ACCT610 Accounting Analysis :The Performance of Woolworths

Introduction

The paper that has been taken into consideration has an objective of analysing the overall business performance and financial position of Woolworths in the supermarket industry. The analysis of the performance of Woolworths can be undertaken effectively with the help of aggregate industrial performance so that a proper understanding regarding the financial position can be attained. Woolworths is a multinational grocery company coming from Australia and is even the retailer of common merchandise. The company has its headquarters in Bella Vista Australia (Woolworths. 2017).

The company operates in over 12 countries that are from Asia and Europe and it is seen that the company capturers a large section of the market in Australian retail industry. The approximate percentage that the company holds in the retail industry of Australia accounts to 28.4%. The company mainly concentrates on selling goods like furniture, groceries, financial and telecommunication services, clothing items and online music download and petrol.

This paper tries to analyse the financial performance of Woolworths by analysing the financial data that has been gathered from the annual report of the firm. The annual report that has been taken into consideration are for the financial year 2015 and 2016. The financial ratio of the company for the pertaining

History and Market Share of Woolworths

Woolworths started their operations in the year 1878 in New York. The company now is the third largest retailer operating globally and this estimation has been done by evaluating their profit. The company was established by Frank Winfield and name was Woolworth’s Great Five Cent Store when the company started. The company slowly diversified their business and moved into various marketing segments and thereby increasing their market share (Woolworths. 2017).

The company has the motive of increasing their market share by moving ahead of their competitors and raising their market share and increasing their competitive edge. The company currently holds a market share of 28% in the Australian retail and supermarket industry. The primary focus of the organization has been to undertake investments in the Australian market as well as in the global market and construct several distribution channels in the target market and sustain a proper and disciplined expansion globally.

It is seen that most of the products that are sold by Woolworths are imported from the local market. It is due to this fact that Woolworths has been selected for the construction of the report to evaluate their performance during the financial year 2015 and 2016. The financial ratios and analysis will be influential in understanding the overall performance of the company.

Target Market

The target market of Woolworths has been the demography of the country where they operate. The company selling various number of products and services aids them to focus on different age groups and their demands. Woolworths, being a super market, targets the everyday people with the help of their diversified product (Moatti et al. 2015).

Performance and Position of Woolworths

The position and performance of Woolworths is analysed with the help of the aggregate performance of the market where it operates so that a proper idea can be attained with respect to the operations and performance in the market.

It is seen that with respect to their performance ratios, it is seen that it has developed their position financially in the year 2016. It is seen that the operating margin of the firm has got raised to 1.92% in the year 2016 from -9.30% in 2015. It is however seen that the ratio is still lower than the industrial aggregate of 3.33%. The probable factor behind such a condition has mainly been due to the increase in the level of competition from the rivals and increase in the material costs and various other resources. It is even seen that the firm has even raised their return on capital employed to 4.32% in the year 2016, which is higher than the previous tear of 2015 as the value in that year is -23.73% (finance.yahoo.com. 2017). This explains that Woolworths has been able to gain over the trust of the consumers because of their brand image that has been seen to be positive.

The liquidity ratios reveal that the company has not been able to pay back their present obligations and debts with respect to their assets that are existent. It is seen that Woolworths in this circumstances has been able to raise their quick ratio to 0.63 in 2016 from 0.45, which was in the year 2015 even through the value is still lower than the industrial aggregate (Eilifsen et al. 2013). The main factor behind this reason has been that the company has sold their current liabilities and assets in order to pay off their short term dues. It is due to this factor that Woolworths has a massive decline in their availability of cash, which on the other hand has even intensified the liabilities burden of the firm. Conversely, it is seen that the ratios of the firm being higher than their competitors depict that Woolworths has a competitive authority in the market.

The report now comes to the efficiency ratios and it is seen that Woolworths has constructed a rigorous terms of taking risks in order to stabilize with respect to the declined cash availability mainly because of the transforming market conditions. Woolworths, in this scenario has over performed with respect to the industrial average, which depicts that the management of the firm has the urgency of gathering huge amount of cash.

With respect to the payable period, it is seen that Woolworths has increased the period to 34.04 days in the year 2016, which was 30.91 days in 2015. This has been done in order to maintain higher cash in hand. Sutton-Brady, Kamvounias and Taylor (2015) has explained that increased payable period with respect to days reveals enhanced reputation of the firm, which in turn raises the ability to hold on to greater amount of cash. Conversely, it is seen that the ratios are lower than the industrial benchmark, which makes a statement that the creditors are reluctant to expand their tenure longer with Woolworths.

Furthermore, it is seen that the inventory turnover of Woolworths with respect to days has seen a rise in 2016 amounting to 19.06 days because of the inadequacy of diversification of the product and discrepancies with Unilever with respect to increased price charges from the consumers.

The gearing ratio for Woolworths has fallen to 0.64 in 2016, which was 0.71 in the previous year of 2015. This indicates that the company has been again gaining the trust of the stakeholders and the investors after the scandal that took place with respect to profit overstatement. However, the ratio is lower than the industrial yardstick and therefore it can be said that Woolworths has an increased debt encumbrance with respect to their rivals that are operating in the same market.

Investor information and movement of share price of Woolworths

It is seen that in order to ease the process of decision making for the investors, there have been various ratios that have been constructed in order to disclose sufficient information. The ratios have been prepared are shown in the table given below:

Table 1: Investor Information ratio

(Source: As Created by Author)

The table above depicts that Woolworths has not been able to pay off dividend to their shareholders in the year 2016. The primary factor that has been recognised has mainly been due to the weakened margin of profit because of decrease in sales of the firm. It is even seen that the company has not been able to stay in line with the industrial benchmark as their rivals are paying off increased dividend rates to their shareholders because of their diversification of product and services that are sold at an economical rate (Hançerlio?ullar?, ?en and Aktunç 2016).

It is seen that the price earnings ratio of Woolworths in the year 2016 has been discovered to be 3442 with respect to the industrial yardstick of 20. This recommends that the price of stock of the firm is overvalued as the firm has not given out adequate returns in the present year (Aguzzoni et al. 2016). Therefore, from the investor outlook, Woolworths is not a reasonable choice for investment as their upcoming growth remain uncertain due to their poor management and operational activities and therefore have an impact in the future years.

Recommendation

The analysis of the financial statements and the ratios that have been prepared for Woolworths reveals that there are various scopes of improvements that can enhance the operations of the company. It is seen that in many aspects with respect to the various ratios, the company has improved their ratios considerably from the previous year but yet improvements are necessary in order to stay in line with the industrial benchmark. The company can improve their performance by undertaking various changes in their operational activity and decision making process thereby improving the financial position of the firm in the coming years.

Conclusion 

The report discloses that Woolworths has been going through extreme financial conditions due to increase in competition and decrease in the demand in the market. The disputes and the inadequate product diversification has led to such problems that has hindered the prospects of the company in the long-run.

In order to provide efficient information to the investors, the price earnings ratio and the dividend yields ratio have been analysed and computed critically. The completion of the assessment reveals that Woolworths has not given out any dividend to their shareholders within the last two years as they have a decreasing net income. The price earnings ratio that has been obtained from the financial data of Woolworths reveals that the prices of the shares of the firm has been overvalued along with a rate of return that is not stable. The report therefore indicates that Woolworths has various scopes of improvements that can can enhance the performance of the firm in the coming years.

References

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Eilifsen, A., Messier, W.F., Glover, S.M. and Prawitt, D.F., 2013. Auditing and assurance services. McGraw-Hill.

Hançerlio?ullar?, G., ?en, A. and Aktunç, E.A., 2016. Demand uncertainty and inventory turnover performance: An empirical analysis of the US retail industry. International Journal of Physical Distribution & Logistics Management, 46(6/7), pp.681-708.

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Sutton-Brady, C., Kamvounias, P. and Taylor, T., 2015. A model of supplier–retailer power asymmetry in the Australian retail industry. Industrial Marketing Management, 51, pp.122-130.

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Uk.finance.yahoo.com. 2017. TSCO.L Basic Chart | WOOLWORTHS ORD 5P Stock - Yahoo! UK & Ireland Finance. [online] Available at: https://finance.yahoo.com/q/bc?t=2y&s=TSCO.L&l=on&z=l&q=l&c=&ql=1&c=%5EFTSE [Accessed 22 May. 2017].