About the paper
The paper is commissioned to conduct a comprehensive financial analysis of one of the leading retail based company in Australia, Woolworths Limited. As part of this analysis, we will be using the raw financial data for the past five (5) years and will run them through the microscope of financial ratios. In addition, we will also analyze the past year trend in the stock price of the company and will unfold the major events that caused changes in the stock price of the company. The report will finally be culminated with a concise yet overall outlook for the stock and whether the trend is favorable or not.
About the company
Founded in the year 1924, Woolworths Limited is one of the leading retail company with geographical presence in Australia and New Zealand. The company owns multiple credential to its name such as the largest retail company in Australia and New Zealand in terms of market capitalization and largest food and liquor retailer in Australia. The company operates through five business segments, Australian Food, Liquor and Petrol; New Zealand Supermarkets; General Merchandise; Hotels; and Home Improvement, and owns some of the vintage and most trusted brands in Australia such as:
Stock Price Trend
Woolworths Limited is listed on the Australian Stock Exchange and owns market capitalization worth A$28.43 Billion. By the end of 2015, the stock yielded a negative return of -13.94%, plunging down from A$28.47 to A$24.5. Below we discuss the series of major events that affected the stock price of the company during the year (1st January, 2015-31st December, 2015):
Beginning the year strongly as one the most sought after blue-chip stock on the Australian Stock Exchange (ASX), Woolworths stock performed well during until February and achieved a peak price of A$31.50/ share. However,the trends took a bearish walk as soon as the company announced a drop in Net Profit After Tax of 3.1 per cent, to $1,280.4 million, for the half year ended 4 January 2015. The announcement faced a flak in the form of a fall in stock price levels by 13.71%. By the end of the trading period, the stock closed at A$27.18/share.
The bearish trend continued and stock continued to plunge post touching the peak level of $31/share. However, the worst was yet to come as the company failed to achieve the set targets in the third quarter and reported a 2% fall in the revenue figures and also announced that it will cut 400 more jobs from its existing workforce. Post the announcement, stock prices decreased further and were trading in the range of A$25-A$26/share. Even the analyst firms such as Motley Fool and many others confirmed that the company has opted for ‘lean’ business model as it is likely to face severe competitive threat from overseas rivals such as Aldi, Costco and Lidl, who are offering lower prices for everyday products than Woolworths and are aggressively wooing the customers.
31St August, 2015:
This was the time when the retail behemoth in Australia released its annual report, and as the markets were expecting, the company announced a fall in sales figures and net profit down by 12.5%. While the stock prices were already discounted by the market analysts, the poor financial results paved way for the bearish trend further.
3rd September, 2015:
After trading in the consolidation stage of $25-$26/share, the stock of the company witnessed yet another fall to $24/share post the announcement of the loss of market share to its rivals, Coles and Aldi. This had brought the company on the back-foot because of which it was forced to adopt lean business model.
29th October, 2015:
This was the time for the company to release the first quarterly report of 2015-16, and unfortunately it continued to show the poor performance. The company declared that during the first quarter of 2015-16, its key measures of sales have fallen at the fastest rate since 2005, signaling towards its failure to compete with aggressive rivalry posed by Aldi and Coles. As a result, stock price crashed by 8.50% and were trading at A$23. 6/share.
This was followed by a report issued by analyst firm, Motley Fool, which alarmed the investors that the stock price of the company might continue to fall owing to some poor managerial decision by the firm that has led the stock towards losses. Motley Fool also confirmed that while CEO of the company, Grant O’Brein is optimistic of the positive steps being taken to transform the company’s business model, however, it will not be easy for the company to regain the investor’s confidence as the company had already disappointed the market with such a massive swing in profitability.
While in the previous section we analyzed major events that affected the stock price of the company during the year, in this section we will un-earth the past five year trend using multiple financial ratios. To facilitate an in-depth understanding of the readers, we will also discuss the factors that were prima-facie reasons for the trend behind financial ratios.
Beginning the analysis with liquidity section, we found that while the overall liquidity was significantly struck during 2015 alone, but cash and receivable position, which accounts for a major proportion of the current assets of the company, had started to decline from 2012. As for current ratio, the multiple increased steadily from 2011 until 2014 surging from 0.80 to 0.95. However, during 2015, amid a higher proportion increase in the current liabilities by 21.32% relative to 6.77% increase in the current assets, the current ratio plummeted to 0.84.
We even tested the liquidity standing using the stringent measure of quick ratio and found interesting trends. Our calculation revealed that while the current ratio continued to increase until 2014, the quick ratio had been decreasing since 2012 because of a significant fall in the cash and receivable position of the company. Important to note, during 2012, the cash position and receivables of the company trimmed by -48% and -32%, respectively. As a result, the quick ratio of the company decreased from 0.31 to 0.22. However, it was not until 2015 when the company managed to increase its cash position by 62.78%, the quick ratio surged marginally to 0.23.
Overall, our calculation confirms that over the period of five years, Woolworths Limited has failed to ensure a sustainable working capital position and the same is evident in the outcome of liquidity ratios. The declining trend in the liquidity ratio and most importantly higher proportionate increase in current liabilities relative to current assets indicates towards the negatively affected ability of the company to honor short-term obligations.
Next, we analyzed the profitability position of the company using some traditional profitability based ratios. Beginning with the operating profit margin, during 2011-2014, the operating profit margin of the company was almost constant in the range of 5.62% -5.95%. However, during 2015, while company struggled even to maintain similar sales level, operating expenses surged by 4.15% and eroded the operating margins of the company.
As for the net profit margins, post struggling in 2012 and facing reduced bottom line margins from 3.91% to 3.27%, Woolworths Limited performed well during 2013 and 2014 as the company witnessed high profit margins recorded a 3.85% and 4.02%, respectively. However, the financial results for 2015 was highly bearish as amid negative sales growth and non-controllable cost structure , the company lost its net margins and the multiple fell to 3.52%.
Finally, we calculated return on equity (ROE) multiple to analyze the profitability trend from the perspective of the shareholders. It is considerable that ROE is looked upon by the shareholders with high amount of interest as it indicates the company’s ability to generate profit using the equity capital raised. Our calculation revealed that over the period of five years, the ROE of the company has declined significantly from 27.97% to 19.8 %. The trend will surely hurt the shareholder expectations and they might not show confidence in the future earning potential the company. Henceforth, the company may continue to witness high selling volume as the company is consistently failing to generate a sustainable return on the equity capital raised.
Overall the above trend confirms that over the years, the company has not been able to improve its profitability standing and amid intense rivalry from companies like Aldi and Costco, the situation is turning unfavorable for the company. In this situation, it is legitimate for the shareholders to show least interest in the company unless the organization consider an intense restructuring of its business model to reclaim the market share and increase profitability.
After witnessing depressing liquidity and profitability trend over the five-year period, we next analyzed the leverage situation of Woolworths Limited using leverage ratios. While these ratios provide us with the insight into the capital structure of the company, they also help in evaluating the debt-paying capacity of the company. Referring to the above figures,we witness that during 2011-2014, the company opted for low debt structure and this resulted in declining debt-equity structure. On the other hand, while the entity was opting for low debt structure, the interest coverage ratio of the company was also going strong, which confirmed a strong solvency position altogether. However, the scenario changed completely during 2015 as while the company raised additional short-term debt and fueling the debt-equity ratio higher, the declining operating margins pushed the interest coverage ratio downwards.
This confirms that the year 2015 was indeed a poor financial year for the company as not only it witnessed a massive swing in its profitability but also lost the strength in its solvency position.
-Asset Management Analysis
This section of ratio analysis assists in understanding as how well the management is using the asset base of the company. Beginning with the inventory turnover ratio, our calculation revealed that post 2012, the multiple is consistently declining year-by-year. This indicates that every year it takes more time for the company to sell its inventory and hence capital is tied up in the inventory for a long period of time. Similar was the trend with payable turnover ratio where post 2013, the ratio multiple is consistently declining and indicates that the company is paying their bills slowly every year. The pessimistic trend in the inventory turnover and payable turnover ratio can directly be linked to the decline in the liquidity position of the company also. Finally, as part of asset management ratio, we calculated asset turnover ratio and found that the ratio multiple is consistently declining for past three years. The trend confirms that the management has been inefficient in using the asset base to generate additional revenue .
In the nutshell, all the three asset management ratios indicate that the management is unable to formulate prudent policies to ensure efficient utilization of inventory and overall asset base, and this is consequently resulting in delayed payments to the creditors.
We initiated the report with the objective to conduct an in-depth analysis of Woolworths Limited and to achieve the said objective, we unfolded multiple events that affected the stock price of the company followed by a five-year ratio analysis. Now at the end, courtesy all the trends we witnessed, we can conclude that the company is going through tough financial times. While poor managerial decisions are the main culprits for the present situation of the company, aggressive rivalry from competitors are also pushing the company on the backfoot. Moreovr, with CEO and Chairman jumping off the boat, situation have now turned critical for the company. Henceforth, it will not be a matter of a big surprise if amid shattered investor confidence, the stock price of the company continues to fall or at least investors shows no sign of additional investment in the company. Therefore, it is important that the management consider the whole situation and takes remedial actions to restore the investor confidence.
Annual Report. (2015, August 31). Retrieved January 19, 2016, from Woolworths Limited: http://www.woolworthslimited.com.au/page/Invest_In_Us/Reports/Reports/
Financials: Woolworths Limited. (2015). Retrieved January 19, 2016, from http://financials.morningstar.com/income-statement/is.html?t=WOW®ion=AUS&culture=en_US
Woolworths report on a year profits turned sour. (2015, August 31). Retrieved January 19, 2016, from http://ausfoodnews.com.au/2015/08/31/woolworths-reports-on-a-year-profits-turned-sour.html
Financial Ratios. (n.d.). Retrieved October 17, 2015, from http://www.businessplans.org/ratios.html
Johnson, E. (2015, October 29). Woolworths Slumps as Key Sales Measure Falls at Record Pace. Retrieved January 19, 2016, from http://www.bloomberg.com/news/articles/2015-10-29/woolworths-slumps-as-key-sales-measure-falls-at-record-pace
Key Statistics: Woolworths Limited. (n.d.). Retrieved January 19, 2016, from Yahoo Finance: https://au.finance.yahoo.com/q/ks?s=WOW.AX
Langley, S. (2015, March 2). Concerns about trends in Woolworths results. Retrieved January 19, 2015, from http://ausfoodnews.com.au/2015/03/02/concerns-about-trends-in-woolworths-results.html
Macarthur, T. (2015, October 29). Why the Woolworths Limited share price could keep falling. Retrieved January 19, 2016, from https://www.fool.com.au/2015/10/29/why-the-woolworths-limited-share-price-could-keep-falling/
Newman, R. (2015, August 29). Profits plunge at Woolworths Limited as chairman and CEO jump ship. Retrieved January 19, 2016, from https://www.fool.com.au/2015/08/28/profits-plunge-at-woolworths-limited-as-chairman-and-ceo-jump-ship/
Newman, R. (2015, September 9). Why the Woolworths Limited share price is falling today. Retrieved January 19, 2016, from https://www.fool.com.au/2015/09/09/why-the-woolworths-limited-share-price-is-falling-today/
Profile: Woolsworth Limited. (n.d.). Retrieved January 19, 2016, from Yahoo Finance: https://au.finance.yahoo.com/q/pr?s=WOW.AX
Woolworths Limited. (2016). Who are We: Woolworths Limited. Retrieved January 19, 2016, from http://www.woolworthslimited.com.au/