, current ratio, times interest earned and asset utilization ratio. 

  • Debt ratio: This ratio provides proportion of debt used to finance the assets of the company. This ratio has been decrease in year 2017 as compared to year 2016. That indicates that Woolworth has improved its leverage position in current year and has make use maximum use of equity capital to finance the assets.
  • Debt to equity ratio: This ratio provides proportion of debt and equity used to finance the company assets. This ratio has been decreased from 0.71 times in year 2016 to 0.45 times in year 2017. It clearly indicates great improvement in the capital structure of the company.
  • Times interest earned ratio: This ratio provides number of times entity can bear the interest expenses for the particular period. This ratio has been increased to 12.01 times in year 2017 as compared to 6.09 times in year 2016. This shows company has increased its ability to pay interest on the debt capital.
  • Asset turnover ratio: This ratio represents how company utilizes its assets to earn the revenue. The ratio of 2.43 times in year 2017 clearly signifies that company uses its assets in most prominent manner. This ratio has also been increased in year 2017 as compared to year 2016 (Tracy, 2012).

Section 2: Analyzing the firm performance using the financial ratios

Financial ratios help to evaluate the firm performance as it compares the performance in current year with performance of previous year. In this segment some financial ratios in context to Woolworth will be calculated for last three years. Results of financial ratios are presented below:

Financial Data of Woolworth for last three years

Financial Items

2015

2016

2017

 

Amount in $ millions

Net Profit after tax

 $    2,137.40

 $  (1,234.80)

 $    1,533.50

Total assets

 $  25,336.80

 $  23,502.20

 $  22,915.80

Cost of Goods Sold

 $  44,345.00

 $  42,677.00

 $  39,740.00

Inventory

 $    4,872.20

 $    4,558.50

 $    4,080.40

Average inventory

 $    4,782.70

 $    4,715.35

 $    4,319.45

Current Assets

 $    7,660.90

 $    7,427.00

 $    6,994.20

Quick Assets

 $    2,788.70

 $    2,868.50

 $    2,913.80

Current Liabilities

 $    9,168.60

 $    8,992.70

 $    8,824.20

Market price per share (MPS) (June, 20__)

 $          20.50

 $          15.53

 $          19.51

Earnings per share (EPS)

 $            1.71

 $          (0.98)

 $            1.19


Ratios

Formula

2015

2016

2017

Profitability Ratio

 

 

 

 

Return on Assets

Net Profit after tax/Total Assets

8.44%

-5.25%

6.69%

 

 

 

 

 

Efficiency Ratios

 

 

 

 

Inventory Turnover Ratio

Cost of Goods Sold/Average Inventory

9.27

9.05

9.20

 

 

 

 

 

Liquidity Ratios

 

 

 

 

Quick Ratio

Quick Assets/Current Liabilities

0.30

0.32

0.33

 

 

 

 

 

Market Ratios

 

 

 

 

Price Earnings Ratio

Market price per share/Earnings per share

11.99

-15.85

16.39

Section 3: Corporate Governance Statements & the Practice of Integrity Policy

            Woolworths Limited develops and publishes its corporate governance statement as per the ASX listed corporate governance principles. The corporate governance practices are disclosed in the governance documents that are published on a continuous basis in the corporate governance report of the company. The governing statements have provided relevant information in relation to the standard ethical policies and procedures adopted by the company for carrying out its daily business activities. Woolworths Group has maintained an integrity policy that seeks to promote the confidence of investors in the performance of its securities. For this, the Group has also established a continuous disclosure policy that is aimed at providing continuous information to the investors regarding its financial and non-financial performance (Woolworths Group: Corporate Governance Statement, 2017).

Management Approach for:  Management of Business Risks

            The business activities of Woolworths Group are exposed to different types of material risk that can impact their successful completion in the long-term. The Group is exposed to different type of strategic, financial, operational and compliance related risks that can negatively impact its business outcomes as it operates in a highly competitive retail and online market. It has adopted an enterprise risk management framework for the development of effective policies and procedures for identification and mitigation of the material business risks.

The risk management framework is developed in relation to the standards and guidelines of the ASX corporate governance principles. The risk management framework of the Group consists of the risk management policies and procedures developed as per its overall values and philosophy. The risk management framework of the Group has adequately defined the key responsibilities of the management personnel at different level for monitoring and controlling the business risks (Woolworths Group: Corporate Governance Statement, 2017).

Attitudes & Actions towards Financial Reporting

            The Group as per the AASB standards and Corporate Governance Act is developing and presenting its financial reports to the end-users. The continuous disclosure policy of the Group is aimed at providing continuous financial information to the investors and its other external stakeholders for decision-making.

Attitudes toward information processing and accounting functions and personnel

            The Group as per its integrity and ethical principles has maintained ethical policies and procedures for marinating a proper flow of communication within the organization and outside. There is a presence of solid organizational structure having different levels of management responsible for carrying out different roles and responsibilities. Also, all the essential information required for decision-making is disclosed to the stakeholders by making ASX announcements, media releases and publishing annual reports. The Group has hired and maintained a competent accounting team for carrying out different accounting roles and responsibilities. The Chief Financial Officer is responsible for maintaining a competent accounting team by examination of their skills and capabilities with the use of efficient compensation and performance evaluation programs (Woolworths Group: Corporate Governance Statement, 2017).

Business Operations

            Woolworths Limited is recognized as a leading retail company within Australia. The principal activities of the Group consist of retailing of food, liquor, petrol, general merchandise, electronic goods, and gaming, hotel and entertainment operations. On the basis of the different business operations of the Group, its principal business segments are categorized as supermarkets, general merchandise, consumer electronics, hotels and wholesale operations (Woolworths Limited: Annual Report, 2017).

Investment and Investment Activities

            The principal investment activities of the Group consist of cash outflow incurred for realization of property, plant and equipment, intangible assets and purchasing of businesses. The investment activities are stated in the cash flow statement of the Group that reflects the aggregate change in its cash position due to gains or losses realized from investment in the financial markets.

Financing and Financing Activities

            The cash flows from the financing activities of the Group consist of proceeds from issue of shares, equity securities, proceeds and repayment of borrowings and dividend paid. As reflected from the cash flow statement of the Group, there is a net cash outflow from the financing activities (Woolworths Limited: Annual Report, 2017).

Industry Size

            The overall size of retail market of Australia is estimated to be about $122 USD and is expected to growth further on account of increase in the purchasing power of consumers in Australia with the rise in disposable income of the consumers (Retail Trade, Australia, 2018).

Major Players/Competitors

            The retail market of Australia is dominated by the presence of large number of competing companies such as Wesfarmers, Billabong, JB Hi-Fi, Myer and many others. These companies are also the major competitor of Woolworth’s and are competing with each other on the basis of similar target consumers and products or services. The main competing company of Woolworths is Wesfarmers as both have approximately same market share and are similar in size (Retail Industry in Australia - Major trends, Growth and Opportunities, 2017).

Market Shares of Industry Players

The report has concluded that Woolworths has maintained a leading position in the retail market of Australia on the basis of its good financial performance over the years. This has been sustained by the company by the adopting of highest standards of ethics and integrity. However, its financial position is not good in the year 2016 but the company has taken significant actions for improving it as reflected from the positive financial results achieved by it in the year 2017.

References

Fabozzi, F. and Peterson, P. 2008.  The Complete CFO Handbook: From Accounting to Accountability. John Wiley & Sons.

Palepu, K. and Healy, P. 2007. Business Analysis and Valuation. Cengage Learning EMEA.

Papadopoulos, P. 2011. Investment Report - Fundamental Analysis/ Ratio Analysis: Comparative Approach between two FTSE 100 corporations Vodafone plc and British Telecom Group. GRIN Verlag.

Retail Industry in Australia - Major trends, Growth and Opportunities. 2017. 

Retail Trade, Australia. 2018. Australian Bureau of Statistics. [Online]. .

Taking Stock in Retail—The 2017 Midyear Wrapup. 2017.

Tracy, A. 2012. Ratio Analysis Fundamentals: How 17 Financial Ratios Can Allow You to Analyse Any Business on the Planet. RatioAnalysis.net.

Wesfarmers Pty Ltd. 2017. Annual Report. [Online]. 

Woolworths Group Ltd. 2018.

Woolworths Group. 2017. Corporate Governance Statement.

Woolworths Limited. 2015. Annual Report.

Woolworths Limited. 2017. Annual Report.

(Woolworths Limited: Annual Report, 2015) & (Woolworths Limited: Annual Report, 2017)

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